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: June 30, 2003 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
-- --
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of July 31, 2003, there were issued and outstanding 3,148,288 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 June 30, 2003 and December 31, 2002 . .. . . . 3
Consolidated Condensed Statements of Operations for
the Three and Six Months Ended
June 30, 2003 and 2002. . . . . . . . . . . . . . . .4
Consolidated Condensed Statement of Shareholders'
Equity for the six months ended June 30, 2003. . . .5
Consolidated Condensed Statements of Cash Flows
for the Six Months Ended June 30, 2003 and 2002 . . .6
Notes to Consolidated Condensed Financial
Statements. . . . . . . . . . . . . . . . . . . . . .7
ITEM 2 - Management's Discussion and Analysis of
Financial Condition and Results of
Operations. . . . . . . . . . . . . . . . . . . . . .10
ITEM 3 - Quantitative and Qualitative Disclosure
About Market Risk . . . . . . . . . . . . . . . . .17
ITEM 4 - Controls and Procedures . . . . . . . . . . . . . . .18
PART II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . .19
SIGNATURES AND CERTFICATIONS. . . . . . . . . . . . . . . . . . . .20
2
PART I - FINANCIAL INFORMATION
AMERIANA BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share data)
June 30, December 31,
2003 2002
(Unaudited)
--------- ---------
Assets
Cash on hand and in other institutions $ 10,431 $ 7,481
Interest-bearing demand deposits 18,479 38,215
--------- ---------
Cash and cash equivalents 28,910 45,696
Investment securities available for sale 110,828 58,155
Mortgage loans available for sale 2,273 3,825
Loans receivable 261,401 313,252
Allowance for loan losses (9,857) (8,666)
--------- ---------
Net loans receivable 251,544 304,586
Assets held for Cincinnati sale 33,137 --
Real estate owned 432 489
Premises and equipment 7,331 7,901
Stock in Federal Home Loan Bank 6,854 6,759
Mortgage servicing rights 1,266 1,197
Investments in unconsolidated affiliates 1,559 1,583
Goodwill 1,291 1,291
Cash surrender value of life insurance 19,350 18,932
Deferred Taxes 3,026 2,611
Other assets 3,870 3,782
--------- ---------
Total assets $ 471,671 $ 456,807
========= =========
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Noninterest-bearing $ 20,161 $ 19,124
Interest-bearing 337,043 383,063
--------- ---------
Total deposits 357,204 402,187
Liabilities to be relieved from Cincinnati sale 59,983 --
Advances from Federal Home Loan Bank 5,087 5,592
Notes payable 750 840
Drafts payable 6,187 5,099
Advances by borrowers for taxes and insurance 400 380
Other liabilities 2,930 3,669
--------- ---------
Total liabilities 432,541 417,767
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:
3,148,288 and 3,147,463, respectively) 3,148 3,147
Additional paid-in capital 506 499
Retained earnings 34,700 34,856
Accumulated other comprehensive income 776 538
--------- ---------
Total shareholders' equity 39,130 39,040
--------- ---------
Total liabilities and shareholders' equity $ 471,671 $ 456,807
========= =========
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 Six Months Ended
June 30, June 30,
-------------------------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Interest Income:
Interest and fees on loans $ 5,348 $ 6,250 $ 10,818 $ 12,505
Interest on investment securities 901 828 1,357 2,975
Other interest and dividend income 163 398 425 588
-------- -------- -------- --------
Total interest income 6,412 7,476 12,600 16,068
Interest Expense:
Interest on deposits 2,721 3,805 5,679 7,911
Interest on FHLB advances and other borrowings 96 970 199 2,108
-------- -------- -------- --------
Total interest expense 2,817 4,775 5,878 10,019
-------- -------- -------- --------
Net interest income 3,595 2,701 6,722 6,049
Provision for Loan Losses 1,400 150 1,550 1,400
-------- -------- -------- --------
Net interest income after provision for loan losses 2,195 2,551 5,172 4,649
Other Income:
Net loan servicing fees (expense) (63) 38 (93) 85
Other fees and service charges 289 218 572 413
Brokerage and insurance commissions 232 265 482 533
Net gain (loss) on investments in unconsolidated affiliates 49 49 (1) (2)
Gains on sales of loans and servicing rights 470 217 953 451
Gain (loss) on sale of investments 1 -- 41 (3,212)
Increase in cash surrender value of life insurance 204 234 418 414
Other 16 166 21 228
-------- -------- -------- --------
Total other income 1,198 1,187 2,393 (1,090)
Other Expense:
Salaries and employee benefits 1,963 1,753 3,968 3,862
Net occupancy and equipment expense 419 410 815 797
Federal insurance premium 46 18 95 36
Data processing expense 84 96 153 216
Printing and office supplies 61 66 113 141
Amortization of intangible assets 8 8 17 17
Other 854 705 1,493 1,210
-------- -------- -------- --------
Total other expense 3,435 3,056 6,654 6,279
-------- -------- -------- --------
Income (loss) before income taxes (42) 682 911 (2,720)
Income taxes (138) 82 60 (1,270)
-------- -------- -------- --------
Net Income (Loss) $ 96 $ 600 $ 851 $ (1,450)
======== ======== ======== ========
Basic Earnings (Loss) Per Share $ 0.03 $ 0.19 $ 0.27 $ (0.46)
======== ======== ======== ========
Diluted Earnings (Loss) Per Share $ 0.03 $ 0.19 $ 0.27 $ (0.46)
======== ======== ======== ========
Dividends Declared Per Share $ 0.16 $ 0.16 $ 0.32 $ 0.32
======== ======== ======== ========
See accompanying notes to consolidated condensed financial statements.
