-----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, PfcUCU5tgBeBQaxy8XeFqtn13hUwmdiGfzyWW/KUg+W57yupVGSPDVkl1nQGLu5i Yhd3h/76RJ7hO0hcDjOZrQ== 0000926274-99-000149.txt : 19990330 0000926274-99-000149.hdr.sgml : 19990330 ACCESSION NUMBER: 0000926274-99-000149 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INDIANA UNITED BANCORP CENTRAL INDEX KEY: 0000720002 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 351562245 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-12422 FILM NUMBER: 99575966 BUSINESS ADDRESS: STREET 1: 201 N BROADWAY STREET 2: PO BOX 87 CITY: GREENSBURG STATE: IN ZIP: 47240 BUSINESS PHONE: 8126634711 MAIL ADDRESS: STREET 1: 201 NORTH BROADWAY STREET 2: P O BOX 87 CITY: GREENSBURG STATE: IN ZIP: 47240 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1998 Commission file number 0-12422 INDIANA UNITED BANCORP (Exact name of registrant as specified in its charter) Indiana 35-1562245 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 201 North Broadway Greensburg, Indiana 47240 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (812) 663-0157 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common shares, no-par value (Title of Class) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No The aggregate market value (not necessarily a reliable indication of the price at which more than a limited number of shares would trade) of the voting stock held by non-affiliates of the registrant was $76,949,900 as of March 10, 1999. As of March 10, 1999, there were outstanding 4,774,628 common shares, without par value, of the registrant. DOCUMENTS INCORPORATED BY REFERENCE Part of Form 10-K Documents Into Which Incorporated --------- ----------------------- 1998 Annual Report to Shareholders Part II (Items 5 through 8) Definitive Proxy Statement for Annual Meeting of Shareholders to be held May 18, 1999 Part III (Items 10 through 13) EXHIBIT INDEX: Page 9 FORM 10-K TABLE OF CONTENTS - --------------------------- Page Part I Item 1 - Business 3 Item 2 - Properties 7 Item 3 - Legal Proceedings 7 Item 4 - Submission of Matters to a Vote of Security Holders 7 Part II Item 5 - Market For the Registrant's Common Equity and Related Stockholder Matters 8 Item 6 - Selected Financial Data 8 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 7A - Quantitative and Qualitative Disclosures About Market Risk 8 Item 8 - Financial Statements and Supplementary Data 8 Item 9 - Disagreements on Accounting and Financial Disclosure 8 Part III Item 10 - Directors and Executive Officers of the Registrant (See below) Item 11 - Executive Compensation (See below) Item 12 - Security Ownership of Certain Beneficial Owners and Management (See below) Item 13 - Certain Relationships and Related Transactions (See below) Part IV Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K 9 - 10 Signatures 11 Pursuant to General Instruction G, the information called for by Items 10, 11, 12 and 13 is omitted by Indiana United Bancorp since Indiana United Bancorp will file with the Commission a definitive proxy statement pursuant to regulation 14A not later than 120 days after the close of the fiscal year containing the information required by Items 10, 11, 12 and 13. 2 PART I ITEM 1. BUSINESS. - ------------------ GENERAL Indiana United Bancorp ("Company") was initially formed in Owensboro, Kentucky, in 1982 as First Commonwealth Bancorp. The Company reincorporated under the laws of the State of Indiana under its present name in 1983, and relocated to Greensburg, Indiana, in anticipation of acquiring Union Bank and Trust Company of Greensburg. In 1987, Peoples Bank in Portland, Indiana was acquired and as of December 31, 1991, Regional Federal Savings Bank, New Albany, Indiana ("Regional Bank") was acquired. Effective July 1, 1994, the Company merged Union Bank and Trust Company of Greensburg into Peoples Bank, Portland, and renamed the combined bank, Union Bank and Trust Company of Indiana ("Union Bank"). On April 30, 1998, the Company completed a merger of equals with P.T.C. Bancorp, Brookville, Indiana. People's Trust Company, ("People's Trust") the wholly owned subsidiary of P.T.C. Bancorp had more than $300 million 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. The Company operates 35 offices in 14 Indiana counties with 360 employees. As of December 31, 1998, the Company had consolidated assets of $828 million, consolidated deposits of $710 million and shareholders' equity of $59 million. Through its Banks, the Company offers a broad range of financial services, including: accepting time and transaction deposits; making consumer, commercial, agri-business and real estate mortgage loans; issuing credit cards; renting safe deposit facilities; providing general agency personal and business insurance services; providing personal and corporate trust services; and providing other corporate services such as 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 chargeoffs of uncollectible loans and formulates loan policy. The Banks maintain conservative loan policies and underwriting practices in order to address and manage loan risks. These policies and practices include granting loans on a sound and collectible basis, serving the legitimate needs of the community and the general market area while obtaining a balance between maximum yield and minimum risk, ensuring that primary and secondary sources of repayment are adequate in relation to the amount of the loan, developing and maintaining adequate diversification of the loan portfolio as a whole and of the loans within each category and developing and applying adequate collection policies. Commercial loans include secured and unsecured loans, including real estate loans, to individuals and companies and to governmental units within the market area of the Banks for a myriad of business purposes. Agricultural loans are generated in the Banks markets. Most of the loans are real estate loans on farm properties. Loans are also made for agricultural production and such loans, are generally reviewed annually. Residential real estate lending has been the largest component of the loan portfolio for many years. All affiliate banks have generated residential mortgages for their own portfolios. In addition, People's Trust has been originating residential mortgages for sale into the secondary market since 1990 and has extended its expertise to the other affiliates so that in 1999 all affiliates will originate for the secondary market as well as continue to grow their internal portfolios. At December 13, 1998, People's Trust was servicing a $150 million portfolio which was increased from $109 million and $86 million at year end 1997 and 1996. By originating loans for sale in the secondary market, the Company can more fully satisfy customer demand for fixed rate residential mortgages and increase fee income. Consumer lending includes secured and unsecured loans for personal, family or household purposes, such as automobile installment loans and personal lines of credit. Consumer lending has increased throughout 1998 allowing the Company to grow its portfolio to approximately $71 million. In addition to providing greater diversification within the loan portfolio, consumer loans also provide a higher gross yield than residential real estate mortgages. The principal source of revenues for the Company is interest and fees on loans, which accounted for 73.7% of total revenues in 1998, 74.4% in 1997 and 71.8% in 1996. 3 The Company's investment securities portfolio is comprised of U. S. Treasuries, federal agencies, state and municipal bonds, mortgage-backed securities and corporate securities. The Company has classified 90% 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 14.6% of total revenues in 1998, 15.4% in 1997 and 18.2% in 1996. As of December 31, 1998, 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 time deposit accounts. These programs include interest and noninterest bearing demand and individual retirement accounts. The Company also purchased seven branch facilities and their correlating deposits in the third and fourth quarters of 1998 from large regional competitors. In all, more than $121 million in deposits were acquired, together with approximately $21 million in consumer and small business loans. Currently, national retailing and manufacturing subsidiaries, brokerage and insurance firms and credit unions are fierce competitors within the financial services industry. Mergers between financial institutions within Indiana and neighboring states, which became permissible under the Interstate Banking and Branching Efficiency Act of 1994, have added competitive pressure. The permissibility of banks and bank holding companies to acquire thrift institutions will undoubtedly further redefine the competitive marketplace. The Company's Banks are located in predominantly non-metropolitan areas and their business is centered in loans and deposits generated within markets considered largely rural in nature. In addition to competing vigorously with other banks, thrift institutions, credit unions and finance companies located within their service areas, they also compete, directly and indirectly, with all providers of financial services. BRANCH PURCHASES The Company has signed an agreement with Bank One to acquire four branch banking facilities in Henry and Wayne counties, Indiana. The Company will integrate these offices into People's Trust. The Company expects the consummation of this purchase to occur in the first quarter of 1999. The branch acquisitions will include approximately $2 million of loans and $100 million of deposits. In addition, The Company has signed a loan agreement for two loans. The first is a 70 month term loan for $8 million calling for quarterly interest and ten equal semi-annual principal payments beginning in December, 1999. The second loan is a $3 million line which can be drawn upon for general corporate and cash flow needs. Both loans are tied to the "libor" rate and are considered adjustable. The Company leveraged itself in order that all affiliate banks could maintain a "well-capitalized" tier 1 capital rating by the FDIC. EMPLOYEES As of December 31, 1998, the Company and its subsidiaries had approximately 360 employees to whom it provides a variety of benefits and with whom it enjoys excellent relations. REGULATION AND SUPERVISION OF THE COMPANY The Company is a bank holding company ("BHC") within the meaning of the Bank Holding Company Act of 1956, as amended ("ACT"). This Act subjects BHCs to regulations of the Federal Reserve Board ("FRB") and restricts the business of BHCs to banking and related activities. In addition, the Company is a nondiversified unitary savings and loan holding company subject to regulations, examinations, supervision and reporting requirements of the Office of Thrift Supervision ("OTS"). Under the ACT, a BHC is, with limited exceptions, prohibited from acquiring direct or indirect ownership or control of voting stock of any company that is not a bank or engaging in any activity other than managing or controlling banks. A BHC may, however, own shares of a company engaged in activities which the FRB has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. These activities include: operating a savings association, mortgage company, finance company, credit card or factoring company; performing certain data processing operations; providing investment and financial advice; and, acting as an insurance agent for certain types of credit-related insurance. Acquisitions by the Company of banks and savings associations are subject to federal and state regulation. Any acquisition by the Company of more than five percent of the voting stock of any bank requires prior approval of the FRB. Acquisition of savings associations is also subject to the approval of the OTS. 4 Indiana law permits BHCs to acquire BHCs and banks out of state on a reciprocal basis, subject to certain limitations. Under current law, the Company may acquire banks, and may be acquired by BHCs, located in any state in the United States that permits reciprocal entry by Indiana BHCs. Under the ACT, BHCs may acquire savings associations without geographic restrictions. A BHC and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with the extension of credit, lease or sale of property, or the provision of any property or service. The Company is under the jurisdiction of the Securities and Exchange Commission ("SEC") and state securities commission for matters relating to the offering and sale of its securities. The Company is subject to the SEC's rules and regulations relating to periodic reporting, reporting to shareholders, proxy solicitation and insider trading. The Company's income is principally derived from dividends paid on the common stock of its subsidiaries. The payment of these dividends is subject to certain regulatory restrictions. Under FRB policy, the Company is expected to act as a source of financial strength to, and commit resources to support, its affiliates. As a result of such policy, the Company may be required to commit resources to its affiliate banks in circumstances where it might not otherwise do so. REGULATION AND SUPERVISION OF THE SUBSIDIARY BANKS Union Bank and People's Trust are supervised, regulated and examined by the Indiana Department of Financial Institutions ("DFI") and the Federal Deposit Insurance Corporation ("FDIC"). Regional Bank is supervised, regulated and examined by the OTS. A cease-and-desist order may be issued against the banks, if the respective agency finds that the activities of the bank represent an unsafe and unsound banking practice or violation of law. The deposits of Union Bank and People's Trust are insured by the Bank Insurance Fund ("BIF") of the FDIC. The deposits of Regional Bank are insured by the Savings Association Insurance Fund ("SAIF") of the FDIC. The FDIC has the authority to change premiums twice per year. Commencing in 1997, thrift institutions paid approximately five times higher assessment rates than commercial banks (6.44 cents versus 1.29 cents per $100 of deposits). After a three-year period, BIF and SAIF-insured institutions will pay the same assessment rate of 2.43 cents per $100 of deposits. Branching by banks in Indiana is subject to the jurisdiction, and requires the prior approval, of the bank's or savings bank's primary federal regulatory authority and, if the branching bank is a state bank, of the DFI. Under Indiana law, banks may branch anywhere in the state. The Company is a legal entity separate and distinct from its subsidiary Banks. There are various legal limitations on the extent to which the Banks can supply funds to the Company. The principal source of the Company's funds consists of dividends from its subsidiary Banks. State and Federal law restrict the amount of dividends, which may be paid by banks and savings banks. In addition, the Banks are subject to certain restrictions on extensions of credit to the Company, on investments in the stock or other securities of the Company and in taking such stock or securities as collateral for loans. LEGISLATION The Federal Deposit Insurance Corporation Act of 1991 ("FDICIA") represented a comprehensive and fundamental change to banking supervision and mandates the development of additional regulations governing almost every aspect of the operations, management and supervision of banks and BHCs. FDICIA also included several supervisory reforms related to the frequency of regulatory examinations and audit requirements. FDICIA also required the adoption of safety and soundness standards on matters such as loan underwriting and documentation, and compensation and other employee benefits; mandated consumer protection disclosures with respect to deposit accounts; and the establishment of a risk-based deposit insurance system. The federal banking agencies have issued guidelines establishing standards for safety and soundness, for operational and managerial standards and compensation standards. The federal banking agencies have issued guidelines for asset quality and earnings. FDICIA requires banking regulators to take prompt corrective actions with respect to depository institutions that fall below certain capital levels and prohibit any depository institution from making a capital distribution that would cause it to be considered undercapitalized. Banking regulators were also required to revise their capital standards to take into account interest rate risk. A policy statement has been proposed providing a supervisory framework to measure and monitor interest rate risk at individual banks. Banks may use an internal model that provides a measure of the change in a bank's economic value. 5 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, nonbank 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 of the operating results of banks and BHCs. The nature of future monetary policies and the effect of such policies on the future business and earnings of the Company and its subsidiaries cannot be predicted. The Deposit Insurance Funds Act was enacted in 1996 and contained several major provisions. The new law recapitalized the SAIF by a one-time assessment on all SAIF-insured deposits. For 1997 through 1999 the banking industry will help pay for the Financing Corp. ("FICO") bond interest payments at an assessment rate that is one-fifth the rate paid by thrifts. Beginning January 1, 2000, the FICO interest payments will be paid pro-rata by banks and thrifts. Deposit shifting is prohibited for three years and the $2,000 annual minimum assessment was repealed. CAPITAL REQUIREMENTS The Company and its subsidiary Banks must meet certain minimum capital requirements mandated by the FRB, FDIC, OTS and DFI. These regulatory agencies require BHCs and banks to maintain certain minimum ratios of primary capital to total assets and total capital to total assets. The FRB requires BHCs to maintain a minimum Tier 1 leverage ratio of 3 percent capital 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, 1998, the Company's leverage ratio of capital to total assets was 8.3%. The FRB, OTS and FDIC each have approved the imposition of "risk-adjusted" capital ratios on BHCs and financial institutions. The Company's Tier 1 Capital to Risk-Weighted Assets Ratio was 12.1% and its Total Capital to Risk-Weighted Assets Ratio was 13.7% at December 31, 1998. The Company's Banks had capital to asset ratios and risk-adjusted capital ratios at December 31, 1998, 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. 6 Federal regulators have issued final regulations revising risk-based capital standard and the regulatory framework for measuring market risk. Any BHC or bank with significant exposure to market risk must measure such risk internally and maintain adequate capital to support that exposure. YEAR 2000 ("Y2K") COMPUTER ISSUES In the next year, many large companies will face a potentially serious information systems (computer) problem because many software application and operational programs written in the past may not properly recognize calendar dates beginning in the year 2000. This problem could force computers to either shut down or provide incorrect data or information. The Company began the process of identifying the changes required to its computer programs and hardware, in consultation with software and hardware providers and bank regulators, in early 1997. The Company has developed and implemented a Y2K Plan calling for a review of all computer-based equipment, software and services. While the Company is taking all appropriate steps to assure Y2K compliance, it is dependent on vendor compliance to some extent. The Company has required its systems and software vendors to represent that the services and products provided are Y2K compliant. The Company has begun a testing program for its own compliance satisfaction. The Company has allocated hundreds of man-hours over the past two years to ensure compliance. The Company expended $30 thousand in capital expenditures in 1997 and 1998 to ensure all systems are compliant and expects to spend an additional $120 thousand in 1999 to complete the process. The Company's subsidiaries have been reviewed by their regulators to ensure the Company's plan and testing is timely and addressing all systems. The Y2K problem is pervasive and complex as virtually every computer operation will be affected in some way by the rollover of the two digit year value to 00. Consequently, no assurance can be given that Y2K compliance can be achieved without costs and uncertainties that might affect future financial results or cause reported financial information not to be necessarily indicative of future operating results or future financial condition. ITEM 2. PROPERTIES. - -------------------- Indiana United Bancorp owns no physical properties and has no need for space other than what is available at the offices of its subsidiaries. Its subsidiaries own, or lease, all of the facilities from which they conduct business. During 1998, the Company relocated the Westport Branch of Union Bank and in 1999 is considering relocating certain People's Trust branches. Relocating the Westport Branch and the possibility of relocating certain People's Trust branches is intended to increase visibility, enhance drive-through banking and ATM accessibility and improve ingress and egress. The Company has 35 locations of which People's Trust has 17, Union Bank has 12 and Regional Bank has 6. At December 31, 1998, the Company had $12.5 million 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 1998 to a vote of security holders, through the solicitation of proxies or otherwise. 7 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. - ------------------------------------------------------------------------- The information required under this item is incorporated by reference to the Company's Annual Report to Shareholders, Exhibit 13. ITEM 6. SELECTED FINANCIAL DATA. - -------------------------------- The information required under this item is incorporated by reference to the Company's Annual Report to Shareholders, Exhibit 13. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. - ----------------------------------------------------------------------- The information required under this item is incorporated by reference to the Company's Annual Report to Shareholders, Exhibit 13. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. - --------------------------------------------------------------------- The information required under this item is incorporated by reference to the Company's Annual Report to Shareholders, Exhibit 13. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. - ---------------------------------------------------- The financial statements and supplementary data required under this item are incorporated herein by reference to the Company's Annual Report to Shareholders, Exhibit 13. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. - -------------------------------------------------------------- In connection with its audits for the two most recent fiscal years ended December 31, 1998, there have been no disagreements (as defined in Item 4(b) of Form 8-K) with the Company's independent certified public accountants on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure. 8 PART IV ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. - --------------------------------------------------------------------------
Included In Annual Report ------------ (a)1. Financial statements Indiana United Bancorp and Subsidiary Independent auditor's report 21 Consolidated balance sheet at December 31, 1998 and 1997 22 Consolidated statement of income, years ended December 31, 1998, 1997 and 1996 23 Consolidated statement of cash flows, years ended December 31, 1998, 1997 and 1996 25 Consolidated statement of shareholders' equity, years ended December 31, 1998, 1997 and 1996 24 Notes to consolidated financial statements 26 - 39
