SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15 (d) of
The Securities Exchange Act of 1934
For the Quarter Ended: September 30, 2002 Commission File Number: 0-18392
- ---------------------
Ameriana Bancorp
Indiana 35-1782688
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. employer identification
incorporation or organization) number)
2118 Bundy Avenue, New Castle, Indiana 47362-1048
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, include area code (765) 529-2230
--------------
Common Stock, par value $1.00 per share
---------------------------------------
(Title of Class)
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 XX NO
-- --
As of November 14, 2002, there were issued and outstanding 3,147,463 shares of
the registrant's common stock.
AMERIANA BANCORP AND SUBSIDIARIES
CONTENTS
PART I - FINANCIAL INFORMATION Page No.
-------
ITEM 1 - Financial statements
Consolidated Condensed Balance Sheets
as of September 30, 2002 and December 31, 2001 . . . . . . . 3
Consolidated Condensed Statements of Operations for
the three and nine months ended
September 30, 2002 and 2001. . . . . . . . . . . . . . . . . 4
Consolidated Condensed Statements of Shareholders'
Equity for the nine months ended September 30, 2002. . . . . 5
Consolidated Condensed Statements of Cash Flows
for the nine months ended September 30, 2002 and 2001. . . . 6
Notes to Consolidated Condensed Financial
Statements . . . . . . . . . . . . . . . . . . . . . . . . . 7
ITEM 2 - Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . 9
ITEM 3 - Quantitative and Qualitative Disclosure
About Market Risk . . . . . . . . . . . . . . . . . . . . . 16
ITEM 4 - Controls and Procedures . . . . . . . . . . . . . . . . . . 18
PART II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . 19
SIGNATURES AND CERTIFICATIONS . . . . . . . . . . . . . . . . . . . . . . 20
2
PART I - FINANCIAL INFORMATION
AMERIANA BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share data)
September 30, December 31,
2002 2001
(Unaudited)
------------- ----------
Assets
Cash on hand and in other institutions $ 7,395 $ 7,540
Interest-bearing demand deposits 31,019 4,283
--------- ---------
Cash and cash equivalents 38,414 11,823
Investment securities held for sale 62,121 140,629
Mortgage loans held for sale 4,843 5,290
Loans receivable 336,355 352,113
Allowance for loan losses (3,074) (1,730)
--------- ---------
Net loans receivable 333,281 350,383
Real estate owned 246 586
Premises and equipment 7,849 6,919
Stock in Federal Home Loan Bank 7,419 7,365
Mortgage servicing rights 1,108 1,012
Investments in unconsolidated affiliates 1,329 825
Goodwill 1,486 1,511
Cash surrender value of life insurance 18,725 18,035
Other assets 3,426 7,697
--------- ---------
Total assets $ 480,247 $ 552,075
========= =========
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Noninterest-bearing $ 20,330 $ 24,257
Interest-bearing 399,956 388,156
--------- ---------
Total deposits 420,286 412,413
Advances from Federal Home Loan Bank 5,865 87,653
Notes payable 840 930
Drafts payable 6,204 6,092
Advances by borrowers for taxes and insurance 705 662
Other liabilities 4,505 1,430
--------- ---------
Total liabilities 438,405 509,180
Commitments and Contingent Liabilities
Shareholders' equity:
Preferred stock (5,000,000 shares authorized;
none issued) -- --
Common stock ($1.00 par value; authorized
15,000,000 shares; issued shares:
3,147,463 and 3,146,616, respectively) 3,147 3,147
Additional paid-in capital 499 499
Retained earnings 37,770 39,945
Accumulated other comprehensive income (loss) 426 (696)
--------- ---------
Total shareholders' equity 41,842 42,895
--------- ---------
Total liabilities and shareholders' equity $ 480,247 $ 552,075
========= =========
See accompanying notes to consolidated condensed financial statements.
3
AMERIANA BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------------
2002 2001 2002 2001
--------- -------- -------- --------
Interest Income:
Interest and fees on loans $ 6,022 $ 7,227 $ 18,527 $ 22,770
Interest on mortgage-backed securities 508 214 2,934 621
Interest on investment securities 564 927 1,113 3,752
Other interest and dividend income 174 296 762 684
-------- -------- -------- --------
Total interest income 7,268 8,664 23,336 27,827
Interest Expense:
Interest on deposits 3,566 4,696 11,477 14,272
Interest on FHLB advances and other borrowings 626 1,072 2,734 4,358
-------- -------- -------- --------
Total interest expense 4,192 5,768 14,211 18,630
-------- -------- -------- --------
Net interest income 3,076 2,896 9,125 9,197
Provision for Loan Losses 150 90 1,550 270
-------- -------- -------- --------
Net interest income after provision for loan losses 2,926 2,806 7,575 8,927
Other Income:
Net loan servicing fees 2 48 87 157
Other fees and service charges 228 214 641 643
Brokerage and insurance commissions 239 256 772 764
Net gain (loss) on investments in unconsolidated affiliates (20) (91) (22) (179)
Gains on sales of loans and servicing rights 290 180 741 408
Gain (loss) on sale of investments 1,188 -- (2,024) --
Increase in cash surrender value of life insurance 276 220 690 717
Other 22 42 250 130
-------- -------- -------- --------
Total other income 2,225 869 1,135 2,640
Other Expense:
Salaries and employee benefits 1,997 1,552 5,859 4,729
Net occupancy and equipment expense 467 354 1,254 1,061
Federal insurance premium 18 19 54 54
Data processing expense 80 78 296 214
Printing and office supplies 74 88 215 252
Amortization of intangible assets 9 36 26 124
Penalty on early payoff of FHLB advances 1,077 -- 1,077 --
Other 367 545 1,587 1,600
-------- -------- -------- --------
Total other expense 4,089 2,672 10,368 8,034
-------- -------- -------- --------
Income (loss) before income taxes 1,062 1,003 (1,658) 3,533
Income taxes 276 252 (994) 949
-------- -------- -------- --------
Net Income (Loss) $ 786 $ 751 $ (664) $ 2,584
======== ======== ======== ========
Basic Earnings (Loss) Per Share $ 0.25 $ 0.24 $ (0.21) $ 0.82
======== ======== ======== ========
Diluted Earnings (Loss) Per Share $ 0.25 $ 0.24 $ (0.21) $ 0.82
======== ======== ======== ========
Dividends Declared Per Share $ 0.16 $ 0.15 $ 0.48 $ 0.45
======== ======== ======== ========
See accompanying notes to consolidated condensed financial statements.
