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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15 (d) of
The Securities Exchange Act of 1934
For the Quarter Ended: March 31, 2004
---------------------
Commission File Number: 0-18392
Ameriana Bancorp
--------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Indiana 35-1782688
- ------------------------------ -----------------------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
2118 Bundy Avenue, New Castle, Indiana 47362-1048
- -------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, include area code (765) 529-2230
--------------
Common Stock, par value $1.00 per share
---------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X ]
As of April 30, 2004, there were issued and outstanding 3,148,788 shares of the
registrant's common stock.
AMERIANA BANCORP AND SUBSIDIARIES
CONTENTS
PART I - FINANCIAL INFORMATION Page No.
-------
ITEM 1 - Financial statements
Consolidated Condensed Balance Sheets
as of March 31, 2004 (Unaudited)
and December 31, 2003 (Audited) . . . . . . . . . . . . . 3
Consolidated Condensed Statements of Operations for
the Three Months Ended
March 31, 2004 and 2003 (Unaudited). . . . . . . . . . . . 4
Consolidated Condensed Statement of Shareholders'
Equity for the Three Months Ended March 31, 2004 . . . . . 5
(Unaudited)
Consolidated Condensed Statements of Cash Flows
for the Three Months Ended March 31, 2004
and 2003 (Unaudited). . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Condensed Financial
Statements. . . . . . . . . . . . . . . . . . . . . . . . 7
ITEM 2 - Management's Discussion and Analysis of
Financial Condition and Results of
Operations. . . . . . . . . . . . . . . . . . . . . . . . 9
ITEM 3 - Quantitative and Qualitative Disclosure
About Market Risk . . . . . . . . . . . . . . . . . . . . 15
ITEM 4 - Controls and Procedures . . . . . . . . . . . . . . . . . 16
PART II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . 17
ITEM 1 - Legal Proceedings
ITEM 2 - Changes in Securities, Use of Proceeds and Issuer's
Purchase of Equity Securities
ITEM 3 - Defaults upon Senior Securities
ITEM 4 - Submission of Matters to a Vote of Security Holders
ITEM 5 - Other Information
ITEM 6 - Exhibits and Reports on Form 8-K
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2
PART I - FINANCIAL INFORMATION
AMERIANA BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share data)
March 31 December 31,
2004 2003
(Unaudited) (Audited)
-------------------- --------------------
Assets
Cash on hand and in other institutions $ 9,860 $ 9,505
Interest-bearing demand deposits 37,743 5,044
-------------------- --------------------
Cash and cash equivalents 47,603 14,549
Investment securities held to maturity (fair value of $22,463) 22,384 --
Investment securities available for sale 117,072 137,788
Mortgage loans available for sale 405 730
Loans receivable 198,580 207,885
Allowance for loan losses (3,226) (3,744)
-------------------- --------------------
Net loans receivable 195,354 204,141
Real estate owned 559 602
Premises and equipment 7,996 7,887
Stock in Federal Home Loan Bank 7,033 6,948
Mortgage servicing rights 1,288 1,313
Investments in unconsolidated affiliates 1,549 1,592
Goodwill 564 564
Cash surrender value of life insurance 19,917 19,705
Deferred taxes 2,208 2,603
Other assets 3,384 4,031
-------------------- --------------------
Total assets $ 427,316 $ 402,453
==================== ====================
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Noninterest-bearing $ 23,177 $ 19,039
Interest-bearing 326,464 326,705
-------------------- --------------------
Total deposits 349,641 345,744
Advances from Federal Home Loan Bank 29,665 9,630
Notes payable 400 600
Drafts payable 3,041 3,477
Advances by borrowers for taxes and insurance 273 89
Other liabilities 4,866 4,039
-------------------- --------------------
Total liabilities 387,886 363,579
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock (5,000,000 shares authorized;
none issued) -- --
Common stock ($1.OO par value; authorized
15,000,000 shares; issued shares:
3,148,788 and 3,148,288, respectively) 3,149 3,148
Additional paid-in capital 511 506
Retained earnings 35,226 35,259
Accumulated other comprehensive income (loss) 544 (39)
-------------------- --------------------
Total shareholders' equity 39,430 38,874
-------------------- --------------------
Total liabilities and shareholders' equity $ 427,316 $ 402,453
==================== ====================
See accompanying notes to consolidated condensed financial statements.
