SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15 (d) of
The Securities Exchange Act of 1934
For the Quarter Ended: June 30, 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 identification
incorporation or organization) number)
2118 Bundy Avenue, New Castle, Indiana 47362-1048
- -------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, include area code (765) 529-2230
--------------
Common Stock, par value $1.00 per share
---------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES XX NO __
--
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of July 30, 2004, there were issued and outstanding 3,149,088 shares of the
registrant's common stock.
AMERIANA BANCORP AND SUBSIDIARIES
CONTENTS
PART I FINANCIAL INFORMATION Page No.
-------
ITEM 1 Financial statements
Consolidated Condensed Balance Sheets as of June 30, 2004
and December 31, 2003. . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Condensed Statements of Operations for the Three
and Six Months Ended June 30, 2004 and 2003. . . . . . . . . . . . 4
Consolidated Condensed Statement of Shareholders' Equity for
the Six Months Ended June 30, 2004 . . . . . . . . . . . . . . . . 5
Consolidated Condensed Statements of Cash Flows for the Six
Months Ended June 30, 2004 and 2003 . . . . . . . . . . . . . . . 6
Notes to Consolidated Condensed Financial Statements . . . . . . . 7
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . .9
ITEM 3 Quantitative and Qualitative Disclosure About Market Risk . . . . 16
ITEM 4 Controls and Procedures . . . . . . . . . . . . . . . . . . . . . 18
PART II OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 19
ITEM 1 Legal Proceedings
ITEM 2 Changes in Securities, Use of Proceeds and Issuer Purchases 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. . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . 20
2
PART I - FINANCIAL INFORMATION
AMERIANA BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share data)
June 30 December 31,
2004 2003
(Unaudited)
------------------------ ------------------------
Assets
Cash on hand and in other institutions $ 11,046 $ 9,505
Interest-bearing demand deposits 13,274 5,044
------------------------ ------------------------
Cash and cash equivalents 24,320 14,549
Investment securities held to maturity (fair value
of $150,726) 154,681 --
Investment securities available for sale 11,797 137,788
Mortgage loans available for sale 395 730
Loans receivable 194,641 207,885
Allowance for loan losses (3,182) (3,744)
------------------------ ------------------------
Net loans receivable 191,459 204,141
Real estate owned 1,184 602
Premises and equipment 7,955 7,887
Stock in Federal Home Loan Bank 7,110 6,948
Mortgage servicing rights 1,270 1,313
Investments in unconsolidated affiliates 1,602 1,592
Goodwill 564 564
Cash surrender value of life insurance 20,109 19,706
Other assets 6,092 6,633
------------------------ ------------------------
Total assets $428,538 $402,453
======================== ========================
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Noninterest-bearing $ 23,308 $ 19,039
Interest-bearing 323,965 326,705
------------------------ ------------------------
Total deposits 347,273 345,744
Advances from Federal Home Loan Bank 34,776 9,630
Notes payable 400 600
Drafts payable 3,835 3,477
Advances by borrowers for taxes and insurance 365 89
Other liabilities 2,744 4,039
------------------------ ------------------------
Total liabilities 389,393 363,579
Shareholders' equity:
Preferred stock (5,000,000 shares authorized;
none issued) -- --
Common stock ($1.00 par value; authorized
15,000,000 shares; issued shares:
3,148,988 and 3,148,288, respectively) 3,149 3,148
Additional paid-in capital 514 506
Retained earnings 35,157 35,259
Accumulated other comprehensive income (loss) 325 (39)
------------------------ ------------------------
Total shareholders' equity 39,145 38,874
------------------------ ------------------------
Total liabilities and shareholders' equity $428,538 $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 June 30, Six Months Ended June 30,
------------------------------------------------------------------
2004 2003 2004 2003
------------ ---------------- ---------------- ----------------
Interest Income:
Interest and fees on loans $3,024 $5,348 $6,472 $10,818
Interest on investment securities 1,214 901 2,316 1,357
Other interest and dividend income 131 163 286 425
------------ ---------------- ---------------- ----------------
Total interest income 4,369 6,412 9,074 12,600
Interest Expense:
Interest on deposits 1,493 2,721 3,022 5,679
Interest on FHLB advances and other borrowings 309 96 524 199
------------ ---------------- ---------------- ----------------
Total interest expense 1,802 2,817 3,546 5,878
------------ ---------------- ---------------- ----------------