4
AMERIANA BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
2002
--------
Balances, January 1 $ 42,895
Net loss
(664)
Other comprehensive income 1,123
--------
Comprehensive income
459
Dividends declared
(1,512)
--------
Balances, September 30 $ 41,842
========
See accompanying notes to consolidated condensed financial statements.
5
AMERIANA BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
----------------------
2002 2001
--------- ---------
OPERATING ACTIVITIES
Net income (loss) $ (664) $ 2,584
Items not requiring cash:
Provisions for losses on loans 1,550 270
Depreciation 452 453
Accretion/Amortization of securities (net) 216 172
Equity in loss of unconsolidated subsidiaries 22 179
Mortgage servicing rights amortization 214 136
Goodwill amortization 25 124
Losses (gains) on sales of real estate owned (48) 3
Net loss on sale of investments 2,024 --
Increase in cash surrender value of life insurance (690) (717)
Mortgage loans originated for sale (56,633) (47,101)
Proceeds from sales of mortgage loans 57,500 44,480
Gains on sales of loans and servicing rights (683) (407)
Change in:
Other assets 3,753 1,098
Drafts payable 112 188
Other liabilities 2,388 2,280
--------- ---------
Net cash provided by operating activities 9,538 3,742
INVESTING ACTIVITIES
Proceeds from calls of securities held to maturity -- 55,605
Principal collected on mortgage-backed securities held to maturity -- 2,362
Purchase of investment securities held to maturity -- (42,261)
Purchase of investment securities available for sale (131,197) --
Proceeds from sale of investment securities available for sale 179,218 --
Proceeds from calls of securities available for sale 1,207 --
Proceeds from maturity of securities available for sale 5,000 --
Principal collected on securities available for sale 23,892 --
Net change in loans 15,758 33,228
Proceeds from sale of real estate owned 653 279
Net purchases of premises and equipment (1,382) (225)
Purchase of Federal Home Loan Bank stock (54) (79)
Other investing activities (526) (112)
--------- ---------
Net cash provided by investing activities 92,569 48,797
FINANCING ACTIVITIES
Net change in demand and saving deposits 13,250 1,619
Net change in certificates of deposit (5,377) 22,298
Advances from Federal Home Loan Bank 55,812 17,500
Repayment of Federal Home Loan Bank advances (137,600) (89,846)
Repayment of notes payable (90) (1,090)
Cash dividends paid (1,511) (1,416)
--------- ---------
Net cash used by financing activities (75,516) (50,935)
--------- ---------
Change in cash and cash equivalents 26,591 1,604
Cash and cash equivalents at beginning of period 11,823 19,031
--------- ---------
Cash and cash equivalents at end of period $ 38,414 $ 20,635
========= =========
Supplemental information:
Interest paid $ 12,900 $ 16,540
Income taxes paid 290 841
See accompanying notes to consolidated condensed financial statements.
6
AMERIANA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- -----------------------------------------------------
(Table dollar amounts in thousands, except share data)
NOTE A - - BASIS OF PRESENTATION
Ameriana Bancorp (the "Company") was incorporated under Indiana law for the
purpose of becoming the holding company for Ameriana Bank and Trust of Indiana.
In 1990, the Company acquired all of Ameriana Bank and Trust of Indiana common
stock in connection with its reorganization into the holding company form of
ownership. In 1992, the Company acquired Ameriana Bank of Ohio, F.S.B. ("ABO").
ABO was merged into Ameriana Bank and Trust of Indiana in October 2000. On June
29, 2001, Ameriana Bank and Trust of Indiana converted from a Federal Savings
Bank to an Indiana Chartered State Savings Bank and changed its name to Ameriana
Bank and Trust, SB ("ABT"). At the same time, the Company contributed Ameriana
Insurance Agency, Inc. ("AIA") to ABT. AIA operates a general insurance agency
in three locations. ABT has a brokerage operation through its wholly owned
subsidiary Ameriana Financial Services, Inc., which also owns a partial interest
in a life insurance company and a title insurance company. The title insurance
company, Indiana Title Insurance Company, LLC, was acquired in the first quarter
of 2002. In 1995, the Company purchased a minority interest in a limited
partnership organized to acquire and manage real estate investments, which
qualify for federal tax credits.
