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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-K

 

 

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 0-18392

 

 

AMERIANA BANCORP

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Indiana   35-1782688

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

2118 Bundy Avenue, New Castle, Indiana   47362-1048
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s telephone number, including area code: (765) 529-2230

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, par value $1.00 per share   The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES  ¨    NO  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    YES  ¨    NO  x

Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

The aggregate market value of the registrant’s common stock held by nonaffiliates of the registrant at June 30, 2014 was approximately $40.3 million. For purposes of this calculation, shares held by the directors and executive officers of the registrant are deemed to be held by affiliates.

At March 26, 2015, the registrant had 3,021,412 shares of its common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Proxy Statement for the 2015 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form 10-K.

 

 

 

 


Table of Contents

INDEX

 

    Page  
PART I   

Item 1.

Business

  1   

Item 1A.

Risk Factors

  26   

Item 1B.

Unresolved Staff Comments

  32   

Item 2.

Properties

  33   

Item 3.

Legal Proceedings

  34   

Item 4.

Mine Safety Disclosures

  34   
PART II   

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

  34   

Item 6.

Selected Financial Data

  35   

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

  37   

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

  55   

Item 8.

Financial Statements and Supplementary Data

  56   

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

  101   

Item 9A

Controls and Procedures

  101   

Item 9B.

Other Information

  101   
PART III   

Item 10.

Directors, Executive Officers and Corporate Governance

  102   

Item 11.

Executive Compensation

  102   

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  102   

Item 13.

Certain Relationships and Related Transactions, and Director Independence

  103   

Item 14.

Principal Accountant Fees and Services

  103   
PART IV   

Item 15.

Exhibits and Financial Statement Schedules

  103   

 

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Forward-Looking Statements

This report contains certain “forward-looking statements” within the meaning of the federal securities laws. These statements are not historical facts, rather statements based on Ameriana Bancorp’s current expectations regarding its business strategies, intended results and future performance. Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions. Such statements are subject to certain risks and uncertainties including changes in economic conditions in the Company’s market area, including real estate values, changes in policies by regulatory agencies, the outcome of litigation, fluctuations in interest rates, demand for loans in the Company’s market area, and competition that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. Additional factors that may affect our results are discussed in this annual report on Form 10-K under Part I - Item 1A - “Risk Factors.” The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company advises readers that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions, that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

PART I

 

Item 1. Business

General

The Company. Ameriana Bancorp (the “Company”) is an Indiana chartered bank holding company subject to regulation and supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) under the Bank Holding Company Act of 1956 (the “BHCA”). The Company became the holding company for Ameriana Bank (the “Bank”) in 1990. The Company also holds a minority interest in a limited partnership organized to acquire and manage real estate investments, which qualify for federal tax credits. References to “we,” “us” and “our” refer to Ameriana Bancorp and/or the Bank, as appropriate.

The Bank. The Bank began operations in 1890. Since 1935, the Bank has been a member of the Federal Home Loan Bank (the “FHLB”) System. Its deposits are insured to applicable limits by the Deposit Insurance Fund, administered by the Federal Deposit Insurance Corporation (the “FDIC”). On June 29, 2002, the Bank converted to an Indiana savings bank and adopted the name “Ameriana Bank and Trust, SB. On July 31, 2006, the Bank closed its Trust Department and adopted the name “Ameriana Bank, SB.” On June 1, 2009, the Bank converted from an Indiana savings bank to an Indiana commercial bank and adopted its present name, “Ameriana Bank.” The Bank is subject to regulation by the Indiana Department of Financial Institutions (the “DFI”) and the FDIC. The Bank conducts business through its main office at 2118 Bundy Avenue, New Castle, Indiana and through 13 branch offices located in New Castle, Middletown, Knightstown, Morristown, Greenfield, Anderson, Avon, Carmel, New Palestine, Westfield, Noblesville and two branches in Fishers, Indiana. The Bank offers a wide range of consumer and commercial banking services, including: (1) accepting deposits; (2) originating commercial, mortgage, consumer and construction loans; and (3) through its subsidiaries, providing investment and brokerage services and insurance services.

The Bank has two wholly-owned subsidiaries, Ameriana Insurance Agency (“AIA”) and Ameriana Financial Services, Inc. (“AFS”). AIA provides insurance sales from offices in New Castle, Greenfield and Avon, Indiana. AFS operates a brokerage business in conjunction with LPL Financial that provides non-bank investment product alternatives to its customers and the general public.

The principal sources of funds for the Bank’s lending activities include deposits received from the general public, funds borrowed from the FHLB of Indianapolis, principal amortization and prepayment of loans. The Bank’s primary sources of income are interest and fees on loans and interest on investments. The Bank has from

 

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time to time purchased loans and loan participations in the secondary market. The Bank also invests in various federal and government agency obligations and other investment securities permitted by applicable laws and regulations, including mortgage-backed, municipal and mutual fund securities. The Bank’s principal expenses are interest paid on deposit accounts and borrowed funds and operating expenses.

Competition. The geographic markets we serve are highly competitive for deposits, loans and other financial services, including retail brokerage services and insurance. Our direct competitors include traditional banking and savings institutions, as well as other non-bank providers of financial services, such as insurance companies, brokerage firms, mortgage companies and credit unions located in the Bank’s market area. Additional significant competition for deposits comes from money market mutual funds and corporate and government debt securities, and Internet banks.

The primary factors in competing for loans are interest rates and loan origination fees, and the range of services offered by the various financial institutions. Competition for origination of loans normally comes from commercial banks, savings institutions, mortgage bankers, mortgage brokers and insurance companies.

The Bank has banking offices in Henry, Hancock, Hendricks, Shelby, Madison, and Hamilton Counties in Indiana. The Bank competes with numerous commercial banks and savings institutions in the Bank’s primary service areas and in surrounding counties, many of which have capital and assets that are substantially larger than the Bank.

The Company expects competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Technological advances, for example, have lowered barriers to entry into the industry, allowed banks to expand their geographic reach by providing services over the Internet and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks. Changes in federal law permit affiliation among banks, securities firms and insurance companies, which promotes a competitive environment in the financial services industry. Competition for deposits and the origination of loans could limit the Company’s growth in the future.

Available Information

The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are made available free of charge on the Company’s website, www.ameriana.com, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission. Information on the Company’s website should not be considered a part of this Form 10-K.

Lending Activities

General. The principal lending activity of the Bank has been the origination of conventional first mortgage loans secured by residential property and commercial real estate, and commercial loans and consumer loans. The residential mortgage loans have been predominantly secured by single-family homes and have included construction loans.

The majority of the Bank’s mortgage loan portfolio is secured by real estate located in Henry, Hancock, Hamilton, Hendricks, Madison, Shelby, Delaware and Marion Counties in Indiana.

 

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The following table sets forth information concerning the Bank’s loans by type of loan at the dates indicated.

 

    At December 31,  
    2014     2013     2012     2011     2010  
    Amount     %     Amount     %     Amount     %     Amount     %     Amount     %  
    (Dollars in thousands)  

Real estate loans:

                   

Commercial

  $ 111,455        34.72   $ 104,766        33.05   $ 101,106        31.77   $ 100,126        31.58   $ 94,595        29.79

Residential

    163,839        51.04        168,529        53.17        167,998        52.78        164,420        51.86        169,274        53.30   

Construction

    13,570        4.23        11,382        3.59        14,886        4.68        17,980        5.67        24,705        7.77   

Commercial loans and leases

    29,358        9.14        29,254        9.23        30,934        9.72        30,961        9.76        22,360        7.04   

Municipal loans

    785        0.24        997        0.32        1,187        0.37        740        0.23        2,718        0.86   

Consumer loans

    2,018        0.63        2,032        0.64        2,176        0.68        2,860        0.90        3,943        1.24   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

$ 321,025      100.00 $ 316,960      100.00 $ 318,287      100.00 $ 317,087      100.00 $ 317,595      100.00
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less:

Undisbursed loan proceeds

  302      248      214      12      443   

Deferred loan fees (expenses), net

  707      684      629      434      225   

Allowance for loan losses

  3,903      3,993      4,239      4,132      4,212   
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Subtotal

  4,912      4,925      5,082      4,578      4,880   
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Total

$ 316,113    $ 312,035    $ 313,205    $ 312,509    $ 312,715   
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

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The following table shows, at December 31, 2014, the Bank’s loans based on their contractual terms to maturity. Demand loans, loans having no stated schedule of repayments and no stated maturity and overdrafts are reported as due in one year or less. Contractual principal repayments of loans do not necessarily reflect the actual term of the loan portfolio. The average life of mortgage loans is substantially less than their contractual terms because of loan prepayments and because of enforcement of due-on-sale clauses, which give the Bank the right to declare a loan immediately due and payable if, among other things, the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase, however, when current mortgage loan rates substantially exceed rates on existing mortgage loans.

 

     Amounts of Loans Which Mature in  
     2015      2016 – 2019      2020 and
Thereafter
     Total  
     (In thousands)  

Type of Loan:

           

Residential and commercial real estate mortgage

   $ 18,716       $ 90,346       $ 166,232       $ 275,294   

Construction

     6,572         4,788         2,210         13,570   

Other

     8,573         19,019         4,569         32,161   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 33,861    $ 114,153    $ 173,011    $ 321,025   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table sets forth the dollar amount of the Company’s aggregate loans due after one year from December 31, 2014, which have predetermined interest rates and which have floating or adjustable interest rates.

 

     Fixed
Rate
     Adjustable
Rate
     Total  
     (In thousands)  

Residential and commercial real estate mortgage

   $ 199,098       $ 57,480       $ 256,578   

Construction

     4,160         2,838         6,998   

Other loans

     14,665         8,923         23,588   
  

 

 

    

 

 

    

 

 

 

Total

$ 217,923    $ 69,241    $ 287,164   
  

 

 

    

 

 

    

 

 

 

Residential Real Estate and Residential Construction Lending. The Bank originates loans on one-to four-family residences. The original contractual loan payment period for residential mortgage loans originated by the Bank generally ranges from ten to 30 years. Because borrowers may refinance or prepay their loans, they normally remain outstanding for a shorter period. The Bank normally sells a portion of its newly originated fixed-rate mortgage loans in the secondary market and retains all adjustable-rate loans in its portfolio. The decision to sell fixed-rate mortgage loans is determined by management based on available pricing and balance sheet considerations. The Bank also originates hybrid mortgage loans. Hybrid mortgage loans carry a fixed-rate for the first three to five years, and then convert to an adjustable-rate thereafter. The residential mortgage loans originated and retained by the Bank in 2014 were composed primarily of fixed-rate loans and, to a lesser extent, one-year adjustable rate loans and hybrid loans that have a fixed-rate for three years and adjust annually to the one-year constant maturity treasury rate thereafter. The overall strategy is to maintain a low risk mortgage portfolio that helps to diversify the Bank’s overall asset mix.

The Bank makes construction/permanent loans to borrowers to build one-to four-family owner-occupied residences with terms of up to 30 years. These loans are made as interest-only loans for a period typically of 12 months, at which time the loan converts to an amortized loan for the remaining term. The loans are typically made as adjustable-rate mortgages. One-to four-family residential construction loans were $3.8 million, or 28.2% of the construction loan portfolio, at December 31, 2014 compared to $2.6 million, or 22.9%, at December 31, 2013. Additionally, at December 31, 2014, the Bank held loans on $758,000 of residential land and building lots, which represented 5.6% of the construction loan portfolio, compared to $820,000, or 7.2%, at December 31, 2013.

Loans involving construction financing present a greater level of risk than loans for the purchase of existing homes since collateral value and construction costs can only be estimated at the time the loan is approved. The Bank has sought to minimize this risk by limiting construction lending to qualified borrowers in its market area and by limiting the number of construction loans outstanding at any time to individual builders. In addition, many of the Bank’s construction loans are made on homes that are pre-sold, for which permanent financing is already arranged.

 

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Home equity lines of credit have adjustable rates of interest that are indexed to the prime rate as published in The Wall Street Journal for terms of up to 10 years. The loans are originated with a total maximum loan-to-value ratio of 85% (including the first mortgage) of the appraised value of the property, and the Bank requires that it has a second lien position on the property.

In 2014, the Bank originated $32.5 million in non-construction residential real estate loans. The total included $3.7 million in adjustable-rate residential first mortgage loans, including hybrids, $25.7 million of fixed-rate first mortgage loans, $2.9 million of home equity credit lines and $285,000 of closed end second mortgage loans. Fixed-rate residential mortgage loans sold into the secondary market in 2014 and 2013 were $4.7 million and $14.9 million, respectively. Gains on residential loan sales, including imputed gains on servicing rights and loan origination fees net of direct origination costs, were $170,000 in 2014 compared with $511,000 in 2013.

Commercial Real Estate and Commercial Real Estate Construction Lending. The Bank originates loans secured by both owner-occupied and nonowner-occupied properties. The Bank originates commercial real estate loans and purchases loan participations from other financial institutions. These participations are reviewed and approved based upon the same credit standards as commercial real estate loans originated by the Bank. At December 31, 2014, the Bank’s individual commercial real estate loan balances ranged from $1,000 to $4.2 million. The Bank’s commercial real estate loans may have a fixed or variable interest rate.

Loans secured by commercial real estate properties are generally larger and involve a greater degree of credit risk than one-to four-family residential mortgage loans. Because payments on loans secured by commercial real estate properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or by general economic conditions. If the cash flows from the project are reduced (for example, if leases are not obtained or renewed), the borrower’s ability to repay the loan may be impaired. To minimize the risks involved in originating such loans, the Bank considers, among other things, the creditworthiness of the borrower, the location of the real estate, the condition and occupancy levels of the security, the projected cash flows of the business, the borrower’s ability to service the debt and the quality of the organization managing the property.

Commercial real estate construction loans are made to developers for the construction of commercial properties, owner-occupied facilities, nonowner-occupied facilities and for speculative purposes. These construction loans are granted based on a reasonable estimate of the time to complete the projects. Commercial real estate construction loans made up $9.0 million, or 66.2% of the construction loan portfolio, at December 31, 2014 compared to $8.0 million, or 69.9%, at December 31, 2013. As these loans mature they will either pay-off or roll to a permanent commercial real estate loan.

The Bank’s underwriting criteria are designed to evaluate and minimize the risks of each construction loan. Among other things, the Bank considers evidence of the availability of permanent financing or a takeout commitment to the borrower; the reputation of the borrower and his or her financial condition; the amount of the borrower’s equity in the project; independent appraisal and review of cost estimates; pre-construction sale and leasing information; cash flow projections of the borrower; and the number of other active construction projects a borrower has ongoing.

At December 31, 2014, the largest commercial real estate lending relationship was comprised of five loans to five separate borrowing entities with a total commitment of $9.0 million and a total outstanding balance of $8.7 million. All five loans were secured by retail strip shopping centers, and were performing according to their original terms at December 31, 2014.

Municipal Lending. At December 31, 2014, the Bank’s loan portfolio included two municipal loans with approved credit limits totaling $785,000 outstanding balances totaling $785,000.

Consumer Lending. The consumer lending portfolio includes automobile loans and other consumer products. The collateral is generally the asset defined in the purpose of the request. The policies of the Bank are adhered to in our underwriting of consumer loans.

 

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Management believes that the shorter terms and the normally higher interest rates available on various types of consumer loans have been helpful in maintaining profitable spreads between average loan yields and costs of funds. Consumer loans may entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly. In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections depend on the borrower’s continuing financial stability, and therefore, are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans. The Bank has sought to reduce this risk by primarily granting secured consumer loans.

Commercial Lending. The Bank lends to business entities for the short-term working capital, inventory financing, equipment purchases and other business financing needs. The loans can be in the form of revolving lines of credit, commercial lines of credit or term debt. The Bank also matches the term of the debt to the estimated useful life of the assets.

At December 31, 2014, the largest commercial relationship included seven credits with a total commitment of $6.7 million and outstanding balances totaling $4.9 million that were secured by business assets of the borrower. One of the credits with a $5.0 million commitment and outstanding balance of $3.9 million was approved under the Small Business Administration (“SBA”) 7(a) CAPLine program and carries a 75% SBA guarantee. All of the individual credits were performing according to their original terms at December 31, 2014.

Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property the value of which tends to be more easily ascertainable, commercial loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flows of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.

Originations, Purchases and Sales. Historically, most residential and commercial real estate loans have been originated directly by the Bank through salaried and commissioned loan officers. Residential loan originations have been attributable to referrals from real estate brokers and builders, and banking center staff. In 2014, the Bank acquired a $254,000 loan on vacant commercial land and four residential property loans totaling $155,000 from the Indianapolis Neighborhood Housing Partnership, a 23-year-old independent, non-governmental nonprofit that helps families and individuals become long-term, successful homeowners. At December 31, 2014, balances outstanding for all loan participations or whole loan purchases totaled $13.3 million. Commercial real estate and construction loan originations have also been obtained by direct solicitation. Consumer loan originations are attributable to walk-in customers who have been made aware of the Bank’s programs by advertising as well as direct solicitation.

The Bank has previously sold whole loans and loan participations to other financial institutions and institutional investors, and sold $4.7 million of fixed-rate single-family mortgage loans in 2014. Sales of loans generate income (or loss) at the time of sale, produce future servicing income and provide funds for additional lending and other purposes. When the Bank retains the servicing of loans it sells, the Bank retains responsibility for collecting and remitting loan payments, inspecting the properties, making certain insurance and tax payments on behalf of borrowers and otherwise servicing those loans. The Bank typically receives a fee of between 0.25% and 0.375% per annum of the loan’s principal amount for performing these services. The right to service a loan has economic value and the Bank carries capitalized servicing rights on its books based on comparable market values and expected cash flows. At December 31, 2014, the Bank was servicing $70.9 million of loans for others. The aggregate book value of capitalized servicing rights at December 31, 2014 was $530,000.

Management believes that purchases of loans and loan participations are desirable when local mortgage demand is less than the local supply of funds available for mortgage originations or when loan terms available outside the Bank’s local lending areas are favorable to those available locally. Additionally, purchases of loans may be made to diversify the Bank’s lending portfolio. The Bank’s loan purchasing activities fluctuate significantly. The seller generally performs the servicing of purchased loans. The Bank utilizes the same underwriting and monitoring processes and standards for loans it purchases as it would for internally generated loans. To cover

 

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servicing costs, the service provider retains a portion of the interest being paid by the borrower. In addition to whole loan purchases, the Bank also purchases participation interests in loans. Both whole loans and participations are purchased on a yield basis.

For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of this Annual Report on Form 10-K.

Loan Underwriting. During the loan approval process, the Bank assesses both the borrower’s ability to repay the loan and the adequacy of the underlying security. Potential residential borrowers complete an application that is submitted to a commissioned loan originator. As part of the loan application process, the Bank obtains information concerning the income, financial condition, employment and credit history of the applicant. In addition, qualified appraisers inspect and appraise the property that is offered to secure the loan. The Bank’s underwriter or the Senior Vice President of Mortgage Banking approves or denies the loan request.

Consumer loan applications are evaluated using a multi-factor based scoring system or by direct underwriting.

Commercial loans that are part of a lending relationship exceeding $250,000 are submitted to the Bank’s credit analysts for review, financial analysis and for preparation of a Loan Approval Memorandum. The Loan Committee, consisting of members of the Board or management appointed by the Board of Directors, must approve secured and unsecured loans over $500,000 and $100,000, respectively, and all loans that have a variance to loan policy.

In connection with the origination of single-family, residential adjustable-rate loans with the initial rate fixed for five years or less, borrowers are qualified at a rate of interest equal to the new rate at the first re-pricing date, assuming the maximum increase. It is the policy of management to make loans to borrowers who not only qualify at the low initial rate of interest, but who would also qualify following an upward interest rate adjustment.

Loan Fee and Servicing Income. In addition to interest earned on loans, the Bank receives income through servicing of loans, and fees in connection with loan originations, loan modifications, late payments, changes of property ownership and for other miscellaneous services related to the loan. Income from these activities is volatile and varies from period to period with the volume and type of loans made.

When possible, the Bank charges loan origination fees on commercial loans that are calculated as a percentage of the amount borrowed and are charged to the borrower at the time of origination of the loan. These fees generally range up to one point (one point being equivalent to 1% of the principal amount of the loan). In accordance with Accounting Standards Codification 310, loan origination and commitment fees and certain direct loan origination costs are deferred and the net amount amortized as an adjustment of yield over the contractual life of the related loans.

For additional information, see Note 7 to the Consolidated Financial Statements included under Item 8 of this Annual Report on Form 10-K.

Delinquencies. When a borrower defaults on a required payment on a non-commercial loan, the Bank contacts the borrower and attempts to induce the borrower to cure the default. A late payment notice is mailed to the borrower and a telephone contact is made after a payment is fifteen days past due. If the delinquency on a mortgage loan exceeds 90 days and is not cured through the Bank’s normal collection procedures or an acceptable arrangement is not worked out with the borrower, the Bank will institute measures to remedy the default, including commencing foreclosure action. In the case of default related to a commercial loan, the contact is initiated by the commercial lender after a payment is ten days past due. The Loan Committee reviews delinquency reports weekly and the Criticized Assets Committee reviews classified delinquent loans quarterly.

The Bank follows the collection processes required by Freddie Mac, Fannie Mae and the Federal Home Loan Bank of Indianapolis to manage residential loans underwritten for the secondary market. The collection practices for all other loans adhere with the Bank’s loan policies and regulatory requirements. It is the Bank’s intention to be proactive in its collection of delinquent accounts while adhering to state and federal guidelines.

 

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Nonperforming Assets and Asset Classification. Loans are reviewed regularly and are placed on nonaccrual status when, in the opinion of management, the collection of additional interest is doubtful. Residential mortgage loans are placed on nonaccrual status when principal or interest payments are 90 days or more past due unless it is adequately secured and there is reasonable assurance of full collection of principal and interest. Consumer loans generally are charged off when the loan delinquency exceeds 120 days. Commercial real estate loans and commercial loans are generally placed on nonaccrual status when the loan is 90 days or more past due. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is charged against interest income. Subsequent payments are applied to the outstanding principal balance.

Real estate acquired by the Bank as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until such time as it is sold. When such property is acquired, it is recorded at its fair value. Any subsequent deterioration of the property is charged off directly to income, reducing the value of the asset.

The following table sets forth information with respect to the Company’s aggregate nonperforming assets at the dates indicated.

 

     At December 31,  
     2014     2013     2012     2011     2010  
     (Dollars in thousands)  

Loans accounted for on a nonaccrual basis:

          

Real Estate:

          

Residential

   $ 2,212      $ 2,767      $ 3,903      $ 4,500      $ 6,258   

Commercial

     812        351        354        —          —     

Construction

     836        1,207        2,375        3,432        4,184   

Commercial loans and leases

     516        733        967        644        731   

Consumer loans

     —          —          4        —          14   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  4,376      5,058      7,603      8,576      11,187   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accruing loans contractually past due 90 days or more:

Real Estate:

Residential

  14      9      —        243      60   

Consumer loans

  1      —        1      9      —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  15      9      1      252      60   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total of nonaccrual and 90 days or more past due loans (1)

$ 4,391    $ 5,067    $ 7,604    $ 8,828    $ 11,247   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total loans

  1.37   1.60   2.39   2.79   3.54
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other nonperforming assets (2)

$ 6,639    $ 5,171    $ 6,326    $ 7,571    $ 9,082   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonperforming assets

$ 11,030    $ 10,238    $ 13,930    $ 16,399    $ 20,329   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total assets

  2.33   2.23   3.13   3.82   4.73
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Troubled debt restructurings in total of nonaccrual and 90 days or more past due loans (1)

$ 1,082    $ 1,781    $ 2,750    $ 1,783    $ 2,245   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total troubled debt restructurings

$ 7,455    $ 11,558    $ 12,171    $ 9,016    $ 8,393   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Total nonaccrual loans and 90 days or more past due loans at December 31, 2014 included $1.1 million of troubled debt restructurings, which consisted of four residential real estate loans totaling $885,000 and three commercial loans totaling $197,000.
(2) Other nonperforming assets represent property acquired through foreclosure or repossession. This property is carried at the lower of its fair market value or the principal balance of the related loan.

In a slowly improving local economy the Company has continued to make progress in reducing nonperforming loans, with $4.4 million at December 31, 2014 representing a $676,000 reduction from $5.1 million at December 31, 2013. Nonaccrual residential real estate loans decreased $555,000 for the year to $2.2 million at December 31, 2014, primarily the result of the repurchase by the servicer of a loan with a $781,000 balance at

 

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December 31, 2013. Nonaccrual construction loans decreased by $371,000 during 2014, as the property securing all three nonaccrual loans totaling $1.2 million at December 31, 2013 was transferred to other real estate owned, partly offset by the addition of one nonaccrual loan for $836,000 at December 31, 2014. Our nonaccrual commercial loans declined $217,000 during 2014 to $516,000 from $733,000 at December 31, 2013. There was one nonaccrual commercial real estate loan with a balance of $812,000 at December 31, 2014, an increase of $460,000 over the amount for one loan a year earlier. We have analyzed our collateral position on these nonperforming loans using current appraisals and valuations, and have established reserves accordingly.

Troubled debt restructurings (“TDRs”) decreased $4.1 million from $11.6 million at December 31, 2013 to $7.5 million at December 31, 2014. The decrease was the net result of the payoff of six loans totaling $3.0 million at December 31, 2013, the transfer to other real estate owned of a $1.0 million loan, partly offset by one new TDR with a balance of $164,000 and other payments applied to loan principal. The total of $7.5 million at December 31, 2014 included a $3.7 million loan on a hotel in northern Indiana, a $940,000 loan for developed commercial land, 20 single-family home loans totaling $2.6 million and three commercial loans totaling $197,000. As of December 31, 2014, the Bank had classified $1.1 million of the TDRs as doubtful, including the three commercial loans and four single-family home loans. The $940,000 loan for developed commercial land and 12 single-family home loans totaling $1.3 million were classified as pass. The other TDRs totaling $4.1 million were classified as substandard. The total of $11.6 million at December 31, 2013 included a $3.8 million loan on the hotel in northern Indiana, a $1.0 million construction loan on a residential condominium project, 23 single-family home loans totaling $4.0 million, two loans totaling $2.5 million for developed commercial land, three commercial loans totaling $264,000, and a commercial real estate loan for $24,000.

Other nonperforming assets, real estate acquired through foreclosure or deed-in-lieu of foreclosure, totaled $6.6 million at December 31, 2014. The properties consisted of a strip retail center and outlot with a book value of $2.0 million, a residential condominium development project with a book value of $1.5 million, 4 single-family homes totaling $961,000, 2 parcels of land zoned commercial totaling $820,000, 40 single-family lots in 4 developments totaling $607,000, 2 parcels of undeveloped land zoned residential totaling $366,000 and 3 commercial properties totaling $363,000.

Interest income that would have been recorded for 2014 had non-accruing loans been current in accordance with their original terms and had been outstanding throughout the period was $432,000. The amount of interest related to those nonaccrual loans included in interest income for 2014 was $91,000.

For additional information regarding the Bank’s problem assets and loss provisions recorded thereon, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Form 10-K.

Reserves for Losses on Loans and Real Estate

In making loans, management recognizes that credit losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a secured loan, the quality of the security for the loan.

It is management’s policy to maintain reserves for estimated incurred losses on loans. The Bank’s management establishes general loan loss reserves based on, among other things, historical loan loss experience, evaluation of economic conditions in general and in various sectors of the Bank’s customer base, and periodic reviews of loan portfolio quality. Specific reserves are provided for individual loans where the ultimate collection is considered questionable by management after reviewing the current status of loans that are contractually past due and considering the net realizable value of the security of the loan or guarantees, if applicable. It is management’s policy to establish specific reserves for estimated inherent losses on delinquent loans when it determines that losses are anticipated to be incurred on the underlying properties. At December 31, 2014, the Bank’s allowance for loan losses amounted to $3.9 million. Management believes that the allowance for loan losses is adequate to cover all incurred and probable losses inherent in the portfolio at December 31, 2014.

Future reserves may be necessary if economic conditions or other circumstances differ substantially from the assumptions used in making the initial determinations. Regulators, in reviewing the Bank’s loan portfolio, may require the Bank to increase its allowance for loan losses, thereby negatively affecting its financial condition and earnings.

 

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Table of Contents

The following table sets forth an analysis of the Bank’s aggregate allowance for loan losses for the periods indicated:

 

     Year Ended December 31,  
     2014     2013     2012     2011     2010  
     (Dollars in thousands)  

Balance at beginning of period

   $ 3,993      $ 4,239      $ 4,132      $ 4,212      $ 4,005   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Charge-offs:

Real estate loans:

Commercial

  106      479      53      11      238   

Residential

  204      441      456      605      737   

Construction

  46      2      196      536      525   

Commercial loans

  59      137      324      301      398   

Consumer loans

  90      81      69      107      72   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total charge-offs

  505      1,140      1,098      1,560      1,970   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Recoveries:

Real estate loans:

Commercial

  11      —        —        1      —     

Residential

  13      42      21      76      16   

Construction

  4      21      8      1      206   

Commercial loans and leases

  31      38      4      2      4   

Consumer loans

  34      38      27      15      18   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries

  93      139      60      95      244   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

  (412   (1,001   (1,038   (1,465   (1,726

Provision for loan losses

  322      755      1,145      1,385      1,933   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

$ 3,903    $ 3,993    $ 4,239    $ 4,132    $ 4,212   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratio of net charge-offs to average loan outstanding during the period

  0.13   0.31   0.33   0.47   0.54
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses to non-performing Loans

  88.89   78.80   55.75   46.81   37.45
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses to total loans

  1.22   1.26   1.33   1.30   1.33
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Company had a provision for loan losses of $322,000 for 2014 compared to a provision of $755,000 in 2013. The lower 2014 provision was due primarily to a reduction in nonperforming loans and net charge-offs, and to an improvement in the overall credit quality of the loan portfolio.

Total charge-offs were $505,000 for 2014, and included partial charge-offs totaling $184,000 to three loans related to an interior decorating business, $185,000 to seven residential real estate loans, $46,000 to two construction loans, and $90,000 to consumer loans. Charge-offs totaled $1.1 million for 2013, and included a partial charge-off of $479,000 of a loan on a hotel in northern Indiana, $441,000 to 16 residential real estate loans, and $137,000 to five commercial loans. These charge-offs resulted primarily from the continued effects of the recent economic downturn and slow recovery of the local economy, and were based on new appraisals or new valuations. See also Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Loans – Credit Quality.”

 

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Table of Contents

The following table sets forth a breakdown of the Company’s aggregate allowance for loan losses by loan category at the dates indicated. Management believes that the allowance can be allocated by category only on an approximate basis. The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.

 

     At December 31,  
     2014     2013     2012  
     Amount      Percent of
Loans in Each
Category to
Total Loans
    Amount      Percent of
Loans in Each
Category to
Total Loans
    Amount      Percent of
Loans in Each
Category to
Total Loans
 
     (Dollars in thousands)  

Real estate loans:

               

Commercial

   $ 1,059         34.72   $ 1,165         33.05   $ 789         31.77

Residential

     1,934         51.04        1,743         53.17        1,504         52.78   

Construction

     156         4.23        356         3.59        785         4.68   

Commercial loans and leases

     637         9.14        623         9.23        1,080         9.72   

Municipal loans

     —           0.24        —           0.32        —           0.37   

Consumer loans

     117         0.63        106         0.64        81         0.68   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total allowance for loan losses

$ 3,903      100.00 $ 3,993      100.00 $ 4,239      100.00
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     At December 31,  
     2011     2010  
     Amount      Percent of
Loans in Each
Category to
Total Loans
    Amount      Percent of
Loans in Each
Category to
Total Loans
 
     (Dollars in thousands)  

Real estate loans:

          

Commercial

   $ 736         31.58   $ 639         29.79

Residential

     1,605         51.86        1,584         53.30   

Construction

     940         5.67        1,254         7.77   

Commercial loans and leases

     788         9.76        657         7.04   

Municipal loans

     —           0.23        —           0.86   

Consumer loans

     63         0.90        78         1.24   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total allowance for loan losses

$ 4,132      100.00 $ 4,212      100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

Investment Activities

Interest and dividends on investment securities, mortgage-backed securities, FHLB stock and other investments provide the second largest source of income for the Bank (after interest on loans), constituting 8.4% of the Bank’s total interest income (and dividends) for 2014. The Bank maintains its liquid assets at levels believed adequate to meet requirements of normal banking activities and potential savings outflows.

