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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_____________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
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 (I.R.S. Employer
Incorporation or Organization) 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: NONE
----
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $1.00 PER SHARE
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Indicate by check mark whether the registrant: (l) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X
--- ---
At December 31, 2002, the registrant had 3,147,463 shares of its Common Stock,
$1.00 per share, outstanding. The aggregate market value of voting stock held by
nonaffiliates of the registrant at December 31, 2002 was approximately $32
million based on the closing sale price of the registrant's Common Stock as
listed on the Nasdaq National Market as of the last business day of the
registrant's most recently completed second fiscal quarter. For purposes of this
calculation, directors and executive officers are not treated as
"non-affiliates".
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Proxy Statement for the 2003 Annual Meeting of Shareholders
("Proxy Statement") (Part III).
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PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
When used in this Annual Report on Form 10-K (the "Annual Report"), the
words or phrases "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project" or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are subject to certain
risks and uncertainties including changes in economic conditions in the
Company's market area, changes in policies by regulatory agencies, the outcome
of litigation, fluctuations in interest rates, demand for loans in the Company's
market area, and competition that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake, and specifically disclaims any obligation,
to publicly release the result of any revisions, which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
GENERAL
THE COMPANY. Ameriana Bancorp (the "Company") is a bank holding company
subject to regulation and supervision by the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board") under the Bank Holding Company Act
of 1956 ("BHCA"). The Company's principal subsidiary is Ameriana Bank and Trust,
SB, an Indiana chartered savings bank headquartered in New Castle, Indiana (the
"Bank"). The Company also holds a minority interest in a limited partnership
organized to acquire and manage real estate investments, which qualify for
federal tax credits.
The Company became the holding company for the Bank in 1990. In 1992, the
Company acquired Deer Park Financial Corporation, the holding company for Deer
Park Federal Savings and Loan Association ("Deer Park"), a federal savings
association with its main office in Cincinnati, Ohio. After the acquisition, the
Company operated Deer Park as a separate subsidiary. In 1998, the Company
acquired Cardinal State Bank ("Cardinal"), an
1
Ohio-chartered commercial bank with its main office in Maineville, Ohio, through
a merger with Deer Park. Following the acquisition, Deer Park was renamed
Ameriana Bank of Ohio, F.S.B. ("Ameriana-Ohio") and continued to operate as a
separate subsidiary. In October 2000, the Company merged Ameriana-Ohio into the
Bank.
Effective June 29, 2001, the Bank converted to an Indiana savings bank and
adopted its present name, "Ameriana Bank and Trust, SB." As a result of the
conversion, the Bank become subject to regulation by the Indiana Department of
Financial Institutions and the Federal Deposit Insurance Corporation ("FDIC")
rather than by the Office of Thrift Supervision, and the Company became a bank
holding company.
THE BANK. The Bank began operations in 1890. Since 1935, the Bank has been
a member of the Federal Home Loan Bank ("FHLB") System. Its deposits are insured
to applicable limits by the Savings Association Insurance Fund ("SAIF"),
administered by the FDIC. The Bank's main office is located at 2118 Bundy
Avenue, New Castle, Indiana. The Bank also conducts business through eight
Indiana branch offices located in New Castle, Middletown, Knightstown,
Morristown, Greenfield, Anderson, Avon and New Palestine, Indiana and two Ohio
branch offices located in Cincinnati and Maineville, Ohio. The Bank, through a
wholly owned subsidiary, Ameriana Financial Services, Inc., has ownership
interests in a life insurance underwriting firm located in New Orleans,
Louisiana and in an Indiana title insurance agency, and offers a full line of
investments and securities products through its brokerage center located in New
Castle, Indiana. The Bank maintains a website at www.ameriana.com.
The business of the Bank consists primarily of attracting deposits from the
general public and originating mortgage loans on single-family residences,
multi-family housing and commercial real estate. The Bank also makes home
improvement loans and consumer loans and, through its subsidiary, engages in
insurance and brokerage activities. In 1999, the Bank established a Business
Services Division to provide specialized lending and other banking services for
business customers. As a result of the Business Services Division, commercial
real estate loans have increased significantly during 2002, 2001 and 2000.