The unaudited interim consolidated condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do not
include all information and disclosures required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the financial statements reflect all adjustments (comprised only of
normal recurring adjustments and accruals) necessary to present fairly the
Company's financial position and results of operations and cash flows. The
results of operations for the period are not necessarily indicative of the
results to be expected in the full year. A summary of the Company's significant
accounting policies is set forth in Note 1 of Notes to Consolidated Financial
Statements in the Company's annual report on Form 10-K for the year ended
December 31, 2001.
The consolidated condensed balance sheet of the Company as of December 31, 2001
has been derived from the audited consolidated balance sheet of the Company as
of that date. Reclassifications of certain amounts in 2001 consolidated
financial statements have been made to conform to the 2002 presentations.
7
NOTE B - - SHAREHOLDERS' EQUITY
On August 29, 2002, the Board of Directors declared a quarterly cash dividend of
$.16 per share. This dividend, totaling $503,594, was accrued for payment to
shareholders of record on September 13, 2002, and was paid on October 4, 2002.
Total year-to-date dividends declared are $1,510,782. Payment was made to
3,147,463 shareholders, the same as at June 30, 2002. Stock options totaling
9,713 shares were exercised during the first quarter of 2002 with 8,866 shares
retired as part of the same transaction.
The Company's net income increased $35,000 or 4.66%, to $786,000 ($0.25 basic
and diluted earnings per share) for the quarter ended September 30, 2002,
compared to net income of $751,000 ($0.24 basic and diluted earnings per share)
for the same period in 2001. The year-to-date net income decreased $3,248,000 or
125.70%, for a loss of $664,000 ($0.21 loss per basic earnings per share) for
the nine months ended September 30, 2002, compared to net income of $2,584,000
($0.82 basic and diluted earnings per share) for the same period in 2001.
Earnings per share were computed as follows:
(In thousands, except share data)
Three Months Ended September 30,
--------------------------------
2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Income Weighted Average Per Share Weighted Average Per Share
Shares Amount Income Shares Amount
- --------------------------------------------------------------------------------------------------------------------------
Basic Earnings per Share:
Income available to
Common shareholders $786 3,147,463 $0.25 $751 3,146,616 $0.24
Effect of dilutive stock options -- 2,300 -- 3,066
- --------------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share:
Income available to
common shareholders and
assumed conversions $786 3,149,763 $0.25 $751 3,149,682 $0.24
- --------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30,
-------------------------------
2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Income Weighted Average Per Share Weighted Per Share
(Loss) Shares Amount Income Average Shares Amount
- --------------------------------------------------------------------------------------------------------------------------
Basic Earnings (Loss) per Share:
Income available to
Common shareholders ($664) 3,147,246 ($0.21) $2,584 3,146,616 $0.82
Effect of dilutive stock options -- 0 -- 2,828
- --------------------------------------------------------------------------------------------------------------------------
Diluted Earnings (Loss) Per Share:
Income available to
common shareholders and
assumed conversions ($664) 3,147,246 ($0.21) $2,584 3,149,444 $0.82
- --------------------------------------------------------------------------------------------------------------------------
8
AMERIANA BANCORP AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
- -------
This Quarterly Report on Form 10-Q ("Form 10-Q") may contain statements, which
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-Q and include statements regarding the intent, belief,
outlook, estimate or expectations of the Company primarily with respect to
future events and future financial performance. Readers of this Form 10-Q are
cautioned that any such forward looking statements are not guarantees of future
events or performance and involve risks and uncertainties, and that actual
results may differ materially from those in the forward looking statements as a
result of various factors. The accompanying information contained in this Form
10-Q identifies important factors that could cause such differences. These
factors include changes in interest rates; loss of deposits and loan demand to
other financial institutions; substantial changes in financial markets; changes
in real estate values and the real estate market or regulatory changes.
The largest components of the Company's total revenue and total expenses are
interest income and interest expense, respectively. Consequently, the Company's
earnings are primarily dependent on its net interest income, which is determined
by (i) the difference between rates of interest earned on interest-earning
assets and rates paid on interest-bearing liabilities ("interest rate spread"),
and (ii) the relative amounts of interest-earning assets and interest-bearing
liabilities. Levels of other income and operating expenses also significantly
affect net income.
Management believes that interest rate risk, i. e., the sensitivity of income
and net asset values to changes in interest rates, is one of the most
significant determinants of the Company's ability to generate future earnings.
Accordingly, the Company has implemented a long-range plan intended to minimize
the effect of changes in interest rates on operations. The asset and liability
management policies of the Company are designed to stabilize long-term net
interest income by managing the repricing terms, rates and relative amounts of
interest-earning assets and interest-bearing liabilities.