Net interest income 2,567 3,595 5,528 6,722
Provision for Loan Losses 50 1,400 200 1,550
------------ ---------------- ---------------- ----------------
Net interest income after provision for loan losses 2,517 2,195 5,328 5,172
Other Income:
Net loan servicing fees 51 (63) 105 (93)
Other fees and service charges 351 345 663 679
Brokerage and insurance commissions 252 232 592 482
Net gain (loss) on investments in unconsolidated
affiliates 52 49 30 (1)
Gains on sales of loans and servicing rights 95 470 173 953
Gain on sale of investments -- 1 -- 41
Increase in cash surrender value of life insurance 192 204 404 418
Other 51 16 55 21
------------ ---------------- ---------------- ----------------
Total other income 1,044 1,254 2,022 2,500
Other Expense:
Salaries and employee benefits 1,863 1,963 4,013 3,968
Net occupancy and equipment expense 399 419 780 815
Federal insurance premium 39 46 78 95
Data processing expense 139 130 262 242
Printing and office supplies 50 61 118 113
Amortization of intangible assets -- 8 -- 17
Other 727 864 1,317 1,511
------------ ---------------- ---------------- ----------------
Total other expense 3,217 3,491 6,568 6,761
------------ ---------------- ---------------- ----------------
Income (loss) before income taxes 344 (42) 782 911
Income taxes (91) (138) (124) 60
------------ ---------------- ---------------- ----------------
Net Income $ 435 $ 96 $ 906 $ 851
============ ================ ================ ================
Basic Earnings Per Share $0.14 $0.03 $0.29 $0.27
============ ================ ================ ================
Diluted Earnings Per Share $0.14 $0.03 $0.29 $0.27
============ ================ ================ ================
Dividends Declared Per Share $0.16 $0.16 $0.32 $0.32
============ ================ ================ ================
See accompanying notes to consolidated condensed financial statements.
4
AMERIANA BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
2004
---------------
Balances, January 1 $38,874
Net income 906
Other comprehensive income 364
---------------
Comprehensive income 1,270
Exercise of stock options 9
Dividends declared (1,008)
---------------
Balances, June 30 $39,145
===============
See accompanying notes to consolidated condensed financial statements.
5
AMERIANA BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30,
-------------------------
2004 2003
------------- ------------
OPERATING ACTIVITIES
Net income $ 906 $ 851
Items not requiring (providing) cash
Provision for losses on loans 200 1,550
Depreciation and amortization 700 744
Increase in cash surrender value (403) (418)
Mortgage loans originated for sale (11,982) (109,258)
Proceeds from sale of mortgage loans 12,399 111,370
Gains on sale of loans and servicing rights (173) (953)
Gain on sale of investments -- (41)
Increase in drafts payable 358 1,088
Other adjustments 680 (1,054)
--------- ---------
Net cash provided by operating activities 2,685 3,879
INVESTING ACTIVITIES
Purchase of investment securities held to maturity (56,169) --
Purchase of investment securities available for sale (6,528) (99,956)
Proceeds from sale of investment securities available for sale -- 20,664
Proceeds from maturities/calls of securities held to maturity 14,248 --
Proceeds from maturities/calls of securities available for sale 18,499 26,552
Net change in loans 11,709 18,686
Net purchases of premises and equipment (428) (315)
Purchases of federal Home Loan Bank Stock (162) (95)
Other investing activities 165 373
--------- ---------
Net cash used in investing activities (18,666) (34,091)
FINANCING ACTIVITIES
Net change in demand and passbook deposits 9,180 33,782
Net change in certificates of deposit (7,651) (18,782)
Net change in short-term borrowings 7,000 --
Proceeds from borrowings 18,625 --
Repayment of borrowings (679) (595)
Net change in advances by borrowers for taxes and insurance 276 20
Exercise of stock options 9 8
Cash dividends paid (1,008) (1,007)
--------- ---------
Net cash provided by financing activities 25,752 13,426
--------- ---------
CHANGE IN CASH AND CASH EQUIVALENTS 9,771 (16,786)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 14,549 45,696
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 24,320 $ 28,910
========= =========
Supplemental information:
Interest paid $ 3,522 $ 5,859
Income taxes paid -- 950
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 Bank's investment portfolio. In 2002, AFS acquired a 20.9% ownership
interest in Indiana Title Insurance Bank, 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
Bank'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 Bank's significant accounting
policies is set forth in Note 1 of Notes to Consolidated Financial Statements in
the Bank's annual report on Form 10-K for the year ended December 31, 2003.