3
AMERIANA BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)
Three Months Ended March 31,
----------------------------------------------
2004 2003
-------------------- ------------------
Interest Income:
Interest and fees on loans $ 3,448 $ 5,470
Interest on investment securities 1,102 456
Other interest and dividend income 155 262
--------------- ------------------
Total interest income 4,705 6,188
--------------- ------------------
Interest Expense:
Interest on deposits 1,529 2,958
Interest on FHLB advances and other borrowings 215 102
--------------- ------------------
Total interest expense 1,744 3,060
--------------- ------------------
Net interest income 2,961 3,128
--------------- ------------------
Provision for Loan Losses 150 150
--------------- ------------------
Net interest income after provision for loan losses 2,811 2,978
Other Income:
Net loan servicing fees 54 (29)
Other fees and service charges 312 331
Brokerage and insurance commissions 340 250
Loss on investments in unconsolidated affiliates (22) (49)
Gains on sales of loans and servicing rights 78 483
Gain on sale of investments -- 40
Increase in cash surrender value of life insurance 212 214
Other 4 5
--------------- ------------------
Total other income 978 1,245
Other Expense:
Salaries and employee benefits 2,150 2,006
Net occupancy and equipment expense 381 397
Federal insurance premium 39 49
Data processing expense 123 107
Printing and office supplies 68 53
Amortization of intangible assets -- 8
Other 590 650
--------------- ------------------
Total other expense 3,351 3,270
--------------- ------------------
Income before income taxes 438 953
--------------- ------------------
Income taxes (33) 198
--------------- ------------------
Net Income $ 471 $ 755
=============== ==================
Basic Earnings Per Share $ 0.15 $ 0.24
=============== ==================
Diluted Earnings Per Share $ 0.15 $ 0.24
=============== ==================
Dividends Declared Per Share $ 0.16 $ 0.16
=============== ==================
See accompanying notes to consolidated condensed financial statements.
4
AMERIANA BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
2004
---------------
Balances, January 1 $38,874
Net income 471
Other comprehensive income 583
---------------
Comprehensive income 1,054
Exercise of stock options 6
Dividends declared (504)
---------------
Balances, March 31 $39,430
===============
See accompanying notes to consolidated condensed financial statements.
5
AMERIANA BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended March 31,
-----------------------------------------
2004 2003
---------------- -----------------
OPERATING ACTIVITIES
Net income $471 $755
Items not requiring (providing) cash
Provision for losses on loans 150 150
Depreciation and amortization 307 362
Increase in cash surrender value (212) (214)
Mortgage loans originated for sale (5,612) (34,266)
Proceeds from sale of mortgage loans 5,972 36,441
Gains on sale of loans and servicing rights (77) (483)
Gain on sale of investments -- (40)
Decrease in drafts payable (436) (360)
Other adjustments 1,662 1,259
---------------- -----------------
Net cash provided by operating activities 2,225 3,604
INVESTING ACTIVITIES
Purchase of investment securities held for maturity (12,741) --
Purchase of investment securities available for sale (6,357) (72,015)
Proceeds from sale of investment securities available for sale -- 20,604
Proceeds from maturities/calls of securities available for sale 18,414 3,809
Net change in loans 8,637 14,946
Net purchases of premises and equipment (287) (95)
Purchases of Federal Home Loan Bank Stock (85) (9)
Other investing activities 14 58
---------------- -----------------
Net cash provided by (used in) investing activities 7,595 (32,702)
FINANCING ACTIVITIES
Net change in demand and passbook deposits 11,625 3,146
Net change in certificates of deposit (7,728) 11,347
Net change in short-term borrowings 1,685 --
Proceeds from borrowings 18,625 --
Repayment of borrowings (475) (393)
Exercise of stock options 6 8
Cash dividends paid (504) (504)
---------------- -----------------
Net cash provided by financing activities 23,234 13,604
---------------- -----------------
CHANGE IN CASH AND CASH EQUIVALENTS 33,054 (15,494)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 14,549 45,696
---------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $47,603 $30,202
================ =================
Supplemental information:
Interest paid $1,954 $1,542
Income taxes paid 0 750
See accompanying notes to consolidated condensed financial statements.