As an Indiana commercial bank, the Bank is authorized to invest without limitation in direct or indirect obligations of the United States, direct obligations of a United States territory, and direct obligations of the state or a municipal corporation or taxing district in Indiana. The Bank is also permitted to invest in bonds or other securities of a national mortgage association and the stock and obligations of a Federal Home Loan Bank. Indiana commercial banks may also invest in collateralized mortgage obligations to the same extent as national banks. An Indiana commercial bank may also purchase for its own account other investment securities under such limits as the Department of Financial Institutions prescribes by rule, provided that the commercial bank may not invest more than 10% of its equity capital in the investment securities of any one issuer. An Indiana commercial bank may not invest in speculative bonds, notes or other indebtedness that are defined as securities and that are rated below the first four rating categories by a generally recognized rating service, or are in default. An Indiana commercial bank may purchase an unrated security if it obtains financial information adequate to document the investment quality of the security.

The Bank’s investment portfolio consists primarily of mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac. The Bank has also invested in municipal securities and mutual funds and maintains interest-bearing deposits in other financial institutions (primarily the Federal Reserve Bank of Chicago and the FHLB of Indianapolis). As a member of the FHLB System, the Bank is also required to hold stock in the FHLB of Indianapolis. The Bank did not own any security of a single issuer that had an aggregate book value in excess of 10% of its equity at December 31, 2014.

 

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The following table sets forth the amortized cost and fair value of the Bank’s investments in federal agency obligations, mortgage-backed securities, mutual funds, and municipal securities at the dates indicated. All of the other investments were available for sale:

 

     At December 31,  
     2014      2013  
            (In thousands)         
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

Available for sale:

           

Ginnie Mae and GSE mortgage-backed pass-through securities

   $ 43,675       $ 44,198       $ 34,205       $ 33,806   

Ginnie Mae collateralized mortgage obligations

     2,053         2,019         2,349         2,214   

Mutual fund

     1,826         1,867         1,787         1,783   
  

 

 

    

 

 

    

 

 

    

 

 

 
  47,554      48,084      38,341      37,803   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity:

GSE mortgage-backed pass-through securities

  4,736      4,756      —        —     

Municipal securities

  2,346      2,354      2,347      2,347   
  

 

 

    

 

 

    

 

 

    

 

 

 
  7,082      7,110      2,347      2,347   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

$ 54,636    $ 55,194    $ 40,688    $ 40,150   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table sets forth information regarding maturity distribution and average yields for the Bank’s investment securities portfolio at December 31, 2014:

 

     Within 1 Year     1-5 Years     5-10 Years     Over 10 Years     Total  
     Amount      Yield     Amount      Yield     Amount      Yield     Amount      Yield     Amount      Yield  
     (Dollars in thousands)  

Available for sale:

                         

Mutual funds (1)

   $ 1,867         1.87   $ —           —     $ —           —     $ —           —     $ 1,867         1.87

Held to maturity:

                         

Municipal securities (2)

   $ 70         7.95   $ 370         7.95   $ 610         7.95   $ 1,296         7.95   $ 2,346         7.95

 

(1) Mutual funds have no stated maturity date.
(2) Presented on a tax-equivalent basis using a tax rate of 34%.

 

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Table of Contents

The Bank’s mortgage-backed securities, Ginnie Mae and GSE pass-throughs, and Ginnie Mae collateralized mortgage obligations, include both fixed and adjustable-rate securities. At December 31, 2014, these securities consisted of the following:

 

     Carrying      Average  
     Amount      Yield  
     (Dollars in thousands)  

Available for sale:

     

Adjustable-rate:

     

Repricing in one year or less

   $ 487         1.86

Fixed-rate:

     

Maturing in five years or less (1)

     29,283         1.97   

Maturing in five to ten years (1)

     16,447         2.35   
  

 

 

    

 

 

 

Total

$ 46,217      2.11
  

 

 

    

 

 

 

Held to maturity:

Fixed-rate:

Maturing in five to ten years (1)

  4,736      2.89   
  

 

 

    

 

 

 

Total

$ 4,736      2.89
  

 

 

    

 

 

 

 

  (1) Maturities for all securities are based on estimated average life.

Sources of Funds

General. Checking and savings accounts, certificates of deposit and other types of deposits are an important source of the Bank’s funds for use in lending and for other general business purposes. In addition to deposit accounts, the Bank derives funds from loan repayments, loan sales, borrowings and operations. The availability of funds from loan sales and repayments is influenced by general interest rates and other market conditions. Borrowings may be used short-term to compensate for reductions in deposits or deposit inflows at less than projected levels and may be used on a longer-term basis to support expanded lending activities.

Deposits. The Bank attracts both short-term and long-term retail deposits from the general public by offering a wide assortment of deposit accounts and interest rates. The Bank offers regular savings accounts, interest-bearing (NOW) and noninterest-bearing checking accounts, money market accounts, fixed interest rate certificates with varying maturities and negotiated rate jumbo certificates with various maturities. The Bank also offers tax-deferred individual retirement, Keogh retirement and simplified employer plan retirement accounts.

As of December 31, 2014, approximately 63.8%, or $241.9 million, of the Bank’s aggregate deposits consisted of various savings and demand deposit accounts from which customers are permitted to withdraw funds at any time without penalty.

Interest earned on statement accounts is paid from the date of deposit to the date of withdrawal and compounded semi-annually for the Bank. Interest earned on NOW and money market deposit accounts is paid from the date of deposit to the date of withdrawal and compounded and credited monthly. Management establishes the interest rates on these accounts weekly, or as often as necessary to be competitive.

The Bank also makes available to its depositors a number of certificates of deposit with various terms and interest rates to be competitive in its market area. These certificates have minimum deposit requirements as well.

In addition to retail deposits, the Bank may obtain certificates of deposit from the brokered market. The Bank held no brokered certificates at December 31, 2014 and 2013.

 

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Table of Contents

The following table sets forth the change in dollar amount of deposits in the various types of deposit accounts offered by the Bank between the dates indicated, with fixed-rate certificates categorized by original term to maturity:

 

     Balance at     Balance at        
     December 31,     December 31,        
     2014     2013     Increase (Decrease)  
     (Dollars in thousands)        

Noninterest-bearing deposits

   $ 61,063         16.11   $ 52,747         14.54   $ 8,316        15.77

Interest-bearing checking

     112,899         29.79        98,234         27.09        14,665        14.93   

Money market deposits

     34,960         9.23        36,125         9.96        (1,165     (3.23

Savings deposits

     32,997         8.71        30,009         8.28        2,988        9.96   

Certificate accounts:

              

Certificates of $100,000 and more

     46,157         12.18        51,188         14.11        (5,031     (9.83

Fixed-rate certificates:

              

12 months or less

     20,487         5.40        22,970         6.33        (2,483     (10.81

13-24 months

     19,202         5.07        21,265         5.86        (2,063     (9.70

25-36 months

     15,396         4.06        14,937         4.12        459        3.07   

37 months or greater

     35,191         9.29        34,640         9.55        551        1.59   

Variable-rate certificates:

              

18 months

     595         0.16        586         0.16        9        1.54   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Total

$ 378,947      100.00 $ 362,701      100.00 $ 16,246      4.48   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

The variety of deposit accounts offered by the Bank has permitted it to be competitive in obtaining funds and has allowed it to respond with flexibility to, but not eliminate, disintermediation (the flow of funds away from depository institutions such as savings institutions into direct investment vehicles such as government and corporate securities). In addition, the Bank has become increasingly subject to short-term fluctuation in deposit flows, as customers have become more interest rate conscious. The ability of the Bank to attract and maintain deposits and its costs of funds have been, and will continue to be, significantly affected by money market conditions. The Bank currently offers a variety of deposit products, including noninterest-bearing and interest-bearing NOW accounts, savings accounts, money market deposit accounts (“MMDA”) and certificates of deposit ranging in terms from three months to seven years.

The following table sets forth the Bank’s average aggregate balances and interest rates. Average balances in 2014, 2013 and 2012 are calculated from actual daily balances.

 

     For the Years Ended December 31,  
     2014     2013     2012  
            Average            Average            Average  
     Average      Rate     Average      Rate     Average      Rate  
     Balance      Paid     Balance      Paid     Balance      Paid  
     (Dollars in thousands)  

Interest-bearing checking

   $ 103,911         0.10   $ 101,059         0.10   $ 98,553         0.20

Money market deposits

     36,980         0.17        34,853         0.19        30,510         0.21   

Savings deposits

     32,439         0.05        30,456         0.05        29,609         0.05   

Time deposits

     141,359         1.04        132,827         1.12        147,914         1.39   
  

 

 

      

 

 

      

 

 

    

Total interest-bearing deposits

  314,689      0.52      299,195      0.56      306,586      0.76   

Noninterest-bearing demand and savings deposits

  59,395      55,946      48,134   
  

 

 

      

 

 

      

 

 

    

Total deposits

$ 374,084    $ 355,141    $ 354,720   
  

 

 

      

 

 

      

 

 

    

 

 

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The following table sets forth the aggregate time deposits in the Bank classified by rates as of the dates indicated:

 

     At December 31,  
     2014      2013      2012  
     (In thousands)  

Less than 2.00%

   $ 111,211       $ 120,113       $ 108,965   

2.00% - 3.99%

     25,817         24,531         27,860   

4.00% - 5.99%

     —           942         1,658   
  

 

 

    

 

 

    

 

 

 
$ 137,028    $ 145,586    $ 138,483   
  

 

 

    

 

 

    

 

 

 

The following table sets forth the amount and maturities of the Bank’s time deposits at December 31, 2014:

 

     Amount Due  
     Less Than                    More Than         
     One Year      1-2 Years      2-3 Years      3 Years      Total  
     (In thousands)  

Less than 1.00%

   $ 58,410       $ 10,131       $ 2,143       $ —         $ 70,684   

1.00% - 1.99

     17,486         8,579         2,713         11,748         40,526   

2.00% - 3.99

     6,330         1,224         1,626         16,638         25,818   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
$ 82,226    $ 19,934    $ 6,482    $ 28,386    $ 137,028   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table indicates the amount of the Bank’s certificates of deposit of $100,000 or more by time remaining until maturity at December 31, 2014:

 

Maturity Period

   Certificates of
$100,000 or More
 
     (In thousands)  

Three months or less

   $ 6,772   

Over three through six months

     4,879   

Over six through twelve months

     15,920   

Over twelve months

     18,586   
  

 

 

 

Total

$ 46,157   
  

 

 

 

Borrowings. Deposits are the primary sources of funds for the Bank’s lending and investment activities and for its general business purposes. The Bank also uses advances from the FHLB to supplement its supply of lendable funds, to meet deposit withdrawal requirements and to extend the terms of its liabilities. FHLB advances are typically secured by the Bank’s FHLB stock, a portion of first mortgage loans, investment securities and overnight deposits. At December 31, 2014, the Bank had $28.0 million of FHLB advances outstanding.

The Federal Home Loan Banks function as central reserve banks providing credit for member financial institutions. As a member, the Bank is required to own capital stock in the FHLB and is authorized to apply for advances on the security of such stock and certain of its home mortgages and other assets (principally, securities which are obligations of, or guaranteed by, the United States) provided certain standards related to creditworthiness have been met. Borrowings decreased $5.0 million in 2014, as the Bank prepaid a Federal Home Loan Bank note that had been used to match-fund a ten-year commercial real estate loan in 2008. The Bank received a $651,000 prepayment penalty fee from the loan payoff and paid a $614,000 prepayment penalty to the Federal Home Loan Bank. Borrowings increased $5.0 million in 2013, as the Bank added a three-year Federal Home Loan Bank note with an interest rate of 0.77% as partial funding of a leverage strategy that involved the purchase of $8.1 million of Ginnie Mae mortgage-backed securities.

 

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On March 8, 2006, the Company formed Ameriana Capital Trust I (“Trust I”), a wholly owned statutory business trust. The Company purchased 100% of the common stock of Trust I for $310,000. Trust I issued $10.0 million in trust preferred securities and those proceeds, combined with the $310,000 in proceeds of the common stock, were used to purchase $10.3 million in subordinated debentures issued by the Company. The subordinated debentures are unconditionally guaranteed by the Company and are the sole asset of Trust I. The subordinated debentures had a rate equal to the average of 6.71% and the three-month London Interbank Offered Rate (“LIBOR”) plus 150 basis points for the first five years following the offering. Effective March 15, 2011, the fixed rate converted to a floating rate and the subordinated debentures now bear a rate equal to 150 basis points over the three-month LIBOR rate. At December 31, 2014, the debentures had an interest rate of 1.74%.

The following table sets forth certain information regarding borrowings at the dates and for the periods indicated:

 

     At or for the Year  
     Year Ended December 31,  
     2014     2013     2012  
     (Dollars in thousands)  

Amounts outstanding at end of period:

      

FHLB advances

   $ 28,000      $ 33,000      $ 28,000   

Subordinated debentures

     10,310        10,310        10,310   

Repurchase agreement

     7,500        7,500        7,500   

Weighted average rate paid on:

      

FHLB advances at end of period (1)

     2.17     2.54     2.83

Subordinated debentures

     1.74        1.74        1.81   

Repurchase agreement

     4.42        4.42        4.42   

Maximum amount of borrowings outstanding at any month end:

      

FHLB advances

   $ 33,000      $ 33,000      $ 28,000   

Subordinated debentures

     10,310        10,310        10,310   

Repurchase agreement

     7,500        7,500        7,500   

Approximate average amounts outstanding during period:

      

FHLB advances

   $ 32,677      $ 29,022      $ 28,054   

Subordinated debentures

     10,310        10,310        10,310   

Repurchase agreement

     7,500        7,500        7,500   

Approximate weighted average rate during the period paid on:

      

FHLB advances

     2.52     2.82     3.45

Subordinated debentures

     1.74        1.80        1.99   

Repurchase agreement

     4.42        4.42        4.42   

 

  (1) The actual weighted average rate at December 31, 2014 was 1.10%, but the effective rate was 2.17%. The effective rate incorporates the impact on interest expense from the amortization of two prepayment penalties totaling $1.5 million that resulted when two advances of $10.0 million each were replaced in 2012 with new borrowings that have lower rates and later maturity dates.

 

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Average Balance Sheet

The following table sets forth certain information relating to the Bank’s average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expenses by the average balance of assets or liabilities, respectively, for the periods presented. Interest/dividends from tax-exempt municipal loans and tax-exempt municipal securities have been increased by $60,000, $62,000 and $64,000 for 2014, 2013 and 2012, respectively, from the amount listed on the income statement to reflect interest income on a tax-equivalent basis. Average balances for 2014, 2013 and 2012 are calculated from actual daily balances.

 

    Years Ended December 31,  
    2014     2013     2012  
    Average
Balance
    Interest/
Dividends
    Average
Yield/

Cost
    Average
Balance
    Interest
Dividends
    Average
Yield/
Cost
    Average
Balance
    Interest/
Dividends
    Average
Yield/
Cost
 
    (Dollars in thousands)  

Interest-earning assets:

                 

Loan portfolio (1)

  $ 318,913      $ 16,633        5.22   $ 319,452      $ 15,930        4.99   $ 313,057      $ 16,739        5.35

Mortgage-backed securities

    45,821        1,026        2.24        32,851        634        1.93        38,056        890        2.34   

Other securities:

                 

Taxable

    2,113        45        2.13        2,072        48        2.30        2,020        61        3.02   

Tax-exempt (2)

    2,326        186        8.00        2,324        186        8.00        2,323        186        8.01   

Short-term investments and other interest-earning
assets (3)

    42,979        316        0.74        30,160        244        0.81        27,764        220        0.79   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-earning assets

  412,152      18,206      4.42      386,859      17,042      4.41      383,220      18,096      4.72   

Noninterest-earning assets

  59,175      59,732      60,350   
 

 

 

       

 

 

       

 

 

     

Total assets

$ 471,327    $ 446,591    $ 443,570   
 

 

 

       

 

 

       

 

 

     

Interest-bearing liabilities:

Demand deposits and savings

$ 173,330      181      0.10    $ 166,368      177      0.11    $ 158,672      278      0.18   

Certificate of deposits

  141,359      1,465      1.04      132,827      1,486      1.12      147,914      2,057      1.39   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing deposits

  314,689      1,646      0.52      299,195      1,663      0.56      306,586      2,335      0.76   

Borrowings

  50,487      1,351      2.68      46,832      1,340      2.86      45,864      1,510      3.29   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing liabilities

  365,176      2,997      0.82      346,027      3,003      0.87      352,450      3,845      1.09   
   

 

 

       

 

 

       

 

 

   

Noninterest-bearing liabilities

  66,956      63,559      55,626   
 

 

 

       

 

 

       

 

 

     

Total liabilities

  432,132      409,586      408,076   

Stockholders’ equity

  39,195      37,005      35,494   
 

 

 

       

 

 

       

 

 

     

Total liabilities and stockholders’ equity

$ 471,327    $ 446,591    $ 443,570   
 

 

 

       

 

 

       

 

 

     

Net interest income

$ 15,209    $ 14,039    $ 14,251   
   

 

 

       

 

 

       

 

 

   

Interest rate spread

  3.60   3.54   3.63
     

 

 

       

 

 

       

 

 

 

Net tax-equivalent yield (4)

  3.69   3.63   3.72
     

 

 

       

 

 

       

 

 

 

Ratio of average interest-earning assets to average interest-bearing liabilities

  112.86   111.80   108.73
     

 

 

       

 

 

       

 

 

 

 

 

(1) Interest and average yield presented on a tax-equivalent basis using a tax-effective tax rate of 32% for municipal bank qualified tax-exempt loans subject to the Tax Equity and Fiscal Responsibility Act of 1982 penalty. Nonaccrual loans are included in average loans outstanding.
(2) Interest and average yield presented on a tax-equivalent basis using a tax rate of 34%.
(3) Includes interest-bearing deposits in other financial institutions, mutual funds, trust preferred securities and FHLB stock.
(4) Net interest income is presented on a tax-equivalent basis as a percentage of average interest-earning assets.

 

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Subsidiary Activities

The Company maintains two wholly owned subsidiaries, the Bank and Ameriana Capital Trust I. The Company also holds a minority interest in a limited partnership organized to acquire and manage real estate-investments, which qualify for federal tax credits. The Bank has two wholly owned subsidiaries: AIA, which sells insurance products and AFS, which operates a brokerage business. At December 31, 2014, the Bank’s investments in its subsidiaries were approximately $1.7 million, consisting of direct equity investments.

Indiana commercial banks may acquire or establish subsidiaries that engage in activities permitted to be performed by the commercial bank itself, or permitted to operating subsidiaries of national banks. Under FDIC regulations, a subsidiary of a state bank may not engage as principal in any activity that is not of a type permissible for a subsidiary of a national bank unless the FDIC determines that the activity does not impose a significant risk to the affected insurance fund.

REGULATION AND SUPERVISION

Certain of the regulatory requirements that are or will be applicable to the Company or the Bank are described below. The description of statutes and regulations is not intended to be a complete explanation of such statutes and regulations and their effects on the Company and the Bank and is qualified in its entirety by reference to the actual statutes and regulations.

Regulation and Supervision of the Company

General. As a bank holding company, the Company is subject to Federal Reserve Board regulations, examinations, supervision, reporting requirements and regulations concerning its activities. In addition, the Federal Reserve Board has enforcement authority over the Company. As a public reporting company registered with the Securities and Exchange Commission (the “SEC”), the Company is required to file annual, quarterly and current reports with the SEC. The Company is also subject to regular examination by the Federal Reserve Board.

The Gramm-Leach-Bliley Act of 1999 authorized a bank holding company that meets specified conditions, including its depository institution subsidiaries being well-capitalized and well managed, to opt to become a “financial holding company,” and thereby engage in a broader array of financial activities than previously permitted. Such activities can include insurance underwriting and investment banking. The Dodd-Frank Act added the requirements that the holding company itself be well-capitalized and “well managed.” The Company has not opted to become a financial holding company. The Federal Reserve Board has the power to order a holding company or its subsidiaries to terminate any activity, or to terminate its ownership or control of any subsidiary, when it has reasonable cause to believe that the continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness or stability of any bank subsidiary of that holding company.

Dividends. The Federal Reserve Board has the power to prohibit dividends by bank holding companies if their actions constitute unsafe or unsound practices. The Federal Reserve Board has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve Board’s view that a bank holding company should pay cash dividends only to the extent that the company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the company’s capital needs, asset quality and overall financial condition. The Federal Reserve Board also indicated that it would be inappropriate for a bank holding company experiencing serious financial problems to borrow funds to pay dividends. Under the prompt corrective action regulations adopted by the Federal Reserve Board, the Federal Reserve Board may prohibit a bank holding company from paying any dividends if the holding company’s bank subsidiary is classified as “undercapitalized.” See “Regulation and Supervision of the Bank – Prompt Corrective Regulatory Action.” The Federal Reserve Board has long had a policy under which bank holding companies are required to serve as a source of strength for their depository subsidiaries by providing capital, liquidity and other resources in times of financial distress. The Dodd-Frank Act codified the source of strength doctrine and required the issuance of implementing regulations.

Stock Repurchases. As a bank holding company, the Company is required to give the Federal Reserve Board prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases

 

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or redemptions during the preceding 12 months, is equal to 10% or more of the Company’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would violate any law, regulation, Federal Reserve Board order, directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. This requirement does not apply to bank holding companies that are “well-capitalized,” “well-managed” and are not the subject of any unresolved supervisory issues.

Acquisitions. The Company is required to obtain the prior approval of the Federal Reserve Board to acquire all, or substantially all, of the assets of any bank or bank holding company or merge with another bank holding company. Prior Federal Reserve Board approval will also be required for the Company to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if, after giving effect to such acquisition, the Company would, directly or indirectly, own or control more than 5% of any class of voting shares of such bank or bank holding company. In evaluating such transactions, the Federal Reserve Board considers the financial and managerial resources of and future prospects of the companies involved, competitive factors and the convenience and needs of the communities to be served. Bank holding companies may acquire additional banks in any state, subject to certain restrictions such as deposit concentration limits. With certain exceptions, the Bank Holding Company Act (the “BHCA”) prohibits a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of a company that is not a bank or a bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities, which, by statute or by Federal Reserve Board regulation or order, have been identified as activities closely related to the business of banking. The activities of the Company are subject to these legal and regulatory limitations under the BHCA and the related Federal Reserve Board regulations.

Under the Change in Bank Control Act of 1978 (the “CBCA”), notice must be submitted to the Federal Reserve Board if any person (including a company), or any group acting in concert, seeks to acquire 10% of any class of the Company’s outstanding voting securities, unless the Federal Reserve Board determines that such acquisition will not result in a change of control of the bank. Under the CBCA, the Federal Reserve Board has 60 days within which to act on such notice taking into consideration certain factors, including the financial and managerial resources of the proposed acquirer, the convenience and needs of the community served by the bank and the antitrust effects of an acquisition.

Under the BHCA, any company would be required to obtain prior approval from the Federal Reserve Board before it may obtain “control” of the Company within the meaning of the BHCA. Control for BHCA purposes generally is defined to mean the ownership or power to vote 25% or more of any class of the Company’s voting securities or the ability to control in any manner the election of a majority of the Company’s directors.

Under Indiana banking law, prior approval of the Indiana Department of Financial Institutions is also required before any person may acquire control of an Indiana bank or bank holding company. The Department will issue a notice approving the transaction if it determines that the persons proposing to acquire the Indiana bank or bank holding company are qualified in character, experience and financial responsibility, and the transaction does not jeopardize the interests of the public.

Capital Requirements. The Federal Reserve Board maintains guidelines regarding the capital adequacy of bank holding companies, which require bank holding companies to maintain on a consolidated basis, specified minimum ratios of capital to total assets and capital to risk-weighted assets. These requirements, which generally apply to bank holding companies with consolidated assets of $500 million or more, are substantially similar to, but somewhat more generous than, those applicable to the Bank. See “– Regulation and Supervision of the Bank – Capital Requirements.” The Dodd-Frank Act required the Federal Reserve Board to adopt consolidated capital requirements for holding companies that are equally as stringent as those applicable to the depository institution subsidiaries. That means that certain instruments that had previously been includable in Tier 1 capital for bank holding companies, such as trust preferred securities, will no longer be eligible for inclusion. The revised capital requirements are subject to certain grandfathering and transition rules.

Regulation and Supervision of the Bank

General. The Bank, as an Indiana chartered commercial bank, is subject to extensive regulation, examination and supervision by the Indiana Department of Financial Institutions and the FDIC. The Bank must file

 

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reports with the Indiana Department of Financial Institutions and the FDIC describing its activities and financial condition. The Bank is also subject to certain reserve requirements promulgated by the Federal Reserve Board. This supervision and regulation is intended primarily for the protection of depositors.

The Dodd-Frank Act provides for the establishment of the Consumer Financial Protection Bureau as an independent bureau of the Federal Reserve Board. The Consumer Financial Protection Bureau will assume responsibility for implementing federal consumer financial protection and fair lending laws and regulations, a function currently handled by federal bank regulatory agencies. However, institutions of $10 billion or less in total assets will continue to be examined for compliance by, and subject to the enforcement authority of, the federal bank regulator.

Federal Banking Law

Capital Requirements. The Bank is required to maintain a 4% minimum leverage capital requirement consisting of a ratio of Tier 1 capital to total assets (3% for institutions receiving the highest rating on the CAMELS rating system). Tier 1 capital is the sum of common stockholders’ equity, noncumulative perpetual preferred stock (including any related surplus) and minority interests in consolidated subsidiaries, minus all intangible assets (other than certain mortgage and certain other servicing assets, purchased credit card relationships, credit-enhancing interest-only strips and certain deferred tax assets), identified losses, investments in certain financial subsidiaries and non-financial equity investments.

In addition to the leverage capital ratio, state chartered nonmember banks must maintain a minimum ratio of qualifying total capital to risk-weighted assets of at least 8%, of which at least half must be Tier 1 capital. Qualifying total capital consists of Tier 1 capital plus Tier 2 capital (also referred to as supplementary capital) items. Tier 2 capital items include allowances for loan losses in an amount of up to 1.25% of risk-weighted assets, cumulative preferred stock and preferred stock with a maturity of over 20 years, certain other capital instruments and up to 45% of pre-tax net unrealized holding gains on equity securities. The includable amount of Tier 2 capital cannot exceed the institution’s Tier 1 capital. Qualifying total capital is further reduced by the amount of the bank’s investments in banking and finance subsidiaries that are not consolidated for regulatory capital purposes, reciprocal cross-holdings of capital securities issued by other banks, most intangible assets and certain other deductions. Under the FDIC risk-weighted system, all of a bank’s balance sheet assets and the credit equivalent amounts of certain off-balance sheet items are assigned to one of four broad risk-weight categories from 0% to 100%, based on the regulators’ perception of the risks inherent in the type of assets or item. The aggregate dollar amount of each category is multiplied by the risk weight assigned to that category. The sum of these weighted values equals the bank’s risk-weighted assets.

At December 31, 2014, the Bank’s ratio of Tier 1 capital to average total assets was 9.49%, its ratio of Tier 1 capital to risk-weighted assets was 14.38% and its ratio of total risk-based capital to risk-weighted assets was 15.64%.

Basel III. On July 9, 2013, the federal bank regulatory agencies issued a final rule that revised their risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision (“Basel III”) and certain provisions of the Dodd-Frank Act. The final rule applies to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more and top-tier savings and loan holding companies.

The rule established a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increased the minimum Tier 1 capital to risk-based assets requirement (from 4.0% to 6.0% of risk-weighted assets) and assigned a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property.

The rule also includes changes in what constitutes regulatory capital, some of which are subject to a two-year transition period. These changes include the phasing-out of certain instruments as qualifying capital. In addition, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of common stock will be required to be deducted from capital, subject to a two-year transition period. Finally, Tier 1 capital will include accumulated other comprehensive income (which includes all unrealized gains and losses on available for sale debt and equity securities), subject to a two-year transition period.

 

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The new capital requirements also include changes in the risk-weights of assets to better reflect credit risk and other risk exposures. These include a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and non-residential mortgage loans that are 90 days past due or otherwise on nonaccrual status; a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable; a 250% risk weight (up from 100%) for mortgage servicing rights and deferred tax assets that are not deducted from capital; and increased risk-weights (from 0% to up to 600%) for equity exposures.

Finally, the rule limits capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements.

The final rule became effective on January 1, 2015. The capital conservation buffer requirement will be phased in beginning January 1, 2016, at 0.625% of risk-weighted assets, increasing each year until fully implemented at 2.5% on January 1, 2019. It is management’s belief that, as of December 31, 2014, the Company and the Bank have met all capital adequacy requirements under Basel III on a fully phased-in basis if such requirements were currently effective.

Investment Activities. State-chartered FDIC-insured banks are generally limited in their activities as principal and their equity investments to the type and amount authorized for national banks, notwithstanding state law. Federal law and regulations permit exceptions to these limitations. The FDIC is authorized to permit institutions to engage in state authorized activities or investments not permissible for national banks (other than non-subsidiary equity investments) if they meet all applicable capital requirements and it is determined that such activities or investments do not pose a significant risk to the Deposit Insurance Fund. The FDIC has adopted regulations governing the procedures for institutions seeking approval to engage in such activities or investments. The Gramm-Leach-Bliley Act of 1999 specifies that a non-member bank may control a subsidiary that engages in activities as principal that would only be permitted for a national bank to conduct in a “financial subsidiary” if a bank meets specified conditions and deducts its investment in the subsidiary for regulatory capital purposes.

Interstate Banking and Branching. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 permitted bank holding companies to acquire banks in any state subject to specified concentration limits and other conditions. The Interstate Banking Act also authorizes the interstate merger of banks. In addition, among other things, the Interstate Banking Act, as amended by the Dodd-Frank Act, permits banks to establish de novo branches on an interstate basis provided that state banks chartered by the target state are permitted to establish de novo branches in the state.

Dividend Limitations. The Bank may not pay dividends on its capital stock if its regulatory capital would be reduced below the amount then required for the liquidation account established for the benefit of certain depositors of the Bank at the time of its conversion to stock form. In addition, the Bank may not pay dividends that exceed retained net income for the applicable calendar year to date, plus retained net income for the preceding two years without prior approval from the Indiana Department of Financial Institutions.

Earnings of the Bank appropriated to bad debt reserves and deducted for federal income tax purposes are not available for payment of cash dividends or other distributions to stockholders without payment of taxes at the then current tax rate by the Bank on the amount of earnings removed from the reserves for such distributions.

Under FDIC regulations, the Bank is prohibited from making any capital distributions if, after making the distribution, the Bank would fail to meet any applicable capital requirements. For additional information about dividend limitations see Note 12 in the Consolidated Financial Statements.

Insurance of Deposit Accounts. Under the FDIC’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors, with less risky institutions paying lower assessments. An institution’s assessment rate depends upon the category to which it is assigned. The assessment rate ranges from 2.5 to 45 basis points based on domestic deposits

 

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to one based on average consolidated total assets minus average tangible equity. No institution may pay a dividend if in default of the federal deposit insurance assessment. The rate schedules will automatically adjust in the future when the Deposit Insurance Fund reaches certain milestones. No institution may pay a dividend if in default of the federal deposit insurance assessment.

The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the FDIC.

The FDIC has the authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank.

Prompt Corrective Regulatory Action. Federal law requires, among other things, that federal bank regulatory authorities take “prompt corrective action” with respect to institutions that do not meet minimum capital requirements. For such purposes, the law establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized.

The Federal Reserve Board has adopted regulations to implement prompt corrective action. Among other things, the regulations define the relevant capital measures for the five capital categories. For the period ended December 31, 2014, an institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a leverage capital ratio of 5% or greater, and is not subject to a regulatory order, agreement, or directive to meet and maintain a specific capital level for any capital measure. An institution is deemed to be “adequately capitalized” if it has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater, and generally a leverage capital ratio of 4% or greater. An institution is deemed to be “undercapitalized” if it has a total risk-based capital ratio of less than 8%, a Tier 1 risk-based capital ratio of less than 4%, or generally a leverage capital ratio of less than 4%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 3%, or a leverage capital ratio of less than 3%. An institution is deemed to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2%.

