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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-18392
AMERIANA BANCORP
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(Exact Name of Registrant as Specified in Its Charter)
Indiana 35-1782688
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2118 Bundy Avenue, New Castle, Indiana 47362-1048
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (765) 529-2230
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
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Indicate by check mark whether the registrant: (l) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X
-- --
At June 30, 2003, the registrant had 3,148,288 shares of its Common Stock, $1.00
per share, outstanding. The aggregate market value of voting stock held by
non-affiliates of the registrant at June 30, 2003 was approximately $39 million
based on the closing sale price of the registrant's Common Stock as listed on
the Nasdaq National Market as of the last business day of the registrant's most
recently completed second fiscal quarter. For purposes of this calculation,
directors and executive officers are not treated as "non-affiliates".
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Proxy Statement for the 2004 Annual Meeting of Shareholders
("Proxy Statement") (Part III).
PART I
Item 1. Business
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FORWARD-LOOKING STATEMENTS
When used in this Annual Report on Form 10-K (the "Annual Report"), the
words or phrases "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project" or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are subject to certain
risks and uncertainties including changes in economic conditions in the
Company's market area, changes in policies by regulatory agencies, the outcome
of litigation, fluctuations in interest rates, demand for loans in the Company's
market area, and competition that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake, and specifically disclaims any obligation,
to publicly release the result of any revisions, which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
GENERAL
THE COMPANY. Ameriana Bancorp (the "Company") is a bank holding company
subject to regulation and supervision by the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board") under the Bank Holding Company Act
of 1956 ("BHCA"). The Company became the holding company for the Bank in 1990.
The Company's principal subsidiary is Ameriana Bank and Trust, SB, an Indiana
chartered savings bank headquartered in New Castle, Indiana (the "Bank"). The
Company also holds a minority interest in a limited partnership organized to
acquire and manage real estate investments, which qualify for federal tax
credits.
THE BANK. The Bank began operations in 1890. Since 1935, the Bank has been
a member of the Federal Home Loan Bank ("FHLB") System. Its deposits are insured
to applicable limits by the Savings Association Insurance Fund ("SAIF"),
administered by the FDIC. Effective June 29, 2002, the Bank converted to an
Indiana savings bank and adopted its present name, "Ameriana Bank and Trust,
SB." As a result of the conversion, the Bank become subject to regulation by the
Indiana Department of Financial Institutions (the "DFI") and the Federal
1
Deposit Insurance Corporation ("FDIC") rather than by the Office of Thrift
Supervision and the Company became a bank holding company. The Bank's main
office is located at 2118 Bundy Avenue, New Castle, Indiana. The Bank also
conducts business through ten Indiana branch offices located in New Castle,
Middletown, Knightstown, Morristown, Greenfield, Anderson, Avon, McCordsville
and New Palestine, Indiana. The Bank has three direct wholly-owned subsidiaries,
Ameriana Insurance Agency ("AIA"), Ameriana Financial Services, Inc. ("AFS") and
Ameriana Investment Management, Inc. ("AIMI"). AIA provides insurance sales from
offices in New Castle, Greenfield and Avon, Indiana. AFS offers insurance
products through its ownership of an interest in Family Financial Life Insurance
Company, New Orleans, Louisiana, which offers a full line of credit, related
insurance products. AIMI manages the Company's investment portfolio. In 2002,
AFS acquired a 20.9% ownership interest in Indiana Title Insurance Company, LLC
through which it offers title insurance. AFS also operates a brokerage facility
in conjunction with Linsco/Private Ledger. The Bank maintains a website at
www.ameriana.com.
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The business of the Bank consists primarily of attracting deposits from the
general public and originating mortgage loans on single-family residences,
multi-family housing and commercial real estate. The Bank also makes home
improvement loans and consumer loans and, through its subsidiary, engages in
insurance and brokerage activities. The Bank has a Business Services Division
which provides specialized lending and other banking services for business
customers. As a result of the Business Services Division, commercial real estate
loan activity has increased significantly during 2003, 2002 and 2001.
The Bank operates a Trust Department, which provides trust, investment and
estate planning services. The principal sources of funds for the Bank's lending
activities include deposits received from the general public, funds borrowed
from the FHLB, principal amortization and prepayment of loans. The Bank's
primary sources of income are interest and fees on loans and interest on
investments. The Bank has from time to time purchased loans and loan
participations in the secondary market. The Bank also invests in various federal
and government agency obligations and other investment securities permitted by
applicable laws and regulations, including mortgage-backed, municipal and equity
securities. The Bank's principal expenses are interest paid on deposit accounts
and borrowed funds and operating expenses incurred in the operation of the Bank.
RECENT DEVELOPMENTS. On September 30, 2003, the Bank completed the sale of
its two Cincinnati-area branches located in Deer Park and Landen, Ohio and
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 Bank's real
property related to the Deer Park branch and its leasehold on the premises for
the Landen branch. Additionally, the Bank conveyed most of
2
the 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.
On September 30, 2003, the Company charged-off the remaining balances of
two troubled equipment lease pools originated by Commercial Money Center, a now
bankrupt company, and recorded an after-tax loss of $3,534,000 or $1.12 per
diluted share for the year ended December 31, 2003 (see Item 3 -- "Legal
Proceedings").
REGULATORY ACTIONS. During the second quarter of 2002, the Bank entered
into a memorandum of understanding ("MOU") with the FDIC and the DFI. Among
other things, the MOU required the Bank to adopt written action plans with
respect to certain classified assets, revise its lending policies, require
greater financial information from borrowers, establish a loan review program
and certain other internal controls. For a more detailed discussion of the terms
and conditions of the MOU, see "Regulation and Supervision - Regulation and
Supervision of the Bank - Capital Requirements" below.
LENDING AND INVESTMENT ACTIVITIES
GENERAL. The principal lending activity of the Bank has been the
origination of conventional first mortgage loans secured by residential
property, commercial real estate, equity lines of credit and consumer loans. The
residential mortgage loans have been predominantly secured by single-family
homes and have included construction loans.
The Bank may originate or purchase whole loans or loan participations
secured by real estate located in any part of the United States. Notwithstanding
this nationwide lending authority, the majority of the Bank's mortgage loan
portfolio is secured by real estate located in Henry, Hancock, Hendricks,
Madison, Shelby, Delaware and Marion counties in the State of Indiana and in
Hamilton, Butler, Clermont and Warren counties in the State of Ohio.
3
The following table sets forth information concerning the Bank's aggregate
loans by type of loan at the dates indicated.
At December 31,
2003 2002 2001 2000 1999
------------------- ----------------- ------------------- -------------- -------------
Amount % Amount % Amount % Amount % Amount %
------ ----- ------ ----- ------ ----- ------ --- ------ ---
(Dollars in thousands)
Real estate mortgage loans:
Commercial........................ $ 79,621 37.19% $ 88,558 27.54% $ 61,678 16.91% $ 35,615 8.57% $ 22,411 6.51%
Residential loans................. 100,865 47.12 157,622 49.00 211,601 58.00 295,949 71.18 250,392 72.77
Construction loans................ 18,035 8.43 42,714 13.28 42,045 11.52 43,287 10.41 42,971 12.49
Commercial loans.................... 7,672 3.58 19,192 5.97 18,536 5.08 8,764 2.11 1,209 0.35
Consumer loans:
Mobile home and auto loans........ 5,191 2.42 10,092 3.14 15,941 4.37 20,767 5.00 16,373 4.77
Loans secured by deposits......... 811 0.38 1,130 0.35 1,348 0.37 1,598 0.38 1,392 0.40
Home improvement loans............ 206 0.10 248 0.08 403 0.11 321 0.08 1,577 0.46
Other............................. 1,661 0.78 2,043 0.64 13,294 3.64 9,431 2.27 7,762 2.26
--------- ------ --------- ------ --------- ------ -------- ------ -------- ------
Total.......................... 214,062 100.00% 321,599 100.00% 364,846 100.00% 415,732 100.00% 344,087 100.00%
--------- ======= --------- ====== --------- ====== -------- ====== -------- ======
Less:
Loans in process.................. 5,859 7,985 12,725 16,724 16,723
Deferred loan fees................ 318 362 8 (143) (129)
Loan loss reserve................. 3,744 8,666 1,730 1,489 1,534
--------- --------- --------- -------- --------
Subtotal......................... 9,921 17,013 14,463 18,070 18,128
--------- --------- --------- -------- --------
Total.......................... $ 204,141 $ 304,586 $ 350,383 $397,662 $325,959
========= ========= ========= ======== ========
4
The following table shows, at December 31, 2003, the Bank's aggregate loans
based on their contractual terms to maturity (mortgage-backed securities are not
included). Demand loans, loans having no stated schedule of repayments and no
stated maturity and overdrafts are reported as due in one year or less.
Contractual principal repayments of loans do not necessarily reflect the actual
term of the loan portfolio. The average life of mortgage loans is substantially
less than their contractual terms because of loan prepayments and because of
enforcement of due-on-sale clauses, which give the Bank the right to declare a
loan immediately due and payable in the event, among other things, that the
borrower sells the real property subject to the mortgage and the loan is not
repaid. The average life of mortgage loans tends to increase, however, when
current mortgage loan rates substantially exceed rates on existing mortgage
loans.
Amounts of Loans Which Mature in
--------------------------------------------------------------------------------
2009 and
2004 2005 - 2008 Thereafter Total
-------- ----------- ------------ ----------
(In thousands)
Type of Loan:
Real estate mortgage....... $ 28,620 $ 18,417 $ 151,484 $ 198,521
Other...................... 6,011 7,930 1,600 15,541
---------- ---------- --------- ----------
Total................... $ 34,631 $ 26,347 $ 153,084 $ 214,062
========== ========== ========= ==========
The following table sets forth the dollar amount of the Company's
aggregate loans due after one year from December 31, 2003 which have
predetermined interest rates and which have floating or adjustable interest
rates (mortgage-backed securities are not included).
Fixed Adjustable
Rate Rate Total
----------- ----------- -----
(In thousands)
Real estate mortgage loans............. $ 39,821 $ 130,080 $ 169,901
Other loans............................ 8,245 1,285 9,530
---------- --------- ---------
Total................................ $ 48,066 $ 131,365 $ 179,431
========== ========= =========
RESIDENTIAL REAL ESTATE LENDING. The Bank's primary lending activities are
the origination of loans on one-to-four family residential dwelling units. The
Bank currently offers fixed-rate, first and second mortgage loans. The
fixed-rate mortgage loans provide for a maturity of ten to thirty years, with
the thirty-year loan bearing a slightly higher rate of interest. The terms of
the first mortgage loans generally conform to the guidelines established by the
Federal Home Loan Mortgage Corporation ("FHLMC") and are, therefore, saleable in
the secondary mortgage market. The Bank's fixed-rate second mortgage loans
provide for a maturity of up to 15 years and bear interest at a rate slightly
higher than that borne by the first mortgage loans. At the time the Bank makes a
fixed-rate mortgage loan, it determines whether the loan will be held in
portfolio or sold. Normally the Bank sells fixed-rate loans and
5
retains adjustable-rate loans. Once placed in portfolio, loans are not sold.
Loans originated for sale are promptly sold in the secondary market. Fixed-rate
mortgage loans in the amount of $150.3 million were originated for sale during
2003 and $154.5 million were sold at a gain of $1.9 million. Mortgage loans held
for sale are those loans that have been committed to be sold, but have not
closed as of the end of the year and were $730,000 at December 31, 2003.
The Bank emphasizes the origination of adjustable-rate mortgages ("ARMs")
for portfolio. The Bank currently offers several types of ARMs either as
first-lien mortgage loans or as second-lien mortgage loans that are adjustable
semi-annually, annually, or on three-year, five-year or seven-year intervals and
indexed to the yields on comparable United States Treasury securities.
The Bank limits the maximum loan-to-value ratio on one-to-four family
residential first mortgages to 97% of the appraised value with the requirement
that private mortgage insurance normally be obtained for loan-to-value ratios in
excess of 80%. The Bank limits the loan-to-value ratio to 89.9% on second
mortgages on one-to-four family dwellings.
The Bank's residential lending activities also include loans secured by
multi-family residential structures, which are structures consisting of over
four separate dwelling units. This has not constituted a significant portion of
the Bank's lending activities to date. Multi-family residential structures are
generally income-producing properties. The Bank generally does not lend above
80% of the appraised values of multi-family residences on first mortgage loans.
CONSTRUCTION AND COMMERCIAL REAL ESTATE LENDING. The Bank originates loans
secured by existing commercial properties and construction loans on residential
real estate. Churches, nursing homes, hotels/motels, and other income-producing
properties secure the Bank's commercial real estate loans. The Bank's Business
Services Division operation makes direct commercial real estate loans and
purchases loan participations from other financial institutions. These
participations in commercial real estate loans are reviewed and approved based
upon the same credit standards as direct commercial real estate loans at the
Bank. Loans secured by commercial real estate properties are generally larger
and involve a greater degree of credit risk than one-to-four family residential
mortgage loans. Because payments on loans secured by commercial real estate
properties are often dependent on the successful operation or management of the
properties, repayment of such loans may be subject to adverse conditions in the
real estate market or by general economic conditions. If the cash flow from the
project is reduced (for example, if leases are not obtained or renewed), the
borrower's ability to repay the loan may be impaired. To minimize the risks
involved in originating such loans, the Bank considers, among other things, the
credit worthiness
6
of the borrower, the location of the real estate, the condition and occupancy
levels of the security and the quality of the organization managing the
property.
The Bank originates and/or purchases construction loans on single-family
residential properties in its primary market areas. The loans are secured by
real estate, and most of the homes to be constructed are already subject to a
sales contract at the time the construction loan is made. The Bank's
construction loans generally range in size between $100,000 and $500,000, and
the Bank's commercial real estate loans range from $100,000 to $4,000,000.
Substantially all of the commercial real estate and construction loans
originated and/or purchased by the Bank have either adjustable interest rates
with maturities of 30 years or less or are loans with fixed interest rates and
maturities of ten years or less.
Loans involving construction financing present a greater level of risk than
loans for the purchase of existing homes since collateral value and construction
costs can only be estimated at the time the loan is approved. The Bank has
sought to minimize this risk by limiting construction lending to qualified
borrowers in its market area and by limiting the number of construction loans
outstanding at any time to individual builders. In addition, most of the Bank's
construction loans are made on homes that are pre-sold, for which permanent
financing is already arranged.
The Bank's underwriting criteria are designed to evaluate and minimize the
risks of each construction loan. Among other things, the Bank considers evidence
of the availability of permanent financing or a takeout commitment to the
borrower; the reputation of the borrower and his or her financial condition; the
amount of the borrower's equity in the project; independent appraisal and review
of cost estimates; pre-construction sale and leasing information; and cash flow
projections of the borrower.
CONSUMER LOANS. The consumer loans granted by the Bank have included loans
on automobiles and other consumer goods, loans secured by savings accounts and
secured and unsecured lines of credit.
Management believes that the shorter terms and the normally higher interest
rates available on various types of consumer loans have been helpful in
maintaining profitable spreads between average loan yields and costs of funds.
Consumer loans do, however, pose additional risks of collection when compared to
traditional types of loans granted by thrift institutions such as residential
first mortgage loans. The Bank has sought to reduce this risk by primarily
granting secured consumer loans.
COMMERCIAL BUSINESS LENDING. Under applicable law, the Bank is permitted to
make secured and unsecured loans for commercial, corporate, business and
agricultural purposes, including issuing letters of credit and
7
engaging in inventory financing and commercial leasing activities. The Bank does
not, as a common practice, make unsecured commercial loans. The total lease and
commercial portfolio at December 31, 2003 was $7.7 million.
ORIGINATIONS, PURCHASES AND SALES. Historically, most residential and
commercial real estate loans have been originated directly by the Bank through
salaried loan officers. Residential loan originations have been attributable to
referrals from real estate brokers and builders, depositors and walk-in
customers, and commissioned loan agents. The Bank also obtains consumer and
commercial loans from paid brokers. The Bank obtained $1.5 million of loans from
brokers and other financial institutions through loan participations in 2003.
Commercial real estate and construction loan originations have also been
obtained by direct solicitation. Consumer loan originations are attributable to
walk-in customers who have been made aware of the Bank's programs by advertising
as well as direct solicitation.
The Bank has previously sold whole loans to other financial institutions
and institutional investors. Sales of loans generate income (or loss) at the
time of sale, produce future servicing income and provide funds for additional
lending and other purposes. When the Bank retains the servicing of loans it
sells, the Bank retains responsibility for collecting and remitting loan
payments, inspecting the properties, making certain insurance and tax payments
on behalf of borrowers and otherwise servicing those loans. The Bank typically
receives a fee of between 0.25% and 0.375% per annum of the loan's principal
amount for performing this service. The right to service a loan has economic
value and the Bank carries capitalized servicing rights on its books based on
comparable market values and expected cash flows. At December 31, 2003, the Bank
was servicing $193.0 million of loans for others. The aggregate book value of
capitalized servicing rights at December 31, 2003 was $1.3 million.
Management believes that purchases of loans and loan participations are
generally desirable, primarily when area mortgage demand is less than the supply
of funds available for local mortgage origination or when loan terms are
available in areas outside the Bank's local lending areas that are more
favorable to its investment requirements. Additionally, purchases of loans may
be made in order to diversify the Bank's lending portfolio. The Bank's loan
purchasing activities fluctuate significantly. The seller generally performs the
servicing of purchased loans. In order to cover servicing costs, the service
provider retains a portion of the interest being paid by the borrower. In
addition to whole loan purchases, the Bank also purchases participation
interests in loans. Both whole loans and participations are purchased on a yield
basis.
For additional information, see "Management's Discussion and Analysis --
Results of Operations" included in Item 7 of this Annual Report.
8
LOAN UNDERWRITING. During the loan approval process, the Bank assesses both
the borrower's ability to repay the loan and the adequacy of the underlying
security. Potential residential borrowers complete an application that is
submitted to a salaried loan officer. As part of the loan application process,
the Bank obtains information concerning the income, financial condition,
employment, and credit history of the applicant. In addition, qualified
appraisers inspect and appraise the property that is offered to secure the loan.
The Bank's loan officers and/or loan committee analyze the loan application
and the property to be used as collateral and subsequently approve or deny the
loan request. Individual salaried employees are authorized to approve loans up
to their individual lending limits and loan parameters. A committee consisting
of certain members of senior management must approve residential loans exceeding
$500,000, and commercial loans between $350,000 and $1,000,000. The Board of
Directors approves all loans in excess of $1,000,000. In connection with the
origination of single-family, residential adjustable-rate loans, borrowers are
qualified at a rate of interest equal to the second year rate, assuming the
maximum increase. It is the policy of management to make loans to borrowers who
not only qualify at the low initial rate of interest, but who would also qualify
following an upward interest rate adjustment.
LOAN COMMITMENTS. Conventional loan commitments by the Bank are generally
granted for periods of up to 60 days. The total amount of the Bank's aggregate
outstanding commitments to originate real estate loans at December 31, 2003, was
approximately $1.2 million of residential mortgage commitments and approximately
$1.7 million of commercial commitments. It has been the Bank's experience that
few commitments expire unfunded.
LOAN FEE AND SERVICING INCOME. In addition to interest earned on loans, the
Bank receives income through servicing of loans and fees in connection with loan
originations, loan modifications, late payments, and changes of property
ownership and for miscellaneous services related to the loan. Income from these
activities is volatile and varies from period to period with the volume and type
of loans made.
When possible, the Bank charges loan origination fees on commercial loans
that are calculated as a percentage of the amount borrowed and are charged to
the borrower at the time of origination of the loan. These fees generally range
from none to 1.00 point (one point being equivalent to 1% of the principal
amount of the loan). In accordance with Statement of Financial Accounting
Standard No. 91, loan origination and commitment fees and certain direct loan
origination costs are deferred and the net amount amortized as an adjustment of
yield over the contractual life of the related loans.
9
For additional information, see Note 4 to the "Consolidated Financial
Statements" included under Item 8 of this Annual Report.
DELINQUENCIES. When a borrower defaults upon a required payment on a loan,
the Bank contacts the borrower and attempts to induce the borrower to cure the
default. A late payment notice is mailed to the borrower and a telephone contact
is made after a payment is 15 days past due. If the delinquency on a mortgage
loan exceeds 90 days and is not cured through the Bank's normal collection
procedures or an acceptable arrangement is not worked out with the borrower, the
Bank will institute measures to remedy the default, including commencing
foreclosure action.
NON-PERFORMING ASSETS AND ASSET CLASSIFICATION. Loans are reviewed on a
regular basis and are placed on a non-accrual status when, in the opinion of
management, the collection of additional interest is doubtful. Residential
mortgage loans are placed on non-accrual status when either principal or
interest is 90 days or more past due unless it is adequately secured and there
is reasonable assurance of full collection of principal and interest. Consumer
loans generally are charged off when the loan becomes over 120 days delinquent.
Commercial business and real estate loans are placed on non-accrual status when
the loan is 90 days or more past due. Interest accrued and unpaid at the time a
loan is placed on non-accrual status is charged against interest income.
Subsequent payments are applied to the outstanding principal balance.
Real estate acquired by the Bank as a result of foreclosure or by deed in
lieu of foreclosure is classified as real estate owned until such time as it is
sold. When such property is acquired, it is recorded at the lower of the unpaid
principal balance of the related loan or its fair value. Any subsequent
deterioration of the property is charged off directly to income, reducing the
value of the asset.
10
The following table sets forth information with respect to the
Company's aggregate non-performing assets at the dates indicated.
At December 31,
-----------------------------------------------------------
2003 2002 2001 2000 1999
----- ------ ------ ------ ------
(Dollars in thousands)
Loans accounted for on a non-accrual basis:
Real Estate:
Residential.................................... $ 1,691 $ 3,281 $ 818 $ 720 $ 703
Commercial..................................... 3,390 2,269 1,348 36 226
Construction................................... 3,217 -- -- -- --
Commercial........................................ 85 12,500 -- 8 11
Consumer.......................................... -- 257 12 37 231
-------- -------- -------- -------- --------
Total........................................... 8,383 18,307 2,178 801 1,171
-------- -------- -------- -------- --------
Accruing loans contractually past due 90
days or more:
Real Estate:
Residential.................................... 74 103 268 576 16
Commercial..................................... -- 28 -- -- --
Construction................................... -- -- -- 158 --
Commercial........................................ -- -- -- -- --
Consumer.......................................... -- 4 127 13 9
-------- -------- -------- -------- --------
Total........................................... 74 135 395 747 25
-------- -------- -------- -------- --------
Total of non-accrual and
90 days past due loans....................... $ 8,457 $ 18,442 $ 2,573 $ 1,548 $ 1,196
======== ======== ======== ======== ========
Percentage of total loans (excluding
mortgage-backed securities)..................... 4.07% 5.89% 0.74% 0.39% 0.37%
======== ======== ======== ======== ========
Other non-performing assets (1)..................... $ 623 $ 525 $ 606 $ 125 $ --
======== ======== ======== ======== ========
- --------------------
(1) Other non-performing assets represents property acquired through
foreclosure or repossession. This property is carried at the lower of its
fair market value or the principal balance of the related loan.
The decrease of $9.9 million in non-accrual loans during 2003 is primarily
due to the charge-off of the two troubled equipment lease pools for $10.9
million (see Item 3 -- "Legal Proceedings").
The Bank has real estate development/lot loans and single family
residential loans on existing properties with a builder/developer group, and its
related parties, totaling $3.5 million at December 31, 2003, that are currently
in default and bankruptcy. There appears to be a considerable number of
fraudulent transactions involved and there are multiple lien issues on a number
of the properties. 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 its related parties and
their counsel for resolution of the remaining properties.
11
During 2003, the Bank would have recorded gross interest income of $596,000
on the loans set forth above as accounted for on a non-accrual basis, if such
loans had been current in accordance with their terms. Instead, the Bank
recorded interest income of $71,000 on those loans for the year.