The Bank also began operating a Trust Department during 1999, which
provides trust, investment and estate planning services. The principal sources
of funds for the Bank's lending activities include deposits received from the
general public, funds borrowed from the FHLB, principal amortization and
prepayment of loans. The Bank's primary sources of income are interest and fees
on loans and interest on investments. The Bank has from time to time purchased
loans and loan participations in the secondary market. The Bank also invests in
various federal and government agency obligations and other investment
securities permitted by applicable laws and
2
regulations, including mortgage-backed securities. The Bank's principal expenses
are interest paid on deposit accounts and borrowed funds and operating expenses
incurred in the operation of the Bank.
REGULATORY ACTIONS. During the second quarter of 2002, the Bank entered
into a memorandum of understanding ("MOU") with the FDIC and the Indiana
Department of Financial Institutions ("DFI"). Among other things, the MOU
required the Bank to adopt written action plans with respect to certain
classified assets, revise its lending policies, require greater financial
information from borrowers, establish a loan review program and certain other
internal controls. For more a more detailed discussion of the terms and
conditions of the MOU, see "Regulation and Supervision - Regulation and
Supervision of the Bank - Capital Requirements" below.
LENDING AND INVESTMENT ACTIVITIES
GENERAL. The principal lending activity of the Bank has been the
origination of conventional first mortgage loans secured by residential
property, commercial real estate, equity lines of credit and consumer loans. The
residential mortgage loans have been predominantly secured by single-family
homes and have included construction loans.
The Bank may originate or purchase whole loans or loan participations
secured by real estate located in any part of the United States. Notwithstanding
this nationwide lending authority, the majority of the Bank's mortgage loan
portfolio is secured by real estate located in Henry, Hancock, Hendricks,
Madison, Shelby, Delaware and Marion counties in the state of Indiana and in
Hamilton, Butler, Clermont and Warren counties in the state of Ohio.
Certain amounts in the tables that follow have been reclassified to conform
to 2002 presentation.
3
The following table sets forth information concerning the Company's
aggregate loans by type of loan at the dates indicated.
AT DECEMBER 31,
--------------------------------------------------------------------
2002 2001 2000
------------------- ------------------- ------------------
AMOUNT % AMOUNT % AMOUNT %
------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
Real estate mortgage loans:
Commercial.............................. $ 88,558 27.54% $ 61,678 16.91% $ 35,615 8.57%
Residential loans....................... 157,622 49.00 211,601 58.00 295,949 71.18
Construction loans...................... 42,714 13.28 42,045 11.52 43,287 10.41
Commercial loans.......................... 19,192 5.97 18,536 5.08 8,764 2.11
Consumer loans:
Mobile home and auto loans.............. 10,092 3.14 15,941 4.37 20,767 5.00
Loans secured by deposits............... 1,130 0.35 1,348 0.37 1,598 0.38
Home improvement loans.................. 248 0.08 403 0.11 321 0.08
Other................................... 2,043 0.64 13,294 3.64 9,431 2.27
--------- ------ --------- ------ ---------- ------
Total................................ 321,599 100.00% 364,846 100.00% 415,732 100.00%
--------- ====== --------- ====== ---------- ======
Less:
Loans in process........................ 7,985 12,725 16,724
Deferred loan fees...................... 362 8 (143)
Loan loss reserve....................... 8,666 1,730 1,489
Subtotal............................... 17,013 14,463 18,070
--------- --------- ---------
Total................................ $ 304,586 $ 350,383 $ 397,662
========= ========= =========
AT DECEMBER 31,
---------------------------------------
1999 1998
------------------- -----------------
AMOUNT % AMOUNT %
------ ----- ------ -----
(DOLLARS IN THOUSANDS)
Real estate mortgage loans:
Commercial.............................. $ 22,411 6.51% $ 15,282 5.55%
Residential loans....................... 250,392 72.77 205,636 74.69
Construction loans...................... 42,971 12.49 23,176 8.42
Commercial loans.......................... 1,209 0.35 862 0.31
Consumer loans:
Mobile home and auto loans.............. 16,373 4.77 21,854 7.94
Loans secured by deposits............... 1,392 0.40 1,351 0.49
Home improvement loans.................. 1,577 0.46 2,774 1.01
Other................................... 7,762 2.26 4,387 1.59
--------- ------ -------- ------
Total................................ 344,087 100.00% 275,322 100.00%
--------- ====== -------- ======
Less:
Loans in process........................ 16,723 12,123
Deferred loan fees...................... (129) 102
Loan loss reserve....................... 1,534 1,284
-------- --------
Subtotal............................... 18,128 13,509
-------- --------
Total................................ $325,959 $261,813
======== ========
4
The following table shows, at December 31, 2002, the Company's aggregate
loans based on their contractual terms to maturity (mortgage-backed securities
are not included). Demand loans, loans having no stated schedule of repayments
and no stated maturity, and overdrafts are reported as due in one year or less.