The consolidated condensed balance sheet of the Bank as of December 31,
2003 has been derived from the audited consolidated balance sheet of the Bank as
of that date.
NOTE B - - SHAREHOLDERS' EQUITY
On May 20, 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 June 11, 2004, and was paid on July 2,
2004. Payment was made for 3,148,988 shares, compared to 3,148,788 the previous
quarter. Stock options totaling 200 shares were exercised during the second
quarter of 2004.
7
NOTE C - - EARNINGS PER SHARE
Earnings per share were computed as follows:
(In thousands, except share data)
Three Months Ended June 30,
2004 2003
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
Basic Earnings per Share: Income available to Common $435 3,148,922 $0.14 $96 3,148,288 $0.03
shareholders ============ ===========
Effect of dilutive stock options -- 23,558 -- 1,279
--------------------- --------------------------
Diluted Earnings Per Share: Income available to common
shareholders and assumed conversions $435 3,172,480 $0.14 $96 3,149,567 $0.03
====================================================================================================================================
(In thousands, except share data)
Six Months Ended June 30,
2004 2003
--------------------------------------------------------------------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
Basic Earnings per Share: Income available to Common $906 3,148,737 $0.29 $851 3,148,037 $0.27
shareholders ============ ===========
Effect of dilutive stock options -- 22,065 -- 270
--------------------- --------------------------
Diluted Earnings Per Share: Income available to common
shareholders and assumed conversions $906 3,170,802 $0.29 $851 3,148,307 $0.27
====================================================================================================================================
At June 30, 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.
NOTE D - - STOCK BASED COMPENSATION
The Bank has stock-based employee compensation plans, which are accounted for
under the recognition and measurement principles of 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 those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the Bank had
applied the fair value recognition provisions of SFAS Statement No. 123,
"Accounting for Stock-Based Compensation," to stock-based employee compensation.
(In thousands, except share data)
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
--------------------------------------------------
Net income, as reported $435 $ 96 $906 $851
Less: Total stock-based employee compensation cost determined under the fair
value based method, net of income taxes (78) (7) (78) (7)
------------------------ -----------------------
Pro forma net income $357 $ 89 $828 $844
======================== =======================
Earnings per share:
Basic - as reported $ 0.14 $ 0.03 $ 0.29 $ 0.27
Basic - pro forma 0.11 0.03 0.26 0.27
Diluted - as reported 0.14 0.03 0.29 0.27
Diluted - pro forma 0.11 0.03 0.26 0.27
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 Bank 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 acBanking 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.
As with most banks, the Bank'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. Consequently, the Bank'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 Bank 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 Bank
announced the completion of the sale of the two branches to PCBI. In connection
with the sale, the Bank 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
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.
Bank Writes Off Troubled Lease Portfolio in 2003: On September 30, 2003 the
Bank charged-off the two troubled equipment leases ("lease pools") originated by
Commercial Money Center ("CMC"), a now bankrupt Bank. The Bank recorded an
after-tax loss of approximately $2,784,000 or $0.88 per diluted share. Prior to
September 30, 2003, the Bank 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 Bank are in accordance with
accounting principles generally accepted in the United States and conform to
general practices within the banking industry. The Bank's significant accounting
policies are described in detail in the Notes to the Bank'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 Bank'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 Bank'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 Bank 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 Bank'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 Bank
estimates a range of inherent losses related to the existence of these
exposures. The estimates are based upon the Bank'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 Bank 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
- -------------------
Assets totaled $428.5 million at June 30, 2004, an increase of $26.1
million, or 6.5% from December 31, 2003. 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
$28,625,000 in the first six months of 2004.