(a)2. Financial statement schedules All schedules are omitted because they are not applicable or not required, or because the required information is included in the consolidated financial statements or related notes. (a)3. Exhibits: 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. 3.2 Bylaws adopted April 28, 1998. 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 (included as an exhibit to Exhibit 4.1 to the Registration Statement on Form S-2 of the Registrant filed November 19, 1997 with the Commission (Registration No. 333-40579)). 4.3 Form of IUB Capital Trust Amended and Restated Trust Agreement dated as of December 12, 1997 among the Registrant, as Depositor, State Street Bank and Trust Company, as Property Trustee, Wilmington Trust Company, as Delaware Trustee and the Administrative Trustees named therein (incorporated by reference to Exhibit 4.5 to the Registration Statement on Form S-2 of the Registrant filed November 19, 1997 with the Commission (Registration No. 333-40579)). 4.4 Form of Preferred Securities Guarantee Agreement dated as of December 12, 1997 between the Registrant and State Street Bank and Trust Company (incorporated by reference to Exhibit 4.7 to the Registration Statement on Form S-2 of the Registrant filed November 19, 1997 with the Commission (Registration No. 333-40579)). 4.5 Form of Agreement as to Expenses and Liabilities dated as of December 12, 1997 between Registrant and IUB Capital Trust (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)), which is incorporated by reference. 9 10 Employment Agreement between the Registrant and James L. Saner (included as an exhibit to Annex A to the Joint Proxy Statement/Prospectus on Form S-4 filed March 17, 1998 with the Commission (Registration No. 333-48057) which is incorporated by reference. 13 1998 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 Consent of Olive LLP. 27 Financial Data Schedule. (b) Reports on Form 8-K The Registrant filed a Form 8-K on March 2, 1999 disclosing its acquisition of four banking offices from Bank One, Indiana N.A. 10 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 22nd day of March, 1999. INDIANA UNITED BANCORP By /s/ James L. Saner, Sr. -------------------------------- James L. Saner, Sr., President and Chief Operating 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 - --------- -------- ---- - -------------------- John E. Back Director March 22, 1999 - -------------------- William G. Barron Director March 22, 1999 - -------------------- Dale J. Deffner Director March 22, 1999 - -------------------- Robert S. Dunevant Director March 22, 1999 - -------------------- Philip A. Frantz Director March 22, 1999 - -------------------- Robert E. Hoptry Chairman of the Board March 22, 1999 and Chief Executive Officer - -------------------- Martin G. Wilson Director March 22, 1999 - -------------------- Edward J. Zoeller Director March 22, 1999 11 EX-3.1 2 EXHIBIT 3.1 ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION OF INDIANA UNITED BANCORP Pursuant to the provisions of IC 23-1-38-6, Articles of Amendment to the Articles of Incorporation of Indiana United Bancorp (the "Corporation") are hereby adopted: FIRST: The name of the Corporation is Indiana United Bancorp. SECOND: The amendment adopted amends Section 1 and Section 2.A of Article V of the Articles of Incorporation to read in their entirety as follows: "ARTICLE V AUTHORIZED SHARES SECTION 1. NUMBER OF SHARES The total number of shares which the Corporation is to have authority to issue is 10,400,000. A. The number of authorized shares the Corporation designates as having a par value is none. B. The number of authorized shares the Corporation designates as without par value is 10,400,000. SECTION 2. TERMS OF SHARES A. PREFERRED AND COMMONS SHARES. The 10,400,000 authorized shares which the Corporation shall have the authority to issue shall be divided into two classes designated as follows: 1. 10,000,000 Common Shares; and 2. 400,000 Preferred Shares." THIRD: The amendment does not provide for an exchange, reclassification or cancellation of issued shares. FOURTH: The above-described amendment was adopted on June 23, 1998 at a meeting of the shareholders of the Corporation held upon written notice as provided in the Indiana Business Corporation Law. FIFTH: Of the 2,387,314 Common Shares of the Corporation outstanding and entitled to vote on the above-described amendment, 1,783,353.805 Common Shares were represented at the meeting, and 1,736,478.754 votes were cast in favor of the amendment, 40,944.189 votes were cast against the amendment and 5,930.862 Common Shares abstained from the vote. The number of votes cast for approval of the above-described amendment was sufficient for approval thereof. Dated: July 27, 1998 INDIANA UNITED BANCORP By: /s/ ROBERT E. HOPTRY ----------------------------- Robert E. Hoptry, Chairman and Chief Executive Officer 2 EX-3.2 3 EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS OF INDIANA UNITED BANCORP (HEREINAFTER CALLED THE "CORPORATION") ARTICLE I OFFICES 1.1 PRINCIPAL OFFICE. The principal office of the Corporation shall be located in Greensburg, Indiana. The Corporation may have such other offices, either within or outside the State of Indiana, as the business of the Corporation may require from time to time. 1.2 REGISTERED OFFICE. The registered office of the Corporation shall be 201 N. Broadway, Greensburg, Indiana 47240. The address of the registered office may be changed from time to time by the Board of Directors. ARTICLE II SHAREHOLDERS 2.1 ANNUAL MEETINGS. The annual meeting of the shareholders shall be held at such time, place and on such date as the Board of Directors shall designate and as stated in the notice of the meeting, said date to be no later than six months following the end of the Corporation's fiscal year. The purpose of such meeting shall be the election of directors and the transaction of such other business as may properly come before it. If the election of directors shall not be held on the day designated for an annual meeting, or at any adjournment thereof, the Board of Directors shall cause the election to be held at a special meeting of the shareholders to be held as soon thereafter as may be practicable. Failure to hold the annual meeting at or within the designated time, or to elect directors at or within such time, shall not work any forfeiture or a dissolution of the Corporation, and shall not otherwise affect valid corporate acts. 2.2 SPECIAL MEETINGS. Special meetings of the shareholders for any purpose or purposes may be called by the Chairman of the Board or the Chief Executive Officer of the Corporation, and shall be called by the Chairman of the Board at the written request of a majority of the members of the Board of Directors, or upon delivery to the Corporation's Secretary of a signed and dated written demand for a special meeting from the holders of at least 25% of all the votes entitled to be cast on any issue proposed to be considered at the proposed special meeting. 2.3 PLACE OF SPECIAL MEETINGS. The Board of Directors may designate any place within or outside the State of Indiana as the place for any special meeting of shareholders called by the Board of Directors. If no designation is properly made, or if a special meeting is otherwise called, the place of meeting shall be at the principal office of the Corporation in the State of Indiana. 2.4 NOTICE OF ANNUAL OR SPECIAL MEETINGS. The Corporation shall give notice to shareholders of record of the date, time and place of each annual or special shareholders meeting to be held, and, in case of a special meeting, the purpose or purposes for which the meeting is called, no less than 10 days nor more than 60 days before the date of the meeting. Notice shall be given in written form, delivered personally or by telegraph, teletype, any other form of wire or wireless written communication or by mail or private carrier, by or at the direction of the Chairman of the Board or the Secretary. If notice is given by mail, such notice shall be deemed to be delivered when deposited in the United States mail correctly addressed to the shareholder at his address as it appears on the stock transfer books of the Corporation, with postage prepaid. If notice is given by private carrier, such notice shall be deemed to be delivered upon delivery of such notice to a private carrier, in any envelope required by such private carrier for delivery without charge to the shareholder, correctly addressed to the shareholder at his address as it appears on the stock transfer books of the Corporation. If notice is given by telegraph, teletype or any other form of wire or wireless written communication, notice shall be deemed to be delivered upon proper transmission of such written communication to the shareholder's address as it appears on the stock transfer books of the Corporation or through a wireless communication telephone number for a shareholder's business or residence address known to the Corporation that the Corporation reasonably believes will result in the receipt of such written communication (or all material information as to its contents) by the shareholder. An affidavit (a) of mailing of notice of a meeting of shareholders, executed by 2 the Secretary, any Assistant Secretary or any transfer agent of the Corporation, (b) of delivery of notice, executed by any private carrier or any independent company engaged in the transmission and delivery of telegraphs, and (c) of proper transmission of notice by teletype or any other form of wire or wireless written communication, executed by any officer of the Corporation, shall be prima facie evidence of the giving of such notice. 2.5 ADVANCE NOTICE OF SHAREHOLDER BUSINESS. At any annual meeting of the shareholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors or (c) otherwise properly brought before the meeting by a shareholder. For business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal office of the Corporation, not less than 60 nor more than 90 days prior to the meeting; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation's stock transfer books, of the shareholder proposing such business, (c) the class and number of shares of the Corporation which are beneficially owned by the shareholder and (d) any material interest of the shareholder in such business. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Section 2.5. The chairman of the annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section 2.5, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. 3 2.6 CLOSING TRANSFER BOOKS AND FIXING OF A RECORD DATE. The Board of Directors of the Corporation may close its stock transfer books for a period not exceeding 70 days, immediately prior to the date of any meeting of shareholders, or the date for the payment of any dividend or for the allotment of rights, or the date when any exchange or reclassification of shares shall be effective; or in lieu thereof, may fix in advance a date, not exceeding 70 days prior to the date of any meeting of shareholders, or to the date for the payment of any dividend or for the allotment of rights, or to the date when any exchange or reclassification of shares shall be effective, as the record date for the determination of shareholders entitled to notice of, or to vote at, such meeting, or shareholders entitled to receive payment of any such dividend or to receive any such allotment of rights, or to exercise rights in respect of any exchange or reclassification of shares. The shareholders of record on such record date shall be the shareholders entitled to notice of, and to vote at, such meeting, or to receive payment of such dividend or to receive such allotment of rights, or to exercise such rights, in the event of an exchange or reclassification of shares, as the case may be. If the transfer books are not closed and no record date is fixed by the Board of Directors, the date on which notice of the meeting is mailed, or the date on which the resolution of the Board of Directors declaring such dividend is adopted or such other action is taken, as the case may be, shall be deemed to be the record date for the determination of the shareholders of the Corporation and the number of shares owned by them for all of the purposes set forth in the immediately preceding sentence. When a record date has been established as provided herein, such record date shall be effective for any adjournment of the meeting for which such record date was established, unless the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting, in which case the Board of Directors shall establish a new record date in accordance with these Bylaws. 2.7 VOTING RECORD. The officer or agent having charge of the Corporation's stock transfer books shall make, at least 5 business days before every meeting of shareholders, a list of the shareholders entitled to notice of the shareholders' meeting, arranged in alphabetical order. The list shall be further arranged by voting group (and within each voting group by class or series of shares) and show the address of and number of shares held by each shareholder. Such shareholders' list shall be available for inspection by any shareholder, beginning 5 business days before the meeting for which the list was prepared and continuing through the meeting, at the Corporation's principal office 4 or at a place identified in the meeting notice in the city where the meeting will be held. A shareholder, his agent or attorney may on written demand inspect and copy the list during regular business hours and at the shareholder's expense, during the period it is available for inspection, subject to the provisions of the Indiana Business Corporation Law (including, without limitation, provisions concerning the Corporation's ability to refuse to permit such inspection or copying without a court order). The Corporation shall make the shareholders' list available at the meeting, and any shareholder, his agent or attorney shall be entitled to inspect the list at any time during the meeting or any adjournment. 2.8 QUORUM. A majority of the outstanding shares of the Corporation entitled to vote, represented in person or by proxy, shall constitute a quorum of the shareholders for all purposes unless a greater or lesser quorum shall be provided by law or the Corporation's Articles of Incorporation and in such case the representation of the number so required shall constitute a quorum. Once a share is represented for any purpose at a meeting, it shall be deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting, unless a new record date is or must be set for that adjourned meeting. In the absence of a quorum, the shareholders so present may, by majority vote, adjourn the meeting from time to time in the manner provided in Section 2.9 of these Bylaws. 2.9 ADJOURNMENTS. Any meeting of shareholders, annual or special, may adjourn from time to time to reconvene at the same or some other place, and notice need not be given of any such adjourned meeting if the time and place thereof is announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting. If after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting. 2.10 ORGANIZATION. The Chairman of the Board, or such other person as may have been designated for the purpose by the Board of Directors, or if no such designation shall have been made, a chairman elected by the shareholders present, shall act as chairman of meetings of shareholders. The Secretary of the Corporation shall act as secretary of meetings of shareholders, but in the absence of the Secretary the chairman of the meeting may appoint any person to act as secretary of the meeting. 5 2.11 VOTING. Unless otherwise required by the Indiana Business Corporation Law, the Corporation's Articles of Incorporation or these Bylaws, (a) any question brought before any meeting of shareholders shall be decided by the vote of the holders of a majority of the shares represented and entitled to vote on the matter and (b) each shareholder represented at a meeting of shareholders shall be entitled to cast one vote for each share entitled to vote on the matter held by such shareholder. The Board of Directors, in its discretion, or the chairman presiding at a meeting of shareholders, in his discretion, may require that any votes cast at such meeting shall be cast by written ballot. 2.12 PROXIES. At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his duly authorized attorney-in-fact. Such proxy shall be filed with the Secretary of the Corporation before or at the time of the meeting. No proxy shall be valid after 11 months from the date of its execution, unless otherwise expressly provided in the proxy. A proxy may be revoked in writing at any time unless the appointment form conspicuously states that it is irrevocable and the appointment is coupled with an interest. The effective time of such revocation shall be the time the Secretary of the Corporation receives the written notice of revocation. 2.13 VOTING OF SHARES BY CERTAIN HOLDERS. (a) Shares standing in the name of another corporation may be voted by that corporation's president or by proxy appointed by him or by such other person as the board of directors of such other corporation may determine. (b) Shares held by an administrator, executor, guardian or conservator may be voted by him, either in person or by proxy, without a transfer of such shares into his name. Shares standing in the name of a trustee may be voted by him, either in person or by proxy, but no trustee shall be entitled to vote shares held by him without a transfer of such shares into his name. (c) Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into his name if authority so to do is contained in an appropriate order of the court by which such receiver was appointed. (d) Where shares are held jointly by two or more fiduciaries, unless the Secretary of the Corporation is given written notice to the contrary by any of such fiduciaries, the vote of one or more of such 6 fiduciaries shall be presumed to be the vote of all such fiduciaries. Where shares are held jointly by two or more fiduciaries and written notice is given to the Secretary of the Corporation that the vote of one or more of such fudiciaries may not be presumed to be the vote of all such fiduciaries, the vote of the majority of such fiduciaries (or both in the case of two fiduciaries) shall control the manner of voting or the giving of a proxy unless the instrument or order appointing the fiduciaries otherwise directs. Where, in any case, fiduciaries are equally divided upon the manner of voting shares jointly held by them, any court of competent jurisdiction may, upon petition filed by any of the fiduciaries, or by any beneficiary, appoint an additional person to act with the fiduciaries in determining the manner in which the shares shall be voted upon the particular questions as to which the fiduciaries are divided. (e) A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter, the pledgee shall be entitled to vote the shares so transferred. (f) Neither treasury shares of its own stock held by the Corporation, nor shares held by another corporation if a majority of the shares entitled to vote for the election of directors of such other corporation is held by the Corporation, shall be voted at any meeting or counted in determining the total number of outstanding shares at any given time. (g) The Secretary or any shareholder may demand written proof that the person asserting the right to vote shares pursuant to this Section 2.13 holds the position he claims to hold and has been properly authorized to vote the shares he represents. Such proof, if demanded, shall be presented prior to the voting of such shares by such person. 2.14 INSPECTORS OF ELECTIONS. The Board of Directors or the chairman of the meeting may appoint two or more inspectors to tally and certify each vote required to be tallied and certified by them as provided in the resolution of the Board of Directors appointing them or in their appointment by the chairman of the meeting, and to perform such other acts or duties as may be requested by the chairman of the meeting or required by law. On request of the chairman of the meeting or as otherwise required by law, the inspectors shall make and execute a written report to the chairman of the meeting certifying any facts found by them and matters determined by them. The report shall be prima 7 facie evidence of the facts stated and of the vote certified by the inspectors. 2.15 ATTENDANCE AT MEETING AS WAIVER. Attendance by a shareholder at a meeting of shareholders (a) waives objection to lack of notice or defective notice of the meeting, unless the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting; and (b) waives objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless the shareholder objects to considering the matter when it is presented. ARTICLE III DIRECTORS 3.1 GENERAL POWERS. The business affairs of the Corporation shall be managed by its Board of Directors. 3.2 NUMBER, TENURE AND QUALIFICATIONS. The number of directors of the Corporation shall be not less than five (5) and no more than fifteen (15), as fixed by resolution of the Board of Directors from time to time. Each director shall hold office for the term for which he was elected and until his successor shall be elected and qualified, whichever period is longer, or until his death or until he shall resign or shall have been removed in the manner hereinafter provided. 3.3 REMOVAL AND RESIGNATIONS. Subject to the rights of the holders of any series of Preferred Shares then outstanding, at a meeting of shareholders called expressly for the purpose of removing one or more directors, any director or the entire Board of Directors may be removed, with or without cause, by a vote of the holders of a majority of the shares then entitled to vote at an election of directors. Whenever any voting group is entitled to elect one or more directors by the provisions of the Articles of Incorporation, the provisions of this Section shall apply, in respect to the removal of a director or directors so elected by such voting group, to the vote of the voting group and not to the vote of the outstanding shares as a whole. Any member of the Board of Directors may resign from the Board of Directors at any time by giving written notice to the Chairman of the Board or Secretary of the Corporation, and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 8 3.4 ANNUAL AND REGULAR MEETINGS. An annual meeting of the Board of Directors shall be held without other notice than this Bylaw immediately after, and at the same place as, the annual meeting of shareholders. The Board of Directors may provide by resolution the time and place, either within or outside the State of Indiana, for the holding of regular meetings without other notice than such resolution. 3.5 SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by, or at the request of, the Chairman of the Board or by any two directors. All special meetings of the Board of Directors shall be held at the principal office of the Corporation unless some other place shall be specified in the notice of the meeting. 3.6 NOTICE. Notice of any special meeting shall be given at least 48 hours prior thereto, either in person or by telephone, or in written form delivered personally or by telegraph, teletype, any other form of wire or wireless written communication or by mail or private carrier, to each director at such business address (and business wire or wireless communication telephone number, if any) as he shall register with the Secretary of the Corporation. If mailed, such notice shall be deemed to be delivered at the earliest of the following: (a) when received, (b) five days after its deposit in the United States mail, as evidenced by the postmark, if mailed postpaid and correctly addressed, or (c) on the date shown on the return receipt, if sent by registered or certified mail, return receipt requested, and the receipt is signed by or on behalf of the director. If notice is given by a private carrier, such notice shall be deemed to be delivered upon delivery of such notice to a private carrier, in any envelope required by such private carrier for delivery without charge to the director, correctly addressed to the director at his business address. If notice is given by telegraph, teletype or any other form of wire or wireless written communication, notice shall be deemed to be delivered when receipt of such written communication is confirmed (whether by telephone or otherwise) by any person present at the director's business address to which such written communication has been transmitted. Any director may waive notice of any meeting. The attendance of a director at any meeting shall constitute a waiver of notice of such meeting, except where a director at the beginning of the meeting (or promptly upon the director's arrival) objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. 9 3.7 QUORUM. A majority of the number of directors determined in accordance with Section 3.2 of these Bylaws shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, provided, if less than a majority of the directors are present at said meeting, a majority of the directors present may adjourn the meeting from time to time without further notice. 3.8 ORGANIZATION. Meetings of the Board of Directors shall be presided over by the Chairman of the Board, or in his absence the Vice-Chairman, if any, or in the absence of the Vice Chairman, if any, the President, or in his absence by a chairman chosen at the meeting. The Secretary shall act as secretary of the meeting, but in his absence the chairman of the meeting may appoint any person to act as secretary of the meeting. 3.9 MANNER OF ACTING. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, unless otherwise required by the Articles of Incorporation. 3.10 PARTICIPATION BY TELEPHONIC MEANS. Members of the Board of Directors, or of any committee designated by the Board of Directors, may participate in a meeting of such Board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear and speak to each other at the same time, and participation in a meeting pursuant to this provision shall constitute presence in person at the meeting. 3.11 NEWLY CREATED DIRECTORSHIPS AND VACANCIES. Subject to the rights of the holders of any series of Preferred Shares then outstanding, newly created directorships resulting from any increase in the authorized number of directors shall, and any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause may, be filled by a majority of the remaining directors then in office, and directors so chosen shall serve for a term expiring at the next annual meeting of shareholders and until his successor shall have been duly elected and qualified, or until his earlier resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. 3.12 COMPENSATION. Directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a stated salary as director, a 10 fixed sum for attendance at each meeting of the Board of Directors or some combination thereof. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. 3.13 ACTION BY WRITTEN CONSENT. Any action required or permitted to be taken by the Board of Directors at a meeting may be taken without a meeting if the action is taken by all directors. Any such action shall be evidenced by one (1) or more written consents describing the action taken, signed by each director, and included in the minutes or filed with the corporate records reflecting the action taken. 3.14 NOMINATIONS OF DIRECTOR CANDIDATES. Only persons who are nominated in accordance with the procedures set forth in this Section 3.14 shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of shareholders by or at the direction of the Board of Directors or by any shareholder of the Corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 3.14. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a shareholder's notice shall be delivered to or mailed and received at the principal office of the Corporation not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such shareholders' notice shall set forth (a) as to each director whom the shareholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the Corporation which are beneficially owned by such person and (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or as otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including, without limitation, such persons' written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (b) as 11 to the shareholder giving the notice, (i) the name and address, as they appear on the Corporation's stock transfer books, of such shareholder and (ii) the class and number of shares of the Corporation which are beneficially owned by such shareholder. At the request of the Board of Directors any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a shareholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 3.14. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by the Bylaws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. ARTICLE IV COMMITTEES 4.1 COMMITTEES. The Board of Directors may, by resolution passed by a majority of the full Board of Directors, designate one or more committees, each committee to consist of two or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of the committee, and in the absence of a designation by the Board of Directors of an alternate member to replace the absent or disqualified member, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in place of any such absent or disqualified member. Any such committee, to the extent permitted by law and to the extent provided in the resolution of the Board of Directors, shall have and may exercise all of the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it. Each committee shall keep regular minutes and report to the Board of Directors when required. 