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, 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 October 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 September 30, 2003 (Unaudited)
and December 31, 2002 . . . . . . . . . . . . . . .. . . . 3
Consolidated Condensed Statements of Operations for
the Three and Nine Months Ended
September 30, 2003 and 2002 (Unaudited). . . . . . . . . . 4
Consolidated Condensed Statement of Shareholders'
Equity for the Nine Months Ended September 30, 2003. . . . 5
(Unaudited)
Consolidated Condensed Statements of Cash Flows
for the Nine Months Ended September 30, 2003
and 2002 (Unaudited). . . . . . . . . . . . . . . . . . . 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
ITEM 1 - Legal Proceedings
ITEM 2 - Changes in Securities and Use of Proceeds
ITEM 3 - Defaults upon Senior Securities
ITEM 4 - Submission of Matters to a Vote of Security Holders
ITEM 5 - Other Information
ITEM 6 - Exhibits and Reports on Form 8-K
SIGNATURES . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . .20
2
PART I - FINANCIAL INFORMATION
AMERIANA BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share data)
September 30, December 31,
2003 2002
(Unaudited)
---------------------- ----------------------
Assets
Cash on hand and in other institutions $ 8,338 $ 7,481
Interest-bearing demand deposits 25,778 38,215
---------------------- ----------------------
Cash and cash equivalents 34,116 45,696
Investment securities available for sale 106,783 58,155
Mortgage loans available for sale 1,970 3,825
Loans receivable 218,744 313,252
Allowance for loan losses (3,702) (8,666)
---------------------- ----------------------
Net loans receivable 215,042 304,586
Real estate owned 569 489
Premises and equipment 7,424 7,901
Stock in Federal Home Loan Bank 6,864 6,759
Mortgage servicing rights 1,323 1,197
Investments in unconsolidated affiliates 1,562 1,583
Goodwill 564 1,291
Cash surrender value of life insurance 19,524 18,932
Deferred taxes 3,327 2,611
Other assets 3,184 3,782
---------------------- ----------------------
Total assets $ 402,252 $ 456,807
====================== ======================
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Noninterest-bearing $ 18,882 $ 19,124
Interest-bearing 329,610 383,063
---------------------- ----------------------
Total deposits 348,492 402,187
Advances from Federal Home Loan Bank 4,880 5,592
Notes payable 600 840
Drafts payable 3,866 5,099
Advances by borrowers for taxes and insurance 448 380
Other liabilities 4,971 3,669
---------------------- ----------------------
Total liabilities 363,257 417,767
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock (5,000,000 shares authorized;
none issued) -- --
Common stock ($1.OO 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 35,148 34,856
Accumulated other comprehensive income (loss) 193 538
---------------------- ----------------------
Total shareholders' equity 38,995 39,040
---------------------- ----------------------
Total liabilities and shareholders' equity $ 402,252 $ 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 Nine Months Ended
September 30, September 30,
------------------------------------------------------
2003 2002 2003 2002
------------ ----------- ------------ -----------
Interest Income:
Interest and fees on loans $ 4,664 $ 6,022 $ 15,482 $ 18,527
Interest on investment securities 793 1,072 2,150 4,047
Other interest and dividend income 179 174 604 762
------------ ----------- ------------ -----------
Total interest income 5,636 7,268 18,236 23,336
Interest Expense:
Interest on deposits 2,300 3,566 7,980 11,477
Interest on FHLB advances and other borrowings 92 626 290 2,733
------------ ----------- ------------ -----------
Total interest expense 2,392 4,192 8,270 14,210
------------ ----------- ------------ -----------
Net interest income 3,244 3,076 9,966 9,126
Provision for Loan Losses 4,790 150 6,340 1,550
------------ ----------- ------------ -----------
Net interest income after provision for loan losses (1,546) 2,926 3,626 7,576
Other Income:
Net loan servicing fees (101) 2 (193) 87
Other fees and service charges 305 228 877 641
Brokerage and insurance commissions 241 239 723 772
Net gain (loss) on investments in unconsolidated affiliates 3 (20) 2 (22)
Net gain on sale of branches 5,511 -- 5,511 --
Gains on sales of loans and servicing rights 818 289 1,771 741
Gain (loss) on sale of investments -- 1,187 41 (2,025)
Increase in cash surrender value of life insurance 173 277 592 690
Other 25 22 47 250
------------ ----------- ------------ -----------
Total other income 6,975 2,224 9,371 1,134
Other Expense:
Salaries and employee benefits 2,174 1,997 6,142 5,859
Net occupancy and equipment expense 424 458 1,240 1,255
Federal insurance premium 48 18 143 54
Data processing expense 107 80 260 296
Printing and office supplies 74 73 188 215
Amortization of intangible assets 8 8 25 25
Penalty on early payoff of FHLB advances -- 1,077 -- 1,077
Other 705 377 2,199 1,587
------------ ----------- ------------ -----------
Total other expense 3,540 4,088 10,197 10,368
------------ ----------- ------------ -----------
Income (loss) before income taxes 1,889 1,062 2,800 (1,658)
Income taxes 937 276 997 (994)