As a result of Basel III (discussed further above), effective January 1, 2015, an institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 8% or greater, a common equity Tier 1 risk-based capital ratio of 6.5% or greater, and a leverage capital ratio of 5% or greater, and is not subject to a regulatory order, agreement, or directive to meet and maintain a specific capital level for any capital measure. An institution is deemed to be “adequately capitalized” if it has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 6% or greater, a common equity Tier 1 risk-based capital ratio of 4.5% or greater and generally a leverage capital ratio of 4% or greater. An institution is deemed to be “undercapitalized” if it has a total risk-based capital ratio of less than 8%, a Tier 1 risk-based capital ratio of less than 6%, a common equity Tier 1 risk-based capital ratio of less than 4.5% or generally a leverage capital ratio of less than 4%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 4%, a common equity Tier 1 risk-based capital ratio of less than 3% or a leverage capital ratio of less than 3%. An institution is deemed to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2%.

“Undercapitalized” institutions are subject to growth, capital distribution (including dividend), and other limitations, and are required to submit a capital restoration plan. An institution’s compliance with such a plan is required to be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5% of the bank’s total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an undercapitalized institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” Significantly undercapitalized institutions are subject to one or more additional restrictions including, but not limited to, a regulatory order requiring them to sell sufficient voting stock to become adequately capitalized; requirements to reduce total assets, cease receipt of deposits from correspondent banks, or dismiss directors or officers; and restrictions on interest rates paid on deposits, compensation of executive officers, and capital distributions by the parent holding company.

 

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Beginning 60 days after becoming “critically undercapitalized,” critically undercapitalized institutions also may not make any payment of principal or interest on certain subordinated debt, extend credit for a highly leveraged transaction, or enter into any material transaction outside the ordinary course of business. In addition, subject to a narrow exception, the appointment of a receiver is required for a critically undercapitalized institution within 270 days after it obtains such status.

Enforcement. The FDIC has extensive enforcement authority over nonmember insured state banks, including the Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, issue cease and desist orders and remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations and unsafe or unsound practices. The FDIC has authority under federal law to appoint a conservator or receiver for an insured bank under certain circumstances, including on the basis of the institution’s financial condition or upon the occurrence of other events, including (1) insolvency; (2) substantial dissipation of assets or earnings through violations of law or unsafe or unsound practices; (3) existence of an unsafe or unsound condition to transact business; and (4) insufficient capital, or the incurring of losses that will deplete substantially all of the institution’s capital with no reasonable prospect of replenishment without federal assistance.

Reserve Requirements. Under Federal Reserve Board regulations, the Bank is required to maintain non-interest earning reserves against their transaction accounts (primarily Negotiable Order of Withdrawal (NOW) and regular checking accounts). The regulations generally provide that reserves be maintained against aggregate transaction accounts as follows for 2014: a 3% reserve ratio was assessed on net transaction accounts up to and including $89.0 million; a 10% reserve ratio is applied above $89.0 million. The first $13.3 million of otherwise reservable balances (subject to adjustments by the Federal Reserve Board) are exempted from the reserve requirements. The amounts are adjusted annually and, for 2015, will require a 3% ratio for up to $103.6 million and an exemption of $14.5 million. At December 31, 2014, the Bank met applicable Federal Reserve Board reserve requirements.

Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks governed and regulated by the Federal Housing Finance Board (“FHFB”). As a member, the Bank is required to purchase and hold stock in the FHLB of Indianapolis. As of December 31, 2014, the Bank held stock in the FHLB of Indianapolis in the amount of $3.8 million and was in compliance with the above requirement.

Loans to Executive Officers, Directors and Principal Stockholders. Loans to directors, executive officers and principal stockholders of a state nonmember bank must be made on substantially the same terms as those prevailing for comparable transactions with persons who are not executive officers, directors, principal stockholders or employees of the Bank unless the loan is made pursuant to a compensation or benefit plan that is widely available to employees and does not favor insiders. Loans to any executive officer, director and principal stockholder together with all other outstanding loans to such person and affiliated interests generally may not exceed 15% of the Bank’s unimpaired capital and surplus and all loans to such persons may not exceed the institution’s unimpaired capital and unimpaired surplus. Loans to directors, executive officers and principal stockholders, and their respective affiliates, in excess of the greater of $25,000 or 5% of capital and surplus (on any loans where the total outstanding amounts to $500,000 or more) must be approved in advance by a majority of the Board of Directors of the Bank with any “interested” director not participating in the voting. State nonmember banks are prohibited from paying the overdrafts of any of their executive officers or directors unless payment is made pursuant to a written, pre-authorized interest-bearing extension of credit plan that specifies a method of repayment or transfer of funds from another account at the bank.

Transactions with Affiliates. A state nonmember bank or its subsidiaries may not engage in “covered transactions” with any one affiliate in an amount greater than 10% of such bank’s capital stock and surplus, and for all such transactions with all affiliates, a state non-member bank is limited to an amount equal to 20% of capital stock and surplus. All such transactions must also be on terms substantially the same, or at least as favorable, to the bank or subsidiary as those provided to a nonaffiliate. Certain covered transactions must meet prescribed collateralization requirements. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and similar other types of transactions. An affiliate of a state non-member bank is any company or entity that controls or is under common control with the state non-member bank and, for purposes of the aggregate limit on transactions with affiliates, any subsidiary that would be deemed a financial subsidiary of a

 

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national bank. In a holding company context, the parent holding company of a state non-member bank (such as the Company) and any companies that are controlled by such parent holding company are affiliates of the state non-member bank. The BHCA further prohibits a depository institution from extending credit to or offering any other services, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or certain of its affiliates or not obtain services of a competitor of the institution, subject to certain limited exceptions.

Indiana Banking Law

Branching. An Indiana bank is entitled to establish one or more branches de novo or by acquisition in any location or locations in Indiana and in other states (subject to the requirements of federal law for interstate banking). The Bank is required to file an application with the Department of Financial Institutions. Approval of the application is contingent upon the Department’s determination that after the establishment of the branch, the Bank will have adequate capital, sound management and adequate future earnings. An application to branch must also be approved by the FDIC.

Lending Limits. Indiana banks are not subject to percentage of asset or capital limits on their commercial, consumer and non-residential mortgage lending, and accordingly, have more flexibility in structuring their portfolios than federally chartered savings banks. Indiana law provides that a bank may not make a loan or extend credit to a borrower or group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional 10% of capital and surplus may be lent if secured by specified readily marketable collateral.

Enforcement. The Department has authority to take enforcement action against an Indiana bank in appropriate cases, including the issuance of cease and desist orders, removal of directors or officers, issuance of civil money penalties and appointment of a conservator or receiver.

Other Activities. The Bank is authorized to engage in a variety of agency and fiduciary activities including acting as executors of an estate, transfer agent and in other fiduciary capacities. On approval from the Department of Financial Institutions, the Bank would be permitted to exercise any right granted to national banks.

TAXATION

Federal Taxation. The Company and its subsidiaries file a consolidated federal income tax return on a calendar year end. Banks are subject to the provisions of the Internal Revenue Code of 1986 (the “Code”) in the same general manner as other corporations. However, institutions, such as the Bank, which met certain definitional tests and other conditions prescribed by the Code benefited from certain favorable provisions regarding their deductions from taxable income for annual additions to their bad debt reserve.

The Company’s federal income tax returns have not been audited in the past five years.

State Taxation. The State of Indiana imposes a franchise tax which is assessed on qualifying financial institutions, such as the Bank. The tax is based upon federal taxable income before net operating loss carryforward deductions (adjusted for certain Indiana modifications) and is levied at a rate of 8.5% of apportioned adjusted taxable income. The rate will be reduced to 6.5%, phased in by 0.5% increments over four years beginning in 2014.

The Company’s state income tax returns have not been audited by the State of Indiana since 2008.

 

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EXECUTIVE OFFICERS OF THE REGISTRANT

 

Name

  

Age at

December 31, 2014

    

Principal Position

Jerome J. Gassen

   64      President and Chief Executive Officer of the Bank and the Company

John J. Letter

   69      Executive Vice President-Treasurer and Chief Financial Officer of the Bank and the Company

Deborah C. Robinson

   48      Executive Vice President and Chief Banking Officer of the Bank and the Company

Michael L. Wenstrup

   57      Executive Vice President and Chief Credit Officer of the Bank

Unless otherwise noted, all officers have held the position described below for at least the past five years.

Jerome J. Gassen was appointed President and Chief Executive Officer and director of the Company and the Bank on June 1, 2005. Before joining the Company, Mr. Gassen served as Executive Vice President of Banking of Old National Bank, Evansville, Indiana from August 2003 until January 2005. Before serving as Executive Vice President, Mr. Gassen was the Northern Region President of Old National Bank from March 2000 to August 2003. Mr. Gassen also served on Old National Bank’s Board of Directors from March 2000 until January 2005. Mr. Gassen served as President and Chief Operating Officer of American National Bank and Trust Company, Muncie, Indiana from 1997 until March 2000, when American National was acquired by Old National Bank.

John J. Letter was appointed Executive Vice President, Treasurer and Chief Financial Officer of the Company and the Bank on January 28, 2014. From January 22, 2007 to January 28, 2014, he served as Senior Vice President, Treasurer and Chief Financial Officer of the Company and the Bank. Before joining the Company, Mr. Letter served as Regional President with Old National Bank in Muncie, Indiana from September 2004 to April 2005. Before being named Regional President, Mr. Letter also served as District President with Old National Bank from November 2003 to September 2004 and Regional Chief Financial Officer – Old National Bank from March 2000 to November 2003. Mr. Letter was also Chief Financial Officer and Controller with American National Bank in Muncie from March 1997 to March 2000.

Deborah C. Robinson was appointed Executive Vice President and Chief Banking Officer of the Bank on January 28, 2014. From March 11, 2008 to January 28, 2014, she served as Senior Vice President, Retail Banking and Chief Marketing Officer. Before joining the Bank, Ms. Robinson was Vice President of Marketing at Old National Bank, Indianapolis, Indiana, for the Central Indiana and Louisville markets from December 2003 until March 2008. Ms. Robinson also held the position of Vice President, Northeast Region, Muncie, Indiana, from March 2000 until December 2003. Prior to Old National, she was the Assistant Vice President, Director of Marketing for American National Bank, Muncie, Indiana from September 1997 until March 2000, when American National was acquired by Old National Bank. Before her banking career, Ms. Robinson was the Marketing Coordinator at OLIVE LLP (now BKD, LLP), Indianapolis, Indiana from December 1993 until September 1997.

Michael L. Wenstrup was appointed Executive Vice President and Chief Credit Officer of the Bank on January 28, 2014. From March 1, 2010 to January 28, 2014, he served as Senior Vice President and Chief Credit Officer of the Bank. Mr. Wenstrup assumed the additional responsibilities of Chief Lending Officer of the Bank effective August 1, 2011. Before joining Ameriana, Mr. Wenstrup was Executive Vice President – Chief Credit Officer and Director of Parkway Bank Arizona, Phoenix, Arizona from November 2005 to December 2008. Mr. Wenstrup was Executive Vice President of Parkway Bank and Trust, Harwood Heights, Illinois from June 1999 to November 2005 and served as Vice President – Portfolio Manager, Commercial Real Estate with LaSalle National Bank, Chicago, Illinois from January 1994 to June 1999.

 

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Item 1A. Risk Factors

An investment in shares of our common stock involves various risks. Before deciding to invest in our common stock, you should carefully consider the risks described below in conjunction with the other information in this Form 10-K, including the items included as exhibits. Our business, financial condition and results of operations could be harmed by any of the following risks or by other risks that have not been identified or that we may believe are immaterial or unlikely. The value or market price of our common stock could decline due to any of these risks. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements.

Our increased emphasis on commercial and construction lending may expose us to increased lending risk. At December 31, 2014, our loan portfolio consisted of $111.5 million, or 34.7%, of commercial real estate loans, $13.6 million, or 4.2%, of construction loans (primarily commercial properties) and $29.4 million, or 9.1%, of commercial and industrial loans and leases. We intend to continue to maintain our emphasis on the origination of commercial loans. However, these types of loans generally expose a lender to greater risk of non-payment and loss than one- to four-family residential mortgage loans because repayment of the loans often depends on the successful operation of the property, the income stream of the borrowers and, for construction loans, the accuracy of the estimate of the property’s value at completion of construction and the estimated cost of construction. Commercial and construction loans typically involve larger loan balances compared to one- to four-family residential mortgage loans. Commercial and industrial loans expose us to additional risks since they typically are made on the basis of the borrower’s ability to make repayments from the cash flows of the borrower’s business and are secured by non-real estate collateral that may depreciate over time. In addition, since such loans generally entail greater risk than one to four-family residential mortgage loans, we may need to increase our allowance for loan losses to account for the likely increase in probable incurred credit losses associated with the growth of such loans. Also, many of our commercial and construction borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan.

Our nonperforming loans have declined, however, we may be required to increase our provision for loan losses and to charge-off additional loans in the future, each of which could adversely affect our results of operations. Further, our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio. For 2014, we recorded a provision for loan losses of $322,000. We also recorded net loan charge-offs of $412,000. Although we have experienced a slowly improving local economic recovery, other real estate owned has remained at a relatively high level totaling $6.6 million as of December 31, 2014. Our nonperforming loans totaled $4.4 million, representing 1.37% of total loans, at December 31, 2014. Loans classified as special mention, substandard, doubtful or loss totaled $11.9 million, representing 3.72% of total loans at December 31, 2014. If these loans do not perform according to their terms and the collateral is insufficient to pay any remaining loan balance, we may be required to add further reserves to our allowance for loan losses or we may experience loan losses, which could have a material effect on our operating results. Like all financial institutions, we maintain an allowance for loan losses to provide for loans in our portfolio that may not be repaid in their entirety. We believe that our allowance for loan losses is maintained at a level adequate to absorb probable losses inherent in our loan portfolio as of the corresponding balance sheet date. However, our allowance for loan losses may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect our operating results.

In evaluating the adequacy of our allowance for loan losses, we consider numerous quantitative factors, including our historical charge-off experience, growth of our loan portfolio, changes in the composition of our loan portfolio and the volume of delinquent and classified loans. In addition, we use information about specific borrower situations, including their financial position and estimated collateral values, to estimate the risk and amount of loss for those borrowers. Finally, we also consider many qualitative factors, including general and economic business conditions, current general market collateral valuations, trends apparent in any of the factors we take into account and other matters, which are by nature more subjective and fluid. Our estimates of the risk of loss and amount of loss on any loan are complicated by the significant uncertainties surrounding our borrowers’ abilities to successfully execute their business models through changing economic environments, competitive challenges and other factors. Because of the degree of uncertainty and susceptibility of these factors to change, our actual losses may vary from our current estimates.

 

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At December 31, 2014, our allowance for loan losses as a percentage of total loans was 1.22%. Our regulators, as an integral part of their examination process, periodically review our allowance for loan losses and may require us to increase our allowance for loan losses by recognizing additional provisions for loan losses charged to expense, or to decrease our allowance for loan losses by recognizing loan charge-offs. Any such additional provisions for loan losses or charge-offs, as required by these regulatory agencies, could have a material adverse effect on our financial condition and results of operations.

A return to recessionary conditions could result in increases in our level of nonperforming loans and/or reduce demand for our products and services, which would lead to lower revenue, higher loan losses and lower earnings. Following a national home price peak in mid-2006, falling home prices and sharply reduced sales volumes, along with the collapse of the United States’ subprime mortgage industry in early 2007, significantly contributed to a recession that officially lasted until June 2009, although the effects continued thereafter. Dramatic declines in real estate values and high levels of foreclosures resulted in significant asset write-downs by financial institutions, which have caused many financial institutions to seek additional capital, to merge with other institutions and, in some cases, to fail.

A return of recessionary conditions and/or negative developments in the domestic and international credit markets may significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. Subsequent declines in real estate values and sales volumes and continued high unemployment levels may result in higher than expected loan delinquencies, increases in our levels of nonperforming and classified assets and a decline in demand for our products and services. These negative events may cause us to incur losses and may adversely affect our capital, liquidity, and financial condition.

Our cost of operations is high relative to our assets. Our failure to maintain or reduce our operating expenses costs could hurt our profits. Our operating expenses, which consist primarily of salaries and employee benefits, occupancy, furniture and equipment expense, professional fees, data processing expense, FDIC insurance premiums and assessments, and marketing, totaled $17.2 million for the year ended December 31, 2014 compared to $16.1 million for the year ended December 31, 2013, with $614,000 of the $1.1 million increase related to a prepayment penalty paid to the Federal Home Loan Bank. Newer banking centers in the Indianapolis metropolitan area that have not yet become profitable are currently having a negative impact on our efficiency ratio. The Company’s efficiency ratio totaled 82.6% for the year ended December 31, 2014 compared to 81.1% for the year ended December 31, 2013. Failure to control our expenses could hurt future profits.

The building of market share through our branching strategy could cause our expenses to increase faster than revenues. We opened a full-service banking center in Fishers, Indiana in October 2008, a second banking center in Carmel in December 2008 and a third in Westfield in May 2009. We also purchased property in Plainfield in 2008 with the expectation of building a new full-service banking center, but those plans were put on hold and the Bank is in the process of determining the appropriate time to begin construction based on its long-term expansion strategy. The Bank purchased two vacant banking centers in June 2013 located in Hamilton County, which is in the Indianapolis metropolitan area, and opened the Noblesville Office in September 2014 and the Fishers Crossing Office in November 2014. A Broad Ripple Banking Center, our first brick and mortar location in Marion County, is scheduled to open in mid-2015. There are considerable costs involved in opening branches and new branches generally require a period of time to generate sufficient revenues to offset their costs, especially in areas in which we do not have an established presence. Accordingly, any new branch can be expected to negatively impact our earnings for some period of time until the branch reaches a certain customer base.

Changes in interest rates could reduce our net interest income and earnings. Our net interest income is the interest we earn on loans and investment less the interest we pay on our deposits and borrowings. Our interest rate spread is the difference between the yield we earn on our assets and the interest rate we pay for deposits and our other sources of funding. Changes in interest rates could adversely affect our interest rate spread and, as a result, our net interest income and net interest margin. Although the yield we earn on our assets and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, causing our net interest margin to expand or contract. Our liabilities tend to be shorter in duration than our assets, so they may adjust faster in response to changes in interest rates. As a result, when interest rates rise, our funding costs may rise faster than the yield we earn on our assets, causing our net interest margin to contract until the yield catches up. Changes in the slope of the “yield curve”—or the spread between short-term and long-term interest rates—could also reduce our net interest margin. Normally, the yield curve is upward sloping, meaning short-term rates are lower

 

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than long-term rates. Because our liabilities tend to be shorter in duration than our assets, when the yield curve flattens or even inverts, we could experience pressure on our net interest margin as our cost of funds increases relative to the yield we can earn on our assets. Changes in interest rates can also affect: (1) our ability to originate loans; (2) the value of our interest-earning assets; (3) our ability to obtain and retain deposits in competition with other investment alternatives; and (4) the ability of our borrowers to repay adjustable-rate loans.

We operate in a highly regulated environment and we may be adversely affected by changes in laws and regulations. The Bank is subject to extensive regulation, supervision and examination by the Indiana Department of Financial Institutions, its chartering authority, and by the FDIC, as insurer of its deposits. The Company is subject to regulation and supervision by the Federal Reserve Board. Such regulation and supervision govern the activities in which an institution and its holding company may engage, and are intended primarily for the protection of the insurance fund and for the depositors and borrowers of the Bank. The regulation and supervision by the Indiana Department of Financial Institutions and the FDIC are not intended to protect the interests of investors in the Company’s common stock. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations.

Regulation of the financial services industry is undergoing major changes, and future legislation could increase our cost of doing business or harm our competitive position. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) enacted in 2010 has created a significant shift in the way financial institutions operate. The Dodd-Frank Act created the Consumer Financial Protection Bureau, which has broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10.0 billion or less in assets continue to be examined by their applicable bank regulators. The Dodd-Frank Act contains various other provisions designed to enhance the regulation of depository institutions and prevent the recurrence of a financial crisis such as occurred in 2008-2009. The full impact of the Dodd-Frank Act on our business and operations will not be known for years until regulations implementing the statute are written and adopted. The Dodd-Frank Act may have a material impact on our operations, particularly through increased regulatory burden and compliance costs. Any future legislative changes could have a material impact on our profitability, the value of assets held for investment or collateral for loans. Future legislative changes could require changes to business practices or force us to discontinue businesses and potentially expose us to additional costs, liabilities, enforcement action and reputational risk.

We may not be able to realize the full value of our deferred tax asset. We recognize deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax bases of assets and liabilities, coupled with unused tax credits and tax benefits from operating loss carryforwards. At December 31, 2014, our net deferred tax asset was $4.3 million. The net deferred tax asset was composed of approximately $1.2 million of tax benefit from both state and federal net operating loss carryforwards, approximately $954,000 of tax benefit from temporary differences between book and tax income and an unused federal tax credit of $2.7 million, reduced by a valuation allowance of $608,000.

We regularly review our deferred tax asset for recoverability based on our history of earnings, expectations for future earnings and expected timing of reversals of temporary differences, as well as tax strategies available to expedite the use of both the deferred state tax asset and the deferred federal tax asset. Realization of our deferred tax asset ultimately depends on the existence of sufficient future taxable income. We currently expect that it is more likely than not that our net deferred tax asset at December 31, 2014 will be fully realizable based on our expected future earnings. Realization of our deferred tax asset would significantly improve our earnings and capital through a related reversal of the current valuation allowance.

Any reduction in the corporate tax rate for federal or state income taxes could immediately result in partial impairment of the book value of the deferred tax asset, and require a write-down that would be charged against earnings in the year of the enactment of the related tax law.

 

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Strong competition within our market area could hurt our profits and slow growth. We face intense competition both in making loans and attracting deposits. This competition has made it more difficult for us to make new loans and has occasionally forced us to offer higher deposit rates. Price competition for loans and deposits might result in us earning less on our loans and paying more on our deposits, which reduces net interest income. Competition also makes it more difficult to grow loans and deposits. According to the FDIC, as of June 30, 2014, we held 29.9% of the deposits in Henry County, Indiana, which was the second largest market share of deposits out of the six financial institutions that held deposits in this county. We also held 9.9% of the deposits in Hancock County, Indiana, which was the fourth largest market share of deposits out of the seven financial institutions that held deposits in this county. We also maintain offices in four other counties in which we held between 0.8% and 5.6% of the deposits in those counties as of June 30, 2014. Some of the institutions with which we compete have substantially greater resources and lending limits than we have and may offer services that we do not provide. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Technological advances, for example, have lowered barriers to entry, allowed banks to expand their geographic reach by providing services over the Internet and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks. Changes in federal law permit affiliation among banks, securities firms and insurance companies, which promotes a competitive environment in the financial services industry. Competition for deposits and the origination of loans could limit the Company’s growth in the future. Our profitability depends upon our continued ability to compete successfully in our market area.

The trading history of our common stock is characterized by low trading volume. Our common stock may be subject to sudden decreases. Although our common stock trades on the NASDAQ Capital Market, it has not been regularly traded. We cannot predict whether a more active trading market in our common stock will occur or how liquid that market might become. A public trading market having the desired characteristics of depth, liquidity and orderliness depends upon the presence in the marketplace of willing buyers and sellers of our common stock at any given time, which presence is dependent upon the individual decisions of investors, over which we have no control.

The market price of our common stock may be highly volatile and subject to wide fluctuations in response to numerous factors, including, but not limited to, the factors discussed in other risk factors and the following:

 

    actual or anticipated fluctuations in our operating results;

 

    changes in interest rates;

 

    changes in the legal or regulatory environment in which we operate;

 

    press releases, announcements or publicity relating to us or our competitors or relating to trends in our industry;

 

    changes in expectations as to our future financial performance, including financial estimates or recommendations by securities analysts and investors;

 

    future sales of our common stock;

 

    changes in economic conditions in our marketplace, general conditions in the U.S. economy, financial markets or the banking industry; and

 

    other developments affecting our competitors or us.

These factors may adversely affect the trading price of our common stock, regardless of our actual operating performance, and could prevent you from selling your common stock at or above the price you desire. In addition, the stock markets, from time to time, experience extreme price and volume fluctuations that may be unrelated or disproportionate to the operating performance of companies. These broad fluctuations may adversely affect the market price of our common stock, regardless of our trading performance.

We may require additional capital in the future, but that capital may not be available when it is needed. We anticipate that we have adequate capital for the foreseeable future. However, we may at some point

 

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need to raise additional capital to support our continued growth or if we incur significant loan or securities impairment. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital, if needed, on terms acceptable to us. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth could be materially impaired.

Provisions of our articles of incorporation, bylaws and Indiana law, as well as state and federal banking regulations, could delay or prevent a takeover of us by a third party. Provisions in our articles of incorporation and bylaws and the corporate law of the State of Indiana could delay, defer or prevent a third party from acquiring us, despite the possible benefit to our shareholders, or otherwise adversely affect the price of our common stock. These provisions include: supermajority voting requirements for certain business combinations; the election of directors to staggered terms of three years; and advance notice requirements for nominations for election to our board of directors and for proposing matters that shareholders may act on at shareholder meetings. In addition, we are subject to Indiana laws, including one that prohibits us from engaging in a business combination with any interested shareholder for a period of five years from the date the person became an interested shareholder unless certain conditions are met. These provisions may discourage potential takeover attempts, discourage bids for our common stock at a premium over market price or adversely affect the market price of, and the voting and other rights of the holders of, our common stock. These provisions could also discourage proxy contests and make it more difficult for you and other shareholders to elect directors other than the candidates nominated by our Board of Directors.

A failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors and other service providers, including as a result of cyber-attacks, could disrupt our business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses. We depend upon our ability to process, record and monitor our client transactions on a continuous basis. As client, public and regulatory expectations regarding operational and information security have increased, our operational systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions and breakdowns. Our business, financial, accounting and data processing systems, or other operating systems and facilities, may stop operating properly or become disabled or damaged as a result of a number of factors, including events that are wholly or partially beyond our control. For example, there could be electrical or telecommunications outages; natural disasters such as earthquakes, tornadoes and hurricanes; disease pandemics; events arising from local or larger scale political or social matters, including terrorist acts; and, as described below, cyber-attacks. Although we have business continuity plans and other safeguards in place, our business operations may be adversely affected by significant and widespread disruption to our physical infrastructure or operating systems that support our business and clients.

Information security risks for financial institutions such as ours have generally increased in recent years in part because of the proliferation of new technologies, the use of the internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, activists and other external parties. As noted above, our operations rely on the secure processing, transmission and storage of confidential information in our computer systems and networks. Our business relies on our digital technologies, computer and email systems, software and networks to conduct its operations. In addition, to access our products and services, our clients may use personal smartphones, tablet PC’s, personal computers and other mobile devices that are beyond our control systems. Although we have information security procedures and controls in place, our technologies, systems, networks and our clients’ devices may become the target of cyber-attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our or our clients’ confidential, proprietary and other information, or otherwise disrupt our or our clients’ or other third parties’ business operations.

Third parties with whom we do business or that facilitate our business activities, including financial intermediaries or vendors that provide services or security solutions for our operations, could also be sources of operational and information security risk to us, including from breakdowns or failures of their own systems or capacity constraints.

 

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Although to date we have not experienced any material losses relating to cyber-attacks or other information security breaches, there can be no assurance that we will not suffer such losses in the future. Our risk and exposure to these matters remains heightened because of the evolving nature of these threats. As a result, cyber security and the continued development and enhancement of our controls, processes and practices designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access remain a focus for us. As threats continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate information security vulnerabilities.

Disruptions or failures in the physical infrastructure or operating systems that support our business and clients, or cyber-attacks or security breaches of the networks, systems or devices that our clients use to access our products and services could result in client attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs and/or additional compliance costs, any of which could materially and adversely affect our financial condition or results of operations.

Capital rules require insured depository institutions and their holding companies to hold more capital. The impact of the capital rules on our financial condition and operations is uncertain but could be materially adverse. In July 2013, the Federal Reserve adopted a final rule for the Basel III capital framework. These rules substantially amend the regulatory risk-based capital rules applicable to us. The rules phase in over time beginning in 2015 and will become fully effective in 2019. The rules apply to the Company as well as to the Bank. Beginning in 2015, our minimum capital requirements will be (i) a common Tier 1 equity ratio of 4.5%, (ii) a Tier 1 capital (common Tier 1 capital plus Additional Tier 1 capital) of 6% (up from 4%) and (iii) a total capital ratio of 8% (the current requirement). Our leverage ratio requirement will remain at the 4% level now required. Beginning in 2016, a capital conservation buffer will phase in over three years, ultimately resulting in a requirement of 2.5% on top of the common Tier 1, Tier 1 and total capital requirements, resulting in a require common Tier 1 equity ratio of 7%, a Tier 1 ratio of 8.5%, and a total capital ratio of 10.5%. Failure to satisfy any of these three capital requirements will result in limits on paying dividends, engaging in share repurchases and paying discretionary bonuses. These limitations will establish a maximum percentage of eligible retained income that could be utilized for such actions.

We are subject to a variety of operational risks, environmental, legal and compliance risks, and the risk of fraud or theft by employees or outsiders, which may adversely affect our business and results of operations. We are exposed to many types of operational risks, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, and unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems. Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance and acquisitions and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect our ability to attract and keep customers and can expose us to litigation and regulatory action. Actual or alleged conduct by the Bank can also result in negative public opinion about our other businesses.

If personal, non-public, confidential or proprietary information of customers in our possession were to be misappropriated, mishandled or misused, we could suffer significant regulatory consequences, reputational damage and financial loss. Such mishandling or misuse could include, for example, erroneously providing such information to parties who are not permitted to have the information, either by fault of our systems, employees, or counterparties, or the interception or inappropriate acquisition of such information by third parties.

Because the nature of the financial services business involves a high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified. Our necessary dependence upon automated systems to record and process transactions and our large transaction volume may further increase the risk that technical flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. We also may be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control (for example, computer viruses or electrical or telecommunications outages, or natural disasters, disease pandemics or other damage to property or physical assets) which may give rise to disruption of service to customers and to financial loss or liability. We are further exposed to the risk that our external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as we are) and to the risk that our (or our vendors’) business continuity and data security systems prove to be inadequate. The occurrence of any of these risks could result in our

 

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diminished ability to operate our business (for example, by requiring us to expend significant resources to correct the defect), as well as potential liability to clients, reputational damage and regulatory intervention, which could adversely affect our business, financial condition or results of operations, perhaps materially.

We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations. The federal Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “PATRIOT Act”) and other laws and regulations require financial institutions, among other duties, to institute and maintain effective anti-money laundering programs and file suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network, established by the U.S. Treasury Department to administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. Federal and state bank regulators also have begun to focus on compliance with Bank Secrecy Act and anti-money laundering regulations. If our policies, procedures and systems are deemed deficient or the policies, procedures and systems of the financial institutions that we may acquire in the future are deficient, we would be subject to liability, including fines and regulatory actions such as restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans, which would negatively impact our business, financial condition and results of operations. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us.

The geographic concentration of our markets in Indiana makes our business highly susceptible to downturns in these local economies and depressed banking markets, which could materially and adversely affect us. Unlike larger financial institutions that are more geographically diversified, we are a regional banking franchise concentrated in certain markets in Indiana. Our success depends significantly on growth in population, income levels, deposits and housing starts in the geographic markets in which we operate. The local economic conditions in these areas have a significant impact on our commercial, real estate and construction loans, the ability of borrowers to repay these loans, and the value of the collateral securing these loans. Adverse changes in, and deterioration of, the economic conditions in the markets in which we operate in Indiana could negatively affect our financial condition, results of operations and profitability. A deterioration in economic conditions could result in the following consequences, any of which could have a material adverse effect on our business:

 

    loan delinquencies may increase;

 

    problem assets and foreclosures may increase;

 

    demand for our products and services may decline; and

 

    collateral for loans that we make may decline in value, in turn reducing a customer’s borrowing power, and reducing the value of assets and collateral associated with the our loans.