Cash and cash equivalents totaled $24,320,000 at June 30, 2004, an increase
of $9,771,000 from $14,549,000 at December 31, 2003.
Investment securities totaled $166,478,000 at June 30, 2004, an increase of
$28,690,000 or 20.8% from $137,788,000 at December 31, 2003. The increase is due
to additional Federal Home Loan Bank Advances and a decline in the loan
portfolio partially offset by an increase in cash and cash equivalents. The Bank
transferred the majority of its investment securities from available for sale to
held to maturity in the first six months of 2004. The securities were
transferred at fair value at the date of the transfer. The unrealized holding
gain or loss at the date of the transfer will continue to be reported in
"accumulated other comprehensive income (loss)", a separate component of
shareholders' equity, but will be amortized over the remaining life of the
security. Investments classified as available for sale are adjusted to fair
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 fair value each
month.
The loan portfolio totaled $194,641,000 at June 30, 2004, a decline of
$13,244,000 or 6.4% from $207,885,000 at December 31, 2003. Most of the decline
was in residential mortgage loans. The Bank continued to sell new fixed rate
mortgages to minimize potential long-term interest rate risk associated with
such long-term, low-interest loans.
The deposit portfolio totaled $347,273,000 at June 30, 2004, an increase of
$1,529,000 or 0.4% from $345,744,000 at December 31, 2003. Non interest-bearing
deposits increased $4,269,000 while interest-bearing deposits declined
$2,740,000.
Advances from Federal Home Loan Bank totaled $35,176,000 at June 30, 2004,
an increase of $24,946,000 or 243.9% from $10,230,000 at December 31, 2003. The
Bank 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 1.63% at August 4, 2004. The Bank had a total of $20,000,000 in
putable FHLB advances at June 30, 2004. The remaining advances were for
fixed-and variable-rate advances to fund a security purchase and general
liquidity needs.
Equity totaled $39,145,000 at June 30, 2004, an increase of $271,000 or
0.7% from $38,874,000 at December 31, 2003. The increase was due primarily to
accumulated comprehensive income.
The Bank's capital ratios are well in excess of minimum regulatory
requirements. At June 30, 2004, the Bank had a risk-based capital ratio of
15.83% and a tier 1 capital ratio of 8.97%.
11
The Bank had outstanding commitments to originate loans of approximately
$30,925,000 and $2,845,000 at June 30, 2004 and December 31, 2003. The
commitments outstanding at June 30, 2004 were primarily for commercial real
estate loans. In addition, the Bank had $23,177,000 and $21,409,000 of
conditional commitments for lines of credit receivables at June 30, 2004 and
December 31, 2003. The Bank also had $4,599,000 and $3,604,000 of letters of
credit outstanding as of June 30, 2004 and December 31, 2003.
RESULTS OF OPERATIONS
- ---------------------
Net income for the quarter ended June 30, 2004 totaled $435,000 or $0.14
per diluted share compared to net income of $96,000, or $0.03 per diluted share
for the quarter ended June 30, 2003. The higher earnings were primarily due to
reduced provision for loan losses, offset by a reduction in net interest income
and lower gains on sale of loans and servicing rights.
Net income for the six months ended June 30, 2004 totaled $906,000 or $0.29
per diluted share compared to net income of $851,000, or $0.27 per diluted share
for the six months ended June 30, 2003. The higher earnings were primarily due
to reduced provision for loan losses, offset by a reduction in net interest
income and lower gains on sale of loans and servicing rights.