4
AMERIANA BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
2003
--------
Balances, January 1 $ 39,040
Net income 851
Other comprehensive income 238
--------
Comprehensive income 1,089
Purchase of common stock --
Exercise of stock options 8
Dividends declared (1,007)
--------
Balances, June 30 $ 39,130
========
See accompanying notes to consolidated condensed financial statements.
5
AMERIANA BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30,
2003 2002
--------- ---------
OPERATING ACTIVITIES
Net income (loss) $ 851 $ (1,450)
Items not requiring (providing) cash
Provision for losses on loans 1,550 1,400
Depreciation and amortization 744 338
Increase in cash surrender value (418) (414)
Mortgage loans originated for sale (109,258) (39,469)
Proceeds from sale of mortgage loans 111,370 44,389
Gains on sale of loans and servicing rights (953) (451)
Loss (Gain) on sale of investments (41) 3,212
Increase (decrease) in drafts payable 1,088 (2,743)
Other adjustments (1,034) 4,185
--------- ---------
Net cash provided by operating activities 3,899 8,997
INVESTING ACTIVITIES
Purchase of investment securities available for sale (99,956) (130,901)
Proceeds from sale of investment securities available for sale 20,664 133,429
Proceeds from maturities/calls of securities available for sale 19,000 6,350
Principal collected on mortgage-backed securities available for sale 7,552 18,497
Net change in loans 18,686 9,238
Net purchases of premises and equipment (315) (823)
Other investing activities 278 82
--------- ---------
Net cash provided by (used in) investing activities (34,091) 35,872
FINANCING ACTIVITIES
Net change in demand and passbook deposits 33,782 12,511
Net change in certificates of deposit (18,782) (16,693)
Proceeds from borrowings -- 20,812
Repayment of borrowings (595) (53,792)
Purchase of common stock -- (137)
Exercise of stock options 8 137
Cash dividends paid (1,007) (1,006)
--------- ---------
Net cash provided by (used in) financing activities 13,406 (38,168)
--------- ---------
CHANGE IN CASH AND CASH EQUIVALENTS (16,786) 6,701
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 45,696 11,823
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 28,910 $ 18,524
========= =========
Supplemental information:
Interest paid $ 5,959 $ 10,183
Income taxes paid 950 290
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 is a bank holding company. Through its wholly owned
subsidiary, Ameriana Bank and Trust, the Company offers an extensive line of
banking services and provides a range of investments and securities products
through branches in central Indiana and in the greater Cincinnati, Ohio area. As
its name implies, Ameriana Bank and Trust also offers trust and investment
management services, has interests in Family Financial Life Insurance Company
and Indiana Title Insurance Company, and owns Ameriana Insurance Agency, a
full-service insurance agency.
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, 2002.
The consolidated condensed balance sheet of the Company as of December
31, 2002 has been derived from the audited consolidated balance sheet of the
Company as of that date.
7
NOTE B - - SHAREHOLDERS' EQUITY
On May 22, 2003, the Board of Directors declared a quarterly cash dividend
of $.16 per share. This dividend, totaling $504,000, was accrued for payment to
shareholders of record on June 13, 2003, and was paid on July 3, 2003. Payment
was made for 3,148,288 shares, the same as the previous quarter. Stock options
totaling 825 shares were exercised during the first quarter of 2003.