6
AMERIANA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- ----------------------------------------------------
(Table dollar amounts in thousands, except share data)
NOTE A - - BASIS OF PRESENTATION
Ameriana Bancorp ("the Company") is a bank holding company. Through its
wholly owned subsidiary, Ameriana Bank and Trust ("the Bank"), the Company
offers an extensive line of banking services and provides a range of investments
and securities products through branches in the central Indiana area. Ameriana
Bank and Trust also offers trust and investment management services. 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 Holdings, Incorporated, Columbus,
Indiana, 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.
----------------
The unaudited interim consolidated condensed financial statements have
been prepared in accordance with the instructions to Form 10-Q and, therefore,
do not include all information and disclosures required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the financial statements reflect all adjustments (comprised only of
normal recurring adjustments and accruals) necessary to present fairly the
Company's financial position and results of operations and cash flows. The
results of operations for the period are not necessarily indicative of the
results to be expected in the full year. A summary of the Company's significant
accounting policies is set forth in Note 1 of Notes to Consolidated Financial
Statements in the Company's annual report on Form 10-K for the year ended
December 31, 2003.
The consolidated condensed balance sheet of the Company as of December
31, 2003 has been derived from the audited consolidated balance sheet of the
Company as of that date.
7
NOTE B - - SHAREHOLDERS' EQUITY
On February 23, 2004, the Board of Directors declared a quarterly cash
dividend of $.16 per share. This dividend, totaling $504,000, was accrued for
payment to shareholders of record on March 12, 2004, and was paid on April 2,
2004. Payment was made for 3,148,788 shares, compared to 3,148,200 the previous
quarter. Stock options totaling 500 shares were exercised during the first
quarter of 2004.
NOTE C - - EARNINGS PER SHARE
Earnings per share were computed as follows:
(In thousands, except share data)
Three Months Ended March 31,
2004 2003
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
Basic Earnings (Loss) per Share: Income
available to Common shareholders $471 3,148,552 $0.15 $755 3,147,784 $0.24
======== ========
Effect of dilutive stock options -- 20,444 -- 200
-------------------- ------------------
Diluted Earnings (Loss) Per Share: Income available to
common shareholders and assumed conversions $471 3,168,996 $0.15 $755 3,147,984 $0.24
==================================================================================================================================
At March 31, 2004, options to purchase 34,100 shares were excluded from the
computation of diluted earnings per share because the options' exercise price
was greater than or equal to the average market price of common shares.
8
AMERIANA BANCORP AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
- -------
This Quarterly Report on Form 10-Q ("Form 10-Q") may contain
statements, which constitute forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements appear in
a number of places in this Form 10-Q and include statements regarding the
intent, belief, outlook, estimate or expectations of the Company primarily with
respect to future events and future financial performance. Readers of this Form
10-Q are cautioned that any such forward looking statements are not guarantees
of future events or performance and involve risks and uncertainties, and that
actual results may differ materially from those in the forward looking
statements as a result of various factors. The accompanying information
contained in this Form 10-Q identifies important factors that could cause such
differences. These factors include changes in interest rates; loss of deposits
and loan demand to other financial institutions; substantial changes in
financial markets; changes in real estate values and the real estate market or
regulatory changes.
The largest components of the Company's total revenue and total
expenses are interest income and interest expense, respectively. Consequently,
the Company's earnings are primarily dependent on its net interest income, which
is determined by (i) the difference between rates of interest earned on
interest-earning assets and rates paid on interest-bearing liabilities
("interest rate spread"), and (ii) the relative amounts of interest-earning
assets and interest-bearing liabilities. Levels of other income and operating
expenses also significantly affect net income.