On March 19, 2002, the Company announced that it had changed the accounting
classification for its investment portfolio from "Held to Maturity" to
"Available for Sale", effective as of December 31, 2001. The change in
accounting stems from the Company's review of its investment portfolio and the
determination that recent deterioration in the markets has fundamentally changed
the interest rate risk characteristics of these investments and increased the
Company's exposure to volatility in future interest income.
The Company's investment portfolio totaled approximately $142 million as of
December 31, 2001. Since the change in classification for these investments as
"Available for Sale" was effective as of December 31, 2001, the Company reduced
shareholders' equity by the difference between fair value and book value on its
investment portfolio as of that date, net of tax. The amount of this charge to
shareholders' equity was $696,000, or a $0.22 reduction in year-end book value
per share. The Company's total shareholders' equity as of December 31, 2001,
adjusted for this unrealized depreciation of its "Available for Sale" investment
portfolio at that date, was approximately $42.9 million, representing a book
value of $13.63 per share. Total assets at year-end 2001 stood at $552 million,
including almost $350 million in traditional residential mortgages and consumer
or commercial loans.
9
Critical Accounting Policies
- ----------------------------
The notes to the consolidated financial statements contain a summary of the
Company's significant accounting policies presented in the annual report for
fiscal year 2001. Certain of these policies are important to the portrayal of
the Company's financial condition, since they require management to make
difficult, complex or subjective judgments, some of which may relate to matters
that are inherently uncertain. Management believes that it's critical accounting
policies include determining the allowance for loan losses ("ALL"), and the
valuation of mortgage servicing rights, ("MSR's").
Allowance for Loan Losses
- -------------------------
The ALL is a significant estimate that can and does change based on Management's
assumptions about specific borrowers and applicable economic and environmental
conditions, among other factors. Management reviews the adequacy of the ALL on
at least a quarterly basis. This review is based on four components: specific
identified risks or anticipated losses in individual loans, a percentage factor
based on the type of loan and the risk rating assigned to the credit, growth or
shrinkage in the overall portfolio and managements' analysis of overall economic
conditions such as employment, bankruptcy trends, property value changes and
change in delinquency levels.
Credits are evaluated individually based on degree of delinquency and/or
identified risk ratings of special mention or worse. Credits with delinquency
levels of less than 60 days and risk ratings of satisfactory or better are
reviewed in the aggregate. Percentage factors applied to individual credits are
based on risk rating, the type of credit and estimated potential losses in the
event liquidation becomes necessary. Percentage factors applied to loans
reviewed in the aggregate are based solely on the type of credit. Anticipated
losses on other real estate owned are recognized immediately upon recording the
asset.
The ALL may also include a component based on management's assumptions of
changes in risk in non-qualified areas such as market conditions, property
values, employment conditions and perceived changes in overall portfolio quality
due to changes in concentration, underwriting changes and both national and
regional trends.
External factors such as increases in unemployment, regional softness in
property values, increasing national numbers in bankruptcy, unsecured
delinquency and charge-offs and internal factors such as the continuing increase
in the commercial real estate loan portfolio may result in larger losses in
current economic conditions.
Changes in concentration, delinquency and portfolio are addressed through the
variation in percentages used in calculating the reserve for various types of
credit as well as individual review of "high risk" credits and large loans.
Valuation of Mortgage Servicing Rights
- --------------------------------------
The Company recognizes the rights to service mortgage loans as a separate asset.
MSR's on originated loans are capitalized by estimating the fair value of the
streams of net servicing revenues that will occur over the estimated life of the
servicing agreement. MSR's are subsequently carried at the lower of the initial
carrying value, adjusted for amortization, or fair value. MSR's are evaluated
for impairment based on the fair value of those rights. Capitalized servicing
rights, which include purchased servicing rights, are amortized over the
estimated period of net servicing revenue. Differing valuations would affect the
carrying value of the MSR's on the balance sheet as well as the income recorded
from loan servicing in the income statement. As of September 30, 2002 and
December 31, 2001, MSR's had carrying values of $1,108,000 and $1,012,000
respectively.
10
RESULTS OF OPERATIONS
- ---------------------
Net income for the quarter ended September 30, 2002 increased to $786,000, or
$0.25 per diluted share compared to $751,000 or $0.24 per diluted share reported
in the third quarter of 2001. The higher earnings in the 2002 period reflect
improved net interest income and an increase in other income attributable
principally to third quarter securities sales. These improvements offset an
increase in other expenses resulting primarily from a prepayment penalty on the
early pay-off of FHLB advances undertaken as part of the Company's de-leveraging
strategy.
For the first nine months of 2002, the Company incurred a net loss totaling
$664,000 or $0.21 per share compared with net income of $2,584,000 or $0.82 per
diluted share in the year-earlier period. This loss largely reflected charges in
the first quarter of the year related to the liquidation of its investment
portfolio and the increase in reserves for loan losses. Net interest income for
the first nine months was $9,125,000 versus $9,197,000 in the comparable period
last year, while the provision for loan losses amounted to $1,550,000 compared
with $270,000 in the year-earlier period.