4.2 COMMITTEE RULES. Unless the Board of Directors otherwise provides, each committee designated by the Board of Directors may make, alter and repeal rules for the conduct of its business. In the absence of such rules, each committee shall conduct its business in the same manner as 12 the Board of Directors conducts its business pursuant to Article III of these Bylaws. ARTICLE V OFFICERS 5.1 CLASSES. The officers of the Corporation shall be chosen by the Board of Directors and shall consist of a Chairman of the Board of Directors, a Chief Executive Officer, a President, a Secretary and a Treasurer. Further, the Board of Directors may elect or appoint a Vice Chairman (which position the Board of Directors may designate by resolution as a non-officer, honorary position), one or more Vice Presidents (whose titles may be modified by one or more words such as "Executive," "Senior," "Finance," "Operations" or words of similar ranking or descriptive import), a Controller, Assistant Secretaries, Assistant Treasurers and such other officers and assistants to offices as it from time to time deems necessary. Any two or more offices may be held by the same person. 5.2 ELECTION AND TERM OF OFFICE. The officers of the Corporation shall be elected by the Board of Directors at its first meeting held after the Annual Meeting of Shareholders. If the election of officers is not held at any such meeting, such election shall be held as soon thereafter as is practicable. Vacancies may be filled or new offices created and filled at any meeting of the Board of Directors. Each officer shall hold office until his successor is duly elected or until his death or until he shall resign or shall have been removed in the manner hereinafter provided. 5.3 REMOVAL AND RESIGNATIONS. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors whenever, in its judgment, the best interests of the Corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. Any officer of the Corporation may resign at any time by giving written notice to the President or Secretary of the Corporation, and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 5.4 VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification or otherwise may be filled by the Board of Directors for the unexpired portion of the term. 13 5.5 CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board shall be a director and shall preside at meetings of the Board of Directors and meetings of shareholders. The Chairman of the Board shall be responsible for (a) board and shareholder governance, (b) external relations with industry, cities and communities, (c) corporate wide business management and (d) implementation of business plans with other team members. The Chairman of the Board shall share with the Chief Executive Officer responsibility for (a) external relations with the financial community, (b) corporate governance, (c) setting the agenda for all meetings of the Board of Directors (and committees thereof) and (d) enterprise support. The Chairman of the Board shall be a member of any Executive Committee of the Board and an ex officio member of all standing committees. 5.6 VICE-CHAIRMAN. The Vice Chairman, if any, shall have such duties and powers as from time to time may be assigned by these Bylaws or the Board of Directors. 5.7 CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall be a director, shall submit a report of the operations of the Company for the fiscal year to the shareholders at their annual meeting and from time to time shall report to the Board of Directors all matters within his knowledge that the interests of the Company may require be brought to their notice. The Chief Executive Officer shall be responsible for (a) the strategic direction, development and oversight of the Company, (b) the growth of the Company and (c) the deployment of strategic assets of the Company (including executive management and other personnel employed by the Corporation (excluding personnel employed solely by any subsidiary of the Corporation)). The Chief Executive Officer shall share with the Chairman of the Board responsibility for (a) external relations with the financial community, (b) corporate governance, (c) setting the agenda for all meetings of the Board of Directors (and committees thereof) and (d) enterprise support. The Chief Executive Officer shall be a member of any Executive Committee of the Board. The Chief Executive Officer will report directly to the Board of Directors. 5.8 PRESIDENT. The President shall be the Chief Operating Officer of the Corporation. Subject to the direction of the Board of Directors and the Chief Executive Officer of the Corporation, the President shall have general supervision over the administration and business operations of the Corporation as conducted through its operating subsidiaries. 14 5.9 VICE-PRESIDENTS. Any Vice-President shall have such duties and powers as shall be designated from time to time by the Board of Directors. 5.10 SECRETARY. The Secretary shall (a) keep the minutes of the shareholders' meetings and of the Board of Directors' meetings and (unless otherwise directed) all committees thereof in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law; (c) be custodian of the corporate records and of the seal, if any, of the Corporation; (d) keep a register of the mailing address of each shareholder; (e) sign with the President or Vice-President certificates for shares of stock of the Corporation; (f) have general charge of the stock transfer books of the Corporation (which may, however, be kept by any transfer agent or agents of the Corporation); and, (g) in general, perform all duties incident to the office of Secretary, and have such other duties and powers as may be designated from time to time by the Chairman of the Board (provided he is the Chief Executive Officer) or the President. 5.11 TREASURER. The Treasurer shall be the Chief Financial Officer of the Corporation unless the Board of Directors expressly designates another officer as such by resolution. The Treasurer shall supervise and conduct the routine financial business of the Corporation and shall have care and custody of its funds, securities and property subject to the supervision of the President. The Treasurer shall keep permanent records of the funds and property of the Corporation and shall have authority to receive all monies and to pay out and disburse such monies under the direction and control of the Board of Directors. The Treasurer shall deposit daily to the credit of the Corporation all monies not required for the convenience of the Corporation's business, in such banks, trust companies or other depositories as the Board of Directors may from time to time direct. The Treasurer shall in general perform all the duties incident to the office of Treasurer, and have such other duties and powers as may be designated from time to time by the Chairman of the Board (provided he is the Chief Executive Officer), the President or any officer who is designated the Chief Financial Officer of the Corporation. 5.12 CONTROLLER. The controller shall be the Chief Accounting Officer of the Corporation and shall be in charge of its books of account, accounting records and accounting procedures. He shall have such other duties and powers as may be designated from time to time by the Chairman of the 15 Board (provided he is the Chief Executive Officer) or the President. 5.13 OTHER OFFICERS; ASSISTANT OFFICERS. If the Board of Directors elects or appoints (i) other officers or (ii) assistants to any other officers, such officers and assistant officers shall exercise such powers and perform such duties as pertain to their respective offices, or as may be conferred upon, or assigned to, them by the Chairman of the Board (provided he is the Chief Executive Officer) or the President and, in the case of assistant officers, the respective officer to whom they are assistants. 5.14 COMPENSATION. The compensation of the Chairman of the Board, the Vice-Chairman of the Board, if any, the Chief Executive Officer and the President of the Corporation shall be fixed from time to time by the Board of Directors. The compensation of the other officers of the Corporation may be fixed by the President, although such compensation shall be reviewed at least annually by the Board of Directors and may be altered by the Board of Directors. No officer shall be prevented from receiving such compensation by reason of the fact that he is also a director of the Corporation. ARTICLE VI CLERKS, AGENTS AND EMPLOYEES The Board of Directors may appoint, from time to time, such clerks, agents and employees as it may deem advisable for the prompt and orderly transaction of the business of the Corporation, define their duties, fix the salaries to be paid them and dismiss them. Subject to the authority of the Board of Directors, the President, or any other officer of the Corporation authorized by him, may appoint and dismiss all or any of such clerks, agents and employees and prescribe their duties and the conditions of their employment, and from time to time fix their compensation. ARTICLE VII CONTRACTS, LOANS, CHECKS AND DEPOSITS 7.1 CONTRACTS. The Board of Directors may authorize any officer or officers, or agent or agents, to enter into any contract and execute and deliver any instruments in the 16 name of and on behalf of the Corporation. Such authority may be general or confined to specific instances. 7.2 LOANS AND EVIDENCES OF INDEBTEDNESS. No loan shall be contracted on behalf of the Corporation, and no evidence of indebtedness shall be issued in its name, unless authorized by the Board of Directors. Such authorization may be general or confined to specific instances. Loans so authorized by the Board of Directors may be effected at any time for the Corporation from any bank, trust company or other institution, or from any firm, corporation or individual. All bonds, debentures, notes and other obligations or evidences of indebtedness of the Corporation issued for such loans shall be made, executed and delivered as the Board of Directors shall authorize. When so authorized by the Board of Directors, any part of or all of the properties, including contract rights, assets, business or goodwill of the Corporation, whether then owned or thereafter acquired, may be mortgaged, pledged, hypothecated or conveyed or assigned in trust as security for the payment of such bonds, debentures, notes and other obligations or evidences of indebtedness of the Corporation, and of the interest thereon, by instruments executed and delivered in the name of the Corporation. 7.3 CHECKS, DRAFTS, ETC. All checks, drafts or other orders for the payment of money, issued in the name of the Corporation, shall be signed by such person or persons and in such manner as may from time to time be designated by the Board of Directors. Such designations may be general or confined to specific instances. 7.4 DEPOSITS. All funds of the Corporation not otherwise employed shall be deposited, from time to time, to the credit of the Corporation in such banks, trust companies and other depositories as the Board of Directors may authorize. The Board of Directors may make such special rules and regulations with respect to such bank accounts, not inconsistent with the provisions of these Bylaws, as it may deem expedient. For the purpose of deposit and for the purpose of collection for the account of the Corporation, checks, drafts and other orders for the payment of money that are payable to the order of the Corporation shall be endorsed, assigned and delivered by such person or persons and in such manner as may from time to time be authorized by the Board of Directors. 17 ARTICLE VIII CERTIFICATES FOR SHARES AND THEIR TRANSFER 8.1 CERTIFICATES FOR SHARES. Every shareholder shall be entitled to have a certificate certifying the number and type of shares of the Corporation owned by him, signed by, or in the name of the Corporation by the Chairman of the Board, or Vice-Chairman, President or a Vice-President and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation (except that when any such certificate is countersigned by a transfer agent other than the Corporation or its employee or by a registrar other than the Corporation or its employee the signature of any such officers may be facsimiles). Such certificates shall be in such form as may be determined by the Board of Directors and by the laws of the State of Indiana. If the Corporation shall be authorized to issue more than one class of shares or more than one series of any class, the designations, preferences and relative, participating, optional or other special rights of each class of shares or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the Corporation shall issue to represent such class or series of shares, provided that, except in the case of restrictions on transfer of securities which are required to be noted on the certificate, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate that the Corporation shall issue to represent such class or series of shares, a statement that the Corporation will furnish without charge to each shareholder who so requests the designations, preferences and relative, participating, optional or other special rights of each class of shares or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 8.2 TRANSFER OF SHARES. Transfer of shares of the Corporation shall be made only on the books of the Corporation by the registered holder thereof, or by his legal representative who shall furnish proper evidence of authority to transfer, or by his attorney-in-fact thereunto authorized by power of attorney duly executed and filed with the Corporation, and on surrender for cancellation of the certificate for such shares. The person in whose name shares stand on the books of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation. 18 8.3 LOST, STOLEN OR DESTROYED CERTIFICATES. A new certificate or certificates may be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of shares to be lost, stolen or destroyed. When issuing a new certificate or certificates, the Corporation, acting through its officers or agents, including any transfer agent or registrar, may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. 8.4 REGULATIONS. The Board of Directors shall have the power and authority to take such action and make such rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates for shares of the Corporation, including, without limitation, the appointment of a transfer agent and registrar for the Corporation. ARTICLE IX EMERGENCY BYLAWS The Board of Directors may adopt, either before or during an emergency, as that term is defined by the Indiana Business Corporation Law, any emergency regulations permitted by the Indiana Business Corporation Law which shall be operative only during such emergency. In the event the Board of Directors does not adopt any such emergency regulations the special rules provided in the Indiana Business Corporation Law shall be applicable during such emergency. ARTICLE X INDEMNIFICATION OF DIRECTORS AND OFFICERS 10.1 GENERAL. The Corporation shall, to the fullest extent permitted by, and in accordance with the provisions of, the Indiana Business Corporation Law, as it presently exists or may hereafter be amended, indemnify each director and officer of the Corporation against expenses (including attorneys' fees), judgments, taxes, fines, and amounts paid in settlement, incurred by him in connection with, and shall 19 advance expenses (including attorneys' fees) incurred by him in defending, any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative or investigative) to which he is, or is threatened to be made, a party by reason of the fact that he is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, employee, or agent of another domestic or foreign corporation, partnership, joint venture, trust or other enterprise. Advancement of expenses shall be made upon receipt of an undertaking, with such security, if any, as the Board of Directors or shareholders may reasonably require, by or on behalf of the person seeking indemnification to repay amounts advanced if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized herein. 10.2 NON-EXCLUSIVE RIGHT. The indemnification provided for by Section 10.1 shall not be deemed exclusive of any other rights to which directors or officers of the Corporation may be entitled under any statute, provision in the Corporation's Articles of Incorporation, agreement or action of the Board of Directors or shareholders of the Corporation, or otherwise, and shall continue as to a person who has ceased to be a director or officer of the Corporation, and shall inure to the benefit of the heirs, executors, and administrators of such a person. 10.3 INSURANCE. Without in any way limiting the Corporation's power to purchase and maintain insurance for any other purpose or on behalf of any other person, the Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, employee, or agent of another domestic or foreign corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against him and incurred by him in such capacity or arising out of his status as such, whether or not the Corporation would have the power or be obligated to indemnify him against such liability under the provisions of Section 10.1 of these Bylaws or the Indiana Business Corporation Law. ARTICLE XI MISCELLANEOUS 11.1 AMENDMENTS. The Board of Directors shall have the power and authority to alter, amend or repeal these Bylaws, 20 and to make new Bylaws, by the vote of a majority of the entire Board of Directors, subject always to the power of the shareholders to change or repeal such Bylaws. 11.2 FISCAL YEAR. The Board of Directors shall have the power to fix, and from time to time change, the fiscal year of the Corporation. 11.3 SEAL. The Board of Directors may adopt a corporate seal which shall be circular in form and shall have inscribed thereon the name of the Corporation, the state of incorporation, and the word "SEAL". 11.4 WAIVER OF NOTICE. Whenever any notice is required to be given under the provisions of these Bylaws, the Articles of Incorporation, or the Indiana Business Corporation Law, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be equivalent to the giving of such notice. 11.5 VOTING OF SHARES HELD BY CORPORATION. Unless otherwise ordered by the Board of Directors, the Chief Executive Officer of the Corporation may from time to time appoint an attorney or attorneys, or any agent or agents, to exercise in the name and on behalf of the Corporation the powers and rights that the Corporation may have, as the holder of shares or other securities in any other corporation, to vote or to consent in respect of such shares or other securities; and the Chief Executive Officer may instruct the person or persons so appointed as to the manner of exercising such powers and rights; and the Chief Executive Officer may execute or cause to be executed in the name and on behalf of the Corporation and under its corporate seal or otherwise, all such written proxies, powers of attorney or other written instruments as he may deem necessary in order that the Corporation may exercise such powers and rights. 11.6 FORM OF RECORDS. Any records maintained by the Corporation in the regular course of its business, including its stock ledger, books of account and minute books, may be kept on, or be in the form of, punch cards, magnetic tape, photographs, microphotographs, or any other information storage device, provided that the records so kept can be converted into clearly legible form within a reasonable time. The Corporation shall so convert any records so kept upon the request of any person entitled to inspect the same. 11.7 STOCK LEDGER. The stock ledger of the Corporation shall be the only evidence as to who are the shareholders 21 entitled to examine the stock ledger and the list of the shareholders entitled to vote at every meeting of shareholders or the books of the Corporation, to vote in person or by proxy at any meeting of shareholders, to receive notice of any meeting of shareholders and to receive distributions on shares of the Corporation. The Corporation shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not it shall have express or other notice there of, except as otherwise provided by the laws of the State of Indiana. 11.8 CONSTRUCTION. Unless the context specifically requires otherwise, any reference in these Bylaws to any gender shall include all other genders; any reference to the singular shall include the plural; and any reference to the plural shall include the singular. The above Amended and Restated Bylaws of the Corporation were adopted by the Corporation's Board of Directors at a meeting held on April 28, 1998. /s/ SUE FAWBUSH ----------------------------- Sue Fawbush, Secretary 22 EX-13 4 Indiana United Bancorp 1998 Annual Report Blueprint for Success Indiana United Bancorp ("Company") is a registered bank holding company incorporated under the laws of Indiana in 1983, concurrent with its acquisition of Union Bank and Trust Company of Greensburg, Indiana. The Company acquired The Peoples Bank, Portland, Indiana in 1987,and Regional Federal Savings Bank, New Albany, Indiana at the end of 1991. In 1994, Peoples Bank merged with Union Bank to form Union Bank and Trust Company of Indiana, retaining state banking charter #1. On April 30, 1998, the Company completed a merger of equals with P.T.C. Bancorp, Brookville, Indiana. Through its three banking subsidiaries, the Company operates 35 offices in 14 Indiana counties (see map). All three banking subsidiaries offer a full array of competitive commercial and consumer loan and deposit related services. The Company provides 28 ATMs as well as 24-hour, 7 day a week telephone banking services. In addition, the Company operates two general line, independent insurance agencies and a full-service trust division. IUB stock trades on the NASDAQ exchange under the symbol IUBC. There are 4,774,628 shares outstanding, held by 2,517 shareholders residing in 38 states and two foreign countries. CONTENTS Letter to Shareholders 2 Building for the Future 4 Management's Discussion and Analysis 7 Management's Report 21 Auditor's Report 21 Financial Statements 22 Notes to Financial Statements 26 Directors and Officers 40 Corporate and Investor Information 41 Map of the state of Indiana appears here. Within the state the various locations of Union Bank Offices, People's Trust Company Offices and Regional Bank Offices are shown. Financial Highlights
- ---------------------------------------------------------------------------------------------------- (Dollar amounts in thousands except per share data) 1998 1997 Percent Change - ---------------------------------------------------------------------------------------------------- Results of Operations Gross revenues $59,837 $54,104 10.60 Net interest income 25,892 24,606 5.23 Provision for loan losses 1,218 1,789 (31.92) Net income 6,448 7,205 (10.51) Per Common Share* Earnings per share (basic) $1.36 $1.53 (11.11) Earnings per share (diluted) 1.35 1.52 (11.18) Dividends paid** 0.59 0.51 15.69 Book value - end of period Excluding SFAS No. 115 adjustment 12.25 11.52 6.34 Including SFAS No. 115 adjustment 12.40 11.68 6.16 Market price - end of period 22.13 22.75 (2.73) At Year End Total assets $827,945 $693,168 19.44 Total loans 539,404 472,627 14.13 Allowance for loan losses 6,099 5,451 11.89 Total deposits 709,871 583,168 21.73 Common shareholders' equity 59,196 55,006 7.62 Financial Ratios Return on average assets 0.89% 1.13% (20.87) Return on average common shareholders' equity 11.23 13.83 (18.84) Tier 1 capital to average assets 8.31 10.71 (22.41) Total capital to risk-adjusted assets 13.70 24.00 (42.92) - ---------------------------------------------------------------------------------------------------- Shares outstanding at year end 4,774,628 4,708,556 1.40 Number of common shareholders 2,517 2,604 (3.34) Number of full-time equivalent employees 360 299 20.40 - ----------------------------------------------------------------------------------------------------