Significant Events in 2003
- --------------------------
Sale of Cincinnati Branches: On April 7, 2003, the Company announced
that it had agreed to sell its two Cincinnati-area branches to Peoples Community
Bancorp, Inc. (NASDAQ/NM: PCBI)("PCBI") of West Chester, Ohio. The two branches
are located in Deer Park and Landen, Ohio. On September 30, 2003, the Company
announced the completion of the sale of the two branches to PCBI. In connection
with the sale, the Company recorded an after-tax gain of approximately
$2,930,000 or $0.93 per diluted share in the third quarter 2003. The transaction
included the Company's real property related to the Deer Park branch and its
leasehold on the premises for the Landen branch. Additionally, the Company
conveyed most consumer and commercial loans at those branches as part of the
transaction, as well as the branches' saving deposits, but retained and will
continue to service certain single family residential mortgages originated in
those locations.
Company Writes Off Troubled Lease Portfolio in 2003: On September 30,
2003 the Company charged-off the two troubled equipment leases ("lease pools")
originated by Commercial Money Center ("CMC"), a now bankrupt company. The
Company recorded an after-tax loss of approximately $2,784,000 or $0.88 per
diluted share. Prior to September 30, 2003, the Company had established reserves
against these lease pools equal to approximately 58% of the $10,900,000 that
remained outstanding.
9
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 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.
10
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.
The Cincinnati branches sold had approximately $890,000 recorded as
goodwill and core deposit intangibles. The $890,000 was written-off and netted
against the gain on the sale of the branches in the third quarter of 2003.
FINANCIAL CONDITION
- -------------------
The Company's total assets increased $24,863,000 or 6.18% from
$402,453,000 at December 31, 2003 to $427,316,000 at March 31, 2004. The
increase was primarily due to a planned strategy to leverage the institutions
assets to improve earnings and return on equity. This was accomplished primarily
through new FHLB advances of $20,310,000 in the first quarter of 2004.
The Company's principal sources of funds are cash generated from
operations, deposits, loan principal repayments, investments, and advances from
the Federal Home Loan Bank ("FHLB").
Cash and cash equivalents increased $33,054,000 from $14,549,000 at
December 31, 2003 to $47,603,000 at March 31, 2004. The increase was mainly due
to $16,000,000 of securities called in the first quarter of 2004 and a decrease
in the loan portfolio. The funds were kept in overnight accounts over
quarter-end due to concerns that interest rates were temporarily depressed. The
excess liquidity was re-invested in April 2004.
Investment securities increased $1,668,000 or 1.2% from $137,788,000 at
December 31, 2003 to $139,456,000 at March 31, 2004. The Company acquired
$22,384,000 in municipal securities since the fourth quarter of 2003. The
municipal securities acquired in 2003 were transferred from "available for sale"
to "held to maturity" effective January 1, 2004. Accordingly, investment
securities have been separated on the balance sheet between available for sale
and held to maturity. Investments classified as available for sale are adjusted
to market value each month-end with the resulting after-tax unrealized gains or
loss included in "accumulated other comprehensive income (loss)" included in
equity. Investments classified as held to maturity are not adjusted to market
value each month.
The loan portfolio declined $9,305,000 or 4.5% from $207,885,000 at
December 31, 2003 to $198,580,000 at March 31, 2004. Most of the decline was in
residential mortgage loans. The Company continued to sell new fixed rate
mortgage production to minimize potential long-term interest rate risk
associated with such long-term, low-interest loans.
The deposit portfolio increased $3,897,000 or 1.1% from $345,744,000 at
December 31, 2003 to $349,641,000 at March 31, 2004.
Borrowings increased $19,835,000 from $10,230,000 at December 31, 2003
to $30,065,000 at March 31, 2004. The Company borrowed $15,000,000 in ten year
putable FHLB advances for an average cost of 3.67%. These advances may re-price
to the three-month Libor rate should this index reach 8.00% during any quarterly
period after two-years. The three-month Libor was 1.17% at April 22, 2004. The
Company had a total of $20,000,000 in putable FHLB advances at March 31, 2004.