NOTE C - - EARNINGS PER SHARE
Earnings per share were computed as follows:
(In thousands, except share data)
Three Months Ended June 30,
- ---------------------------------------------------------------------------------------------------------------
2003 2002
- ---------------------------------------------------------------------------------------------------------------
Weighted Weighted
Income Average Per Share Average Per Share
(Loss) Shares Amount Income Shares Amount
- ---------------------------------------------------------------------------------------------------------------
Basic Earnings (Loss) per Share: Income
available to Common shareholders $96 3,148,288 $0.03 $600 3,147,463 $0.19
======= =======
Effect of dilutive stock options -- 1,279 -- 7,930
------------------ -------------------
Diluted Earnings (Loss) Per Share: Income
available to common shareholders and assumed
conversions $96 3,149,567 $0.03 $600 3,155,393 $0.19
===============================================================================================================
(In thousands, except share data)
Six Months Ended June 30,
- ---------------------------------------------------------------------------------------------------------------
2003 2002
- ---------------------------------------------------------------------------------------------------------------
Weighted Weighted
Income Average Per Share Income Average Per Share
(Loss) Shares Amount (Loss) Shares Amount
- ---------------------------------------------------------------------------------------------------------------
Basic Earnings (Loss) per Share: Income
available to Common shareholders $851 3,148,037 $0.27 ($1,450) 3,146,616 ($0.46)
======= =======
Effect of dilutive stock options -- 270 -- 6,585
------------------ -------------------
Diluted Earnings (Loss) Per Share: Income
available to common shareholders and assumed
conversions $851 3,148,307 $0.27 ($1,450) 3,153,201 ($0.46)
===============================================================================================================
At June 30, 2003, options to purchase 133,825 shares were excluded from the
computation of diluted earnings per share because the options' exercise price
was greater than or equal to the average market price of common shares.
8
NOTE D - - Effect of Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") adopted Statement of
Financial Accounting Standards ("SFAS") No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. This Statement amends FASB Statement
No. 123, Accounting for Stock-Based Compensation. SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require more
prominent and more frequent disclosures in financial statements about the
effects of stock-based compensation.
Under the provisions of SFAS No. 123, companies that adopted the fair value
based method were required to apply that method prospectively for new stock
option awards. This contributed to a "ramp-up" effect on stock-based
compensation expense in the first few years following adoption, which caused
concern for companies and investors because of the lack of consistency in
reported results. To address that concern, SFAS No. 148 provides two additional
methods of transition that reflect an entity's full complement of stock-based
compensation expense immediately upon adoption, thereby eliminating the ramp-up
effect.
SFAS No. 148 also improves the clarity and prominence of disclosures about
the proforma effects of using the fair value based method of accounting for
stock-based compensation for all companies - regardless of the accounting method
used - by requiring that the data be presented more prominently and in a more
user-friendly format in the footnotes to the financial statements. In addition,
SFAS No. 148 improves the timeliness of those disclosures by requiring that this
information be included in interim as well as annual financial statements. In
the past, companies were required to make proforma disclosures only in annual
financial statements.
The transition guidance and annual disclosure provisions of SFAS No. 148
are effective for fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002.
The FASB has stated it intends to issue an exposure draft of a new
statement on accounting for stock-based compensation and will require companies
to expense stock options using a fair value based method at date of grant. The
implementation for this proposed statement is not known.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"). FIN 45 will change current
practice in the accounting for and disclosure of guarantees. Guarantees meeting
the characteristics described in FIN 45 are required to be initially recorded at
fair value, which is different from the general current practice of recording a
liability only when a loss is probable and reasonably estimable, as those terms
are defined in FASB Statement No. 5, Accounting for Contingencies. FIN 45 also
requires a guarantor to make new disclosures for virtually all guarantees even
if the likelihood of the guarantor's having to make payments under the guarantee
is remote.
In general, FIN 45 applies to contracts or indemnification agreements that
contingently require the guarantor to make payments to the guaranteed party
based on changes in an underlying asset, liability, or an equity security of the
guaranteed party such as financial standby letters of credit.
Disclosure requirements of FIN 45 are effective for financial statements of
interim or annual periods ending after December 31, 2002. The initial
recognition and measurement provisions are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. The guarantor's previous accounting for guarantees
issued prior to the date of FIN 45 initial applications should not be revised or
restated to reflect the provisions of FIN 45.