The following table summarizes the Bank's average net interest-earning
assets (which include non-accrual loans) and average interest-bearing
liabilities with the accompanying average rates for the three and six months
ended June 30, 2004 and 2003. The yields shown below were adjusted for the
tax-equivalent benefit of non-taxable municipal securities:
Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
----------------------------------------- -----------------------------------
(Dollars in Thousands)
Average interest-earning assets $379,103 $433,290 $374,056 $431,777
Average interest-bearing liabilities $354,963 $400,083 $351,004 $397,004
----------------------------------------- -----------------------------------
Net interest-earning assets $ 24,140 $ 33,207 $ 23,052 $ 34,773
========================================= ===================================
Average yield on/cost of:
Interest-earning assets 4.73% 5.94% 4.95% 5.85%
Interest-bearing liabilities 2.04% 2.82% 2.03% 2.97%
----------------------------------------- -----------------------------------
Net interest spread 2.69% 3.12% 2.92% 2.88%
========================================= ===================================
Net interest income for the quarter ended June 30, 2004 totaled $2,567,000,
a decrease of $1,028,000, or 28.6% from $3,595,000 for the quarter ended June
30, 2003. Part of the decrease was due to non-taxable interest income from the
purchase of municipal securities, which accounts for approximately $96,000 of
the decrease in the second quarter of 2004 using a federal income tax rate of
34%. Average earning assets declined $54,187,000 to $379,103,000 in the second
quarter of 2004 compared to $433,290,000 in the second quarter of 2003. The
decline was due to the write-off of troubled leases and the sale of the Ohio
branches, both of which took place in the third quarter of 2003. In addition,
the mix of assets changed as earning asset balances shifted from higher yielding
loans to lower-yielding investments. Average loan balances decreased by $105.4
million or 35.0% to $195.4 million. Lower yielding securities and short-term
investment average balances increased by $51.2 million or 38.7% to $183.7
million. The net interest spread, which is the mathematical difference between
the yield on average interest-earning assets and cost of interest-bearing
liabilities, decreased 43 basis points to 2.69% for the second quarter of 2004
compared to 3.12% in the second quarter of 2003. The change in the net interest
spread is due to a decrease in yield of 121 basis points on average
interest-earning assets offset by a 78 basis point reduction in the cost of
average interest-bearing liabilities. The change in interest rate spreads
resulted in a decrease of interest income offset by lower interest expense. The
$1,947,000 decrease in interest income on average interest-earning assets in the
second quarter of 2004 was a combination of a decrease of $1,463,000 because of
lower average balances and an decrease of $484,000 due to lower average rates.
The $484,000 decline because of lower average rates included a $220,000
correction for interest owed to FHLMC for loans sold from June 2002 to June
2004. The decrease of $1,015,000 in cost of interest-bearing liabilities in the
second quarter of 2004 was a combination of a decrease of $66,000 from lower
average balances and a decrease of $949,000 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, decreased 51 basis points to 2.82% in the second
quarter of 2004 from 3.33% in the second quarter of 2003.
Net interest income decreased 17.8% or $1,194,000 in the six months ended
June 30, 2004 compared to the same period in 2003. Part of the decrease was due
to non-taxable interest income from the purchase of municipal securities, which
accounts for approximately $152,000 of the decrease for the six months ended
June 30, 2004 using a federal income tax rate of 34%. Average earning assets
declined $57,721,000 to $374,056,000 in the six months ended June 30, 2004
compared to $431,777,000 in the same period in 2003. The decline was due to the
write-off of troubled leases and the sale of the Ohio branches, both of which
took place in the third quarter of 2003. In addition, the mix of assets changed
as earning asset balances shifted from higher yielding loans to lower-yielding
investments. Average loan balances decreased by $105.0 million or 34.4% to
$199.8 million. Lower yielding securities and short-term investment average
balances increased by $47.3 million or 37.2% to $174.2 million. The net interest
spread increased 4 basis points to 2.92% for the six months ended June 30, 2004
compared to 2.88% for the same period in 2003. The change in the net interest
spread is due to a decrease in yield of 90 basis points on average
interest-earning assets offset by a 94 basis point reduction in the cost of
average interest-bearing liabilities. The change in interest rate spreads
resulted in a decrease of interest income offset by lower interest expense. The
$3,374,000 decrease in interest income on average interest-earning assets in the
six months ended June 30, 2004 was a combination of a decrease of $3,063,000
because of lower average balances and an decrease of $311,000 due to lower
average rates. The $311,000 decline because of lower average rates included the
correction for interest owed to FHLMC as discussed in the preceding paragraph.
The decrease of $2,332,000 in cost of interest-bearing liabilities in the first
six months of 2004 was a combination of a decrease of $296,000 from lower
average balances and a decrease of $2,036,000 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 decreased 8 basis points to 3.04% for the six
months ended June 30, 2004 from 3.12% for the same period in 2003.