The Company restructured its investments before the end of the first quarter of
2002. The loss on disposition of these securities was approximately $3,212,000,
or approximately $1,900,000 after tax or $0.61 per share. Consistent with
accounting principles for "Available for Sale" securities, the Company will
record the after-tax difference between fair value and book value on its
remaining investment portfolio as a charge or credit to shareholders' equity
each quarter. Because of the liquidation of most of its investments during the
first quarter of 2002 and the current market value of its remaining investment
portfolio, the reduction in equity recorded at December 31, 2001, was largely
reversed in the first quarter of 2002. The funds from the investments
liquidation were subsequently reinvested in instruments that are thought to be
less interest-rate sensitive, or were used to pay down a portion of funds
borrowed from the Federal Home Loan Bank.
The Company sold an additional $44,601,000 of investments in the third quarter
and realized a gain on the sale of approximately $1,188,000, which offset, to
some extent, the loss on disposition of investments realized earlier in the
year. The proceeds from this latest investment sale were used to prepay
higher-rate Federal Home Loan Bank advances, which involved a prepayment penalty
of approximately $1,077,000. These transactions, taken together, had a net
positive effect of about $111,000 ($69,000 or $0.02 per diluted share after tax)
on the Company's third quarter results. Aside from their de-leveraging effect,
these transactions are expected to improve the Company's net interest margin
going forward through the reduction of higher rate debt using proceeds from the
sale of lower earning investments.
During the first nine months of 2002, loan production increased $20,714,000 or
17.40% compared to the first nine months of 2001 for a total year-to-date loan
production of $139,760,000. Mortgage loan production, which accounted for
$12,300,000 of the increase in loan production, consisted of fixed rate loans
that are normally sold to the secondary market. Loans sold during the first nine
months of 2002 were $57,080,000 compared to $44,275,000 sold in the first nine
months of the prior year. The total outstanding loans decreased $15,758,000 or
4.48% during the first nine months to $336,355,000 at September 30, 2002, from
$352,113,000 at December 31, 2001. The mortgage loans held for sale decreased to
$4,843,000 at September 30, 2002, from $5,290,000 at December 31, 2001. See
comments in other income section for detail of gains on loans sold.
The net interest spread (difference between yield on interest-earning assets and
cost on interest-bearing liabilities) increased 33 basis points during the third
quarter of 2002 compared to the third quarter of 2001. The change is due to a
decrease in yield of 85 basis points on average interest-earning assets offset
by a 118 basis point reduction in the cost of interest-bearing average
liabilities. The Company's increase in the net interest spread for the third
quarter was due primarily to higher interest income from investments following
the second quarter liquidation of its investment portfolio and reinvesting those
proceeds into less interest-rate sensitive investments. The net interest spread
decreased 1 basis point during the first nine months of 2002 compared to
11
the same period in 2001. Overall, the change in yields and cost of funds for
2002 is the result of general reductions in interest rates during 2001.
The following table summarizes the Company's average net interest-earning assets
and average interest-bearing liabilities with the accompanying average rates for
the third quarter and first nine months of 2002 and 2001:
(Dollars in Thousands)
----------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- --------------------------
2002 2001 2002 2001
Interest-earning assets $ 468,023 $ 490,277 $ 487,870 $485,230
Interest-bearing liabilities 435,915 457,273 $ 455,055 $457,465
---------------------------------- ----------------------------
Net interest-earning assets $ 32,108 $ 33,004 $ 32,815 $ 27,765
================================== ============================
Average yield on/cost of:
Interest-earning assets 6.16% 7.01% 6.40% 7.67%
Interest-bearing liabilities 3.82% 5.00% 4.18% 5.44%
================================== ============================
Net interest spread 2.34% 2.01% 2.22% 2.23%
================================== ============================
Net interest income for the third quarter of 2002 was $3,076,000 for an increase
of $180,000 or 6.22% compared to $2,896,000 recorded during the third quarter of
2001. This increase is due to lower interest income offset by even lower
interest expense. The $1,396,000 decrease in interest income on average
interest-earning assets is a combination of a decrease of $393,000 because of
the decrease in average interest earning balances and $1,003,000 due to lower
rates. The decrease of $1,576,000 in cost of interest-bearing liabilities is a
combination of a decrease of $270,000 from lower average balances and $1,306,000
from lower rates. The net interest margin ratio, which is net interest income
divided by average earning assets, increased to 2.63% for the third quarter 2002
compared to 2.36% for the third quarter of 2001.
Net interest income for the first nine months of 2002 was $9,125,000 for a
decrease of $72,000 or 0.78% compared to $9,197,000 recorded during the same
period in 2001. This decrease is due to lower interest income offset by lower
interest expense. The $4,491,000 decrease in interest income on average
interest-earning assets is a combination of an increase of $152,000 because of
the increase in higher average balances less $4,643,000 due to lower rates. The
decrease of $4,419,000 in cost of interest-bearing liabilities is a combination
of a decrease of $98,000 from lower average balances less $4,321,000 from lower
rates.
The following table sets forth the details of the rate and volume change for the
three and nine months ended September 30, 2002 compared to the same period in
2001.