------------ ----------- ------------ -----------
Net Income (Loss) $952 $786 $ 1,803 $(664)
============ =========== ============ ===========
Basic Earnings (Loss) Per Share $ 0.30 $ 0.25 $0.57 $ (0.21)
============ =========== ============ ===========
Diluted Earnings (Loss) Per Share $ 0.30 $ 0.25 $0.57 $ (0.21)
============ =========== ============ ===========
Dividends Declared Per Share $ 0.16 $ 0.16 $0.48 $0.48
============ =========== ============ ===========
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 1,803
Other comprehensive income (345)
---------------
Comprehensive income 1,458
Purchase of common stock --
Exercise of stock options 8
Dividends declared (1,511)
---------------
Balances, September 30 $38,995
===============
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,
--------------------------------------------
2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1,803 $ (664)
Items not requiring (providing) cash
Provision for losses on loans
6,340 1,550
Depreciation and amortization
1,154 668
Increase in cash surrender value
(592) (690)
Mortgage loans originated for sale
(190,692) (52,443)
Proceeds from sale of mortgage loans
193,650 53,310
Gains on sale of loans and servicing rights
(1,771) (741)
Loss (Gain) on sale of investments
(41) 2,024
Net gain on sale of branches
(5,511) --
Increase (decrease) in drafts payable
(1,233) 112
Other adjustments
1,787 7,563
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,894 10,689
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
- ------------------------------------------------------------------------------------------------------------------------------------
Purchase of investment securities available for sale
(104,103) (131,197)
Proceeds from sale of investment securities available for sale
20,705 179,218
Proceeds from maturities/calls of securities available for sale
33,577 30,599
Net change in loans
53,927 15,325
Net purchases of premises and equipment
(591) (1,382)
Net cash paid on sale of branches
(19,751) --
Other investing activities
301 85
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (15,935) 92,648
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
- ------------------------------------------------------------------------------------------------------------------------------------
Net change in demand and passbook deposits
35,778 13,250
Net change in certificates of deposit
(33,862) (5,377)
Proceeds from borrowings
-- 55,812
Repayment of borrowings
(952) (137,690)
Purchase of common stock
-- (137)
Exercise of stock options
8 137
Cash dividends paid
(1,511) (2,741)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (539) (76,746)
- ------------------------------------------------------------------------------------------------------------------------------------
CHANGE IN CASH AND CASH EQUIVALENTS
(11,580) 26,591
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
45,696 11,823
- ------------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 34,116 $ 38,414
====================================================================================================================================
Supplemental information:
Interest paid $ 7,523 $ 12,891
Income taxes paid 1,503 290
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 the central Indiana area. As its name implies, Ameriana Bank
and Trust also offers trust and investment management services. It 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 August 25, 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 September 12, 2003, and was paid on October
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 September 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 $952 3,148,288 $0.30 $786 3,147,463 $0.25
Common shareholders ===== =====
Effect of dilutive stock options -- 5,355 -- 2,300
------------------- ------------------
Diluted Earnings (Loss) Per Share: Income available to
common shareholders and assumed conversions $952 3,153,643 $0.30 $786 3,149,763 $0.25
==================================================================================================================================
(In thousands, except share data)
Nine Months Ended September 30,
- -----------------------------------------------------------------------------------------------------------------------------------
2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted Per Share Weighted
Income Average Per Share Income Average Per Shares
(Loss) Shares Amount (Loss) Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------------
Basic Earnings (Loss) per Share: Income available to $ 1,803 3,148,122 $0.57 ($664) 3,147,246 ($0.21)
Common shareholders ===== ======
Effect of dilutive stock options -- 2,028 -- 0
--------------------- --------------------
Diluted Earnings (Loss) Per Share: Income available to
common shareholders and assumed conversions $ 1,803 3,150,150 $0.57 ($664) 3,147,246 ($0.21)
==================================================================================================================================
At September 30, 2003, options to purchase 132,689 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 pro forma 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 pro forma 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.