For additional information regarding the Bank's problem assets and loss
provisions recorded thereon, see "Management's Discussion and Analysis" in Item
7 of this Annual Report.
RESERVES FOR LOSSES ON LOANS AND REAL ESTATE
In making loans, management recognizes the fact that credit losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan and, in the case of a secured loan, the quality of the security for the
loan.
It is management's policy to maintain reserves for estimated losses on
loans. The Bank's personnel provide general loan loss reserves based on, among
other things, estimates of the historical loan loss experience, evaluation of
economic conditions in general and in various sectors of the Bank's customer
base, and periodic reviews of loan portfolio quality. Specific reserves are
provided for individual loans where the ultimate collection is considered
questionable by management after reviewing the current status of loans which are
contractually past due and considering the net realizable value of the security
of the loan or guarantees, if applicable. It is management's policy to establish
specific reserves for estimated losses on delinquent loans when it determines
that losses are anticipated to be incurred on the underlying properties. At
December 31, 2003, the Bank's allowance for loan losses amounted to $3.7
million.
Future reserves may be necessary if economic conditions or other
circumstances differ substantially from the assumptions used in making the
initial determinations. There can be no assurance that regulators, in reviewing
the Bank's loan portfolio in the future, will not ask the Bank to increase its
allowance for loan losses, thereby negatively affecting its financial condition
and earnings.
12
The following table sets forth an analysis of the Bank's aggregate
allowance for loan losses for the periods indicated.
Year Ended December 31,
----------------------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(Dollars in thousands)
Balance at Beginning of Period..................... $ 8,666 $ 1,730 $ 1,489 $ 1,534 $ 1,284
--------- -------- -------- -------- --------
Charge-Offs:
Real Estate:
Residential.................................... 182 202 29 30 --
Commercial..................................... 68 -- -- 206 --
Construction................................... -- 24 -- -- --
Commercial business.............................. 10,902 -- -- 252 --
Consumer......................................... 242 162 117 -- 98
--------- -------- -------- -------- --------
11,394 388 146 488 98
-------- -------- -------- -------- --------
Recoveries:
Real Estate:
Residential.................................... 1 -- 12 -- --
Commercial..................................... -- -- -- -- --
Construction................................... -- -- -- -- --
Commercial business.............................. -- -- -- 3 4
Consumer......................................... 31 24 15 23 16
--------- -------- -------- -------- --------
32 24 27 26 20
-------- -------- -------- -------- --------
Net Charge-Offs.................................... (11,362) (364) (119) (462) (78)
Increase from Acquisition.......................... -- -- -- -- --
Provision for Loan Losses.......................... 6,440 7,300 360 417 328
--------- -------- -------- -------- --------
Balance at End of Period............................ $ 3,744 $ 8,666 $ 1,730 $ 1,489 $ 1,534
======== ======== ======== ======== ========
Ratio of Net Charge-Offs to Average
Loans Outstanding During the Period.............. 4.25% 0.11% 0.03% 0.12% 0.03%
======== ======== ======== ======== ========
Ratio of Ending Allowance for
Loan Losses to Ending Loans...................... 1.80% 2.77% 0.49% 0.37% 0.47%
======== ======== ======== ======== ========
The provision for loan losses in 2003 decreased to $6.4 million from
$7.3 million from the prior year. The provision expense for both 2003 and 2002
was significantly higher than 1999 through 2001. The increases in 2002 and 2003
were primarily due to the non-accrual loans in the table under the heading
"Non-Performing Assets and Asset Classification" earlier in this section. The
two lease pools had 50% reserves at year-end 2002 due to an expected lengthy
litigation process, and the remaining 50% was charged off in 2003 due to
continuing uncertainty surrounding the prospects for eventual recovery from the
sureties (see Item 3 -- "Legal Proceedings"). The loans to the builder/developer
group, and its related parties had 25% reserves for $895,000 and $831,000 at
year-end 2002 and 2003 respectively. The remaining reserves were necessary to
reflect management's view on the risk in the loan
13
portfolio due to the change in the portfolio mix. See also "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Loans -- Credit Quality".
Net charge-offs for the year ended December 31, 2003 increased $11.0
million from 2002. The lease write-off in 2003 was $10.9 million. Net
charge-offs for the year ended December 31, 2002 increased $245,000 from 2001.
The following table sets forth a breakdown of the Company's aggregate
allowance for loan losses by loan category at the dates indicated. Management
believes that the allowance can be allocated by category only on an approximate
basis. The allocation of the allowance to each category is not necessarily
indicative of future losses and does not restrict the use of the allowance to
absorb losses in any category.
At December 31,
-------------------------------------------------------------------------------
2003 2002 2001
-------------------------- ------------------------ --------------------------
Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ------------- ------ ------------- ------ -------------
(Dollars in thousands)
Loans:
Real Estate Mortgage:
Commercial............................ $ 1,686 37% $ 1,414 28% $ 617 17%
Residential........................... 620 47 772 49 417 58
Construction.......................... 1,095 9 539 13 90 12
Commercial.............................. 192 4 5,618 6 185 5
Consumer................................ 151 3 323 4 421 8
--------- --- --------- --- --------- ---
Total Allowance for Loan Losses....... $ 3,744 100% $ 8,666 100% $ 1,730 100%
========= === ========= === ========= ===
At December 31,
-----------------------------------------------------------------------
2000 1999
------------------------------- -------------------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ------------- ------ --------------
(Dollars in thousands)
Loans:
Real Estate Mortgage:
Commercial.......................... $ 76 9% $ 58 7%
Residential......................... 635 71 649 73
Construction........................ 93 10 112 12
Commercial............................ 8 2 11 --
Consumer.............................. 677 8 704 8
----- --- ------- ---
Total Allowance for Loan Losses..... $ 1,489 100% $ 1,534 100%
===== === ===== ===
14
INVESTMENT ACTIVITIES
Interest and dividends on investment securities, mortgage-backed
securities, collateralized mortgage obligations, FHLB stock and other
investments provide the second largest source of income for the Bank (after
interest on loans), constituting 16.7% of the Bank's total interest income (and
dividends) for fiscal 2003. The Bank maintains its liquid assets at levels
believed adequate to meet requirements of normal banking activities and
potential savings outflows.
As an Indiana savings bank, the Bank is authorized to invest without
limitation in direct or indirect obligations of the United States, direct
obligations of a United States territory, an insular possession and direct
obligations of the state or a municipal corporation or taxing district in
Indiana. The Bank is also permitted to invest in bonds or other securities of a
national mortgage association and the stock and obligations of a Federal Home
Loan Bank. Indiana savings banks may also invest in collateralized mortgage
obligations to the same extent as national banks. An Indiana savings bank may
also purchase for its own account other investment securities under such limits
as the Department of Financial Institutions prescribes by rule provided that the
savings bank may not invest more than 10% of its equity capital in the
investment securities of any one issuer. Any Indiana savings bank may not invest
in speculative bonds, notes or other indebtedness which are defined as
securities and which are rated below the first four rating categories by a
generally recognized rating service or are in default. An Indiana savings bank
may purchase an unrated security if it obtains financial information adequate to
document the investment quality of the security.
The Bank's investment portfolio consists primarily of obligations issued by
federal agencies such as FNMA, FHLB and the FFCB System, mortgage-backed
securities issued by GNMA, FNMA and FHLMC. The Bank has also invested in
trust-preferred securities, municipal securities, mutual funds and maintains
interest-bearing deposits in other financial institutions (primarily the FHLBs).
As a member of the FHLB System, the Bank is also required to hold stock in the
FHLBs of Indianapolis and Cincinnati. At December 31, 2003, the Bank had two
investments which exceeded 10% of equity: securities issued by Shay Financial
Services, Inc. with book values of $5.1 million and $4.6 million and market
values of $5.0 million and $4.5 million as of that date.
15
During 2001, the Bank substantially increased its portfolio of
mortgage-backed securities and collateralized mortgage obligations to offset
declines in the loan portfolio due to refinancings and calls of federal agencies
securities attributable in both cases to the radically declining interest rate
environment. As interest rates stabilized at the end of 2001, the estimated
lives of these securities increased significantly, exposing the Bank to
unacceptable levels of interest rate risk. The Bank accordingly reclassified
these securities, effective December 31, 2001, from held-to-maturity to
available-for-sale and marked them to fair value, recording an accumulated other
comprehensive loss of $696,000. The Bank disposed of these mortgage-backed
securities and collateralized mortgage obligation portfolios in the first
quarter of 2002 at an estimated after-tax loss of $1.9 million. All investments,
as of December 31, 2003, was classified as available-for-sale.
The following table sets forth the carrying value of the Banks investments
in federal agency obligations and mortgage-backed securities, collaterized
mortgage obligations and other investments at the dates indicated.
At December 31,
-----------------------------------------
2003 2002 2001
------ ------ ------
(In thousands)
Federal agencies.......................... $ 78,423 $ 8,227 $ 28,696
Mortgage-backed securities and
collateral mortgage obligations........ 36,501 27,824 110,393
Interest-bearing deposits (1)............. 5,044 38,215 4,283
FHLB stock................................ 6,948 6,759 7,365
Mutual fund............................... 11,796 -- --
Municipal securities...................... 9,424 20,538 --
Other investments......................... 1,644 1,566 1,540
--------- --------- ---------
Total investments..................... $ 149,780 $ 103,129 $ 152,277
========= ========= =========
- ----------------------
(1) Consist of overnight deposits and short-term non-negotiable certificates of
deposit.
16
The following table sets forth information regarding maturity
distribution and average yields for the Bank's investment securities portfolio
at December 31, 2003. The Bank's federal agencies investment portfolio consists
of obligations issued by FHLMC, FHLB, and the FFCB System.
Within 1 Year 1-5 Years 5-10 Years Over 10 Years Total
------------- ------------ ------------ ------------- ------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Federal agencies......... $ 4,061 3.70% $74,362 2.98% -- -- -- -- $78,423 3.02%
Municipal Securities..... -- -- -- -- $3,205 3.46 $6,219 3.66% $ 9,424 3.59%
Mutual fund(1)........... $11,796 2.69% -- -- -- -- -- -- $11,796 2.69%
Trust preferred securities -- -- -- -- -- -- $1,644 8.09% $ 1,644 8.09%
(1) Note that these securities have no maturity date.
The Bank's mortgage-backed securities include both fixed and
adjustable-rate securities. At December 31, 2003, the Bank's mortgage-backed
securities consisted of the following:
Carrying Average
Amount Rate
-------- ------
(Dollars in thousands)
Variable-rate:
Repricing in one year or less........................... $ 2,923 3.45%
Fixed-rate:
Maturing in five years or less.......................... $ 17,822 2.84%
Maturing in five to ten years........................... $ 6,146 4.18%
Maturing in more than ten years......................... $ 9,610 5.65%
----------- ----
Total.............................................. $ 36,501 3.86%
=========== ====
SOURCES OF FUNDS
GENERAL. Savings accounts and other types of deposits have traditionally
been an important source of the Bank's funds for use in lending and for other
general business purposes. In addition to deposit accounts, the Bank derives
funds from loan repayments, loan sales, borrowings and operations. The
availability of funds from loan sales is influenced by general interest rates
and other market conditions. Borrowings may be used on a short-term basis to
compensate for reductions in deposits or deposit inflows at less than projected
levels and may be used on a longer-term basis to support expanded lending
activities.
DEPOSITS. The Bank attracts both short-term and long-term deposits from the
general public by offering a wide assortment of deposit accounts and interest
rates. The Bank offers regular savings accounts, NOW accounts, money market
accounts, fixed interest rate certificates with varying maturities, and
negotiated rate jumbo certificates
17
with various maturities. The Bank also offers tax-deferred individual
retirement, Keogh retirement, and simplified employer plan retirement accounts.
As of December 31, 2003, approximately 45.8%, or $158.5 million, of the
Bank's aggregate deposits consisted of various savings and demand deposit
accounts from which customers are permitted to withdraw funds at any time
without penalty.
Interest earned on passbook and statement accounts is paid from the date of
deposit to the date of withdrawal and compounded semi-annually for the Bank.
Interest earned on NOW and money market deposit accounts is paid from the date
of deposit to the date of withdrawal and compounded and credited monthly.
Management establishes the interest rate on these accounts.
The Bank also makes available to its depositors a number of certificates of
deposit with various terms and interest rates to be competitive in its market
area. These certificates have minimum deposit requirements as well.
18
The following table sets forth the change in dollar amount of deposits in
the various types of deposit accounts offered by the Bank between the dates
indicated.
Increase Increase
Balance at (Decrease) Balance at (Decrease) Balance at
December 31, From Prior December 31, From Prior December 31,
2003 Year 2002 Year 2001
------------------ ---------- ----------------- ------------ ------------------
(Dollars in thousands)
Savings deposits.................... $ 30,558 8.84% $ (3,432) $ 33,990 8.45% $ 1,343 $ 32,647 7.92%
NOW accounts........................ 43,162 12.48 3,818 39,344 9.78 (1,297) 40,641 9.85
Super NOW accounts.................. 36,545 10.57 36,545 -- -- -- -- --
Money market deposit accounts....... 48,238 13.95 (12,889) 61,127 15.20 13,441 47,686 11.56
Certificate accounts:
Certificates $100,000 and more.... 27,212 7.87 (18,298) 45,510 11.32 (14,853) 60,363 14.64
Fixed-rate certificates:
12 months or less.............. 49,837 14.42 (16,493) 66,330 16.49 4,792 61,538 14.92
13-24 months................... 42,705 12.35 (16,107) 58,812 14.62 (38,221) 97,033 23.53
25-36 months................... 14,228 4.12 7,036 7,192 1.79 (593) 7,785 1.89
37 months or greater........... 51,140 14.79 (36,465) 87,605 21.78 25,423 62,182 15.08
Variable-rate certificates:
18 months...................... 2,119 0.61 (158) 2,277 0.57 (261) 2,538 0.61
---------- ------ --------- -------- ------ --------- --------- ------
$ 345,744 100.00% $ (56,443) $402,187 100.00% $ (10,226) $ 412,413 100.00%
========== ====== ========= ======== ====== ========= ========= ======
19
The variety of deposit accounts offered by the Bank has permitted it to be
competitive in obtaining funds and has allowed it to respond with flexibility
to, but without eliminating the threat of, disintermediation (the flow of funds
away from depository institutions such as savings institutions into direct
investment vehicles such as government and corporate securities). In addition,
the Bank has become much more subject to short-term fluctuation in deposit
flows, as customers have become more interest rate conscious. The ability of the
Bank to attract and maintain deposits and its costs of funds have been, and will
continue to be, significantly affected by money market conditions. The Bank
currently offers a variety of deposit products as options to the customer. They
include noninterest-bearing and interest-bearing NOW accounts, interest-bearing
Super NOW accounts, savings accounts, Money Market Deposit Accounts ("MMDA") and
Certificates of Deposit ranging in terms from three months to seven years. In
September of 2003, the Bank sold its Cincinnati branch locations. This sale
included $38.3 million in Certificates of Deposits and $17.3 million in
checking, savings and money market deposit accounts. The Bank introduced a Super
NOW account in 2003 which had a portfolio balance of $36.5 million at December
31, 2003.
The following table sets forth the Bank's average aggregate balances and
interest rates. Average balances in 2003 and 2002 are calculated from actual
daily balances. Average balances for 2001 are derived from balances which
management does not believe are materially different from daily balances (actual
daily balances could not be obtained without undue effort and expense).
For the Year Ended December 31,
2003 2002 2001
--------------------- ---------------------- ----------------------
Average Average Average
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
------- ------- ------- ------- ------- -------
(Dollars in thousands)
Interest-bearing demand
deposits.................... $ 103,179 1.47% $ 78,490 2.01% $ 60,791 2.93%
Savings deposits............... 33,951 .69 34,003 1.16 33,321 1.68
Time deposits.................. 236,887 3.34 284,259 4.48 276,924 5.89
---------- ----- ---------- ----- ---------- ----
Total interest bearing
deposits............... 374,017 2.58% 396,752 3.71% 371,036 5.03%
===== ===== ====
Non-interest-bearing demand
and savings deposits........ 22,439 19,448 16,494
---------- ---------- ----------
Total deposits............ $ 396,456 $ 416,200 $ 387,530
========== ========== ==========
20
The following table sets forth the aggregate time deposits in the Bank
classified by rates as of the dates indicated.
At December 31,
--------------------------------------------
2003 2002 2001
------ ------ ------
(In thousands)
Less than 2%.............................. $ 77,121 $ 24,693 $ 12,984
2% - 3.99%............................... 75,293 129,697 54,762
4% - 5.99%............................... 33,448 52,644 105,139
6% - 7.99%............................... 1,379 60,692 118,554
--------- --------- ---------
$ 187,241 $ 267,726 $ 291,439
========= ========= =========
The following table sets forth the amount and maturities of the Bank's time
deposits at December 31, 2003.
Amount Due
----------------------------------------------------------------------------
Less Than More Than
Rate One Year 1-2 Years 2-3 Years 3 Years Total
---- -------- --------- --------- --------- -----
(In thousands)
Less than 2%.................... $ 68,151 $ 8,914 $ 56 $ -- $ 77,121
2% - 3.99%...................... 32,802 5,645 12,600 24,246 75,293
4% - 5.99%...................... 5,360 12,491 8,533 7,064 33,448
6% - 7.99%...................... 436 849 47 47 1,379
--------- ---------- ---------- ---------- ----------
$ 106,749 $ 27,899 $ 21,236 $ 31,357 $ 187,241
========= ========== ========== ========== ==========
The following table indicates the amount of the Bank's certificates of
deposit and other deposits of $100,000 or more by time remaining until maturity
at December 31, 2003.
Savings, NOW
Certificates and MMDA
Maturity Period of Deposit Deposits
--------------- ------------ ------------
(In thousands)
Three months or less......................... $ 4,682 $ 66,156
Over three through six months................ 5,529 --
Over six through twelve months............... 4,941 --
Over twelve months........................... 12,060 --
--------- ----------
Total................................. $ 27,212 $ 66,156
========= ==========
21
BORROWINGS. Deposits are the primary sources of funds for the Bank's
lending and investment activities and for its general business purposes. The
Bank also uses advances (borrowings) from the Federal Home Loan Bank ("FHLB") to
supplement its supply of lendable funds, to meet deposit withdrawal requirements
and to extend the terms of its liabilities. FHLB advances are typically secured
by the Bank's FHLB stock, a portion of first mortgage loans, investment
securities and overnight deposits. At December 31, 2003, the Bank had $9.6
million of FHLB advances outstanding.
The FHLB's function as central reserve banks providing credit for savings
institutions and certain other member financial institutions. As a member, the
Bank is required to own capital stock in its FHLB and is authorized to apply for
advances on the security of such stock and certain of its home mortgages and
other assets (principally, securities which are obligations of, or guaranteed
by, the United States) provided certain standards related to creditworthiness
have been met.
The Company had a note payable to a third party financial institution with
a current balance of $600,000 and bearing interest at 3.50% at December 31,
2003, the proceeds of which were used to finance stock repurchases during 1999.
The following table sets forth certain information regarding borrowings
from the FHLBs at the dates and for the periods indicated.
At or for the Year
Year Ended December 31,
--------------------------------------------
2003 2002 2001
------ ------ --------
(Dollars in thousands)
Amounts outstanding at end of period:
FHLB advances........................................ $ 9,630 $ 5,592 $ 87,653
Weighted average rate paid on:
FHLB advances........................................ 5.38% 6.83% 5.51%
Maximum amount of borrowings outstanding at any month end:
FHLB advances........................................ $ 9,698 $ 75,105 $ 128,497
Approximate average amounts outstanding:
FHLB advances........................................ $ 5,829 $ 43,813 $ 84,080
Approximate weighted average rate paid on:
FHLB advances........................................ 6.57% 6.39% 6.50%
22
AVERAGE BALANCE SHEET
The following table sets forth certain information relating to the
Company's aggregate average yield on assets and average cost of liabilities for
the periods indicated. Such yields and costs are derived by dividing income or
expenses by the average balance of assets or liabilities, respectively, for the
periods presented. Average balances for 2003 and 2002 are calculated from actual
daily balances. Average balances for 2001 are derived from balances which
management does not believe are materially different from daily balances (actual
daily balances could not be obtained without undue effort and expense).
For the Year Ended December 31,
----------------------------------------------------------------------------------------------
2003 2002 2001
----------------------------- ------------------------------- ------------------------------
Average Average Average
Average Interest/ Yield/ Average Interest/ Yield/ Average Interest/ Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost
------- --------- ------- ------- --------- ------- ------- --------- -------
(Dollars in thousands)
Interest-earning assets:
Loan portfolio.................. $267,119 $19,241 7.20% $ 342,240 $24,473 7.15% $376,157 $ 30,005 7.98%
Mortgage-backed securities...... 34,187 1,109 3.24 56,644 3,196 5.64 31,768 2,225 7.00
Short-term investments and other
interest-earning assets (1).... 101,941 2,746 2.69 74,610 2,304 3.09 74,186 4,940 6.66
-------- ------- ----- --------- ------- ----- -------- --------- -----
Total interest-earning assets 403,247 23,096 5.73 473,494 29,973 6.33 482,111 37,170 7.71
Noninterest-earning assets....... 49,247 40,566 42,722
-------- --------- --------
Total assets................. $452,494 $ 514,060 $ 524,833
======== ========= =========
Interest-bearing liabilities:
Deposits....................... $374,017 $ 9,656 2.58 $ 396,752 $14,712 3.71 $371,036 18,663 5.03%
FHLB advances.................. 5,829 383 6.57 43,813 2,798 6.39 84,080 5,466 6.50
Notes payable.................. 683 27 3.95 841 31 3.69 1,562 114 7.30
-------- ------- ----- --------- ------- ----- -------- --------- -----
Total interest-bearing
liabilities 380,529 10,066 2.65 441,406 17,541 3.97 456,678 24,243 5.31
------- ----- ------- ----- --------- -----
Noninterest-bearing liabilities.. 32,967 30,621 25,549
-------- --------- --------
Total liabilities............ 413,496 472,027 482,227
Shareholders' equity............. 38,998 42,033 42,606
-------- --------- --------
Total liabilities and
shareholders' equity....... $452,494 $ 514,060 $524,833
======== ========= ========
Net interest income.............. $13,030 $12,432 $ 12,927
======= ======= =========
Interest rate spread............. 3.08% 2.36% 2.40%
===== ===== =====
Net yield on interest-earning assets 3.23% 2.63% 2.68%
===== ===== =====
Ratio of average interest-earning
assets to average interest-bearing
liabilities.................... 105.97% 107.27% 105.57%
====== ====== ======
- --------------------
(1) Includes interest-bearing deposits in other financial institutions,
investment securities and FHLB stock.
23
TRUST ACTIVITIES
During 1999, the Bank began offering trust, investment and estate planning
services through its Ameriana Trust and Investment Management Services division.
Trust services consist of personal trusts, testamentary trusts, investment
agency accounts (discretionary and directed), guardianships, rollover IRA's
(discretionary and directed) and estates (personal representative). These
accounts are offered to customers within the Bank's service areas in Indiana.
Trust account balances of $75,000 and more can profitably be managed by the
Bank. At December 31, 2003, the Bank had $15.6 million in trust assets under
management.
SUBSIDIARY ACTIVITIES
The Bank has three direct wholly-owned subsidiaries; AFS, AIS and AIMI.
At December 31, 2003, the Bank's investments in its subsidiaries were
approximately $137.8 million, consisting of direct equity investments.
Indiana savings banks may acquire or establish subsidiaries that engage in
activities permitted to be performed by the savings bank itself or permitted to
operating subsidiaries of national banks. Under FDIC regulations, a subsidiary
of a state bank may not engage as principal in any activity that is not of a
type permissible for a subsidiary of a national bank unless the FDIC determines
that the activity does not impose a significant risk to the affected insurance
fund.
24
COMPETITION
The Bank experiences substantial competition both in attracting and
retaining savings deposits and in the making of mortgage and other loans. Direct
competition for savings deposits comes from other savings institutions,
commercial banks, and credit unions located in the Bank's market area.