(Dollars in Thousands)
----------------------
Three Months Ended September 30, Nine Months Ended September 30,
2002 vs 2001 2002 vs 2001
--------------------------------- -----------------------------------
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
--------------------------------- -----------------------------------
Volume Rate Net Change Volume Rate Net Change
-------- -------- ----------- --------- ------- ----------
Interest Income:
Loans $ (154) $ (1,051) $(1,205) $ (1,964) $(2,279) $ (4,243)
Other interest-earning assets (239) 48 (191) 2,116 (2,364) (248)
------ -------- ------- -------- ------- --------
Total interest-earning assets (393) (1,003) (1,396) 152 (4,643) (4,491)
------ -------- ------- -------- ------- --------
Interest Expense:
Deposits 44 (1,174) (1,130) 1,357 (4,151) (2,795)
FHLB advance and other loans (314) (132) (446) (1,455) (170) (1,624)
------ --------- ------- -------- ------- --------
Total interest-bearing (270) (1,306) (1,576) (98) (4,321) (4,419)
liabilities
Change in net interest income $ (123) $ 303 $ 180 $ 250 $ (322) $ (72)
====== ======== ======= ======== ======= ========
12
The following table summarizes the Company's non-performing assets at:
(Dollars in Thousands)
----------------------
September 30, December 31,
2002 2001
------------- ------------
Loans:
Non-accrual $17,955 $ 2,178
Restructured Loans 500 294
Over 90 days delinquent and still accruing 6 395
Real estate owned 246 586
------- -------
Total $18,707 $ 3,453
======= =======
The Company's non-performing assets increased $7,069,000 in the third quarter of
2002, and increased $15,715,000 year to date. Because of this, and as a
precautionary move reflecting recent weakness in the general economy, the
Company strengthened its reserve for loan losses by $1,250,000 during the first
quarter of 2002 and an overall increase of $1,550,000 year-to-date. The Company
took this action even though none of the underlying loans or leases related to
the additional charge have been written off.
The increase in non-performing loans in the third quarter of 2002 primarily
involves a series of real estate development loans with the same builder with
combined outstanding balances of $1,860,000 and a second lease receivables pool
purchased from Commercial Money Center (CMC) with an outstanding balance of
$5,390,000.
The increase in non-performing loans year to date as of September 30, 2002 is
primarily due to a commercial real estate loan and real estate development loans
with two companies with outstanding balances of $2,233,000 and $1,850,000
respectively and two lease receivables pools with outstanding balances of
$5,510,000 and $5,390,000 respectively.
One of the commercial loans is for a condominium project in Bloomington, Indiana
and is collateralized both by the subject real estate and personal guarantees of
the borrowers. The real estate development loans are collateralized by real
estate and are for properties located in West Central Indiana.
In June and September 2001, the Company purchased two separate pools of lease
receivables totaling $12,003,000, consisting primarily of equipment leases. Each
lease within each pool is supported by a surety bond issued by one of two
insurance companies rated at least "A" by Moody's. The bonds guarantee payment
of all amounts due under the leases in the event of default by the lessee. Each
pool was sold by the terms of a Sales and Service Agreement which provides that
the insurers will service the leases. In each case the insurers have assigned
their servicing rights and responsibilities to Commercial Servicing Corporation,
a company, which has now filed bankruptcy.
When the lease pools went into default, notice was given to each insurer. One of
them made payments for a few months under a reservation of rights; the other
paid nothing. Both insurers claim they were defrauded by CMC, the company which
sold the lease pools. Both are now denying responsibility for payment. CMC has
filed for bankruptcy protection.
Many other financial institutions have purchased lease pools from CMC. All of
the lease pools are in default and in litigation. The Panel on Multidistrict
Litigation has taken control of the many actions and assigned them to the U.S.
District Court for the Northern District of Ohio, Eastern Division. An initial
pre-trial conference is scheduled for November 21, 2002 in Cleveland.
The Company believes the surety bonds are enforceable against the insurers. The
current unpaid balance for the pools is $10,900,000. It is highly unlikely that
the litigation will be resolved in 2002.
13
The total provision for loan losses was $150,000 during the third quarter of
2002 compared to $90,000 during the same period in 2001. Third quarter 2002 had
net charge-offs (charge-offs less recoveries) of $138,000 compared to net
charge-offs of $27,000 for the third quarter 2001.
The total provision for loan losses was $1,550,000 during the first nine months
of 2002 compared to $270,000 during the same period in 2001. The first nine
months of 2002 had net charge-offs of $206,000 compared to net charge-offs of
$33,000 for the same period in 2001.
Management believes the allowance for loan losses is adequate and that
sufficient provision has been provided to absorb any losses that may ultimately
be incurred on non-performing loans and the remainder of the portfolio based on
information at September 30, 2002. The allowance for loan losses as a percentage
of loans was 0.91% and 0.49% at September 30, 2002 and December 31, 2001,
respectively.
The Company regularly monitors the developments related to the two lease pools
and other nonperforming loans and has discussions with its federal and state
bank regulators so that it can determine whether its loss reserves are adequate.
Based upon further developments, as well as further discussions with its federal
and state bank regulators, it is possible that the Company may in the future
determine to increase its loss reserves against the lease pools and other
nonperforming loans.