The Company adopted FIN 45 on January 1, 2003. The adoption of FIN 45 does
not currently have a material impact on the Company's consolidated financial
statements.
9
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.
Agreement to Sell Cincinnati Branches
- -------------------------------------
On April 7, 2003, the Company announced that it has agreed to sell its two
Cincinnati-area branches to Peoples Community Bancorp, Inc. (NASDAQ/NM: PCBI) of
West Chester, Ohio for an expected after-tax gain of $2,700,000 or $0.86 per
diluted share. The two branches are located in Deer Park and Landen, Ohio.
In the sale Ameriana will convey all consumer and commercial loans but will
retain in the Company's portfolio and continue to service single-family
residential loans of approximately $24,000,000. Ameriana will also convey
deposits as part of the transaction. These sale components are identified in the
June 30, 2003 balance sheet. The balance sheet account "Assets held for
Cincinnati sale" consists of approximately $32,587,000 in loans and $550,000 in
fixed assets. The balance sheet account "Liabilities to be relieved from
Cincinnati sale" consists entirely of deposits. The Company expects to complete
the transaction during the third quarter of 2003, subject to regulatory review
and approval.
10
Critical Accounting Policies
- ----------------------------
The notes to the consolidated financial statements included in the
Company's 2002 annual report contain a summary of the Company's significant
accounting policies. 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 its critical accounting
policies include determining the allowance for loan losses ("ALL"), and the
valuation of mortgage servicing rights, ("MSR's"), and the way the Company
accounts for goodwill and other intangibles.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses provides coverage for probable losses
inherent in the Company's loan portfolio. Management evaluates the adequacy of
the allowance for credit losses each quarter based on changes, if any, in
underwriting activities, the loan portfolio composition (including product mix
and geographic, industry or customer-specific concentrations), trends in loan
performance, regulatory guidance and economic factors. This evaluation is
inherently subjective, as it requires the use of significant management
estimates. Many factors can affect management's estimates of specific and
expected losses, including volatility of default probabilities, rating
migrations, loss severity and economic and political conditions. The allowance
is increased through provisions charged to operating earnings and reduced by net
charge-offs.
The Company determines the amount of the allowance based on relative risk
characteristics of the loan portfolio. The allowance recorded for commercial
loans is based on reviews of individual credit relationships and an analysis of
the migration of commercial loans and actual loss experience. The allowance
recorded for homogeneous consumer loans is based on an analysis of loan mix,
risk characteristics of the portfolio, fraud loss and bankruptcy experiences,
and historical losses, adjusted for current trends, for each homogeneous
category or group of loans. The allowance for credit losses relating to impaired
loans is based on the loan's observable market price, the collateral for certain
collateral-dependent loans, or the discounted cash flows using the loan's
effective interest rate.
Regardless of the extent of the Company's analysis of customer performance,
portfolio trends or risk management processes, certain inherent but undetected
losses are probable within the loan portfolio. This is due to several factors
including inherent delays in obtaining information regarding a customer's
financial condition or changes in their unique business conditions, the
judgmental nature of individual loan evaluations, collateral assessments and the
interpretation of economic trends. Volatility of economic or customer-specific
conditions affecting the identification and estimation of losses for larger
non-homogeneous credits and the sensitivity of assumptions utilized to establish
allowances for homogenous groups of loans are among other factors. The Company
estimates a range of inherent losses related to the existence of these
exposures. The estimates are based upon the Company's evaluation of imprecision
risk associated with the commercial and consumer allowance levels and the
estimated impact of the current economic environment.
Valuation of Mortgage Servicing Rights
- --------------------------------------
MSR's associated with loans originated and sold, where servicing is
retained, are capitalized and included in other intangible assets in the
consolidated balance sheet. The value of the capitalized servicing rights
represents the present value of the future servicing fees arising from the right
to service loans in the portfolio. Critical accounting policies for MSRs relate
to the initial valuation and subsequent impairment tests. The methodology used
to determine the valuation of MSRs requires the development and use of a number
of estimates, including anticipated principal amortization and prepayments of
that principal balance. Events that may significantly affect the estimates used
are changes in interest rates, mortgage loan prepayment speeds and the payment
performance of the underlying loans. The carrying value of the MSRs is
periodically reviewed for impairment based on a determination of fair value.
Impairment, if any, is recognized through a valuation allowance and is recorded
as amortization of intangible assets.