Item 1B. Unresolved Staff Comments

None.

 

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Item 2. Properties

The following table sets forth the location of the Company’s office facilities at December 31, 2014 and certain other information relating to these properties at that date.

 

     Year
Acquired
   Total
Investment
     Net
Book Value
     Owned/
Leased
    Square
Feet
 
          (Dollars in thousands)         

Main Office:

             

2118 Bundy Avenue

New Castle, Indiana

   1958    $ 2,037       $ 395         Owned        20,500   

Branch Offices:

             

1311 Broad Street

New Castle, Indiana

   1890      1,215         168         Owned        18,000   

956 North Beechwood Avenue

Middletown, Indiana

   1971      363         28         Owned        5,500   

22 North Jefferson Street

Knightstown, Indiana

   1979      633         286         Owned        3,400   

1810 North State Street

Greenfield, Indiana

   1995      2,659         1,824         Owned        7,600   

99 South Dan Jones Road

Avon, Indiana

   1995      1,844         1,186         Owned        12,600   

1724 East 53rd Street

Anderson, Indiana

   1993      750         492         Owned        3,000   

488 West Main Street

Morristown, Indiana

   1998      364         217         Owned        2,600   

7435 West U.S. 52

New Palestine, Indiana

   1999      947         579         Owned        3,300   

11521 Olio Road

Fishers, Indiana

   2008      2,148         1,843         Owned        2,500   

3975 West 106th Street

Carmel, Indiana

   2008      2,098         1,828         Owned        3,500   

3333 East State Road 32

Westfield, Indiana

   2008      619         489         Leased  (1)      5,000   

11991 Fishers Crossing Drive

Fishers, Indiana

   2013      812         809         Owned        2,400   

107 West Logan Street

Noblesville, Indiana

   2013      623         619         Owned        3,200   

Lease for Space Under Construction

for Future Branch Office:

             

5915 N. College Avenue

Indianapolis, Indiana

   2014      59         59         Leased  (2)      2,375   

Land Acquired for Future

Branch Office:

             

2437 East Main Street

Plainfield, Indiana

   2008      1,377         1,377         Owned        —     

Former Branch Office Used to

House Lending Personnel:

             

6653 West Broadway

McCordsville, Indiana

   2004      1,141         923         Owned        3,400   

Ameriana Insurance Agency, Inc.:

             

1908 Bundy Avenue

New Castle, Indiana

   1999      391         266         Owned        5,000   
     

 

 

    

 

 

      

Total

$ 20,080    $ 13,388   
     

 

 

    

 

 

      

 

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(1) The initial lease expires on May 31, 2029 and the Bank has options for four additional terms of five years each.
(2) The initial lease expires in mid-2025, and the Bank has options for two additional terms of five years each.

The total net book value of $13.4 million shown above for the Company’s office facilities is $2.1 million less than the total of $15.5 million shown for premises and equipment on the consolidated balance sheet. This difference represents the net book value as of December 31, 2014 for furniture, equipment and automobiles.

 

Item 3. Legal Proceedings

On March 18, 2014, the City of Noblesville filed action seeking to take title of the real estate purchased by Ameriana Bank that was used to open a banking center in September 2014. The suit seeks to acquire title pursuant to condemnation proceedings and the City has made an offer to acquire the real estate for $375,000. That offer has been rejected by the Bank. The City has agreed not to take action before July 1, 2016, during which time the Bank can continue to operate its banking center. The Court has now entered its order approving the agreement.

 

Item 4. Mine Safety Disclosures

Not applicable.

PART II

 

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchasers of Equity Securities

Market for Common Equity and Related Stockholder Matters

The Company’s common stock, par value $1.00 per share, is traded on the NASDAQ Capital Market under the symbol “ASBI.” On March 9, 2015, there were 316 holders of record of the Company’s common stock. The Company’s ability to pay dividends depends on a number of factors including our capital requirements, our financial condition and results of operations, tax considerations, statutory and regulatory limitations and general economic conditions. No assurance can be given that we will continue to pay dividends or that they will not be reduced in the future. See Note 12 to the Consolidated Financial Statements included under Item 8 of this Form 10-K for a discussion of the restrictions on the payment of cash dividends by the Company.

The following table sets forth the high and low sales prices for the common stock as reported on the NASDAQ Capital Market and the cash dividends declared on the common stock for each full quarterly period during the last two fiscal years.

 

     2014      2013  
                   Dividends                    Dividends  

Quarter Ended:

   High      Low      Declared      High      Low      Declared  

March 31

   $ 14.00       $ 13.00       $ 0.02       $ 9.30       $ 7.42       $ 0.01   

June 30

     16.73         13.11         0.02         10.88         9.00         0.01   

September 30

     20.00         13.15         0.02         12.96         10.07         0.01   

December 31

     18.50         14.38         0.02         14.07         12.50         0.01   

 

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Purchases of Equity Securities

We did not repurchase any of our common stock during the quarter ended December 31, 2014 and at December 31, 2014 we had no publicly announced repurchase plans or programs.

 

Item 6. Selected Financial Data

 

     (Dollars in thousands, except per share data)  
     At December 31,  

Summary of Financial Condition

   2014     2013     2012     2011     2010  

Cash

   $ 6,020      $ 5,049      $ 6,589      $ 6,204      $ 3,673   

Investment securities

     55,166        40,150        41,645        43,847        38,608   

Loans, net of allowances for loan losses

     316,113        312,035        313,205        312,509        312,715   

Interest-bearing deposits and stock in Federal Home Loan Bank

     35,039        43,264        24,440        7,977        13,175   

Other assets

     60,480        58,106        59,884        59,254        61,486   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

$ 472,818    $ 458,604    $ 445,763    $ 429,791    $ 429,657   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deposits noninterest-bearing

$ 61,063    $ 52,747    $ 53,024    $ 40,197    $ 34,769   

Deposits interest-bearing

  317,884      309,954      303,679      297,053      303,209   

Borrowings

  45,810      50,810      45,810      49,810      51,810   

Other liabilities

  7,009      7,380      6,704      8,226      6,618   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

  431,766      420,891      409,217      395,286      396,406   

Stockholders’ equity

  41,052      37,713      36,546      34,505      33,251   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

$ 472,818    $ 458,604    $ 445,763    $ 429,791    $ 429,657   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Year Ended December 31,  

Summary of Earnings

   2014     2013     2012     2011     2010  

Interest income

   $   18,146      $   16,980      $   18,032      $   18,794      $   19,985   

Interest expense

     2,997        3,003        3,845        4,870        6,574   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

  15,149      13,977      14,187      13,924      13,411   

Provision for loan losses

  322      755      1,145      1,385      1,933   

Other income

  5,617      5,801      5,181      5,628      5,650   

Other expense

  17,211      16,095      15,827      17,004      16,817   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

  3,233      2,928      2,396      1,163      311   

Income tax (benefit)

  867      741      556      21      (242
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

$ 2,366    $ 2,187    $ 1,840    $ 1,142    $ 553   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

$ 0.79    $ 0.73    $ 0.62    $ 0.38    $ 0.19   

Diluted earnings per share

$ 0.79    $ 0.73    $ 0.62    $ 0.38    $ 0.19   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per share

$ 0.08    $ 0.04    $ 0.04    $ 0.04    $ 0.04   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Book value per share

$ 13.59    $ 12.61    $ 12.23    $ 11.54    $ 11.12   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Year Ended December 31,  

Other Selected Data

   2014     2013     2012     2011     2010  

Return on average assets

     0.50     0.49     0.41     0.26     0.13

Return on average equity

     6.04        5.91        5.18        3.38        1.66   

Ratio of average equity to average assets

     8.32        8.29        8.00        7.76        7.68   

Dividend payout ratio (1)

     10.14        5.48        6.50        10.47        21.70   

 

(1) Dividends per share declared divided by net income per share.

 

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Quarterly Data

   First
Quarter
     Second
Quarter
     Third
Quarter
     Fourth
Quarter
 

2014

           

Total interest income

   $ 4,474       $ 4,385       $ 4,245       $ 5,042   

Total interest expense

     758         755         760         724   

Net interest income

     3,716         3,630         3,485         4,318   

Provision for loan losses

     150         150         22         —     

Net income

     729         603         501         533   

Securities gains - net

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

  0.24      0.20      0.17      0.18   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share

  0.24      0.20      0.17      0.18   
  

 

 

    

 

 

    

 

 

    

 

 

 

Dividends declared per share

  0.02      0.02      0.02      0.02   
  

 

 

    

 

 

    

 

 

    

 

 

 

Stock price range

High

$ 14.00    $ 16.73    $ 20.00    $ 18.50   

Low

$ 13.00    $ 13.11    $ 13.15    $ 14.38   
  

 

 

    

 

 

    

 

 

    

 

 

 

2013

Total interest income

$ 4,291    $ 4,261    $ 4,184    $ 4,244   

Total interest expense

  762      747      746      748   

Net interest income

  3,529      3,514      3,438      3,496   

Provision for loan losses

  255      210      210      80   

Net income

  614      531      561      481   

Securities gains - net

  92      —        75      —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

  0.21      0.18      0.19      0.16   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share

  0.21      0.18      0.19      0.16   
  

 

 

    

 

 

    

 

 

    

 

 

 

Dividends declared per share

  0.01      0.01      0.01      0.01   
  

 

 

    

 

 

    

 

 

    

 

 

 

Stock price range

High

$ 9.30    $ 10.88    $ 12.96    $ 14.07   

Low

$ 7.42    $ 9.00    $ 10.07    $ 12.50   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Who We Are

Ameriana Bancorp (the “Company”) is an Indiana chartered bank holding company organized in 1987 by Ameriana Bank (the “Bank”). The Company is subject to regulation and supervision by the Federal Reserve Bank. The Bank began banking operations in 1890. In June 2002, the Bank converted to an Indiana savings bank and adopted the name, Ameriana Bank and Trust, SB. In July 2006, the Bank closed its Trust Department and adopted the name “Ameriana Bank, SB.” On June 1, 2009, the Bank converted to an Indiana commercial bank and adopted its present name, “Ameriana Bank.” The Bank is subject to regulation and supervision by the FDIC (the “FDIC”), and the Indiana Department of Financial Institutions (the “DFI”). Our deposits are insured to applicable limits by the Deposit Insurance Fund administered by the FDIC. References in this Annual Report on Form 10-K to “we,” “us,” and “our” refer to Ameriana Bancorp and/or the Bank, as appropriate.

We are headquartered in New Castle, Indiana. We conduct business through our main office at 2118 Bundy Avenue, New Castle, Indiana, through 13 branch offices located in New Castle, Middletown, Knightstown, Morristown, Greenfield, Anderson, Avon, New Palestine, Carmel, Westfield and two in Fishers, Indiana.

The Bank has two wholly-owned subsidiaries, Ameriana Insurance Agency (“AIA”) and Ameriana Financial Services, Inc. (“AFS”). AIA provides insurance sales from offices in New Castle, Greenfield and Avon, Indiana. On July 1, 2009, AIA purchased the book of business of Chapin-Hayworth Insurance Agency Inc. located in New Castle, Indiana, and on July 27, 2011, AIA purchased the insurance book of business of Koontz Insurance & Financial Services also located in New Castle, Indiana. AFS had offered insurance products through its ownership of an interest in Family Financial Life Insurance Company (“Family Financial”), New Orleans, Louisiana, which offers a full line of credit-related insurance products. On May 22, 2009, the Company announced that AFS had liquidated its 16.67% interest in Family Financial, and recorded a pre-tax gain of $192,000 from the transaction. AFS also operates a brokerage facility in conjunction with LPL Financial that provides non-bank investment product alternatives to its customers and the general public. The Company holds a minority interest in a limited partnership, House Investments, organized to acquire and manage real estate investments which qualify for federal tax credits.

What We Do

The Bank is a community-oriented financial institution. Our principal business consists of attracting deposits from the general public and investing those funds primarily in mortgage loans on single-family residences, multi-family loans, construction loans, commercial real estate loans, and, to a lesser extent, commercial and industrial loans, small business loans, home improvement loans, and consumer loans. We have from time-to-time purchased loans and loan participations in the secondary market. We also invest in various federal and government agency obligations and other investment securities permitted by applicable laws and regulations, including mortgage-backed, municipal and equity securities. We offer customers in our market area time deposits with terms from three months to seven years, interest-bearing and noninterest-bearing checking accounts, savings accounts and money market accounts. Our primary source of borrowings is FHLB advances. Through our subsidiaries, we engage in insurance, investment and brokerage activities.

Our primary source of income is net interest income, which is the difference between the interest income earned on our loan and investment portfolios and the interest expense incurred on our deposits and borrowing portfolios. Our loan portfolio typically earns more interest than the investment portfolio, and our deposits typically have a lower average rate than FHLB advances. Several factors affect our net interest income. These factors include the loan, investment, deposit, and borrowing portfolio balances, their composition, the length of their maturity, re-pricing characteristics, liquidity, credit, and interest rate risk, as well as market and competitive conditions.

Expansion

To diversify the balance sheet and provide new avenues for loan and deposit growth, the Bank further expanded into the Indianapolis area, adding three full-service offices in 2008 and 2009 in the suburban markets of Carmel, Fishers and Westfield. The Bank purchased two vacant banking centers on June 2013 located in Hamilton County, which is in the Indianapolis metropolitan area, and opened the Noblesville Office in September 2014 and

 

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the Fishers Crossing Office in November 2014. As a result, half of our banking centers are located in the Indianapolis metropolitan area. These banking centers are focused on generating new deposit and lending relationships, where significant opportunities exist to win market share from smaller institutions lacking the depth of financial products and services, and from large institutions that have concentrated on large business customers. A Broad Ripple Banking Center, our first brick and mortar location in Marion County, is scheduled to open in mid-2015.

Although the expansion strategy initially negatively affects earnings, the Bank’s expansion into new markets is critical for its long-term sustainable growth. Additional expansion in the Indianapolis metropolitan area includes plans for the building of a new full-service banking center in Plainfield on property purchased in early 2008, which was put on hold and the Bank is now in the process of determining the appropriate time to begin construction.

Executive Overview of 2014

The Company recorded net income of $2.4 million, or $0.79 per share, for 2014, compared to net income of $2.2 million, or $0.73 per share, for 2013. The growth in earnings for 2014 was due primarily to an improvement in net interest income and a reduction in the provision for loan losses, partly offset by lower total noninterest income and higher total noninterest expense. Following is additional summary information for the year:

 

    Consistent with its capital contingency plan, the Company paid a de minimis quarterly dividend of $0.01 per share, or $0.04 per share for each year from 2010 through 2013. In 2014, the quarterly dividend was increased to $0.02 per share, or $0.08 per share for the year.

 

    The Company’s tangible common equity ratio at December 31, 2014 was 8.45%.

 

    At December 31, 2014, the Bank’s tier 1 leverage ratio was 9.49%, the tier 1 risk-based capital ratio was 14.38%, and the total risk-based capital ratio was 15.64%. All three ratios were considerably above the levels required under regulatory guidelines to be considered “well capitalized.”

 

    Net interest income of $15.1 million for 2014 represented an increase of $1.2 million over 2013 due primarily to increases of $25.3 million in average interest-earning and $745,000 in prepayment fees, which included a $651,000 prepayment fee related to a match-funded commercial real estate loan. These metrics contributed to a six basis point increase in net interest margin from 3.63% for 2013 to 3.69% for 2014.

 

    The Bank recorded a $322,000 provision for loan losses in 2014 compared with a $755,000 provision in 2013. The improvement was due primarily to a reduction in nonperforming loans and net charge-offs.

 

    Total nonperforming loans of $4.4 million, or 1.37%, of total loans at December 31, 2014, represented a $676,000 decrease from $5.1 million, or 1.60% of total loans at December 31, 2013.

 

    Net charge-offs declined $589,000 from $1.0 million in 2013 to $412,000 in 2014.

 

    The allowance for loan losses was $3.9 million, or 1.22% of total loans at December 31, 2014, compared with $4.0 million, or 1.26% of total loans at December 31, 2013.

 

    Other income of $5.6 million for 2014 was $184,000, or 3.2%, lower than the total for the prior year, due primarily to the $341,000 decrease in gains on sales of mortgage loans and servicing rights that resulted from a decline in demand in our markets, coupled with management’s decision to retain a substantial portion of the 2014 loan originations for the Bank’s portfolio. The change in other income also included the following differences:

 

    Fees and service charges on deposit accounts of $2.7 million for 2014 represented a $228,000, or 9.3%, improvement over 2013 that was due primarily to an increase in the number of checking accounts that resulted from the Bank’s continuing focus on growing core deposit relationships.

 

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    A $57,000 decrease in brokerage and insurance commissions to $1.6 million for 2014 included a $38,000 decrease in commissions and fees earned by the Bank’s investment services subsidiary that resulted primarily from a lower volume of sales, and a $34,000 decrease in the contingency bonus received by the Bank’s insurance subsidiary related to claims loss experience.

 

    The Bank had no sales of investment securities in 2014, compared to $167,000 in net gains from $10.2 million in sales in 2013.

 

    A $32,000 decrease in the net loss from sales and write-downs of other real estate owned to $3,000 for 2014 compared with $35,000 for 2013.

 

    A $60,000 increase in other real estate owned income to $280,000 that resulted primarily from the January 2014 collection of $26,000 in delinquent rent from a tenant of a commercial strip center.

 

    Other expense for 2014 of $17.2 million was $1.1 million, or 6.9%, higher than 2013, due primarily to a prepayment penalty of $614,000 paid to the Federal Home Loan Bank related to a borrowing for a match-funded commercial real estate loan, and to costs associated with two new banking centers. The change in other expense also included the following differences:

 

    Total salaries and employee benefits of $9.3 million for 2014 represented an increase of $323,000, or 3.6%, from 2013 that was due in part to $155,000 of expense related to the two new banking centers opened in the last half of 2014, and a $71,000 increase in the expense of our frozen multi-employer defined benefit retirement plan.

 

    A $56,000 decrease in furniture and equipment expense to $778,000 related mostly to reduced ATM maintenance expense and lower depreciation.

 

    A $149,000 increase in legal and professional fees to $723,000 was due primarily to a $72,000 increase in legal fees, a $38,000 increase in fees related to successful appeals of real estate tax assessments and a $16,000 increase in recruiting fees.

 

    A $127,000 decrease in FDIC insurance premiums resulted primarily from a reduction in the Bank’s assessment rate.

 

    A $90,000 increase in data processing expense related primarily to our cost to support greater use of new technology by our customers.

 

    A $168,000 increase in marketing expense to $529,000 for 2014 related primarily to media advertising to build brand awareness in the greater Indianapolis metropolitan area.

 

    An $84,000 decrease in other real estate owned expense to $277,000 related primarily to real estate tax refunds from successful appeals of assessments that resulted in a $55,000 expense reduction.

 

    A $66,000 decrease in loan expense resulted primarily from an expense reversal of $62,000 as a result of the repurchase of a non-performing loan by the servicer.

 

    A $102,000 increase in other noninterest expense to $1.7 million resulted primarily from a $101,000 increase in expense related to split-dollar life insurance agreements.

 

    The Company had income before income taxes of $3.2 million for 2014 and recorded income tax expense of $867,000, an effective rate of 26.8%, which was lower than the statutory rate due primarily to a significant amount of tax-exempt bank-owned life insurance.

 

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The Company’s total assets of $472.8 million at December 31, 2014 were up $14.2 million, or 3.1%, from $458.6 million at December 31, 2013:

 

    Net loans receivable were $316.1 million at December 31, 2014, which represented a $4.1 million, or 1.3%, increase from $312.0 million at December 31, 2013. Portfolio growth efforts in 2014 were hampered mostly by prepayments of large commercial real estate loans, for which the Bank received $778,000 in prepayment fees, and also by a weak local single-family residential mortgage market. Total prepayment fees received were partly offset by a $614,000 prepayment penalty paid to the Federal Home Loan Bank related to one of the commercial real estate loans that was match-funded.

 

    The growth in total loans outstanding to $321.0 million at December 31, 2014 resulted from a $6.7 million increase in commercial real estate loans to $111.5 million, a $2.2 million increase in construction loans to $13.6 million, and a $104,000 increase in commercial loans to $29.4 million, partly offset by a $4.7 million decrease in residential real estate loans to $163.8 million, a $212,000 decrease in municipal loans to $785,000 and a $14,000 decrease in consumer loans to $2.0 million.

 

    Reflective of the effect of the low interest rate environment coupled with competitive pricing pressures, the 4.67% weighted-average rate for the loan portfolio at December 31, 2014 represented a sixteen basis point decrease from 4.83% at December 31, 2013.

 

    The Bank experienced an increase of $15.0 million, or 37.4%, in the investment securities portfolio during 2014 to $55.2 million, which was due primarily to $21.0 million in purchases of Ginnie Mae and GSE mortgage-backed securities and a $1.1 million increase in the market value of the available for sale portfolio, partly offset by $6.9 million of principal payments on mortgage securities.

 

    The Company had a $8.6 million decrease in interest-bearing demand deposits at the Federal Reserve Bank of Chicago to $27.0 million that was due primarily to growth in the investment securities portfolio.

 

    Other real estate owned of $6.6 million at December 31, 2014 represented an increase of $1.5 million from December 31, 2013, with the addition of ten properties totaling $2.4 million, the sale of 18 properties with a total book value of $900,000, and $26,000 in write-downs during the year. The additions included a residential condominium project with a book value of $1.5 million.

 

    Total deposits of $378.9 million at December 31, 2014 represented an increase of $16.2 million, or 4.5%, for the year. Non-maturity deposits grew $24.8 million, or 11.4%, to $241.9 million, while certificates of deposit decreased $8.6 million, or 5.9%, to $137.0 million.

 

    The Bank achieved a seven basis point reduction in the weighted average cost of interest-bearing deposits to 0.48% at December 31, 2014 from 0.55% at the end of 2013.

 

    Total borrowings decreased by $5.0 million in 2014 to $45.8 million, due to the Bank prepaying a 4.60% Federal Home Loan Bank note with a maturity date of November 20, 2018 that had been used to match-fund a commercial real estate loan in 2008.

Strategic Summary

The 2008 economic downturn created a challenging operating environment for all businesses, and, in particular, the financial services industry. Earnings pressure is expected to moderate as the current slowly improving economy continues to slowly increase loan demand. Deposit acquisition continues to be competitive; however, the Bank’s disciplined pricing has resulted in further reduction of its cost of deposits. The Bank’s pricing strategies during this extended low interest rate environment have minimized the negative impact on the Company’s interest rate spread and net interest income. Managing noninterest expense prudently has been a priority of management, and the Company has utilized aggressive cost control measures, including job restructuring and eliminating certain discretionary expenditures.

 

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With the Bank’s mantra of “Soundness. Profitability. Growth – in that order, no exceptions,” the priorities, culture and risk strategy of the Bank are focused on asset quality and credit risk management. Despite the current economic pressures, as well as the industry’s challenges related to compliance and regulatory requirements, tightened credit standards, and capital preservation, Management remains cautiously optimistic that business conditions are improving and is steadfast in the belief that the Company is well positioned to grow and enhance shareholder value as this recovery gains momentum.

With a community banking history stretching back more than 124 years, the Bank has built its strong reputation through community outreach programs and being a workplace of choice. By combining its rich tradition with exceptional customer service, the Bank will accomplish its mission by:

 

    being our customer’s first choice for financial advice and solutions;

 

    informing and educating customers on the basics of money management; and

 

    understanding and meeting customer’s financial needs throughout their life cycle.

Serving customers requires the commitment of all Ameriana Bank associates to provide exceptional service and sound financial advice. We believe these qualities differentiate us from our competitors and increase profitability and shareholder value.

To meet these long-term goals, we have undertaken the following strategies:

Build Relationships with Our Customers. Banking is essentially a transaction business. Nevertheless, numerous industry studies have shown that customers want a relationship with their bank and banker based on trust and sound advice. Based on this information, we are focusing our efforts on expanding customer relationships and improving our products and services per household.

Achieve Superior Customer Service. Programs and initiatives have been implemented to deliver value-added services and amenities to support our corporate strategy and Brand Promise, which speak to our commitment to our customers. Customer satisfaction surveys are conducted after a new account is opened. Our evaluations include telephone as well as in-person surveys with both consumer loan and deposit customers, in addition to other in-store performance metrics. We have enhanced our efforts to improve our customer service by developing a 3-Year Training and Development Plan and formalizing our service standards and job performance evaluations.

Develop and Deliver Fully Integrated Financial Advice and Comprehensive Solutions to Meet Customer Life Events. The Bank’s retail banking business has a full range of banking products, as well as affiliated insurance, brokerage and asset management services. Products and services are packaged and recommended around customer needs and “life events” such as planning for retirement, buying a home and saving for college education, rather than traditional transaction accounts, savings and consumer loan products.

Establish Strong Brand Awareness. We believe it is important to create a value proposition that is relevant, understood and valued by our customers. To differentiate the Bank among its competitors and support its premium service brand, Ameriana developed a brand strategy which surrounds the customer with 360 Degrees of Service. New logo, signage, facility design, web design, service training, marketing and public relations efforts were developed to support the brand strategy and brand concepts.

Use Technology to Expand Our Customer Base. Ameriana utilizes a fully integrated, real-time information technology platform. We continuously seek opportunities to enhance our electronic delivery of products and services to our customers, and the Bank’s technology plan has included upgrades to our ancillary support systems, such as business sweep products, cash management services, business remote item capture and online mortgage loan applications. In addition, the Bank has introduced online account opening, Visa© Instant Check Cards, Picture Pay and Mobile Check Deposit to the personal mobile banking application, the “Ameriana Biz” mobile banking application for commercial customers, and an upgraded online consumer loan application, along with other technology to remain competitive in its markets.

 

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Develop an Innovative Delivery System. We believe our banking centers must evolve into “Financial Stores” that showcase our financial products and offer our customers an environment and unique experience that is conducive to interacting with knowledgeable Ameriana Bank associates. Ameriana’s strategy focuses on enhancing the customer experience and demonstrating our community banking spirit with value-added services, such as space for community meetings, business and financial planning seminars, community outreach programs and small special interest events.

Increase Market Share in Existing Markets and Expand into New Markets. Tremendous opportunity exists to expand our products and services per household with existing customers and attract new customers in both our existing and new markets. The Bank’s expansion strategy in the Indianapolis metropolitan area is well underway as a result of opening three well-situated locations in Hamilton County in 2008 and 2009, located just north of Marion County and Indianapolis. In June 2013, the Bank purchased two vacant banking centers in the Hamilton County Indianapolis metropolitan area. The Noblesville Banking Center opened in September 2014 and the Bank opened the Fishers Crossing Banking center in November 2014. With the addition of these two offices, Ameriana has five locations in Hamilton County. A Broad Ripple Banking Center, the Bank’s first brick and mortar location in Marion County, is scheduled to open in the middle of 2015. In addition, the Company owns a site in Plainfield, which will enhance our presence on the west side of Indianapolis along with our existing office in Avon. Construction of the Plainfield office was put on hold until we have determined the appropriate time to open the office, based on the Bank’s long-term expansion strategy. The Bank currently plans to continue the strategy of acquiring additional locations for development of full-service banking centers to increase our footprint in Marion County and surrounding Indianapolis metropolitan area and to boost our visibility in this market, while maximizing profitability for its shareholders.

Critical Accounting Policies

The accounting and reporting policies of the Company are maintained 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. The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions. The financial position and results of operations can be affected by these estimates and assumptions, and such estimates and assumptions 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 Loan Losses. The allowance for loan 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 noncommercial 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 loan 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

 

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several factors, including inherent delays in obtaining information regarding a customer’s financial condition or changes in their unique business conditions, the subjective 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, nonhomogeneous 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 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.

Valuation Measurements. Valuation methodologies often involve a significant degree of judgment, particularly when there are no observable active markets for the items being valued. Investment securities are carried at fair value, as defined by FASB fair value guidance, which requires key judgments affecting how fair value for such assets and liabilities is determined. In addition, the outcomes of valuations have a direct bearing on the carrying amounts for goodwill and intangible assets. To determine the values of these assets and liabilities, as well as the extent to which related assets may be impaired, management makes assumptions and estimates related to discount rates, asset returns, prepayment rates and other factors. The use of different discount rates or other valuation assumptions could produce significantly different results, which could affect the Company’s results of operations.

Income Tax Accounting. We file a consolidated federal income tax return. The provision for income taxes is based upon income in our consolidated financial statements. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on our deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date.

Under U.S. GAAP, a valuation allowance is required to be recognized if it is “more likely than not” that a deferred tax asset will not be realized. The determination of the realizability of the deferred tax asset is highly subjective and dependent upon judgment concerning our evaluation of both positive and negative evidence, our forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. Positive evidence includes the existence of taxes paid in available carry-back years as well as the probability that taxable income will be generated in future periods, while negative evidence includes any cumulative losses in the current year and prior two years and general business and economic trends. At December 31, 2014 and December 31, 2013, we determined that our existing valuation allowance was adequate, largely based on our projections of future taxable income and available tax planning strategies, which include the evaluation of a sale/leaseback of office properties, sales of banking centers not important to long-term growth objectives, and a reduction of our current investment in tax-exempt bank owned life insurance policies. Any reduction in estimated future taxable income may require us to increase the valuation allowance against our deferred tax assets. Any required increase to the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.

Positions taken in our tax returns may be subject to challenge by the taxing authorities upon examination. The benefit of an uncertain tax position is initially recognized in the financial statements only when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that is more likely than not of being realized upon

 

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settlement with the tax authority, assuming full knowledge of the position and all relevant facts. Differences between our position and the position of tax authorities could result in a reduction of a tax benefit or an increase to a tax liability, which could adversely affect our future income tax expense.

We believe our tax policies and practices are critical accounting policies because the determination of our tax provision and current and deferred tax assets and liabilities have a material impact our net income and the carrying value of our assets. We believe our tax liabilities and assets are adequate and are properly recorded in the consolidated financial statements at December 31, 2014.

FINANCIAL CONDITION

Total assets increased by $14.2 million, or 3.1%, to $472.8 million at December 31, 2014 from $458.6 million at December 31, 2013. This change was due primarily to an increase in investment securities that were funded primarily from growth in deposit balances, as loan growth efforts were limited by a weak local single-family residential mortgage market and by a significant volume of prepayments of commercial real estate loans.

Cash and Cash Equivalents

Cash and cash equivalents decreased $7.7 million to $33.1 million at December 31, 2014 from $40.8 million at December 31, 2013. Interest-bearing demand deposits decreased $8.7 million to $27.1 million at December 31, 2014, with the totals for both year-end dates consisting almost entirely of balances with the Federal Reserve Bank of Chicago.

Interest-Bearing Time Deposits

At December 31, 2014, the Bank held $4.2 million in FDIC-insured bank certificates of deposit, which had a weighted-average interest rate of 1.24% and a weighted-average remaining life of approximately 2.0 years.

Securities

Investment securities increased $15.0 million, or 37.4%, to $55.2 million at December 31, 2014 from $40.2 million at December 31, 2013. This change was due primarily to $21.0 million in purchases of Ginnie Mae and GSE mortgage-backed pass-through securities and a $1.1 million increase in the market value of the available for sale portfolio that resulted from a decline in market interest rates during 2014, partly offset by $6.9 million of principal repayments on the mortgage securities and $271,000 of net amortization of purchase premiums and discounts.

All mortgage-backed securities and collateralized mortgage obligations at December 31, 2014 are guaranteed by either Ginnie Mae, Fannie Mae or Freddie Mac. All of our investments are evaluated for other-than-temporary impairment, and such impairment, if any, is recognized as a charge to earnings. There were no other than temporarily impaired investment securities as of December 31, 2014.