The remaining $5,310,000 was for seven separate fixed-rate advances with terms
ranging from 30 days to six years with a weighted-average rate of 2.37% as of
quarter-end. These seven advances are matched against a 7/1 FNMA mortgage-backed
security with an expected yield to maturity of 3.88%.
Equity increased $556,000 or 1.4% from $38,874,000 at December 31, 2003
to $39,430,000 at March 31, 2004. The increase was due to accumulated
comprehensive income.
The Bank's capital ratios are well in excess of minimum regulatory
requirements. At March 31, 2004, the Bank had a risk-based capital ratio of
15.51% and a tier 1 capital ratio of 9.14%.
11
The Company had outstanding commitments to originate loans of
approximately $9,094,000 and $2,845,000 at March 31, 2004 and December 31, 2003,
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 $22,666,000 and
$21,409,000 of conditional commitments for lines of credit receivables at March
31, 2004 and December 31, 2003. The Company also had $4,604,000 and $3,604,000
of letters of credit outstanding as of March 31 2004 and December 31, 2003.
RESULTS OF OPERATIONS
- ---------------------
The Company's net income for the first quarter of 2004 was $471,000 or
$0.15 per diluted share compared to $755,000, or $0.24 per diluted share
reported in the first quarter of 2003. The lower earnings were primarily due to
lower gains on sale of loans and servicing rights, higher salaries and benefits,
which were partially offset by higher brokerage and insurance commissions.
The Company derives the majority of its income from net interest
income. Net interest income decreased 5.3% or $167,000 in the first quarter of
2004 compared to the first quarter of 2003. Part of the decrease was due to
non-taxable interest income from the purchase of municipal securities, which
accounts for approximately $56,000 of the decrease using a federal income tax
rate of 34%. Interest income and net interest income were adjusted for the
tax-equivalent benefit of the non-taxable municipal securities in the following
analysis.
The following table summarizes the Company's average net
interest-earning assets (which include non-accrual loans) and average
interest-bearing liabilities with the accompanying average rates for the first
three months of 2004 and 2003:
(Dollars in Thousands)
Three Months Ended
March 31,
----------------------------------
2004 2003
Average interest-earning assets $ 369,009 $430,246
Average interest-bearing liabilities $ 347,046 $396,633
----------------------------------
Net interest-earning assets $21,963 $ 33,613
==================================
Average yield on/cost of:
Interest-earning assets 5.18% 5.83%
Interest-bearing liabilities 2.02% 3.13%
----------------------------------
Net interest spread 3.16% 2.70%
==================================
The net interest spread, which is the mathematical difference between
the yield on average interest-earning assets and cost of interest-bearing
liabilities, increased 46 basis points to 3.16% for the first quarter of 2004
compared to 2.70% in the first quarter of 2003. The change in net interest is
due to a decrease in yield of 65 basis points on average interest-earning assets
offset by a 111 basis point reduction in the cost of interest-bearing average
liabilities. The change in interest rate spreads resulted in a decrease of
interest income offset by lower interest expense. The $1,427,000 decrease in
interest income on average interest-earning assets in the first quarter of 2004
was a combination of a decrease of $1,596,000 because of lower average balances
and an increase of $169,000 due to higher average rates. The decrease of
$1,316,000 in cost of interest-bearing liabilities in the first quarter of 2004
was a combination of a decrease of $249,000 from lower average balances and
$1,067,000 from lower average rates. The lower average rates were the result 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 net interest margin on interest-earning assets, which
is net interest income as a percentage of average earning assets, increased 35
basis points to 3.30% in the first quarter of 2004 from 2.95% in the first
quarter of 2003.
Average earning assets declined $61,237,000 to $369,009,000 in the
first quarter of 2004 compared to $430,246,000 in the first quarter of 2003. The
decline was due to the
12
write-off of troubled leases and the sale of the Ohio branches, both of which
took place in the third quarter of 2003. The decline in average earning assets
more than offset the improvements in the net interest spread and net interest
margin, which resulted in lower net interest income for the period.
Net interest earning assets declined $11,650,000 to $21,963,000 in the
first quarter of 2004 from $33,613,000 in the first quarter of 2003. The decline
was mainly due to the troubled leases that were written-off in the third quarter
of 2003.