11
Goodwill and Other Intangibles
- ------------------------------
The Company records all assets and liabilities acquired in purchase
acquisitions, including goodwill and other intangibles, at fair value as
required by SFAS 141. Goodwill is subject, at a minimum, to annual tests for
impairment. Other intangible assets are amortized over their estimated useful
lives using straight-line and accelerated methods, and are subject to impairment
if events or circumstances indicate a possible inability to realize the carrying
amount. The initial goodwill and other intangibles recorded and subsequent
impairment analysis requires management to make subjective judgments concerning
estimates of how the acquired asset will perform in the future. Events and
factors that may significantly affect the estimates include, among others,
customer attrition, changes in revenue growth trends, specific industry
conditions and changes in competition.
FINANCIAL CONDITION
- -------------------
Total assets increased $14,864,000 to $471,671,000 or 3.25% at June 30,
2003 from $456,807,000 at December 31, 2002. The main reason for the increase
was due to deposits, net of reclassification of deposits to be conveyed in the
sale of the Cincinnati branches.
Cash and cash equivalents decreased $16,786,000 or 36.73% during the first
six months of 2003 to $28,910,000. The main reason for the decrease was due to
the purchase of investment securities.
Investment securities available for sale increased $52,673,000 or 90.57%
during the first six months of 2003 to $110,828,000. The funding for the
increase came from loan payoffs, deposits, and cash and cash equivalents.
Total outstanding loans decreased $53,042,000 or 17.41% during the first
six months of 2003 to $251,544,000. The decline was mainly due to mortgage loan
refinancing, the subsequent sale of those loans, and the reclassification of
loans held for the Cincinnati sale, which consists of approximately $32,587,000
of commercial and consumer loans.
Deposits decreased $44,983,000 or 11.18% during the first six months of
2003 to $357,204,000. The decline was mainly due to deposits to be conveyed to
the acquirer of the Cincinnati branches of approximately $59,983,000. Excluding
the Cincinnati sale, deposits increased $15,000,000 mainly due to the new
interest-bearing checking account introduced at the beginning of 2003.
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").
The Bank's capital ratios are well in excess of minimum regulatory
requirements. At June 30, 2003, the Bank had a risk-based capital ratio of
12.71% and a tier 1 capital ratio of 7.79% at June 30, 2003.
At June 30, 2003 and December 31, 2002, the Company had outstanding
commitments to originate loans of approximately $23,402,000 and $15,439,000,
which were primarily for adjustable-rate mortgages with rates that are
determined just prior to closing or fixed-rate mortgage loans with rates locked
in at the time of loan commitment. The Company had $22,742,000 and $23,580,000
of conditional commitments for lines of credit receivables at June 30, 2003 and
December 31, 2002. Unused draws against construction and commercial loan
commitments totaled $9,281,000 and $8,863,000 at June 30, 2003 and December 31,
2002
12
RESULTS OF OPERATIONS
- ---------------------
Net income for the second quarter of 2003 was $96,000, or $0.03 per diluted
share compared to a profit of $600,000 or $0.19 per diluted share reported in
the second quarter of 2002. The low earnings in the second quarter of 2003 were
mainly due to an increase in the reserve for loan and lease losses primarily as
a result of additional provision expense taken for a lease pool. Higher
compensation and benefits cost and legal expenses also contributed to the lower
earnings.
For the first six months of 2003, the Company incurred a profit of $851,000
or $0.27 per diluted share compared with a net loss of $1,450,000 or $0.46 per
diluted share in the year-earlier period. The loss in 2002 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 and lease losses. Net
interest income for the first six months of 2003 was $6,722,000 versus
$6,049,000 in the comparable period last year, while the provision for loan and
lease losses amounted to $1,550,000 for the first six months of 2003 compared
with $1,400,000 in the year-earlier period.
The Bank's interest rate position at year-end 2001 exceeded the Bank's risk
parameters, primarily due to collateralized mortgage obligations that were
particularly volatile. The Company disposed of most of its investments during
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
diluted share. The funds from the investments liquidation were subsequently
reinvested in the first and second quarter of 2002 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 adjusted the balance sheet through the sale of an additional
$44,601,000 of investments in the third quarter of 2002 with the proceeds from
this latest investment sale were used to prepay higher-rate Federal Home Loan
Bank advances. As discussed below, these transactions improved the Company's net
interest margin through the reduction of higher rate debt using proceeds from
the sale of lower earning investments.