 

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The following table identifies changes in the investment securities carrying values:

 

(Dollars in thousands)

                           
     2014      2013      $ Change      % Change  

December 31:

           

Available for sale:

           

Ginnie Mae and GSE mortgage-backed pass-through securities

   $ 44,198       $ 33,806       $ 10,392         30.74

Ginnie Mae collateralized mortgage obligations

     2,019         2,214         (195      (8.81

Mutual funds

     1,867         1,783         84         4.71   
  

 

 

    

 

 

    

 

 

    
  48,084      37,803      10,281      27.20   
  

 

 

    

 

 

    

 

 

    

Held to maturity:

GSE mortgage-backed pass-through securities

  4,736      —        4,736      —     

Municipal securities

  2,346      2,347      (1   (0.04
  

 

 

    

 

 

    

 

 

    
  7,082      2,347      4,735      201.75   
  

 

 

    

 

 

    

 

 

    

Totals

$ 55,166    $ 40,150    $ 15,016      37.40   
  

 

 

    

 

 

    

 

 

    

The following table identifies the percentage composition of the invested securities.

 

     2014     2013     2012  

December 31:

      

Available for sale

      

Ginnie Mae and GSE mortgage-backed pass-through securities

     80.1     84.2     83.8

Ginnie Mae collateralized mortgage obligations

     3.7        5.5        6.1   

Mutual funds

     3.4        4.5        4.5   
  

 

 

   

 

 

   

 

 

 
  87.2      94.2      94.4   
  

 

 

   

 

 

   

 

 

 

Held to maturity:

GSE mortgage-backed pass-through securities

  8.6      —        —     

Municipal securities

  4.2      5.8      5.6   
  

 

 

   

 

 

   

 

 

 
  12.8      5.8      5.6   
  

 

 

   

 

 

   

 

 

 

Totals

  100.0   100.0   100.0
  

 

 

   

 

 

   

 

 

 

See Note 3 to the Consolidated Financial Statement for more information on investment securities.

Loans

Net loans receivable totaled $316.1 million at December 31, 2014, an increase of $4.1 million, or 1.3% from $312.0 million at December 31, 2013. Additional growth was hindered by prepayments of large commercial real estate loans, for which the Bank received $778,000 in prepayment fees, and also by a weak local single-family residential mortgage loan market. Total prepayment fees received were partly offset by a $614,000 prepayment penalty paid to the Federal Home Loan Bank related to one of the commercial real estate loans that was match-funded.

Residential real estate loans decreased $4.7 million to $163.8 million at December 31, 2014, from $168.5 million at December 31, 2013. New loan originations involved a mix of owner-occupied single-family and investment properties, as well as a blend of fixed-rate and, to a lesser degree, variable-rate notes. During 2014, the Bank originated $32.5 million in non-construction residential real estate loans, including home equity loans, and sold $4.7 million into the secondary market.

Commercial real estate loans increased $6.7 million to $111.5 million at December 31, 2014, from $104.8 million at December 31, 2013. Commercial loans and leases increased $104,000 to $29.4 million at December 31, 2014 from $29.3 million at December 31, 2013. Non-construction commercial real estate loans totaling $38.1 million were originated in 2014, and $12.3 million in other commercial loans were also added in 2014.

 

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Construction loans increased $2.2 million to $13.6 million at December 31, 2014 from $11.4 million at December 31, 2013. Construction loan originations in 2014 totaled $13.0 million, which included eight commercial construction loans totaling $9.1 million and 17 residential construction loans totaling $3.9 million.

On December 31, 2014, the Bank had two loans to local municipalities totaling $785,000, compared to three loans totaling $997,000 at December 31, 2013. Municipal loans are usually added through a competitive bid process. No municipal loans were added in 2014 or in 2013.

Consumer loans declined $14,000 from December 31, 2013 to $2.0 million at December 31, 2014. This decrease reflected the impact of the local economy and competitive pressures on the Bank’s lending growth objectives. The Bank originated $1.2 million of consumer loans in 2014.

New loan volume in 2014 totaled $97.5 million. New loan volume in 2013 totaled $81.1 million. New residential loan additions, including $11.0 million of construction loans and $155,000 in purchases, increased to $43.7 million in 2014 from $41.0 million in 2013. Commercial loan, commercial real estate, and commercial construction loan additions in 2014, including a $254,000 purchased loan, totaled $52.6 million, compared to $39.0 million in 2013. New consumer loans totaled $1.2 million in 2014 compared to $1.1 million in 2013.

We generally retain loan servicing on loans sold. Loans we serviced for investors, primarily Freddie Mac, Fannie Mae and the Federal Home Loan Bank of Indianapolis, totaled approximately $70.9 million at December 31, 2014 compared to $80.7 million at December 31, 2013. The decrease of $9.8 million for 2014 was due to $14.5 million of payoffs and other principal payments on loans serviced for investors exceeding the $4.7 million of loans sold with servicing retained during the year. Loans sold that we service generate a steady source of fee income, with servicing fees ranging from 0.25% to 0.375% per annum of the loan principal amount.

Credit Quality

Nonperforming loans decreased $676,000 to $4.4 million at December 31, 2014 from $5.1 million at December 31, 2013. Nonaccrual residential real estate loans decreased $555,000 for the year to $2.2 million at December 31, 2014, primarily as a result of the repurchase of a loan with a $781,000 balance at December 31, 2013. Nonaccrual construction loans decreased by $371,000 and nonaccrual commercial loans declined $216,000 during 2014. There was one nonaccrual commercial real estate loan with a balance of $812,000 at December 31, 2014, an increase of $460,000 over a year earlier.

We recorded net charge-offs of $412,000 in 2014 and $1.0 million in 2013. Total charge-offs were $505,000 in 2014 and $1.1 million in 2013. Total recoveries in 2014 were $93,000, while total recoveries were $139,000 in 2013.

The allowance for loan losses as a percent of loans was 1.22% at December 31, 2014 and 1.26% at December 31, 2013. As a result of our review of collateral positions and historic loss ratios, management believes that the allowance for loan losses is adequate to cover all incurred and probable losses inherent in the portfolio at December 31, 2014.

Premises and Equipment

Premises and equipment of $15.5 million at December 31, 2014 represented an $825,000 increase from $14.7 million at December 31, 2013. The net increase resulted primarily from capital expenditures totaling $1.8 million, of which $1.1 million related to the two new banking centers, partly offset by $966,000 of depreciation for the year.

Stock in Federal Home Loan Bank

The $719,000 decrease in Federal Home Loan Bank stock to $3.8 million at December 31, 2014 was the result of a stock repurchase program initiated by the Federal Home Loan Bank in 2014.

 

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Goodwill

Goodwill was $656,000 at December 31, 2014, unchanged from December 31, 2013. Goodwill of $457,000 relates to deposits associated with a banking center acquired on February 27, 1998, and $199,000 is the result of three separate acquisitions of insurance businesses. The results of the Bank’s impairment tests have reflected a fair value for the deposits at this banking center that exceeds the goodwill, and a fair value of the three insurance agency books of business purchased that exceeds the associated goodwill.

Cash Value of Life Insurance

We have investments in life insurance on employees and directors, with a balance or cash surrender value of $28.4 million and $27.7 million, respectively, at December 31, 2014 and 2013. The majority of these policies were purchased in 1999. Some policies were exchanged in 2014 to reduce our concentration with one insurance carrier, and some policies with lower returns were exchanged in 2007 as part of a restructuring of the program. The nontaxable increase in cash surrender value of life insurance was $716,000 in 2014, compared to $720,000 in 2013.

Other Real Estate Owned

Other real estate owned of $6.6 million at December 31, 2014 represented an increase of $1.5 million from December 31, 2013. Ten additions to other real estate owned totaling $2.4 million and the sale of eight properties with an aggregate book value of $900,000 occurred during 2014. The additions included a residential condominium project with a book value of $1.5 million, two commercial real estate properties totaling $244,000, five single-family residential properties totaling $472,000 and 20 residential building lots totaling $195,000. The sales resulted in a net gain of $23,000, and consisted of five single-family properties, two residential building lots, and developed commercial land. Write-downs of other real estate owned during 2014 totaled $26,000, of which $24,000 related to an outlot adjacent to a strip retail center also owned by the Bank. All of the write-downs during 2014 were due to reduction of the property’s market value, evidenced by updated appraisals or valuations received during the period.

Other Assets

Other assets were $8.9 million at December 31, 2014, compared to $9.9 million at December 31, 2013. The decrease of $966,000 resulted primarily from a $1.0 million reduction of the Company’s net income tax asset.

Deposits

The following table shows deposit changes by category:

 

(Dollars in thousands)

                           

December 31,

   2014      2013      $ Change      % Change  

Noninterest-bearing deposits

   $ 61,063       $ 52,747       $ 8,316         15.77

Savings deposits

     32,997         30,009         2,988         9.96   

Interest-bearing checking

     112,899         98,234         14,665         14.93   

Money market deposits

     34,960         36,125         (1,165      (3.23

Certificates $100,000 and more

     46,157         51,188         (5,031      (9.83

Other certificates

     90,871         94,398         (3,527      (3.74
  

 

 

    

 

 

    

 

 

    

Totals

$ 378,947    $ 362,701    $ 16,246      4.48   
  

 

 

    

 

 

    

 

 

    

Non-maturity deposits increased $24.8 million, or 11.4%, to $241.9 million at December 31, 2014 from $217.1 million at December 31, 2013. The growth resulted primarily from a $23.0 million increase in checking account balances, noninterest-bearing and interest-bearing deposits, which included a $7.0 million temporary public funds checking balance related to a municipal construction project. The $8.6 million decline in certificate balances resulted primarily from the Bank’s decision not to renew a maturing $7.5 million State of Indiana certificate deposit that was accepted in December 2013.

 

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Borrowings

Borrowings decreased $5.0 million to $45.8 million at December 31, 2014 from $50.8 million at December 31, 2013, as the Bank prepaid a Federal Home Loan Bank note that had been used to match-fund a ten-year commercial real estate loan in 2008. The Bank received a $651,000 prepayment fee from the loan payoff and paid a $614,000 prepayment penalty to the Federal Home Loan Bank. In 2013, the Bank added a three-year Federal Home Loan Bank note with an interest rate of 0.77%. The proceeds from the note were used to purchase $8.1 million of Ginnie Mae mortgage-backed securities, with the balance of the purchase funded with cash from the Bank’s interest-bearing demand account at the Federal Reserve Bank of Chicago. In September 2012, the Bank prepaid a $10.0 million FHLB note that had an interest rate of 3.42% and maturity date of June 24, 2015, using the proceeds from a $10.0 million FHLB borrowing with an interest rate of 0.96% and maturity date of September 20, 2017. In November 2012, the Bank prepaid a $10.0 million FHLB note that had an interest rate of 3.40% and maturity date of July 24, 2015, using the proceeds from a $10.0 million borrowing with an interest rate of 0.92% and maturity date of November 28, 2017. This restructuring strategy, which included two prepayment penalties totaling $1.5 million that are being amortized over the lives of the two new borrowings, allowed the Bank to extend the debt during a low interest rate environment, and reduce the amount of interest expense that will be recorded during the period from the restructuring dates to the original maturity dates of the replaced borrowings.

At December 31, 2014, our borrowings consisted of FHLB advances totaling $28.0 million, one $7.5 million repurchase agreement, and subordinated debentures of $10.3 million. The subordinated debentures were issued on March 7, 2006, and mature on March 7, 2036.

Yields Earned and Rates Paid

The following tables set forth the weighted average yields earned on interest-earning assets and the weighted average interest rates paid on the interest-bearing liabilities, together with the net yield on interest-earning assets. Yields are calculated on a tax-equivalent basis. The tax-equivalent adjustment was $60,000, $62,000 and $64,000 for the years ended December 31, 2014, 2013, and 2012, respectively.

 

     Year Ended December 31,  
     2014     2013     2012  

Weighted Average Yield:

      

Loans

     5.22     4.99     5.35

Mortgage-backed pass through and collateralized mortgage obligations

     2.24        1.93        2.34   

Securities – taxable

     2.13        2.30        3.02   

Securities – tax-exempt

     8.00        8.00        8.01   

Other interest-earning assets

     0.74        0.81        0.79   

All interest-earning assets

     4.42        4.41        4.72   

Weighted Average Cost:

      

Demand deposits, money market deposit accounts, and savings

     0.10        0.11        0.18   

Certificates of deposit

     1.04        1.12        1.39   

Federal Home Loan Bank advances, Federal Reserve Bank discount window borrowings, repurchase agreement and subordinated debentures

     2.68        2.86        3.29   

All interest-bearing liabilities

     0.82        0.87        1.09   
  

 

 

   

 

 

   

 

 

 

Interest Rate Spread (spread between weighted average yield on all Interest-earning assets and all interest-bearing liabilities)

  3.60      3.54      3.63   
  

 

 

   

 

 

   

 

 

 

Net Tax Equivalent Yield (net interest income as a percentage of average interest-earning assets)

  3.69      3.63      3.72   

 

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     At December 31,  
     2014     2013     2012  

Weighted Average Interest Rates:

      

Loans

     4.67     4.83     5.07

Mortgage-backed pass through and collateralized mortgage obligations

     2.18        2.21        2.11   

Other securities – taxable

     1.87        2.01        2.00   

Other securities – tax-exempt

     7.95        7.95        7.95   

Other earning assets

     0.72        0.65        0.96   

Total interest-earning assets

     4.03        4.15        4.52   

Demand deposits, money market deposit accounts, and savings

     0.10        0.11        0.11   

Certificates of deposit

     0.99        1.06        1.19   

Federal Home Loan Bank advances, repurchase agreement, and subordinated debentures (1)

     2.48        2.69        2.86   

Total interest-bearing liabilities

     0.73        0.86        0.90   

Interest rate spread

     3.30        3.29        3.62   

 

(1) The actual weighted average rate at December 31, 2014 for Federal Home Loan Bank advances was 1.10%, but the effective rate was 2.17%, which was used in this calculation. The effective rate incorporates the impact on interest expense from the amortization of two prepayment penalties totaling $1.5 million that resulted when two advances of $10.0 million each were replaced in 2012 with new borrowings that have lower rates and later maturity dates.

Rate/Volume Analysis

The following table sets forth certain information regarding changes in interest income, interest expense and net interest income for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (1) changes in volume (changes in volume multiplied by old rate) and (2) changes in rate (changes in rate multiplied by old volume). For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionally based on the changes due to the rate and the changes due to volume. No material amounts of loan fees or out-of-period interest are included in the table. Nonaccrual loans were not excluded in the calculations. The information shown below was adjusted for the tax-equivalent benefit of bank qualified non-taxable municipal securities and municipal loans. The tax-equivalent adjustment was $60,000, $62,000 and $64,000 for the years ended December 31, 2014, 2013 and 2012, respectively.

 

     Year Ended December 31,  
     2014 vs. 2013     2013 vs. 2012  
     Increase (Decrease)
Due to Changes in
          Increase (Decrease)
Due to Changes in
       
     Volume     Rate     Net
Change
    Volume     Rate     Net
Change
 
     (In thousands)  

Interest income:

            

Loans

   $ (27   $ 730      $ 703      $ 342      $ (1,151   $ (809

Mortgage-backed securities

     290        102        392        (122     (134     (256

Securities – taxable

     —          (3     (3     2        (15     (13

Securities – tax-exempt

     —          —          —          —          —          —     

Other interest-earning assets

     93        (21     72        18        6        24   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

  356      808      1,164      240      (1,294   (1,054
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

Demand deposits and savings

  6      (2   4      14      (115   (101

Certificates of deposits

  87      (108   (21   (211   (360   (571

FHLB advances, Federal Reserve Bank discount window borrowings, repurchase agreement and subordinated debentures

  96      (85   11      32      (202   (170
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

  189      (195   (6   (165   (677   (842
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in net interest income

$ 167    $ 1,003    $ 1,170    $ 405    $ (617 $ (212
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Drafts Payable

Drafts payable of $1.3 million at December 31, 2014 represented a decrease of $205,000 from $1.5 million at December 31, 2013. This difference will vary and is a function of the dollar amount of checks issued near period end and the time required for those checks to clear.

Other Liabilities

The total for other liabilities decreased $166,000 to $5.7 million at December 31, 2014, from $5.9 million at December 31, 2013, and included a $186,000 decrease in a payable related to the transfer of loan servicing on loans purchased by the bank in prior years, and a $111,000 increase in loan escrow balances.

Shareholders’ Equity

Total shareholders’ equity of $41.1 million at December 31, 2014 was $3.3 million higher than the total at December 31, 2013. This increase resulted from net income of $2.4 million, $511,000 related to vesting of stock options and from stock options exercised, and other comprehensive income of $702,000 from unrealized appreciation of available-for-sale securities, partially offset by $240,000 in dividends to shareholders.

RESULTS OF OPERATIONS

2014 Compared to 2013

Net Income

The Company recorded net income of $2.4 million for 2014, or $0.79 per diluted share, compared to net income of $2.2 million, or $0.73 per diluted share, for 2013. This increase of $179,000 resulted primarily from growth in net interest income and a reduction in the provision for loan losses, partly offset by lower total noninterest income and higher total noninterest expense. The following is a summary of changes in the components of net income for 2014 compared to 2013:

 

    Net interest income of $15.1 million for 2014 represented an increase of $1.2 million over 2013, and resulted primarily from a $25.3 million increase in average interest-earning assets and a $745,000 increase in prepayment fees from commercial real estate loans. Total prepayment fee income for 2014 included one prepayment fee of $651,000 received on a commercial real estate loan that was match-funded with a FHLB borrowing in 2008. The $614,000 prepayment penalty paid to the FHLB is included in noninterest expense for 2014.

 

    Provisions for loan losses of $322,000 were recorded during 2014, compared to $755,000 for the same period of 2013, a decrease of $433,000.

 

    Other income for 2014 was $5.6 million, or a decrease of $184,000 from 2013, due primarily to the $341,000 reduction in gains on sales of loans and servicing rights.

 

    $17.2 million in other expense for 2014 represented a $1.1 million, or 6.9%, increase from $16.1 million for 2013. The increase resulted primarily from a $614,000 prepayment penalty paid to the Federal Home Loan Bank related to a 2008 borrowing used to match-fund a commercial real estate loan.

 

    The income tax expense of $867,000 on $3.2 million of pre-tax income for 2014 represented a reduced effective federal tax rate of 26.8% that resulted primarily from $857,000 of tax-exempt income from bank-owned life insurance, municipal securities and municipal loans. The income tax expense of $741,000 on $2.9 million of pre-tax income for 2013 represented a reduced effective federal tax rate of 25.3% that resulted from $865,000 of tax-exempt income from bank-owned life insurance, municipal securities and municipal loans.

 

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For a quarterly breakdown of earnings, see “Quarterly Data” under “Item 6. Selected Financial Data.”

Net Interest Income

We derive the majority of our income from net interest income. The following table shows a breakdown of net interest income on a tax-equivalent basis for 2014 compared to 2013. The tax equivalent adjustment was $60,000 and $62,000 for the years ended December 31, 2014 and 2013, respectively, based on a tax rate of 34%.

 

     (Dollars in thousands)  

Years ended December 31,

   2014     2013        
     Interest      Yield/Rate     Interest      Yield/Rate     Change  

Interest and fees on loans

   $ 16,633         5.22   $ 15,930         4.99   $ 703   

Other interest income

     1,573         1.69        1,112         1.65        461   
  

 

 

      

 

 

      

 

 

 

Total interest income

  18,206      4.42      17,042      4.41      1,164   
  

 

 

      

 

 

      

 

 

 

Interest on deposits

  1,646      0.52      1,663      0.56      (17

Interest on borrowings

  1,351      2.68      1,340      2.86      11   
  

 

 

      

 

 

      

 

 

 

Total interest expense

  2,997      0.82      3,003      0.87      (6
  

 

 

      

 

 

      

 

 

 

Net interest income

$ 15,209    $ 14,039    $ 1,170   
  

 

 

      

 

 

      

 

 

 

Net interest spread

  3.60   3.54

Net interest margin

  3.69   3.63

The 8.3% increase in net interest income on a tax-equivalent basis, as shown in the table above, was mostly the result of a $25.3 million, or 6.5% increase in average interest-earning assets, and a $745,000 increase in prepayment fee income that included a fee of $651,000 from one commercial real estate loan that was match-funded with a FHLB borrowing. Although average interest-bearing liabilities for 2014 represented a 5.5% increase over 2013, interest expense decreased $6,000, as both the average cost of deposits and the average cost of borrowings declined from a year earlier. Our interest-bearing liabilities have shorter overall maturities and typically reprice more frequently to market conditions than our interest-earning assets. For a discussion on interest rate risk, see “– Interest Rate Risk.”

The Company’s net interest margin on a fully-tax equivalent basis increased six basis points to 3.69% for 2014 from 3.63% for 2013.

Tax-exempt interest for 2014 was $141,000 compared to $145,000 for 2013. Tax-exempt interest is from qualifying municipal securities and municipal loans. Total interest income on a tax-equivalent basis of $18.2 million for 2014 represented an increase of $1.2 million compared to $17.0 million for 2013. This increase resulted primarily from the Company’s growth in average interest-earning assets and significant increase in prepayment fee income. Total interest expense for 2014 decreased $6,000 compared to 2013, due mostly to the Bank taking advantage of market opportunities to reprice and continue to reduce its cost of interest-bearing deposits. For further information, see “– Financial Condition – Rate/Volume Analysis.”

Provision for Loan Losses

The provision for loan losses represents the current period credit or cost associated with maintaining an appropriate allowance for loan losses. Periodic fluctuations in the provision for loan losses result from management’s assessment of the adequacy of the allowance for loan losses. The allowance for loan losses is dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, assessment by management, third parties and banking regulators of the quality of the loan portfolio, the value of the underlying collateral on problem loans and the general economic conditions in our market area. We believe the allowance for loan losses is adequate to cover losses inherent in the loan portfolio as calculated in accordance with generally accepted accounting principles.

We had a provision for loan losses of $322,000 for 2014 compared to a provision of $775,000 for 2013. The decrease in the provision was due primarily to a reduction in nonperforming loans and net charge-offs, and to an improvement in the overall credit quality of the loan portfolio. The allowance to total loans ratio was 1.22% at December 31, 2014, compared to 1.26% at December 31, 2013.

 

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Other Income

The $184,000 decrease in total other income to $5.6 million in 2014 resulted primarily from the net of the following changes:

 

    A $341,000 decrease in gains on sales of mortgage loans and servicing rights to $170,000 for 2014 from $511,000 for 2013, that resulted primarily from a decline in single-family home loan demand nationwide and management’s decision to retain a substantial portion of the 2014 new loan production in the Bank’s portfolio;

 

    No sales of investment securities, compared to $167,000 in net gains from $10.2 million in sales of available-for-sale investment securities in 2013; and

 

    A $57,000 decrease in brokerage and insurance commissions to $1.6 million for 2014 compared to the year earlier total, that included a $38,000 decrease in commissions and fees earned by the Bank’s investment services subsidiary that resulted primarily from a lower volume of sales, and an $18,000 decrease in revenue earned by the Bank’s insurance subsidiary that resulted primarily from a $34,000 decrease in the contingency bonus received related to the claims loss experience on insured properties; partially offset by

 

    A $228,000, or 9.3%, increase in fees and service charges from deposit account relationships to $2.7 million that was due primarily to a 5.9% increase in the number of checking accounts that resulted from the Bank’s continuing focus on growing core deposit relationships;

 

    A $32,000 decrease in the net loss from sales and write-downs of other real estate owned to $3,000 for 2014 from $35,000 for 2013. The $3,000 net loss for 2014 included write-downs of $26,000 that were partly offset by net gains of $23,000 from the sale of 8 properties with a total book value of $900,000. The net loss for 2013 included write-downs totaling $283,000, including a write-down of $141,000 related to a high-end single family property, offset in part by a $154,000 gain on the sale of a single-family residential property with the potential for increased value when converted to commercial use.

 

    A $60,000 increase in other real estate owned income to $280,000 that resulted primarily from the January 2014 collection of $26,000 in delinquent rent from a tenant of a commercial strip center.

Other Expense

The Company recorded a $1.1 million, or 6.9%, increase in total other expense to $17.2 million for 2014, compared to $16.1 million for 2013, due primarily to the following major differences:

 

    A $614,000 prepayment penalty paid to the Federal Home Loan Bank related to a borrowing for a match-funded commercial real estate loan;

 

    A $323,000, or 3.6%, increase in salaries and employee benefits to $9.3 million for 2014 from $9.0 million for 2013 that was due in part to $155,000 of expense related to the two new banking centers opened in the last half of 2014, and a $71,000 increase in the expense of our frozen multi-employer defined benefit retirement plan;

 

    A $168,000 increase in marketing expense to $529,000 for 2014 that related primarily to media advertising to build brand awareness in the greater Indianapolis metropolitan area;

 

    A $149,000 increase in legal and professional fees to $723,000 that resulted primarily from a $72,000 increase in legal fees, a $38,000 increase in fees related to successful appeals of real estate tax assessments on office properties and other real estate owned, and a $16,000 increase in recruiting fees;

 

    A $90,000 increase in data processing expense to $1.0 million for 2014 related primarily to our cost to support greater use of new technology by our customers; and

 

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    A $102,000 increase in other noninterest expense to $1.7 million that resulted primarily from a $101,000 increase in expense related to split-dollar life insurance agreements; partly offset by

 

    A $127,000 decrease in FDIC insurance premiums that resulted primarily from a reduction in the Bank’s assessment rate;

 

    An $84,000 decrease in other real estate owned expense to $277,000, due primarily to real estate tax refunds from successful appeals of assessments that resulted in a $55,000 expense reduction;

 

    A $66,000 decrease in loan expense that resulted primarily from the reversal of $62,000 of loan expense as a result of the repurchase of a non-performing loan by the servicer, and

 

    A $56,000 decrease in furniture and equipment expense to $778,000 that related mostly to reduced ATM maintenance expense and lower depreciation.

Income Tax Expense

We recorded income tax expense of $867,000 on pre-tax income of $3.2 million for 2014, compared to income tax expense of $741,000 on $2.9 million of pre-tax income for 2013. Both years had a significant amount of tax-exempt BOLI income, and tax-exempt income from municipal loans and municipal securities.

 

    We have a deferred state tax asset of $1.4 million that is primarily the result of operating losses sustained since 2003 for state tax purposes. We started recording a valuation allowance against our current period state income tax benefit in 2005 due to our concern that we may not be able to use more than the tax asset already recorded on the books without modifying the use of AIMI, our investment subsidiary, which was liquidated effective December 31, 2009. Operating income from AIMI was not subject to state income taxes under state law, and is the primary reason for the tax asset. The valuation allowance was $608,000 at December 31, 2014.

 

    The Company had a deferred federal tax asset of $3.7 million at December 31, 2014, that was composed of $70,000 of tax benefit from a net operating loss carryforward of $205,000, $904,000 related to temporary differences between book and tax income, and $2.7 million in tax credits. The federal loss carryforward expires in 2026, and the tax credits begin to expire in 2023. Included in the $2.7 million of tax credits available to offset future federal income tax are approximately $2.0 million of alternative minimum tax credits which have no expiration date. Management believes that the Company will be able to utilize the benefits recorded for loss carryforwards and credits within the allotted time periods.

 

    In addition to the liquidation of AIMI, the Bank has initiated several strategies designed to expedite the use of both the deferred state tax asset and the deferred federal tax asset. Through sales of $34.5 million of municipal securities and only one purchase since December 31, 2006, that segment of the investment securities portfolio has been reduced to $2.3 million. The proceeds from these sales have been reinvested in taxable financial instruments. The Bank periodically evaluates a sale/leaseback transaction that could result in a taxable gain on its office properties, and also allow the Bank to convert nonearning assets to earnings assets that will produce taxable income. Additionally, the Bank is exploring options related to reducing its current investment in tax-exempt bank owned life insurance policies that involve the reinvestment of the proceeds in taxable financial instruments with a similar or greater risk-adjusted after-tax yield. Sales of banking centers not important to long-term growth objectives that would result in taxable gains and reduced operating expenses could be considered by the Bank.

 

    The effective tax rate was 26.8% in 2014, which resulted from $3.2 million in pre-tax income with income tax of $867,000, compared to an effective tax rate of 25.3% for 2013 that resulted from $2.9 million in pre-tax income coupled with a $741,000 income tax expense. The primary difference in the effective tax rate and the statutory tax rates in both 2014 and 2013 relates to the cash value of life insurance, municipal loans and municipal securities income.

 

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See Note 10 to the Consolidated Financial Statements for more information relating to income taxes

Liquidity and Capital Resources

Liquidity is the ability to meet current and future obligations of a short-term nature. Historically, funds provided by operations, loan repayments and new deposits have been our principal sources of liquid funds. In addition, we have the ability to obtain funds through the sale of new mortgage loans, through borrowings from the FHLB system, and through the brokered certificates market. We regularly adjust the investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities and (4) the objectives of our asset/liability program.

The Company is a separate entity and apart from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for the payment of dividends declared for its shareholders, and the payment of interest on its subordinated debentures. At times, the Company has repurchased its stock. Substantially all of the Company’s operating cash is obtained from subsidiary service fees and dividends. Payment of such dividends to the Company by the Bank is limited under Indiana law.

At December 31, 2014, we had $28.5 million in loan commitments outstanding and $59.9 million of additional commitments for line of credit receivables.

Certificates of deposit due within one year of December 31, 2014 totaled $82.2 million, or 21.7%, of total deposits. If these maturing certificates of deposit do not remain with us, other sources of funds must be used, including other certificates of deposit, brokered CDs, and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than currently paid on the certificates of deposit due on or before December 31, 2015. However, based on past experiences we believe that a significant portion of the certificates of deposit will remain. We have the ability to attract and retain deposits by adjusting the interest rates offered. We held no brokered CDs at December 31, 2014 and 2013.

Our primary investing activities are the origination of loans and purchase of securities. In 2014, our loan originations totaled $97.4 million, and we had purchases of four residential real estate loans totaling $155,000.

Financing activities consist primarily of activity in deposit accounts, including brokered certificates of deposit, and FHLB advances. Deposit flows are affected by the overall level of interest rates, the interest rates and products we offer, and our local competitors and other factors. Deposit account balances increased by $16.2 million in 2014. We had FHLB advances of $28.0 million and $33.0 million at December 31, 2014 and 2013, respectively.

The Bank is subject to various regulatory capital requirements set by the FDIC, including a risk-based capital measure. The Company is also subject to similar capital requirements set by the Federal Reserve Bank. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At December 31, 2014, both the Company and the Bank exceeded all of regulatory capital requirements and are considered “well capitalized” under regulatory guidelines.

Off-Balance-Sheet Arrangements

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded on our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. See Note 17 of the Notes to Consolidated Financial Statements.

We do not have any off-balance-sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

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Impact of Inflation and Changing Prices

The consolidated financial statements and related data presented in this report have been prepared in accordance with generally accepted accounting principles. This requires the measurement of financial position and operating results in terms of historical dollars without consideration of changes in the relative purchasing power of money over time due to inflation.

Virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or at the same rate as changes in the prices of goods and services, which are directly affected by inflation, although interest rates may fluctuate in response to perceived changes in the rate of inflation.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Not applicable as issuer is a smaller reporting company.

 

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Item 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page  

Management’s Report on Internal Control Over Financial Reporting

     57   

Report of Independent Registered Public Accounting Firm

     58   

Consolidated Balance Sheets at December 31, 2014 and 2013

     59   

Consolidated Statements of Income for Each of the Two Years in the Period Ended December 31, 2014

     60   

Consolidated Statements of Comprehensive Income for Each of the Two Years in the Period Ended December  31, 2014

     61   

Consolidated Statements of Shareholders’ Equity for Each of the Two Years in the Period Ended December 31, 2014

     62   

Consolidated Statements of Cash Flows for Each of the Two Years in the Period Ended December 31, 2014

     63   

Notes to Consolidated Financial Statements

     64   

 

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MANAGEMENT’S REPORT OF INTERNAL CONTROL OVER FINANCIAL

PROCEDURES AND FINANCIAL STATEMENTS

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The internal control process has been designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.

Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014, utilizing the framework established in Internal Control – Integrated Framework issued in 1992 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2014 is effective.

Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail, transactions and dispositions of assets; and provide reasonable assurances that: (1) transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States; (2) receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements are prevented or timely detected.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

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Report of Independent Registered Public Accounting Firm

Audit Committee, Board of Directors and Shareholders

Ameriana Bancorp

New Castle, Indiana

We have audited the accompanying consolidated balance sheets of Ameriana Bancorp as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for the years then ended. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing auditing procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits also included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ameriana Bancorp as of December 31, 2014 and 2013, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

/s/ BKD, LLP
Indianapolis, Indiana
March 26, 2015

 

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Ameriana Bancorp

Consolidated Balance Sheets

(in thousands, except share data)

 

     December 31,  
     2014     2013  

Assets

    

Cash on hand and in other institutions

   $ 6,020      $ 5,049   

Interest-bearing demand deposits

     27,122        35,818   
  

 

 

   

 

 

 

Cash and cash equivalents

  33,142      40,867   

Interest-bearing time deposits

  4,164      2,974   

Investment securities available for sale, at fair value

  48,084      37,803   

Investment securities held to maturity, at amortized cost

  7,082      2,347   

Loans held for sale

  332      —     

Loans, net of allowance for loan losses of $3,903 and $3,993

  316,113      312,035   

Premises and equipment, net

  15,511      14,686   

Stock in Federal Home Loan Bank

  3,753      4,472   

Goodwill

  656      656   

Cash value of life insurance

  28,446      27,731   

Other real estate owned

  6,639      5,171   

Other assets

  8,896      9,862   
  

 

 

   

 

 

 

Total assets

$ 472,818    $ 458,604   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

Liabilities

Deposits

Noninterest-bearing

$ 61,063    $ 52,747   

Interest-bearing

  317,884      309,954   
  

 

 

   

 

 

 

Total deposits

  378,947      362,701   

Borrowings

  45,810      50,810   

Drafts payable

  1,298      1,503   

Other liabilities

  5,711      5,877   
  

 

 

   

 

 

 

Total liabilities

  431,766      420,891   
  

 

 

   

 

 

 

Commitments and contingencies

Shareholders’ equity

Preferred stock - 5,000,000 shares authorized and unissued

  —        —     

Common stock, $1.00 par value

Authorized 15,000,000 shares

Issued – 3,245,684 and 3,215,752 shares

  3,246      3,216   

Outstanding – 3,020,684 and 2,990,752 shares

Additional paid-in capital

  1,657      1,176   

Retained earnings

  38,785      36,659   

Accumulated other comprehensive income (loss)

  362      (340

Treasury stock – 225,000 and 225,000 shares

  (2,998   (2,998
  

 

 

   

 

 

 

Total shareholders’ equity

  41,052      37,713   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

$ 472,818    $ 458,604   
  

 

 

   

 

 

 

See notes to consolidated financial statements

 

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Ameriana Bancorp

Consolidated Statements of Income

(in thousands, except for share data)

 

     Year Ended December 31,  
     2014     2013  

Interest Income

    

Interest and fees on loans

   $ 16,628      $ 15,924   

Interest on mortgage-backed securities

     1,026        634   

Interest on investment securities

     176        178   

Other interest and dividend income

     316        244   
  

 

 

   

 

 

 

Total interest income

  18,146      16,980   
  

 

 

   

 

 

 

Interest Expense

Interest on deposits

  1,646      1,663   

Interest on borrowings

  1,351      1,340   
  

 

 

   

 

 

 

Total interest expense

  2,997      3,003   
  

 

 

   

 

 

 

Net Interest Income

  15,149      13,977   

Provision for loan losses

  322      755   
  

 

 

   

 

 

 

Net Interest Income After Provision for Loan Losses

  14,827      13,222   
  

 

 

   

 

 

 

Other Income

Other fees and service charges

  2,679      2,451   

Brokerage and insurance commissions

  1,583      1,640   

Net realized and recognized gains on available-for-sale securities (includes $167 for the year ended December 31, 2013 related to accumulated other comprehensive income reclassifications)

  —        167   

Gains on sales of loans and servicing rights

  170      511   

Net loss from sales and write-downs of other real estate owned

  (3   (35

Other real estate owned income

  280      220   

Increase in cash value of life insurance

  716      720   

Other

  192      127   
  

 

 

   

 

 

 

Total other income

  5,617      5,801   
  

 

 

   

 

 

 

Other Expense

Salaries and employee benefits

  9,342      9,019   

Net occupancy expense

  1,469      1,486   

Furniture and equipment expense

  778      834   

Legal and professional fees

  723      574   

FDIC insurance premiums and assessments

  381      508   

Data processing expense

  1,007      917   

Printing and offices supplies

  284      264   

Marketing expense

  529      361   

Other real estate owned expense

  277      361   

Loan expense

  130      196   

Prepayment penalty on borrowing

  614      —     

Other

  1,677      1,575   
  

 

 

   

 

 

 

Total other expense

  17,211      16,095   
  

 

 

   

 

 

 

Income Before Income Taxes

  3,233      2,928   

Income tax expense (includes $57 for the year ended December 31, 2013 related to income tax expense from reclassification items)

  867      741   
  

 

 

   

 

 

 

Net Income

$ 2,366    $ 2,187   
  

 

 

   

 

 

 

Basic and Diluted Earnings Per Share

$ 0.79    $ 0.73   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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Ameriana Bancorp

Consolidated Statements of Comprehensive Income

(In thousands)

 

     Year Ended December 31,  
     2014      2013  

Net Income

   $ 2,366       $ 2,187   

Unrealized appreciation (depreciation) on available-for-sale securities, net of tax expense of $366 and net of tax benefit of $468 for the years ended December 31, 2014 and December 31, 2013, respectively

     702         (916

Less: reclassification adjustment for realized gains included in net income, net of taxes of $57 for the year ended December 31, 2013

     —           110   
  

 

 

    

 

 

 

Other comprehensive income (loss)

  702      (1,026
  

 

 

    

 

 

 

Comprehensive income

  3,068      1,161   
  

 

 

    

 

 

 

See notes to consolidated financial statements.

 

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Ameriana Bancorp

Consolidated Statements of Shareholders’ Equity

(In thousands, except for per share data)

 

     Common
Stock
     Additional
Paid-in
Capital
     Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Treasury
Stock
    Total  

Balance at December 31, 2012

   $ 3,214       $ 1,052       $ 34,592      $ 686      $ (2,998   $ 36,546   

Net Income

           2,187            2,187   

Other comprehensive loss

             (1,026       (1,026

Share-based compensation

        104               104   

Exercise of stock options

     2         20               22   

Dividends declared ($0.04 per share)

           (120         (120
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

$ 3,216    $ 1,176    $ 36,659    $ (340 $ (2,998 $ 37,713   

Net Income

  2,366      2,366   

Other comprehensive income

  702      702   

Share-based compensation

  74      74   

Exercise of stock options

  30      387      417   

Tax benefit realized from exercise of stock options

  20      20   

Dividends declared ($0.08 per share)

  (240   (240
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

$ 3,246    $ 1,657    $ 38,785    $ 362    $ (2,998 $ 41,052   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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Ameriana Bancorp

Consolidated Statements of Cash Flows

(in thousands, except share data)

 

     Year Ended December 31,  
     2014     2013  

Operating Activities

    

Net income

   $ 2,366      $ 2,187   

Items not requiring (providing) cash

    

Provision for losses on loans

     322        755   

Depreciation and amortization

     1,298        1,446   

Increase in cash value of life insurance

     (716     (720

Gain on sale of investments

     —          (167

Deferred taxes

     341        147   

Loss on sale or write-down of other real estate owned

     3        35   

Share-based compensation

     74        104   

Mortgage loans originated for sale

     (4,997     (14,076

Proceeds from sale of mortgage loans

     4,773        15,178   

Gains on sale of mortgage loans and servicing rights

     (170     (511

Increase in accrued interest payable

     18        4   

Other adjustments

     (31     1,605   
  

 

 

   

 

 

 

Net cash provided by operating activities

  3,281      5,987   
  

 

 

   

 

 

 

Investing Activities

Purchases of available for sale securities

  (16,262   (18,195

Purchases of held to maturity securities

  (4,822   —     

Proceeds/principal from sale of available-for-sale securities

  —        10,184   

Net change in interest-bearing time deposits

  (1,190   2,730   

Principal collected on mortgage-backed securities

  6,858      7,730   

Net change in loans

  (6,801   149   

Proceeds from sales of other real estate owned

  923      1,341   

Net purchases and construction of premises and equipment

  (1,790   (1,142

Proceeds from stock repurchased by Federal Home Loan Bank

  719      —     
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

  (22,365   2,797   
  

 

 

   

 

 

 

Financing Activities

Net change in demand and savings deposits

  24,803      (1,105

Net change in certificates of deposit

  (8,557   7,103   

(Decrease) increase in drafts payable

  (205   260   

Proceeds from long-term borrowings

  —        5,000   

Repayment of long-term borrowings

  (5,000   —     

Net change in advances by borrowers for taxes and insurance

  111      70   

Proceeds from exercise of stock options

  417      22   

Cash dividends paid

  (210   (120
  

 

 

   

 

 

 

Net cash provided by financing activities

  11,359      11,230   
  

 

 

   

 

 

 

Change in Cash and Cash Equivalents

  (7,725   20,014   

Cash and Cash Equivalents at Beginning of Year

  40,867      20,853   
  

 

 

   

 

 

 

Cash and Cash Equivalents at End of Year

$ 33,142    $ 40,867   
  

 

 

   

 

 

 

    

Supplemental information:

Interest paid on deposits

$ 1,648    $ 1,662   

Interest paid on borrowings

$ 1,361    $ 1,337   

Income tax paid

$ 190    $ 457   

Non-cash supplemental information:

Transfer from loans to other real estate owned

$ 2,401    $ 266   

See notes to consolidated financial statements.

 

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Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

1. Nature of Operations and Summary of Significant Accounting Policies

Principles of Consolidation: The consolidated financial statements include the accounts of Ameriana Bancorp (the “Company”) and its wholly-owned subsidiary, Ameriana Bank (the “Bank”), and the Bank’s wholly-owned subsidiaries, Ameriana Financial Services, Inc., and Ameriana Insurance Agency, Inc. All significant intercompany accounts and transactions have been eliminated.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The Company is a bank holding company whose principal activity is the ownership and management of the Bank and its subsidiaries. The Bank provides various banking services and engages in loan servicing activities for investors and operates in a single significant business segment. The Bank is subject to the regulation of the Indiana Department of Financial Institutions (the “DFI”) and the Federal Deposit Insurance Corporation (the “FDIC”). The Company’s gross revenues are substantially earned from the various banking services provided by the Bank. The Company also earns brokerage and insurance commissions from the services provided by the other subsidiaries.

The Bank generates loans and receives deposits from customers located primarily in the Indianapolis metropolitan area and east central Indiana. Loans are generally secured by specific items of collateral including real property, business assets, or consumer assets. The Company has sold various loans to investors while retaining the servicing rights.

Cash and Cash Equivalents

The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2014 and 2013, cash equivalents consisted primarily of interest-bearing deposits with the Federal Reserve Bank of Chicago.

Beginning January 1, 2013, noninterest-bearing transaction accounts became subject to the $250,000 limit on FDIC insurance per covered institution. At December 31, 2014, the Company’s cash accounts exceeded federally insured limits by $30,313,000, with $30,160,000 held by the Federal Reserve Bank of Chicago and $153,000 held by the Federal Home Loan Bank of Indianapolis. Neither of those banks are insured.

Investment Securities

Debt securities are classified as held to maturity when the Company has the positive intent and ability to hold the securities to maturity. Securities held to maturity are carried at amortized cost. Debt securities not classified as held to maturity are classified as available for sale. Securities available for sale are carried at fair value with unrealized gains and losses reported separately in accumulated comprehensive income (loss), net of tax.

Amortization of premiums and accretion of discounts are recorded using the interest method as interest income from securities. Realized gains and losses are recorded as net security gains (losses). Gains and losses on sales of securities are determined on the specific identification method.

With regard to other-than-temporary impairment of debt securities, when the Company does not intend to sell a debt security, and it is more likely than not that the Company will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. For held-to-maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the noncredit portion of a previous other-than-temporary impairment is amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.

 

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Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

For equity securities, when the Company has decided to sell an impaired available-for-sale security and the entity does not expect the fair value of the security to fully recover before the expected time of sale, the security is deemed other-than-temporarily impaired in the period in which the decision to sell is made. The Company recognizes an impairment loss when the impairment is deemed other than temporary even if a decision to sell has not been made.

Valuation Measurements: Valuation methodologies often involve a significant degree of judgment, particularly when there are no observable active markets for the items being valued. In determining fair values for investment securities and residential mortgage loans held for sale, fair values, as defined in ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”), require key judgments affecting how fair value for such assets and liabilities are determined. In addition, the outcomes of valuations have a direct bearing on the carrying amounts for goodwill and intangible assets. To determine the values of these assets and liabilities, as well as the extent to which related assets may be impaired, management makes assumptions and estimates related to discount rates, asset returns, prepayment rates and other factors. The use of different discount rates or other valuation assumptions could produce significantly different results, which could affect the Company’s results of operations.

Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to noninterest income. Gains and losses on loan sales are recorded in noninterest income, and direct loan origination costs and fees are deferred at origination of the loan and are recognized in noninterest income upon sale of the loan.

Loans are carried at the principal amount outstanding. A loan is impaired when, based on current information or events, it is probable that the Company will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Payments with insignificant delays not exceeding 90 days outstanding are not considered impaired. Certain non-accrual and substantially delinquent loans may be considered to be impaired. Generally, loans are placed on non-accrual status at 90 days past due and accrued interest is reversed against earnings, unless the loan is well-secured and in the process of collection. The Company considers its investment in one-to four- family residential loans and consumer loans to be homogeneous and, therefore, they are generally excluded from separate identification of evaluation of impairment. Interest income is accrued on the principal balances of loans. The accrual of interest on impaired and non-accrual loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due.

When interest accrual is discontinued, all unpaid accrued interest is reversed when considered uncollectible. Generally, interest income is subsequently recognized only to the extent cash payments are received. Certain loan fees and direct costs are being deferred and amortized as an adjustment of yield on the loans over the contractual lives of the loans. When a loan is paid off or sold, any unamortized loan origination fee balance is credited to income.

Allowance for Loan Losses is maintained at a level believed adequate by management to absorb inherent losses in the loan portfolio. Management’s determination of the adequacy of the allowance is based on an evaluation of the portfolio including consideration of past loan loss experience, current economic conditions, size, growth and composition of the loan portfolio, the probability of collecting all amounts due, and other relevant factors. Loan losses for impaired loans are measured by the present value of expected future cash flows, or the fair value of the collateral of the loan, if collateral dependent. The allowance is increased by provisions for loan losses charged against income. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. Management believes that as of December 31, 2014, the allowance for loan losses was adequate based on information then available. A worsening or protracted economic decline in the areas within which the Company operates would increase the likelihood of additional losses due to credit and market risks and could create the need for additional loss reserves.

Premises and Equipment are stated at cost less accumulated depreciation. Depreciation is computed principally by the straight-line method over the estimated useful lives of the related assets. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized.

 

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Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

Stock in Federal Home Loan Bank is the amount of stock the Company is required to own as determined by regulation. This stock is carried at cost and represents the amount at which it can be sold back to the Federal Home Loan Bank (the “FHLB”). The Company reviewed the FHLB stock and based on current performance of the Federal Home Loan Bank of Indianapolis, the Company determined there was no impairment of this stock at December 31, 2014.

Goodwill is tested at least annually for impairment. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the financial statements. There was no impairment of goodwill recognized in 2014 or 2013.

Other Real Estate Owned: Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net income or expense from foreclosed assets.

Earnings per Share is computed by dividing net income by the weighted-average number of common shares and divided by dilutive stock options outstanding during each year.

Mortgage Servicing Rights on originated loans are capitalized by estimating the fair value of the streams of net servicing revenues that will occur over the estimated life of the servicing arrangement. Capitalized servicing rights, which include purchased servicing rights, are amortized in proportion to and over the period of estimated servicing revenues. At least annually, the Bank engages a third party consulting firm to perform a valuation analysis, that is reviewed by management, of the fair value of the mortgage servicing rights. Based on the most recent valuation as of November 30, 2014, there was a $4,000 valuation allowance as of December 31, 2014, compared to none at December 31, 2013.

Stock Options: The Company has stock plans which are described more fully in Note 10.

Income Tax in the consolidated statements of income includes deferred income tax provisions or benefits for all significant temporary differences in recognizing income and expenses for financial reporting and income tax purposes. The Company and its subsidiaries file consolidated tax returns. The Company and its subsidiaries are charged or given credit for income taxes as though separate returns were filed. The Company recognizes interest and penalties on income taxes as a component of income tax expense.

The Company accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense, current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effect of the differences between the book and tax basis of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

Uncertain tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term “more likely than not” means a likelihood of more than 50 percent; the terms examined and upon examination also included resolution of the related appeals or litigation processes, if any. A tax position that meets the “more likely than not” recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the “more likely than not” recognition threshold considers the facts, circumstances and information available at the reporting date, and is subject to management’s judgment.

 

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Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

Under U.S. GAAP, a valuation allowance is required to be recognized if it is “more likely than not” that a deferred tax asset will not be realized. The determination of the realizability of the deferred tax asset is highly subjective and dependent upon judgment concerning our evaluation of both positive and negative evidence, our forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. Positive evidence includes the existence of taxes paid in available carry-back years as well as the probability that taxable income will be generated in future periods, while negative evidence includes any cumulative losses in the current year and prior two years and general business and economic trends. At December 31, 2014 and December 31, 2013 we determined that our existing valuation allowance was adequate, largely based on available tax planning strategies and our projections of future taxable income. Any reduction in estimated future taxable income may require us to increase the valuation allowance against our deferred tax assets. Any required increase to the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.

 

2. Restriction on Cash and Due From Banks

The Bank is required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank. The reserve required at December 31, 2014 was $458,000.

 

3. Investment Securities

The amortized cost and approximate fair values of available for sale securities, together with unrealized gains and losses, are as follows:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Available for sale at December 31, 2014

           

Ginnie Mae and GSE mortgage-backed pass-through securities

   $ 43,675       $ 566       $ 43       $ 44,198   

Ginnie Mae collateralized mortgage obligations

     2,053         —           34         2,019   

Mutual fund

     1,826         41         —           1,867   
  

 

 

    

 

 

    

 

 

    

 

 

 
$ 47,554    $ 607    $   77    $ 48,084   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to Maturity at December 31, 2014

GSE mortgage-backed pass-through securities

$ 4,736    $ 20      —      $ 4,756   

Municipal securities

  2,346      8      —        2,354   
  

 

 

    

 

 

    

 

 

    

 

 

 
$ 7,082    $ 28      —      $ 7,110   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Available for sale at December 31, 2013

           

Ginnie Mae and GSE mortgage-backed pass-through securities

   $ 34,205       $ 100       $ 499       $ 33,806   

Ginnie Mae collateralized mortgage obligations

     2,349         —           135         2,214   

Mutual fund

     1,787         —           4         1,783   
  

 

 

    

 

 

    

 

 

    

 

 

 
$ 38,341    $ 100    $ 638    $ 37,803   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to Maturity at December 31, 2013

Municipal securities

$ 2,347      —        —      $ 2,347   
  

 

 

    

 

 

    

 

 

    

 

 

 
$ 2,347      —        —      $ 2,347   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

The amortized cost and fair value of securities at December 31, 2014, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     Available for Sale  
     Amortized
Cost
     Fair
Value
 

One to five years

   $ —         $ —     

Five to ten years

     —           —     

After ten years

     —           —     
  

 

 

    

 

 

 
  —        —     

Ginnie Mae and GSE mortgage-backed pass-through securities

  43,675      44,198   

Ginnie Mae collateralized mortgage obligations

  2,053      2,019   

Mutual funds

  1,826      1,867   
  

 

 

    

 

 

 
$ 47,554    $ 48,084   
  

 

 

    

 

 

 
     Held to Maturity  
     Amortized
Cost
     Fair
Value
 

Less than one year

   $ 70       $ 70   

One to five years

     370         371   

Five to ten years

     610         612   

After ten years

     1,296         1,301   
  

 

 

    

 

 

 
  2,346      2,354   

GSE mortgage-backed pass-through securities

  4,736      4,756   
  

 

 

    

 

 

 
$ 7,082    $ 7,110   
  

 

 

    

 

 

 

Certain investment securities are reported in the consolidated financial statements at an amount less than their historical cost. Total fair value of these investments at December 31, 2014 and December 31, 2013 were $12,122,000 and $32,002,000, respectively, which was approximately 22.0% and 79.6% of the Company’s investment portfolio, respectively.

Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

 

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Table of Contents

Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

The following table shows the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2014 and December 31, 2013:

 

At December 31, 2014

   Less Than 12 Months      12 Months or Longer      Total  
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

Ginnie Mae and GSE mortgage-backed pass-through securities

   $ 5,540       $ 5       $ 4,563       $ 38       $ 10,103       $ 43   

Ginnie Mae collateralized mortgage obligations

     —           —           2,019         34         2,019         34   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
$ 5,540    $ 5    $ 6,582    $ 72    $ 12,122    $ 77   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2013

   Less Than 12 Months      12 Months or Longer      Total  
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
 

Ginnie Mae and GSE mortgage-backed pass-through securities

   $ 27,963       $ 498       $ 42       $ 1       $ 28,005       $ 499   

Ginnie Mae collateralized mortgage obligations

     2,214         135         —           —           2,214         135   

Mutual fund

     1,783         4         —           —           1,783         4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
$ 31,960    $ 637    $ 42    $ 1    $ 32,002    $ 638   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage-backed pass-through securities: The contractual cash flows of those investments are guaranteed by either Ginnie Mae, a U.S. Government agency, or by U.S. Government-sponsored entities, Fannie Mae and Freddie Mac, institutions which the U.S. Government has affirmed its commitment to support. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment.

Collateralized mortgage obligations: The contractual cash flows of those investments are guaranteed by Ginnie Mae, a U.S. Government agency. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment.

Municipal securities: The municipal securities consisted of non-rated local issue tax increment revenue bonds.

Mutual fund: The mutual fund balance consisted of an investment in the CRA Qualified Investment mutual fund, whose portfolio composition is primarily in debt securities with an average credit quality rating of AAA.

Investment securities with a total market value of $8,499,000 and $8,914,000 were pledged at December 31, 2014 and December 31, 2013, respectively, to secure a repurchase agreement.

There were no sales of available for sale securities during the year ended December 31, 2014. A gross gain of $178,000 and gross losses of $11,000 resulting from sales of available for sale securities were realized during the year ended December 31, 2013 with a tax expense of $57,000.

 

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Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

4. Loans

Classes of loans include:

 

     December 31,  
     2013      2013  

Real estate loans:

     

Commercial

   $ 111,455       $ 104,766   

Residential

     163,839         168,529   

Construction

     13,570         11,382   

Commercial loans and leases

     29,358         29,254   

Municipal loans

     785         997   

Consumer loans

     2,018         2,032   
  

 

 

    

 

 

 
  321,025      316,960   
  

 

 

    

 

 

 

Deduct

Undisbursed loan proceeds

  302      248   

Deferred loan fees, net

  707      684   

Allowance for loan losses

  3,903      3,993   
  

 

 

    

 

 

 
  4,912      4,925   
  

 

 

    

 

 

 
$ 316,113    $ 312,035   
  

 

 

    

 

 

 

Executive officers and directors of Ameriana Bancorp and significant subsidiaries and their related interests are loan clients of Ameriana Bancorp’s affiliate bank in the normal course of business. An analysis of the 2014 and 2013 activity of these loans is as follows:

 

     2014      2013  

Balance at beginning of year

   $ 4,663       $ 5,571   

New loans

     —           —     

Repayments

     (41      (908
  

 

 

    

 

 

 

Balance at end of year

$ 4,622    $ 4,663   
  

 

 

    

 

 

 

At December 31, 2014, unfunded commitment amounts not included in the outstanding loan balances shown above totaled $100,000.

 

5. Allowance for Loan Losses

The risk characteristics of each loan portfolio segment are as follows:

Commercial Real Estate: These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Bank’s commercial real estate portfolio are diverse in terms of type and geographic location. Management monitors and evaluates commercial real estate loans based on collateral and risk grade criteria. As a general rule, the Bank avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

 

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Table of Contents

Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

Construction Real Estate: Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Bank until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, timely completion and sale of the property, governmental regulation of real property, general economic conditions and the availability of long-term financing.

Commercial Loans and Leases: Commercial loans and leases are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans and leases may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Residential and Consumer: With respect to residential loans that are secured by one-to four-family residences and are generally owner occupied, the Bank generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in one-to four-family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Municipal: Municipal loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. Most municipal loans are secured by the full faith and credit of the municipality. The availability of funds for the repayment of these loans may be substantially dependent on the ability of the municipality to collect taxes or other revenue.

Allowance for Loan and Lease Losses Methodology:

Bank policy is designed to ensure that an adequate allowance for loan and lease losses (“ALLL”) will be maintained. Primary responsibility for ensuring that the Bank has in place processes to consistently assess the adequacy of the ALLL rests with the Board. The Board has charged the Chief Credit Officer (“CCO”) with responsibility for establishing the methodology to be used and to assess the adequacy of the ALLL quarterly. The methodology will be reviewed and affirmed by the Loan Review Officer. Quarterly the Board will review recommendations from the CCO to adjust the allowance as appropriate.

The methodology employed by the CCO for each portfolio segment will at a minimum contain the following:

 

  1) Loans will be segmented by type of loan.

 

  2) Loans will be further segmented by risk grades.

 

  3) The required ALLL for types of performing homogeneous loans which do not have a specific reserve will be determined by applying a factor based on historical losses averaged over the 12 quarters prior to the most recent quarter. In those instances, where the Bank’s historical experience is not available, the CCO will develop factors based on industry experience and best practices.

 

  4) All criticized and classified loans will be tested for impairment by applying one of three methodologies:

 

  a. Present value of future cash flows;

 

  b. Fair value of collateral less cost to sell; or

 

  c. The loan’s observable market price.

 

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Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

  5) Loans tested for impairment will be removed from other pools to prevent layering (double-counting).

 

  6) The required ALLL for each group of loans will be added together to determine the total required ALLL for the Bank. The required ALLL will be compared to the current ALLL to determine the required provision to increase the ALLL or credit to decrease the ALLL.

The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Bank over the 12 quarters prior to the most recent quarter. Management believes the historical loss experience methodology is appropriate in the current economic environment, as it captures loss rates that are comparable to the current period being analyzed.

We also factor in the following qualitative considerations:

 

  1) Changes in policies and procedures;

 

  2) Changes in national, regional and local economic and business conditions;

 

  3) Changes in the composition and size of the portfolio and in the terms of loans;

 

  4) Changes in the experience, ability and depth of lending management and other relevant staff;

 

  5) Changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans;

 

  6) Changes in the quality of the Bank’s loan review system;

 

  7) Changes in the value of underlying collateral for collateral-dependent loans;

 

  8) The existence and effect of any concentration of credit, and changes in the level of such concentrations; and

 

  9) The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing portfolio.

The following table presents the balance and activity in allowance for loan losses and the recorded investment in loans and impairment methods as of December 31, 2014 (dollars in thousands):

Allowance for Loan Losses and Recorded Investment In Loans

For Year Ended December 31, 2014

 

     Commercial
Real Estate
Loans
    Residential
Real Estate
Loans
    Construction
Real Estate
Loans
    Commercial
Loans and
Leases
    Municipal
Loans
     Consumer
Loans
    Total  

Balance at beginning of year

   $ 1,165      $ 1,743      $ 356      $ 623      $ —         $ 106      $ 3,993   

Provision (credit) for losses

     (11     382        (158     42        —           67        322   

Charge-offs (1)

     (106     (204     (46     (59     —           (90     (505

Recoveries

     11        13        4        31        —           34        93   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance at end of period

$ 1,059    $ 1,934    $ 156    $ 637    $ —      $ 117    $ 3,903   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Ending allowance balance:

Individually evaluated for impairment

$ —      $ 319    $ —      $ 166    $ —      $ 12    $ 497   

Collectively evaluated for impairment

  1,059      1,615      156      471      —        105      3,406   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total

$ 1,059    $ 1,934    $ 156    $ 637      —      $ 117    $ 3,903   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Ending loan balance:

Individually evaluated for impairment

$ 4,263    $ 3,967    $ 2,004    $ 516    $ —      $ 89    $ 10,839   

Collectively evaluated for impairment

  107,192      159,872      11,566      28,842      785      1,929      310,186   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total

$ 111,455    $ 163,839    $ 13,570    $ 29,358    $ 785    $ 2,018    $ 321,025   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

The following table presents the balance and activity in allowance for loan losses and the recorded investment in loans and impairment methods as of December 31, 2013 (dollars in thousands):

Allowance for Loan Losses and Recorded Investment In Loans

For Year Ended December 31, 2013

 

     Commercial
Real Estate
Loans
    Residential
Real Estate
Loans
    Construction
Real Estate
Loans
    Commercial
Loans and
Leases
    Municipal
Loans
     Consumer
Loans
    Total  

Balance at beginning of year

   $ 789      $ 1,504      $ 785      $ 1,080      $ —         $ 81      $ 4,239   

Provision (credit) for losses

     855        638        (448     (358     —           68        755   

Charge-offs (1)

     (479     (441     (2     (137     —           (81     (1,140

Recoveries

     —          42        21        38        —           38        139   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance at end of period

$ 1,165    $ 1,743    $ 356    $ 623    $ —      $ 106    $ 3,993   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Ending allowance balance:

Individually evaluated for impairment

$ 96    $ 495    $ 285    $ 148    $ —      $ 8    $ 1,032   

Collectively evaluated for impairment

  1,069      1,248      71      475      —        98      2,961   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total

$ 1,165    $ 1,743    $ 356    $ 623      —      $ 106    $ 3,993   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Ending loan balance:

Individually evaluated for impairment

$ 4,836    $ 6,266    $ 4,113    $ 732    $ —      $ 69    $ 16,016   

Collectively evaluated for impairment

  99,930      162,263      7,269      28,522      997      1,963      300,944   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total

$ 104,766    $ 168,529    $ 11,382    $ 29,254    $ 997    $ 2,032    $ 316,960   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Policy for Charging Off Loans:

A loan should be charged off at any point in time when it no longer can be considered a bankable asset, meaning collectable within the parameters of policy. The Bank shall not renew any loan, or put a loan on a demand basis, only to defer a problem, nor is it appropriate to attempt long-term recoveries while reporting loans as assets. An unsecured loan generally should be charged off no later than when it is 120 days past due as to principal or interest. For loans in the legal process of foreclosure against collateral of real and/or liquid value, the 120-day rule does not apply. Such charge-offs can be deferred until the foreclosure process progresses to the point where the Bank can adequately determine whether or not any ultimate loss will result. In similar instances where other legal actions will cause extraordinary delays, such as the settlement of an estate, yet collateral of value is realizable, the 120-day period could be extended. When a loan is unsecured or not fully collateralized, the loan should be charged off or written down to the documented collateral value rather than merely being placed on non-accrual status.

All charge-offs and forgiveness of debt greater than $50,000 must be approved by the Loan Committee upon recommendation by the CCO. The Loan Committee consists of the Bank’s Chief Executive Officer, Chief Credit Officer, Chief Banking Officer and Loan Review Officer. Charge-offs between $10,000 and $50,000 must be approved by the CCO. Decisions to defer the charge-off of a loan must be approved by the CCO.

 

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Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

Narrative Description of Borrower Rating:

Grade 1 — Highest Quality (Pass)

This loan represents a credit extension of the highest quality. The borrower’s historic (at least five years) cash flows manifest extremely large and stable margins of coverage. Balance sheets are conservative, well capitalized, and liquid. After considering debt service for proposed and existing debt, projected cash flows continue to be strong and provide ample coverage. The borrower typically reflects broad geographic and product diversification and has broad access to alternative financial markets. Also included in this category may be loans secured by U.S. government securities, U.S. government agencies, highly rated municipal bonds, insured savings accounts, and insured certificates of deposit drawn on high quality banks.

Grade 2 — Excellent Quality (Pass)

This loan has a sound primary and secondary source of repayment. The borrower has proven access to alternative sources of financing. This loan carries a low level of risk, with minimal loss exposure. The borrower has the ability to perform according to the terms of the credit facility. The margins of cash flow coverage are strong. Loans secured by high quality traded stocks and lower grade municipal bonds (must still be investment grade).