The following table sets forth the impact of rate and volume changes on
net interest income for the three months ended March 31, 2004 compared to the
same period in 2003.
(Dollars in Thousands)
Three Months Ended March 31,
2004 vs 2003
Increase (Decrease)
Due to Change in
Volume Rate Net Change
------------ ------------ --------------
Interest-earning assets $ (1,596) $ 169 $ (1,427)
Interest-bearing liabilities (249) (1,067) (1,316)
------------ ------------ --------------
Change in net interest income $ (1,347) $ 1,236 $ (111)
============ ============ ==============
The following table summarizes the Company's non-performing assets at March 31,
2004 and December 31, 2003:
(Dollars in Thousands)
March 31, December 31,
2004 2003
Loans:
Non-accrual $ 7,649 $ 8,383
Restructured Loans 469 473
Over 90 days delinquent and still accruing 4,594 74
Real estate owned 559 602
------------------ ------------------
Total $ 13,271 $ 9,532
================== ==================
The Company's non-performing assets increased $3,739,000 in the first
quarter of 2004. The increase was in the "over 90 days delinquent and still
accruing" category. The increase was mostly due to a commercial real estate loan
to a single borrower, which was brought current in May 2004. Non-accrual loans,
which declined $734,000, are mostly made up of commercial and commercial
real-estate loans with the majority related to loans to a builder/developer.
The Bank has a number of real estate development/lot loans and single
family residential loans on existing properties with a builder/developer group,
and its related parties, that are currently in default and bankruptcy. The Bank
is working closely with the workout specialist hired by the bankruptcy trustee
on liquidation of the properties involved in the bankruptcy and is negotiating
with the borrower and its counsel for resolution of the remaining properties.
The total outstanding balance of these loans totaled $3.1 million and $3.5
million as of March 31, 2004 and December 31, 2003.
The Bank is involved in a variety of litigation relating to its
interests in the two pools of equipment leases originated by the Commercial
Money Center, Inc. ("CMC"), a California based equipment-leasing company that is
now in bankruptcy.
In June and September 2001, the Bank purchased two separate pools of
lease receivables totaling $12,003,000, consisting primarily of equipment
leases. Each lease within each pool was supported by a surety bond issued by one
of two insurance companies rated at least "A" by Moody's. The bonds guarantee
payment of all amounts due under the leases in the event of default by the
lessee. Each pool was sold by the terms of a Sales and Servicing Agreement which
provides that the insurers will service the leases. In each
13
case the insurers have assigned their servicing rights and responsibilities to
Commercial Service Center, a company, which has now filed bankruptcy.
When the lease pools went into default, notice was given to each
insurer. One of them made payments for a few months under a reservation of
rights; the other paid nothing. Both insurers claim they were defrauded by
Commercial Money Center (CMC), the company which sold the lease pools. Both are
now denying responsibility for payment. CMC has also filed for bankruptcy
protection.
Many other financial institutions have purchased lease pools from CMC. All of
the lease pools are in default and in litigation. The Panel on Multidistrict
Litigation has taken control of the many actions and assigned them to the U.S.
District Court for the Northern District of Ohio, Eastern Division. The actions
have been consolidated for the purpose of discovery and other potential
proceedings.
The Company believes the surety bonds are enforceable against the
insurers. The current unpaid balance for the pools is $10,900,000. It is
unlikely that the litigation will be resolved in 2004.
The lease pools had reserves of approximately 50% at December 31, 2002.
Due to the downgrade of one of the sureties to "D" by A.M. Best, the inherent
uncertainty surrounding the potential for recovery, the Company charged-off the
two lease pools during the third quarter of 2003. The Company believes that the
charge-off of these lease pools is consistent with the conservative posture that
banking industry regulators will likely assume in this matter.
Net charge-offs (charge-offs less recoveries) were $668,000 and
$185,000 for the first three months of 2004 and 2003 respectively. The main
reason for the net charge-offs in the first quarter of 2004 was from a
charge-off of a commercial real-estate loan for $509,000.