* Adjusted for stock split and dividends ** Dividends paid by Indiana United Bancorp Note: Prior amounts have been restated as appropriate to reflect a pooling-of-interests transaction with P.T.C. Bancorp. [CHARTS] THE FOUNDATION IS SET. Dear Shareholders and Friends: 1998 was a very special year for Indiana United Bancorp. Last year's annual shareholder message described 1998 as a critical period in an ambitious growth strategy. Our plan heavily relied on attaining two goals: completing the merger of P.T.C. Bancorp into Indiana United and; investing the $22.4 million of newly issued trust preferred securities in branch acquisitions, complimentary to our community banking philosophy. We are pleased to report each of these priorities in our Blueprint for Success has been achieved. The merger was completed on April 30, 1998 and, during the remainder of the year, seven branches with deposits totaling $121.3 million were integrated into Indiana United subsidiaries. Even though our corporate focus in 1998 was primarily on revenue growth and market expansion, our banking subsidiaries did not lose sight of net earnings growth. As a result, net income from our banking subsidiaries increased more than $600,000, or 7.5% over the prior year. However, when corporate overhead, including the one time expenses of the merger and the annual expense of the trust preferred securities, is factored into results, consolidated net income per share declined to $1.35, which was in line with expected results. We expect 1999 to produce a solid gain over 1998 earnings, setting the stage for our return to high performance banking in the new millennium. We are also very pleased that our financial performance in 1998 supported a 15.7% increase in common dividends paid per share, marking the tenth consecutive year dividends have increased by at least 15%. Our emphasis on growth was not, and is not, without risk. The annual pre-tax interest cost of our new securities equals $.42 per share. If we had not correctly anticipated the intentions of our large competitors to retreat from many small communities, or if we had bid timidly on key branch acquisition opportunities, we could have incurred a negative arbitrage on these funds for five page two years or more. That risk has now been eliminated by our success in acquiring targeted branches. The risk we face over the next twelve to eighteen months relates to the level of success we can attain in leveraging these deposits into high quality loan growth to offset acquired deposit premiums. In this regard, we believe we have an excellent staff of lenders capable of realizing this goal without undermining our long history of maintaining a high performance loan portfolio. Our focus in 1998 was, and again in 1999 will be, on achieving revenue growth. By expanding our top line growth now, we are confident that our bottom line performance will accelerate in the years ahead. In 1998, gross revenues increased by $5.7 million or 10.6%,and we expect another significant increase in 1999. In our continued pursuit of this objective, our top line growth will be boosted during the first quarter of 1999 by four additional branch acquisitions with deposits totaling in excess of $100 million. It is also our intent to open two de novo branches by early spring. When completed, Indiana United will operate 40 banking offices in 15 Indiana counties, and will have assets totaling approximately $925 million. While these actions will complete our branch expansion strategy until the new millennium, we will continue to consider other appropriate bank acquisitions or mergers, as opportunities may occur. Our growth in 1999 will not be limited to increases in loans and deposits. As of January 1, all trust services have been consolidated into The Trust Investment Group under the leadership of Dan Anderson. During 1999, we expect to introduce a full range of trust and money management services throughout our organization. Experienced trust officers will provide local services in many of the communities we serve. This is in sharp contrast to many of our larger competitors who have moved their trust administration to Chicago or Cleveland or some other distant city. In 1999, you will also see a significant expansion of insurance products and services. Our plans include expanding our insurance division by 200% and adding a broad range of new insurance products. These services will be available through our newly created subsidiary, The Insurance Group, and will be locally available in many of our banking subsidiaries' larger locations. And finally, plans are underway to offer investment brokerage services in the third or fourth quarter. Technology will play a large role in our expansion of markets, products and services. Before year-end, customers will have access to a range of delivery channels rivaling our large city competitors. We will offer internet and telephone banking options, as well as continue our commitment to personal service. This means customer friendly lobby and drive-up hours, quick responses and customized approvals for loan requests, a full range of insurance and money management services and a willingness to "bring the bank to you" if an in-bank visit is not convenient. In addition, depositors throughout Indiana United will have unlimited free access to the ATMs of any Indiana United banking subsidiary. We enthusiastically embrace the changes now impacting the banking industry and we are confident our responses to these new challenges and opportunities portend a bright future for Indiana United Bancorp. We believe attainment of our goal to establish "one stop" financial centers in small communities will differentiate us positively from all of our competitors, large or small. A vital element of our success is the support of our shareholders. On behalf of all of our officers, directors and employees, we appreciate and thank you for your trust and confidence in our vision of the future. /s/ Robert E. Hoptry Robert E. Hoptry, Chairman and CEO /s/ James L. Saner, Sr. James L. Saner, Sr., President and COO [PHOTO APPEARS HERE] Robert E. Hoptry, Chairman and James L. Saner, Sr., President page three 1998 was a period of change and opportunity! It was a year of increased volatility in the banking industry. And it was also a year of opportunity for Indiana United Bancorp. Mergers across the industry were completed to create the critical volume necessary to offset the costs of creating alternative delivery channels. But, in the process, many large competitors forgot one critical element... THE CUSTOMER! The very large super-regional and nationwide banks appear to be reducing their commitment to service in favor of electronic delivery systems. Increasingly, these banks are selling branches in small communities across America. IUB chose to seize this opportunity. Our increase in size, resulting from strategically targeted branch acquisitions, provided the deposit base needed to explore new advances in technology while remaining steadfast in our commitment to superior customer service and participation as an active community business partner. A Carefully Planned Balance... Short-Term Commitments and Long-Term Earnings Growth The Indiana United approach involves a carefully planned balance of expansion and commitment to core values. The plan was to use technology not as a substitute but as an enhancement to customer service. The decisions were tough. We had to make major short-term financial commitments to assure strong long-term earnings growth. The considerable short-term expenses relative to branch acquisitions has created the critical mass desired to effectively implement new technologies like internet banking, and the introduction or refinement of a broad range of non-banking services. At the same time, we have not wavered in our commitment to those who helped get us where we are... the communities, the shareholders and the customers we serve. [PHOTO APPEARS HERE] "During 1998, we entered a new and exciting market for Union Bank. Expanding into both Madison and Hancock counties allows us the chance to preserve community banking values that are quickly being abandoned by larger institutions currently operating in this market." Daryl R. Tressler, Chairman, President and CEO, Union Bank and Trust Company of Indiana Union Bank and Trust Company of Indiana Main Office Address: 201 North Broadway P.O. Box 87 Greensburg, IN 47240-0087 Tel: 812-663-4711 Fax: 812-663-4904 Number of Offices: 12 Number of Employees: 146 Total Deposits: $255,094,000 Total Loans: $174,578,000 Total Assets: $301,758,000 page four That commitment became the basis of our Blueprint for Success! The Right Fit The defining event in launching our Blueprint for Success was the merger of Indiana United Bancorp and P.T.C. Bancorp. The time was right... the geography was right... the people were right, and most importantly, the philosophies were right. After months of careful planning, this one step nearly doubled the size of IUB, bringing us closer to the critical mass we were seeking. Simultaneously, we initiated an aggressive campaign to identify and acquire small branches being sold by large regional banks. As always, we looked for "The Right Fit" in locations, people, financial strength and potential. Through the end of 1998, we acquired seven branches across the state, with four more scheduled for the first quarter of 1999. Product... Price... Promotion... Place... People! To assure success in the future, we have identified and are concentrating on five specific operational areas: Product: Our goal is to continuously improve upon existing products, refine them when necessary, and add new ones, including internet banking and a variety of improved and new non-banking services. The market for our products and services is an increasingly complex one and, with our growth comes the capacity to respond more quickly with products and services that serve our customers' ever changing needs. Price: Our continuous focus on our customers means that we will strive to provide the BEST VALUE of financial services in our communities. We will deliver the services our customers want at rates which will make us the obvious choice to be their primary financial institution. Promotion: There's no question that, today, making the right banking decisions is more complicated. There are more options... more products and services. More than ever before, our customers rely on us for the information they need to make the right choices. We also know that, for most people, time is at a premium. That's why we focus on the needs of our customers and develop the products that [PHOTO APPEARS HERE] "We are determined to offer a variety of innovative products that meet the needs of our customers and quickly respond to changes in the Southern Indiana market that we serve. Managing the growth we have encountered in 1998 will be our primary focus in 1999." Michael K. Bauer, Chairman, President and CEO, Regional Federal Savings Bank Regional Federal Savings Bank Main Office Address: 100 East Spring Street P.O. Box 1207 New Albany, IN 47151-1207 Tel: 812-948-5500 Fax: 812-948-5537 Number of Offices: 6 Number of Employees: 63 Total Deposits: $155,582,000 Total Loans: $116,562,000 Total Assets: $187,373,000 page five meet those needs. We're the "solution" people. That means that we strive to take a much more proactive approach. We listen. Then we respond by providing a complete package of product and service options and the information our customers need to make decisions, all available from the one convenient source they know and trust. Place: Planning for IUB expansion involves a careful selection of locations. As we expand, the geography must make sense from an operational standpoint, and the locations must make sense from a customer service standpoint. Upgrades and relocations, such as the new Union Bank facility in Westport, Indiana, that opened during the summer of 1998, have resulted in increased deposits and customer traffic. We will continuously strive to be where we can best serve our customers. People: Our plan for the future is aggressive and our people are up to the challenge. We are where we are today because, unlike large, impersonal financial competitors, when our customers do business with us, they are dealing with people they know and trust. We will always maintain our emphasis on customer service and supplement that effort with the new product and service training our people need to get the job done. The Future... 1999 and beyond will be a time of further CHANGE... and OPPORTUNITY! The industry is evolving at an unprecedented pace. While it is impossible to predict exactly what it will take to meet the needs of our customers in the future, we have all the pieces in place. Our plans for fiscally responsible growth will make it possible to implement the technology required to deliver the right banking products and services in the future. At the same time, we'll always be "customer driven". We'll use technology not to replace, but to enhance the customer service that helped get us where we are today. Our strong management team, along with a committed, knowledgeable team of associates, will deliver what our customers want, when and where they want it at rates which will assure profitable growth for IUB. For our customers, shareholders, associates and the communities in which we operate, our Blueprint for Success defines an exciting future for 1999... and beyond! [PHOTO APPEARS HERE] "People's Trust Company has a strong commitment to community banking ideals. Our partnership with Indiana United provides an even better opportunity to expand that philosophy into the next millennium." Lynn T. Gordon, President and CEO, People's Trust Company People's Trust Company Main Office Address: 9014 State Road 101 P.O. Box 7 Brookville, IN 47012-0007 Tel: 765-647-3591 Fax: 765-647-3531 Number of Offices: 17 Number of Employees: 184 Total Deposits: $305,326,000 Total Loans: $259,236,000 Total Assets: $337,294,000 page six MANAGEMENT'S DISCUSSION AND ANALYSIS (Table Dollar Amounts in Thousands) FORWARD-LOOKING STATEMENTS Except for historical information contained herein, the discussion in this Annual Report includes certain forward-looking statements based upon management expectations. Factors which could cause future results to differ from these expectations include the following: general economic conditions; legislative and regulatory initiatives; monetary and fiscal policies of the federal government; deposit flows; the costs of funds; general market rates of interest; interest rates on competing investments; demand for loan products; demand for financial services; changes in accounting policies or guidelines; and changes in the quality or composition of the Company's loan and investment portfolios. The Company does not undertake and specifically disclaims any obligation to update any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. OVERVIEW The Company operates under the broad tenets of a long-term strategic plan ("Plan") designed to improve the Company's financial performance, expand its competitive ability and enhance long-term shareholder value. The Plan is premised on the belief of the Company's board of directors that the Company can best promote long-term shareholder interests by pursuing strategies which will continue to preserve its community-focused philosophy. In conformance with the Plan, the Company issued $22.425 million of cumulative trust preferred security 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 payoff its long-term loan and acquired seven branch facilities and their correlating 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 million in deposits were acquired, together with approximately $21 million 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 Madison and Hancock counties in addition to its traditional base of Decatur and Jay counties in Indiana. The Company, through its Union Bank subsidiary, also agreed to purchase two existing facilities in Madison County and will renovate these buildings to create two de novo branches which are expected to be operational in the second quarter of 1999. 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 million. People's Trust Company, the wholly owned subsidiary of P.T.C. Bancorp had seventeen office locations spread throughout eight counties in eastern and southeastern Indiana. These counties were contiguous to the Company's existing locations. The transaction was regarded by both companies as a merger of equals and the management and directors of both organizations have been integrated. This transaction was accounted for as a "pooling of interests" for accounting and financial reporting purposes. During the past two years, many technological improvements were initiated. Certain of these improvements, such as upgrading communication lines, have provided faster response time for customer transactions. Others represent capital investments which allow the Company to continue to effectively compete within a financial services industry that is becoming increasingly dependent upon technology. In 1997, a significant investment was made in technology enhancements, such as an automated voice response information system, additional ATMs, laser printed deposit statements, optical disk storage, and an increase in the power and memory of the AS400 computer system which allows for improved efficiency in the management of computer resources. In 1998, additional investments were made to expand and upgrade the use of personal computers throughout the Company as well as upgrading communication lines for speed of data delivery. These improvements allow the Company to improve efficiency as well as provide quality services to its customers. The dynamics of the Plan assure continually evolving goals, and the extent of the Company's success will depend upon how well it anticipates and responds to competitive changes within its markets, the interest rate environment and other external forces. YEAR 2000 ("Y2K") COMPUTER ISSUES In the next year, many large companies will face a potentially serious information systems (computer) problem because many software applications and operational programs written in the past may not properly recognize calendar dates beginning in the year 2000. This problem could force computers to either shut down or provide incorrect data or information. The Company began the process of identifying page seven MANAGEMENT'S DISCUSSION AND ANALYSIS (Table Dollar Amounts in Thousands Except Share Data)
TABLE 1 - SELECTED FINANCIAL DATA SUMMARY - ------------------------------------------------------------------------------------------------------------------------- December 31 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------- RESULTS OF OPERATIONS Net interest income $25,892 $24,606 $22,260 $20,568 $19,984 Provision for loan losses 1,218 1,789 978 770 565 Non-interest income 5,122 4,501 3,974 3,358 4,464 Non-interest expense 19,672 16,203 15,722 14,868 15,669 Income before income tax 10,124 11,115 9,534 8,288 8,214 Income tax 3,676 3,910 3,565 2,852 2,943 Net income 6,448 7,205 5,969 5,436 5,271 Dividends paid on common stock 2,721 2,105 1,717 1,406 1,075 Dividends paid on preferred stock 50 139 157 - ------------------------------------------------------------------------------------------------------------------------- PER COMMON SHARE * Earnings per share (basic) $1.36 $1.53 $1.25 $1.13 $1.12 Earnings per share (diluted) 1.35 1.52 1.25 1.12 1.11 Dividends paid ** 0.59 0.51 0.42 0.35 0.30 Book value - end of period Excluding SFAS No.115 adjustment 12.25 11.52 10.44 10.05 8.79 Including SFAS No.115 adjustment 12.40 11.68 10.50 10.13 8.03 Market price - end of period 22.13 22.75 14.53 12.50 10.50 AT YEAR END Total assets $827,945 $693,168 $624,922 $577,779 $547,624 Investment securities 197,599 126,104 151,978 152,037 152,195 Loans 539,404 472,627 416,016 374,534 353,832 Allowance for loan losses 6,099 5,451 4,506 4,476 4,385 Total deposits 709,871 583,168 547,529 504,080 483,670 Long-term debt 5,500 7,000 8,908 Federal Home Loan Bank advances 10,000 10,000 Trust preferred securities 22,425 22,425 Preferred stock 2,000 2,400 Shareholders' equity 59,196 55,006 49,402 47,463 40,049 - ------------------------------------------------------------------------------------------------------------------------- FINANCIAL RATIOS Return on average assets 0.89% 1.13% 1.02% 0.98% 0.94% Return on average common shareholders' equity 11.23 13.83 12.57 12.55 14.00 Allowance for loan losses to total loans (year end) 1.13 1.15 1.08 1.20 1.24 Shareholders' equity to total assets (year end) 7.15 7.94 7.91 8.21 7.31 Average equity to average total assets 7.96 8.16 8.17 8.02 6.99 Dividend payout ratio 42.20 29.22 29.01 26.54 21.02 - -------------------------------------------------------------------------------------------------------------------------
* Adjusted for stock split and dividends ** Dividends paid by Indiana United Bancorp Note: Prior amounts have been restated as appropriate to reflect a pooling-of-interests transaction with P.T.C. Bancorp. page eight the changes required to its computer programs and hardware, in consultation with software and hardware providers and bank regulators, in early 1997. The Company has developed and implemented a Y2K Plan calling for a review of all computer-based equipment, software and services. While the Company is taking all appropriate steps to assure Y2K compliance, it is dependent on vendor compliance to some extent. The Company has required its systems and software vendors to represent that the services and products provided are Y2K compliant. The Company has begun a testing program for its own compliance satisfaction. The Company has allocated hundreds of man-hours over the past two years to ensure compliance. The Company expended $30 thousand in capital expenditures in 1997 and 1998 to ensure all systems are compliant and expects to spend an additional $120 thousand in 1999 to complete the process. The Company's subsidiaries have been reviewed by their regulators to ensure the Company's plan and testing is timely and addressing all systems. The Y2K problem is pervasive and complex as virtually every computer operation will be affected in some way by the rollover of the two digit year value to 00. Consequently, no assurance can be given that Y2K compliance can be achieved without costs and uncertainties that might affect future financial results or cause reported financial information not to be necessarily indicative of future operating results or future financial condition. BUSINESS STRATEGY The Company holds first or second market share positions as measured by total deposits in five of the fourteen counties it serves and intends to pursue growth strategies that result in meaningful market share positions in other rural or suburban communities. The Company is seeking to identify potential whole bank acquisitions in markets that offer opportunities to benefit from its community banking philosophy and that will likely result in meaningful market share. In addition, the Company believes it needs to expand other financial services and products in an attempt to offer a full array of financial services to its customer base. In conformance with this strategy, the Company has entered into an agreement with Bank One to purchase four bank branches located in Cambridge City in Wayne County and Knightstown and New Castle in Henry County, Indiana. The purchase is for more than $100 million in deposits and $2 million in loans. These four locations will be integrated into the People's Trust Company subsidiary and will allow it to expand its market share in Wayne County and penetrate the Henry County area. 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 business acquired from People's Trust Company. The Trust Investment Group plans to expand its services through-out 1999 and beyond into larger market areas of the Company including Madison, Henry, Wayne, Jefferson, Floyd, and Clark counties. [CHART APPEARS HERE] RESULTS OF OPERATIONS Annual net income was $6.448 million in 1998 compared to $7.205 million in 1997 and $5.969 million in 1996. Significant non-recurring merger expense of $700 thousand net of taxes impacted 1998 earnings. The Company recorded $118 thousand after-tax non-recurring income in 1997 from the sale of real estate property acquired in lieu of foreclosure and a $329 thousand after-tax charge in 1996 to recapitalize the Savings Association Insurance Fund (SAIF). Excluding these non-recurring items, net income of $7.148 million would have been recorded in 1998, $7.087 million in 1997 and $6.298 million in 1996. Net income per common share from recurring operations equaled $1.50 in 1998 and 1997 and $1.33 in 1996. Including the merger expenses for 1998, the special real estate owned income for 1997and the SAIF assessment for 1996, the earnings per share were$1.35 for 1998, $1.52 for 1997 and $1.25 for 1996. The Company's return on average total assets was .89% in 1998, 1.13% in 1997 and 1.02% in 1996. Excluding non-recurring items for the three years, return on average assets for 1998 was.99%, 1.11% for 1997 and 1.07% for 1996. Return on average common shareholders' equity during these years were 11.23% for 1998, 13.83% for 1997 and 12.57% for 1996. Excluding non-recurring items, the ratio for 1998 was 12.44%, 13.60% for 1997 and 13.27% for 1996. NET INTEREST INCOME Net interest income is influenced by the volume and yield of earning assets and the cost of interest-bearing liabilities. Net interest margin reflects the mix of interest-bearing and noninterest-bearing liabilities that fund earning assets, as well as interest spreads between the rates earned on these assets and the rates paid on interest-bearing liabilities. Tax equivalent total interest income of $55.730 million in 1998 increased 10.0% from $50.646 million in 1997, which was 9.7% above 1996 (see Table 5). The largest amount of this increase (76.2%) was directly attributed to the increased volume of loans held within the Company's portfolio. The remaining 23.8% of the increase over 1997 was the volume page nine Management's Discussion and Analysis (Continued)
TABLE 2 - VOLUME/RATE ANALYSIS OF CHANGES IN NET INTEREST INCOME (Taxable Equivalent Basis)* - ----------------------------------------------------------------------------------------------------------- 1998 over 1997 1997 over 1996 - ----------------------------------------------------------------------------------------------------------- Volume Rate Total Volume Rate Total - ----------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans $4,591 $(716) $3,875 $5,193 $(232) $4,961 Securities 451 (113) 338 (757) 171 (586) Federal funds sold 944 (64) 880 116 23 139 Short-term investments (16) 7 (9) (44) (9) (53) - ----------------------------------------------------------------------------------------------------------- Total interest income 5,970 (886) 5,084 4,508 (47) 4,461 - ----------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest-bearing demand accounts 221 (19) 202 305 63 368 Money market investment accounts 0 0 0 0 0 0 Savings deposits 166 (92) 74 31 (23) 8 Certificates of deposit 1,817 (104) 1,713 1,726 37 1,763 Borrowings 184 (266) (82) (160) 10 (150) Trust preferred securities 1,913 5 1,918 106 0 106 - ----------------------------------------------------------------------------------------------------------- Total interest expense 4,301 (476) 3,825 2,008 87 2,095 - ----------------------------------------------------------------------------------------------------------- Changes in net interest income $1,669 $(410) 1,259 $2,500 $(134) 2,366 Change in taxable equivalent adjustments 27 (20) - ----------------------------------------------------------------------------------------------------------- Change in net interest income after taxable equivalent adjustments $1,286 $2,346 - -----------------------------------------------------------------------------------------------------------