The following table sets forth the impact of rate and volume changes on net
interest income for the three and six months ended June 30, 2004 compared to the
same periods in 2003. The yields shown below were adjusted for the
tax-equivalent benefit of non-taxable municipal securities:
(Dollars in Thousands)
Three Months Ended June 30, Six Months Ended June 30,
2004 vs 2003 2004 vs 2003
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
Volume Rate Net Change Volume Rate Net Change
Interest-earning assets $ (1,463) $(484) $ (1,947) $ (3,063) $ (311) $ (3,374)
Interest-bearing liabilities (66) (949) (1,015) (296) (2,036) (2,332)
------------ ------------- --------------- ------------ ------------- --------------
Change in net interest income $ (1,397) $ 465 $ (932) $ (2,767) $1,725 $ (1,042)
============ ============= =============== ============ ============= ==============
The following table summarizes the Bank's non-performing assets at June 30, 2004
and December 31, 2003:
Dollars in Thousands
13
June 30, December 31,
2004 2003
Loans:
Non-accrual $ 5,560 $ 8,383
Restructured Loans 356 473
Over 90 days delinquent and still accruing 153 74
Real estate owned 1,184 602
------------------ ------------------
Total $ 7,253 $ 9,532
================== ==================
The Bank's non-performing assets decreased $2,279,000 in the six months
ended June 30, 2004. The decline was mainly in non-accrual loans partially
offset by an increase in other real estate owned. The non-accrual loans are
mostly made up of commercial and commercial real-estate loans with about half
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 $2.7 million and $3.5
million as of June 30, 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 Bank that is now in
bankruptcy.
In June and September 2001, the Bank purchased two separate pools of lease
receivables totaling $12,003,000, consisting primarily of equipment leases. Each
lease within each pool was supported by a surety bond issued by one of two
insurance companies rated at least "A" by Moody's. The bonds guarantee payment
of all amounts due under the leases in the event of default by the lessee. Each
pool was sold by the terms of a Sales and Servicing Agreement which provides
that the insurers will service the leases. In each case the insurers have
assigned their servicing rights and responsibilities to Commercial Servicing
Corporation, a Bank, 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 Bank 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 pretrial
proceedings.
The Bank 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 Bank charged-off the two
lease pools during the third quarter of 2003. The Bank 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 $95,000 and $185,000 for
the second quarter of 2004 and 2003 respectively. Net charge-offs were $762,000
and $358,000 for the first six months of 2004 and 2003 respectively. A
charge-off in the first quarter of 2004 of a commercial real-estate loan for
$509,000 made up most of the net charge-offs for the first six months of 2004.
Management believes the allowance for loan losses is adequate and that
sufficient provision has been made to absorb losses that may ultimately be
incurred on non-performing loans and the remainder of the portfolio based on
information at June 30, 2004. The allowance for loan losses as a percentage of
loans was 1.63% and 1.80% at June 30, 2004 and December 31, 2003, respectively.
14
Provision expense was $50,000 and $1,400,000 for second quarter of 2004 and 2003
respectively. Provision expense was $200,000 and $1,550,000 for first six months
of 2004 and 2003 respectively. The provision in the current-year was lower than
planned levels due to recoveries of earlier losses; in the prior-year period,
the Bank set aside additional specific reserves totaling $1,250,000 on two pools
of commercial leases that were written off completely in the third quarter of
2003.
The Company's non-interest income was $1,044,000 and $1,254,000 in the
second quarter of 2004 and 2003 respectively, for an overall decrease of
$210,000 or 16.8%. The main cause of the decrease was due to gain on sale of
loans and servicing rights which declined $375,000 to $95,000 in the second
quarter of 2004 from $470,000 in the same period in 2003. The decline was due to
a drop in the volume of mortgage loan refinancing which resulted in less loans
sold. Mortgage loans originated by the Bank declined $54.1 million to $10.5
million from $64.6 million in the second quarter of 2004 and 2003, respectively.