Additional significant competition for savings deposits comes from money market
mutual funds and corporate and government debt securities.
The primary factors in competing for loans are interest rates and loan
origination fees and the range of services offered by the various financial
institutions. Competition for origination of real estate loans normally comes
from other thrift institutions, commercial banks, mortgage bankers, mortgage
brokers and insurance companies. The Bank has been able to compete effectively
in its market area.
The Bank has branch offices in Henry, Hancock, Hendricks, Shelby and
Madison Counties in Indiana. In addition to savings banks with offices in these
counties, the Bank competes with several commercial banks and savings
institutions in surrounding counties, many with assets which are substantially
larger than the Bank.
REGULATION AND SUPERVISION
REGULATION AND SUPERVISION OF THE COMPANY
GENERAL. The Company is a public company registered with the Securities and
Exchange Commission (the "SEC"), whose common stock trades on the Nasdaq Stock
Market, Inc. (the "Nasdaq") and it is a bank holding company subject to
regulation by the Federal Reserve Board under the BHCA. As a result, the
activities of the Company are subject to certain requirements and limitations,
which are described below. As a public reporting company, the Company is
required to file annual, quarterly and current reports with the SEC and as a
bank holding company, the Company is required to file annual and quarterly
reports with the Federal Reserve Board and to furnish such additional
information as the Federal Reserve Board may require pursuant to the BHCA. The
Company is also subject to regular examination by the Federal Reserve Board.
DIVIDENDS. The Federal Reserve Board has the power to prohibit dividends by
bank holding companies if their actions constitute unsafe or unsound practices.
The Federal Reserve Board has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the Federal Reserve Board's
view that a bank holding company should pay cash dividends only to the extent
that the company's net income for the past year is sufficient to cover both the
cash dividends and a rate of earnings retention that is consistent with the
company's capital needs, asset quality, and overall financial condition. The
Federal Reserve Board also indicated that it would be inappropriate for a bank
holding company experiencing serious financial problems to borrow funds to pay
25
dividends. Under the prompt corrective action regulations adopted by the Federal
Reserve Board pursuant to FDICIA, the Federal Reserve Board may prohibit a bank
holding company from paying any dividends if the holding company's bank
subsidiary is classified as "undercapitalized." See "Regulation and Supervision
of the Bank-- Prompt Corrective Regulatory Action."
STOCK REPURCHASES. As a bank holding company, the Company is required to
give the Federal Reserve Board prior written notice of any purchase or
redemption of its outstanding equity securities if the gross consideration for
the purchase or redemption, when combined with the net consideration paid for
all such purchases or redemptions during the preceding 12 months, is equal to
10% or more of the Company's consolidated net worth. The Federal Reserve Board
may disapprove such a purchase or redemption if it determines that the proposal
would violate any law, regulation, Federal Reserve Board order, directive, or
any condition imposed by, or written agreement with, the Federal Reserve Board.
This requirement does not apply to bank holding companies that are
"well-capitalized," "well-managed" and are not the subject of any unresolved
supervisory issues.
SARBANES-OXLEY ACT OF 2002 AND RELATED REGULATIONS. On July 30, 2002, the
Sarbanes-Oxley Act of 2002 ("SOX") was signed into law. SOX contains provisions
addressing corporate and accounting fraud which both amended the Securities
Exchange Act of 1934, as amended (the "Act") and directed the SEC to promulgate
rules. SOX provided for the establishment of a new Public Company Accounting
Oversight Board ("PCAOB"), to enforce auditing, quality control and independence
standards for firms that audit public reporting companies and will be funded by
fees from all public reporting companies. It is unlawful for any person that is
not a registered public accounting firm ("RPAF") to audit a public reporting
company. Under the Act, a RPAF is prohibited from performing statutorily
mandated audit services for a company if such company's chief executive officer,
chief financial officer, comptroller, chief accounting officer or any person
serving in equivalent positions has been employed by such firm and participated
in the audit of such company during the one-year period preceding the audit
initiation date. The SEC has prescribed rules requiring inclusion of an internal
control report and assessment by management in the annual report to
shareholders. SOX requires the RPAF that issues the audit report to attest to
and report on management's assessment of the Company's internal controls. In
addition, SOX requires that each financial report required to be prepared in
accordance with (or reconciled to) generally accepted accounting principles and
filed with the SEC reflect all material correcting adjustments that are
identified by a RPAF in accordance with generally accepted accounting principles
and the rules and regulations of the SEC. SOX requires chief executive officers
and chief financial officers, or their equivalent, to certify to the accuracy of
periodic reports
26
filed with the SEC, subject to civil and criminal penalties if they knowingly or
willfully violate this certification requirement.
SOX also increases the oversight and authority of audit committees of
publicly traded companies. SOX imposed higher standards for auditor independence
and restricts provisions of consulting services by auditing firms to companies
they audit. Any non-audit services (subject to a 5% de minimis exception) being
provided to an audit client require pre-approval by the Company's audit
committee members. Audit committee members must be independent and are barred
from accepting consulting, advisory or other compensatory fees from the issuer.
In addition, all public reporting companies must disclose whether at least one
member of the committee is an audit committee "financial expert" (as such terms
is defined by the SEC rules) and if not, why not. Audit committees of Company's
listed on the Nasdaq must be composed of three directors who meet the definition
of "independent" set forth both in NASD Rule 4200(a)(15) and Section 10A(m) and
Rule 10A-3 of the Act, and whose audit committee has a written charter
containing specific elements set forth in these same NASD and SEC rules and
sections. A Company with stock quoted on the Nasdaq that fails to be in
compliance with these audit committee requirements, as well as additional Nasdaq
requirements, will be delisted.
Due to SOX, longer prison terms will be applied to corporate executives who
violate federal securities laws, the period during which certain types of suits
can be brought against a company or its officers has been extended, and bonuses
issued to top executives prior to restatement of a company's financial
statements are now subject to disgorgement if such restatement was due to
corporate misconduct. Executives are also prohibited from trading during
retirement plan "blackout" periods, and loans to company executives are
restricted. In addition, a provision directs that civil penalties levied by the
SEC as a result of any judicial or administrative action under the Act be
deposited in a fund for the benefit of harmed investors.
Although the Company anticipates it will incur additional expense in
complying with the provisions of the Act and the related rules, management does
not expect that such compliance will have a material impact on the Company's
financial condition or results of operations.
ACQUISITIONS. With certain exceptions, the BHCA prohibits a bank holding
company from acquiring direct or indirect ownership or control of more than 5%
of the voting shares of a company that is not a bank or a bank holding company,
or from engaging directly or indirectly in activities other than those of
banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities, which, by statute or by Federal Reserve Board regulation or
order, have been identified
27
as activities closely related to the business of banking. The activities of the
Company are subject to these legal and regulatory limitations under the BHCA and
the related Federal Reserve Board regulations. Notwithstanding the Federal
Reserve Board's prior approval of specific non-banking activities, the Federal
Reserve Board has the power to order a holding company or its subsidiaries to
terminate any activity, or to terminate its ownership or control of any
subsidiary, when it has reasonable cause to believe that the continuation of
such activity or such ownership or control constitutes a serious risk to the
financial safety, soundness or stability of any bank subsidiary of that holding
company.
Under Indiana banking law, prior approval of the Indiana Department of
Financial Institutions is also required before any person may acquire control of
an Indiana stock savings bank, bank or bank holding company. The Department will
issue a notice approving the transaction if it determines that the persons
proposing to acquire the savings bank or bank holding company are qualified in
character, experience and financial responsibility, and the transaction does not
jeopardize the interests of the public.
FINANCIAL MODERNIZATION LEGISLATION. On November 12, 1999, legislation was
enacted which could have a far-reaching impact on the financial services
industry. The Gramm-Leach-Bliley Act ("GLB") authorizes affiliations between
banking, securities and insurance firms and authorizes bank holding companies
and national banks to engage in a variety of new financial activities. Among the
new activities that will be permitted to bank holding companies are securities
and insurance brokerage, securities underwriting, insurance underwriting and
merchant banking. The Federal Reserve Board, in consultation with the Secretary
of the Treasury, may approve additional financial activities. The GLB, however,
prohibits future acquisitions of existing unitary savings and loan holding
companies by firms which are engaged in commercial activities and limits the
permissible activities of unitary holding companies formed after May 4, 1999.
CAPITAL REQUIREMENTS. The Federal Reserve Board has adopted guidelines
regarding the capital adequacy of bank holding companies, which require bank
holding companies to maintain specified minimum ratios of capital to total
assets and capital to risk-weighted assets. See "--Regulation and Supervision of
Banks - Capital Requirements."
REGULATION AND SUPERVISION OF THE BANK
GENERAL. The Bank is subject to extensive regulation by the Indiana
Department of Financial Institutions ("DFI") and the FDIC. The lending
activities and other investments of the Bank must comply with various regulatory
requirements. The DFI and FDIC periodically examine the Bank for compliance with
various regulatory
28
requirements. The Bank must file reports with the DFI and the FDIC describing
its activities and financial condition. The Bank is also subject to certain
reserve requirements promulgated by the Federal Reserve Board. This supervision
and regulation is intended primarily for the protection of depositors. Certain
of these regulatory requirements are referred to below or appear elsewhere
herein.
CAPITAL REQUIREMENTS. Under FDIC regulations, state-chartered banks that
are not members of the Federal Reserve System are required to maintain a minimum
leverage capital requirement consisting of a ratio of Tier 1 capital to total
assets of 3% if the FDIC determines that the institution is not anticipating or
experiencing significant growth and has well-diversified risk, including no
undue interest rate risk exposure, excellent asset quality, high liquidity, good
earnings and in general a strong banking organization, rated composite 1 under
the Uniform Financial Institutions Rating System (the CAMELS rating system)
established by the Federal Financial Institutions Examination Council. For all
but the most highly rated institutions meeting the conditions set forth above,
the minimum leverage capital ratio is 3% plus an additional "cushion" amount of
at least 100 to 200 basis points with a minimum leverage capital requirement of
not less than 4%. Tier 1 capital is the sum of common stockholders' equity,
noncumulative perpetual preferred stock (including any related surplus) and
minority interests in consolidated subsidiaries, minus all intangible assets
(other than certain mortgage servicing assets, purchased credit card
relationships, credit-enhancing interest-only strips and certain deferred tax
assets) minus identified losses, investments in certain financial subsidiaries
and nonfinancial equity investments.
In addition to the leverage ratio (the ratio of Tier I capital to total
assets), state-chartered nonmember banks must maintain a minimum ratio of
qualifying total capital to risk-weighted assets of at least 8% of which at
least four percentage points must be Tier 1 capital. Qualifying total capital
consists of Tier 1 capital plus Tier 2 or supplementary capital items. Tier 2
capital items include allowances for loan losses in an amount of up to 1.25% of
risk-weighted assets, cumulative preferred stock and preferred stock with a
maturity of over 20 years, certain other capital instruments and up to 45% of
pretax net unrealized holding gains on equity securities. The includable amount
of Tier 2 capital cannot exceed the institution's Tier 1 capital. Qualifying
total capital is further reduced by the amount of the bank's investments in
banking and finance subsidiaries that are not consolidated for regulatory
capital purposes, reciprocal cross-holdings of capital securities issued by
other banks, most intangible assets and certain other deductions. Under the FDIC
risk-weighted system, all of a bank's balance sheet assets and the credit
equivalent amounts of certain off-balance sheet items are assigned to one of
four broad risk weight categories from 0% to 100%, based on the risks inherent
in the type of assets or item. The aggregate dollar amount of each category
29
is multiplied by risk weight assigned to that category. The sum of these
weighted values equals the bank's risk-weighted assets.
At December 31, 2003, the Bank's ratio of Tier 1 capital to total assets
was 9.38%, its ratio of Tier 1 capital to risk-weighted assets was 15.17% and
its ratio of total risk-based capital to risk-weighted assets was 16.42%.
During the second quarter of 2002, the Bank entered into a memorandum of
understanding ("MOU") with the FDIC and the DFI. Among other things, the MOU
required the Bank to adopt written action plans with respect to certain
classified assets, revise its lending policies in accordance with examiner
recommendations, require greater financial information from borrowers, establish
a loan review program, document Board review of the adequacy of loan losses,
formulate a plan for improving the Bank's profitability, review staffing needs
with particular emphasis on loan administration, strengthen certain internal
controls and audit coverage and address other regulatory compliance issues
raised in the most recent examination report by the FDIC and DFI. While the MOU
is in effect, the Bank must maintain Tier 1 capital at or above 7% of assets.
The Company's Board of Directors have adopted resolutions providing that
the Company will not cause the Bank to pay dividends if its Tier 1 capital would
be less than 7% thereafter, that the Company will not incur additional debt
without prior Federal Reserve approval, and that the Company will not purchase
any treasury stock. The resolutions remain in effect until the MOU is lifted.
The Company believes that the Company and the Bank have taken all actions
specified in the MOU and Board resolutions within the timeframes specified. The
Company does not believe the MOU or Board resolutions will materially affect the
operations of the Company or the Bank. A failure to comply with either the MOU
or resolutions could lead to the initiation of formal enforcement action by the
FDIC, DFI and the Federal Reserve.
DIVIDEND LIMITATIONS. The Bank may not pay dividends on its capital stock
if its regulatory capital would thereby be reduced below the amount then
required for the liquidation account established for the benefit of certain
depositors of the Bank at the time of its conversion to stock form. In addition,
the Bank may not pay dividends that exceed retained net income for the
applicable calendar year to date, plus retained net income for the preceding two
years without prior approval from the DFI. The Company's Board of Directors have
also resolved not to cause the Bank to pay dividends if its Tier 1 capital would
be less than 7% thereafter. At December 31, 2003, the shareholder's equity of
the Bank was $38.3 million and approval is required by the Indiana Department of
Financial Institutions to pay dividends to the Company.
30
Earnings of the Bank appropriated to bad debt reserves and deducted for
Federal income tax purposes are not available for payment of cash dividends or
other distributions to stockholders without payment of taxes at the then current
tax rate by the Bank on the amount of earnings removed from the reserves for
such distributions. See "Federal and State Taxation."
Under FDIC regulations, the Bank is prohibited from making any capital
distributions if after making the distribution, the Bank would have: (i) a total
risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-based capital
ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0%. For
additional information about dividend limitations see Note 12 in the
Consolidated Financial Statements.
DEPOSIT INSURANCE. The Bank is required to pay assessments to the FDIC for
insurance of its deposits by the SAIF based on a percentage of its insured
deposits. Under the FDIA, the FDIC is required to set semi-annual assessments
for SAIF-insured institutions at a rate determined by the FDIC to be necessary
to maintain the designated reserve ratio of the SAIF at 1.25% of estimated
insured deposits or at a higher percentage of insured deposits that the FDIC
determines to be justified for that year by circumstances raising a significant
risk of substantial future losses to the SAIF. In the event that the SAIF should
fail to meet its statutory reserve ratio, the FDIC would be required to set
semi-annual assessment rates for SAIF members that are sufficient to increase
the reserve ratio to 1.25% within one year or in accordance with such other
schedule that the FDIC adopts by regulation to restore the reserve ratio in not
more than 15 years.
The assessment rate for an insured depository institution is determined by
the assessment risk classification assigned to the institution by the FDIC based
on the institution's capital level and supervisory evaluations. Based on the
data reported to regulators for date closest to the last day of the fourth month
preceding the semi-annual assessment period, institutions are assigned to one of
three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as in the prompt
corrective action regulations. See "-- Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund.
The FDIC has adopted an assessment schedule for SAIF deposit insurance
pursuant to which the assessment rate for well-capitalized institutions with the
highest supervisory ratings have been reduced to zero and institutions in the
worst risk assessment classification will be assessed at the rate of 0.27% of
insured deposits. At
31
December 31, 2003, the Bank is considered well capitalized. In addition,
FDIC-insured institutions are required to pay assessments to the FDIC to help
fund interest payments on certain bonds issued by the Financing Corporation
("FICO"), an agency of the federal government established to finance takeovers
of insolvent thrifts.
PROMPT CORRECTIVE REGULATORY ACTION. Under FDICIA, the federal banking
regulators are required to take prompt corrective action if an insured
depository institution fails to satisfy certain minimum capital requirements,
including a leverage limit, a risk-based capital requirement, and any other
measure deemed appropriate by the federal banking regulators for measuring the
capital adequacy of an insured depository institution. All institutions,
regardless of their capital levels, are restricted from making any capital
distribution or paying any management fees if the institution would thereafter
fail to satisfy the minimum levels for any of its capital requirements. An
institution that fails to meet the minimum level for any relevant capital
measure (an "undercapitalized institution") may be: (i) subject to increased
monitoring by the appropriate federal banking regulator; (ii) required to submit
an acceptable capital restoration plan within 45 days; (iii) subject to asset
growth limits; and (iv) required to obtain prior regulatory approval for
acquisitions, branching and new lines of businesses. The capital restoration
plan must include a guarantee by the institution's holding company that the
institution will comply with the plan until it has been adequately capitalized
on average for four consecutive quarters, under which the holding company would
be liable up to the lesser of 5% of the institution's total assets or the amount
necessary to bring the institution into capital compliance as of the date it
failed to comply with its capital restoration plan. A "significantly
undercapitalized" institution, as well as any undercapitalized institution that
does not submit an acceptable capital restoration plan, may be subject to
regulatory demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits,
asset growth and other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank holding company
controlling the institution. Any company controlling the institution may also be
required to divest the institution or the institution could be required to
divest subsidiaries. The senior executive officers of a significantly
undercapitalized institution may not receive bonuses or increases in
compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt. In their
discretion, the federal banking regulators may also impose the foregoing
sanctions on an undercapitalized institution if the regulators determine that
such actions are necessary to carry out the purposes of the prompt corrective
provisions. If an institution's ratio of tangible capital to total assets falls
below the "critical capital level"
32
established by the appropriate federal banking regulator, the institution will
be subject to conservatorship or receivership within specified time periods.
Under the implementing regulations, the federal banking regulators
generally measure an institution's capital adequacy on the basis of its total
risk-based capital ratio (the ratio of its total capital to risk-weighted
assets), Tier 1 risk-based capital ratio (the ratio of its core capital to
risk-weighted assets) and leverage ratio (the ratio of its core capital to
adjusted total assets). The following table shows the capital ratios required
for the various prompt corrective action categories.
Adequately Significantly
Well Capitalized Capitalized Undercapitalized Undercapitalized
---------------- ----------- ---------------- ----------------
Total risk-based
capital ratio 10.0% or more 8.0% or more Less than 8.0% Less than 6.0%
Tier 1 risk-based
capital ratio 6.0% or more 4.0% or more Less than 4.0% Less than 3.0%
Leverage ratio 5.0% or more 4.0% or more * Less than 4.0% * Less than 3.0%
- -----------
* 3.0% if institution has a composite 1 CAMELS rating.
A "critically undercapitalized" institution is defined as an institution that
has a ratio of "tangible equity" to total assets of less than 2.0%. Tangible
equity is defined as core capital plus cumulative perpetual preferred stock (and
related surplus) less all intangible assets other than qualifying supervisory
goodwill and certain purchased mortgage servicing rights. The FDIC may
reclassify a well capitalized depository institution as adequately capitalized
and may require an adequately capitalized or undercapitalized institution to
comply with the supervisory actions applicable to institutions in the next lower
capital category (but may not reclassify a significantly undercapitalized
institution as critically undercapitalized) if the FDIC determines, after notice
and an opportunity for a hearing, that the savings institution is in an unsafe
or unsound condition or that the institution has received and not corrected a
less-than-satisfactory rating for any CAMELS rating category.
SAFETY AND SOUNDNESS GUIDELINES. Under FDICIA, as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each federal banking agency was required to establish safety and soundness
standards for institutions under its authority. The interagency guidelines
require depository institutions to maintain internal controls and information
systems and internal audit systems that are appropriate for the size, nature and
scope of the institution's business. The guidelines also establish certain basic
standards for loan documentation, credit underwriting, interest rate risk
exposure, and asset growth. The guidelines further provide that depository
institutions should maintain safeguards to prevent the payment of compensation,
fees and benefits that are excessive or that could lead to material financial
loss, and should take into account factors such as comparable compensation
practices at comparable institutions. If the appropriate federal banking agency
determines
33
that a depository institution is not in compliance with the safety
and soundness guidelines, it may require the institution to submit an acceptable
plan to achieve compliance with the guidelines. A depository institution must
submit an acceptable compliance plan to its primary federal regulator within 30
days of receipt of a request for such a plan. Failure to submit or implement a
compliance plan may subject the institution to regulatory sanctions. Management
believes that the Bank meets all the standards adopted in the interagency
guidelines.
RESERVE REQUIREMENTS. Under Federal Reserve Board regulations, the Bank
currently must maintain average daily reserves equal to 3% of net transaction
accounts over $6.0 million up to $42.1 million, plus 10% on the remainder. This
percentage is subject to adjustment by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or in a
noninterest-bearing account at a Federal Reserve Bank, the effect of the reserve
requirement is to reduce the amount of the institution's interest-earning
assets. At December 31, 2003, the Bank met applicable Federal Reserve Board
reserve requirements.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the Federal Home
Loan Bank System, which consists of 12 regional Federal Home Loan Banks governed
and regulated by the Federal Housing Finance Board ("FHFB"). As a member, the
Bank is required to purchase and hold stock in the FHLB of Indianapolis in an
amount equal to the greater of 1% of its aggregate unpaid home loan balances at
the beginning of the year or an amount equal to 5% of FHLB advances outstanding,
whichever is greater. As of December 31, 2003, the Bank held stock in the FHLB
of Indianapolis in the amount $6.0 million was in compliance with the above
requirement.
The FHLB of Indianapolis serves as a reserve or central bank for the member
institutions within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of FHLB System. It makes loans
(i.e., advances) to members in accordance with policies and procedures
established by the FHLB System and the Board of Directors of the FHLB of
Indianapolis.
The Bank is also a member of the FHLB of Cincinnati due to remaining
borrowings after the merger of Ameriana-Ohio and the Bank. As of December 31,
2003, the Bank held stock in the FHLB of Cincinnati in the amount of $1.0
million and was in compliance with requirements of membership.
LOANS TO EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS. Loans to
directors, executive officers and principal stockholders of a state non-member
bank like the Bank must be made on substantially the same terms as those
prevailing for comparable transactions with persons who are not executive
officers, directors, principal stockholders or employees of the Bank unless the
loan is made pursuant to a compensation or benefit plan that is widely available
to employees and does not favor insiders. Loans to any executive officer,
director and
34
principal stockholder together with all other outstanding loans to such person
and affiliated interests generally may not exceed 15% of the bank's unimpaired
capital and surplus and all loans to such persons may not exceed the
institution's unimpaired capital and unimpaired surplus. Loans to directors,
executive officers and principal stockholders, and their respective affiliates,
in excess of the greater of $25,000 or 5% of capital and surplus (up to
$500,000) must be approved in advance by a majority of the board of directors of
the bank with any "interested" director not participating in the voting. State
non-member banks are prohibited from paying the overdrafts of any of their
executive officers or directors unless payment is made pursuant to a written,
pre-authorized interest-bearing extension of credit plan that specifies a method
of repayment or transfer of funds from another account at the bank. Loans to
executive officers may not be made on terms more favorable than those afforded
other borrowers and are restricted as to type, amount and terms of credit. In
addition, Section 106 of the BHCA prohibits extensions of credit to executive
officers, directors, and greater than 10% stockholders of a depository
institution by any other institution which has a correspondent banking
relationship with the institution, unless such extension of credit is on
substantially the same terms as those prevailing at the time for comparable
transactions with other persons and does not involve more than the normal risk
of repayment or present other unfavorable features.