*Adjusted to reflect income related to securities and loans exempt from Federal income taxes. increase in the investment securities portfolio and federal funds sold which was directly attributed to the increase of deposits purchased through acquisitions. The increase in 1997 over 1996 was also due to loan volume. Throughout the past two years, the Company employed a deposit-pricing strategy focused on retaining and attracting lower cost short-to-moderate term funds. In addition, the Company has competed more aggressively for high quality loans. While management correctly anticipated a relatively flat to lower rate environment throughout 1996, 1997,and 1998, the Company's net interest margin decreased 30 basis points from 1997 to 3.95%. The decrease in this margin was caused by two factors: 1) The Company's purchase of $121.3 million of deposits, and 2) The twelve months of interest expense related to the Trust Preferred Securities. The Company's net interest margin had increased from 4.17% to 4.25% from 1996 to 1997. The Company believes that continued growth in loans throughout 1999 will permit the net interest margin to improve by year end. The changes in interest income and interest expense resulting from changes in volume and rate are summarized in Table 2. Variances have been allocated on the basis of the absolute relationship between volume and rate. PROVISION FOR LOAN LOSSES The Company expensed $1.218 million in provision for loan losses throughout 1998. This level of provision allowed the Company to maintain its allowance for loan losses in proportion to its risk and growth of gross loans. This topic is discussed in detail under the heading "Loans, Credit Risk and the Allowance and Provision for Loan Losses". NON-INTEREST INCOME Non-interest income increased from $4.501 million in 1997 to $5.122 million in 1998, an increase of $621 thousand or 13.8%. Of this total, $115 thousand was attributable to service charges on newly acquired deposit relationships. The primary increase was a direct result of increased mortgage banking activity and the selling of residential mortgages into the secondary market. The Company holds the servicing rights on these mortgages. Mortgage banking income increased $240 thousand over 1997. The Company also experienced a $205 thousand increase from other income which includes fee income from its debit cards, surcharges of foreign card users on its ATMs and fees generated from several cash dispensers distributed throughout the Company's trade area. Non-interest income increased by $527 thousand from 1996 to 1997 primarily due to increases in mortgage banking and service charge income. INTEREST EXPENSE Total interest expense increased from $22.903 million in 1996 to $24.997 million in 1997 and $28.823 million in 1998. The majority of the increase from 1997 to 1998 was the result of the deposit acquisitions made by the Company in the third and fourth quarters of the year. The Company also absorbed the page ten interest expense on the Trust Preferred Securities for twelve months in 1998 as compared to less than a month in 1997. NON-INTEREST EXPENSE The largest component of non-interest expense is personnel and benefits cost. The Company experienced an increase of $1.6 million, or 17.3% in this area over 1997 after increasing by $634 thousand or 7.4% over 1996. The 1998 increase was a direct result of purchasing the seven new branch facilities and retaining all the personnel associated with them. The number of full-time equivalent employees at year end in 1998 was 360 compared to 299 in 1997 and 292 in 1996. All other areas of non-interest expense increased in 1998 over 1997. All of these expenses were a direct result of expanding facilities and personnel related to the acquisitions made through-out 1998. Total non-interest expense to average assets for 1998 was 2.73% compared to 2.54% in 1997 and 2.68% in 1996. The Company historically has been able to control its overhead costs when compared to its peers (see Table 3 and graph). INCOME TAXES The effective tax rate was 36.3% for 1998, 35.2% for 1997 and 37.4% for 1996. Generally, the change in income tax expense reflects the change in income before income tax as the level of tax-exempt income remained relatively constant from 1996 to 1998. The Company and its subsidiaries file consolidated income tax returns. FINANCIAL CONDITION Total average assets in 1998 increased $83.607 million over the prior year. Average assets increased by $50.923 million in 1997 as compared to 1996. Year-end assets increased to $827.945 million in 1998 from $693.168 million for 1997. Acquired deposits, repayments of loans, as well as internal growth of interest-bearing deposits, funded loan and securities growth in 1998. Average non-interest bearing deposits increased 17.2% in 1998 compared to an 11.1% increase in 1997. Average interest-bearing deposits increased $45.707 million or 8.9% in 1998 compared to 9.0% in 1997. The majority of this growth is attributable to deposit acquisitions made during the third and fourth quarters of 1998. When comparing deposit growth from December 31, 1998 to December 31, 1997, the Company experienced a total deposit growth of $126.703 million or a 21.7% increase (see Table 4). Guaranteed Preferred Beneficial Interests in the Company's Subordinated Debentures ("Preferred Securities") in the amount of $22.425 million were issued on December 9,1997. The holders of the Preferred Securities are entitled to receive preferential cumulative cash distributions, payable quarterly, at the annual rate of 8.75% of the liquidation amount of $10 per Preferred Security. The Company has the right, so long as no default has occurred, to defer payment of interest TABLE 3 - NON-INTEREST INCOME AND EXPENSE
- ------------------------------------------------------------------------------------------------------- Percent Change - ------------------------------------------------------------------------------------------------------- 1998 1997 1996 1998/97 1997/96 - ------------------------------------------------------------------------------------------------------- NON-INTEREST INCOME Insurance commissions $ 530 $ 515 $ 540 2.9 (4.6) Fiduciary activities 261 278 264 (6.1) 5.3 Mortgage banking income 1,356 1,116 795 21.5 40.4 Service charges on deposit accounts 1,895 1,780 1,656 6.5 7.5 Securities gains (losses) (13) (76) 104 82.9 (173.1) Other income 1,093 888 615 23.1 44.4 ----------------------------- Total non-interest income $ 5,122 $ 4,501 $ 3,974 13.8 13.3 ============================= - ------------------------------------------------------------------------------------------------------- NON-INTEREST EXPENSE Salaries and employee benefits $10,852 $ 9,252 $ 8,618 17.3 7.4 Net occupancy expenses 1,382 1,284 1,185 7.6 8.4 Equipment expenses 1,457 1,323 1,124 10.1 17.7 Data processing expense 855 797 654 7.3 21.9 Deposit insurance expense 129 109 738 18.3 (85.2) Intangible amortization 459 238 229 92.9 3.9 Stationery, printing, and supplies 635 503 438 26.2 14.8 Merger expense 806 - - Other expense 3,097 2,697 2,736 14.8 (1.4) ----------------------------- Total non-interest expense $19,672 $16,203 $15,722 21.4 3.1 ============================= - -------------------------------------------------------------------------------------------------------
page eleven Management's Discussion and Analysis (Continued) TABLE 4 - AVERAGE DEPOSITS
- ----------------------------------------------------------------------------------- 1998 1997 1996 - ----------------------------------------------------------------------------------- Amount Rate Amount Rate Amount Rate - ----------------------------------------------------------------------------------- Demand $ 58,407 $ 49,817 $ 44,850 Interest-bearing demand 131,263 3.01% 123,914 3.03% 113,816 2.97% Savings 64,990 2.91 59,386 3.06 58,385 3.10 Certificates of deposit 360,295 5.55 327,541 5.58 296,594 5.57 Totals $614,955 4.20% $560,658 4.25% $513,645 4.23% - -----------------------------------------------------------------------------------
As of December 31, 1998, certificates of deposit and other time deposits of $100,000 or more mature as follows:
- ----------------------------------------------------------------------------------- 3 Months or Less 3 - 6 Months 6 -12 Months Over 12 Months Total - ----------------------------------------------------------------------------------- Amount $24,884 $17,798 $13,343 $12,796 $68,821 Percent 36% 26% 19% 19% 100% - -----------------------------------------------------------------------------------
at anytime, 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. The Preferred Securities qualify as Tier 1 capital or core capital with respect to the Company under the risk-based capital guidelines established by the Federal Reserve. Under such guidelines, the Preferred Securities cannot constitute more than 25% of the total Tier 1 capital of the Company. Consequently, the amount of Preferred Securities in excess of the 25% limitation will constitute Tier 2 capital, or supplementary capital, of the Company. [CHART APPEARS HERE] Common Shareholders' Equity was $59.196 million on December 31, 1998 compared to $55.006 million at December 31, 1997. Book value per common share increased to $12.40 or 6.2% from $11.68 at year end 1997. 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 risk. The loan underwriting standards observed by each of the Company's subsidiaries are viewed by management as a deterrent to the emergence of an abnormal level of problem loans and a subsequent increase in net chargeoffs. The Company's conservative loan underwriting standards have historically resulted in higher loan quality and lower levels of net charge offs than peer bank averages. (see graph) The Company also believes credit risks may be elevated if undue concentrations of loans in specific industry segments and to out-of-area borrowers are incurred. Accordingly, the Company's board of directors regularly monitors such concentrations to determine compliance with its restrictive loan allocation policy. The Company believes it has no undue concentrations of loans. Total loans increased $66.777 million or 14.1% over year-end 1997, primarily reflecting the growth and development of real estate mortgages, both commercial and residential. The Company increased its commercial real estate portfolio by $14.251 million or 17.5% and increased its residential portfolio by $38.164 million or 18.3% compared to year-end 1997. The Company also increased its construction and development loans from $15.797 million to $30.772 million or 94.8% from December 31, 1997 to December 31, 1998. The Company experienced a moderate growth in consumer loans over 1997, showing a 6.9% increase. The Company decreased its outstanding loans by $1.896 million or 4.9% in farm real estate and $1.008 million or 6.3% in agricultural production financing compared to 1997 (see graph). page twelve TABLE 5 - AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS (Taxable Equivalent Basis)*
- ----------------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Short-term investments $ 1,431 $ 81 5.66% $ 1,713 $ 90 5.25% $ 2,531 $130 5.14% Federal funds sold 33,713 1,832 5.43 16,414 952 5.80 14,411 813 5.64 Securities Taxable 116,262 7,408 6.37 106,557 6,865 6.44 120,195 7,576 6.30 Non-taxable 27,783 1,992 7.17 30,122 2,197 7.29 28,504 2,085 7.31 - ----------------------------------------------------------------------------------------------------------------------------------- Total securities 144,045 9,400 6.53 136,679 9,062 6.63 148,699 9,661 6.50 Loans** Commercial 200,693 18,266 9.10 180,903 17,063 9.43 159,016 15,223 9.57 Mortgage 238,594 19,898 8.34 208,869 17,417 8.34 188,040 15,467 8.23 Installment 62,423 6,253 10.02 59,493 6,062 10.19 45,908 4,891 10.65 - ----------------------------------------------------------------------------------------------------------------------------------- Total loans 501,710 44,417 8.85 449,265 40,542 9.02 392,964 35,581 9.05 - ----------------------------------------------------------------------------------------------------------------------------------- Total earning assets 680,899 55,730 8.18 604,071 50,646 8.38 558,605 46,185 8.27 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and due from banks 19,189 18,464 16,448 Unrealized gains (losses) on securities 1,657 562 (249) Allowance for loan losses (5,806) (4,621) (4,736) Premises and equipment, net 11,045 10,014 9,199 Intangible assets 2,957 1,664 1,678 Accrued interest receivable and other assets 11,836 8,016 6,302 - ------------------------------------------ ---------- --------- Total assets $721,777 $638,170 $587,247 ========================================== ========== ========= LIABILITIES Interest-bearing deposits Interest-bearing demand accounts $131,263 $3,953 3.01 $123,914 $ 3,751 3.03 $113,816 $ 3,383 2.97 Savings 64,990 1,892 2.91 59,386 1,818 3.06 58,385 1,810 3.10 Certificates of deposit 360,295 19,983 5.55 327,541 18,271 5.58 296,594 16,507 5.57 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 556,548 25,828 4.64 510,841 23,840 4.67 468,795 21,700 4.63 Short-term borrowings 9,307 429 4.61 12,349 630 5.10 14,098 690 4.89 Trust preferred securities 22,425 2,024 9.03 1,229 105 8.54 Long-term debt 10,000 542 5.42 4,797 423 8.82 5,606 513 9.15 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 598,280 28,823 4.82 529,216 24,998 4.72 488,499 22,903 4.69 Demand deposits 58,407 49,817 44,850 Other liabilities 7,647 7,032 5,936 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities 664,334 586,065 539,285 Shareholders' equity 57,443 52,105 47,957 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $721,777 28,823 4.23*** $638,170 24,998 4.13*** $587,242 22,903 4.10*** ==========------------------------===========-----------------------==========-------------------- Net interest income $26,907 3.95 $25,648 4.25 $23,282 4.17 - ----------------------------------------------------------------------------------------------------------------------------------- Conversion of tax exempt income to a fully taxable equivalent basis using a marginal rate of 34% $ 1,015 $ 1,042 $1,022 - -----------------------------------------------------------------------------------------------------------------------------------
* Adjusted to reflect income related to securities and loans exempt from Federal income taxes. ** Non accruing loans have been included in the average balances. The mortgage category includes primarily residential mortgages. *** Total interest expense divided by total earning assets. TABLE 6 - LOAN PORTFOLIO
- --------------------------------------------------------------------------------------------- December 31 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------- Types of loans Commercial $ 29,084 $ 33,101 $ 30,929 $ 28,162 $ 20,513 Agricultural production financing and other loans to farmers 14,983 15,991 16,073 15,167 13,538 Commercial real estate mortgage 95,800 81,549 62,501 52,843 55,007 Residential real estate mortgage 246,491 208,327 188,716 170,590 164,988 Farm real estate 36,906 38,802 35,145 36,188 34,843 Construction and development 30,772 15,797 20,239 16,446 13,092 Consumer 70,966 66,357 52,106 44,651 42,333 State and political 13,249 11,362 8,488 8,407 6,699 Government guaranteed loans 1,153 1,341 1,819 2,080 2,819 - --------------------------------------------------------------------------------------------- Total loans $539,404 $472,627 $416,016 $374,534 $353,832 - ---------------------------------------------------------------------------------------------
page thirteen Management's Discussion and Analysis (Continued) TABLE 7 - MATURITIES AND SENSITIVITIES OF COMMERCIAL AND CONSTRUCTION LOANS TO CHANGES IN INTEREST RATES AT DECEMBER 31, 1998
- ------------------------------------------------------------------------------------------------ Within 1 Year 1-5 Years Over 5 Years Total - ------------------------------------------------------------------------------------------------ LOAN TYPE Commercial $17,205 $ 7,885 $3,994 $29,084 Agricultural production financing and other loans to farmers 10,593 2,676 1,714 14,983 Construction 30,326 446 - 30,772 Government guaranteed loans 70 303 780 1,153 - ------------------------------------------------------------------------------------------------ Totals $58,194 $11,310 $6,488 $75,992 - ------------------------------------------------------------------------------------------------ Percent 77% 15% 8% 100% - ------------------------------------------------------------------------------------------------ RATE SENSITIVITY Fixed rate $13,462 $ 7,672 $2,332 $23,466 Variable rate 44,732 3,638 4,156 52,526 - ------------------------------------------------------------------------------------------------ Totals $58,194 $11,310 $6,488 $75,992 - ------------------------------------------------------------------------------------------------
Residential real estate loans continue to represent the largest portion of the total loan portfolio. Such loans represented 45.7% and 44.1% of total loans at December 31, 1998 and 1997, respectively. Of the total residential real estate portfolio, 54.58% are fixed rate and 45.42% are variable rate loans at December 31, 1998. The Company also originates and sells loans into the secondary market but maintains the portfolio's servicing rights. The Company's mortgage banking activity non-interest income increased $240 thousand from 1997 representing a 21.5% increase and $321 thousand in 1997 from 1996 or a 40.4% increase. The Company limits its exposure to long-term fixed rate residential mortgage loans and generally observes 20% minimum down payment guidelines. The Company held some of the shorter term fixed rate mortgages in its own portfolio during 1997 and 1998 to help offset the growth in deposits through new products and acquisitions. This strategy assisted the Company in obtaining its profit goals for 1998. The Company intends to continue its plan of holding some fixed rate mortgages without incurring unacceptable levels of interest rate risk. [CHART APPEARS HERE] The Company regards its ability to identify and correct loan quality problems as one of its greatest strengths. Loans are placed in a nonaccruing status when in management's judgment the collateral value and/or the borrower's financial condition does not justify accruing interest. As a general rule, commercial and real estate loans are reclassified to nonaccruing status at or before becoming 90 days past due. Interest previously recorded but not deemed collectible is reversed and charged against current income. Subsequent interest payments collected on nonaccrual loans may thereafter be recognized as interest income or may be applied as a reduction of the loan's principal balance, as circumstances warrant. The provision for loan losses was $1.218 million in 1998 compared to $1.789 million in 1997 and $978 thousand in 1996. A portion of the increase from 1996 to 1997 was to more closely align the level of the allowance of the Company's new subsidiary under the Company's procedures based on the composition of its loan portfolio and did not reflect any significant loan quality deterioration. The additional provisions for 1996 through 1998 reflect increases in the allowance primarily due to the Company's overall loan growth and to replenish the allowance for chargeoffs incurred. Net chargeoffs were $570 thousand in 1998, $844 thousand in 1997 and $948 thousand in 1996. As a percentage of average loans, net chargeoffs equaled .11%, .19% and .24% in 1998, 1997 and 1996. The Company has outperformed its peer group's net loan loss average and that trend is expected to continue in 1999. Management is not aware of any trend which is likely to cause the level of net chargeoffs in 1999 to materially exceed the average level of chargeoffs over the past three years (see graph). Management maintains a list of loans warranting either the assignment of a specific reserve amount or other special administrative attention. This list, together with a listing of all classified loans, nonaccrual loans and delinquent loans, is reviewed monthly by the board of directors of each subsidiary. The ability to absorb loan losses promptly when problems are identified is invaluable to a banking organization. Most often, losses incurred as a result of prompt, aggressive collection actions are much lower than losses incurred after prolonged page fourteen TABLE 8 - UNDERPERFORMING LOANS
- ---------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------- Nonaccruing loans $3,709 $ 755 $3,039 $2,198 $1,229 Accruing loans contractually past due 90 days or more 195 375 39 174 210 Restructured loans Total $3,904 $1,130 $3,078 $2,372 $1,439 - ---------------------------------------------------------------------------------------- % of total loans 0.72% 0.24% 0.74% 0.63% 0.41% - ----------------------------------------------------------------------------------------
TABLE 9 - SUMMARY OF ALLOWANCE FOR LOAN LOSSES
- -------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------------------- Balance at January 1 $5,451 $4,506 $4,476 $4,385 $4,041 Chargeoffs Commercial 191 695 315 339 17 Commercial real estate mortgage 0 0 334 166 18 Residential real estate mortgage 99 32 10 54 95 Consumer 582 452 523 456 349 - -------------------------------------------------------------------------------------------- Total chargeoffs 872 1,179 1 1,182 1,015 479 - -------------------------------------------------------------------------------------------- Recoveries Commercial 83 134 47 121 91 Residential real estate mortgage 25 25 17 46 29 Consumer 194 176 170 169 138 - -------------------------------------------------------------------------------------------- Total recoveries 302 335 234 336 258 - -------------------------------------------------------------------------------------------- Net chargeoffs 570 844 948 679 221 Provision for loan losses 1,218 1,789 978 770 565 - -------------------------------------------------------------------------------------------- Balance at December 31 $6,099 $5,451 $4,506 $4,476 $4,385 - -------------------------------------------------------------------------------------------- Net chargeoffs to average loans 0.11% 0.19% 0.24% 0.19% 0.06% Provision for loan losses to average loans 0.24 0.40 0.25 0.21 0.16 Allowance to total loans at year end 1.13 1.15 1.08 1.19 1.24 - --------------------------------------------------------------------------------------------
TABLE 10 - ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
- ------------------------------------------------------------------------------------------------------------------------------ 1998 1997 1996 1995 1994 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 $ 294 46% $ 181 44% $ 223 45% $ 181 45% $ 222 47% Farm real estate 275 7 20 8 21 9 20 10 20 10 Commercial 715 18 327 18 348 15 327 14 723 15 Construction and development 830 6 66 3 139 5 66 4 56 4 - ------------------------------------------------------------------------------------------------------------------------------ Total real estate 2,114 77 594 73 731 74 594 73 1,021 76 - ------------------------------------------------------------------------------------------------------------------------------ Commercial Agribusiness 912 3 186 3 224 4 186 4 206 4 Other commercial 316 5 441 7 677 7 441 8 277 6 - ------------------------------------------------------------------------------------------------------------------------------ Total Commercial 1,228 8 627 10 901 11 627 12 483 10 - ------------------------------------------------------------------------------------------------------------------------------ Consumer 1,155 13 611 14 514 13 612 12 412 12 Other 2 3 2 3 2 Unallocated 1,602 3,619 2,360 2,643 2,469 - ------------------------------------------------------------------------------------------------------------------------------ Total $6,099 100 $5,451 100 $4,506 100 $4,476 100 $4,385 100 - ------------------------------------------------------------------------------------------------------------------------------
page fifteen TABLE 11 - INVESTMENT SECURITIES (Carrying Values at December 31)
- ----------------------------------------------------------------------------------------------- Beyond 10 Total 1 Year 2-5 Yrs 6-10 Yrs Years 1998 - ----------------------------------------------------------------------------------------------- Available for sale Federal agencies $ 4,019 $ 73,110 $ 20,846 $ -- $ 97,975 State and municipal 726 6,440 2,606 50 9,822 Mortgage-backed securities 251 1,017 14,463 25,098 40,829 Corporate obligations 2,035 10,537 -- 15,633 28,205 Other securities -- 98 156 173 427 Equity securities -- -- -- 750 750 - ----------------------------------------------------------------------------------------------- Total available for sale $ 7,031 $ 91,202 $ 38,071 $ 41,704 $178,008 - ----------------------------------------------------------------------------------------------- Weighted average yield* 5.84% 5.90 6.34% 7.09% 6.26% Held to maturity - ----------------------------------------------------------------------------------------------- State and municipal $ 5,255 $ 13,067 $ 276 $ 11 $ 18,609 Corporate obligations -- 497 -- -- 497 Other securities -- -- 485 -- 485 - ----------------------------------------------------------------------------------------------- Total held to maturity $ 5,255 $ 13,564 $ 761 $ 11 $ 19,591 - ----------------------------------------------------------------------------------------------- Weighted average yield* 6.89% 6.85% 7.80% 7.58% 6.90% - -----------------------------------------------------------------------------------------------