Total other income increased $1,356,000 to $2,225,000 for the third quarter 2002
from $869,000 in the same period during 2001. Management sold investments for a
net gain of $1,188,000 in the third quarter as part of its de-leveraging
strategy. Total other income decreased $1,505,000 to $1,135,000 for the first
nine months of 2002 from $2,640,000 in the same period during 2001. The main
reason for the year-to-date decrease was the loss on the sale of investment
securities in the first quarter 2002 of $3,212,000 offset by gains on
investments sold in the third quarter. Sales of loans to the secondary market
increased and the $290,000 gain on these sales and servicing rights in the third
quarter 2002 was up from $180,000 in 2001. Net gain (loss) on investments in
unconsolidated affiliates resulted in higher income of $157,000 for a loss of
$22,000 for the first nine months compared to a loss of $179,000 in the prior
period. The main cause of the higher income is due to ITIC, LLC, a title
insurance company, and House Investments, a real estate partnership. The Company
earned $64,000 in pre-tax income earned from the Company's share of ITIC, LLC's
net income for the first nine months of 2002. ITIC, LLC was acquired in the
first quarter 2002. The Company's expected loss from House Investments was
$84,000 less during the first nine months of 2002 compared to the prior year
period.
Total other expense increased $1,417,000, or 53.03%, in the third quarter 2002
to $4,089,000 from $2,672,000 for the same period in 2001. $1,077,000 of the
increase is penalties paid for early payoffs of FHLB advances as part of the
Company's de-leveraging action. Total other expense increased $2,334,000, or
29.05%, for the first nine months of 2002 to $10,368,000 from $8,034,000 for the
same period in 2001. In addition to the penalties paid to the FHLB, salary and
benefits expense for the third quarter 2002 was up $445,000, or 28.67%, to
$1,997,000 from $1,552,000 in the same period during 2001. Salary and benefits
expense for the first nine months of 2002 was up $1,130,000, or 23.90%, to
$5,859,000 from $4,729,000 in the same period during 2001. Severance pay of
$289,350 in the first quarter 2002, increased staffing, merit pay adjustments,
pension costs, and higher health care costs are the main reasons for the
increases.
14
FINANCIAL CONDITION
- -------------------
The Company's principal sources of funds are cash generated from operations,
deposits, loan principal repayments and advances from the Federal Home Loan Bank
("FHLB"). As of September 30, 2002, the Company's cash and interest-bearing time
deposits totaled $38,414,000, or 8.00%, of total assets. The Company's cash and
interest-bearing time deposits increased 26,591,000 from December 31, 2001.
The regulatory minimum net worth requirement of 8% for ABT under the most
stringent of the three capital regulations (total risk-based capital to
risk-weighted assets) at September 30, 2002, was $24,922,000. At September 30,
2002, Ameriana had total risk-based capital of $43,533,000 and a 13.97% ratio.
The Company's tier 1 capital ratio was 7.98% at September 30, 2002, which
exceeded the regulatory minimum required tier 1 capital ratio of 4.00%.
At September 30, 2002, the Company's commitments for loans in process totaled
$39,352,000, with the majority being for real estate secured loans. Management
believes the Company's liquidity and other sources of funds will be sufficient
to fund all outstanding commitments and other cash needs.
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 141 and 142. SFAS No. 141, "Business
Combinations" requires the use of the purchase method of accounting for all
business combinations initiated after June 30, 2001, thereby eliminating the use
of the pooling of interests method. It also provides new criteria that determine
whether an acquisition involving acquired intangible assets should be recognized
separately from goodwill. This Statement does not presently affect the Company
but would be followed in any future acquisitions.
SFAS No. 142, "Goodwill and Other Intangible Assets" is effective for the
Company in 2002, and requires that upon adoption, any goodwill recorded on an
entity's balance sheet would no longer be amortized. This would include existing
goodwill recorded at the date of adoption and any future goodwill. Goodwill will
not be amortized but will be reviewed for impairment at least once a year and
adjusted by reduction of the carrying value of goodwill if the asset is
impaired.
SARBANES-OXLEY ACT OF 2002
- --------------------------
The President signed into law on July 30, 2002, the Sarbanes-Oxley Act of 2002
(the "Act"). The Act aims to correct what was perceived to be structural
weaknesses affecting the capital markets, which may have contributed to massive
stockholder losses.
The Act creates a quasi-governmental entity, the Public Company Accounting
Oversight Board, to regulate the auditors of public company. The SEC oversees
the activities of the Board. The Board replaces the previous system of
self-regulation.
The Board will be chosen no later than October 28, 2002 (90 days after
enactment). The Board is to be operational no later than April 26, 2003 (270
days after enactment). The new Board's authority begins when the SEC certifies
it as operational.
OTHER
- -----
The Securities and Exchange Commission ("SEC") maintains reports, proxy
information, statements and other information regarding registrants that file
electronically with the SEC, including the Company. The address is
(http://www.sec.gov).
15
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Asset/Liability Committee and the Board of Directors reviews the Company's
exposure to interest rate changes and market risk on a quarterly basis. This
review is accomplished by the use of a cash flow simulation model using detailed
securities, loan and deposit, and market information to estimate the potential
impact of interest rate increases and decreases on the earning assets and
liabilities. The model tests the impact on the net interest income under various
interest rate scenarios by estimating the interest rate sensitivity position at
each interest rate interval. The change in the net portfolio value ("NPV") is
also calculated at each interest rate interval. This tests the interest rate
risk exposure from movements in interest rates by using interest sensitivity
analysis to determine the change in the NPV of discounted cash flows from assets
and liabilities.