TRANSACTIONS WITH AFFILIATES. A state non-member bank or its subsidiaries
may not engage in "covered transactions" with any one affiliate in an amount
greater than 10% of such bank's capital stock and surplus, and for all such
transactions with all affiliates a state non-member bank is limited to an amount
equal to 20% of capital stock and surplus. All such transactions must also be on
terms substantially the same, or at least as favorable, to the bank or
subsidiary as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
similar other types of transactions. An affiliate of a state non-member bank is
any company or entity which controls or is under common control with the state
non-member bank and, for purposes of the aggregate limit on transactions with
affiliates, any subsidiary that would be deemed a financial subsidiary of a
national bank. In a holding company context, the parent holding company of a
state non-member bank (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the state non-member
bank. The BHCA further prohibits a depository institution from extending credit
to or offering any other services, or fixing or varying the consideration for
such extension of credit or service, on the condition that the customer obtain
some additional service from the institution or certain of its affiliates or not
obtain services of a competitor of the institution, subject to certain limited
exceptions.
35
PATRIOT ACT. The Patriot Act is intended to strengthen U.S. law
enforcement's and the intelligence communities' abilities to work cohesively to
combat terrorism on a variety of fronts. The potential impact of the Patriot Act
on financial institutions of all kinds is significant and wide ranging. The
Patriot Act contains sweeping anti-money laundering and financial transparency
laws and imposes various regulations including standards for verifying client
identification at account opening, and rules to promote cooperation among
financial institutions, regulators and law enforcement entities in identifying
parties that may be involved in terrorism or money laundering.
36
INDIANA BANKING LAW
BRANCHING. An Indiana savings bank is entitled to establish one or more
branches de novo or by acquisition in any location or locations in Indiana. The
savings bank is required to file an application with the Department of Financial
Institutions. Approval of the application is contingent upon the Department's
determination that after the establishment of the branch, the savings bank will
have adequate capital, sound management and adequate future earnings.
LENDING LIMITS. Indiana savings banks are not subject to percentage of
asset or capital limits on their commercial, consumer and non-residential
mortgage lending, and accordingly, have more flexibility in structuring their
portfolios than federally chartered savings banks.
OTHER ACTIVITIES. The Bank is authorized to engage in a variety of agency
and fiduciary activities including acting as executors of an estate, transfer
agent and in other fiduciary capacities. On approval from the Department of
Financial Institutions, the Bank would be permitted to exercise any right
granted to national banks.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION. The Company and its subsidiaries file a consolidated
federal income tax return on a calendar year end. Saving Banks are subject to
the provisions of the Internal Revenue Code of 1986 (the "Code") in the same
general manner as other corporations. However, institutions such as the Bank
which met certain definitional tests and other conditions prescribed by the Code
benefited from certain favorable provisions regarding their deductions from
taxable income for annual additions to their bad debt reserve.
The Company's federal income tax returns have not been audited in recent
years.
STATE TAXATION. The State of Indiana imposes a franchise tax which is
assessed on qualifying financial institutions, such as the Bank. The tax is
based upon federal taxable income before net operating loss carryforward
deductions (adjusted for certain Indiana modifications) and is levied at a rate
of 8.5% of apportioned adjusted taxable income.
The Company's state income tax returns have not been audited in recent
years.
EMPLOYEES
As of December 31, 2003, the Company and subsidiaries had approximately 164
full-time and 7 part-time employees. The employees are not represented by a
collective bargaining agreement. Management believes the Company and its
subsidiaries enjoy good relations with their personnel.
37
EXECUTIVE OFFICERS
Age at
Name December 31, 2003 Principal Position
- ---- ----------------- ------------------
Harry J. Bailey 61 President and Chief Executive Officer of the Bank and the
Company
Timothy G. Clark 53 Executive Vice President and Chief Operating Officer of
the Bank and the Company
Bradley L. Smith 43 Senior Vice President - Treasurer and Chief Financial Officer
of the Bank and the Company
Nancy A. Rogers 61 Senior Vice President - Marketing Services of
the Bank and Secretary of the Bank and the Company
Ted R. Girton 42 Senior Vice President - Credit Administration
Grover F. Archer 63 Senior Vice President - Retail Banking of the Bank
Deborah A. Bell 51 Senior Vice President - Information Technology of the Bank
Ronald M. Holloway 54 Senior Vice President - Lending Services of the Bank
Jan F. Wright 60 Senior Vice President - Business Services of the Bank
Unless otherwise noted, all officers have held the position described
below for at least the past five years.
HARRY J. BAILEY has been President of the Company and the Bank since May
1990, and was appointed Chief Executive Officer in December 1990. Mr. Bailey had
been the Executive Vice President and Chief Operating Officer of the Company
since its formation in 1989 and of the Bank since February 1984. He has been a
Director of the Bank since 1987 and a Director of the Company since its
formation. From June 1983 to January 1984, Mr. Bailey, an attorney, acted as a
consultant to financial institutions and for 15 years before, served in the
legal department and as operations officer for thrift institutions in the
Chicago area. He is a Trustee of the Henry County Memorial Hospital, Director of
the New Castle/Henry County Economic Development Corporation, is a past member
of the Board of Directors of the Federal Home Loan Bank of Indianapolis, past
Chairman and Director of the Indiana Bankers Association, and past Director of
the Henry County Community Foundation.
TIMOTHY G. CLARK joined the Bank as Executive Vice President and Chief
Operating Officer on September 2, 1997. He was elected Executive Vice President
and Chief Operating Officer of the Company on October 23, 2000. He previously
held the position of Regional Executive and Area President at National City Bank
of Indiana in Seymour, Indiana for 5 years and prior to that held senior
management positions with Central National Bank in Greencastle, Indiana for 5
years and Hancock Bank & Trust in Greenfield, Indiana for 13 years.
BRADLEY L. SMITH, a certified public accountant, joined the Bank as a
Senior Vice President-Treasurer and Chief Financial Officer of the Bank and
Company on April 10, 2002. Prior to joining the Bank, he was the Executive Vice
President of Finance Center Federal Credit Union in Indianapolis where he had
been employed since 1992.
NANCY A. ROGERS was elected as Senior Vice President - Marketing Services
in March 1995 and was also appointed Secretary of the Company and the Bank in
1998. She has been employed at the Bank since 1964 and most recently served as
Vice President and Director of Advertising and Public Relations.
38
TED R. GIRTON was elected as Senior Vice President - Credit Administration
of the Bank in June 2002. Prior to joining the Bank, he was Vice President and
Head of Credit Administration for the Commercial Lending Unit at Union Federal
Bank in Indianapolis.
GROVER F. ARCHER joined the Bank as Senior Vice President - Retail Banking
in January 1999. Prior to joining the Bank he held the position of Area
President for one year, as Regional Administrative Manager for six years and
Senior Vice President and Director of Retail Banking for six years at National
City Bank of Indiana and its predecessor in Anderson, Indiana. Prior to that
time Mr. Archer was in senior management positions with Indiana Lawrence Bank in
North Manchester, Indiana for 16 years.
DEBORAH A. BELL was elected as Senior Vice President - Information
Technology in May 1998. She has been employed at the Bank since 1976 and most
recently served as Vice President and Director of Data Processing since 1991
after serving in that department since July 1985.
RONALD M. HOLLOWAY has been employed by the Bank since 1973 and was elected
Senior Vice President and Chief Lending Officer in December 1995. Mr. Holloway
previously was responsible for the Bank's loan servicing department.
JAN F. WRIGHT was elected as Senior Vice President - Business Services at
the Bank in January 1998 and prior to that served as Senior Vice President -
Branch Operations since March 1995. He previously held the position of Vice
President and Director of Loan Origination and Processing and has been employed
by the Bank since 1972.
39
ITEM 2. PROPERTIES
------------------
The following table sets forth the location of the Company's office
facilities at December 31, 2003 and certain other information relating to these
properties at that date.
Year Total Net Owned/ Square
Acquired Investment Book Value Leased Feet
-------- ---------- ---------- ------ -------
(Dollar amounts in thousands)
MAIN OFFICE:
2118 Bundy Avenue
New Castle, Indiana.......... 1958 $ 1,658 $ 427 Owned 20,500
BRANCH OFFICES:
1311 Broad Street
New Castle, Indiana.......... 1890 1,128 320 Owned 18,000
956 North Beechwood Street
Middletown, Indiana.......... 1971 322 64 Owned 5,500
22 North Jefferson
Knightstown, Indiana......... 1979 400 166 Owned 3,400
1810 North State Street
Greenfield, Indiana.......... 1995 1,207 980 Owned 5,800
99 Dan Jones Road
Avon, Indiana................ 1995 1,558 1,317 Owned 12,600
1754 East 53rd Street
Anderson, Indiana............ 1993 734 655 Owned 4,900
488 W. Main Street
Morristown, Indiana.......... 1998 353 305 Owned 2,600
7435 W. U.S. 52
New Palestine, Indiana....... 1999 944 832 Owned 3,300
6653 West Broadway
McCordsville, Indiana........ 2004 890 890 Owned 3,366
AMERIANA INSURANCE
AGENCY, INC. AND TRUST
DEPARTMENT OF THE BANK
1908 Bundy Avenue
New Castle, Indiana.......... 1999 384 352 Owned 5,000
--------- ----------
Total.................. $ 9,578 $ 6,308
========= ==========
The Bank purchased land in 2003 for future bank use. The total investment
for the land was $236,000. The value of the land is not included in the table
above. The Bank uses on-line processing terminals. Most of the data processing
is done by an in-house data processing center. At December 31, 2003, the total
net book value of the Company's offices and equipment (including leasehold
improvements) was $ 7.9 million.
40
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Bank is involved in a variety of litigation in regard to its interests
in two pools of equipment leases originated by the Commercial Money Center, Inc.
("CMC"), a California based equipment leasing company which is now in
bankruptcy.
In June and September 2001, the Bank purchased the income streams from two
separate pools of leases totaling $12,003,000. Each lease within each pool is
supported by a surety bond issued by one of two insurance companies, which were
rated at least "A" by Moody's at the time that the surety bonds were issued. 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 also filed bankruptcy.
When the lease payments went into default, notice was given to each
insurer. One then 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.
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. The actions
have been consolidated for the purpose of discovery.
The Bank has also been named as a defendant in a suit filed by a group of
lessees in California state court. The California suit alleges that the leases
are usurious and uncollectable 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 of $10,900,000 was fully charged-off in
September of 2003.
41
The Bank has also been named in a suit filed by the Trustee in the CMC and
CSC bankruptcies. The suit alleges that the Bank received preferential treatment
when it received payments from one of the lease pools and seeks repayment of
approximately $86,000 received by the Bank. Additionally, the suit seeks a
determination that the transaction represents a loan in which the Bank failed to
properly perfect its interest such that the Trustee is entitled to all future
payments. The Bank believes the transaction is a true sale in which no
perfection is required. The Bank is vigorously defending its position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASERS OF EQUITY SECURITIES
- --------------------------------------------------------------------------------
The Company's common stock, par value $1.00 per share (the "Common Stock"),
is traded on the Nasdaq National MarketSM under the symbol "ASBI." As of March
12, 2004, the Company had 3,148,788 shares of Common Stock outstanding and had
601 stockholders of record and approximately 1,373 beneficial owners holding
shares in nominee or "street" name. The Company began paying quarterly dividends
during the fourth quarter of fiscal year 1987. The Company's ability to pay
dividends is dependent on dividends received from the Bank. See Note 12 to the
"Consolidated Financial Statements" included under Item 8 of this Annual Report
for a discussion of the restrictions on the payment of cash dividends by the
Company.
The following table sets forth the high, low and closing sales prices for
the Common Stock as reported on the Nasdaq National MarketSM and the cash
dividends declared on the Common Stock for each full quarterly period during the
last two fiscal years.
2003 2002
----------------------------------- -------------------------------------
Dividends Dividends
Quarter Ended: High Low Close Declared High Low Close Declared
- ------------- ---- --- ----- --------- ---- --- ----- --------
March 31 $12.99 $11.36 $12.56 $0.16 $16.00 $13.15 $14.94 $0.16
June 30 14.56 11.96 14.03 0.16 15.10 13.85 14.54 0.16
September 30 15.56 13.13 15.25 0.16 14.20 12.10 13.25 0.16
December 31 16.00 14.50 14.50 0.16 13.25 10.71 11.48 0.16
42
ITEM 6. SELECTED FINANCIAL DATA
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
at December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
Summary of Financial Condition 2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Cash $ 9,505 $ 7,481 $ 7,518 $ 14,609 $ 14,637
Investment securities 137,788 58,155 140,629 99,707 102,705
Loans net of allowances for loan losses 204,141 304,586 350,383 397,662 325,959
Interest-bearing deposits, and stock
in Federal Home Loan Bank 11,992 44,974 11,648 11,687 11,136
Other assets 39,027 41,611 41,896 33,623 31,912
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 402,453 $ 456,807 $ 552,074 $ 557,288 $ 486,349
- ------------------------------------------------------------------------------------------------------------------------------------
Deposits noninterest-bearing $ 19,039 $ 19,124 $ 24,257 $ 12,927 $ 16,308
Deposits interest-bearing 326,705 383,063 388,156 354,668 339,451
Borrowings 10,230 6,432 88,583 141,172 82,872
Other liabilities 7,605 9,148 8,183 6,810 7,689
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 363,579 417,767 509,179 515,577 446,320
- ------------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 38,874 39,040 42,895 41,711 40,029
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 402,453 $ 456,807 $ 552,074 $ 557,288 $ 486,349
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
Summary of Earnings 2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income $ 23,096 $ 29,973 $ 37,170 $ 37,323 $ 29,083
Interest expense 10,066 17,541 24,243 24,728 16,749
Net interest income 13,030 12,432 12,927 12,595 12,334
Provision for loan losses 6,440 7,300 360 417 328
Other income 10,540 2,949 4,046 3,533 3,428
Other expense 13,602 13,675 11,348 10,985 10,635
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes 3,528 (5,594) 5,265 4,726 4,799
Income taxes 1,110 (2,519) 1,465 1,164 1,467
- ------------------------------------------------------------------------------------------------------------------------------------
Net income(loss) $ 2,418 $ (3,075) $ 3,800 $ 3,562 $ 3,332
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss)per share $ 0.77 $ (0.98) $ 1.21 $ 1.13 $ 0.98
Diluted earnings (loss)per share $ 0.77 $ (0.98) $ 1.21 $ 1.13 $ 0.98
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends declared per share $ 0.64 $ 0.64 $ 0.61 $ 0.60 $ 0.60
- ------------------------------------------------------------------------------------------------------------------------------------
Book value per share $ 12.35 $ 12.40 $ 13.63 $ 13.26 $ 12.72
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
Other Selected Data 2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Return on average assets 0.53% (0.60)% 0.72% 0.68% 0.77%
Return on average equity 6.20 (7.32) 8.92 8.68 7.60
Ratio of average equity to average assets 8.62 8.18 8.12 7.84 10.17
Dividend payout ratio (1) 83.12% NM(2) 50.41% 53.00% 61.22%
Number of full-service bank offices 9 11 11 11 12
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Based on total dividends per share declared and net income per share for the
year.
(2) NM - Not meaningful.
43
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
EXECUTIVE SUMMARY
- -----------------
The Company was incorporated under Indiana law for the purpose of becoming
the holding company for the Bank. The Bank has three direct wholly-owned
subsidiaries, Ameriana Insurance Agency ("AIA"), Ameriana Financial Services,
Inc. ("AFS") and Ameriana Investment Management, Inc. ("AIMI"). AIA operates a
general insurance agency in three locations. AFS has a brokerage operation and
owns a partial interest in a life insurance company and a title insurance
company. AIMI manages the Company's investment portfolio. On June 29, 2001, the
Bank converted from a federal savings bank to an Indiana chartered state savings
bank and changed its name to "Ameriana Bank and Trust, SB". The Company also
owns a minority interest in a limited partnership organized to acquire and
manage real estate investments, which qualify for federal tax credits.
The Company returned to profitability in 2003 with net income of $2,418,000
or $0.77 per diluted share compared with a net loss of $3,075,000 or $0.98 per
diluted share in 2002. The Company's net income for the full year 2003 included
charges totaling $5,890,000, or $3,534,000 after tax or $1.12 per diluted share,
taken in the second and third quarters primarily to write off the troubled lease
portfolio. These charges were offset to some extent by a gain of $5,511,000, or
$2,930,000 after tax or $0.93 per diluted share, on the third quarter sale of
two branches in Ohio. The Company's net loss for 2002 reflected both the
additional reserves set aside in the fourth quarter of 2002 as well as a charge
of $3,212,000, or $1,900,000 after tax or $0.61 per diluted share, associated
with the restructuring of the Company's investment portfolio in the first
quarter of 2002. Despite the unfavorable charges mentioned above, the Company's
capital ratios remain strong. The Company's risk based capital to risk-weighted
assets improved to 16.42% at December 31, 2003 from 13.89% at December 31, 2002,
and continues to be classified as "well capitalized" by regulatory standards.
As with most banks, the Company's largest source of revenue has
historically been the net interest margin, which is derived from the spread
earned between its interest income and interest expense. The interest-rate
environment continued at a 40-year low point in 2003, and actually improved the
Company's net interest margin. The net interest margin improved to 3.23% in 2003
from 2.63% in 2002, primarily due to the cost of interest bearing liabilities,
which declined greater than the yield earned on interest earning assets.
Management expects the net interest margin to contract in the coming year should
interest rates remain low.
The low interest rate environment in 2003 and 2002 also kept the demand for
mortgage loan refinancing at a high level. The Company continued to sell new
fixed rate mortgage production to minimize potential long-term
44
interest rate risk associated with such long-term, low-interest loans. As a
result, gain on sale of loans and servicing rights was $1.9 million in 2003 and
$1.4 million in 2002. Due to the rate structure in early 2004 and the large
volume of loans refinanced during 2003 and 2002, current estimates indicate that
the gain on sale of loans during 2004 will be significantly less than 2003 or
2002.
Employee pension and legal expenses increased in 2003. Like many other
organizations, the Company's defined-benefit pension cost continues to rise.
Unfavorable market conditions since 2000 reduced earnings in the pension fund
and accordingly caused a significant increase in the contribution required by
the Company. The Company's pension expense was $768,000 in 2003 compared to
$215,000 in 2002 and $5,000 in 2001. Management expects pension expense to
continue to increase in 2004. Litigation that started in 2002 continues with the
troubled lease portfolio. Legal and professional fees increased to $731,000 in
2003 from $386,000 in 2002.
The Company's profitability is also affected by outside sources beyond
management's control. These outside sources include the economy, the regulatory
environment, and government monetary and fiscal policies. Management started
initiatives in 2004 to improve profits in the areas the Company can control,
such as limiting expense growth, expanding fee income, and enhancing operational
efficiency.
The statements contained within this report contains forward-looking
statements within the meaning of the federal securities laws. Statements in this
release that are not strictly historical are forward-looking and are based upon
current expectations that may differ materially from actual results. These
forward-looking statements, identified by words such as "view" and "believe,"
involve risks and uncertainties that could cause actual results to differ
materially from those anticipated by the statements made herein. These risks and
uncertainties involve general economic trends and changes in interest rates,
increased competition, changes in consumer demand for financial services, the
possibility of unforeseen events affecting the industry generally, the
uncertainties associated with newly developed or acquired operations, the amount
of losses incurred from the liquidation of certain of the Company's investments,
the eventual outcome of litigation to enforce certain surety agreements, and
market disruptions and other effects of terrorist activities. The Company
undertakes no obligation to release revisions to these forward-looking
statements publicly to reflect events or circumstances after the date hereof or
to reflect the occurrence of unforeseen events, except as required to be
reported under the rules and regulations of the Securities and Exchange
Commission.
45
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The accounting and reporting policies of the Company are in accordance with
accounting principles generally accepted in the United States and conform to
general practices within the banking industry. The Company's significant
accounting policies are described in detail in the Notes to the Company's
Consolidated Financial Statements for the year ended December 31, 2003. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions. The
financial position and results of operations can be affected by these estimates
and assumptions and are integral to the understanding of reported results.
Critical accounting policies are those policies that management believes are the
most important to the portrayal of the Company's financial condition and
results, and they require management to make estimates that are difficult,
subjective or complex.
ALLOWANCE FOR CREDIT LOSSES. The allowance for credit losses provides
coverage for probable losses 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 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 loan 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
46
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.
MORTGAGE SERVICING RIGHTS. Mortgage servicing rights ("MSRs") 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.
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 Statement of Financial Accounting
Standards ("SFAS") No. 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.
47
SALE OF TWO CINCINNATI BRANCHES IN 2003
- ---------------------------------------
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.
INVESTMENTS SOLD IN 2002
- ------------------------
The interest rate risk position of the Bank for the prior period ending
December 31, 2001, was reviewed by management. Management determined that a
significant deterioration had occurred in the Company's CMO portfolio, which
resulted in a large increase in the Company's exposure to future increases in
interest rate risk. Upon further review, management determined that the increase
in the exposure was significant enough to call into question the prudence of
continuing to hold the securities to maturity. In order to take the necessary
action to reduce this exposure, management decided to move the entire securities
portfolio from the "Held to Maturity" accounting classification to the
"Available for Sale" classification as of December 31, 2001.
In 2002, the Company determined that most of its investments no longer fit
its risk profile, given the unsettled, uncertain and volatile nature of the
market and the possibility that interest rates could move against the portfolio.
The decelerating speed of prepayments on these instruments during the first
quarter of 2002 was remarkable, significantly extending the practical maturity
of the portfolio to a level that exceeded the Bank's risk parameters. The
alternatives to taking immediate action to mitigate the potential losses,
including long-term funding strategies, hedging strategies and partial
liquidations, were felt to be inadequate in the circumstances. The Company
decided to liquidate the majority of the investment portfolio. In March 2002,
the Bank disposed of $137.0 million in securities at a pretax loss of $3.2
million, or approximately $1.9 million after tax.
The proceeds from the liquidation of the Company's investments were first
applied towards repayment of short-term borrowings from the FHLB. This increased
the Company's flexibility to retain more of its self-originated
48
loans in portfolio and to purchase loan participations in the region as they
became available. The balance of the proceeds were used to purchase short-term
liquid investments, including limited maturity MBS, which present less interest
rate risk than the liquidated investments, and an ARM mutual fund. The Company
also used some proceeds to invest in intermediate-term MBS to provide a balance
to its portfolio between interest rate risk reduction and maintenance of higher
net interest income levels.
In September 2002, the Bank determined it could improve its net interest
margin by paying down the majority of FHLB advances with the sale of a similar
amount of investment securities. The Company sold an additional $44.6 million of
investments in the third quarter 2002 and realized a gain of approximately $1.2
million on the sale, which offset to some extent the loss on disposition of
investments realized earlier in the year. The proceeds from this latest
investment sale were used to pay off higher-rate FHLB advances, which included a
prepayment penalty of approximately $1.1 million. Aside from the de-leveraging
effect, these transactions are expected to improve the Company's net interest
margin through the reduction of higher-rate debt with proceeds from the sale of
lower-earning investments.
TROUBLED LEASE PORTFOLIO WRITE-OFF
- ----------------------------------
On September 30, 2003, the Company wrote-off the remaining balances of two
troubled equipment lease pools originated by Commercial Money Center, a now
bankrupt company and recorded an after-tax loss of $3,534,000 or $1.12 per
diluted share for the year ended December 31, 2003. The Bank entered into these
leases pools, which at the time had receivables totaling $12,003,000, consisting
primarily of equipment leases, in June and September of 2001. Each lease within
each pool is supported by a surety bond issued by insurance companies which were
rated at least "A" by Moodys at the time the Company entered into the lease
pools. When the issuer of the lease pools filed for bankruptcy in 2002 the
outstanding balance on these pools was $10,900,000. The insurers of the lease
pools have denied responsibility for payment of the default on the lease pools
alleging fraud on the part of Commercial Money Center. At December 31, 2002, the
Company established reserves against the two lease pools of $5,450,000, which
was equal to approximately 50% of the outstanding amount in default. At the end
of the second quarter of 2003, the Company set aside an additional $900,000 in
specific reserves for one of the two lease pools. Subsequently, due to continued
uncertainty surrounding the prospects for eventual recovery from the sureties,
the fact that one of the insurance companies had its credit rating down-graded
to "D" by A.M. Best, and that the litigation with respect to the enforcement of
the surety bonds was proving more protracted and challenging
49
than originally anticipated, in keeping with the Company's policy for reserving
against its assets, the Company determined to charge-off the remaining balances
of the lease pools.