Amounts in the table above are based on scheduled maturity dates. Variable interest rates are subject to change not less than annually based upon certain interest rate indexes. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. As of December 31, 1998, there are no corporate bonds and other securities which represent more than 10% of shareholders' equity. *Adjusted to reflect income related to securities exempt from Federal income taxes. legal proceedings. Accordingly, the Company observes the practice of quickly initiating stringent collection efforts in the early stages of loan delinquency. The adequacy of the Allowance for Loan Losses in each subsidiary is reviewed at least quarterly. The determination of the provision amount in any period is based on management's continuing review and evaluation of loan loss experience, changes in the composition of the loan portfolio with general allocations made by loan type, classified loans including non-accrual and impaired loans, current economic conditions, the amount of loans presently outstanding, and the amount and composition of loan growth. The Allowance for Loan Losses as of December 31, 1998, is considered adequate by management. See Tables 6, 7, 8, 9, and 10 for quantitative support of this narrative loan analysis. INVESTMENT SECURITIES Investment securities offer flexibility in the Company's management of interest rate risk, and are the primary means by which the Company provides liquidity and responds to changing maturity characteristics of assets and liabilities. The Company's investment policy prohibits trading activities and does not allow investment in high risk derivative products or junk bonds. As of December 31, 1998, 90% 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 $704 thousand was recorded to adjust the AFS portfolio to current market value at December 31, 1998, compared to a net unrealized gain of $762 thousand at December 31, 1997. The remaining 10% 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 1998, the tax equivalent yield of the investment securities portfolio was 6.53%, compared to 6.63% and 6.50% at year end 1997 and 1996, respectively. Variable rate securities comprised 20.17% of the total portfolio on December 31, 1998 with the remaining 79.83% invested in fixed rate investments. page sixteen SOURCES OF FUNDS The Company relies primarily on customer deposits and securities sold under repurchase agreements ("REPOs"),along with shareholders' equity to fund earning assets. Federal Home Loan Bank ("FHLB") advances are used to provide additional funding. The Company also purchased $121.3 million of local deposits during the last half of 1998 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 90% and 93% of total average earning assets in 1998 and 1997. Total interest-bearing deposits averaged 91% of average total deposits during 1998, 1997 and 1996. Management is continuing efforts to increase the percentage of transaction-related deposits to total deposits due to the positive affect on earnings. REPOs are high denomination investments utilized by public entities and commercial customers as an element of their cash management responsibilities. REPOs are not subject to FDIC assessment so they are less costly than large certificates of deposit. With the reduction in the FDIC assessment, REPOs do not offer as much cost advantage as previously experienced. Management utilized large denomination certificates of deposit in 1997 and 1998 to replace a portion of customer funds previously invested in REPOs. Even though short-term borrowings temporarily increased 32% at year end 1998 compared to 1997, the Company decreased average REPOs and other short-term borrowings in 1998 to $9.307 million or 25% below 1997. REPOs comprised 98% of short-term borrowings on December 31, 1998. CAPITAL RESOURCES Total common shareholders' equity increased $4.190 million to $59.196 million at December 31, 1998. The Federal Reserve Board and other regulatory agencies have adopted risk-based capital guidelines which assign risk weightings to assets and off-balance sheet items. The Company's core capital ("tier 1") consists of common shareholders' equity 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, 1998, tier 1 capital to average assets was 8.3%. Total capital to risk-adjusted assets was 13.7%.Both ratios substantially exceed all required ratios established for bankholding 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 will constitute Tier 2 capital, or supplementary capital, of the Company. [CHART APPEARS HERE] Common shareholders' equity is impacted by the Company's decision to categorize a portion of its securities portfolio as AFS under accounting rules adopted January 1, 1994. 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 $.59 per share in 1998, $.51 in 1997 and $.42 in 1996. Book value per common share increased to $12.40 from $11.68 in 1997. The net adjustment for AFS securities increased book value by $.15 and $.16 at December 31, 1998 and 1997. Depending on market conditions, the adjustment for AFS securities can cause significant fluctuations in equity. The Company declared a 2 for 1 common stock split for those shareholders of record as of August 17, 1998. All financial information used throughout this report has been adjusted to reflect this stock split. 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 $170.977 million of AFS securities maturing after one year, which can be sold to meet liquidity needs. Liquidity is supported by maintaining a relatively stable funding base, which is achieved by diversifying funding sources, extending the contractual maturity of liabilities, and limiting reliance on volatile short-term purchased funds. Short-term funding needs can arise from declines in deposits page seventeen Management's Discussion and Analysis (Continued) or other funding sources, funding of loan commitments and requests for new loans. The Company's strategy is to fund assets to the maximum extent possible with core deposits, which provide a sizable source of relatively stable low-cost funds. Average core deposits funded approximately 90%of total earning assets at December 31, 1998 and approximately 93% in 1997 and 92% in 1996. Management believes the Company has sufficient liquidity to meet all reasonable borrower, depositor and creditor needs in the present economic environment. The Company has not received any directives from regulatory authorities which would materially affect liquidity, capital resources or operations. INTEREST RATE RISK At year end 1998, the Company held approximately $381.4 million 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, 1998 appears in Table 12. Core deposits are distributed or spread among the various repricing categories based upon historical patterns of repricing which are reviewed periodically by management. The assumptions regarding these repricing characteristics greatly influence conclusions regarding interest sensitivity. Management believes its assumptions regarding these liabilities are reasonable. Effective asset/liability management requires the maintenance of a proper ratio between maturing or repriceable interest-earning assets and interest-bearing liabilities. It is the policy of the Company that the ratio of rate-sensitive assets to rate-sensitive liabilities be kept within a range of 80% to 130%. The Company will continue to strive for a more neutral gap position in 1999 based upon its the belief that the current interest rate environment will remain relatively stable throughout 1999. In any event, the Company does not anticipate that its earnings will be materially impacted in 1999, 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 TABLE 12 - RATE SENSITIVITY ANALYSIS AT DECEMBER 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------------- Over 5 Years or 3 Months 1 Year 2 Years 5 Years Insensitive Total - ---------------------------------------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS Loans $ 125,456 $ 153,441 $ 51,654 $ 99,856 $ 108,997 $ 539,404 Securities 43,131 35,912 26,897 63,278 28,381 197,599 Federal funds sold 19,855 19,855 Interest-bearing deposits in banks 1,498 1,498 FHLB stock 2,120 2,120 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 192,060 189,353 78,551 163,134 137,378 760,476 - ---------------------------------------------------------------------------------------------------------------------------------- Other assets 73,568 73,568 Allowance for loan losses (6,099) (6,099) - ---------------------------------------------------------------------------------------------------------------------------------- Total assets $ 192,060 $ 189,353 $ 78,551 $ 163,134 $ 204,847 $ 827,945 - ---------------------------------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES Interest-bearing demand $ 50,188 $ 25,094 $ 25,094 $ 25,095 $ 125,471 Savings 22,580 15,054 18,819 18,819 75,272 Money market 17,095 17,095 34,190 Certificates of deposit 131,686 188,853 58,398 29,225 $ 674 408,836 Short term borrowings 20,032 20,032 Federal Home Loan Bank advances 10,000 10,000 Trust preferred securities 22,425 22,425 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 241,581 246,096 112,311 73,139 23,099 696,226 - ---------------------------------------------------------------------------------------------------------------------------------- Demand deposits 66,102 66,102 Other liabilities 6,421 6,421 Stockholders' equity 59,196 59,196 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 241,581 $ 246,096 $ 112,311 $ 73,139 $ 154,818 $ 827,945 - ---------------------------------------------------------------------------------------------------------------------------------- Rate sensitivity gap (assets less liabilities) $ (49,521) $ (56,743) $ (33,760) $ 89,995 - ---------------------------------------------------------------------------------------------------------------------------------- Rate sensitivity gap (cumulative) (49,521) (106,264) (140,024) (50,029) - ---------------------------------------------------------------------------------------------------------------------------------- Percent of total assets (cumulative) (5.98)% (12.83)% (16.91)% (6.04)% Rate sensitive assets/liabilities (cumulative) 79.50% 78.21% 76.66% 92.57%
page eighteen TABLE 13 - PRINCIPAL CASH FLOWS AND WEIGHTED AVERAGE INTEREST RATES BY MATURITY DATES
- ----------------------------------------------------------------------------------------------------------------------------------- There Fair December 31 1999 2000 2001 2002 2003 after Total Value - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Investment securities Fixed rate $12,300 $18,906 $33,006 $23,327 $23,617 $45,608 $156,764 $157,577 Average interest rate 5.11% 5.36% 5.67% 5.66% 5.74% 6.73% 5.91% Variable rate $ 10 $4,006 $ 1,512 $ 23 $ 30 $34,030 $ 39,611 $40,447 Average interest rate 5.21% 5.02% 5.36% 5.19% 6.19% 6.57% 6.37% Loans Fixed rate $24,544 $9,554 $17,002 $25,968 $23,116 $162,820 $263,004 $264,810 Average interest rate 8.84% 9.81% 9.01% 8.80% 8.50% 7.69% 8.14% Variable rate $44,747 $6,424 $ 4,708 $ 4,555 $5,552 $221,386 287,372 287,708 Average interest rate 8.56% 8.13% 8.91% 8.66% 8.42% 8.15% 8.24% LIABILITIES Deposits NOW, money market and savings deposits Fixed rate Average interest rate Variable rate $234,933 $234,933 $234,933 Average interest rate 2.62% 2.62% Certificates of deposit Fixed rate $287,861 $61,589 $22,392 $ 7,363 $ 6,356 $ 713 $386,274 $389,815 Average interest rate 5.36% 5.54% 5.60% 6.08% 5.67% 5.99% 5.43% Variable rate $ 13,603 $ 5,275 $ 2,795 $ 476 $ 311 $ 102 $22,562 $ 22,562 Average interest rate 5.67% 5.20% 5.47% 5.73% 5.09% 5.65% 5.32% Borrowings Fixed rate $ 1,540 $ 1,540 $ 1,540 Average interest rate 4.38% 4.38% Variable rate $ 18,492 $18,492 $ 18,492 Average interest rate 4.15% 4.15% Federal Home Loan Bank advances Fixed rate $10,000 $10,000 $ 10,270 Average interest rate 5.35% 5.35% Trust Preferred Securities Fixed rate $22,425 $22,425 $ 23,827 Average interest rate 8.75% 8.75% - -----------------------------------------------------------------------------------------------------------------------------------
impact asset/liability committee activities based on interest rate risk sensitivity, board policy limits, desired sensitivity gaps and interest rate trends. Table 13 provides information about the Company's significant financial instruments at December 31, 1998 that are sensitive to changes in interest rates. The table presents principal cashflows 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. page nineteen NEW ACCOUNTING MATTERS REPORTING COMPREHENSIVE INCOME The Financial Accounting Standards Board ("FASB") issued Statement No. 130, Reporting Comprehensive Income, establishing standards for the reporting of comprehensive income and its components in financial statements. Enterprises that have no items of other comprehensive income in any period presented are excluded from the scope of this Statement. Statement No. 130 stipulates that all items required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. It does not require a specific format for that financial statement, but does require that an enterprise display an amount representing total comprehensive income for the period in that financial statement. Upon implementing this new statement, an enterprise will classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. Statement No. 130 is effective for interim and annual periods beginning after December 15, 1997. Earlier application is permitted. The Company adopted Statement No. 130 for 1998. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION Statement No. 131 established standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in financial reports issued to shareholders. It also established standards for related disclosures about products and services, geographic areas and major customers. Statement No. 131 defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operation decision-maker in deciding how to allocate resources and in assessing performance. Statement No. 131 is effective for financial statements for periods beginning after December 15, 1997. The Company was not required to report segment information. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Statement No. 133 requires companies to record derivatives on the balance sheet at their fair value. Statement No. 133 also acknowledges that the method of recording a gain or loss depends on the use of the derivative. If certain conditions are met, a derivative may be specifically designed as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an AFS security, or a foreign-currency-denominated forecasted transaction. The new Statement applies to all entities. If hedge accounting is elected by the entity, the method of assessing the effectiveness of the hedging derivative and the measurement approach of determining the hedge's ineffectiveness must be established at the inception of the hedge. Statement No. 133 amends Statement No. 52 and supercedes Statement Nos. 80, 105, and 119. Statement No. 107 is amended to include the disclosure provision about the concentrations of credit risk from Statement No. 105. Several Emerging Issues Task Force consensuses are also changed or nullified by the provisions of Statement No.133. Statement No. 133 will be effective for all fiscal years beginning after June 15, 1999. TABLE 14 - QUARTERLY FINANCIAL INFORMATION
- -------------------------------------------------------------------------------------------------------------- 1998 1997 - -------------------------------------------------------------------------------------------------------------- Fourth Third Second First Fourth Third Second First - -------------------------------------------------------------------------------------------------------------- Total interest income $14,388 $13,826 $13,468 $13,033 $13,085 $12,498 $12,312 $11,708 Total interest expense 7,833 7,245 6,907 6,838 6,682 6,301 6,166 5,848 Net interest income 6,555 6,581 6,561 6,195 6,403 6,197 6,146 5,860 Net income 1,806 1,728 1,066 1,848 1,636 1,868 1,934 1,767 Earnings per share (basic) 0.38 0.36 0.22 0.39 0.35 0.40 0.41 0.37 Earnings per share (diluted) 0.38 0.36 0.22 0.39 0.35 0.39 0.41 0.37 - --------------------------------------------------------------------------------------------------------------
The above quarterly amounts reflect reclassifications which increased net interest income by $275 for 1998 and $284 for 1997 on an annual basis from amounts previously reported. page twenty REPORT OF MANAGEMENT ON RESPONSIBILITY FOR FINANCIAL INFORMATION The consolidated financial statements and related financial information presented in this annual report have been prepared by the management of Indiana United Bancorp in accordance with generally accepted accounting principles, and include amounts based on management's best estimates and judgments at the time of preparation. In presenting this financial information, management is responsible for its integrity, content and consistency of preparation. To meet this responsibility, management maintains a system of internal control, policies and administrative procedures designed to provide reasonable assurance that transactions are recorded accurately. As an integral part of the internal control, 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 Olive LLP. Their responsibility is to express an opinion as to the integrity of the Company's consolidated financial statements and, in performing their audit, to evaluate the Company's internal control to the extent they deem necessary in order to issue such an opinion. As described further in their report that follows, their opinion is based on their audit, which was conducted in accordance with generally accepted accounting standards and is believed by them to provide a reasonable basis for their opinion. The selection of Olive LLP was approved by the Board of Directors and ratified by shareholders. /s/ Robert E. Hoptry Robert E. Hoptry Chief Executive Officer /s/ James L. Saner, Sr. James L. Saner, Sr. President and Chief Operating Officer INDEPENDENT AUDITOR'S REPORT To the Shareholders and Board of Directors Indiana United Bancorp Greensburg, Indiana We have audited the consolidated balance sheet of Indiana United Bancorp and subsidiaries as of December 31, 1998 and 1997,and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The consolidated financial statements as of December 31,1997, and for the two years then ended have been restated to reflect the pooling of interest with P.T.C. Bancorp as described in Note2 to the consolidated financial statements. We did not audit the 1997 financial statements of P.T.C. Bancorp, which statements reflect total assets of $321,993 as of December 31, 1997, and total revenues of $26,118 and $23,668 for the two years then ended. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for P.T.C. Bancorp as of December 31, 1997,and for the two years then ended, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the consolidated financial statements referred to in the first paragraph present fairly, in all material respects, the consolidated financial position of Indiana United Bancorp and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Olive LLP Indianapolis, Indiana January 29, 1999 page twenty-one CONSOLIDATED BALANCE SHEET - ----------------------------------------------------------------------------- December 31 (In Thousands Except Share Data) 1998 1997 - ----------------------------------------------------------------------------- ASSETS Cash and due from banks $ 25,549 $ 22,405 Interest-bearing demand deposits 31 58 Federal funds sold 19,855 50,750 - ----------------------------------------------------------------------------- Cash and cash equivalents 45,435 73,213 Interest-bearing time deposits 1,498 999 Investment securities Available for sale 178,008 101,922 Held to maturity (fair value of $20,016 and $24,575) 19,591 24,182 - ----------------------------------------------------------------------------- Total investment securities 197,599 126,104 Loans held for sale 10,972 1,580 Loans, net of allowance for loan losses of $6,099 and $5,451 533,305 467,176 Premises and equipment 12,498 10,384 Federal Home Loan Bank stock 2,120 2,024 Income receivable 7,044 5,681 Intangible assets 12,818 1,705 Other assets 4,656 4,302 - ----------------------------------------------------------------------------- Total assets $827,945 $693,168 - ----------------------------------------------------------------------------- LIABILITIES Deposits Noninterest bearing $ 66,102 $ 63,204 Interest bearing 643,769 519,964 - ----------------------------------------------------------------------------- Total deposits 709,871 583,168 Short-term borrowings 20,032 15,164 Federal Home Loan Bank advances 10,000 10,000 Interest payable 4,032 3,681 Other liabilities 2,389 3,724 - ----------------------------------------------------------------------------- Total liabilities 746,324 615,737 - ----------------------------------------------------------------------------- Guaranteed preferred beneficial interests in Company's subordinated debentures 22,425 22,425 - ----------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES 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 and outstanding - 4,774,628 and 4,708,556 shares 2,387 2,354 Paid-in capital 21,742 21,254 Retained earnings 34,363 30,636 Accumulated other comprehensive income 704 762 - ----------------------------------------------------------------------------- Total shareholders equity 59,196 55,006 - ----------------------------------------------------------------------------- Total liabilities and shareholders' equity $827,945 $693,168 - ----------------------------------------------------------------------------- See notes to consolidated financial statements. page twenty-two CONSOLIDATED STATEMENT OF INCOME - -------------------------------------------------------------------------------- Year Ended December 31 (In Thousands Except Share Data) 1998 1997 1996 - -------------------------------------------------------------------------------- INTEREST INCOME Loans receivable Taxable $43,423 $39,674 $34,661 Tax exempt 656 572 607 Investment securities Taxable 7,408 6,865 7,576 Tax exempt 1,315 1,450 1,376 Federal funds sold 1,832 952 813 Deposits with financial institutions 81 90 130 - -------------------------------------------------------------------------------- Total interest income 54,715 49,603 45,163 - -------------------------------------------------------------------------------- INTEREST EXPENSE Deposits 25,828 23,839 21,700 Short-term borrowings 429 630 690 Trust preferred securities 2,024 105 Long-term debt 542 423 513 - -------------------------------------------------------------------------------- Total interest expense 28,823 24,997 22,903 - -------------------------------------------------------------------------------- NET INTEREST INCOME 25,892 24,606 22,260 Provision for loan losses 1,218 1,789 978 - -------------------------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 24,674 22,817 21,282 - -------------------------------------------------------------------------------- NON-INTEREST INCOME Insurance commissions 530 515 540 Mortgage banking 1,356 1,116 795 Fiduciary activities 261 278 264 Service charges on deposit accounts 1,895 1,780 1,656 Net realized gains (losses) on securities (13) (76) 104 Other income 1,093 888 615 - -------------------------------------------------------------------------------- Total non-interest income 5,122 4,501 3,974 - -------------------------------------------------------------------------------- NON-INTEREST EXPENSE Salaries and employee benefits 10,852 9,252 8,618 Net occupancy expenses 1,382 1,284 1,185 Equipment expenses 1,457 1,323 1,124 Data processing fees 855 797 654 Deposit insurance expense 129 109 738 Intangibles amortization 459 238 229 Stationery, printing and supplies 635 503 438 Merger expenses 806 Other expenses 3,097 2,697 2,736 - -------------------------------------------------------------------------------- Total non-interest expense 19,672 16,203 15,722 - -------------------------------------------------------------------------------- Income Before Income Tax 10,124 11,115 9,534 Income tax expense 3,676 3,910 3,565 - -------------------------------------------------------------------------------- Net Income $ 6,448 $ 7,205 $ 5,969 - -------------------------------------------------------------------------------- Basic Earnings per Share $ 1.36 $ 1.53 $ 1.25 Diluted Earnings per Share 1.35 1.52 1.25 - -------------------------------------------------------------------------------- See notes to consolidated financial statements. page twenty-three CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Preferred Stock Common Stock --------------- ------------ Paid-in Comprehensive Retained (In Thousands Except Share Data) Shares Amount Shares Amount Capital Income Earnings - ------------------------------------------------------------------------------------------------------------------- Balances, January 1, 1996 20,000 $2,000 4,488,542 $2,244 $18,517 $24,330 Net income $5,969 5,969 5,969 Unrealized losses on securities, net of reclassification adjustment (80) ------- Total comprehensive income $5,889 ======= Cash dividends Preferred stock-$6.34 per share (50) Common stock-$.42 per share (1,717) Redemptions Preferred stock (20,000) (2,000) Common stock (48,662) (24) (666) Stock dividend 199,784 100 2,896 (2,996) Stock issued 61,166 31 455 486 Exercise of stock options 3,158 1 20 21 - -------------------------------------------------------------------------------------- --------- Balances, December 31, 1996 - - 4,703,988 2,352 21,222 25,536 Net income $7,205 7,205 Unrealized gains on securities, net of reclassification adjustment 470 ------- Total comprehensive income $7,675 ======= Cash dividends-$.51 per share (2,105) Exercise of stock options 4,568 2 32 - -------------------------------------------------------------------------------------- --------- Balances, December 31, 1997 4,708,556 2,354 21,254 30,636 Net income $6,448 6,448 Unrealized losses on securities, net of reclassification adjustment (58) ------- Total comprehensive income $6,390 ======= Cash dividends-$.59 per share (2,721) Exercise of stock options 66,072 33 488 - -------------------------------------------------------------------------------------- --------- Balances, December 31, 1998 4,774,628 $2,387 $21,742 $34,363 - -------------------------------------------------------------------------------------- ---------
Accumulated Other Comprehensive (In Thousands Except Share Data) Income Total - ---------------------------------------------------------------- Balances, January 1, 1996 $372 $47,463 Net income Unrealized losses on securities, net of reclassification adjustment (80) (80) Total comprehensive income Cash dividends Preferred stock-$6.34 per share (50) Common stock-$.42 per share (1,717) Redemptions Preferred stock (2,000) Common stock (690) Stock dividend Stock issued Exercise of stock options 486 21 ---------------------- Balances, December 31, 1996 292 49,402 Net income 7,205 Unrealized gains on securities, net of reclassification adjustment 470 470 Total comprehensive income Cash dividends-$.51 per share (2,105) Exercise of stock options 34 ---------------------- Balances, December 31, 1997 762 55,006 Net income 6,448 Unrealized losses on securities, net of reclassification adjustment (58) (58) Total comprehensive income Cash dividends-$.59 per share (2,721) Exercise of stock options 521 ---------------------- Balances, December 31, 1998 $704 $59,196 ----------------------
See notes to consolidated financial statements. page twenty-four CONSOLIDATED STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------------------- Year Ended December 31 (In Thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 6,448 $ 7,205 $ 5,969 Adjustments to reconcile net income to net cash provided (used) by operating activities Provision for loan losses 1,218 1,789 978 Depreciation and amortization 1,198 1,062 927 Deferred income tax 79 (441) 200 Securities amortization, net 181 155 187 Amortization of fair value adjustments and intangibles 746 322 310 Investment securities (gains) losses 13 76 (104) Foreclosed real estate gains (179) Net loans sold gains (590) (323) (246) Mortgage loans originated for sale (91,194) (38,277) (28,690) Proceeds from sale of mortgage loans 82,392 37,450 30,623 Net change in Income receivable (1,363) (420) (759) Interest payable 351 633 (98) Other adjustments (2,192) (431) (432) - ------------------------------------------------------------------------------------------- Net cash provided (used) by operating activities (2,713) 8,621 8,865 - ------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Net change in short-term investments (499) 998 5,489 Purchases of securities available for sale (109,618) (10,426) (34,466) Proceeds from maturities and paydowns of securities available for sale 27,219 20,577 30,453 Proceeds from sales of securities available for sale 6,040 7,075 3,737 Purchases of securities held to maturity (2,189) (4,021) (12,807) Proceeds from maturities and paydowns of securities held to maturity 6,732 4,997 7,121 Net change in loans (45,976) (57,609) (45,639) Purchases of premises and equipment (1,851) (2,199) (1,283) Proceeds from sale of other real estate 146 1,228 50 Cash received in branch acquisitions 86,802 Other investing activities 58 143 17 - ------------------------------------------------------------------------------------------- Net cash used by investing activities (33,136) (39,237) (47,328) - ------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net change in Noninterest-bearing, NOW, money market and savings deposits 6,033 4,870 9,853 Certificates of deposit (630) 30,964 3,595 Short-term borrowings 4,868 (1,014) 3,943 Repayment of long-term debt (5,500) (1,000) Proceeds from FHLB advances 12,500 Repayment of FHLB advances (2,500) (2,000) Cash dividends (2,721) (2,104) (1,767) Redemption of preferred stock (2,000) Redemption of common stock (690) Proceeds from issuance of stock 521 34 507 Net proceeds from issuance of trust preferred securities 21,198 - ------------------------------------------------------------------------------------------- Net cash provided by financing activities 8,071 58,448 40,441 - ------------------------------------------------------------------------------------------- Net Change in Cash and Cash Equivalents (27,778) 27,832 1,978 Cash and Cash Equivalents, Beginning of Year 73,213 45,381 43,403 - ------------------------------------------------------------------------------------------- Cash and Cash Equivalents, End of Year $ 45,435 $ 73,213 $ 45,381 - ------------------------------------------------------------------------------------------- ADDITIONAL CASH FLOWS INFORMATION Interest paid $ 28,472 $ 24,364 $ 23,002 Income tax paid 4,019 4,028 3,607 Loan balances transferred to foreclosed real estate 1,000