NPV represents the market value of portfolio equity and is equal to the
estimated market value of assets minus the estimated market value of
liabilities. The model uses a number of assumptions, including the relative
levels of market interest rates and prepayments in mortgage loans and certain
types of callable investments. These computations do not contemplate any actions
management may undertake to reposition the assets and liabilities in response to
changes in the interest rate, and should not be relied upon as indicative of
actual results. In addition, certain shortcomings are inherent in the model of
computing NPV. Should interest rates remain or decrease below present levels,
the portion of adjustable rate loans could decrease in future periods due to
loan refinancing or payoff activity. In the event of an interest rate change,
pre-payment levels would likely be different from those assumed in the model and
the ability of borrowers to repay their adjustable rate loans may decrease
during rising interest rate environments.
The model used to prepare the interest rate risk assessment as of September 30,
2002 was a different model from the one used as of September 30, 2001. Both
models provided very similar results and used similar methodologies. The
contract for the model used as of September 30, 2001 expired on June 1, 2002.
Management opted not to renew the contract in favor of using another model it
already owned.
Presented below is the assessment of the risk of NPV in the event of sudden and
sustained 200 basis point increases and decreases in prevailing interest rates
as of September 30, 2002 using the new model.
- -------------------------------------------------------------------------------------------
NPV as Percent of
Net Portfolio Value Present Value of Assets
- -------------------------------------------------------------------------------------------
Change Dollar Dollar Percent
in Rates Amount Change Change NPV Ratio Change
- -------------------------------------------------------------------------------------------
(Dollars in thousands)
- -------------------------------------------------------------------------------------------
+200 bp* $29,828 $ -9,928 -24.97% 7.04% -197 bp*
Base or 0% 39,756 9.01
- -200 bp* 44,882 5,126 12.89% 9.85 84 bp*
- -------------------------------------------------------------------------------------------
* basis points
16
Presented below is the assessment of the risk of NPV in the event of sudden and
sustained 200 basis point increases and decreases in prevailing interest rates
as of September 30, 2001 using the previous model.
- -------------------------------------------------------------------------------------------
NPV as Percent of
Net Portfolio Value Present Value of Assets
- -------------------------------------------------------------------------------------------
Change Dollar Dollar Percent
in Rates Amount Change Change NPV Ratio Change
- -------------------------------------------------------------------------------------------
(Dollars in thousands)
- -------------------------------------------------------------------------------------------
+200 bp* $20,661 $ -18,956 -47.85% 4.29% -347 bp*
Base or 0% 39,617 7.76
- -200 bp* 41,604 1,987 5.02% 7.96 20 bp*
- -------------------------------------------------------------------------------------------
* basis points
17
ITEM 4 - CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have evaluated
the Company's disclosure controls and procedures (as such term is defined in
Rule 13a-14(c) under the Exchange Act) as of a date within 90 days of the date
of filing of this Form 10-Q. Based upon such evaluation, the Company's Chief
Executive Officer and Chief Financial Officer have concluded that such controls
and procedures are effective to ensure that the information required to be
disclosed by the Company in the reports it files under the Exchange Act is
gathered, analyzed and disclosed with adequate timeliness.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of the evaluation described above.
18
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings
-----------------
Not Applicable
ITEM 2 - Changes in Securities
---------------------
Not Applicable
ITEM 3 - Defaults in Senior Securities
-----------------------------
Not Applicable
ITEM 4 - Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not Applicable
ITEM 5 - Other Information
-----------------
Not Applicable
ITEM 6 - Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits.
The following exhibits are filed with this report:
No. Description
-- -----------
99.1 Certification Under Section 906 of Sarbanes-Oxley Act of
2002
99.2 Certification Under Section 906 of Sarbanes-Oxley Act of
2002
b. Current Reports on Form 8-K
---------------------------
None filed in the third quarter 2002.
19
SIGNATURES
AMERIANA BANCORP AND SUBSIDIARIES
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.
AMERIANA BANCORP
DATE: November 14, 2002 /s/ Harry J. Bailey
--------------------------------------
Harry J. Bailey
President and
Chief Executive Officer
(Duly Authorized Representative)
DATE: November 14, 2002 /s/ Bradley L. Smith
---------------------------------------
Bradley L. Smith
Senior Vice President-Treasurer
(Principal Financial Officer
and Accounting Officer)
20
CERTIFICATION
I, Harry J. Bailey, President and Chief Executive Officer of Ameriana Bancorp,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ameriana Bancorp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a)Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b)Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c)Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board or directors (or persons fulfilling the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Harry J. Bailey
-------------------------------------
Harry J. Bailey
President and Chief Executive
Officer
21
CERTIFICATION
I, Bradley L. Smith, Senior Vice President-Treasurer and Chief Financial Officer
of Ameriana Bancorp, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ameriana Bancorp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a)Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b)Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c)Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board or directors (or persons fulfilling the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Bradley L. Smith
-------------------------------------
Bradley L. Smith
Senior Vice President-Treasurer and
Chief Financial Officer
22