FINANCIAL CONDITION
- -------------------
Total assets decreased $54.3 million or 11.9% to $402.5 million at December
31, 2003, from $456.8 million at December 31, 2002. The decrease was primarily
due to the sale of the Ohio branches to Peoples Community Bancorp, Inc. which
reduced assets approximately $55.6 million (See "Sale of Two Cincinnati Branches
in 2003").
CASH AND CASH EQUIVALENTS
Cash and cash equivalents decreased $31.2 million to $14.5 million at
December 31, 2003, from $45.7 million at December 31, 2002. The decrease was the
result of investing cash and cash equivalents in investment securities.
SECURITIES
- ----------
Investment securities increased approximately $79.6 million to $137.8
million at December 31, 2003, from $58.2 million at December 31, 2002. This was
mainly due to a decline in the loan portfolio during 2003 which resulted from
refinanced mortgage loans. Due to the rate environment in 2003, the Bank
continued to sell the majority of its fixed-rate originations.
The following table identifies changes in the investment securities
carrying values:
(Dollars in thousands)
-------------------------------------------- ------------- ---------------- ---------------- ----------------
2003 2002 $ Change % Change
-------------------------------------------- ------------- ---------------- ---------------- ----------------
Available for sale at December 31:
Mortgage-backed and
collateralized mortgage obligations $ 36,501 $27,824 $8,677 31.2%
Federal agencies 78,423 8,227 70,196 853.2
Municipal securities 9,424 -- 9,424 NM(1)
Mutual fund 11,796 20,538 (8,742) (42.6)
Trust preferred 1,644 1,566 78 5.0
-------------------------------------------- ------------- ---------------- ---------------- ----------------
Totals $137,788 $58,155 $ 79,633 136.9%
-------------------------------------------- ------------- ---------------- ---------------- ----------------
(1) NM - Not meaningful.
The following table identifies the percentage composition of the investment
securities:
--------------------------------------------------- ------------- -------------
2003 2002
--------------------------------------------------- ------------- -------------
Available for sale at December 31:
Mortgage-backed and
collateralized mortgage obligations 26.5% 47.8%
Federal agencies 56.9 14.2
Municipal securities 6.8 --
Mutual fund 8.6 35.3
Trust preferred 1.2 2.7
--------------------------------------------------- ------------- -------------
Totals 100.0% 100.0%
--------------------------------------------------- ------------- -------------
50
The following table identifies changes in net unrealized gains and losses
in investment securities:
(Dollars in thousands)
--------------------------------------------------- ------------- -------------- -------------
2003 2002 $ Change
--------------------------------------------------- ------------- -------------- -------------
Available for sale at December 31:
Mortgage-backed and
collateralized mortgage obligations $ 40 $573 $ (533)
Federal agencies (157) 175 (332)
Municipal securities 56 -- 56
Mutual fund (144) 61 (205)
Trust preferred 144 66 78
--------------------------------------------------- ------------- -------------- -------------
Totals $ (61) $875 $ (936)
--------------------------------------------------- ------------- -------------- -------------
See Note 3 to the "Consolidated Financial Statements" for more information on
investment securities.
LOANS
- -----
The following table shows the percentage change of the loan portfolio by
category calculated as of December 31 (loans in process and deferred fees are
not included in this table):
(Dollars in thousands)
--------------------------------------------------- ------------- -------------
2003 2002
vs vs
2002 2001
--------------------------------------------------- ------------- -------------
At year-end December 31:
Real estate mortgage loans:
Commercial loans (10.1)% 43.6%
Residential loans (36.0) (25.5)
Construction loans (57.8) 1.6
Commercial loans and leases (60.0) 3.5
Consumer loans:
Mobile home and auto loans (48.6) (36.7)
Loans secured by deposits (28.2) (16.2)
Home improvement loans (16.9) (38.5)
Other (18.7) (84.6)
--------------------------------------------------- ------------- -------------
The loan portfolio declined $107.5 million to $214.1 million at year end
2003 from $321.6 million at year end 2002. The sale of the Ohio branches
accounted for $28.8 million of the loan portfolio decline, with mortgage loan
refinancing accounting for most of the remainder.
The sale of the Ohio branches included $649,000 in residential real estate
mortgage loans, $25.0 million in commercial mortgage real estate loans, and $3.2
million in consumer loans. The portfolio shift to commercial real estate loans
continued in 2003 and 2002 with commercial loans comprising 37.2% of the overall
portfolio at year-end 2003 compared to 27.5% at year-end 2002. Fixed-rate
residential mortgage loan production were sold in the secondary market in 2003
and 2002, which is the main cause for the decline in residential mortgage loans.
Proceeds from loans sold in the secondary markets were $154.5 million in 2003,
and $113.0 million in 2002. Fixed mortgage
51
loan rates have been at historic lows during this two-year period, which has
increased the volume of refinances. The fixed-rate residential loans are sold to
minimize the Bank's exposure to interest rate risk. Due to the consumer demand
for fixed-rate loans, the Bank's residential loan portfolio has declined. The
Bank generally retains loan servicing on loans originated and sold in Indiana,
and sold loans and loan servicing rights for loans previously originated and
sold in Ohio. Loans serviced by the Bank for investors, primarily the Federal
Home Loan Mortgage Corporation ("FHLMC"), Federal National Mortgage Association
("FNMA") and the Federal Home Loan Bank ("FHLB"), totaled approximately $193.0
million in 2003 and $177.4 million in 2002. Loans sold and subsequently serviced
by the Bank generate a steady source of fee income, with servicing fees ranging
from 0.25% to 0.375%.
In 2001, the Bank purchased two separate pools of lease receivables,
totaling $12.0 million, which is the reason for the substantial increase in
commercial loans and leases in 2001. In 2002 these two pools went into default
and were charged-off in 2003 (see "Troubled Lease Portfolio Charged-Off").
Consumer loans made up 3.68% and 4.21% of the total loan portfolio for 2003
and 2002, respectively. Consumer loans declined $5.6 million, to $7.9 million at
December 31, 2003, from $13.5 million at December 31, 2002. The decline was
primarily due to reduced loan volume as market competitive rates were below
minimums established by the Company and the sale of loans included in the Ohio
branch sale which included $3.2 million in consumer loans.
Total loan production was strong for 2003 and 2002. New loan production was
$229.9 million and $217.0 million in 2003 and 2002, respectively. Since the Bank
sells most of its fixed-rate mortgage loans in the secondary market, the loan
volume is not fully reflected in the balance sheet.
CREDIT QUALITY
- --------------
Non-performing assets, totaling $8.4 million, declined in 2003. This
represents a decrease of $10.0 million from the 2002 non-performing assets total
of $18.4 million. The main cause for the decrease was the two lease pools
totaling $10.9 million that were charged-off in 2003 (see "Troubled Lease
Portfolio Charged-Off").
The Bank also 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 the
Bank is negotiating with the borrower and its counsel for resolution of the
remaining properties. The total outstanding balance of the various loans totaled
$3.5 million as of December 31, 2003.
52
The following table compares delinquent loans as a percentage of total
loans:
-------------------------- --------------------------------------- -- ---------------------------------------
December 31, 2003 2002
-------------------------- --------------------------------------- -- ---------------------------------------
90 90
days Non- days Non-
30-89 and accrual 30-89 and accrual
days over(1) loans Totals days over(1) loans Totals
-------------------------- --------- --------- ---------- -------- -- --------- -------- ---------- ---------
Real Estate:
Residential 0.79% 0.04% 0.81% 1.64% 0.59% 0.03% 1.05% 1.83%
Commercial 0.05 -- 1.63 1.68 0.22 0.01 0.72 0.79
Construction -- -- 1.55 1.55 0.32 -- -- 0.32
Commercial loans 0.01 -- 0.04 0.05 0.14 -- 0.51 0.65
Consumer loans 0.14 -- -- 0.14 0.17 -- 0.08 0.25
Leases -- -- -- -- -- -- 3.48 3.48
-------------------------- --------- --------- ---------- -------- -- --------- -------- ---------- ---------
Totals 0.99% 0.04% 4.03% 5.06% 1.44% 0.04% 5.85% 7.32%
-------------------------- --------- --------- ---------- -------- -- --------- -------- ---------- ---------
(1) Still accruing
The Bank's charged-off loans, less recoveries, were $11,362,000 and
$364,000 in 2003 and 2002, respectively. The percentage of net charge-offs to
average assets were 2.51% and .07% in 2003 and 2002, respectively.
DEPOSITS
- --------
Interest rates paid on Bank deposits stayed at historic lows in 2003 as
market interest rates continued to fall. The fed funds interest rate, the rate
banks charge other banks on overnight loans, was at a 42-year low. Fed fund
rates generally affect the prime lending rate, which was at a 45-year historic
low. The Federal Reserve has cut the fed funds rate 12 times since 2001, with
the last rate cut of .50% in November 2002. Short-term deposits (deposits with
maturities of one year or less, including certificate accounts, checking,
savings and money market accounts) comprised 77% of the Bank's deposit portfolio
as of year-end 2003, compared with 80% for the same period in 2002. With such a
high percentage of deposit accounts staying short-term, an increase in rates in
the near future may squeeze the Bank's net interest margin in the short term,
since loans are slower to re-price at new market rates.
Deposits declined $56.5 million, or 14.0%, in 2003 for a year-end portfolio
balance of $345.7 million. The deposit portfolio at year-end 2002 was $402.2
million. The main reason for the decline was the sale of the two Cincinnati
branches which included the transfer of $55.6 million in deposits.
53
The following table shows deposit changes by category:
(Dollars in thousands)
-------------------------------------------------------------------------------------------------------------
2003 2002 $ Change % Change
-------------------------------------------------------------------------------------------------------------
December 31,
Savings deposits $30,558 $33,990 $(3,432) (10.10)%
NOW and Super NOW accounts 79,707 39,344 40,363 102.59
Money market accounts 48,238 61,127 (12,889) (21.09)
Certificates $100,000 and more 27,212 45,510 (18,298) (40.21)
Other certificates 160,029 222,216 (62,187) (27.98)
-------------------------------------------------------------------------------------------------------------
Totals 345,744 $402,187 $(56,443) (14.03)%
-------------------------------------------------------------------------------------------------------------
BORROWINGS
- ----------
Borrowings increased in 2003. FHLB advances increased $4.0 million to $9.6
million at year-end 2003 from $5.6 million at year-end 2002. The increase was
mainly due to a $5.0 million putable FHLB advance taken in November 2003.
Putable advances offer a low fixed rate of interest in exchange for the
borrower's selling the FHLB the option to convert the advance before maturity on
any given conversion date to an adjustable rate advance based on a predetermined
index for the remaining term to maturity, at the FHLB's sole discretion. The
putable advance has a 10 year maturity with a rate of 3.90% guaranteed for two
years and could convert to an adjustable advance should the three month LIBOR
index reach 8.0%.
Notes payable by the Company declined $240,000 to $600,000 at year-end
2003, from $840,000 at year-end 2002. The notes payable consists of a note
payable to a third-party financial institution with a balance of $600,000 and
$750,000 bearing interest at 3.50% and 4.25% at December 31, 2003 and December
31, 2002 respectively, the proceeds of which were used to finance stock
repurchases during 1999. Notes payable with a balance of $90,000 at December 31,
2002 and paid off in 2003 were 6.0% notes payable to former stockholders of
Cardinal State Bank.
INTEREST RATE RISK
- ------------------
The Bank is subject to interest rate risk to the degree that its
interest-bearing liabilities, primarily deposits and borrowings from the FHLB,
mature or reprice at different rates than its interest-earning assets. Although
having liabilities that mature or reprice more frequently on average than assets
may not be beneficial in times of rising interest rates, such an asset/liability
structure could result in higher net income during periods of declining interest
rates, unless offset by other factors.
The Asset-Liability Management Committee and the Board of Directors review
the Bank'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, deposit, borrowings and market information to
estimate fair values
54
of assets and liabilities using discounted cash flows. The difference between
the Bank's estimated fair value of assets and the estimated fair value of
liabilities, is the fair value of equity, also referred to as net present value
of equity ("NPV"). The change in the NPV is calculated at different interest
rate intervals. This tests the interest rate risk exposure from movements in
interest rates to determine the change in the Bank's NPV. The model also tests
the impact various interest rate scenarios have on net interest income and net
income over a stated period of time (one year, for example).
The model uses a number of assumptions, including the relative levels of
market interest rates and prepayments or extension in maturity and repayment in
loans, MBS and CMO, and certain types of callable investments. These
computations do not contemplate actions management may undertake to reposition
the assets and liabilities, and should not be relied upon as indicative of
actual results. In addition, certain shortcomings are inherent in the model of
computing NPV. Should interest rates remain or decrease below present levels,
the portion of adjustable rate loans could decrease in future periods due to
loan refinancing or payoff activity. In the event of an interest rate change,
pre-payment levels would likely be different from those assumed in the model and
the ability of borrowers to repay their adjustable rate loans may decrease
during rising interest rate environments.
The Bank's information below provides an assessment of the risk of NPV in
the event of sudden and sustained 200-basis-point increases and decreases in the
prevailing interest rates as of December 31, 2003.
- --------------------------------------------------------------------------------------------------------------------------
NPV as Percent of
Net Portfolio Value Present Value of Assets
- --------------------------------------------------------------------------------------------------------------------------
Change Dollar Dollar Percent
in Rates Amount Change Change NPV Ratio Change
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
+200 bp * $41,094 $ (2,751) (6.27)% 10.37% (38) bp
Base or 0% 43,845 10.75%
- -200 bp 43,495 (350) (0.80)% 10.42% (33) bp
* basis points
The Bank information below provides an assessment of the risk of NPV in the
event of sudden and sustained 200 basis point increases and decreases in the
prevailing interest rates as of December 31, 2002.
- ----------------------------------------------------------------------------------------------------------------------------
NPV as Percent of
Net Portfolio Value Present Value of Assets
- ----------------------------------------------------------------------------------------------------------------------------
Change Dollar Dollar Percent
in Rates Amount Change Change NPV Ratio Change
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
+200 bp * $36,812 $ (5,999) (14.01) % 8.61% (147) bp
Base or 0% 42,811 10.08%
- -200 bp 39,952 (2,859) (6.68) 9.65 (43) bp
* basis points
55
The interest rate risk position of the Bank for the prior period ending
December 31, 2003, was within the Bank's risk parameters specified in its
interest rate risk policy.
YIELDS EARNED AND RATES PAID
- ----------------------------
The following tables set forth the weighted average yields earned on the
Company's interest-earning assets and the weighted average interest rates paid
on the Company's interest-bearing liabilities, together with the net yield on
interest-earning assets.
Year Ended December 31,
--------------------------------------
Weighted Average Yield: 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Loans 7.20% 7.15% 7.98%
Mortgage-backed and collateralized mortgage obligations 3.24 5.64 7.00
Other interest-earning assets 2.69 3.09 6.66
All interest-earning assets 5.73 6.33 7.71
Weighted Average Cost:
- ---------------------------------------------------------------------------------------------------------------------
Deposits 2.58 3.71 5.03
Federal Home Loan Bank advances 6.57 6.39 6.50
Notes payable 3.95 3.69 7.30
All interest-bearing liabilities 2.65 3.97 5.31
- ---------------------------------------------------------------------------------------------------------------------
Interest Rate Spread (spread between weighted average yield on all
interest-earning assets and all interest-bearing liabilities) 3.08 2.36 2.40
- ---------------------------------------------------------------------------------------------------------------------
Net Yield (net interest income as a percentage of average
interest-earning assets) 3.23 2.63 2.68
At December 31,
------------------------------------------
Weighted Average Interest Rates: 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Loans 6.82% 6.88% 7.74%
Mortgage-backed and collateralized mortgage obligations 4.79 6.66 6.35
Other earning assets 3.18 2.39 7.18
Total interest-earning assets 5.46 6.07 7.39
Deposits 1.92 3.04 4.40
Federal Home Loan Bank advances 5.38 6.83 5.58
Notes payable 3.50 4.44 6.20
Total interest-bearing liabilities 2.03 3.09 4.62
Interest rate spread 3.43 2.98 2.77
- ---------------------------------------------------------------------------------------------------------------------
56
RATE/VOLUME ANALYSIS
The following table sets forth certain information regarding changes in
interest income, interest expense and net interest income of the Company for the
periods indicated. For each category of interest earning assets and
interest-bearing liabilities, information is provided on changes attributable
to: (1) changes in volume (changes in volume multiplied by old rate) and (2)
changes in rate (changes in rate multiplied by new volume). No material amounts
of loan fees or out-of-period interest are included in the table. Dollars are in
thousands.
Year Ended December 31
2003 vs. 2002 2002 vs 2001
- -------------------------------------------------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Changes in Due to Changes in
- -------------------------------------------------------------------------------------------------------------------
Net Net
Volume Rate Change Volume Rate Change
- -------------------------------------------------------------------------------------------------------------------
Interest income:
Loans $(5,372) $ 140 $(5,232) $(2,705) $(2,827) $ (5,532)
Other interest-earning assets 204 (1,849) (1,645) 1,770 (3,435) (1,665)
- -------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (5,168) (1,709) (6,877) (935) (6,262) (7,197)
- -------------------------------------------------------------------------------------------------------------------
Interest Expense:
Deposits (843) (4,213) (5,056) 2,272 (6,223) (3,951)
FHLB advances and notes payable (2,416) (3) (2,419) (2,671) (80) (2,751)
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (3,259) (4,216) (7,475) (399) (6,303) (6,702)
- -------------------------------------------------------------------------------------------------------------------
Change in net interest income $(1,909) $ 2,507 $ 598 $ (536) $ 41 $ (495)
- -------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
PART 1 2003 COMPARED TO 2002
- ------------------------------
Net Income (Loss)
- ------------------
The Company had a net profit of $2.4 million or $0.77 per diluted share for
the year-end 2003. The Company incurred a provision expense of $6.4 million in
2003 which was offset by a net gain on the sale of branches of $5.5 million for
the same period. The provision expense decreased approximately $900,000 in 2003
compared to 2002. The provision expense was $7.3 million in 2002.
The provision expense included specific reserves of approximately $5.45
million taken in both 2003 and 2002 was largely due to two pools of equipment
lease receivables. (see "Troubled Lease Portfolio Charged-Off").
57
For a quarterly breakdown of earnings, see Note 18 to the "Consolidated
Financial Statements."
The table below shows selected performance data:
- ----------------------------------------------- -------------- ------------- -------------- ------------- --------------
2003 2002 2001 2000 1999
- ----------------------------------------------- -------------- ------------- -------------- ------------- --------------
Net income (loss) (in thousands) $2,418 $(3,075) $3,800 $3,562 $3,332
Basic earnings (loss) per share $ 0.77 $ (0.98) $ 1.21 $ 1.13 $ 0.98
Diluted earning (loss) per share $ 0.77 $ (0.98) $ 1.21 $ 1.13 $ 0.98
Dividends declared per share $ 0.64 $ 0.64 $ 0.61 $ 0.60 $ 0.60
Book value per share $12.35 $ 12.40 $13.63 $13.26 $12.72
Return on average assets 0.53% (0.60)% 0.72% 0.68% 0.77%
Return on average equity 6.20% (7.32)% 8.92% 8.68% 7.60%
Ratio of average equity to average assets 8.62% 8.18% 8.12% 7.84% 10.17%
Dividend Payout Ratio(1) 83.33% NM 50.41% 53.00% 61.22%
Number of full-service bank offices 9 11 11 11 12
- ----------------------------------------------- -------------- ------------- -------------- ------------- --------------
(1) Based on total dividends per share declared and net income per share
for the year. NM - not meaningful.
NET INTEREST INCOME
- -------------------
The Company derives the majority of its income from net interest income.
The following table shows a breakdown of net interest income for 2003 compared
to 2002.
(Dollars in thousands)
- ---------------------------------------------------------------------------------------------------
Years ended December 31, 2003 2002
- ---------------------------------------------------------------------------------------------------
Interest Yield Interest Yield Change
- ------------------------------------------------------------------------------------------------------------------
Interest and fees on loans $19,241 7.20% $24,473 7.15% $ (5,232)
Other interest income 3,855 2.83 5,500 4.19 (1,645)
- ------------------------------------------------------------------------------------------------------------------
Total interest income 23,096 5.73 29,973 6.33 (6,877)
- ------------------------------------------------------------------------------------------------------------------
Interest on deposits 9,656 2.58 14,712 3.71 (5,056)
Interest on borrowings 410 6.30 2,829 6.33 (2,419)
- ------------------------------------------------------------------------------------------------------------------
Total interest expense 10,066 2.65 17,541 3.97 (7,475)
- ------------------------------------------------------------------------------------------------------------------
Net interest income $13,030 -- $12,432 -- 598
- ------------------------------------------------------------------------------------------------------------------
Net interest spread -- 3.08% -- 2.36% --
Net interest margin -- 3.23% -- 2.63% --
- ------------------------------------------------------------------------------------------------------------------
Net interest income increased 4.8% or $598,000 in 2003. Most of the
increase was rate-related. See "Rate/Volume Analysis" for more information. The
net interest spread, which is the mathematical difference between the yield on
average interest-earning assets and cost of interest-bearing liabilities, was
3.08% in 2003 and 2.36% in 2002. The net interest margin on interest-earning
assets, which is interest income as a percentage of average earning assets, was
3.23% in 2003 and 2.63% in 2002. The improvements in the interest spread and
margin are the results of high cost certificates that repriced at maturity to a
lower rate, and an overall shift from certificates to short-term money market,
Super Now accounts, and lower borrowing cost. The lower borrowing costs were the
result of paying off higher costing FHLB advances with lower yielding
investments in September 2002.
58
PROVISION FOR LOAN LOSSES
- -------------------------
The Company's provision for loan losses was $6.4 million for 2003, compared
with 7.3 million in 2002. The provision is the amount that is added to the
allowance for loan losses to absorb inherent losses in the loan portfolio. The
provision expense for both 2003 and 2002 consisted of specific reserves for the
troubled lease pools (see "Troubled Lease Portfolio Charged-Off").
Specific reserves of $895,000 were established in 2002 for
business/development loans and its related parties. The business/development
loans had a principal balance of $3.5 million and 3.6 million at December 31,
2003 and December 31, 2002 respectively. The reserves are approximately 25% of
the principal balance at December 31 2003 and December 31, 2002.
Net loan charge-offs were $11.4 million and $364,000 for the years 2003 and
2002, respectively. The allowance for loan losses as a percent of loans was
1.80% at December 31, 2003, and 2.77% at December 31, 2002. Non-performing
loans, which consists of non-accrual loans and loans delinquent over 90 days and
still accruing, decreased by $10.0 million during 2003. Non-performing loans
were $8.4 million at December 31, 2003, and $18.4 million at December 31, 2002.
The decrease in non-performing loans was mainly due to the charge-off of the
troubled lease portfolio (see "Troubled Lease Portfolio Charged-Off").
The following table breaks out non-performing loans by category.
(Dollars in thousands)
-------------------------------------------- ------------- ---------------- ---------------- ----------------
2003 2002 $ Change % Change
-------------------------------------------------------------------------------------------------------------
December 31,
Non-accrual loans $8,383 $18,307 $(9,924) (54.21)%
Over 90 days delinquent still accruing 74 135 (61) (45.19)%
-------------------------------------------------------------------------------------------------------------
Totals $8,457 $18,442 $(9,985) (54.14)%
-------------------------------------------------------------------------------------------------------------
The Company believes it has established an adequate allowance for loan
losses in accordance with generally accepted accounting principles. The
variation in the amount of provision charged against income is directly related
to changes in loan charge-offs, non-performing loans, loan delinquencies,
economic conditions in the Company's lending area and loan portfolio mix during
each year.