See notes to consolidated financial statements. page twenty-five NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Share Data) NOTE 1 -- NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of Indiana United Bancorp("Company"), its wholly owned bank subsidiaries("Banks") and its subsidiary, IUB Capital Trust, conform to generally accepted accounting principles and reporting practices followed by the banking industry. The more significant of the policies are described below. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company is a bank holding company whose principal activity is the ownership and management of the Banks. People's Trust Company ("People's"), headquartered in Brookville, Indiana, and Union Bank and Trust Company of Indiana("Union Bank"), headquartered in Greensburg, Indiana, operate under state charters and are subject to regulation by the Indiana Department of Financial Institutions ("DFI") and the Federal Deposit Insurance Corporation("FDIC"). Regional Federal Savings Bank ("Regional Bank"), headquartered in New Albany, Indiana, is a federally chartered thrift and is subject to regulation by the Office of Thrift Supervision ("OTS") and the FDIC. IUB Capital Trust is a business trust formed in 1997 to issue the guaranteed preferred beneficial interests in the Company's subordinated debentures ("Trust Preferred Securities"). The Company owns all of the common stock of IUB Capital Trust. The Banks generate commercial, mortgage and consumer loans and receive deposits from customers located primarily in Clark, Dearborn, Decatur, Fayette, Floyd, Franklin, Hancock, Jay, Jefferson, Madison, Ripley, Rush, Switzerland and Wayne counties, Indiana, and surrounding counties. The Banks' loans are generally secured by specific items of collateral including real property, consumer assets and business assets. CONSOLIDATION-The consolidated financial statements include the accounts of the Company, Banks and IUB Capital Trust after elimination of all material intercompany transactions. INVESTMENT SECURITIES-Debt securities are classified as held to maturity ("HTM") when the Company has the positive intent and ability to hold the securities to maturity. Securities HTM are carried at amortized cost. Debt securities not classified as HTM are classified as available for sale ("AFS"). Securities AFS are carried at fair value with unrealized gains and losses reported separately as accumulated other comprehensive income. Amortization of premiums and accretion of discounts are recorded as interest income from securities. Realized gains and losses are recorded as net security gains (losses). Gains and losses on sales of securities are determined on the specific-identification method. LOANS HELD FOR SALE are carried at the lower of aggregate cost or market. Market is determined using the aggregate method.Net unrealized losses, if any, are recognized through a valuation allowance by charges to income based on the difference between estimated sales proceeds and aggregate cost. LOANS are carried at the principal amount outstanding. A loan is impaired when, based on current information or events, it is probable that the Company will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Payments with insignificant delay snot exceeding 90 days outstanding are not considered impaired. Certain non accrual and substantially delinquent loans may be considered to be impaired. The Company considers its investment in one-to-four family residential loans and consumer loans to be homogeneous and therefore excluded from separate identification of evaluation of impairment. Interest income is accrued on the principal balances of loans. The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed when considered uncollectible. Interest income is subsequently recognized only to the extent cash payments are received unless such amounts are applied to principal amounts outstanding. Certain net loan fees are being deferred and amortized as an adjustment of yield on the loans. ALLOWANCE FOR LOAN LOSSES is maintained to absorb loan losses based on management's continuing review and evaluation of the loan portfolio and its judgment as to the impact of economic conditions on the portfolio. The evaluation by management includes consideration of past loss experience, changes in the composition of the portfolio, the current condition and amount of loans outstanding, and the probability of collecting all amounts due. Impaired loans are measured by the present value of expected future cash flows, or the fair value of the collateral of the loan, if collateral dependent. The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. Management believes that as of December 31, 1998 the allowance for loan losses is adequate based on information currently available. A worsening or protracted economic decline in the area within which the Banks operate would increase the likelihood of additional losses due to credit and market risks and could create the need for additional loss reserves. page twenty-six PREMISES AND EQUIPMENT are carried at cost net of accumulated depreciation. Depreciation is computed using the straight-line and declining-balance methods based principally on the estimated useful lives of the assets. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains and losses on dispositions are included in current operations. FEDERAL HOME LOAN BANK STOCK is a required investment for institutions that are members of the Federal Home Loan Bank ("FHLB") system. The required investment in the common stock is based on a predetermined formula. FORECLOSED ASSETS are carried at the lower of cost or fair value less estimated selling costs. When foreclosed assets are acquired, any required adjustment is charged to the allowance for loan losses. All subsequent activity is included in current operations. INTANGIBLE ASSETS consist of core deposit intangibles and goodwill. Core deposit intangibles are being amortized using accelerated and straight-line methods over 10 to 15 years; goodwill is being amortized using the straight-line method over 15 to 20 years. Such assets are periodically evaluated as to the recoverability of their carrying value. MORTGAGE SERVICING RIGHTS on originated loans are capitalized by allocating the total costs of the mortgage loans between the mortgage servicing rights and the loans based on their relative fair values. Capitalized servicing rights are amortized in proportion to and over the period of estimated servicing revenues. STOCK OPTIONS were granted for a fixed number of shares with an exercise price equal to the fair value of the shares at the date of grant. The Company accounted for stock option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly, recognized no compensation expense for the stock option grants. INCOME TAX in the consolidated statement of income includes deferred income tax provisions or benefits for all significant temporary differences in recognizing income and expenses for financial reporting and income tax purposes. The Company files consolidated income tax returns with its subsidiaries. EARNINGS PER SHARE have been computed based upon the weighted average common and potential common shares outstanding during each year. RECLASSIFICATIONS of certain amounts in the 1997 and 1996 consolidated financial statements have been made to conform to the 1998 presentation. NOTE 2 -- BUSINESS COMBINATION On April 30, 1998, the Company completed a merger with P.T.C. Bancorp ("PTC"), Brookville, Indiana, in which PTC was merged with and into the Company. The transaction was accounted for using the pooling-of-interests method of accounting. The Company issued 1,136,417 (or 2,272,834 after stock split)shares of its common stock to the shareholders of PTC. Each outstanding share of PTC at the effective date of the merger was exchanged for 1.075 shares of common stock of the Company. Merger and related costs were charged against net income during 1998. The financial information contained herein reflects the merger and reports the financial condition and results of operations as though the merger occurred as of January 1, 1996. Separate operating results of the combined enterprises for the periods prior to the merger were as follows:
- ---------------------------------------------------------------------------------------- Year Ended December 31 1998 1997 1996 - ---------------------------------------------------------------------------------------- Net interest income Indiana United Bancorp $21,835 $13,144 $11,961 P.T.C. Bancorp 4,057 11,462 10,299 - ---------------------------------------------------------------------------------------- Combined $25,892 $24,606 $22,260 - ---------------------------------------------------------------------------------------- Net income Indiana United Bancorp $ 4,979 $ 3,775 $ 2,693 P.T.C. Bancorp 1,469 3,430 3,276 - ---------------------------------------------------------------------------------------- Combined $ 6,448 $ 7,205 $ 5,969 - ---------------------------------------------------------------------------------------- Basic earnings per share Indiana United Bancorp $ 1.05 $ .80 $ .56 P.T.C. Bancorp .31 .73 .69 - ---------------------------------------------------------------------------------------- Combined $ 1.36 $ 1.53 $ 1.25 - ---------------------------------------------------------------------------------------- Diluted earnings per share Indiana United Bancorp $ 1.04 $ .80 $ .56 P.T.C. Bancorp .31 .72 .69 - ---------------------------------------------------------------------------------------- Combined $ 1.35 $ 1.52 $ 1.25 - ----------------------------------------------------------------------------------------
page twenty-seven NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (In Thousands Except Share Data) NOTE 3 -- BRANCH ACQUISITIONS During 1998, the Company purchased seven branches within target market areas. These branch acquisitions were accounted for using the purchase method of accounting. Total assets acquired, including cash of $86,802 and loans of $21,300, and total liabilities assumed, including deposits of $121,300, amounted to $121,880. The results of operations of the branches have been included since their acquisition dates. Intangible assets are being amortized over estimated useful lives. The Company has further agreed to purchase an additional four branches within target market areas. Consummation is expected to occur in early 1999. Deposits expected to be purchased are estimated at $105,000. NOTE 4 -- RESTRICTION ON CASH AND DUE FROM BANKS The Banks are required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank. The reserve required at December 31, 1998, was $4,889. NOTE 5 -- INVESTMENT SECURITIES
- --------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair December 31, 1998 Cost Gains Losses Value - --------------------------------------------------------------------------------------------- Available for sale Federal agencies $ 96,903 $1,451 $ 379 $ 97,975 State and municipal 9,627 210 15 9,822 Mortgage-backed securities 40,665 421 257 40,829 Corporate obligations 28,428 370 593 28,205 Other securities 412 16 1 427 Equity securities 750 750 - --------------------------------------------------------------------------------------------- Total available for sale 176,785 2,468 1,245 178,008 - --------------------------------------------------------------------------------------------- Held to maturity State and municipal 18,609 327 18,936 Corporate obligations 497 23 520 Other securities 485 75 560 - --------------------------------------------------------------------------------------------- Total held to maturity 19,591 425 20,016 - --------------------------------------------------------------------------------------------- Total investment securities $196,376 $2,893 $1,245 $198,024 - ---------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair December 31, 1997 Cost Gains Losses Value - --------------------------------------------------------------------------------------------- Available for sale Federal agencies $ 45,036 $ 972 $ 54 $ 45,954 State and municipal 7,063 145 3 7,205 Mortgage-backed securities 45,179 598 383 45,394 Corporate obligations 2,621 2 2,619 Equity securities 750 750 - --------------------------------------------------------------------------------------------- Total available for sale 100,649 1,715 442 101,922 - --------------------------------------------------------------------------------------------- Held to maturity State and municipal 22,741 272 1 23,012 Corporate obligations and other securities 1,441 122 1,563 - --------------------------------------------------------------------------------------------- Total held to maturity 24,182 394 1 24,575 - --------------------------------------------------------------------------------------------- Total investment securities $124,831 $2,109 $ 443 $126,497 - ---------------------------------------------------------------------------------------------
page twenty-eight The amortized cost and fair value of securities HTM and AFS at December 31, 1998 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
- --------------------------------------------------------------------------------------- Held to Maturity Available for Sale - --------------------------------------------------------------------------------------- Amortized Fair Amortized Fair Cost Value Cost Value - --------------------------------------------------------------------------------------- Within one year $ 5,255 $ 5,282 $ 6,763 $ 6,780 Two through five years 13,564 13,863 89,821 90,087 Six through ten years 276 294 22,413 23,453 After ten years 11 17 15,961 15,682 - --------------------------------------------------------------------------------------- 19,106 19,456 134,958 136,002 Mortgage backed securities 40,665 40,829 Other securities 485 560 412 427 Equity securities 750 750 - --------------------------------------------------------------------------------------- Total investment securities $19,591 $20,016 $176,785 $178,008 - ---------------------------------------------------------------------------------------
Securities with a carrying value of $28,853 and $26,839 were pledged at December 31, 1998 and 1997 to secure certain deposits and for other purposes as permitted or required by law. Proceeds from sales of securities AFS during 1998, 1997 and 1996 were $6,040, $7,075, and $3,737. Gross gains of $40, $18, and $122 and gross losses of $53, $94, and $18 were realized on those sales in 1998, 1997 and 1996, respectively. The tax expense (benefit) for gains (losses) on security transactions for the years ended December 31, 1998, 1997 and 1996 was $(5), $(30), and $41. NOTE 6 -- LOANS AND ALLOWANCE - -------------------------------------------------------------------- December 31 1998 1997 - -------------------------------------------------------------------- Commercial and industrial loans $ 29,084 $ 33,101 Agricultural production financing 14,983 15,991 Farm real estate 36,906 38,802 Commercial real estate 95,800 81,549 Residential real estate 246,491 208,327 Construction and development 30,772 15,797 Consumer 70,966 66,357 State and political 13,249 11,362 Government guaranteed loans 1,153 1,341 - -------------------------------------------------------------------- Total loans 539,404 472,627 Allowance for loan losses (6,099) (5,451) - -------------------------------------------------------------------- Net loans $533,305 $467,176 - -------------------------------------------------------------------- - -------------------------------------------------------------------- December 31 1998 1997 1996 - -------------------------------------------------------------------- Allowance for loan losses Balances, January 1 $5,451 $4,506 $4,476 Provision for losses 1,218 1,789 978 Recoveries on loans 302 335 234 Loans charged off (872) (1,179) (1,182) - -------------------------------------------------------------------- Balances, December 31 $6,099 $5,451 $4,506 - -------------------------------------------------------------------- page twenty-nine NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (In Thousands Except Share Data) Information on impaired loans is summarized below. - ---------------------------------------------------------------------------- December 31 1998 1997 - ---------------------------------------------------------------------------- Impaired loans with an allowance $2,635 $ 113 Impaired loans for which the discounted cash flows or collateral value exceeds the carrying value of the loan 607 238 - ---------------------------------------------------------------------------- Total impaired loans $3,242 $ 351 - ---------------------------------------------------------------------------- Allowance for impaired loans (included in the Company's allowance for loan losses) $ 600 $ 20 - ---------------------------------------------------------------------------- Year Ended December 31 1998 1997 - ---------------------------------------------------------------------------- Average balance of impaired loans $ 990 $1,351 Interest income recognized on impaired loans 57 92 Cash-basis interest included above 57 92 NOTE 7 -- PREMISES AND EQUIPMENT - ---------------------------------------------------------------------------- December 31 1998 1997 - ---------------------------------------------------------------------------- Land $ 1,943 $ 1,326 Buildings 12,542 11,378 Equipment 9,457 8,589 - ---------------------------------------------------------------------------- Total cost 23,942 21,293 Accumulated depreciation (11,444) (10,909) - ---------------------------------------------------------------------------- Net $ 12,498 $ 10,384 - ---------------------------------------------------------------------------- NOTE 8 -- DEPOSITS - ---------------------------------------------------------------------------- December 31 1998 1997 - ---------------------------------------------------------------------------- Noninterest-bearing $ 66,102 $ 63,204 Interest-bearing demand 159,661 129,043 Savings deposits 75,272 58,102 Certificates and other time deposits of $100,000 or more 68,821 59,140 Other certificates and time deposits 340,015 273,679 - ---------------------------------------------------------------------------- Total deposits $709,871 $583,168 - ---------------------------------------------------------------------------- Certificates and other time deposits maturing in years ending after December 31, 1998 1999 $315,656 2000 52,771 2001 25,199 2002 7,839 2003 6,622 Thereafter 749 - ---------------------------------------------------------------------------- $408,836 - ---------------------------------------------------------------------------- NOTE 9 -- SHORT-TERM BORROWINGS - ---------------------------------------------------------------------------- December 31 1998 1997 - ---------------------------------------------------------------------------- Securities sold under repurchase agreements $19,607 $12,320 U. S. Treasury demand notes 425 2,844 - ---------------------------------------------------------------------------- Total short-term borrowings $20,032 $15,164 - ---------------------------------------------------------------------------- Securities sold under agreements to repurchase ("agreements") consist of obligations of the Company to other parties. The obligations are secured by U. S. Treasury and Federal agency securities, and such collateral is held by a safekeeping agent. The maximum amount of outstanding agreements at any month-end during 1998 and 1997 totaled $19,607 and 12,533 and the daily average of such agreements totaled $8,627 and $9,516. The weighted average yield was 4.15% and 5.21% at page thirty December 31, 1998 and 1997, while the weighted average yield during 1998 and 1997 was approximately 4.40% and 5.21%. The majority of the agreements at December 31, 1998 mature within 30 days. NOTE 10 -- FEDERAL HOME LOAN BANK ADVANCES The Company had an FHLB advance of $10,000 outstanding at December 31, 1998. The advance has an interest rate of 5.35% and matures on December 30, 2002. The FHLB advance is secured by first mortgage loans and investment securities totaling $99,113. The advance is subject to restrictions or penalties in the event of prepayment. 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 life of the securities. The securities and distributions are guaranteed by the Company. Distributions on the securities are payable quarterly in arrears at the annual rate of 8.75% (with an effective rate of 9.03%) 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 $150,523, $110,341 and $89,455 at December 31, 1998, 1997 and 1996. The fair value of capitalized mortgage servicing rights at December 31, 1998 and 1997 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. - --------------------------------------------------------------------------- 1998 1997 1996 - --------------------------------------------------------------------------- Mortgage servicing rights Balances, January 1 $ 529 $ 225 Servicing rights capitalized 690 469 $ 258 Amortization of servicing rights (295) (165) (33) - --------------------------------------------------------------------------- Balances, December 31 $ 924 $ 529 $ 225 - --------------------------------------------------------------------------- NOTE 13 -- INCOME TAX - --------------------------------------------------------------------------- Year Ended December 31 1998 1997 1996 - --------------------------------------------------------------------------- Income tax expense Currently payable Federal $2,642 $3,271 $2,541 State 955 1,080 824 Deferred Federal 119 (343) 188 State (40) (98) 12 - --------------------------------------------------------------------------- Total income tax expense $3,676 $3,910 $3,565 - --------------------------------------------------------------------------- Reconciliation of federal statutory to actual tax expense Federal statutory income tax at 34% $3,442 $3,779 $3,242 Tax exempt interest (573) (558) (509) Effect of state income taxes 604 648 552 Non-deductible expenses 234 58 52 Change in tax law 144 Other (31) (17) 84 - --------------------------------------------------------------------------- Actual tax expense $3,676 $3,910 $3,565 - --------------------------------------------------------------------------- page thirty-one A cumulative net deferred tax liability is included in other liabilities. The components of the liability are as follows: - ----------------------------------------------------------------------------- December 31 1998 1997 - ----------------------------------------------------------------------------- Assets Allowance for loan losses $ 1,602 $ 1,215 Core deposit intangibles 100 81 Deferred compensation 21 77 State income tax 2 - ----------------------------------------------------------------------------- Total assets 1,723 1,375 - ----------------------------------------------------------------------------- Liabilities Accretion on securities (22) (19) Depreciation (427) (328) Fair value adjustments in accounting for assets acquired (586) (772) Goodwill (48) Mortgage servicing rights (393) State income tax (67) Unrealized gain on securities AFS (481) (511) Other (76) (73) - ----------------------------------------------------------------------------- Total liabilities (2,100) (1,703) - ----------------------------------------------------------------------------- $ (377) $ (328) - ----------------------------------------------------------------------------- No valuation allowance was necessary at anytime during 1998, 1997 and 1996. Retained earnings 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 bank stock or excess dividends, or loss of "bank" status, would create income for tax purposes only, which income would be subject to the then-current corporate income tax rate. The unrecorded deferred income tax liability on the above amount at December 31, 1998 was approximately $735. NOTE 14 -- OTHER COMPREHENSIVE INCOME
Before-Tax Tax Net-of-Tax Year Ended December 31, 1998 Amount (Expense)/Benefit Amount - -------------------------------------------------------------------------------------- Unrealized losses on securities Unrealized holding losses arising during the year $(109) $43 $(66) Less: reclassification adjustment for losses realized in net income (13) 5 (8) - -------------------------------------------------------------------------------------- Other comprehensive income-net unrealized losses on securities $ (96) $38 $(58) - -------------------------------------------------------------------------------------- Before-Tax Tax Net-of-Tax Year Ended December 31, 1997 Amount (Expense)/Benefit Amount - -------------------------------------------------------------------------------------- Unrealized gains on securities Unrealized holding gains arising during the year $ 702 $(278) $424 Less: reclassification adjustment for losses realized in net income (76) 30 (46) - -------------------------------------------------------------------------------------- Other comprehensive income-net unrealized gains on securities $ 778 $(308) $470 - -------------------------------------------------------------------------------------- Before-Tax Tax Net-of-Tax Year Ended December 31, 1996 Amount (Expense)/Benefit Amount - -------------------------------------------------------------------------------------- Unrealized losses on securities Unrealized holding losses arising during the year $ (28) $ 11 $(17) Less: reclassification adjustment for gains realized in net income 104 (41) 63 - -------------------------------------------------------------------------------------- Other comprehensive income-net unrealized losses on securities $(132) $52 $(80) - --------------------------------------------------------------------------------------