The following table summarizes the Company's average net interest-earning
assets and average interest-bearing liabilities with the accompanying average
rates for the second quarter and first six months of 2003 and 2002:
Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
-------------------------------------- ------------------------------------
(Dollars in Thousands)
Average interest-earning assets $433,290 $490,277 $431,777 $497,958
Average interest-bearing liabilities $400,083 $457,273 $397,004 $464,784
-------------------------------------- ------------------------------------
Net interest-earning assets $ 33,207 $ 33,004 $ 34,773 $ 33,174
====================================== ====================================
Average yield on/cost of:
Interest-earning assets 5.94% 6.12% 5.88% 6.51%
Interest-bearing liabilities 2.82% 4.19% 2.99% 4.35%
-------------------------------------- ------------------------------------
Net interest spread 3.12% 1.93% 2.89% 2.16%
====================================== ====================================
Net interest income for the second quarter of 2003 was $3,595,000 for an
increase of $894,000 or 33.10% compared to $2,701,000 recorded during the same
period in 2002. The net interest spread (difference between yield on
interest-earning assets and cost on interest-bearing liabilities) increased 119
basis points during the first quarter of 2003 compared to the first quarter of
2002. The change is due to a decrease in yield of 18 basis points on average
interest-earning assets offset by a 137 basis point reduction in the cost of
interest-bearing average liabilities. The change in interest rate spreads
resulted in a decrease of lower interest income offset by lower interest
expense. The $1,064,000 decrease in interest income on average interest-earning
assets in the second quarter of 2003 is a combination of a decrease of $869,000
because of the decrease in average balances and $195,000 due to lower rates. The
decrease of $1,958,000 in cost of interest-bearing liabilities in the second
quarter of 2003 is a combination of a decrease
13
of $597,000 from lower average balances and $1,361,000 from lower rates. The net
interest margin ratio, which is net interest income divided by average earning
assets, increased to 3.33% for the second quarter of 2003 compared to 2.21% for
the same period in 2002.
Net interest income for the first six months of 2003 was $6,722,000 for an
increase of $673,000 or 11.13% compared to $6,049,000 recorded during the same
period in 2002. The net interest spread (difference between yield on
interest-earning assets and cost on interest-bearing liabilities) increased 73
basis points during the first six months of 2003 compared to the same period in
2002. The change is due to a decrease in yield of 63 basis points on average
interest-earning assets offset by a 136 basis point reduction in the cost of
interest-bearing average liabilities. The change in interest rate spreads
resulted in a decrease in interest income offset by lower interest expense. The
$3,468,000 decrease in interest income on average interest-earning assets for
the first six months of 2003 is a combination of a decrease of $2,136,000
because of the decrease in average balances and $1,332,000 due to lower rates.
The decrease of $4,141,000 in cost of interest-bearing liabilities for the first
six months of 2003 is a combination of a decrease of $1,461,000 from lower
average balances and $2,680,000 from lower rates. The net interest margin ratio,
which is net interest income divided by average earning assets, increased to
3.14% for the first six months of 2003 compared to 2.45% for the same period in
2002.
The following table sets forth the impact of rate and volume changes on net
interest income for the three and six months ended June 30, 2003 compared to the
same periods in 2002.
(Dollars in Thousands)
Three Months Ended June 30, Six Months Ended June 30,
2003 vs 2002 2003 vs 2002
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
Volume Rate Net Change Volume Rate Net Change
Interest-earning assets $ (869) $ (195) $ (1,064) $ (2,136) $ (1,332) $ (3,468)
Interest-bearing liabilities (597) (1,361) (1,958) (1,461) (2,680) (4,141)
------------ ------------- --------------- ------------ ------------- --------------
Change in net interest income $ (272) $ 1,166 $ 894 $ (675) $ 1,348 $ 673
============ ============= =============== ============ ============= ==============
The following table summarizes the Company's non-performing assets at June 30,
2003 and December 31, 2002:
In Thousands
June 30, December 31,
2003 2002
Loans:
Non-accrual $17,911 $18,307
Restructured Loans 627 485
Over 90 days delinquent and still accruing 677 135
Real estate owned 432 489
------- -------
Total $19,647 $19,416
======= =======
The Company's non-performing assets increased $231,000 in the first six
months of 2003.
Non-performing assets grew substantially in 2002. The main causes for the
increase are related loans to a builder/developer and two lease pools.
14
The Bank has a number of real estate development/lot loans and single
family residential loans on existing properties with a builder/developer group,
and its related parties, that are currently in default and bankruptcy. The Bank
is working closely with the workout specialist hired by the bankruptcy trustee
on liquidation of the properties involved in the bankruptcy and we are
negotiating with the borrower and their counsel for resolution of the remaining
properties. The total outstanding balance of the various loans totaled $3.6
million as of June 30, 2003 and December 31, 2002.