NON-INTEREST INCOME
- -------------------
Non-interest income was $10.5 million in 2003 and $2.9 million in 2002,
for an overall increase of $7.6 million or 257.4%. The main cause of the change
was due to the net gain on sale of branches of $5.5 million in 2003 (See "Sale
of Two Cincinnati Branches in 2003") and net losses on securities sold in 2002
of $2.0 million (See
59
"Investments Sold in 2002"). Excluding the net gain on sale of branches and
security losses, non-interest income would have improved 1.11%. Gains on sales
of loans and servicing rights improved to $1.9 million for 2003 from $1.4
million for 2002, an increase of 31.97%. Interest rates have steadily declined
since 2001, which has created a higher demand from consumers for fixed-rate
mortgage loans. Proceeds from loans sold in the secondary market were $154.5
million in 2003 and $113.0 million in 2002. The increase in gains on sales of
loans was the result of a continued increase in refinancing during the first
nine months of 2003. Due to the rate structure in early 2004 and the large
amount of loans that refinanced during 2003 and 2002, current estimates indicate
that the gain on sale of loans during 2004 will be significantly less than 2003
or 2002. Other fees and service charges improved 6.31%, while brokerage and
insurance commissions were down 4.48%. The Bank invested in life insurance on
employees and directors, with a balance or cash surrender value of $19.7 million
and $18.9 million, respectively, at December 31, 2003 and 2002. The majority of
these policies were purchased in 1999. The nontaxable increase in cash surrender
value of life insurance declined to $773,000 in 2003 from $897,000 in 2002. The
decline was due to declining interest rates. Operating losses associated with
the limited partnership amounted to a loss of $81,000 in 2003 and a gain of
$92,000 in 2002 and are included in other income. The Company incurred an
allocated gain of $191,000 and tax credit recapture of $33,000 due to the
termination of ownership in one of the properties in 2002. The Company also
reflected federal income tax credits of $174,000 and $159,000 for the year ended
December 31, 2003, and December 31, 2002.
NON-INTEREST EXPENSE
- --------------------
Non-interest expense was $13.6 million in 2003 and $13.7 million in 2002,
for an overall decrease of $73,000 or 0.53%. Non-interest expense in 2002
included penalties charged for early payoff of FHLB advances of $1.1 million
(See "Investments Sold in 2002"). Excluding the advance early payoff penalties,
non-interest expense would have increased $1.1 million or 7.96%. The largest
component of non-interest expense is salaries and employee benefits, which
made-up 59.42% of total non-interest expenses in 2003.
Salaries and employee benefits increased $483,000 to $8.1 million in 2003,
compared with $7.6 million in 2002. The Bank's employee retirement plan expense
increased to $768,000 in 2003 from $215,000 in 2002. Prior to 2002 the stock
market generally provided enough earnings to cover increases required in the
employee retirement fund. With the decline of the stock market, the Bank's
retirement expense in rose substantially in 2002 and 2003. Other insurance
benefits, comprised mainly of medical insurance, increased to $1.2 million in
2003 from $1.0 million in 2002, for an overall increase in insurance benefits
expense of $200,000. Please see Note 11 to the
60
"Consolidated Financial Statements" for more information regarding benefits.
Net occupancy and furniture and equipment expense was $1.6 million in 2003,
compared with $1.7 million 2002, for an overall expense decrease of $104,000, or
6.30%. The decrease was mainly due to real estate taxes which declined $142,000
due to a reduction in Indiana real estate tax assessments. Legal and
professional expenses were $345,000 higher in 2003 from 2002 mainly due to the
CMC leases litigation and the sale of the Ohio branches. Data processing,
printing and supplies, and all other expenses increased $279,000, or 9.42%, in
2003 from 2002 mainly due to higher federal deposit insurance and loan
processing expense. Federal deposit insurance was $119,000 higher due to an
increase in the Bank's insurance premium rate in mid 2002 and loan processing
expense was $87,000 higher due to a greater volume of loans originated and sold
in 2003 from 2002.
INCOME TAX EXPENSE
- ------------------
The Company incurred income tax expense of $1.1 million in 2003, compared
to an income tax benefit of $2.5 million in 2002. The effective tax rate was
31.5% in 2003 and (45.0)% in 2002. The 2003 income taxes were composed of a
$847,000 credit for current taxes and a $2.0 million expense for deferred taxes.
The 2002 income taxes were composed of a $796,000 expense for current taxes and
a $3.3 million credit for deferred taxes. The deferred tax expense in 2003 was
mainly due to net charge-offs in 2003 exceeding the loan provision expense. The
deferred tax credit in 2002 was mainly due to the loan provision expense in 2002
which exceeded net charge-offs. The primary difference between the effective tax
rates and the statutory tax rates in 2003 relates to tax credits, cash value of
life insurance and the disposition of goodwill resulting from the sale of the
Ohio branches. The primary difference between the effective tax rates and the
statutory tax rates in 2002 relate to tax credits and cash value of life
insurance. See Note 10 to the "Consolidated Financial Statements" for more
information.
PART 2 2002 COMPARED TO 2001
- ------------------------------
NET INCOME (LOSS)
- -----------------
The Company had a net loss of $3.1 million for the year-end 2002, due
primarily to security losses and large loan provision expenses.
The total provision for loan and lease losses increased substantially in
2002. Provision expense increased $6.9 million for a total provision expense of
$7.3 million in 2002. This increase was necessary to establish specific reserves
for the additional non-accrual loans, which increased by $16.1 million in 2002,
for a year-end total of $18.3 million. In 2002, the Bank set aside specific
reserves in the amount of $5.5 million for two lease pools with a principal
balance of $10.9 million at December 31, 2002, in addition to specific reserves
of $795,000 for
61
business/development loans and its related parties with a principal balance of
$3.6 million at December 31, 2002. These specific reserves account for $6.2
million of the $6.9 million increase in the provision for loan and lease losses.
The Bank also increased its general reserves due to the weak economy and to
reflect the Bank's current risk in the loan portfolio due to the change in the
portfolio mix.
For a quarterly breakdown of earnings, see Note 18 to the "Consolidated
Financial Statements."
NET INTEREST INCOME
- -------------------
The Company derives the majority of its income from net interest
income. The following table shows a breakdown of net interest income for 2002
compared with 2001.
(Dollars in thousands)
- --------------------------------------------------------------------------------------------------------------------
Years ended December 31, 2002 2001
- ------------------------------------------------------------------------------------------------------
Interest Yield Interest Yield Change
- --------------------------------------------------------------------------------------------------------------------
Interest and fees on loans $24,473 7.15% $30,005 7.98% $ (5,532)
Other interest income 5,500 4.19 7,165 6.76 (1,665)
- --------------------------------------------------------------------------------------------------------------------
Total interest income 29,973 6.33 37,170 7.71 (7,197)
- --------------------------------------------------------------------------------------------------------------------
Interest on deposits 14,712 3.71 18,663 5.03 (3,951)
Interest on borrowings 2,829 6.33 5,580 6.52 (2,751)
- --------------------------------------------------------------------------------------------------------------------
Total interest expense 17,541 3.97 24,243 5.31 (6,702)
- --------------------------------------------------------------------------------------------------------------------
Net interest income $12,432 -- $12,927 -- $(495)
- --------------------------------------------------------------------------------------------------------------------
Net interest spread -- 2.36% -- 2.40% --
Net interest margin -- 2.63% -- 2.68% --
- --------------------------------------------------------------------------------------------------------------------
Net interest income declined 3.8% or $495,000 in 2002. Most of the decrease
was volume related. See "Rate/Volume Analysis" for more information. The net
interest spread, which is the mathematical difference between the yield on
average interest-earning assets and cost of interest-bearing liabilities, was
2.36% in 2002 and 2.40% in 2001. The net interest margin on interest-earning
assets, which is interest income as a percentage of average earning assets, was
2.63% in 2002 and 2.68% in 2001.
PROVISION FOR LOAN LOSSES
- -------------------------
The Company significantly increased the provision for loan losses for a
total provision expense of $7.3 million for 2002, compared with $360,000 in
2001. The provision is the amount that is added to the allowance for loan losses
to absorb inherent losses in the loan portfolio. Net loan charge-offs were
$364,000 and $119,000 for the years 2002 and 2001, respectively. The allowance
for loan losses as a percent of loans was 2.77% at December 31, 2002, and .49%
at December 31, 2001, and represents management's best estimate of the inherent
losses in the loan portfolio. The provision increase in 2002 was necessary to
increase the allowance for loan and lease losses to a sufficient level of
specific and general reserves. Non-performing loans, which consists of
non-accrual loans and loans delinquent over 90 days and still accruing,
substantially increased by $15.8 million during 2002. Non-performing loans were
$18.4 million at December 31, 2002, and $2.6 million at December 31, 2001. The
increase in
62
non-performing loans was mainly due to a few large loans. Please see "Credit
Quality" for more information.
The following table breaks out non-performing loans by category.
(Dollars in thousands)
-------------------------------------------------------------------------------------------------------------
2002 2001 $ Change % Change
-------------------------------------------------------------------------------------------------------------
December 31,
Non-accrual loans $18,307 $2,178 $16,129 740.5%
Over 90 days delinquent still accruing 135 395 (260) (65.8)
-------------------------------------------------------------------------------------------------------------
Totals $18,442 $2,573 $15,869 616.8%
-------------------------------------------------------------------------------------------------------------
The Company believes it has established an adequate allowance for loan
losses in accordance with generally accepted accounting principles. The
variation in the amount of provision charged against income is directly related
to changes in loan charge-offs, non-performing loans, loan delinquencies,
economic conditions in the Company's lending area and loan portfolio mix during
each year.
NON-INTEREST INCOME
- -------------------
Non-interest income was $2.9 million in 2002 and $4.0 million in 2001, for
an overall decrease of 27.50%. The main cause of the decline was due to the net
losses on securities sold in 2002 of $2.0 million (See "Investments Sold in
2002"). Excluding the security losses, non-interest income would have improved
22.94%. Gains on sales of loans and servicing rights improved to $1.4 million
for 2002 from $804,000 for 2001, an increase of 77.00%. Interest rates have
steadily declined since 2001, which has created a higher demand from consumers
for fixed-rate mortgage loans. Proceeds from loans sold in the secondary market
were $113.0 million in 2002 and $86.8 million in 2001. Other fees and service
charges improved 5.25%, while brokerage and insurance commissions were up 1.01%.
The Bank invested in life insurance on employees and directors, with a balance
or cash surrender value of $18.9 million and $18.0 million, respectively, at
December 31, 2002 and 2001. The majority of these policies were purchased in
1999. The nontaxable increase in cash surrender value of life insurance was
$897,000 in 2002 and $945,000 in 2001. Overall, the increase in cash value of
life insurance declined 5.08% in 2002 compared with 2001. Operating losses
associated with the limited partnership amounted to a gain of $92,000 in 2002
and a loss of $172,000 in 2001 and are included in other income. The Company
incurred an allocated gain of $191,000 and tax credit recapture of $33,000 due
to the termination of ownership in one of the properties in 2002. The Company
also reflected federal income tax credits of $159,000 (after-tax credit
recapture) and $210,000 for the year ended December 31, 2002, and December 31,
2001.
63
NON-INTEREST EXPENSE
- --------------------
Non-interest expense was $13.7 million in 2002 and $11.3 million in 2001,
for an overall increase of 20.51%. The main cause of the increase was the
penalties charged for early payoff of FHLB advances in 2002 of $1.1 million (See
"Investments Sold in 2002"). Excluding the advance early payoff penalties,
non-interest expense would have increased 11.02%. The largest component of
non-interest expense is salaries and employee benefits, which make up 55.57% of
total non-interest expenses.
Salaries and employee benefits increased $879,000 to $7.6 million in 2002,
compared with $6.7 million in 2001. In 2002, the Bank paid a former executive
officer severance pay for a non-recurring expense of $289,000. The Bank's
employee retirement plan expense increased to $215,000 in 2002 from $5,000 in
2001. The retirement expense incurred in 2001 was for general administrative
expenses of the retirement fund. In 2001, the stock market generally provided
enough earnings to cover increases required in the employee retirement fund.
With the decline of the stock market, the Bank's retirement expense in 2002 rose
substantially. Other insurance benefits, comprised mainly of medical insurance,
increased to $1.0 million in 2002 from $748,000 in 2001, for an overall increase
in insurance benefits expense of $280,000. There were 11 new positions added
during 2002 in several areas Bank. Please see Note 11 to the "Consolidated
Financial Statements" for more information regarding benefits.
Net occupancy and furniture and equipment expense was $1.7 million in 2002,
compared with $1.4 million 2001, for an overall expense increase of $271,000, or
19.62%, in 2001. The increase was mainly due to building equipment maintenance
expense, utilities, equipment rental and depreciation expense that increased
$74,000, $17,000, $22,000, $14,000, respectively, in 2002 from 2001. Data
processing, printing and supplies, and all expenses increased $32,000, or 1.10%,
in 2002 from 2001.
INCOME TAX EXPENSE
- ------------------
The Company incurred a $2.5 million income tax benefit in 2002 compared
income tax expense of $1.5 million in 2001. The effective tax rate was (45.0)%
in 2002 and 27.8% in 2001. 2002 income taxes were composed of $796,000 expense
for current taxes and a $3.3 million credit for deferred The 2001 income taxes
were composed of $1.7 million expense for current taxes and $229,000 credit for
taxes. The deferred tax credits in 2002 were mainly due to the loan provision
expense in 2002. For both 2002 and 2001 , the primary difference between the
effective tax rates and the statutory tax rates relate to tax credits and cash
value of life insurance. See Note 10 to the "Consolidated Financial Statements"
for more information.
64
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Historically, funds provided by operations, loan principal repayments and
new deposits have been the Company's principal sources of liquid funds. In
addition, the Company has the ability to obtain funds through the sale of new
mortgage loans and through borrowings from the FHLB system. At December 31,
2003, the Company's commitments for loans in process totaled $5.9 million and
conditional commitments for lines of credit receivable totaled $21.4 million.
Management believes that the Company's liquidity and other sources of funds will
be sufficient to fund all outstanding commitments and other cash needs. A
portion of these commitments is for fixed-rate mortgage loans, which will be
sold immediately into the secondary market.
An amendment of the 1996 Stock Option Plan, which provides for the granting
of incentive and non-qualified stock options, was approved by the shareholders
in April 1998 and extended the plan's term to ten years and increased the number
of shares reserved under the plan from 176,000 to 352,000 shares. Options for
825 shares in 2003 were exercised. Options for 9,713 shares in 2002 were
exercised. See Notes 1 and 11 to the "Consolidated Financial Statements" for the
pro forma effect on net income and option activity.
OFF-BALANCE SHEET ARRANGEMENTS
- ------------------------------
The Company does not have any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect of the Company's
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that
is material to investors.
CONTRACTUAL OBLIGATIONS
- -----------------------
Either the Company or the Bank has the following known contractual
obligations as of December 31, 2003:
- ----------------------------------- ----------------------------------------------------------------------------------
Payment due by period
Contractual Obligations
- ----------------------------------- ----------------------------------------------------------------------------------
Less than 1-3 3-5 More than
Total 1 year years years 5 years
- ----------------------------------- ---------------- --------------- ---------------- ---------------- ---------------
(Dollars in thousands)
- ----------------------------------- ----------------------------------------------------------------------------------
Long-Term Debt Obligations $ 9,630 $ 915 $ 3,517 $ 198 $ 5,000
- ----------------------------------- ---------------- --------------- ---------------- ---------------- ---------------
Capital Lease Obligations -- -- -- -- --
- ----------------------------------- ---------------- --------------- ---------------- ---------------- ---------------
Operating Lease Obligations 327 114 150 63 --
- ----------------------------------- ---------------- --------------- ---------------- ---------------- ---------------
Purchase Obligations -- -- -- -- --
- ----------------------------------- ---------------- --------------- ---------------- ---------------- ---------------
Other Long-Term Liabilities -- -- -- -- --
Reflected on the Company's
Balance Sheet under GAAP
- ----------------------------------- ---------------- --------------- ---------------- ---------------- ---------------
Total $ 9,957 $ 1,029 $ 3,667 $ 260 $ 5,000
- ----------------------------------- ---------------- --------------- ---------------- ---------------- ---------------
65
IMPACT OF INFLATION AND CHANGING PRICES
- ---------------------------------------
The consolidated financial statements and related data presented in this
report have been prepared in accordance with generally accepted accounting
principles. This requires the measurement of financial position and operating
results in terms of historical dollars without consideration of changes in the
relative purchasing power of money over time due to inflation.
Virtually all of the assets and liabilities of a financial institution are
monetary in nature. As a result, interest rates have a more significant impact
on a financial institution's performance than the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or at
the same rate as changes in the prices of goods and services, which are directly
affected by inflation, although interest rates may fluctuate in response to
perceived changes in the rate of inflation.
CURRENT ACCOUNTING ISSUES
- -------------------------
In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity. SFAS 150 establishes standards for classification and measurement in the
statement of financial position of certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability. The
FASB's Staff Position 150-3 deferred indefinitely the guidance in SFAS No. 150
on certain mandatorily redeemable noncontrolling interests. At December 31,
2003, the Company has no financial instruments with characteristics of both
liabilities and equity.
In January of 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51, and in December 2003 the FASB deferred certain effective dates of
Interpretation No. 46. For all variable interest entities other than special
purpose entities, the revised Interpretation is effective for periods ending
after March 15, 2004. For variable interest entities meeting the definition of
special purpose entities under earlier accounting rules, the Interpretation
remains effective for periods ending after December 31, 2003. The Interpretation
requires the consolidation of entities in which an enterprise absorbs a majority
of the entity's expected losses, receives a majority of the entity's expected
residual returns, or both, as a result of ownership, contractual or other
financial interests in the entity. Currently, entities are generally
consolidated by an enterprise when it has a controlling interest through
ownership of a majority voting interest in the entity. The Company has
determined that it has no such interests.
66
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-based
Compensation - Transition and Disclosure, which provides guidance for transition
from the intrinsic value method of accounting for stock-based compensation under
Accounting Principles Board ("APB") Opinion No. 25 to SFAS No. 123's fair value
method of accounting, if a company so elects. The Company applies APB Opinion
No. 25 and related Interpretations in accounting for the stock option plan.
Accordingly, no compensation costs have been recognized, as all options granted
had an exercise price equal to the market value of the underlying common stock
on the date of grant. Had compensation cost for the Company's stock option plan
been recorded based on the fair value at the grant dates for awards under the
plan consistent with the method prescribed by SFAS No. 123, net income and net
income per share would have been adjusted to the proforma amounts indicated in
Note 1.
In November 2002, FASB Interpretation No. 45 ("FIN 45"), Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others was issued. FIN 45 requires the disclosures
to be made by a guarantor in its financial statements about its obligations
under certain guarantees that it has issued. It also clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The most
significant FIN45 instruments of the Company are standby letters of credit. The
Company has determined that its standby letters of credit obligations under FIN
45 are not material for disclosure.
67
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- -------------------------------------------------------------------
Reference is made to the discussion captioned "Interest Rate Risk" in Item
7 of this Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Auditors F - 1
Consolidated Balance Sheets at December 31, 2003 and 2002 F - 2
Consolidated Statements of Operations for Each of the Three Years in the Period Ended
December 31, 2003 F - 3
Consolidated Statements of Shareholders' Equity for Each of the Three Years in the
Period Ended December 31, 2003 F - 4
Consolidated Statements of Cash Flows for Each of the Three Years in the Period
Ended December 31, 2003 F - 5
Notes to Consolidated Financial Statements F - 6
68
Independent Accountants' Report
To the Shareholders and
Board of Directors
Ameriana Bancorp
New Castle, Indiana
We have audited the accompanying consolidated balance sheets of Ameriana
Bancorp as of December 31, 2003 and 2002, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of
the three years in the period ended December 31, 2003. These consolidated
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements described above
present fairly, in all material respects, the consolidated financial
position of Ameriana Bancorp as of December 31, 2003 and 2002, and the
results of its operations and its cash flows for each of the three years in
the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
As more fully discussed in Note 7, the Company changed its method of
accounting for goodwill in 2002.
/s/ BKD, LLP
Indianapolis, Indiana
February 6, 2004
F-(1)
Ameriana Bancorp
Consolidated Balance Sheets
(in thousands, except share data)
- -----------------------------------------------------------------------------------------------------------------------------
December 31
- -----------------------------------------------------------------------------------------------------------------------------
2003 2002
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash on hand and in other institutions $ 9,505 $ 7,481
Interest-bearing demand deposits 5,044 38,215
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 14,549 45,696
Investment securities available for sale 137,788 58,155
Loans, net of allowance for loan losses of $3,744 and $8,666 204,141 304,586
Premises and equipment 7,887 7,901
Stock in Federal Home Loan Bank 6,948 6,759
Goodwill 564 1,291
Cash value of life insurance 19,705 18,932
Other assets 10,871 13,487
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $402,453 $456,807
=============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 19,039 $ 19,124
Interest-bearing 326,705 383,063
- -----------------------------------------------------------------------------------------------------------------------------
Total deposits 345,744 402,187
Borrowings 10,230 6,432
Drafts payable 3,477 5,099
Other liabilities 4,128 4,049
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 363,579 417,767
- -----------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity
Preferred stock - 5,000,000 shares authorized and unissued
Common stock, $1.00 par value
Authorized 15,000,000 shares
Issued and outstanding - 3,148,288 and 3,147,463 shares 3,148 3,147
Additional paid-in capital 506 499
Retained earnings 35,259 34,856
Accumulated other comprehensive income (loss) (39) 538
- -----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 38,874 39,040
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $402,453 $456,807
=============================================================================================================================
See notes to consolidated financial statements.
F-(2)
Ameriana Bancorp
Consolidated Statements of Operations
(in thousands, except share data)
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
- ----------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $19,241 $24,473 $30,005
Interest on mortgage-backed securities 1,109 3,196 2,225
Interest on investment securities 1,983 1,320 4,067
Other interest and dividend income 763 984 873
- ----------------------------------------------------------------------------------------------------------------------------
Total interest income 23,096 29,973 37,170
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 9,656 14,712 18,663
Interest on borrowings 410 2,829 5,580
- ----------------------------------------------------------------------------------------------------------------------------
Total interest expense 10,066 17,541 24,243
- ----------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 13,030 12,432 12,927
Provision for loan losses 6,440 7,300 360
- ----------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,590 5,132 12,567
- ----------------------------------------------------------------------------------------------------------------------------
OTHER INCOME
Other fees and service charges 1,365 1,284 1,220
Brokerage and insurance commissions 960 1,005 995
Net realized losses on sales of available-for-sale securities 41 (2,025) --
Gains on sales of loans and servicing rights 1,878 1,423 804
Net gain on sale of branches 5,511 -- --
Increase in cash value of life insurance 773 897 945
Other 12 365 82
- ----------------------------------------------------------------------------------------------------------------------------
Total other income 10,540 2,949 4,046
- ----------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSE
Salaries and employee benefits 8,082 7,599 6,720
Net occupancy expense 783 963 802
Furniture and equipment expense 765 689 579
Legal and professional fees 731 386 317
Data processing expense 554 541 453
Printing and office supplies 253 309 330
Penalty on early payoff of FHLB advances -- 1,076 --
Other 2,434 2,112 2,147
- ----------------------------------------------------------------------------------------------------------------------------
Total other expense 13,602 13,675 11,348
- ----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 3,528 (5,594) 5,265
Income taxes 1,110 (2,519) 1,465
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 2,418 $ (3,075) $ 3,800
============================================================================================================================
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE $ .77 $(.98) $1.21
============================================================================================================================
See notes to consolidated financial statements.