Net loan servicing fees improved $114,000 to $51,000 in the second quarter of
2004 from a net expense of $63,000 in the same period in 2003. The improvement
was due to a decline in mortgage loan refinancing in the second quarter of 2004
compared to the same period in 2003, which resulted in less write-offs of
mortgage loan servicing rights remaining on the Bank's loans that were
refinanced. Mortgage loan servicing rights is an asset that is created when
mortgage loans are sold and the Bank retains the servicing rights. The servicing
rights are recognized as income at the time the loan is sold and the servicing
asset is also recorded. The asset is then amortized as an expense to mortgage
servicing income over the life of the loan. Brokerage and insurance commissions
increased $20,000 or 8.6% to $252,000 in the second quarter of 2004 from
$232,000 in the same period in 2003.
The Company's non-interest income was $2,022,000 and $2,500,000 in the
first six months of 2004 and 2003 respectively, for an overall decrease of
$478,000 or 19.1%. The main cause of the decrease was due to gain on sale of
loans and servicing rights which declined $780,000 to $173,000 in the first six
months of 2004 from $953,000 in the same period in 2003. The decline was due to
a drop in the volume of mortgage loan refinancing which resulted in less loans
sold. Mortgage loans originated by the Bank declined $76.3 million to $20.4
million from $96.7 million in the first six months of 2004 and 2003,
respectively. Net loan servicing fees improved $198,000 for the first six months
of 2004 compared to the same period in 2003. The improvement was due to a
decline in mortgage loan refinancing in the second quarter of 2004 compared to
the same period in 2003, which resulted in less write-offs of mortgage loan
servicing rights remaining on the Bank's loans that were refinanced. Brokerage
and insurance commissions increased $110,000 or 22.8% to $592,000 in the first
six months of 2004 from $482,000 in the same period in 2003. Net realized gain
on sale of securities was zero in the first six months of 2004 compared to
$41,000 in the same period in 2003.
Non-interest expense was $3,217,000 in the second quarter of 2004 and
$3,491,000 in the second quarter of 2003, for an overall decrease of $274,000 or
7.9%. The largest component of the decline is attributable to salary and
benefits expense, which made-up 57.9% of total non-interest expenses in the
second quarter of 2004, compared to 56.2% in the second quarter of 2003.
Salaries and employee benefits decreased $100,000 or 5.1% to $1,863,000 in the
second quarter of 2004, compared to $1,963,000 in the second quarter of 2003.
The decline was attributable to the closure of the Ohio branches offset by lower
deferred loan expenses due to a decline in mortgage loan originations.
Non-interest expense was $6,568,000 and $6,761,000 in the first six months
of 2004 and 2003 respectively, for an overall decrease of $193,000 or 2.9%.
Salaries and employee benefits made-up 61.1% of total non-interest expenses in
the first six months of 2004 compared to 58.7% in the first six months of 2003.
Income taxes was a benefit of $91,000 in the second quarter of 2004
compared to a benefit of $138,000 in the second quarter of 2003 for an overall
reduction of $47,000. The reduction in the tax benefit is due to higher pretax
income in the second quarter of 2004 offset by higher nontaxable interest income
from municipal securities and higher investment income from AIMI, which is
exempt from state income tax. Income taxes was a benefit of $124,000 in the
first six months of 2004 compared to a expense of $60,000 in the same period in
2003 for an overall tax expense decrease of $184,000.
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. The factors that affected this change are
similar to the aforementioned factors for the quarter.
15
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 Bank. The address is
(http://www.sec.gov).
16
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Asset/Liability Committee and the Board of Directors reviews the 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 and deposit, and market information to estimate the potential
impact of interest rate increases and decreases on the earning assets and
liabilities. The model tests the impact on the net interest income under various
interest rate scenarios by estimating the interest rate sensitivity position at
each interest rate interval. The change in the net portfolio value ("NPV") is
also calculated at each interest rate interval. This tests the interest rate
risk exposure from movements in interest rates by using interest sensitivity
analysis to determine the change in the NPV of discounted cash flows from assets
and liabilities.
NPV represents the market value of portfolio equity and is equal to the
estimated market value of assets minus the estimated market value of
liabilities. The model uses a number of assumptions, including the relative
levels of market interest rates and prepayments in mortgage loans and certain
types of callable investments. These computations do not contemplate any actions
management may undertake to reposition the assets and liabilities in response to
changes in the interest rate, and should not be relied upon as indicative of
actual results. In addition, certain shortcomings are inherent in the model of
computing NPV. Should interest rates remain or decrease below present levels,
the portion of adjustable rate loans could decrease in future periods due to
loan refinancing or payoff activity. In the event of an interest rate change,
pre-payment levels would likely be different from those assumed in the model and
the ability of borrowers to repay their adjustable rate loans may decrease
during rising interest rate environments.