The Bank is involved in a variety of litigation relating to its interests
in two pools of equipment leases originated by the Commercial Money Center, Inc.
("CMC"), a California based equipment-leasing company that is now in bankruptcy.
In June and September 2001, the Bank 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 Servicing Agreement which provides
that the insurers will service the leases. In each case the insurers have
assigned their servicing rights and responsibilities to Commercial Service
Center, 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 Commercial Money
Center (CMC), the company which sold the lease pools. Both are now denying
responsibility for payment. CMC has also 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. All parties
are conducting discovery. No trial date has been set.
The Bank has also been named as a defendant in a suit filed by a group of
lessees in California state court against CMC, CSC, the banks that invested in
the CMC pools and the insurers that issued the surety bonds on the CMC pools.
The California suit alleges that the leases are usurious and un-collectable
under California law. None of the plaintiffs in the California suit is a lessee
in either of the lease pools purchased by the Bank.
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 2003.
The total provision for loan losses was $1,550,000 and $1,400,000 during
the first six months of 2003 and 2002 respectively, and $1,400,000 and $150,000
during the second quarter of 2003 and 2002 respectively. The provision expense
in the first six months of 2002 was primarily related to the two lease pools and
a commercial property in Bloomington, Indiana.
The increase in the provision expense in the second quarter of 2003
compared to the second quarter of 2002 primarily relates to one of the two CMC
lease pools. The Bank set aside additional reserves of approximately $1.25
million in the second quarter of 2003. The Company believes this action, which
relates largely to continuing uncertainty surrounding its investment in two
pools of leases during 2001, is required as a result of the recent ratings
downgrade of one of the two sureties involved in the transaction, the Kemper
Insurance Companies, which is now rated "D" by A.M. Best. Moreover, the Company
believes that this new, lower rating is perceived as an important factor by
banking industry regulators in assessing the adequacy of reserves of
institutions that invested in those lease pools.
During 2002, the Company established reserves against the two lease pools
equal to approximately 50% of the outstanding amount. By setting aside an
additional $900,000 in specific reserves for the Kemper-insured lease pool, the
Company has reserved approximately 65% of the Kemper-insured lease pool and
approximately 58% of the combined outstanding amount of both lease pools. The
Company believes that these reserve levels are consistent with the conservative
posture that banking industry regulators will likely assume in this matter.
15
The Company regularly monitors the developments related to the two lease
pools and other non-performing 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 non-performing loans.
Net charge-offs (charge-offs less recoveries) were $358,000 and $69,000 for
the first six months of 2003 and 2002 respectively. Net charge-offs were
$185,000 and $21,000 for the second quarter of 2003 and 2002 respectively.
Management believes the allowance for loan losses is adequate and that
sufficient provision has been made to absorb losses that may ultimately be
incurred on non-performing loans and the remainder of the portfolio based on
information at June 30, 2003. The allowance for loan losses as a percentage of
loans was 3.77% and 2.77% at June 30, 2003 and December 31, 2002, respectively.
Total other income increased $11,000 to $1,198,000 for the second quarter
2003 from $1,187,000 in the same period during 2002. Sales of loans to the
secondary market increased and the $470,000 gain on these sales and servicing
rights in the second quarter 2003 was up from $217,000 for the same period in
2002.
Total other income increased $3,483,000 to $2,393,000 for the first six
months of 2003 from a loss of $1,090,000 in the same period during 2002.
Management sold investments for a net loss of $3,212,000 in the first quarter of
2002, which was the cause for the loss in other income in 2002. The gain on
these sales and servicing rights for the first six months of 2003 was $953,000
compared to $451,000 for the previous period in 2002.
Total other expense in the second quarter 2003 was $3,435,000 compared to
$3,056,000 for the same period in 2002. Salary and benefits expense for the
second quarter of 2003 was $1,963,000 compared to $1,753,000 in the same period
during 2002.
Total other expense for the first six months of 2003 was $6,654,000
compared to $6,279,000 for the same period in 2002. Salary and benefits expense
for the first six months of 2003 was $3,968,000 compared to $3,862,000 in the
same period during 2002. Severance pay of $289,000 was incurred in the first
quarter 2002. Merit pay adjustments, pension costs, and higher health care costs
during the first six months of 2003, as well as increased staffing in the last
half of 2002, resulted in higher salary and benefit expense from the same period
in 2002.