F-(3)
Ameriana Bancorp
Consolidated Statements of Shareholders' Equity
(in thousands, except per share data)
- ---------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Additional Comprehensive
Common Paid-in Retained Income
Stock Capital Earnings (Loss) Total
- ----------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2001 $3,147 $499 $38,065 $41,711
Net income -- -- 3,800 3,800
Unrealized depreciation on
available-for-sale securities, net
of income tax benefit of $464 -- -- -- $(696) (696)
------------------
Comprehensive income 3,104
Dividends declared ($.61 per share) -- -- (1,920) -- (1,920)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 3,147 499 39,945 (696) 42,895
Net loss -- -- (3,075) -- (3,075)
Change in unrealized depreciation on
available-for-sale securities, net
of income tax expense of $801 -- -- -- 1,234 1,234
------------------
Comprehensive loss (1,841)
Exercise of stock options 9 128 -- -- 137
Purchase of common stock (9) (128) -- -- (137)
Dividends declared ($.64 per share) -- -- (2,014) -- (2,014)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 3,147 499 34,856 538 39,040
Net income -- -- 2,418 -- 2,418
Change in unrealized depreciation on
available-for-sale securities, net
of income tax benefit of $359 -- -- -- (577) (577)
------------------
Comprehensive income 1,841
Exercise of stock options 1 7 -- -- 8
Dividends declared ($.64 per share) -- -- (2,015) -- (2,015)
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2003 $3,148 $506 $35,259 $ (39) $38,874
===========================================================================================================================
See notes to consolidated financial statements.
F-(4)
Ameriana Bancorp
Consolidated Statements of Cash Flows
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
- ------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 2,418 $ (3,075) $ 3,800
Items not requiring (providing) cash
Provision for losses on loans 6,440 7,300 360
Depreciation and amortization 1,503 967 804
Increase in cash surrender value (773) (897) (945)
Mortgage loans originated for sale (150,283) (110,756) (91,515)
Proceeds from sale of mortgage loans 154,529 113,047 86,814
Gains on sale of loans and servicing rights (1,878) (1,423) (804)
Loss on sale of investments (41) 2,025 --
Gain on sale of branches (5,511) -- --
Increase (decrease) in drafts payable (1,622) (1,053) 3,053
Other adjustments (1,032) 2,898 (2,297)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 3,750 9,033 (730)
- ------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
- ------------------------------------------------------------------------------------------------------------------------------
Purchase of investment securities held to maturity -- -- (131,430)
Proceeds from maturities/calls of securities held to maturity -- -- 77,805
Principal collected on mortgage-backed securities held to maturity -- -- 11,445
Purchase of investment securities available for sale (139,037) (131,339) --
Proceeds from sale of investment securities available for sale 20,705 179,218 --
Proceeds from maturities/calls of securities available for sale 18,764 6,207 --
Principal collected on mortgage-backed securities available for sale 19,696 28,038 --
Net change in loans 64,512 37,856 45,711
Net purchases of premises and equipment (1,233) (1,589) (425)
Purchase of Federal Home Loan Bank stock -- (69) (100)
Proceeds from sale of Federal Home Loan Bank stock -- 675 --
Net cash paid on sale of branches (19,751) -- --
Other investing activities 488 256 153
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (35,856) 119,253 3,159
- ----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
- ------------------------------------------------------------------------------------------------------------------------------
Net change in demand and passbook deposits 41,347 13,487 10,309
Net change in certificates of deposit (42,179) (23,713) 34,509
Proceeds from borrowings 5,000 55,500 93,500
Repayment of borrowings (1,202) (137,651) (146,089)
Purchase of common stock -- (137) --
Exercise of stock options 8 137 --
Cash dividends paid (2,015) (2,014) (1,888)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 959 (94,391) (9,659)
- ------------------------------------------------------------------------------------------------------------------------------
CHANGE IN CASH AND CASH EQUIVALENTS (31,147) 33,895 (7,230)
Cash and Cash Equivalents at Beginning of Year 45,696 11,801 19,031
- ----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $14,549 $45,696 $11,801
==============================================================================================================================
See notes to consolidated financial statements.
F-(5)
Ameriana Bancorp
Notes to Consolidated Financial Statements
(table dollar amounts in thousands, except share data)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of Ameriana Bancorp (the "Company") and its wholly-owned subsidiary,
Ameriana Bank and Trust, SB ("the Bank"), and the Bank's wholly-owned
subsidiaries, Ameriana Investment Management, Inc. ("AIMI"), Ameriana Financial
Services, Inc., and Ameriana Insurance Agency, Inc. All significant intercompany
accounts and transactions have been eliminated.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The Company is a bank holding company whose principal activity is the
ownership and management of the Bank and its subsidiaries. The Company provides
various banking services and engages in loan servicing activities for investors
and operates in a single significant business segment. The Bank is subject to
the regulation of the Indiana Department of Financial Institutions and the
Federal Deposit Insurance Corporation. The Company's gross revenues are
substantially earned from the various banking services provided by the Bank. The
Company also earns brokerage and insurance commissions from the services
provided by the other subsidiaries. AIMI manages the Company's investment
portfolio.
The Bank generates loans and receives deposits from customers located primarily
in east central Indiana and southwestern Ohio. Loans are generally secured by
specific items of collateral including real property and consumer assets. The
Company has sold various loans to investors while retaining the servicing
rights.
CASH AND CASH EQUIVALENTS consist of cash on hand and in other institutions and
interest-bearing demand deposits.
INVESTMENT SECURITIES: Debt securities are classified as held to maturity when
the Company has the positive intent and ability to hold the securities to
maturity. Securities held to maturity are carried at amortized cost. Debt
securities not classified as held to maturity are classified as available for
sale. Securities available for sale are carried at fair value with unrealized
gains and losses reported separately in accumulated other comprehensive income,
net of tax.
Amortization of premiums and accretion of discounts are recorded using the
interest method as interest income from securities. Realized gains and losses
are recorded as net security gains (losses). Gains and losses on sales of
securities are determined on the specific-identification method.
STOCK IN FEDERAL HOME LOAN BANK ("FHLB") is stated at cost and the amount of
stock the Company is required to own is determined by regulation.
LOANS are carried at the principal amount outstanding. A loan is impaired when,
based on current information or events, it is probable that the Company will be
unable to collect all amounts due (principal and interest) according to the
contractual terms of the loan agreement. Payments with insignificant delays not
exceeding 90 days outstanding are not considered impaired. Certain nonaccrual
and substantially delinquent loans may be considered to be impaired. Generally,
loans are placed on non-accrual status at 90 days past due and interest is
considered a loss, unless the loan is well-secured and in the process of
collection. The Company considers its investment in one-to-four family
residential loans and installment loans to be homogeneous and therefore excluded
from separate identification of evaluation of impairment. Interest income is
accrued on the principal balances of loans. The accrual of interest on impaired
and nonaccrual loans is discontinued when, in management's opinion, the borrower
may be unable to meet payments as they become due. When interest accrual is
discontinued, all unpaid accrued interest is reversed when considered
uncollectible. Interest income is subsequently recognized only to the extent
cash payments are received. Certain loan fees and direct costs are being
deferred and amortized as an adjustment of yield on the loans over the
contractual lives of the loans. When a loan is paid off or sold, any unamortized
loan origination fee balance is credited to income.
F-(6)
Ameriana Bancorp
Notes to Consolidated Financial Statements
(table dollar amounts in thousands, except share data)
ALLOWANCE FOR LOAN LOSSES is maintained at a level believed adequate by
management to absorb inherent losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of the
portfolio including consideration of past loan loss experience, current economic
conditions, volume, growth and composition of the loan portfolio, the
probability of collecting all amounts due, and other relevant factors. Impaired
loans are measured by the present value of expected future cash flows, or the
fair value of the collateral of the loan, if collateral dependent. The allowance
is increased by provisions for loan losses charged against income. Loan losses
are charged against the allowance when management believes the uncollectibility
of a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. Management believes that as of
December 31, 2003, the allowance for loan losses is adequate based on
information currently available. A worsening or protracted economic decline in
the areas within which the Company operates would increase the likelihood of
additional losses due to credit and market risks and could create the need for
additional loss reserves.
PREMISES AND EQUIPMENT are stated at cost less accumulated depreciation.
Depreciation is computed principally by the straight-line method over the
estimated useful lives of the related assets. Maintenance and repairs are
expensed as incurred while major additions and improvements are capitalized.
GOODWILL is annually tested for impairment. If the implied fair value of
goodwill is lower than its carrying amount, goodwill impairment is indicated and
goodwill is written down to its implied fair value. Subsequent increases in
goodwill value are not recognized in the financial statements.
EARNINGS PER SHARE is computed by dividing net income by the weighted-average
number of common and potential common shares outstanding during each year.
MORTGAGE SERVICING RIGHTS on originated loans are capitalized by estimating the
fair value of the streams of net servicing revenues that will occur over the
estimated life of the servicing arrangement. Capitalized servicing rights, which
include purchased servicing rights, are amortized in proportion to and over the
period of estimated servicing revenues.
STOCK OPTIONS - The Company has a stock-based employee compensation plan, which
is described more fully in Note 11. The Company accounts for this plan under the
recognition and measurement principles of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. No stock-based employee compensation cost is reflected in net
income, as all options granted under the plan had an exercise price equal to the
market value of the underlying common stock on the grant date. The following
table illustrates the effect on net income and earnings per share if the Company
had applied the fair value provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, to
stock-based employee compensation.
- -----------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss), as reported $2,418 $(3,075) $3,800
Less: Total stock-based employee compensation cost determined under the
fair value based method, net of income taxes (7) (25) --
- -----------------------------------------------------------------------------------------------------------------------------
Pro forma net income (loss) $2,411 $(3,100) $3,800
=============================================================================================================================
Basic and diluted earnings (loss) per share, as reported $.77 $(.98) $1.21
Basic and diluted earnings (loss) per share, pro forma .77 (.98) 1.21
F-(7)
Ameriana Bancorp
Notes to Consolidated Financial Statements
(table dollar amounts in thousands, except share data)
INCOME TAX in the consolidated statements of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes. The Company
and its subsidiaries file consolidated tax returns. The parent company and
subsidiaries are charged or given credit for income taxes as though separate
returns were filed.
RECLASSIFICATIONS of certain amounts in the 2002 and 2001 consolidated financial
statements have been made to conform to the 2003 presentation.
2. RESTRICTION ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserve funds in cash and/or on deposit with
the Federal Reserve Bank. The reserve required at December 31, 2003 was
$2,934,000.
3. INVESTMENT SECURITIES
- -------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------------
Available for sale at December 31, 2003
Mortgage-backed securities $ 36,461 $365 $325 $ 36,501
Federal agencies 78,580 108 265 78,423
Municipal securities 9,368 67 11 9,424
Equity securities 13,440 144 144 13,440
- -------------------------------------------------------------------------------------------------------------------------
$137,849 $684 $745 $137,788
=========================================================================================================================
Available for sale at December 31, 2002
Mortgage-backed securities and
collateralized mortgage obligations $27,251 $584 $11 $27,824
Federal agencies 8,052 175 -- 8,227
Equity securities 21,977 127 -- 22,104
- -------------------------------------------------------------------------------------------------------------------------
$57,280 $886 $11 $58,155
=========================================================================================================================
F-(8)
Ameriana Bancorp
Notes to Consolidated Financial Statements
(table dollar amounts in thousands, except share data)
The amortized cost and fair value of securities available for sale at December
31, 2003, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because issuers may have the right to call or
prepay obligations with or without call or prepayment penalties.
- -------------------------------------------------------------------------------------------------------------------------
Available for Sale
- -------------------------------------------------------------------------------------------------------------------------
Amortized Fair
Cost Value
- -------------------------------------------------------------------------------------------------------------------------
Within one year $ 3,999 $ 4,061
One to five years 74,581 74,362
Five to ten years 3,168 3,205
After ten years 6,200 6,219
- -------------------------------------------------------------------------------------------------------------------------
87,948 87,847
Mortgage-backed securities 36,461 36,501
Equity securities 13,440 13,440
- -------------------------------------------------------------------------------------------------------------------------
$137,849 $137,788
=========================================================================================================================
Certain investments in debt and equity securities are reported in the financial
statements at an amount less than their historical cost. These declines
primarily resulted from recent increases in market interest rates and failure of
certain investments to maintain consistent credit quality ratings or meet
projected earnings targets.
Based on evaluation of available evidence, including recent changes in market
interest rates and credit rating information, management believes the declines
in fair value for these securities are temporary.
The Company's temporarily impaired investment securities at December 31, 2003
are shown below.
At December 31, 2003 Less Than 12 Months 12 Months or Longer Total
- ---------------------------------------------------------------------------------------------------------------------------
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
- ---------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities $22,724 $318 $392 $7 $23,116 $325
Federal agencies 42,403 265 -- -- 42,403 265
Municipal securities 2,141 11 -- -- 2,141 11
Equity securities 11,796 144 -- -- 11,796 144
- ---------------------------------------------------------------------------------------------------------------------------
$79,064 $738 392 $7 $79,456 $745
===========================================================================================================================
No investment securities were pledged at December 31, 2003. Investment
securities with a total carrying value of $1,811,000 were pledged at December
31, 2002 to secure FHLB advances.
Gross gains of $41,000 and $1,247,000 and gross losses of $0 and $3,272,000
resulting from sales of available-for-sale securities were realized for 2003 and
2002.
In 2001, the Company determined that because of its interest rate risk, it would
not be able to continue to hold its investment securities to maturity.
Accordingly, the Company transferred its held-to-maturity investments to
available for sale as of December 31, 2001, and recorded an accumulated other
comprehensive loss of $696,000 as of that date.
F-(9)
Ameriana Bancorp
Notes to Consolidated Financial Statements
(table dollar amounts in thousands, except share data)
4. LOANS
- ----------------------------------------------------------------------------------------------------------------------------
December 31
- ----------------------------------------------------------------------------------------------------------------------------
2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
Residential mortgage loans $108,172 $195,055
Commercial mortgage loans 90,349 91,856
Installment loans 7,058 12,386
Commercial loans 7,672 21,172
Loans secured by deposits 811 1,130
- ----------------------------------------------------------------------------------------------------------------------------
214,062 321,599
- ----------------------------------------------------------------------------------------------------------------------------
Deduct
- ----------------------------------------------------------------------------------------------------------------------------
Undisbursed loan proceeds 5,859 7,985
Deferred loan costs, net 318 362
Allowance for loan losses 3,744 8,666
- ----------------------------------------------------------------------------------------------------------------------------
9,921 17,013
- ----------------------------------------------------------------------------------------------------------------------------
$204,141 $304,586
============================================================================================================================
Loans being serviced by the Company for investors, primarily the Federal Home
Loan Mortgage Corporation and Federal National Mortgage Association, totaled
approximately $193,016,000, $177,392,000 and $162,017,000 as of December 31,
2003, 2002 and 2001. Such loans are not included in the preceding table.
The aggregate fair value of capitalized mortgage servicing rights at December
31, 2003 and 2002 is based on comparable market values and expected cash flows,
with impairment assessed based on portfolio characteristics including product
type, investor type and interest rates. No valuation allowance was necessary at
December 31, 2003 and 2002.
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
- ----------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Mortgage servicing rights
Balance at beginning of year $1,197 $1,012 $ 847
Servicing rights capitalized 727 597 416
Amortization of servicing rights (611) (412) (251)
- ----------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 1,313 $1,197 $1,012
============================================================================================================================
F-(10)
Ameriana Bancorp
Notes to Consolidated Financial Statements
(table dollar amounts in thousands, except share data)
At December 31, 2003 and 2002, the Company had outstanding commitments to
originate loans of approximately $2,845,000 and $8,379,000, 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. In addition, the Company had $21,409,000 and $22,231,000 of
conditional commitments for lines of credit receivables at December 31, 2003 and
2002. Exposure to credit loss in the event of nonperformance by the other party
to the financial instruments for commitments to extend credit is represented by
the contractual or notional amount of those instruments. The same credit
policies are used in making such commitments as are used for instruments that
are included in the consolidated balance sheets. Commitments to extend credit
are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. Each customer's credit worthiness is evaluated on a case-by-case
basis. The amount of collateral obtained, if deemed necessary upon extension of
credit, is based on management's credit evaluation. Collateral held varies but
may include accounts receivable, inventory, real estate, equipment, and
income-producing commercial properties. In addition, the Company had $3,584,000
of letters of credit outstanding at December 31, 2003 and 2002. Letters of
credit are conditional commitments issued by the Company to guarantee the
performance of a customer to a third party. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loans to
customers.
5. ALLOWANCE FOR LOAN LOSSES
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
- ----------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Balance at beginning of year $8,666 $1,730 $1,489
Provision for losses 6,440 7,300 360
Charge-offs (11,394) (388) (156)
Recoveries 32 24 37
- ----------------------------------------------------------------------------------------------------------------------------
Net charge-offs (11,362) (364) (119)
- ----------------------------------------------------------------------------------------------------------------------------
Balance at end of year $3,744 $8,666 $1,730
============================================================================================================================
At December 31, 2003 and 2002, impaired loans totaled $6,952,000 and $16,669,000
with an allocation of the allowance for loan losses of $1,304,000 and
$6,646,000.
Interest of $154,000 and $119,000 was recognized on average impaired loans of
$14,471,000 and $11,076,000 for 2003 and 2002. All interest recognized on
impaired loans during 2003 and 2002 was on a cash basis.
Impaired loans were immaterial at and during the year ended December 31, 2001.
At December 31, 2003 and 2002, accruing loans delinquent 90 days or more totaled
$74,000 and $135,000. Non-accruing loans at December 31, 2003 and 2002 were
$8,383,000 and $18,307,000.
F-(11)
Ameriana Bancorp
Notes to Consolidated Financial Statements
(table dollar amounts in thousands, except share data)
6. PREMISES AND EQUIPMENT
- ----------------------------------------------------------------------------------------------------------------------------
December 31
- ----------------------------------------------------------------------------------------------------------------------------
2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
Land $1,814 $1,777
Land improvements 502 580
Office buildings 7,498 7,682
Furniture and equipment 4,048 4,891
Automobiles 98 70
- ----------------------------------------------------------------------------------------------------------------------------
13,960 15,000
Less accumulated depreciation 6,073 7,099
- ----------------------------------------------------------------------------------------------------------------------------
$7,887 $7,901
============================================================================================================================
7. GOODWILL
During 2002, the Company changed its method of accounting and financial
reporting for goodwill and other intangible assets by adopting the provisions of
SFAS No. 142. Had the new method been applied retroactively, the previously
reported 2001 net income would have increased by $120,000.
During 2003, $727,000 of goodwill was eliminated in connection with the sale of
two Ohio branches. On September 29, 2003, the branches located in Deer Park and
Landen, Ohio were sold to Peoples Community Bancorp, Inc. of West Chester, Ohio.
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. The Company
retained and will continue to service certain single family residential
mortgages originated in those locations.
8. DEPOSITS
- ----------------------------------------------------------------------------------------------------------------------------
December 31
- ----------------------------------------------------------------------------------------------------------------------------
2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
Demand $127,945 $ 100,471
Savings 30,558 33,990
Certificates of $100,000 or more 27,212 45,510
Other certificates 160,029 222,216
- ----------------------------------------------------------------------------------------------------------------------------
$345,744 $402,187
============================================================================================================================
F-(12)
Ameriana Bancorp
Notes to Consolidated Financial Statements
(table dollar amounts in thousands, except share data)
Certificates maturing in years ending after December 31, 2003:
- --------------------------------------------------------------------------------------------------------
2004 $ 106,749
2005 27,899
2006 21,236
2007 16,145
2008 12,397
Thereafter 2,815
- --------------------------------------------------------------------------------------------------------
$ 187,241
========================================================================================================
Interest paid on deposits approximated interest expense in 2003, 2002 and 2001.
9. BORROWINGS
Borrowings at December 31, 2003 and 2002 include Federal Home Loan Bank advances
totaling $9,630,000 and $5,592,000 with a weighted-average rate of 5.38% and
6.83%. The advances are secured by a combination of first-mortgage loans,
investment securities and overnight deposits. Some advances are subject to
restrictions or penalties in the event of prepayment.
Borrowings at December 31, 2003 and 2002 also include a note payable for
$600,000 and $750,000 to another financial institution with a rate of 3.50% and
4.25%. The note is secured by the outstanding common stock of the Bank. The note
outstanding at December 31, 2002 was due at July 24, 2003 and was renewed at
that date to January 24, 2004.
A promissory note of $90,000 was included in borrowings at December 31, 2002.
The interest rate on the note was 6.0%.
Interest paid on borrowings was $414,000, $3,092,000, and $5,881,000 for 2003,
2002 and 2001.
- ----------------------------------------------------------------------------------------------------------------------------
Maturities in years ending December 31
2004 $ 1,515
2005 3,301
2006 216
2007 170
2008 28
Thereafter 5,000
- ----------------------------------------------------------------------------------------------------------------------------
$10,230
============================================================================================================================
F-(13)
Ameriana Bancorp
Notes to Consolidated Financial Statements
(table dollar amounts in thousands, except share data)
10. INCOME TAXES
- ----------------------------------------------------------------------------------------------------------------------------
December 31
- ----------------------------------------------------------------------------------------------------------------------------
2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
Deferred tax assets
Deferred compensation $ 404 $ 294
General loan loss reserves 1,526 3,428
Net unrealized loss on securities available for sale 22 --
Reserve for uncollected interest 335 534
Other -- 48
- ----------------------------------------------------------------------------------------------------------------------------
2,287 4,304
- ----------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities
FHLB stock dividends (608) (515)
Tax bad debt reserves (23) (88)
Purchase accounting adjustments -- (95)
Deferred loan fees (35) (91)
Mortgage servicing rights (525) (454)
Net unrealized gains on securities available for sale -- (337)
Other (75) (105)
- ----------------------------------------------------------------------------------------------------------------------------
(1,266) (1,685)
- ----------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 1,021 $2,619
============================================================================================================================
The effective income tax rate on income from continuing operations is reconciled
to the statutory corporate tax rate as follows:
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
- ----------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Statutory federal tax rate 34.0% (34.0)% 34.0%
State income taxes, net of federal tax benefit 0.9 (4.5) 2.8
Tax credits (4.9) (2.9) (4.0)
Cash value of life insurance (7.5) (5.5) (6.1)
Disposition/amortization of Goodwill 8.8 .6 1.9
Other 0.2 1.3 (.8)
- ----------------------------------------------------------------------------------------------------------------------------
Effective tax rate 31.5% (45.0)% 27.8%
============================================================================================================================
F-(14)
Ameriana Bancorp
Notes to Consolidated Financial Statements
(table dollar amounts in thousands, except share data)
The provision (credit) for income taxes consists of the following:
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
- ----------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Federal
Current $ (903) $ 702 $1,448
Deferred 1,963 (2,840) (205)
- ----------------------------------------------------------------------------------------------------------------------------
1,060 (2,138) 1,243
- ----------------------------------------------------------------------------------------------------------------------------
State
Current 56 94 246
Deferred (6) (475) (24)
- ----------------------------------------------------------------------------------------------------------------------------
50 (381) 222
- ----------------------------------------------------------------------------------------------------------------------------
$1,110 $(2,519) $1,465
============================================================================================================================
As of December 31, 2003, the Company had approximately $4,700,000 of state tax
loss carryforward available to offset future franchise tax. Also, at December
31, 2003, the Company had approximately $72,000 of tax credits available to
offset future federal income tax. Both the state loss carryforward and the tax
credits expire in 2023.
The Company paid $1,503,000, $290,000 and $969,000 of state and federal income
taxes in 2003, 2002 and 2001.
11. EMPLOYEE BENEFITS
The Company is a participating employer in a multi-employer defined-benefit
pension plan and a 401(k) plan. The plans cover substantially all full-time
employees of the Company. Since the defined-benefit pension plan is a
multi-employer plan, no separate actuarial valuations are made with respect to
each participating employer. Pension expense for the plans totaled $768,000,
$215,000, and $5,000 in 2003, 2002 and 2001, respectively.
The Company has arrangements that provide retirement and death benefits to
certain officers and directors. The accrual of benefits totaled $991,000,
$744,000 and $420,000 for 2003, 2002 and 2001. In connection with these and
other benefits, life insurance has been purchased with the proceeds from the
policies to be utilized for the payment of benefits.