Sale of Two Cincinnati Branches
- -------------------------------
On April 7, 2003, the Company announced that it had agreed to sell its two
Cincinnati-area branches to Peoples Community Bancorp, Inc. (NASDAQ/NM:
PCBI)("PCBI") of West Chester, Ohio. The two branches are located in Deer Park
and Landen, Ohio. On September 30, 2003, the Company announced the completion of
the sale of the two branches to PCBI. In connection with the sale, the Company
recorded an after-tax gain of approximately $2,930,000 or $0.93 per diluted
share in the third quarter 2003.
The transaction included the Company's real property related to the Deer
Park branch and its leasehold on the premises for the Landen branch.
Additionally, the Company conveyed most consumer and commercial loans at those
branches as part of the transaction, as well as the branches' saving deposits,
but retained and will continue to service certain single family residential
mortgages originated in those locations.
Company Writes Off Troubled Lease Portfolio
- -------------------------------------------
On September 30, 2003 the Company charged-off the two troubled equipment
leases ("lease pools") originated by Commercial Money Center ("CMC"), a now
bankrupt company. The Company recorded an after-tax loss of approximately
$2,784,000 or $0.88 per diluted share. Prior to September 30, 2003, the Company
had established reserves against these lease pools equal to approximately 58% of
the approximately $10,900,000 that currently remains outstanding.
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.
The Cincinnati branches sold had approximately $890,000 recorded as
goodwill and core deposit intangibles. The $890,000 was written-off and netted
against the gain on the sale of the branches.
FINANCIAL CONDITION
- -------------------
Total assets decreased $54,555,000 to $402,252,000 or 11.94% at September
30, 2003 from $456,807,000 at December 31, 2002. The main reason for the
decrease was due to deposits conveyed in the sale of the Cincinnati branches.
Cash and cash equivalents decreased $11,580,000 or 25.34% during the first
nine months of 2003 to $34,116,000 from $45,696,000 at December 31, 2002. The
main reason for the decrease was due to the purchase of investment securities.
Investment securities available for sale increased $48,628,000 or 83.62%
during the first nine months of 2003 to $106,783,000 from $58,155,000 at
December 31, 2002. The funding for the increase came from loan payoffs,
deposits, and cash and cash equivalents.
Total net loans decreased $89,544,000 or 29.40% during the first nine
months of 2003 to $215,042,000 from $304,586,000 at December 31, 2002. The
decline was due to mortgage loan refinancing and the subsequent sale of those
loans, the charge-off of the two lease pools, and loans conveyed to PCBI from
the Cincinnati branches sale, which consisted of approximately $28,847,000 of
commercial and consumer loans.
Deposits decreased $53,695,000 or 13.35% during the first nine months of
2003 to $348,492,000 from $402,187,000 at December 31, 2002. The decline was
mainly due to deposits conveyed to PCBI from the Cincinnati branches sale, which
consisted of approximately $55,611,000 of deposits. Excluding the Cincinnati
branches sale, deposits increased approximately $2,000,000.
The Company's principal sources of funds are cash generated from
operations, deposits, loan principal repayments, investments, and advances from
the Federal Home Loan Bank ("FHLB").
The Bank's capital ratios are well in excess of minimum regulatory
requirements. At September 30, 2003, the Bank had a risk-based capital ratio of
15.57% and a tier 1 capital ratio of 8.10%.
At September 30, 2003 and December 31, 2002, the Company had outstanding
commitments to originate loans of approximately $9,094,000 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 $22,513,000 and $23,580,000
of conditional commitments for lines of credit receivables at September 30, 2003
and December 31, 2002. Unused draws against construction and commercial loan
commitments totaled $7,146,000 and $8,863,000 at September 30, 2003 and December
31, 2002.
12
RESULTS OF OPERATIONS
- ---------------------
Net income for the third quarter of 2003 was $952,000, or $0.30 per diluted
share compared to $786,000 or $0.25 per diluted share reported in the third
quarter of 2002. The higher earnings in the third quarter of 2003 were mainly
due to the sale of the Cincinnati branches less the additional provision expense
necessary to charge-off the lease pools.