Management believes the allowance for loan losses is adequate and that
sufficient provision has been made to absorb losses that may ultimately be
incurred on non-performing loans and the remainder of the portfolio based on
information at March 31, 2004. The allowance for loan losses as a percentage of
loans was 1.62% and 1.80% at March 31, 2004 and December 31, 2003, respectively.
Provision expense was $150,000 for both the first quarter of 2004 and first
quarter of 2003.
The Company's non-interest income was $978,000 in the first quarter of
2004 and $1,245,000 in the first quarter of 2003, for an overall decrease of
$267,000 or 21.4%. The main cause of the decrease was due to gain on sale of
loans and servicing rights which declined $405,000 to $78,000 in the first
quarter of 2004 from $483,000 in the first quarter of 2003. The decline was due
to a drop in the volume of mortgage loan refinancing which resulted in less
loans sold. Brokerage and insurance commissions increased $90,000 or 36% to
$340,000 in the first quarter of 2004 from $250,000 in the first quarter of
2003. The increase included $30,000 from brokerage operations and $55,000 from
the insurance agency. Net loan servicing fees improved $83,000 for the first
quarter of 2004 compared to the first quarter of 2003. The increase was due to a
decline in mortgage loan refinancing in the first quarter of 2004 compared to
the first quarter of 2003, which resulted in less write-offs of the remaining
mortgage loan servicing rights. Net realized gain on sale of securities was zero
in the first quarter of 2004 compared to $40,000 in the first quarter of 2003.
Non-interest expense was $3,351,000 in the first quarter of 2004 and
$3,270,000 in the first quarter of 2003, for an overall increase of $81,000 or
2.5%. The largest component of non-interest expense is salaries and employee
benefits, which made-up 64.2% of total non-interest expenses in the first
quarter of 2004. Salaries and employee benefits increased $144,000 or 7.2% to
$2,150,000 in the first quarter of 2004, compared to $2,006,000 in the first
quarter of 2003.
Income taxes was a net benefit of $33,000 in the first quarter of 2004
compared to a $198,000 expense in the first quarter of 2003 for an overall
decrease of $231,000. The decline in tax expense is due to higher nontaxable
interest income from municipal securities, higher investment income from AIMI,
which is exempt from state income tax, and overall lower taxable income.
The effective tax rates and the statutory tax rates differ primarily to
tax credits, cash value of life insurance, nontaxable interest income, and a
reduction in state tax expense.
14
OTHER
- -----
The Securities and Exchange Commission ("SEC") maintains reports, proxy
information, statements and other information regarding registrants that file
electronically with the SEC, including the Company. The address is
(http://www.sec.gov).
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Asset/Liability Committee and the Board of Directors reviews the Company's
exposure to interest rate changes and market risk on a quarterly basis. This
review is accomplished by the use of a cash flow simulation model using detailed
securities, loan and deposit, and market information to estimate the potential
impact of interest rate increases and decreases on the earning assets and
liabilities. The model tests the impact on the net interest income under various
interest rate scenarios by estimating the interest rate sensitivity position at
each interest rate interval. The change in the net portfolio value ("NPV") is
also calculated at each interest rate interval. This tests the interest rate
risk exposure from movements in interest rates by using interest sensitivity
analysis to determine the change in the NPV of discounted cash flows from assets
and liabilities.
NPV represents the market value of portfolio equity and is equal to the
estimated market value of assets minus the estimated market value of
liabilities. The model uses a number of assumptions, including the relative
levels of market interest rates and prepayments in mortgage loans and certain
types of callable investments. These computations do not contemplate any actions
management may undertake to reposition the assets and liabilities in response to
changes in the interest rate, and should not be relied upon as indicative of
actual results. In addition, certain shortcomings are inherent in the model of
computing NPV. Should interest rates remain or decrease below present levels,
the portion of adjustable rate loans could decrease in future periods due to
loan refinancing or payoff activity. In the event of an interest rate change,
pre-payment levels would likely be different from those assumed in the model and
the ability of borrowers to repay their adjustable rate loans may decrease
during rising interest rate environments.