Grade 3 — Good Quality (Pass)

This loan has a sound primary source of repayment. The borrower may have access to alternative sources of financing, but sources are not as widely available as they are to a higher graded borrower. This loan carries a normal level of risk, with minimal loss exposure. The borrower has the ability to perform according to the terms of the credit facility. The margins of cash flow coverage are satisfactory but vulnerable to more rapid deterioration than the higher quality loans. Real estate loans in this category display advance rates below the suggested maximum, debt coverage well in excess of the suggested level, or are leased beyond the loan term by a “credit” tenant.

Grade 4 — Acceptable Quality (Pass)

The borrower is a reasonable credit risk and demonstrates the ability to repay the debt from normal business operations. Risk factors may include reliability of margins and cash flows, liquidity, dependence on a single product or industry, cyclical trends, depth of management, or limited access to alternative financing sources. Historic financial information may indicate erratic performance, but current trends are positive. Quality of financial information is adequate, but is not as detailed and sophisticated as information found on higher graded loans. If adverse circumstances arise, the impact on the borrower may be significant. All small business loans extended based upon credit scoring should be classified in this category unless deterioration occurs, in which case they should bear one of the below mentioned grades.

Grade 5—Marginal Quality (Pass)

The borrower is an acceptable credit risk and while it can demonstrate it has the ability to repay the debt from normal business operations, the coverage is not as strong as an Acceptable Quality loan. Weakness in one or more areas are defined. Risk factors would typically include a higher leverage position than desirable, low liquidity, weak or sporadic cash flow, the lack of reasonably current and complete financial information, and/or overall financial trends are erratic.

Grade 6 – Elevated Risk, Management Attention (Watch)

The borrower while at origination is not considered a high risk potential, there are characteristics related to the financial condition, and/or a level of concern regarding either or both the primary and secondary source of repayment, that may preclude this from being a pass credit. These credit facilities are considered “pass” credits but exhibit the potential of developing a more serious weakness in their operation going forward. Usually, a credit in this category will be upgraded or downgraded on further analysis within a short period of time.

Grade 7 — Special Mention

These credit facilities have developing weaknesses that deserve extra attention from the loan officer and other management personnel. If the developing weakness is not corrected or mitigated, there may be deterioration in the ability of the borrower to repay the Bank’s debt in the future. This grade should not be assigned to loans which bear certain peculiar risks normally associated with the type of financing involved, unless circumstances have caused the risk to increase to a level higher than would have been acceptable when the credit was originally approved. Loans where actual, not potential, weaknesses or problems are clearly evident and significant should generally be graded in one of the grade categories below.

 

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Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

Grade 8 — Substandard

Loans and other credit extensions bearing this grade are considered to be inadequately protected by the current sound worth and debt service capacity of the borrower or of any pledged collateral. These obligations, even if apparently protected by collateral value, have well-defined weaknesses related to adverse financial, managerial, economic, market, or political conditions which have clearly jeopardized repayment of principal and interest as originally intended. Furthermore, there is the possibility that some future loss will be sustained by the Bank if such weaknesses are not corrected. Clear loss potential, however, does not have to exist in any individual assets classified as substandard.

Grade 9 — Doubtful

Loans and other credit extensions graded “9” have all the weaknesses inherent in those graded “8,” with the added characteristic that the severity of the weaknesses make collection or liquidation in full highly questionable or improbable based upon currently existing facts, conditions, and values. The probability of some loss is extremely high, but because of certain important and reasonably specific factors, the amount of loss cannot be determined. Such pending factors could include merger or liquidation, additional capital injection, refinancing plans, or perfection of liens on additional collateral. Loans in this classification should be placed in nonaccrual status, with collections applied to principal on the Bank’s books.

Grade 10 — Loss

Loans in this classification are considered uncollectible and cannot be justified as a viable asset of the Bank. This classification does not mean the loan has absolutely no recovery value, but that it is neither practical nor desirable to defer writing off this loan even though partial recovery may be obtained in the future.

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of December 31, 2014 and December 31, 2013 (dollars in thousands):

Loan Portfolio Quality Indicators

At December 31, 2014

 

     Commercial
Real Estate
Loans
     Residential
Real Estate
Loans
     Construction
Real Estate
Loans
     Commercial
Loans and
Leases
     Municipal
Loans
     Consumer
Loans
     Total  

Rating:

                    

Pass (Grades 1-5)

   $ 100,095       $ 157,518       $ 10,786       $ 28,516       $ 785       $ 1,929       $ 299,629   

Watch (Grade 6)

     7,097         327         1,721         325         —           —           9,470   

Special Mention (Grade 7)

     —           3,355         —           —           —           —           3,355   

Substandard (Grade 8)

     3,451         427         228         —           —           —           4,106   

Doubtful (Grade 9)

     812         2,212         835         517         —           89         4,465   

Loss (Grade 10)

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 111,455    $ 163,839    $ 13,570    $ 29,358    $ 785    $ 2,018    $ 321,025   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

Loan Portfolio Quality Indicators

At December 31, 2013

 

     Commercial
Real Estate
Loans
     Residential
Real Estate
Loans
     Construction
Real Estate
Loans
     Commercial
Loans and
Leases
     Municipal
Loans
     Consumer
Loans
     Total  

Rating:

                    

Pass (Grades 1-5)

   $ 100,086       $ 160,390       $ 8,541       $ 28,453       $ 997       $ 1,963       $ 300,430   

Watch (Grade 6)

     1,137         —           —           56         —           —           1,193   

Special Mention (Grade 7)

     2,250         3,488         —           13         —           —           5,751   

Substandard (Grade 8)

     942         1,884         1,634         —           —           —           4,460   

Doubtful (Grade 9)

     351         2,767         1,207         732         —           69         5,126   

Loss (Grade 10)

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 104,766    $ 168,529    $ 11,382    $ 29,254    $ 997    $ 2,032    $ 316,960   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For all loan classes, the entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date.

The following tables present the Company’s loan portfolio aging analysis as of December 31, 2014 and December 31, 2013 (dollars in thousands):

Loan Portfolio Aging Analysis

At December 31, 2014

 

     30-59 Days
Past Due (A)
     60-89 Days
Past Due
     Greater than
90 Days
     Total Past
Due
     Current      Total Loans
Receivable
     Total Loans
> 90 days &
Accruing
 

Real estate loans:

                    

Commercial

   $ —         $ —         $ 812       $ 812       $ 110,643       $ 111,455       $ —     

Residential

     1,346         212         1,598         3,156         160,683         163,839         14   

Construction

     —           —           836         836         12,734         13,570         —     

Commercial loans and leases

     80         320         117         517         28,841         29,358         —     

Municipal loans

     —           —           —           —           785         785         —     

Consumer loans

     10         4         1         15         2,003         2,018         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 1,436    $ 536    $ 3,364    $ 5,336    $ 315,689    $ 321,025    $ 15   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(A) Includes $667,000 in loans classified as nonaccrual that are less than 30 days past due, of which $587,000 are residential real estate loans and $80,000 are commercial loans.

 

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Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

Loan Portfolio Aging Analysis

At December 31, 2013

 

     30-59 Days
Past Due (A)
     60-89 Days
Past Due
     Greater than
90 Days
     Total Past
Due
     Current      Total Loans
Receivable
     Total Loans
> 90 days &
Accruing
 

Real estate loans:

                    

Commercial

   $ —         $ —         $ 351       $ 351       $ 104,415       $ 104,766       $ —     

Residential

     1,598         612         2,257         4,467         164,062         168,529         9   

Construction

     1,018         —           188         1,206         10,176         11,382         —     

Commercial loans and leases

     169         —           564         733         28,521         29,254         —     

Municipal loans

     —           —           —           —           997         997         —     

Consumer loans

     36         —           —           36         1,996         2,032         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 2,821    $ 612    $ 3,360    $ 6,793    $ 310,167    $ 316,960    $ 9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(A) Includes $507,000 in loans classified as nonaccrual that are less than 30 days past due, of which $338,000 are residential real estate loans and $169,000 are commercial loans.

Impaired Loans: For all loan classes, a loan is designated as impaired when, based on current information or events, it is probable that the Bank will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Payments with insignificant delays not exceeding 90 days outstanding are not considered impaired. Certain non-accrual and substantially delinquent loans may be considered to be impaired. Generally, loans are placed on non-accrual status at 90 days past due and accrued interest is reversed against earnings, unless the loan is well-secured and in the process of collection. The accrual of interest on impaired and non-accrual loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due.

For all loan classes, when interest accrual is discontinued all unpaid accrued interest is reversed when considered uncollectible. When a loan is in a non-accrual status, all cash payments of interest are applied to loan principal. Should the loan be reinstated to accrual status, all cash payments of interest received while in non-accrual status will be taken into income over the remaining life of the loan using the level yield accounting method.

 

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Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

The following table presents impaired loans as of December 31, 2014 (dollars in thousands):

Impaired Loans

At December 31, 2014

 

     Recorded
Balance
     Unpaid
Principal
Balance
     Specific
Allowance
     Average Investment
in Impaired Loans
(1)
     Interest Income
Recognized
(2)
 

Loans without a specific valuation allowance:

              

Real estate loans:

              

Commercial

   $ 4,263       $ 4,742         N/A       $ 4,025       $ 176   

Residential

     2,686         2,923         N/A         2,342         58   

Construction

     2,004         2,004         N/A         1,744         72   

Commercial loans and leases

     70         99         N/A         221         —     

Municipal loans

     —           —           N/A         —           —     

Consumer loans

     —           —           N/A         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 9,023    $ 9,768      N/A    $ 8,332    $ 306   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans with a specific valuation allowance:

Real estate loans:

Commercial

$ —      $ —      $ —      $ 481    $ 22   

Residential

  1,281      1,340      319      2,806      78   

Construction

  —        —        —        2,368      55   

Commercial loans and leases

  446      495      166      222      —     

Municipal loans

  —        —        —        —        —     

Consumer loans

  89      89      12      81      —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 1,816    $ 1,924    $ 497    $ 5,958    $ 155   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

All Impaired Loans

$ 10,839    $ 11,692    $ 497    $ 14,290    $ 461   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes all loans that were classified as impaired at any time during 2014 (not just impaired loans at December 31, 2014), and their average balance for only the period during which they were classified as impaired.
(2) Interest recorded in income during only the period the loans were classified as impaired, for all loans that were classified as impaired at any time during 2014.

For all loan classes, interest income on loans individually classified as impaired is recognized on a cash basis after all past due and current principal payments have been made.

 

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Table of Contents

Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

The following table presents impaired loans as of December 31, 2013 (dollars in thousands):

Impaired Loans

At December 31, 2013

 

     Recorded
Balance
     Unpaid
Principal
Balance
     Specific
Allowance
     Average Investment
in Impaired Loans
(1)
     Interest Income
Recognized
(2)
 

Loans without a specific valuation allowance:

              

Real estate loans:

              

Commercial

   $ 3,542       $ 3,542         N/A       $ 3,679       $ 184   

Residential

     3,158         3,405         N/A         3,650         112   

Construction

     1,272         1,272         N/A         1,178         13   

Commercial loans and leases

     472         608         N/A         581         1   

Municipal loans

     —           —           N/A         —           —     

Consumer loans

     —           —           N/A         2         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 8,444    $ 8,827      N/A    $ 9,090    $ 310   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans with a specific valuation allowance:

Real estate loans:

Commercial

$ 1,294    $ 1,294    $ 96    $ 1,324    $ 63   

Residential

  3,108      3,151      495      3,023      59   

Construction

  2,841      3,016      285      2,871      102   

Commercial loans and leases

  260      299      148      293      —     

Municipal loans

  —        —        —        —        —     

Consumer loans

  69      69      8      54      —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 7,572    $ 7,829    $ 1,032    $ 7,565    $ 224   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

All Impaired Loans

$ 16,016    $ 16,656    $ 1,032    $ 16,655    $ 534   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes all loans that were classified as impaired at any time during 2013 (not just impaired loans at December 31, 2013), and their average balance for only the period during which they were classified as impaired.
(3) Interest recorded in income during only the period the loans were classified as impaired, for all loans that were classified as impaired at any time during 2013.

For all loan classes, interest income on loans individually classified as impaired is recognized on a cash basis after all past due and current principal payments have been made.

 

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Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

Non-Accrual Loans: Any loan which becomes 90 days delinquent, or has the full collection of principal and interest in doubt, or a portion of principal has been charged off will immediately be placed on non-accrual status. The loan does not have to be placed on non-accrual if the charge-off is part of a Chapter 13 reaffirmation. At the time a loan is placed on non-accrual, all accrued but unpaid interest will be reversed from interest income. Placing the loan on non-accrual does not relieve the borrower of the obligation to repay interest.

For all loan classes, when a loan is in a non-accrual status all cash payments of interest are applied to loan principal.

A loan placed on non-accrual may be restored to accrual status when all delinquent principal and interest has been brought current, and the Bank expects full payment of the remaining contractual principal and interest including any previous charge-offs. The Bank requires a period of satisfactory performance of not less than six months before returning a non-accrual loan to accrual status. Should the loan be reinstated to accrual status, all cash payments of interest received while in non-accrual status will be taken into income over the remaining life of the loan using the level yield accounting method.

The following table presents the Company’s non-accrual loans at December 31, 2014 and December 31, 2013 (dollars in thousands):

Loans Accounted for on a Non-Accrual Basis

 

     At December 31,
2014
     At December 31,
2013
 

Real estate loans:

     

Commercial

   $ 812       $ 351   

Residential

     2,212         2,767   

Construction

     836         1,207   

Commercial loans and leases

     516         733   

Municipal loans

     —           —     

Consumer loans

     —           —     
  

 

 

    

 

 

 

Total

$ 4,376    $ 5,058   
  

 

 

    

 

 

 

Total non-accrual loans at December 31, 2014 and December 31, 2013 included $1,082,000 and $1,781,000 of troubled debt restructurings, respectively.

Troubled Debt Restructurings (“TDRs”): Our loan and lease portfolio includes certain loans where economic concessions have been granted to borrowers who have experienced financial difficulties. These concessions typically result from loss mitigation efforts and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as non-performing at the time of restructuring and only are returned to performing status after considering the borrower’s sustained repayment performance for a period of at least six consecutive months.

When we modify loans and leases in a TDR, we evaluate any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan or lease agreement, or use the current fair value of the collateral, less selling costs for collateral dependent loans. If we determine that the value of the modified loan is less than the recorded balance of the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through a specific allowance or charge-off to the allowance. In periods subsequent to modification, we evaluate all TDRs, including those that have payment defaults, for possible impairment and recognize impairment through the allowance.

 

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Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

The following table presents the Company’s troubled debt restructurings at December 31, 2014 and December 31, 2013 (dollars in thousands):

Troubled Debt Restructurings

 

     Total      Nonperforming  
     At December 31,
2014
     At December 31,
2013
     At December 31,
2014
     At December 31,
2013
 

Real estate loans:

           

Commercial

   $ 3,451       $ 3,542       $ —         $ —     

Residential

     2,639         3,997         885         498   

Construction

     1,168         3,755         —           1,019   

Commercial loans and leases

     197         264         197         264   

Municipal loans

     —           —           —           —     

Consumer loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 7,455    $ 11,558    $ 1,082    $ 1,781   
  

 

 

    

 

 

    

 

 

    

 

 

 

Loans classified as a troubled debt restructuring during 2014 and 2013, segregated by class, are shown in the table below (dollars in thousands). These modifications consisted primarily of interest rate concessions.

 

     Year Ended  
     December 31, 2014      December 31, 2013  
     Modifications      Modifications  
     Number      Recorded
Balance Before
     Recorded
Balance After
     Number
     Recorded
Balance Before
     Recorded
Balance After
 

Real estate loans:

                 

Commercial

     —         $ —         $ —           —         $ —         $ —     

Residential

     1         164         164         2         448         448   

Construction

     —           —           —           —           —           —     

Commercial loans and leases

     —           —           —           —           —           —     

Municipal loans

     —           —           —           —           —           —     

Consumer loans

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

  1    $ 164    $ 164      2    $ 448    $ 448   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The troubled debt restructuring included in the table above for 2014 did not increase the allowance for loan losses and did not result in a charge-off during the year ended December 31, 2014. The troubled debt restructurings included in the table above for 2013 increased the allowance for loan losses by $9,000 and resulted in charge-offs of $16,000 during the year ended December 31, 2013.

There were no troubled debt restructured loans that had payment defaults during 2014 or 2013. Default occurs when a loan or lease is 90 days or more past due or transferred to nonaccrual and is within 12 months of restructuring.

 

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Table of Contents

Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

6. Premises and Equipment

Major classifications of premises and equipment, stated at cost, are as follows:

 

     December 31,  
     2014      2013  

Land

   $ 4,681       $ 4,684   

Land improvements

     1,216         1,203   

Office buildings

     14,183         13,204   

Furniture and equipment

     8,030         7,290   

Automobiles

     128         161   
  

 

 

    

 

 

 
  28,238      26,542   

Less accumulated depreciation

  12,727      11,856   
  

 

 

    

 

 

 
$ 15,511    $ 14,686   
  

 

 

    

 

 

 

 

7. Mortgage Servicing Rights

Loans being serviced by the Company for investors, primarily Freddie Mac, totaled approximately $70,866,000 and $80,695,000 as of December 31, 2014 and 2013, respectively. Such loans are not included in the preceding table in Note 4.

The aggregate fair value of capitalized mortgage servicing rights at December 31, 2014 and 2013 is based on comparable market values and expected cash flows, with impairment assessed based on portfolio characteristics including product type, investor type and interest rates.

 

     Year Ended December 31,  
     2014      2013  

Mortgage servicing rights

     

Balance at beginning of year

   $ 582       $ 576   

Servicing rights capitalized

     47         144   

Amortization of servicing rights

     (95      (150

(Increase) reduction to valuation allowance

     (4      12   
  

 

 

    

 

 

 

Balance at end of year

$ 530    $ 582   
  

 

 

    

 

 

 
Fair value disclosures

Fair value as of the beginning of year

$ 628    $ 576   

Fair value as of the end of year

$ 530    $ 628   
  

 

 

    

 

 

 

 

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Table of Contents

Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

8. Deposits

Deposits by type are as follows:

 

     December 31,  
     2014      2013  

Demand

   $ 208,921       $ 187,106   

Savings

     32,997         30,009   

Certificates of $100,000 or more

     46,158         51,188   

Other certificates

     90,871         94,398   
  

 

 

    

 

 

 
$ 378,947    $ 362,701   
  

 

 

    

 

 

 

Certificates maturing in years ending after December 31, 2014:

 

2015

$ 82,227   

2016

  19,934   

2017

  6,482   

2018

  7,659   

2019

  19,981   

Thereafter

  746   
  

 

 

 
$ 137,029   
  

 

 

 

Deposits from related parties held by the Company were $1,400,000 and $2,419,000 at December 31, 2014 and December 31, 2013, respectively.

 

9. Borrowings

Borrowings at December 31, 2014 and 2013 include Federal Home Loan Bank advances totaling $28,000,000 and $33,000,000, respectively, with a weighted-average rate of 1.10% and 1.63%, respectively. The effective weighted-average rate at December 31, 2014 was 2.17%, when giving consideration to the impact on interest expense from the amortization of two prepayment penalties paid on advances that were replaced in 2012 with longer-term advances. The advances are secured by a combination of first mortgage loans and overnight deposits. At December 31, 2014, the mortgage loans pledged as collateral for Federal Home Loan Bank advances totaled $138,968,000.

Some advances are subject to restrictions or penalties in the event of prepayment.

Borrowings at December 31, 2014 and 2013 also include subordinated debentures in the amount of $10,310,000. The securities bear a rate equal to 150 basis points over the three-month LIBOR rate. At December 31, 2014, the interest rate was 1.74%. These subordinated debentures mature on March 15, 2036.

Borrowings at December 31, 2014 and 2013 also include a repurchase agreement with Barclays Capital, Inc. in the amount of $7,500,000 with a rate of 4.42%. The repurchase agreement had embedded interest rate caps with a notional value of $15,000,000 for a four-year term that ended on September 22, 2012. The interest rate caps would have provided a reduction of the interest rate during any quarter if three-month LIBOR had exceeded 3.81% on the quarterly determination date. These embedded interest rate caps were considered to be clearly and closely related to the host instrument. The repurchase agreement has a seven-year term with a final repurchase date of September 22, 2015. At December 31, 2014, pledged investment securities for this repurchase agreement had a market value of $8,499,000.

 

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Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

Aggregate annual maturities of borrowings at December 31, 2014 are:

 

     FHLB
Advances
     Repurchase
Agreement
     Subordinated
Debentures
     Total  

Maturities in years ending December 31,

           

2015

   $ 3,000       $ 7,500       $ —         $ 10,500   

2016

     5,000         —           —           5,000   

2017

     20,000         —           —           20,000   

2018

     —           —           —           —     

2019

     —           —           —           —     

Thereafter

     —           —         $ 10,310         10,310   
  

 

 

    

 

 

    

 

 

    

 

 

 
$ 28,000    $ 7,500    $ 10,310    $ 45,810   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

10. Income Taxes

The components of the net deferred tax asset at December 31, 2014 and 2013 are as follows:

 

     December 31,  
     2014      2013  

Deferred tax assets:

     

Deferred compensation

   $ 897       $ 854   

General loan loss reserves

     1,635         2,021   

State and federal net operating loss carryforward and tax credits carryforward

     3,920         4,278   

Other real estate owned

     526         541   

Net unrealized loss on securities available for sale

     —           176   
  

 

 

    

 

 

 
  6,978      7,870   
  

 

 

    

 

 

 

Deferred tax liabilities:

Net unrealized gain on securities available for sale

  (186   —     

FHLB stock dividends

  (210   (252

FHLB prepayment interest

  (358   (488

Deferred loan fees

  (199   (194

Mortgage servicing rights

  (220   (244

Deferred state tax

  (264   (283

Depreciation

  (215   (224

Prepaid expenses

  (233   (204

Goodwill

  (199   (198

Other

  (20   (2
  

 

 

    

 

 

 
  (2,104   (2,089
  

 

 

    

 

 

 

Net deferred tax asset before valuation allowance

  4,874      5,781   
  

 

 

    

 

 

 

Valuation allowance

Beginning balance

  (813   (996

Change during the period

  205      183   
  

 

 

    

 

 

 

Ending balance

  (608   (813
  

 

 

    

 

 

 

Net deferred tax asset

$ 4,266    $ 4,968   
  

 

 

    

 

 

 

As of December 31, 2014, the Company had approximately $14,374,000 of state tax loss carryforward available to offset future franchise tax. As of December 31, 2014, the Company had approximately $205,000 of federal tax loss carryforward available to offset future federal tax. Also, at December 31, 2014, the Company had approximately $2,700,000 of tax credits available to offset future federal income tax. The state loss carryforward begins to expire in 2023. The federal loss carryforward expires in 2026. The tax credits begin to expire in 2023. Included in the $2,700,000 of tax credits available to offset future federal income tax are approximately $1,964,000 of alternative minimum tax credits which have no expiration date. Management believes that the Company will be able to utilize the benefits recorded for both state and federal loss carryforwards and federal credits within the allotted time periods, except for the amount represented by the valuation allowance. The entire valuation allowance has been recorded for the possible inability to use a portion of the state net operating loss carryover. During 2014, the Company reduced a portion of its state deferred tax asset valuation allowance. The Company generated state taxable income in excess of previous years, so management determined a portion of this valuation allowance could be reduced. After the reduction of the state tax valuation allowance the total state tax recorded remains materially unchanged from previous years.

Retained earnings at December 31, 2014 includes an allocation of income to bad debt deductions of approximately $11,883,000 for which no provision for federal income taxes has been made. If, in the future, this portion of retained

 

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Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

earnings is used for any purpose other than to absorb bad debt losses, including redemption of bank stock or excess dividends, or loss of “bank” status, federal income taxes may be imposed at the then applicable rates. The unrecorded deferred income tax liability on the above amount was approximately $4,000,000.

The effective income tax rate on income from continuing operations is reconciled to the statutory corporate tax rate as follows:

 

     Year Ended December 31,  
     2014     2013  

Statutory federal tax rate

     34.0     34.0

Cash value of life insurance

     (6.4     (8.2

Tax exempt interest - municipal securities and municipal loans

     (1.4     (1.5

Other

     0.6        1.0   
  

 

 

   

 

 

 

Effective tax rate

  26.8   25.3
  

 

 

   

 

 

 

The expense for income taxes consists of the following:

 

     Year Ended December 31,  
     2014      2013  

Federal

     

Current

   $ 526       $ 594   

Deferred

     341         147   
  

 

 

    

 

 

 

Tax expense

$ 867    $ 741   
  

 

 

    

 

 

 

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. With a few exceptions, the Company is no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years before 2010.

 

11. Employee Benefits

Multi-Employer Defined Benefit Pension Plan. The Company is a participating employer in a multi-employer defined benefit pension plan. Since the defined benefit pension plan is a multi-employer plan, no separate actuarial valuations are made with respect to each participating employer. The Company froze its participation in the defined benefit pension plan on June 30, 2004 to stop accruing benefits to plan participants beyond what was already earned to that date and to prevent new participants from entering the plan. The change was made in an effort to control and reduce pension plan expense in the future. The Company will continue to make contributions to meet required funding obligations.

The Company participates in the Pentegra Defined Benefit Plan for Financial Institutions (the “Pentegra Plan”), a non-contributory pension plan covering all qualified employees. The trustees of the Financial Institutions Retirement Fund administer the Pentegra Plan, employer identification number 35-0377080 and plan number 6087. The Pentegra Plan operates as a multi-employer plan for accounting purposes and as a multiple-employer plan under the Employee Retirement Income Security Act of 1974 and the internal Revenue Code. There are no collective bargaining agreements in place that require contributions to the Pentegra Plan.

The Pentegra Plan is a single plan under Internal Revenue Code Section 413(c) and, as a result, all of the assets stand behind all of the liabilities. Accordingly, under the Pentegra Plan contributions made by a participating employer may be used to provide benefits to participants of other participating employers. There is no separate valuation of the Pentegra Plan benefits or segregation of the Pentegra Plan assets specifically for the Company, because the Pentegra Plan is a multi-employer plan and separate actuarial valuations are not made with respect to each employer. If the Company chooses to stop participating in the multi-employer plan, they may be required to pay an amount based on the underfunded status of the plan, referred to as a withdrawal liability. The funded status of the Pentegra Plan, market value of plan assets divided by funding target, as of July 1, 2014 and 2013 was 89.15% and 84.45%, respectively.

 

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Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

The Company had expenses of $423,000 and $352,000 for the years ended December 2014 and 2013, respectively. Company cash contributions to the Pentegra Plan for these same periods were $392,000 and $650,000, respectively. Total contributions made to the Pentegra Plans were $190,752,000 and $136,478,000 for the plan years ended June 30, 2014 and 2013, respectively. The Company’s contributions to the Pentegra Plan were not more than 5% of the total contributions to the plan.

401(k) Plan. The 401(k) plan covers substantially all full-time employees of the Company. The Company matches employees’ contributions to the 401(k) plan at the rate of 100% for the first 4% of base salary contributed by participants. Effective April 1, 2011, the Company added an employee stock ownership plan component to its 401(k) plan. Matching contributions made to the 401(k) plan by the Company will be used to purchase shares of Ameriana Bancorp stock.

Expense for the 401(k) plan was $239,000 and $237,000 in 2014 and 2013, respectively.

Split-dollar Life Insurance Agreements. The Company adopted the accounting guidance for separate agreements which split the life insurance policy benefits between an employer and the employee. This guidance requires the employer to recognize a liability for future benefits payable to the employee under these agreements. At December 31, 2014 and 2013, the Company had a recorded a liability of $1,186,000 and $1,109,000, respectively. During 2014 and 2013, the Company recognized net expense of $76,000 and net income of $14,000, respectively.

Executive Retirement Plan. Effective January 1, 2008, the Company terminated a supplemental retirement plan (the “Plan”) that provided retirement and death benefits to certain officers and directors. At that time, the officers and directors covered by that Plan voluntarily elected to forego their benefits under the Plan. Instead, the Company entered into separate agreements with these officers and directors that provide retirement and death benefits. The Company is recording an expense equal to the projected present value of the payment due at the full eligibility date. The liability for the plan at December 31, 2014 and 2013 was $2,102,000 and $2,012,00, respectively. The expense for the plan was $218,000 and $219,000 for 2014 and 2013, respectively.

Employment or Change in Control Agreements. The Company has entered into employment or change in control agreements with certain officers that provide for the continuation of salary and certain benefits for a specified period of time under certain conditions. Under the terms of the agreements, these payments could occur in the event of a change in control of the Company, as defined, along with other specific conditions. The severance payment under these agreements is generally three times the annual salary of the officer in the event of a change in control.

Stock Options. Under the 1996 Stock Option and Incentive Plan (“1996 Plan”) and the 2006 Long-Term Incentive Plan (“2006 Plan”), the Company has granted options to individuals to purchase common stock at a price equal to the fair market value at the date of grant, subject to the terms and conditions of the plans. Options vest and are fully exercisable when granted or over an extended period subject to continuous employment or under other conditions set forth in the plans. The period for exercising options shall not exceed ten years from the date of grant. The plans also permit grants of stock appreciation rights. An amendment of the 1996 Plan extended the plan’s term by five years and increased the number of shares reserved under the plan from 176,000 to 352,000 shares. The 2006 Plan permits the granting of up to 225,000 shares. The 1996 Plan and 2006 Plan were approved by the stockholders of the Company.

The fair value of each option award is estimated on the date of grant using a Black-Scholes option pricing model.

 

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Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

A summary of option activity under the Plan as of December 31, 2014, and changes during the year then ended, is presented below.

 

     Shares      Weighted-
Average
Exercise Price
     Weighted-
Average
Remaining
Contractual
Term
     Aggregate
Intrinsic Value
 

Outstanding, beginning of year

     183,982       $ 13.50         3.44       $ 107,000   

Granted

     —           —           

Exercised

     (29,932      13.93         

Expired

     (71,500      14.80         

Forfeited

     (7,700      11.93         
  

 

 

    

 

 

       

Outstanding, end of year

  74,850    $ 12.25      5.07    $ 468,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Exercisable, end of year

  50,550    $ 12.40      3.31    $ 308,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no options granted during the year ended December 31, 2014. There were 52,500 options granted in the year ended December 31, 2013, with a weighted-average grant-date value of $7.90. The total intrinsic value of options exercised during the years ended December 31, 2014 and December 31, 2013 were $61,000 and $2,000, respectively.

As of December 31, 2014, there was $176,000 of unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a period of 2.75 years. During 2014, the Company recognized $74,000 of share-based compensation expense. As of December 31, 2013, there was $302,000 of unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan, and during 2013, the Company recognized $104,000 of share-based compensation expense.

Cash received from options exercised under all share-based compensation arrangements for the years ended December 31, 2014 and December 31, 2013 was $417,000 and $22,000, respectively. The tax benefit realized from the options exercised during 2014 was $20,000 and there was no actual tax benefit realized from the options exercised during 2013.

The following summarizes the assumptions used in the Black-Scholes model for the options granted during the year ended December 31, 2013:

 

Expected volatility

  71.66

Expected dividends

  0.335

Expected term (in years)

  6.0   

Risk-free rate

  1.815

 

12. Dividend and Capital Restrictions

The payment of dividends by the Company depends substantially upon receipt of dividends from the Bank, which is subject to various regulatory restrictions on the payment of dividends. Under current regulations, the Bank may not declare or pay a cash dividend or repurchase any of its capital stock if the effect thereof would cause its net worth to be reduced below regulatory capital requirements or the amount required for its liquidation account.

In addition, without prior approval, current regulations allow the Bank to pay dividends to the Company not exceeding retained net income for the applicable calendar year to date, plus retained net income for the preceding two years. Application is required by the Bank to pay dividends in excess of this restriction.

 

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Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

On August 26, 2013, following notification by the FDIC and the Indiana Department of Financial Institutions, the Board of Directors of Ameriana Bank rescinded the previously adopted resolution noted below.