Presented below is the assessment of the risk of NPV in the event of sudden and
sustained 200 and 100 basis point increases and decreases respectively, in
prevailing interest rates as of June 30, 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* $ 40,691 $ (7,565) (15.68)% 9.77% (138) bp*
Base or 0% 48,256 11.15
- -100 bp* 50,319 2,063 4.28 11.44 29 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* 44,538 693 1.58 10.77 3 bp*
- ------------------------------------------------------------------------------------------------------------------------------------
* basis points
At June 30, 2004, an increase in interest rates of 200 basis points would have
resulted in a decrease of 15.68% in the net portfolio value compared to a
decrease of 6.27% at December 31, 2003. This change was primarily the result an
increase in the duration of investment securities from 1.90 to 2.44 and an
increase in the duration of the loan portfolio from 3.64 to 3.82 at December 31,
2003 and June 30, 2004, respectively. Duration is a measure of price or value
sensitivity typically expressed in years. It is calculated by time-weighting the
present value of an instrument's cash flows.
17
ITEM 4 - CONTROLS AND PROCEDURES
As of the end of the period covered by this report, management of the Bank
carried out an evaluation, under the supervision and with the participation of
the Bank's principal executive officer and principal financial officer, of the
effectiveness of the Bank's disclosure controls and procedures. Based on this
evaluation, the Bank's principal executive officer and principal financial
officer concluded that the Bank's disclosure controls and procedures are
effective in ensuring that information required to be disclosed by the Bank 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 Bank'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 Bank's principal executive and financial officers have concluded that
the Bank's disclosure controls and procedures are, in fact, effective at a
reasonable assurance level.
In addition, there have been no changes in the Bank'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 Bank's last fiscal quarter, that has materially
affected, or is reasonably likely to materially affect, the Bank's internal
control over financial reporting.
18
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings
-----------------
Not Applicable
ITEM 2 - Changes in Securities,Use of Proceeds and Issuer Purchases of Equity
Securities
--------------------------------------------------------------------
Not Applicable
ITEM 3 - Defaults in Senior Securities
-----------------------------
Not Applicable
ITEM 4 - Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On May 20, 2004, the Bank held its 2004 annual meeting of
shareholders. A total of 2,685,116 shares, representing 85.3% of the
total outstanding shares, were present in person or by proxy at the
meeting, constituting quorum.
Two directors were nominated by the Bank's Board of Directors to serve
new three-year terms. The nominees and the voting results for each are
listed below:
FOR WITHHELD
Donald C. Danielson 2,618,958 (97.5%) 66,158 (2.5%)
Paul W. Prior 2,619,069 (97.5%) 66,047 (2.5%)
The terms of office as a director of directors Harry J. Bailey,
Charles M. Drackett, Jr., Ronald R. Pritzke, R. Scott Hayes and
Michael E. Kent continued after the meeting.
The shareholders also ratified the appointment of BKD, LLP as auditors
for the Bank for the fiscal year ended December 31, 2004. At total of
2,654,863 votes (98.9%) in favor, 16,671 votes (0.6%) against and
13,582 (0.5%) abstained from voting on the proposal.
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 May 7, 2004, the Bank filed a Current Report on 8-K reporting
under Item 12 its unaudited financial results for the quarter
ended March 31, 2004. A copy of the press release was attached to
this Report as an exhibit.
19
SIGNATURES
AMERIANA BANCORP AND SUBSIDIARIES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AMERIANA BANCORP
DATE: August 16, 2004 /s/ Harry J. Bailey
--------------- --------------------------------
Harry J. Bailey
President and
Chief Executive Officer
(Duly Authorized Representative)
DATE: August 16, 2004 /s/ Bradley L. Smith
--------------- -------------------------------
Bradley L. Smith
Senior Vice President-Treasurer
(Principal Financial Officer
and Accounting Officer)