Presented below is the assessment of the risk of NPV in the event of sudden and
sustained 200 and 100 basis point increases and decreases respectively, in
prevailing interest rates as of March 31, 2004.
NPV as Percent of
Net Portfolio Value Present Value of Assets
- -----------------------------------------------------------------------------------------------------------------------------------
Change in Rates Dollar Amount Dollar Change Percent Change NPV Ratio Change
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
+200 bp* $ 39,061 $ (3,329) (7.85)% 9.31% (48) bp*
Base or 0% 42,390 9.79
-100 bp* 42,481 91 0.21 9.68 (11) bp*
- -----------------------------------------------------------------------------------------------------------------------------------
* basis points
Presented below is the assessment of the risk of NPV in the event of sudden and sustained 200 and 100 basis point increases and
decreases respectively in prevailing interest rates as of December 31, 2003.
NPV as Percent of
Net Portfolio Value Present Value of Assets
- -----------------------------------------------------------------------------------------------------------------------------------
Change in Rates Dollar Amount Dollar Change Percent Change NPV Ratio Change
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
+200 bp* $ 41,094 $ (2,751) (6.27) 10.37% (38) bp*
Base or 0% 43,845 -- -- 10.75 --
- -100 bp* 43,495 (350) (0.80) 10.42 (33) bp*
- -----------------------------------------------------------------------------------------------------------------------------------
* basis points
15
ITEM 4 - CONTROLS AND PROCEDURES
As of the end of the period covered by this report, management of the Company
carried out an evaluation, under the supervision and with the participation of
the Company's principal executive officer and principal financial officer, of
the effectiveness of the Company's disclosure controls and procedures. Based on
this evaluation, the Company's principal executive officer and principal
financial officer concluded that the Company's disclosure controls and
procedures are effective in ensuring that information required to be disclosed
by the Company in reports that it files or submits under the Securities Exchange
Act of 1934, as amended, is recorded, processed, summarized and reported, within
the time periods specified in the Securities and Exchange Commission's rules and
forms. It should be noted that the design of the Company's disclosure controls
and procedures is based in part upon certain reasonable assumptions about the
likelihood of future events, and there can be no reasonable assurance that any
design of disclosure controls and procedures will succeed in achieving its
stated goals under all potential future conditions, regardless of how remote,
but the Company's principal executive and financial officers have concluded that
the Company's disclosure controls and procedures are, in fact, effective at a
reasonable assurance level.
In addition, there have been no changes in the Company's internal control over
financial reporting (to the extent that elements of internal control over
financial reporting are subsumed within disclosure controls and procedures)
identified in connection with the evaluation described in the above paragraph
that occurred during the Company's last fiscal quarter, that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
16
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings
-----------------
Not Applicable
ITEM 2 - Changes in Securities,Use of Proceeds and Issuers Purchase of Equity
--------------------------------------------------------------------
Securities
----------
Not Applicable
ITEM 3 - Defaults in Senior Securities
-----------------------------
Not Applicable
ITEM 4 - Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not Applicable
ITEM 5 - Other Information
-----------------
Not Applicable
ITEM 6 - Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits.
The following exhibits are filed with this report:
No. Description
--- -----------
Exhibit 31, Rule 13a-14(a) Certifications
Exhibit 32, Section 1350 Certifications
b. Current Reports on Form 8-K
---------------------------
On February 6, 2004, the Company filed a Current Report on 8-K
reporting under Item 12 its unaudited financial results for the
quarter and fiscal year ended December 31, 2003. A copy of the
press release was attached to this Report as an exhibit.
17
SIGNATURES
AMERIANA BANCORP AND SUBSIDIARIES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AMERIANA BANCORP
DATE: May 14, 2004 /s/ Harry J. Bailey
------------------------------------
Harry J. Bailey
President and
Chief Executive Officer
(Duly Authorized Representative)
DATE: May 14, 2004 /s/ Bradley L. Smith
------------------------------------
Bradley L. Smith
Senior Vice President-Treasurer
(Principal Financial Officer
and Accounting Officer)
18