page thirty-two 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: 1998 1997 - ----------------------------------------------------------------------- Commitments to extend credit $84,352 $67,375 Standby letters of credit 517 736 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Collateral held varies, but may include accounts receivable, inventory, property and equipment and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Banks to guarantee the performance of a customer to a third party. The Company and Banks may, from time to time, be subject to claims and lawsuits which arise primarily in the ordinary course of business. Management is presently not aware of any such material claims. NOTE 16 -- AUTHORIZED SHARES AND STOCK SPLIT In June 1998, the Company's shareholders approved an amendment to the Articles of Incorporation to increase the number of authorized shares of common stock from 3,000,000 to 10,000,000 shares. On July 31, 1998, the Company approved a 2-for-1 stock split in which each share of its common stock outstanding at the close of business on August 17, 1998, was converted into two shares of common stock. The additional 2,387,314 shares were distributed to shareholders on August 31, 1998. The stated value of shares was changed from $1 to $.50. Share, per share and stock option data have been restated for the 2-for-1 stock split. NOTE 17 -- PREFERRED SHARES In 1987, the Company issued 30,000 shares of no-par value, $100 stated value, convertible preferred stock. The Company redeemed the remaining 20,000 shares of preferred stock in 1996. Cash dividends for 1996 were paid at the rate of 6.34% per annum. The Company's Articles of Incorporation permit the Board of Directors, without further shareholder approval, to establish the relative rights, designations, preferences and limitations or restrictions of the Company's preferred stock prior to the issuance thereof. NOTE 18 -- YEAR 2000 Like all entities, the Company and subsidiaries are exposed to risks associated with the Year 2000 Issue, which affects computer software and hardware; transactions with customers, vendors, and other entities; and equipment dependent upon microchips. The Company has begun, but not yet completed, the process of identifying and remediating potential Year 2000 problems. It is not possible for any entity to guarantee the results of its own remediation efforts or to accurately predict the impact of the Year 2000 Issue on third parties with which the Company and subsidiaries do business. If remediation efforts of the Company or third parties with which the Company and subsidiaries do business are not successful, the Year 2000 Issue could have negative effects on the Company's financial condition and results of operations in the near term. The Company has not estimated the ultimate cost of addressing the Year 2000 Issue. It is reasonably possible that the Company's belief that it will recover the carrying amount of certain existing hardware and software could change materially in the near term as a result of the Company's Year 2000 resolution decisions. NOTE 19 -- DIVIDENDS AND CAPITAL RESTRICTIONS Without prior approval, People's and Union Bank are restricted by Indiana law and regulations of the DFI and the FDIC as to the maximum amount of dividends People's and Union Bank can pay to the parent in any calendar year to People's and Union Bank's retained net profits (as defined) for that year and the two preceding years. The OTS regulations provide that a savings bank which meets fully phased-in 1994 capital requirements and is subjected only to "normal supervision," such as Regional Bank, may payout 100% of net income to date over the calendar year and 50% of surplus capital existing at the beginning of the calendar year without supervisory approval, but with 30 days prior notice to OTS. As a result of limitations relating to tax bad debt deductions, Regional Bank's nontaxable dividends to the Company are limited to an amount approximately equal to net income commencing in 1997. At December 31, 1998, total shareholders' equity of the Banks was $71,030 of which $59,540 was restricted or limited from dividend distribution to the Company. As a practical matter, page thirty-three NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (In Thousands Except Share Data) The Banks may restrict dividends to a lesser amount because of the need to maintain an adequate capital structure. NOTE 20 -- DIVIDEND REINVESTMENT PLAN The Company approved an Automatic Dividend Reinvestment Plan in February 1997. The plan enabled shareholders to elect to have their cash dividends on all or a portion of shares held automatically reinvested in additional shares of the Company's common stock. The stock is purchased by the Company's transfer agent on the open market and credited to participant accounts at fair market value. Dividends are reinvested on a quarterly basis commencing with the March 1997 dividend payment. NOTE 21 -- 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, 1998 and 1997, the Banks are categorized as well capitalized and met all subject capital adequacy requirements. There are no conditions or events since December 31, 1998 that management believes have changed the Company's or Banks' classification. The Company's and Banks' capital amounts and ratios are as follows:
- --------------------------------------------------------------------------------------------------------------------------- Required for To Be Well Actual Adequate Capital(1) Capitalized(1) - --------------------------------------------------------------------------------------------------------------------------- December 31, 1998 Amount Ratio Amount Ratio Amount Ratio - --------------------------------------------------------------------------------------------------------------------------- Indiana United Bancorp Total capital(1) (to risk-weighted assets) $74,199 13.7% $43,285 8.0% N/A Tier 1 capital(1) (to risk-weighted assets) 65,171 12.1 21,642 4.0 N/A Tier 1 capital(1) (to average assets) 65,171 8.3 31,365 4.0 N/A People's Total capital(1) (to risk-weighted assets) 28,324 12.5 18,102 8.0 $22,628 10.0% Tier 1 capital(1) (to risk-weighted assets) 25,495 11.2 9,051 4.0 13,577 6.0 Tier 1 capital(1) (to average assets) 25,495 7.8 13,006 4.0 16,258 5.0 Union Bank Total capital(1) (to risk-weighted assets) 20,969 11.4 14,707 8.0 18,384 10.0 Tier 1 capital(1) (to risk-weighted assets) 18,993 10.3 7,354 4.0 11,030 6.0 Tier 1 capital(1) (to average assets) 18,993 6.9 11,063 4.0 13,829 5.0 Regional Bank Total risk-based capital(1) (to risk-weighted assets) 14,174 12.9 8,792 8.0 10,990 10.0 Core capital(1) (to adjusted tangible assets) 13,135 7.3 7,240 4.0 10,860 6.0 Core capital(1) (to adjusted total assets) 13,135 7.3 7,240 4.0 9,050 5.0 - ---------------------------------------------------------------------------------------------------------------------------
Regional Bank's tangible capital at December 31, 1998 was $13,135, which amount was 7.3 percent of tangible assets and exceeded the required ratio of 1.5 percent. (1) As defined by regulatory agencies page thirty-four
- --------------------------------------------------------------------------------------------------------------------------- Required for To Be Well Actual Adequate Capital(1) Capitalized(1) - --------------------------------------------------------------------------------------------------------------------------- December 31, 1997 Amount Ratio Amount Ratio Amount Ratio - --------------------------------------------------------------------------------------------------------------------------- Indiana United Bancorp Total capital(1) (to risk-weighted assets) $55,246 24.0% $18,416 8.0% N/A Tier 1 capital(1) (to risk-weighted assets) 40,120 17.4 9,208 4.0 N/A Tier 1 capital(1) (to average assets) 40,120 10.7 14,979 4.0 N/A P.T.C. Bancorp Total capital(1) (to risk-weighted assets) 25,099 11.8 16,961 8.0 N/A Tier 1 capital(1) (to risk-weighted assets) 22,449 10.6 8,481 4.0 N/A Tier 1 capital(1) (to average assets) 22,449 7.0 12,813 4.0 N/A People's Total capital(1) (to risk-weighted assets) 24,219 11.3 17,097 8.0 $21,371 10.0% Tier 1 capital(1) (to risk-weighted assets) 21,547 10.1 8,548 4.0 12,823 6.0 Tier 1 capital(1) (to average assets) 21,547 6.7 12,766 4.0 15,958 5.0 Union Bank Total capital(1) (to risk-weighted assets) 23,074 16.2 11,392 8.0 14,240 10.0 Tier 1 capital(1) (to risk-weighted assets) 21,294 15.0 5,696 4.0 8,544 6.0 Tier 1 capital(1) (to average assets) 21,294 9.5 8,992 4.0 11,240 5.0 Regional Bank Total risk-based capital(1) (to risk-weighted assets) 12,376 14.5 6,811 8.0 8,514 10.0 Core capital(1) (to adjusted tangible assets) 11,433 8.4 4,082 3.0 8,165 6.0 Core capital(1) (to adjusted total assets) 11,433 8.4 4,082 3.0 6,804 5.0 - ---------------------------------------------------------------------------------------------------------------------------
Regional Bank's tangible capital at December 31, 1997 was $11,433, which amount was 8.4 percent of tangible assets and exceeded the required ratio of 1.5 percent. 1 As defined by regulatory agencies NOTE 22 -- 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 $736 in 1998, $529 in 1997 and $442 in 1996. NOTE 23 -- RELATED PARTY TRANSACTIONS The Company has entered into transactions with certain directors, executive officers, significant stockholders and their affiliates or associates (related parties). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. The aggregate amount of loans, as defined, to such related parties were as follows: Balances, January 1, 1998 $ 3,245 Changes in composition of related parties (470) New loans, including renewals 1,766 Payments, etc., including renewals (1,541) - --------------------------------------------------------------------- Balances, December 31, 1998 $ 3,000 - --------------------------------------------------------------------- Deposits from related parties held by the Company at December 31, 1998 and 1997 totaled $763 and $700. NOTE 24 -- STOCK OPTION PLANS Under the stock option plans effective through April 30, 1998 which were accounted for in accordance with Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and related interpretations, options were page thirty-five NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (In Thousands Except Share Data) granted to selected executive officers and directors which vested and became fully exercisable generally at the end of four years of continued employment. The exercise price of each option was equal to the fair value of the Company's stock on the date of grant; therefore, no compensation expense was recognized. Although the Company has elected to follow APB No. 25, Statement of Financial Accounting Standards (SFAS) No. 123 requires pro forma disclosures of net income and earnings per share as if the Company had accounted for its employee stock options under that Statement. The fair value of each option grant was estimated on the grant date using a present value calculation with the following assumptions: - -------------------------------------------------------------------------- 1996 - -------------------------------------------------------------------------- Risk-free interest rates 6.50% Dividend yields 2.31% Volatility factors of expected market price of common stock 1.00% Weighted-average expected life of the options 9 years - -------------------------------------------------------------------------- Under SFAS No. 123, compensation cost is recognized in the amount of the estimated fair value of the options and amortized to expense over the options' vesting period. The pro forma effect on net income and earnings per share of this statement are as follows: - ------------------------------------------------------------------------ 1998 1997 1996 - ------------------------------------------------------------------------ Net income As reported $6,448 $7,205 $5,969 Pro forma 6,433 7,194 5,957 Basic earnings per share As reported 1.36 1.53 1.25 Pro forma 1.35 1.53 1.25 Diluted earnings per share As reported 1.35 1.52 1.25 Pro forma 1.35 1.52 1.24 - ------------------------------------------------------------------------ The following is a summary of the status of the stock option plans and changes in the plans as of and for the years ended December 31, 1998, 1997, and 1996.
- ------------------------------------------------------------------------------------------------------------------ Year Ended December 31 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------ Weighted Weighted Weighted Average Average Average Options Shares Exercise Price Shares Exercise Price Shares Exercise Price - ------------------------------------------------------------------------------------------------------------------ Outstanding, beginning of year 66,072 $7.88 70,640 $7.77 68,714 $7.36 Granted 5,084 12.68 Exercised (66,072) 7.88 (4,568) 6.78 (3,158) 6.78 ------- ------ ------ Outstanding, end of year 0 66,072 7.88 70,640 7.77 ------- ------ ------ Options exercisable at year end 56,818 47,382 Weighted-average fair value of options granted during the year $3.23 - ------------------------------------------------------------------------------------------------------------------
page thirty-six NOTE 25 -- EARNINGS PER SHARE Earnings per share were computed as follows:
Weighted Average Per-Share Year Ended December 31, 1998 Income Shares Amount - -------------------------------------------------------------------------------------------- Basic Earnings Per Share Net income available to common shareholders $ 6,448 4,753,268 $1.36 Effect of dilutive stock options 12,446 ------------------------- Diluted Earnings Per Share Net income available to common shareholders and assumed conversions $ 6,448 4,765,714 $1.35 ==================================== Weighted Average Per-Share Year Ended December 31, 1997 Income Shares Amount - -------------------------------------------------------------------------------------------- Basic Earnings Per Share Net income available to common shareholders $ 7,205 4,705,699 $1.53 Effect of dilutive stock options 32,596 ------------------------- Diluted Earnings Per Share Net income available to common shareholders and assumed conversions $ 7,205 4,738,295 $1.52 ==================================== Weighted Average Per-Share Year Ended December 31, 1996 Income Shares Amount - -------------------------------------------------------------------------------------------- Basic Earnings Per Share Net income $5,969 Less: Preferred stock dividends (50) -------- Net income available to common shareholders $5,919 4,720,426 $1.25 Effect of dilutive stock options 31,102 ---------------------- Diluted Earnings Per Share Net income available to common shareholders and assumed conversions $5,919 4,751,528 $1.25 - --------------------------------------------------------------------------------------------
page thirty-seven NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (In Thousands Except Share Data) NOTE 26 -- FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instrument: CASH AND CASH EQUIVALENTS -- The fair value of cash and cash equivalents approximates carrying value. SHORT-TERM INVESTMENTS -- The fair value of short-term investments approximates carrying value. SECURITIES -- The fair values are based on quoted market prices. LOANS -- For both short-term loans and variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair value for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. FHLB STOCK -- The fair value of FHLB stock is based on the price at which it may be resold to the FHLB. INCOME RECEIVABLE/INTEREST PAYABLE -- The fair value of these amounts approximates carrying values. DEPOSITS -- The fair values of noninterest-bearing, Interest-bearing demand, and savings accounts are equal to the amount payable on demand at the balance sheet date. The carrying amounts for variable rate, fixed-term certificates of deposit approximate their fair values at the balance sheet date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on such time deposits. SHORT-TERM BORROWINGS -- The interest rates for short-term borrowings approximate market rates, thus the fair value approximates carrying value. FHLB ADVANCES -- The fair value of this borrowing is established using a discounted cash flow calculation, based on current rates for similar debt. Fair value approximates carrying value. TRUST PREFERRED SECURITIES -- The fair value is based on quoted market values. The estimated fair values of the Company's financial instruments are as follows:
- ------------------------------------------------------------------------------------------ 1998 1997 - ------------------------------------------------------------------------------------------ Carrying Carrying December 31 Amount Fair Value Amount Fair Value - ------------------------------------------------------------------------------------------ Assets Cash and cash equivalents $ 45,435 $ 45,435 $ 73,213 $ 73,213 Interest-bearing time deposits 1,498 1,498 999 999 Securities available for sale 178,008 178,008 101,922 101,922 Securities held to maturity 19,591 20,016 24,182 24,575 Loans including loans held for sale, net 544,277 546,419 468,756 469,793 Stock in FHLB 2,120 2,120 2,024 2,024 Income receivable 7,044 7,044 5,681 5,681 Liabilities Deposits 709,871 713,412 583,168 585,060 Borrowings Short-term 20,032 20,032 15,164 15,164 FHLB advances 10,000 10,270 10,000 10,000 Interest payable 4,032 4,032 3,681 3,681 Trust preferred securities 22,425 23,827 22,425 22,705 - ------------------------------------------------------------------------------------------
NOTE 27 -- CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) Presented on the opposite page is condensed financial information as to financial position, results of operations and cash flows of the Company: page thirty-eight CONDENSED BALANCE SHEET December 31 1998 1997 - ------------------------------------------------------------------------------ ASSETS Cash on deposit and repurchase agreements $ 2,467 $17,901 Short-term investments with subsidiaries 5,700 - ------------------------------------------------------------------------------ Total cash and cash equivalents 8,167 17,901 Investment security-AFS 750 1,837 Investment in subsidiaries 71,724 57,043 Other assets 1,946 2,133 - ------------------------------------------------------------------------------ Total assets $82,587 $78,914 - ------------------------------------------------------------------------------ LIABILITIES Subordinated debentures payable to IUB Capital Trust $23,119 $23,119 Other liabilities 272 789 - ------------------------------------------------------------------------------ Total liabilities 23,391 23,908 Shareholders' Equity 59,196 55,006 - ------------------------------------------------------------------------------ Total liabilities and shareholders' equity $82,587 $78,914 - ------------------------------------------------------------------------------ CONDENSED STATEMENT OF INCOME Year Ended December 31 1998 1997 1996 - ------------------------------------------------------------------------------ INCOME Dividends from subsidiaries $ 975 $4,275 $5,963 Fees from subsidiaries 139 45 33 Other income 971 216 307 - ------------------------------------------------------------------------------ Total income 2,085 4,536 6,303 - ------------------------------------------------------------------------------ EXPENSES Interest expense 2,085 513 514 Salaries and benefits 1,015 786 682 Professional fees 149 126 119 Other expenses 1,255 373 337 - ------------------------------------------------------------------------------ Total expenses 4,504 1,798 1,652 - ------------------------------------------------------------------------------ Income (loss) before income tax and equity in undistributed income of subsidiaries (2,419) 2,738 4,651 Income tax benefit 1,129 600 553 - ------------------------------------------------------------------------------ Income (loss) before equity in undistributed income of subsidiaries (1,290) 3,338 5,204 Equity in undistributed income of subsidiaries 7,738 3,867 765 - ------------------------------------------------------------------------------ Net Income $ 6,448 $7,205 $5,969 - ------------------------------------------------------------------------------ CONDENSED STATEMENT OF CASH FLOWS - ------------------------------------------------------------------------------ Year Ended December 31 1998 1997 1996 - ------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income $ 6,448 $7,205 $5,969 (Undistributed) income of subsidiaries (7,738) (3,867) (765) Other adjustments (177) 120 128 - ------------------------------------------------------------------------------ Net cash provided (used) by operating activities (1,467) 3,458 5,332 - ------------------------------------------------------------------------------ INVESTING ACTIVITIES Capital contributed to subsidiary (7,000) Purchase of equipment (154) (15) (102) Proceeds from sale of equipment 17 Proceeds from sale of security AFS 1,087 135 Purchase of security AFS (1,087) - ------------------------------------------------------------------------------ Net cash provided (used) by investing activities (6,067) (1,102) 50 - ------------------------------------------------------------------------------ FINANCING ACTIVITIES Payments on long-term debt (5,500) (1,500) Cash dividends (2,721) (2,104) (1,767) Redemptions of stock (2,690) Net proceeds from issuance of debentures 21,892 Purchase of IUB Capital Trust common shares (694) Proceeds from issuance of stock 521 34 507 - ------------------------------------------------------------------------------ Net cash provided (used) by financing activities (2,200) 13,628 (5,450) - ------------------------------------------------------------------------------ Net Change in Cash and Cash Equivalents (9,734) 15,984 (68) Cash and Cash Equivalents, Beginning of Year 17,901 1,917 1,985 - ------------------------------------------------------------------------------ Cash and Cash Equivalents, End of Year $ 8,167 $17,901 $1,917 - ------------------------------------------------------------------------------ page thirty-nine OFFICERS AND DIRECTORS INDIANA UNITED BANCORP DIRECTORS OFFICERS Robert E. Hoptry Robert E. Hoptry Chairman and CEO Chairman and CEO Indiana United Bancorp James L. Saner, Sr. James L. Saner, Sr. President and COO President and COO Indiana United Bancorp Michael K. Bauer Vice President John E. Back Retired Jay B. Fager Treasurer and CFO William G. Barron Chairman and President B. Sue Fawbush Wm. G. Barron Enterprises Vice President and Secretary, Director of Human Resources Dale J. Deffner Partner Dennis M. Flack Deffner and Tebbe Accounting Firm Vice President, Director of Training and Sales Robert S. Dunevant Vice Chairman Lynn T. Gordon Indiana United Bancorp Vice President President Unity Company Daryl R. Tressler Vice President Philip A. Frantz Attorney at Law; Partner Suzanne Kendall Coldren and Frantz Corporate Auditor Dale E. Smith Dawn M. Schwering Owner Director of Marketing Smith's Realty and Insurance Martin G. Wilson Farmer Edward J. Zoeller President E.M. Cummings Veneer, Inc. REGIONAL BANK DIRECTORS Michael K. Bauer Marvin L. Slung Chairman, President and CEO Sales Representative Regional Federal Savings Bank Jeb Advertising William G. Barron Edward J. Zoeller Chairman and President President Wm. G. Barron Enterprises E.M. Cummings Veneer, Inc. D.J. Hines DIVISION MANAGERS President Schuler Realty Inc. Larry W. Brumley Senior Vice President Robert E. Hoptry Commercial Lending Division Chairman and CEO Indiana United Bancorp Dennis R. Morrison Senior Vice President Michael J. Kapfhammer Retail Lending Division President Buckhead Mountain Grill James S. Honour, Jr. Vice President Charles E. MacGregor Retail Services Division Attorney at Law Wyatt, Tarrant and Combs UNION BANK DIRECTORS DIVISION MANAGERS Daryl R. Tressler W. Brent Hoptry Chairman, President and CEO Senior Vice President Union Bank and Trust Company Lending Division of Indiana Glenn R. Raver William G. Barron Senior Vice President Chairman and President Retail Services and Operations Wm. G. Barron Enterprises Divisions Philip A. Frantz Daniel F. Anderson Attorney at Law; Partner Vice President Coldren and Frantz Senior Trust Officer Robert E. Hoptry Dee M. Knueven Chairman and CEO Manager Indiana United Bancorp Insurance Division David L. Miers Duane D. Sautbine Manager President Miers Farm Corporation Jay County Division Lawrence R. Rueff, D.V.M. President Swine Veterinary Services John G. Young Chairman Jay Garment Corporation PEOPLE'S TRUST COMPANY DIRECTORS Dale J. Deffner Dale E. Smith Chairman Owner People's Trust Company Smith's Realty and Insurance Partner Deffner and Tebbe Norman Winkler Accounting Firm Farmer Lynn T. Gordon DIVISION MANAGERS President and CEO People's Trust Company Elaine Cook Senior Vice President John E. Back Retail /Deposit Services Division Retired Mark W. Dunevant Mark W. Dunevant Senior Vice President Senior Vice President, Retail Lending Division Retail Lending People's Trust Company L. Les Estep Senior Vice President Dieter Johnsen Commercial Lending Division Owner Dieter K.H. Johnsen, Inc. John C. Parker Senior Vice President Larry A. Johnson Data Processing and Retired Operations Division James L. Saner, Sr. President and COO Indiana United Bancorp John G. Seale Partner Rettig, Blankman, Mack and Seale Accounting Firm page forty SHAREHOLDER INFORMATION ANNUAL MEETING Tuesday, May 18, 1999, 10:00 AM Conference Center, Second Floor Union Bank and Trust Company 201 N. Broadway Greensburg, IN CORPORATE ADDRESS Indiana United Bancorp 201 N. Broadway PO Box 87 Greensburg, IN 47240-9979 FORM 10-K Copies of the Company's 1998 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 Reliance Trust Company 3295 Northcrest Road, NE Atlanta, GA 30340-4099 COMMON SHARES The Common shares of the Company are listed on the NASDAQ National Market system. In newspaper listings, Company shares are frequently listed as IndUtd. The trading symbol is IUBC. MARKET MAKERS Market Makers in the Company's common stock include: Stifel, Nicolaus & Company, Inc. J.J.B. Hilliard/W.L. Lyons, Inc. NatCity Investments, Inc. The range of known per share prices by calendar quarter, based on actual transactions, excluding commissions, is shown below. 1998 Q4 Q3 Q2 Q1 - ------------------------------------------------- High $26.50 $28.00 $30.38 $32.47 Low $21.00 $23.00 $26.75 $21.25 Last Sale $22.13 $25.75 $27.63 $29.06 1997 Q4 Q3 Q2 Q1 - ------------------------------------------------- High $23.13 $20.75 $20.50 $17.00 Low $20.25 $18.75 $15.88 $14.25 Last Sale $22.75 $20.50 $19.00 $16.63 The following dividends per share were paid by Indiana United Bancorp. 1998 Q4 Q3 Q2 Q1 - ------------------------------------------------- $ .155 $ .145 $ .145 $ .140 1997 Q4 Q3 Q2 Q1 - ------------------------------------------------- $ .135 $ .130 $ .125 $ .115 Amounts have been adjusted to reflect a 2 for 1 stock split to shareholders of record as of August 17, 1998. Indiana United Bancorp 201 North Broadway P.O. Box 87 Greensburg, Indiana 47240 EX-21 5 EXHIBIT (21)--SUBSIDIARIES OF THE REGISTRANT - -------------------------------------------- State of Name Incorporation People's Trust Company Indiana Union Bank and Trust Company of Indiana Indiana Regional Federal Savings Bank United States Kentucky United Bancorp, Inc. Kentucky IUB Capital Trust Delaware The Insurance Group, Inc. Indiana EX-23 6 EXHIBIT (23)--CONSENT OF OLIVE LLP - ---------------------------------- We consent to the incorporation by reference in the Registration Statement on Form S-8, File No. 33-45395, of our report dated January 29, 1999 contained in the 1998 Annual Report to Shareholders of Indiana United Bancorp, which is incorporated by reference in this Form 10-K. /s/ Olive LLP Indianapolis, Indiana March 25, 1999 EX-27 7
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED CONDENSED BALANCE SHEET AND THE CONSOLIDATED CONDENSED INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1998 DEC-31-1998 25,549 1,529 19,855 0 178,008 19,591 20,016 539,404 6,099 827,945 709,871 20,032 28,846 10,000 0 0 2,387 56,809 827,945 44,079 8,723 1,913 54,715 25,828 28,823 25,892 1,218 (13) 19,672 10,124 6,448 0 0 6,448 1.36 1.35 8.04 3,709 195 0 0 5,451 872 302 6,099 4,497 0 1,602
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