On July 26, 2010, following a joint examination by and discussions with the FDIC and the Indiana Department of Financial Institutions (“DFI”), the Board of Directors of the Bank adopted a resolution agreeing to obtain prior written consent from the FDIC and the DFI before declaring or paying any dividends. All requests from the Bank to declare and pay a quarterly dividend to the Company had been approved by the FDIC and DFI prior to approval by the Bank’s Board of Directors and payment by the Bank, for all dividends paid before the resolution was rescinded on August 26, 2013.

On November 25, 2013, following notification by the Federal Reserve Bank of Chicago, the Board of Directors of the Company rescinded the previously adopted resolution noted below.

On December 17, 2009, following an off-site review by the Federal Reserve Bank of Chicago, the Board of Directors of the Company adopted a resolution agreeing to seek and obtain the approval of the Federal Reserve Bank at least thirty days before taking any of the following actions:

 

    The payment of corporate dividends;

 

    The payment of interest on trust preferred securities;

 

    Any increase in debt or issuance of trust preferred obligations; and

 

    The redemption of Company stock.

All requests from the Company to pay quarterly dividends to shareholders and to make quarterly interest payments on the trust preferred securities had been approved by the Federal Reserve Bank of Chicago prior to approval by the Company’s Board of Directors and payment by the Company, for all payments before the resolution was rescinded on November 25, 2013. There had been no requests from the Company for approval of an increase in debt or issuance of trust preferred obligations, or redemption of Company stock.

 

13. Earnings Per Share

 

     2014      2013  
     Net
Income
     Weighted-
Average

Shares
     Per
Share
Amount
     Net
Income
     Weighted-
Average
Shares
     Per
Share
Amount
 

Basic Earnings Per Share:

                 

Income available to common shareholders

   $ 2,366         2,996,733       $ 0.79       $ 2,187         2,988,991       $ 0.73   
        

 

 

          

 

 

 

Effect of Dilutive Stock Options

  —        6,230      —        263   
  

 

 

    

 

 

       

 

 

    

 

 

    

Diluted Earnings Per Share:

Income available to common shareholders and assumed conversions

$ 2,366      3,002,963    $ 0.79    $ 2,187      2,989,254    $ 0.73   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

An option to purchase 5,000 shares of common stock at an exercise price of $14.80 was outstanding at December 31, 2014, but was not included in the computation of diluted earnings per share because the option’s exercise price was greater than the average market price of the common shares.

 

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Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

Options to purchase 91,732 shares of common stock at exercise prices of $14.80 to $15.56 per share were outstanding at December 31, 2013, but were not included in the computation of diluted earnings per share because the option’s exercise price was greater than the average market price of the common shares.

 

14. Accumulated other comprehensive income (loss)

The components of accumulated other comprehensive income (loss), included in shareholders’ equity, are as follows:

 

     2014      2013  

Net unrealized gain (loss) on available-for-sale securities, net of income tax expense of $186 and net of income tax benefit of $176 at December 31, 2014 and 2013, respectively

   $ 362       $ (340
  

 

 

    

 

 

 

 

15. Regulatory Matters

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies and is assigned to a capital category. The assigned capital category is largely determined by three ratios that are calculated according to the regulations. The ratios are intended to measure capital relative to assets and credit risk associated with those assets and off-balance sheet exposures. The capital category assigned can also be affected by qualitative judgments made by regulatory agencies about the risk inherent in the entity’s activities that are not part of the calculated ratios.

There are five capital categories defined in the regulations, ranging from well capitalized to critically undercapitalized. Classification in any of the undercapitalized categories can result in actions by regulators that could have a material effect on a bank’s operations. At December 31, 2014 and 2013, the Bank was categorized as well capitalized and met all subject capital adequacy requirements. There are no conditions or events since December 31, 2014, that management believes have changed this classification.

On August 26, 2013, following notification by the FDIC and the Indiana Department of Financial Institutions, the Board of Directors of Ameriana Bank rescinded the previously adopted resolution noted below.

On July 26, 2010, following a joint examination by and discussions with the FDIC and the Indiana Department of Financial Institutions, the Board of Directors of the Bank adopted a resolution agreeing to, among other things, adopt a capital plan to increase its Tier 1 Leverage Ratio to 8.50% by June 30, 2010 and to maintain a Total Risk-Based Capital Ratio of 12.00%.

Actual and required capital amounts and ratios for the Bank are as follows:

 

     December 31, 2014  
     Required for
Well Capitalized
     Required For
Adequate Capital
     Actual Capital  
     Ratio     Amount      Ratio     Amount      Ratio     Amount  

Total risk-based capital ratio

     10.00   $ 31,167         8.00   $ 24,933         15.64   $ 48,737   

Tier 1 risk-based capital ratio

     6.00        18,700         4.00        12,467         14.38        44,823   

Tier 1 leverage ratio

     5.00        23,626         3.00        14,175         9.49        44,823   

 

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Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

     December 31, 2013  
     Required for
Well Capitalized
     Required For
Adequate Capital
     Actual Capital  
     Ratio     Amount      Ratio     Amount      Ratio     Amount  

Total risk-based capital ratio

     10.00   $ 30,274         8.00   $ 24,219         15.16   $ 45,897   

Tier 1 risk-based capital ratio

     6.00        18,164         4.00        12,109         13.91        42,110   

Tier 1 leverage ratio

     5.00        22,223         3.00        13,334         9.47        42,110   

 

16. Fair Value of Financial Instruments

DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES

ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy has been established that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1 Quoted prices in active markets for identical assets or liabilities.

Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Available-for-Sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. The securities valued in Level 1 are mutual funds.

Level 2 securities include U.S. agency and U.S. government sponsored enterprise mortgage-backed securities and collateralized mortgage obligations. Level 2 securities are valued by a third party pricing service commonly used in the banking industry utilizing observable inputs, and the values are reviewed by the Bank’s management. The pricing provider utilizes evaluated pricing models that vary based on asset class. These models incorporate available market information including quoted prices of securities with similar characteristics and, because many fixed-income securities do not trade on a daily basis, apply available information through processes such as benchmark curves, benchmarking of like securities, sector grouping and matrix pricing. In addition, model processes, such as an option adjusted spread model is used to develop prepayment and interest rate scenarios for securities with prepayment features.

 

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Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

The following table presents the fair value measurements of assets recognized in the accompanying balance sheet measured at fair value on a recurring basis and the level within the ASC 820 fair value hierarchy in which the fair value measurements fall at December 31, 2014 and December 31, 2013:

 

            Fair Value Measurements Using  

Available-for-sale securities:

   Fair Value      Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)
     Significant Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

At December 31, 2014:

           

Ginnie Mae and GSE mortgage-backed pass-through securities

   $ 44,198       $ —         $ 44,198       $ —     

Ginnie Mae collateralized mortgage obligations

     2,019         —           2,019         —     

Mutual funds

     1,867         1,867         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
$ 48,084    $ 1,867    $ 46,217    $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2013:

Ginnie Mae and GSE mortgage-backed pass-through securities

$ 33,806    $ —      $ 33,806    $ —     

Ginnie Mae collateralized mortgage obligations

  2,214      —        2,214      —     

Mutual funds

  1,783      1,783      —        —     
  

 

 

    

 

 

    

 

 

    

 

 

 
$ 37,803    $ 1,783    $ 36,020    $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Transfers between Levels

Transfers between levels did not occur during the years ended December 31, 2014 and 2013.

Following is a description of valuation methodologies used for instruments measured at fair value on a non-recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Collateral-Dependent Impaired Loans, Net of ALLL

The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy.

The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by management. Appraisals are reviewed for accuracy and consistency by management. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by management by comparison to historical results.

 

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Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

Other Real Estate Owned

Other real estate owned (“OREO”) is carried at the lower of fair value at acquisition date or current estimated fair value, less estimated cost to sell when the real estate is acquired. Estimated fair value of OREO is based on appraisals or evaluations. OREO is classified within Level 3 of the fair value hierarchy.

Appraisals of OREO are obtained when the real estate is acquired and subsequently as deemed necessary by management. Appraisals are reviewed for accuracy and consistency by management. Appraisers are selected from the list of approved appraisers maintained by management.

Loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. If the carrying amount exceeds fair value, impairment is recorded so that the servicing asset is carried at fair value. Fair value is determined based on market prices for comparable mortgage servicing contracts, when available, or alternatively based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model utilizes interest rate, prepayment speed, and default rate assumptions that market participants would use in estimating future net servicing income and that can be validated against available market data.

The following table presents the fair value measurements of assets recognized in the accompanying balance sheet measured at fair value on a nonrecurring basis and the level within the ASC 820 fair value hierarchy in which the fair value measurements fall at December 31, 2014 and December 31, 2013:

 

            Fair Value Measurements Using  
     Fair Value      Quoted Prices in
Active Markets for
Identical Assets

(Level 1)
     Significant Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

At December 31, 2014:

           

Impaired loans

   $ 940       $ —         $ —         $ 940   

Other real estate owned

     1,166         —           —           1,166   

Mortgage servicing rights

     530         —           —           530   

At December 31, 2013:

           

Impaired loans

   $ 6,353       $ —         $ —         $ 6,353   

Other real estate owned

     2,401         —           —           2,401   

Unobservable (Level 3) Inputs:

The following table presents quantitative information about unobservable inputs used in nonrecurring Level 3 fair value measurements at December 31, 2014 (dollars in thousands):

 

     Fair Value     

Valuation Technique

  

Unobservable Inputs

   Rate/Rate Range

Impaired loans

   $ 940       Third party valuations    Discount to reflect realizable value    0.6%-64.9%

Other real estate owned

     1,166       Third party valuations    Discount to reflect realizable value    6.4%-7.0%

Mortgage servicing rights

     530       Third party valuation    Discount rate    5.06%-6.08%
        

Prepayment speed

   10.22%-22.74%

 

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Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

The following table presents quantitative information about unobservable inputs used in nonrecurring Level 3 fair value measurements at December 31, 2013 (dollars in thousands):

 

     Fair Value     

Valuation Technique

  

Unobservable Inputs

   Rate/Rate Range

Impaired loans

   $ 6,353       Third party valuations    Discount to reflect realizable value    0.0% -77.88%

Other real estate owned

     2,401       Third party valuations    Discount to reflect realizable value    6.0%-20.7%

Fair Value of Financial Instruments

Fair values are based on estimates using present value and other valuation techniques in instances where quoted market prices are not available. These techniques are significantly affected by the assumptions used, including discount rates and estimates of future cash flows. Accordingly, the aggregate fair value amounts presented do not represent, and should not be construed to represent, the underlying value of the Company.

The following table presents the estimates of fair value of financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2014 (dollars in thousands):

 

December 31, 2014 - Fair Value Measurements Using

 
     Carrying
Value
     Fair
Value
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Assets

        

Cash and cash equivalents

   $ 33,142       $ 33,142       $ 33,142       $ —         $ —     

Interest-bearing time deposits

     4,164         4,162         4,162         —           —     

Investment securities held to maturity

     7,082         7,110         —           4,756         2,354   

Loans held for sale

     332         332         —           332         —     

Loans

     316,113         322,035         —           311,196         10,839   

Stock in FHLB

     3,753         3,753         —           3,753         —     

Mortgage servicing rights

     530         530         —           —           530   

Interest and dividends receivable

     1,179         1,179         —           1,179         —     

Liabilities

        

Deposits

     378,947         379,339         241,918         137,421         —     

Borrowings

     45,810         41,605         —           35,543         6,062   

Drafts payable

     1,298         1,298         —           1,298         —     

Interest and dividends payable

     97         97         —           97         —     

 

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Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

The following table presents the estimates of fair value of financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2013 (dollars in thousands):

 

December 31, 2013 – Fair Value Measurements Using

 
     Carrying
Value
     Fair
Value
     Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Assets

              

Cash and cash equivalents

   $ 40,867       $ 40,867       $ 40,867       $ —         $ —     

Interest-bearing deposits

     2,974         2,983         2,983         —           —     

Investment securities held to maturity

     2,347         2,347         —           —           2,347   

Loans

     312,035         319,232         —           303,216         16,016   

Stock in FHLB

     4,472         4,472         —           4,472         —     

Mortgage servicing rights

     582         582         —           —           582   

Interest and dividends receivable

     818         818         —           818         —     

Liabilities

              

Deposits

     362,701         363,536         217,115         146,421         —     

Borrowings

     50,810         46,897         —           41,330         5,567   

Drafts payable

     1,503         1,503         —           1,503         —     

Interest and dividends payable

     78         78         —           78         —     

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

Cash and Cash Equivalents and Stock in FHLB: The carrying amounts reported in the consolidated balance sheets approximate those assets’ fair values.

Interest-bearing time deposits: The carrying amounts reported in the consolidated balance sheets approximate those assets’ fair values.

Held-to-maturity securities: The carrying amount reported in the consolidated balance sheets for December 31, 2012, the date the securities were reclassified from available-for-sale, represents their approximate fair value and became their new amortized cost basis as of that date.

Loans Held for Sale: The carrying amounts reported in the consolidated balance sheets approximate fair values.

Loans: The fair values for loans are estimated using a discounted cash flow calculation that applies interest rates used to price new similar loans to a schedule of aggregated expected monthly maturities on loans.

Mortgage Servicing Rights: The fair value is determined by a valuation performed by an independent third party that is reviewed by the Bank’s management. The valuation is based on the discounted cash flow method, utilizing Bloomberg’s Median Forecasted Prepayment Speeds for mortgage-backed securities assumed to possess enough similarities to the Bank’s servicing portfolio to facilitate a comparison.

Interest and Dividends Receivable/Payable: The fair value of accrued interest receivable/payable approximates carrying values.

Deposits: The fair values of non-maturity demand, savings, and money market accounts are equal to the amount payable on demand at the balance sheet date. Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on deposits to a schedule of aggregated expected monthly maturities on deposits.

 

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Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

Borrowings: The fair value of borrowings is estimated using a discounted cash flow calculation, based on borrowing rates for periods comparable to the remaining terms to maturity of the borrowings.

Drafts Payable: The fair value approximates carrying value.

 

17. Commitments to Originate Loans

At December 31, 2014 and 2013, the Company had outstanding commitments to originate loans of approximately $28,530,000 and $24,485,000, respectively. The outstanding commitments for 2014 included $4,497,000 for one-to four-family mortgage loans, $14,871,000 for commercial real estate loans, $6,239,000 for a commercial real estate construction loan and $2,923,000 for commercial loans. The outstanding commitments for 2013 included $1,901,000 for one-to four-family mortgage loans, $6,493,000 for commercial real estate loans, $3,100,000 for a commercial real estate construction loan and $12,991,000 for commercial loans. In addition, the Company had $59,881,000 and $50,450,000 of conditional commitments for lines of credit at December 31, 2014 and 2013, respectively. Exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit is represented by the contractual or notional amount of those instruments. The same credit policies are used in making such commitments as are used for instruments that are included in the consolidated balance sheets. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s credit worthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts receivable, inventory, real estate, equipment, and income-producing commercial properties. In addition, the Company had $5,014,000 and $6,091,000 of letters of credit outstanding at December 31, 2014 and 2013, respectively. Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.

 

18. Parent Company Financial Information

The following are condensed financial statements for the parent company, Ameriana Bancorp, only:

 

     December 31,  

Balance Sheets

   2014      2013  

Assets

     

Cash

   $ 1,294       $ 610   

Investment in Bank

     46,446         43,908   

Investments in affiliates

     310         310   

Other assets

     3,438         3,237   
  

 

 

    

 

 

 
$ 51,488    $ 48,065   
  

 

 

    

 

 

 

Liabilities and shareholders’ equity

Notes payable, other

$ 10,310    $ 10,310   

Other liabilities

  126      42   

Shareholders’ equity

  41,052      37,713   
  

 

 

    

 

 

 
$ 51,488    $ 48,065   
  

 

 

    

 

 

 

 

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Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

     Year Ended December 31,  

Statements of Income and Comprehensive Income

   2014      2013  

Dividends from Bank

   $ 1,200       $ 1,250   

Interest income

     5         6   
  

 

 

    

 

 

 
  1,205      1,256   

Operating expense

  955      892   
  

 

 

    

 

 

 

Income before income tax benefit and equity in undistributed income of Bank

  250      364   

Income tax benefit

  323      301   
  

 

 

    

 

 

 
  573      665   

Equity in undistributed income of Bank and affiliates

  1,793      1,522   
  

 

 

    

 

 

 

Net Income

$ 2,366    $ 2,187   

Unrealized appreciation (depreciation) on available-for-sale securities, net of tax expense of $366 and net of tax benefit of $468 for the years ended December 31, 2014 and December 31, 2013, respectively.

  702      (916

Less: Reclassification adjustment for realized gains included in net income, net of taxes of $57 for the year ended December 31, 2013.

  —        110   
  

 

 

    

 

 

 

Other Comprehensive Income (Loss)

  702      (1,026
  

 

 

    

 

 

 

Comprehensive Income

$ 3,068    $ 1,161   
  

 

 

    

 

 

 
     Year Ended December 31,  

Statements of Cash Flows

   2014      2013  

Operating Activities

     

Net income

   $ 2,366       $ 2,187   

Items not requiring (providing) cash:

     

Undistributed income of Bank and affiliates

     (1,793      (1,522

Other adjustments

     (96      (266
  

 

 

    

 

 

 

Net cash provided by operating activities

  477      399   
  

 

 

    

 

 

 

Financing Activities

Proceeds from exercise of stock options

  417      22   

Cash dividends paid

  (210   (120
  

 

 

    

 

 

 

Net cash provided by (used in) financing activities

  207      (98
  

 

 

    

 

 

 

Change in cash

  684      301   

Cash at beginning of year

  610      309   
  

 

 

    

 

 

 

Cash at end of year

$ 1,294    $ 610   
  

 

 

    

 

 

 

 

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Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

19. Accounting Developments

 

  Financial Accounting Standards Board (“FASB”)

In January 2014, the FASB issued ASU 2014-01, “Accounting for Investments in Qualified Affordable Housing Projects,” to permit entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. The ASU modifies the conditions that an entity must meet to be eligible to use a method other than the equity or cost methods to account for qualified affordable housing project investments. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

In January 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-04, “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure,” to reduce diversity by clarifying when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

In April 2014, the FASB issued ASU 2014-08,Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” This update seeks to better define the groups of assets which qualify for discontinued operations, in order to ease the burden and cost for prepares and stakeholders. This issue changed “the criteria for reporting discontinued operations” and related reporting requirements, including the provision for disclosures about the “disposal of and individually significant component of an entity that does not qualify for discontinued operations presentation.” The amendments in this Update are effective for fiscal years beginning after December 15, 2014. Early adoption is permitted only for disposals or classifications as held for sale. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

In May 2014, the FASB, in joint cooperation with IASB, issued ASU 2014-09, “Revenue from Contracts with Customers.” The topic of Revenue Recognition had become broad, with several other regulatory agencies issuing standards which lacked cohesion. The new guidance establishes a “common framework” and “reduces the number of requirements to which an entity must consider in recognizing revenue” and yet provides improved disclosures to assist stakeholders reviewing financial statements. The amendments in this Update are effective for annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. The Company will adopt the methodologies prescribed by this ASU by the date required, and is still evaluating the impact the ASU will have on its financial position or results of operations.

In June 2014, the FASB issued ASU 2014-11, “Transfers and Servicing.” This update addresses the concerns of stakeholders’ by changing the accounting practices surrounding repurchase agreements. The new guidance changes the “accounting for repurchase-to-maturity transactions and linked repurchase financings to secured borrowing accounting, which is consistent with the accounting for other repurchase agreements.” The amendments in this Update are effective for annual reporting periods beginning after December 15, 2015. Early adoption is prohibited. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

 

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Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

In June 2014, the FASB issued ASU 2014-12,Compensation – Stock Compensation.” This update defines the accounting treatment for share-based payments and “resolves the diverse accounting treatment of those awards in practice.” The new requirement mandates that “a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition.” Compensation cost will now be recognized in the period in which it becomes likely that the performance target will be met. The amendments in this Update are effective for annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

In August 2014, FASB, issued ASU 2014-14, “Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.” The objective of this update is to reduce diversity in practice by addressing the classification of foreclosed mortgage loans that are fully or partially guaranteed under government programs. Currently, some creditors reclassify those loans to real estate as with other foreclosed loans that do not have guarantees; others reclassify the loans to other receivables. The amendments affect creditors that hold government-guaranteed mortgage loans, including those guaranteed by the FHA and the VA. The amendments in this update are effective for annual reporting periods ending after December 15, 2015, and interim periods beginning after December 15, 2015. An entity should adopt the amendments in this update using either a prospective transition method or a modified retrospective transition method. For prospective transition, an entity should apply the amendments in this update to foreclosures that occur after the date of adoption. For the modified retrospective transition, an entity should apply the amendments in the update by means of a cumulative-effect adjustment (through a reclassification to a separate other receivable) as of the beginning of the annual period of adoption. Prior periods should not be adjusted. However, a reporting entity must apply the same method of transition as elected under ASU No. 2014-04. Early adoption, including adoption in an interim period, is permitted if the entity already has adopted update 2014-04. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

In August 2014, FASB, issued ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” The update provides U.S. GAAP guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued. The amendments in this update are effective for annual reporting periods ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

 

20. Significant Estimates, Concentrations and Contingencies

Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Estimates related to the allowance for loan losses are reflected in the footnote regarding loans. Current vulnerabilities due to certain concentrations of credit risk are discussed in the footnote on commitments and credit risk.

Litigation

Neither the Company nor the Bank is involved in any pending legal proceedings other than routing legal proceedings occurring in the ordinary course of business. Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to the financial condition and results of operations of the Company.

 

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Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

 

Bank-Owned Life Insurance

Approximately 36% and 47% of the Company’s investment in bank-owned life insurance was held by two carriers at December 31, 2014 and 2013, respectively. The reduction from 47% to 36% was primarily the result of replacing policies in 2014 with those from another insurance carrier.

 

21. Risks and Uncertainties

The Company’s allowance for loan losses contains certain assumptions on the value of collateral dependent loans as well as certain economic and industry conditions which may be subject to change within the next year. These changes could have an adverse impact on the allowance for loan loss in the near term.

 

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

 

Item 9A. Controls and Procedures

 

  (a) Disclosure Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

  (b) Internal Controls Over Financial Reporting

Management’s annual report on internal control over financial reporting is incorporated herein by reference to the Company’s audited Consolidated Financial Statements in this Annual Report on Form 10-K.

 

  (c) Changes to Internal Control Over Financial Reporting

Except as indicated herein, there were no changes in the Company’s internal control over financial reporting during the three months ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Item 9B. Other Information

Not applicable.

 

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PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

Information concerning the directors of the Company is incorporated herein by reference to the section captioned “Items to be Voted on by Shareholders – Item 1 – Election of Directors” in the Proxy Statement for the 2015 Annual Meeting of Shareholders (the “Proxy Statement”).

Information concerning the executive officers of the Company is incorporated herein by reference to “Item 1. Business – Executive Officers” in Part I of this Annual Report on Form 10-K.

Information concerning compliance with Section 16(a) of the Exchange Act required by this item is incorporated herein by reference to the cover page of this Form 10-K and the section titled “Other Information Relating to Directors and Executive Officers —- Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.

The Company has adopted a Code of Ethics that applies to the Company’s principal executive officer, principal accounting and financial officer and senior executive officers. For information concerning the Code of Ethics, see the section titled “Corporate Governance and Board Matters – Code of Ethics” in the Proxy Statement. The Code of Ethics is posted on the Company’s Internet Web site at www.ameriana.com. The Company intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to or waiver from a provision of the Company’s Code of Ethics by posting such information on its Internet site at www.ameriana.com.

Information concerning the Audit Committee and its composition and the audit committee financial expert and other corporate governance matters is incorporated by reference to the section titled “Corporate Governance and Board Matters” in the Proxy Statement.

 

Item 11. Executive Compensation

The information required by this item is incorporated herein by reference to the sections captioned “Corporate Governance and Board Matters—Director Compensation” and “Executive Compensation” in the Proxy Statement.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in the Proxy Statement.

 

  (a) Security Ownership of Certain Beneficial Owners

Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in the Proxy Statement.

 

  (b) Security Ownership of Management

Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in the Proxy Statement.

 

  (c) Changes in Control

Management of Ameriana Bancorp knows of no arrangements, including any pledge by any person or securities of Ameriana Bancorp, the operation of which may at a subsequent date result in a change in control of the registrant.

 

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  (d) Equity Compensation Plan Information

The following table sets forth information about Company common stock that may be issued under the Company’s equity compensation plans as of December 31, 2014. The Company does not maintain any equity compensation plans that have not been approved by shareholders.

 

Plan Category

   Number of securities
to be issued upon
the exercise of
outstanding options,
warrants and rights
     Weighted-average
exercise price of
outstanding options,
warrants and rights
     Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in the first
column)
 

Equity compensation plans approved by security holders

     74,850       $ 12.25         178,400   

Equity compensation plans not approved by security holders

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

  74,850    $ 12.25      178,400   
  

 

 

    

 

 

    

 

 

 

 

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information concerning certain relationships and related transactions is incorporated herein by reference to the section captioned “Other Information Relating to Directors and Executive Officers—Transactions with Related Persons” in the Proxy Statement.

Information concerning director independence is incorporated by reference to the section titled “Items to be Voted on by Shareholders – Item 1 – Election of Directors” in the Proxy Statement.

 

Item 14. Principal Accountant Fees and Services

The information required by this item is incorporated herein by reference to the section captioned “Items to be Voted on by Shareholders – Item 2 – Ratification of the Independent Registered Public Accounting Firm” in the Proxy Statement.

PART IV

 

Item 15. Exhibits and Financial Statement Schedules

List of Documents Filed as Part of This Report

(1) Financial Statements. The following consolidated financial statements are filed under Item 8 hereof:

 

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets at December 31, 2014 and 2013

Consolidated Statements of Income for Each of the Two Years in the Period Ended December 31, 2014

Consolidated Statements of Comprehensive Income for Each of the Two Years in the Period Ended December 31, 2014

Consolidated Statements of Stockholders’ Equity for Each of the Two Years in the Period Ended December 31, 2014

Consolidated Statements of Cash Flows for Each of the Two Years in the Period Ended December 31, 2014

Notes to Consolidated Financial Statements

 

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(2) Financial Statement Schedules. All schedules for which provision is made in the applicable accounting regulations are either not required under the related instructions or are inapplicable, and therefore have been omitted.

(3) Exhibits. The following is a list of exhibits as part of this Annual Report on Form 10-K and is also the Exhibit Index.

 

No.

  

Description

    3.1    Ameriana Bancorp Amended and Restated Articles of Incorporation (incorporated herein by reference to the Company’s Registration Statement on Form S-4 filed with the SEC on September 18, 1989)
    3.2    Amended and Restated Bylaws (incorporated herein by reference to the Company’s Current Report on Form 8-K filed with the SEC on October 2, 2007)
    4.1    No long-term debt instrument issued by the Registrant exceeds 10% of consolidated assets or is registered. In accordance with paragraph 4 (iii) of Item 601 (b) of Regulation S-K, the Registrant will furnish the SEC copies of long-term debt instruments and related agreements upon request.
  10.1*    Employment Agreement between Ameriana Bank and Jerome J. Gassen (incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 31, 2011)
  10.2*    Ameriana Bancorp Amended and Restated 1996 Stock Option and Incentive Plan (incorporated herein by reference to the Company’s Registration Statement on Form S-8 filed with the SEC on May 9, 2003)
  10.3*    Employment Agreement between Ameriana Bank, SB and John J. Letter (incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 31, 2011)
  10.4*    Supplemental Life Insurance Agreement, effective December 20, 2007, by and between Ameriana Bank, SB and Jerome J. Gassen (incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, filed with the SEC on March 31, 2008)
  10.5*    Supplemental Life Insurance Agreement, effective December 20, 2007, by and between Ameriana Bank, SB and Richard E. Hennessey (incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, filed with the SEC on March 31, 2008)
  10.6*    Ameriana Bank, SB Salary Continuation Agreement dated December 15, 2008 between Ameriana Bank, SB and Jerome J. Gassen (incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 30, 2009)
  10.7*    Ameriana Bank, SB Supplemental Retirement Plan, dated December 10, 2008 between Ameriana Bank, SB and Michael E. Kent (incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 30, 2009)

 

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  10.8* Mr. Danielson’s Supplemental Retirement Plan is the same as the Supplemental Retirement Plan in Exhibit 10.11, which is incorporated herein by reference except as to: (i) the name of the Executive, which is Donald C. Danielson; (ii) the date of execution, which is November 17, 2008; (iii) the normal retirement age under Section 1.10, which is age 87; and (iv) the annual benefit amount in Section 2.1.1, which is $20,000.
  10.9* Ameriana Bank, SB Supplemental Retirement Plan dated November 15, 2008 between Ameriana Bank, SB and Ronald R. Pritzke (incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 30, 2009)
  10.10* Mr. Hayes’s Supplemental Retirement Plan is the same as the Supplemental Retirement Plan in Exhibit 10.11, which is incorporated herein by reference except as to: (i) the name of the Executive, which is R. Scott Hayes; (ii) the date of execution, which is November 16, 2008; and (iii) the annual benefit amount in Section 2.1.1, which is $15,000.
  10.11* Ameriana Bank, SB Supplemental Retirement Plan dated December 30, 2008 between Ameriana Bank, SB and Richard E. Hennessey (incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 30, 2009)
  10.12* Ameriana Bancorp 2006 Long-Term Incentive Plan (incorporated herein by reference to Appendix A to the Proxy Statement for the 2006 Annual Meeting of Shareholders, filed with the SEC on April 14, 2006)
  10.13* Standstill Agreement, dated March 26, 2013, by and among Ameriana Bancorp, Financial Edge Fund, L.P., Financial Edge – Strategic Fund, L.P., PL Capital/Focused Fund, L.P., Goodbody/PL Capital L.P., PL Capital, LLC, PL Capital Advisers, LLC, Goodbody/PL Capital, LLC, John W. Palmer and Richard J. Lashley (Incorporated herein by reference to Exhibit 10.1 to the Form 8-K filed with the Securities and Exchange Commission on March 26, 2013)
  10.14* Employment Agreement between Ameriana Bank and Deborah C. Robinson
  21 Subsidiaries
  23 Consent of BKD, LLP
  31.1 Rule 13(a)-14(a) Certification of Chief Executive Officer
  31.2 Rule 13(a)-14(a) Certification of Chief Financial Officer
  32 Certifications Pursuant to 18 U.S.C. Section 1350
101 The following materials from Ameriana Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2014 formatted in Extensible Business Reporting Language (“XBRL”): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Income; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Shareholders’ Equity; (v) the Consolidated Statements of Cash Flows; and (vi) Notes to the Consolidated Financial Statements.

 

* Management contract or compensation plan or arrangement.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

AMERIANA BANCORP
Date: March 26, 2015 By:

/s/ Jerome J. Gassen

Jerome J. Gassen
President and Chief Executive Officer
(Duly Authorized Representative)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated.

 

By:

/s/ Jerome J. Gassen

March 26, 2015
Jerome J. Gassen
President, Chief Executive Officer and Director
(Principal Executive Officer)
By:

/s/ John J. Letter

March 26, 2015
John J. Letter
Executive Vice President, Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
By:

/s/ Michael E. Kent

March 26, 2015
Michael E. Kent
Chairman of the Board
By:

/s/ Michael E. Bosway

March 26, 2015
Michael E. Bosway
Director
By:

/s/ Donald C. Danielson

March 26, 2015
Donald C. Danielson
Director
By:

/s/ R. Scott Hayes

March 26, 2015
R. Scott Hayes
Director
By:

/s/ Charles R. Haywood

March 26, 2015
Charles R. Haywood
Director
By:

/s/ Richard E. Hennessey

March 26, 2015
Richard E. Hennessey
Director
By:

/s/ Ronald R. Pritzke

March 26, 2015
Ronald R. Pritzke
Director


Table of Contents
By:

/s/ Jennifer P. Bott

March 26, 2015
Jennifer P. Bott
Director
By:

/s/ William F. McConnell, Jr.

March 26, 2015
William F. McConnell, Jr.
Director
By:

/s/ Michael W. Wells

March 26, 2015
Michael W. Wells
Director