The Company recorded an income tax benefit of $138,000 in the second
quarter of 2003 compared to a tax expense of $82,000 for the same period in
2002. Income tax expense was $60,000 in the first six months of 2003 compared to
a tax benefit of $1,270,000 for the same period in 2002. The differences are due
to changes in pre-tax income.
The effective tax rates and the statutory tax rates differ primarily to tax
credits, cash value of life insurance, and a reduction in state tax expense.
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).
16
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.
Presented below is the assessment of the risk of NPV in the event of sudden and
sustained 200 and 100 basis point increases and decreases respectively, in
prevailing interest rates as of June 30, 2003.
NPV as Percent of
Net Portfolio Value Present Value of Assets
- ------------------------------------------------------------------------------------------------------------------------------------
Change in Rates Dollar Amount Dollar Change Percent Change NPV Ratio Change
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
+200 bp* $ 30,812 $ (6,995) (18.50%) 6.69% (125) bp*
Base or 0% 37,807 7.94
- -100 bp* 41,254 3,447 9.12% 8.51 57 bp*
- ------------------------------------------------------------------------------------------------------------------------------------
* basis points
Presented below is the assessment of the risk of NPV in the event of sudden and
sustained 200 and 100 basis point increases and decreases respectively in
prevailing interest rates as of December 31, 2002.
NPV as Percent of
Net Portfolio Value Present Value of Assets
- ------------------------------------------------------------------------------------------------------------------------------------
Change in Rates Dollar Amount Dollar Change Percent Change NPV Ratio Change
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
+200 bp* $ 39,952 $ (2,859) (6.68) 9.65% (43) bp*
Base or 0% 42,811 -- -- 10.08 --
- -100 bp* 41,054 (1,757) (4.10) 9.61 (47) bp*
- ------------------------------------------------------------------------------------------------------------------------------------
* basis points
17
ITEM 4 - CONTROLS AND PROCEDURES
As of the end of the period covered by this report, management of the Company
carried out an evaluation, under the supervision and with the participation of
the Company's principal executive officer and principal financial officer, of
the effectiveness of the Company's disclosure controls and procedures. Based on
this evaluation, the Company's principal executive officer and principal
financial officer concluded that the Company's disclosure controls and
procedures are effective in ensuring that information required to be disclosed
by the Company in reports that it files or submits under the Securities Exchange
Act of 1934, as amended, is recorded, processed, summarized and reported, within
the time periods specified in the Securities and Exchange Commission's rules and
forms. It should be noted that the design of the Company's disclosure controls
and procedures is based in part upon certain reasonable assumptions about the
likelihood of future events, and there can be no reasonable assurance that any
design of disclosure controls and procedures will succeed in achieving its
stated goals under all potential future conditions, regardless of how remote,
but the Company's principal executive and financial officers have concluded that
the Company's disclosure controls and procedures are, in fact, effective at a
reasonable assurance level.
In addition, there have been no changes in the Company's internal control over
financial reporting (to the extent that elements of internal control over
financial reporting are subsumed within disclosure controls and procedures)
identified in connection with the evaluation described in the above paragraph
that occurred during the Company's last fiscal quarter, that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
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
--- -----------
31 Rule 13a-14(a) Certifications
32 Section 1350 Certifications
b. Current Reports on Form 8-K
---------------------------
On April 7, 2003, the Company filed a Current Report on Form 8-K
reporting under item 5 that its bank subsidiary, Ameriana Bank and
Trust, SB (the "Bank"), had entered into a definitive Branch Purchase
and Assumption Agreement with Peoples Community Bank ("Peoples"), a
subsidiary of Peoples Community Bancorp, Inc. Pursuant to such
agreement, the Bank will sell two of its retail branch offices located
in Deer Park and Landen, Ohio to Peoples. No financial statements were
filed with this report.
On May 5, 2003, the Company filed a Current Report on 8-K reporting
under item 9 its unaudited financial results for the quarter ended
March 31, 2003. A copy of the press release was attached to this
Report as an exhibit.
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: August 13, 2003 /s/ Harry J. Bailey
-------------------------------
Harry J. Bailey
President and
Chief Executive Officer
(Duly Authorized Representative)
DATE: August 13, 2003 /s/ Bradley L. Smith
-------------------------------
Bradley L. Smith
Senior Vice President-Treasurer
(Principal Financial Officer
and Accounting Officer)
20