For the first nine months of 2003, the Company incurred a profit of
$1,803,000 or $0.57 per diluted share compared with a net loss of $664,000 or
$0.21 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 nine months of 2003 was $9,966,000 compared to
$9,126,000 in the comparable period last year, an increase of 9.20%. The
provision for loan and lease losses was $6,340,000 for the first nine months of
2003 compared with $1,550,000 in the year-earlier period. The majority of the
provision expense in 2003 was due to the charge-off of the two lease pools while
the prior period provision expense was higher than expected due to an increase
in non-performing loans.
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 third quarter and first nine months of 2003 and 2002:
(Dollars in Thousands)
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------------------------------------
2003 2002 2003 2002
Average interest-earning assets $ 424,948 $468,023 $429,475 $487,870
Average interest-bearing liabilities $ 395,797 $435,915 $396,598 $455,055
------------------------------- ------------------------------
Net interest-earning assets $29,151 $ 32,108 $ 32,877 $ 32,815
=============================== ==============================
Average yield on/cost of:
Interest-earning assets 5.26% 6.16% 5.68% 6.40%
Interest-bearing liabilities 2.40% 3.82% 2.79% 4.18%
------------------------------- ------------------------------
Net interest spread 2.86% 2.34% 2.89% 2.22%
=============================== ==============================
Net interest income for the third quarter of 2003 was $3,244,000 for an
increase of $168,000 or 5.46% compared to $3,076,000 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 52
basis points during the third quarter of 2003 compared to the third quarter of
2002. The change is due to a decrease in yield of 90 basis points on average
interest-earning assets offset by a 142 basis point reduction in the cost of
interest-bearing average liabilities. The change in interest rate spreads
resulted in a decrease of interest income offset by lower interest expense. The
13
$1,632,000 decrease in interest income on average interest-earning assets in the
third quarter of 2003 is a combination of a decrease of $669,000 because of
lower average balances and $963,000 due to lower rates. The decrease of
$1,800,000 in cost of interest-bearing liabilities in the third quarter of 2003
is a combination of a decrease of $385,000 from lower average balances and
$1,415,000 from lower rates. The net interest margin ratio, which is net
interest income divided by average earning assets, increased to 3.03% for the
third quarter of 2003 compared to 2.61% for the same period in 2002.
Net interest income for the first nine months of 2003 was $9,966,000 for an
increase of $840,000 or 9.20% compared to $9,126,000 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 67
basis points during the first nine months of 2003 compared to the same period in
2002. The change is due to a decrease in yield of 72 basis points on average
interest-earning assets offset by a 139 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
$5,100,000 decrease in interest income on average interest-earning assets for
the first nine months of 2003 is a combination of a decrease of $2,793,000
because of a decline in average balances and $2,307,000 due to lower rates. The
decrease of $5,940,000 in cost of interest-bearing liabilities for the first
nine months of 2003 is a combination of a decrease of $1,825,000 from lower
average balances and $4,115,000 from lower rates. The net interest margin ratio,
which is net interest income divided by average earning assets, increased to
3.10% for the first nine months of 2003 compared to 2.50% 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 nine months ended September 30, 2003 compared
to the same periods in 2002.
(Dollars in Thousands)
Three Months Ended September 30, Nine Months Ended September 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 $(669) $(963) $ (1,632) $ (2,793) $ (2,307) $ (5,100)
Interest-bearing liabilities (385) (1,415) (1,800) (1,825) (4,115) (5,940)
------------ ------------ -------------- -------------- ------------- ------------
Change in net interest income $(284) $ 452 $ 168 $ (968) $1,808 $ 840
============ ============ ============== ============== ============= ============
The following table summarizes the Company's non-performing assets at September
30, 2003 and December 31, 2002:
Dollars in Thousands
September 30, December 31,
2003 2002
Loans:
Non-accrual $ 7,924 $ 18,307
Restructured Loans 485
Over 90 days delinquent and still accruing 1,337 135
Real estate owned 569 489
------------------ -----------------
Total $ 9,830 $ 19,416
================== =================
14
The Company's non-performing assets decreased $9,586,000 in the first nine
months of 2003 primarily due to the charge-off of the lease pools.
Non-performing assets grew substantially in 2002. The main causes for the
increase are related loans to a builder/developer and the aforementioned lease
pools.
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 is negotiating
with the borrower and its counsel for resolution of the remaining properties.
The total outstanding balance of the various loans totaled $3.6 million as of
September 30, 2003 and December 31, 2002.
The Bank is involved in a variety of litigation relating to its interests
in the 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 was 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 lease pools had reserves of approximately 50% at December 31, 2002. Due
to the downgrade of one of the sureties to "D" by A.M. Best, the inherent
uncertainty surrounding the potential for recovery, the Company charged-off the
two lease pools during the third quarter of 2003. The Company believes that the
charge-off of these lease pools is consistent with the conservative posture that
banking industry regulators will likely assume in this matter.