The Company has entered into employment agreements with certain officers that
provide for the continuation of salary and certain benefits for a specified
period of time under certain conditions. Under the terms of the agreements,
these payments could occur in the event of a change in control of the Company,
as defined, along with other specific conditions. The contingent liability under
these agreements is generally three times the annual salary of the officer.
F-(15)
Ameriana Bancorp
Notes to Consolidated Financial Statements
(table dollar amounts in thousands, except share data)
Under the 1987 Stock Option Plan and the 1996 Stock Option and Incentive Plan
("1996 Plan"), which are accounted for under the recognition and measurement
principles of APB No. 25, Accounting for Stock Issued to Employees, and related
interpretations, the Company has granted options to individuals to purchase
common stock at a price equal to the fair market value at the date of grant,
subject to the terms and conditions of the plans. Plan terms permit certain
nonincentive stock options to be granted at less than market value at plan
committee discretion. Options vest and are fully exercisable when granted or
over an extended period subject to continuous employment or under other
conditions set forth in the plans. The period for exercising options shall not
exceed ten years from the date of grant. The plans also permit grants of stock
appreciation rights. An amendment of the 1996 Plan extended the plan's term by
five years and increased the number of shares reserved under the plan from
176,000 to 352,000 shares.
The following is a summary of the status of the Company's stock option plans and
changes in those plans as of and for the years ended December 31, 2003, 2002 and
2001.
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
- ----------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 199,022 $14.27 203,510 $14.37 226,786 $14.31
Granted -- -- 22,000 14.25 -- --
Exercised (825) 9.43 (9,713) 14.15 -- --
Forfeited/expired (3,145) 14.30 (16,775) 17.81 (23,276) 13.81
----------- ----------- -----------
Outstanding at end of year 195,052 14.29 199,022 14.27 203,510 14.37
=========== =========== ===========
Options exercisable at year end 187,052 14.29 187,022 14.27 201,750 14.35
Weighted-average fair value of
options granted during the year -- $1.58 --
As of December 31, 2003, selected other information in exercise price ranges for
options outstanding and exercisable is as follows:
Outstanding Exercisable
- ---------------------------------------------------------------------------------------- ----------------------------------
Weighted- Weighted-Average Weighted-
Exercise Price Number Average Remaining Contractual Number Average
Range of Shares Exercise Price Life of Shares Exercise Price
- ---------------------------------------------------------------------------------------- ----------------------------------
$9.43 - 12.53 63,352 $ 12.50 2.1 years 63,352 $ 12.50
13.05 - 18.30 131,700 15.15 3.9 years 123,700 15.21
There were 178,442 shares under the 1996 Plan available for grant at December
31, 2003.
Although the Company has elected to follow APB No. 25, SFAS No. 123 requires pro
forma disclosures of net income and earnings per share as if the Company had
accounted for its employee stock options under that Statement. The fair value of
each option grant was estimated on the grant date using an option-pricing model
with the following assumptions:
2002
------------------
Risk-free interest rates 3.3%
Dividend yields 4.7%
Expected volatility factors of market price of common stock 18.4%
Weighted-average expected life of the options 10 years
The proforma effect on net income is disclosed in Note 1.
F-(16)
Ameriana Bancorp
Notes to Consolidated Financial Statements
(table dollar amounts in thousands, except share data)
12. SHAREHOLDERS' EQUITY
The payment of dividends by the Company depends substantially upon receipt of
dividends from the Bank, which is subject to various regulatory restrictions on
the payment of dividends. Under current regulations the Bank may not declare or
pay a cash dividend or repurchase any of its capital stock if the effect thereof
would cause the net worth of this entity to be reduced below regulatory capital
requirements or the amount required for its liquidation accounts.
In addition, without prior approval, current regulations allow the Bank to pay
dividends to the Company not exceeding retained net income for the applicable
calendar year to date, plus retained net income for the preceding two years.
Application is required by the Bank to pay dividends in excess of this
restriction and the Company's Board of Directors have resolved not to cause the
Bank to pay dividends if its Tier 1 capital would be less than 7% thereafter. At
December 31, 2003, the shareholder's equity of the Bank was $38,325,000 and
approval is required by the Indiana Department of Financial Institutions to pay
dividends to the Company.
13. EARNINGS (LOSS) PER SHARE
Year Ended December 31
- ------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Per Share Average Per Share Average Per Share
Income Shares Amount Loss Shares Amount Income Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share
Income (loss) available to common
shareholders $2,418 3,148,164 $ .77 $(3,075) 3,147,301 $(.98) $3,800 3,146,616 $1.21
===== ===== =====
Effect Of Dilutive Stock Options -- 3,412 -- -- -- 1,352
----------------- ------------------- -------------------
Diluted Earnings Per Share
Income available to common
shareholders and assumed
conversions $2,418 3,151,576 $ .77 $(3,075) 3,147,301 $(.98) $3,800 3,147,968 $1.21
===========================================================================================
Options to purchase 131,700, 199,022 and 138,420 shares of common stock at
exercise prices of $14.25 to $18.30, $9.43 to $18.30 and $14.32 to $18.30 per
share were outstanding at December 31, 2003, 2002 and 2001 but were not included
in the computation of diluted earnings per share because the options were
anti-dilutive.
14. OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes were as follows:
2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------
Unrealized gains (losses) on securities available for sale $(895) $ 10 $1,160
Reclassification for realized amount included in income 41 (2,025) --
- ------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), before tax effect (936) 2,035 1,160
Tax expense (benefit) (359) 801 (464)
- ------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) $(577) $1,234 $ (696)
==============================================================================================================================
F-(17)
Ameriana Bancorp
Notes to Consolidated Financial Statements
(table dollar amounts in thousands, except share data)
15. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies and is assigned to a capital category. The assigned
capital category is largely determined by three ratios that are calculated
according to the regulations. The ratios are intended to measure capital
relative to assets and credit risk associated with those assets and off-balance
sheet exposures. The capital category assigned can also be affected by
qualitative judgments made by regulatory agencies about the risk inherent in the
entity's activities that are not part of the calculated ratios.
There are five capital categories defined in the regulations, ranging from well
capitalized to critically undercapitalized. Classification in any of the
undercapitalized categories can result in actions by regulators that could have
a material effect on a bank's operations. At December 31, 2003 and 2002, the
Bank is categorized as well capitalized and met all subject capital adequacy
requirements. There are no conditions or events since December 31, 2003, that
management believes have changed this classification.
Actual and required capital amounts and ratios for the Bank are as follows:
- ------------------------------------------------------------------------------------------------------------------------------
December 31, 2003
- ------------------------------------------------------------------------------------------------------------------------------
Required For
Adequate Capital(1) Actual Capital
- ------------------------------------------------------------------------------------------------------------------------------
Ratio Amount Ratio Amount
- ------------------------------------------------------------------------------------------------------------------------------
Total risk-based capital(1)(to risk-weighted assets) 8.0% $19,882 16.42% $40,819
Tier 1 capital (to risk-weighted assets) 4.0 9,941 15.17 37,705
Core capital(1)(to adjusted total assets) 3.0 12,057 9.38 37,705
Core capital(1)(to adjusted tangible assets) 2.0 8,038 9.38 37,705
Tangible capital (to adjusted total assets) 1.5 6,028 9.38 37,705
(1) As defined by regulatory agencies
- ------------------------------------------------------------------------------------------------------------------------------
December 31, 2002
- ------------------------------------------------------------------------------------------------------------------------------
Required For
Adequate Capital(1) Actual Capital
- ------------------------------------------------------------------------------------------------------------------------------
Ratio Amount Ratio Amount
- ------------------------------------------------------------------------------------------------------------------------------
Total risk-based capital(1)(to risk-weighted assets) 8.0% $23,754 13.89% $41,255
Tier 1 capital (to risk-weighted assets) 4.0 11,877 12.61 37,455
Core capital(1)(to adjusted total assets) 3.0 14,109 7.96 37,455
Core capital(1)(to adjusted tangible assets) 2.0 9,406 7.96 37,455
Tangible capital (to adjusted total assets) 1.5 7,054 7.96 37,455
(1) As defined by regulatory agencies
During the second quarter of 2002, the Bank entered into a memorandum of
understanding (the "MOU") with the Federal Deposit Insurance Corporation (the
"FDIC") and the Indiana Department of Financial Institutions (the "DFI"). Among
other things, the MOU required the Bank to adopt written action plans with
respect to certain classified assets, revise its lending policies in accordance
with examiner recommendations, require greater financial information from
borrowers, establish a loan review program, document Board review of the
adequacy of loan losses, formulate a plan for improving the Bank's
profitability, review staffing needs with particular emphasis on loan
administration, strengthen certain internal controls and audit coverage and
address other regulatory compliance issues raised in the most recent examination
report by the FDIC and DFI. While the MOU is in effect, the Bank must maintain
Tier 1 capital at or above 7% of assets.
F-(18)
Ameriana Bancorp
Notes to Consolidated Financial Statements
(table dollar amounts in thousands, except share data)
The Company's Board of Directors have adopted resolutions providing that the
Company will not cause the Bank to pay dividends if its Tier 1 capital would be
less than 7% thereafter, that the Company will not incur additional debt without
prior Federal Reserve approval, and that the Company will not purchase any
treasury stock. The resolutions remain in effect until the MOU is lifted.
The Company believes that it has taken all actions specified in the MOU and
Board resolutions within the timeframes specified. The Company does not believe
the MOU or Board resolutions will materially affect the operations of the
Company or the Bank. A failure to comply with either the MOU or resolutions
could lead to the initiation of formal enforcement action by the FDIC, DFI and
the Federal Reserve.
Retained earnings at December 31, 2003, includes an allocation of income to bad
debt deductions of approximately $11,883,000 for which no provision for federal
income taxes has been made. If, in the future, this portion of retained earnings
is used for any purpose other than to absorb bad debt losses, including
redemption of bank stock or excess dividends, or loss of "bank" status, federal
income taxes may be imposed at the then applicable rates. The unrecorded
deferred income tax liability on the above amount was approximately $4,000,000.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values are based on estimates using present value and other valuation
techniques in instances where quoted market prices are not available. These
techniques are significantly affected by the assumptions used, including
discount rates and estimates of future cash flows. As such, the derived fair
value estimates cannot be compared to independent markets and, further, may not
be realizable in an immediate settlement of the instruments. Accordingly, the
aggregate fair value amounts presented do not represent, and should not be
construed to represent, the underlying value of the Company.
The following table presents the estimates of fair value of financial
instruments:
- ----------------------------------------------------------------------------------------------------------------------------
December 31
- ----------------------------------------------------------------------------------------------------------------------------
2003 2002
- ------------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- ----------------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 14,549 $ 14,549 $ 45,696 $ 45,696
Investment securities 137,788 137,788 58,155 58,155
Loans 204,141 206,589 304,586 309,792
Interest receivable 2,037 2,037 1,958 1,958
Stock in FHLB 6,948 6,948 6,759 6,759
Cash value of life insurance 19,705 19,705 18,932 18,932
Liabilities
Deposits 345,744 346,897 402,187 403,745
Borrowings 10,230 10,591 6,432 6,897
Interest payable 210 210 411 411
Drafts payable 3,477 3,477 5,099 5,099
F-(19)
Ameriana Bancorp
Notes to Consolidated Financial Statements
(table dollar amounts in thousands, except share data)
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
CASH AND CASH EQUIVALENTS, STOCK IN FHLB AND CASH VALUE OF LIFE INSURANCE: The
carrying amounts reported in the consolidated balance sheets approximate those
assets' fair values.
INVESTMENT SECURITIES: Fair values are based on quoted market prices.
LOANS: The fair values for loans are estimated using a discounted cash flow
calculation that applies interest rates used to price new similar loans to a
schedule of aggregated expected monthly maturities on loans.
INTEREST RECEIVABLE/PAYABLE: The fair value of accrued interest
receivable/payable approximates carrying values.
DEPOSITS: The fair values of interest-bearing demand and savings accounts are
equal to the amount payable on demand at the balance sheet date. Fair values for
certificates of deposit are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on deposits to a schedule of
aggregated expected monthly maturities on deposits.
BORROWINGS: The fair value of borrowings is estimated using a discounted cash
flow calculation, based on borrowing rates for periods comparable to the
remaining terms to maturity of the borrowings.
DRAFTS PAYABLE: The fair value approximates carrying value.
17. PARENT COMPANY FINANCIAL INFORMATION
The following are condensed financial statements for the parent company,
Ameriana Bancorp, only:
- ----------------------------------------------------------------------------------------------------------------------------
December 31
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE SHEETS 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
Assets
Cash $ 22 $ --
Advances to subsidiaries 1,746 --
Investment in the Bank 38,325 39,590
Investments in affiliates 382 464
Other assets 11 360
- ----------------------------------------------------------------------------------------------------------------------------
$40,486 $40,414
============================================================================================================================
Liabilities and shareholders' equity
Notes payable, other $ 600 $ 840
Other liabilities 1,012 534
Shareholders' equity 38,874 39,040
- ----------------------------------------------------------------------------------------------------------------------------
$40,486 $40,414
============================================================================================================================
F-(20)
Ameriana Bancorp
Notes to Consolidated Financial Statements
(table dollar amounts in thousands, except share data)
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
- ----------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Dividends from subsidiary $3,300 $1,500 $3,000
Interest income 8 6 47
- -----------------------------------------------------------------------------------------------------------------------------
3,308 1,506 3,047
Operating expense 525 489 594
- ----------------------------------------------------------------------------------------------------------------------------
Income before income tax benefit and equity in undistributed
income of subsidiary 2,783 1,017 2,453
Income tax benefit 404 356 511
- ---------------------------------------------------------------------- -------------------------------------------------------
3,187 1,373 2,964
Equity in undistributed income of subsidiary and affiliates
(distributions in excess of equity in income) (769) (4,448) 836
- ----------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $2,418 $(3,075) $3,800
============================================================================================================================
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
- ----------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income (loss) $2,418 $(3,075) $3,800
Items not requiring (providing) cash
Equity in undistributed income of subsidiaries and affiliates 769 4,448 (866)
Other adjustments 828 (368) 210
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,015 1,005 3,144
- ----------------------------------------------------------------------------------------------------------------------------
Investing Activity - changes in advances to subsidiaries (1,746) 1,341 484
- ----------------------------------------------------------------------------------------------------------------------------
Financing Activities
Repayment of notes payable to subsidiaries -- (243) (250)
Repayment of other borrowings (240) (90) (1,491)
Cash dividends paid (2,015) (2,014) (1,888)
Purchase of common stock -- (137) --
Proceeds from exercise of stock options 8 137 --
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (2,247) (2,347) (3,629)
- ----------------------------------------------------------------------------------------------------------------------------
Change in cash 22 (1) (1)
Cash at beginning of year -- 1 2
- ----------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 22 $ -- $ 1
============================================================================================================================
F-(21)
Ameriana Bancorp
Notes to Consolidated Financial Statements
(table dollar amounts in thousands, except share data)
18. QUARTERLY DATA (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------------------------
2003
Total interest income $6,188 $ 6,412 $ 5,636 $ 4,860
Total interest expense 3,060 2,817 2,392 1,797
Net interest income 3,128 3,595 3,244 3,063
Provision for loan losses 150 1,400 4,790 100
Net income 755 96 952 615
- ----------------------------------------------------------------------------------------------------------------------------
Basic earnings per share .24 .03 .30 .20
- ----------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share .24 .03 .30 .19
- ----------------------------------------------------------------------------------------------------------------------------
Dividends declared per share .16 .16 .16 .16
- ----------------------------------------------------------------------------------------------------------------------------
Stock price range
High 12.99 14.56 15.56 16.00
Low 11.36 11.96 13.13 14.50
- ----------------------------------------------------------------------------------------------------------------------------
2002
Total interest income $8,592 $7,476 $7,268 $6,637
Total interest expense 5,244 4,775 4,192 3,330
Net interest income 3,348 2,701 3,076 3,307
Provision for loan losses 1,250 150 150 5,750
Net income (2,050) 600 786 (2,411)
- ----------------------------------------------------------------------------------------------------------------------------
Basic and diluted earnings per share (.65) .19 .25 (.77)
- ----------------------------------------------------------------------------------------------------------------------------
Dividends declared per share .16 .16 .16 .16
- ----------------------------------------------------------------------------------------------------------------------------
Stock price range
High 16.00 15.10 14.20 13.25
Low 13.15 13.85 12.10 12.70
- ----------------------------------------------------------------------------------------------------------------------------
F-(22)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------
Not applicable.
ITEM 9A. 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.
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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
For information concerning the directors of the Company, the identification
of the Audit Committee and the audit committee financial expert, the information
contained under the section captioned "Proposal I -- Election of Directors" in
the Proxy Statement is incorporated herein by reference. For information
concerning the executive officers of the Company, see "Item 1. Business --
Executive Officers" under Part I of the Annual Report, which is incorporated
herein by reference.
69
For information concerning compliance with Section 16(a) of the Exchange
Act, see the section titled "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement, which is incorporated herein by reference.
The Company has adopted a Code of Ethics that applies to the Company's
principal executive officer, principal accounting and financial officer and
senior executive officers. The Code of Ethics is posted on the Company's
Internet Web site at www.ameriana.com. The Company intends to satisfy the
disclosure requirement under Item 10 of Form 8-K regarding an amendment to or
waiver from a provision of the Company's Code of Ethics by posting such
information on its Internet Web site at www.ameriana.com.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors -- Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
- --------------------------------------------------------------------------------
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and
Security Ownership" in the Proxy Statement.
(b) SECURITY OWNERSHIP OF MANAGEMENT
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and
Security Ownership" in the Proxy Statement.
(c) CHANGES IN CONTROL
The Company is not aware of any arrangements, including any
pledge by any person of securities of the Company, the
operation of which may at a subsequent date result in a change
in control of the Company.
70
(d) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION
PLANS
The following table sets forth certain information with respect
to the Company's equity compensation plans as of December 31, 2003.
(a) (b) (c)
Number of securities remaining
Number of securities to be available for future issuance
issued upon exercise of Weighted-average exercise under equity compensation
outstanding options, price of outstanding plans (excluding securities
Plan category warrants and rights options, warrants and rights reflected in column (a))
- ------------- ------------------- ---------------------------- ------------------------
Equity compensation plans
approved by security holders
195,052 $ 14.29 178,442
Equity compensation plans not
approved by security holders -- -- --
--------- -------- ----------
Total 195,052 $ 14.29 178,442
========= ======= ==========
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Transactions with Management" in the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
- ------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Audit Fees" in the Proxy Statement.
71
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
----------------------------------------------
(1) Financial Statements. The following consolidated
financial statements are filed under Item 8 hereof:
Report of Independent Auditors
Consolidated Balance Sheets at December 31, 2003 and
2002
Consolidated Statements of Operations for Each of the
Three Years in the Period Ended December 31, 2003
Consolidated Statements of Shareholders' Equity for
Each of the Three Years in the Period Ended December
31, 2003
Consolidated Statements of Cash Flows for Each of the
Three Years in the Period Ended December
31, 2003
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules. All schedules for which
provision is made in the applicable accounting regulations are
either not required under the related instructions or are
inapplicable, and therefore have been omitted.
(3) Exhibits. The following is a list of exhibits as part of
this Report and is also the Exhibit Index.
No. Description
--- -----------
3(i) Ameriana Bancorp Amended and Restated Articles of Incorporation
-- incorporated herein by reference to the Company's Registration
Statement on Form S-4 filed with the SEC on September 18, 1989
3(ii) Amended and Restated Bylaws
10.1* Ameriana Bancorp 1987 Stock Option Plan--incorporated herein by
reference to the Company's Registration Statement on Form S-8
filed with the SEC on March 30, 1990 and May 17, 1996
10.2* Employment Agreement, dated February 26, 2001, between Ameriana
Bank & Trust and Harry J. Bailey -- incorporated herein by
reference to the Company's Annual Report on Form 10-K filed with
the SEC on March 29, 2001
10.3* Employment Agreement, dated February 26, 2001, between Ameriana
Bank & Trust and Timothy G. Clark -- incorporated herein by
reference to the Company's Annual Report on Form 10-K filed with
the SEC on March 29, 2001
72
No. Description
--- -----------
10.4 Employment Agreement, dated January 1, 2004, between Ameriana
Bank & Trust and Bradley L. Smith
10.5* Ameriana Bank of Indiana, F.S.B. Director Supplemental
Retirement Program Director Agreement -- incorporated herein by
reference to the Company's Annual Report on Form 10-K filed with
the SEC on March 30, 2000
10.6* Ameriana Bank of Indiana, F.S.B. Director Supplemental
Retirement Program Director Agreement, dated June 4, 1999,
between Ameriana Bank of Indiana, F.S.B. and Paul W. Prior --
incorporated herein by reference to the Company's Annual Report
on Form 10-K filed with the SEC on March 30, 2000
10.7* Executive Supplemental Retirement Plan Agreement, dated May 6,
1999, between Ameriana Bank of Indiana, F.S.B. and Harry J.
Bailey -- incorporated herein by reference to the Company's
Annual Report on Form 10-K filed with the SEC on March 30, 2000
10.8* Executive Supplemental Retirement Plan Agreement, dated May 6,
1999, between Ameriana Bank of Indiana, F.S.B. and Timothy G.
Clark -- incorporated herein by reference to the Company's Annual
Report on Form 10-K filed with the SEC on March 29, 2001
10.9 Executive Supplemental Retirement Plan Agreement Amendment, dated
December 5, 2003, between Ameriana Bank of Indiana, F.S.B. and
Harry J. Bailey
10.10 Executive Supplemental Retirement Plan Agreement Amendment,
dated December 5, 2003, between Ameriana Bank of Indiana, F.S.B.
and Timothy G. Clark
23 Consent of BKD, LLP
31.1 Rule 13(a)-14(a) Certification of Chief Executive Officer
31.2 Rule 13(a)-14(a) Certification of Chief Financial Officer
32 Certification Pursuant to 18 U.S.C. Section 1350
-------
* Management contract or compensation plan or arrangement.
73
(b) REPORTS ON FORM 8-K. During the fourth quarter of the fiscal year
--------------------
covered by this Annual Report, the Company filed the following Current Report on
Form 8-K:
Financial
Date of Report Item(s) Reported Statements Filed
-------------- ---------------- ----------------
October 30, 2003 7, 12 N/A
(c) EXHIBITS. The exhibits required by Item 601 of Regulation S-K are
---------
either filed as part of this Report or incorporated by reference herein.
(d) FINANCIAL STATEMENTS AND SCHEDULES EXCLUDED FROM ANNUAL REPORT.
---------------------------------------------------------------
There are no other financial statements and financial statement schedules
required by Regulation S-X which are excluded from the Annual Report to
Stockholders pursuant to Rule 14a-3(b)(1) which are required to be included
herein.
74
SIGNATURES
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: March 26, 2004 By:/s/ Harry J. Bailey
------------------------------------
Harry J. Bailey
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
in the capacities and on the dates indicated.
By: /s/ Harry J. Bailey March 26, 2004
-------------------------------------------------
Harry J. Bailey
President, Chief Executive Officer
and Director
(Principal Executive Officer)
By: /s/ Bradley L. Smith March 26, 2004
-------------------------------------------------
Bradley L. Smith
Senior Vice President - Treasurer
(Principal Financial and Accounting Officer)
By:
-------------------------------------------------
Paul W. Prior
Chairman of the Board and Director
By:
-------------------------------------------------
Donald C. Danielson
Director
By: /s/ Charles M. Drackett, Jr. March 26, 2004
-------------------------------------------------
Charles M. Drackett, Jr.
Director
By:
--------------------------------------------------
R. Scott Hayes
Director
By: /s/ Michael E. Kent March 26, 2004
-------------------------------------------------
Michael E. Kent
Director
By: /s/ Ronald R. Pritzke March 26, 2004
--------------------------------------------------
Ronald R. Pritzke
Director