15
Net charge-offs (charge-offs less recoveries) were $11,304,000 and $206,000
for the first nine months of 2003 and 2002 respectively. Net charge-offs were
$10,945,000 and $137,000 for the third quarter of 2003 and 2002 respectively.
The main reason for the large charge-offs for the third quarter of 2003 and the
first nine months of 2003 are due to the $10,900,000 charge-off of the lease
pools.
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 September 30, 2003. The allowance for loan losses as a percentage
of loans was 1.69% and 2.77% at September 30, 2003 and December 31, 2002,
respectively.
Total other income increased $8,237,000 to $9,371,000 for the first nine
months of 2003 from $1,134,000 in the same period during 2002. The gain on sale
of the Cincinnati branches in September 2003 was $5,511,000. Management sold
investments for a net loss of $3,212,000 in the first quarter of 2002 that was
offset by a gain on sale of investments in the third quarter of 2002 of
$1,188,000, which were the primary causes for the low level of other income in
2002. Gains on sales of loans and servicing rights for the first nine months of
2003 increased $1,030,000 to $1,771,000 compared to $741,000 for the previous
period in 2002. The increase was due to higher mortgage loan re-financings
spurred by low interest rates and the subsequent sale of these loans in 2003
than the same period in 2002.
Total other income increased $4,751,000 to $6,975,000 for the third quarter
2003 from $2,224,000 in the same period during 2002. The sale of the two
Cincinnati branches was the main cause for the increase offset by the gain on
sale of investments in the third quarter of 2002. Gains on sales of loans and
servicing rights to the secondary market were $818,000 for the third quarter of
2003 compared to a net gain of $289,000 for the same period in 2002.
Total other expense decreased $171,000 to $10,197,000 for the first nine
months of 2003 from $10,368,000 in the same period in 2002. Expenses in 2002
included $1,077,000 for penalties on early pay-off of FHLB advances. Salary and
benefits expense was $6,142,000 for the first nine months of 2003 compared to
$5,859,000 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 nine 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.
Total other expense in the third quarter of 2003 decreased $548,000 to
$3,540,000 compared to $4,088,000 for the same period in 2002. Expenses in the
second quarter of 2002 included the $1,077,000 for penalties on early pay-off of
FHLB advances. Salary and benefits expense for the third quarter of 2003 was
$2,174,000 compared to $1,997,000 in the same period during 2002. Merit pay
adjustments, pension costs, and higher health care costs during 2003 resulted in
higher salary and benefit expense from the same period in 2002.
The Company recorded an income tax expense of $997,000 for the first nine
months of 2003 compared to a tax benefit of $994,000 for the same period in
2002. Income tax expense was $937,000 in the third quarter of 2003 compared to
$276,000 in the third quarter of 2002.
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. The
high effective tax rates through September 30, 2003 and the third quarter of
2003 were mainly due to the write-off of approximately $890,000 of goodwill and
core deposit intangibles associated with the sale of the Cincinnati branches,
which is not tax deductible.
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 September 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* $ 38,846 $ (3,045) (7.27) 9.83% -48 bp*
Base or 0% 41,891 10.31
- -100 bp* 43,637 1,746 4.17 10.59 28 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
--- -----------
Exhibit 31, Rule 13a-14(a) Certifications
Exhibit 32, Section 1350 Certifications
b. Current Reports on Form 8-K
---------------------------
On July 14, 2003, the Company filed a current report on Form 8-K
announcing additional reserves of approximately $1.25 million the
Company set aside in the second quarter.
On August 5, 2003, the Company filed a Current Report on 8-K
reporting under Item 12 its unaudited financial results for the
quarter ended June 30, 2003. A copy of the press release was
attached to this Report as an exhibit.
On September 30, 2003, the Company filed a current report on Form
8-K that announced the completed sale of its two Cincinnati area
branches to Peoples Community Bancorp. As a separate matter, the
Company also announced that it was writing off two lease pools in
the third quarter.
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, 2003 /s/ Harry J. Bailey
----------------- --------------------------------
Harry J. Bailey
President and
Chief Executive Officer
(Duly Authorized Representative)
DATE: November 14, 2003 /s/ Bradley L. Smith
----------------- -------------------------------
Bradley L. Smith
Senior Vice President-Treasurer
(Principal Financial Officer
and Accounting Officer)
20