Contractual principal repayments of loans do not necessarily reflect the actual
term of the loan portfolio. The average life of mortgage loans is substantially
less than their contractual terms because of loan prepayments and because of
enforcement of due-on-sale clauses, which give the Bank the right to declare a
loan immediately due and payable in the event, among other things, that the
borrower sells the real property subject to the mortgage and the loan is not
repaid. The average life of mortgage loans tends to increase, however, when
current mortgage loan rates substantially exceed rates on existing mortgage
loans.
AMOUNTS OF LOANS WHICH MATURE IN
-------------------------------------------------------------
2008 AND
2003 2004 - 2007 THEREAFTER TOTAL
---- ----------- ---------- -----
(IN THOUSANDS)
Type of Loan:
Real estate mortgage....... $ 38,807 $ 33,948 $ 216,139 $ 288,894
Other...................... 4,183 26,569 1,953 32,705
---------- ---------- --------- ----------
Total................... $ 42,990 $ 60,517 $ 218,092 $ 321,599
========== ========== ========= ==========
The following table sets forth the dollar amount of the Company's aggregate
loans due after one year from December 31, 2002 which have predetermined
interest rates and which have floating or adjustable interest rates
(mortgage-backed securities are not included).
FIXED ADJUSTABLE
RATE RATE TOTAL
------ ----------- -----
(IN THOUSANDS)
Real estate mortgage loans............. $ 111,845 $ 138,242 $ 250,087
Other loans............................ 27,216 1,306 28,522
---------- --------- ---------
Total................................ $ 139,061 $ 139,548 $ 278,609
========== ========= =========
RESIDENTIAL REAL ESTATE LENDING. The Bank's primary lending activities are
the origination of loans on one-to-four family residential dwelling units. The
Bank currently offers fixed-rate, first and second mortgage loans. The
fixed-rate mortgage loans provide for a maturity of ten to thirty years, with
the thirty-year loan bearing a slightly higher rate of interest. The terms of
the first mortgage loans generally conform to the guidelines established by the
Federal Home Loan Mortgage Corporation ("FHLMC") and are, therefore, saleable in
the secondary mortgage market. The Bank's fixed-rate second mortgage loans
provide for a maturity of up to 15 years and bear interest at a rate slightly
higher than that borne by the first mortgage loans. At the time the Bank makes a
fixed-rate
5
mortgage loan, it determines whether the loan will be held in portfolio or sold.
Normally the Bank sells fixed rate loans and retains adjustable rate loans. Once
placed in portfolio, loans are not sold. Loans originated for sale are promptly
sold in the secondary market. Fixed-rate mortgage loans in the amount of $110.8
million were originated for sale during 2002 and $113.0 million were sold at a
gain of $1.4 million. Mortgage loans held for sale are those loans that have
been committed to be sold, but have not closed as of the end of the year and
were $3.8 million at December 31, 2002.
The Bank emphasizes the origination of adjustable-rate mortgages ("ARMs")
for portfolio. The Bank currently offers several types of ARMs either as
first-lien mortgage loans or as second-lien mortgage loans that are adjustable
semi-annually, annually, or on three-year, five-year or seven-year intervals and
indexed to the yields on comparable United States Treasury securities.
The Bank limits the maximum loan-to-value ratio on one-to-four family
residential first mortgages to 97% of the appraised value with the requirement
that private mortgage insurance normally be obtained for loan-to-value ratios in
excess of 80%. The Bank limits the loan-to-value ratio to 89.9% on second
mortgages on one-to-four family dwellings.
The Bank's residential lending activities also include loans secured by
multi-family residential structures, which are structures consisting of over
four separate dwelling units. This has not constituted a significant portion of
the Bank's lending activities to date. Multi-family residential structures are
generally income-producing properties. The Bank generally does not lend above
80% of the appraised values of multi-family residences on first mortgage loans.
CONSTRUCTION AND COMMERCIAL REAL ESTATE LENDING. The Bank originates loans
secured by existing commercial properties and construction loans on residential
real estate. Churches, nursing homes, hotels/motels, and other income-producing
properties secure the Bank's commercial real estate loans. The Bank's commercial
real estate loans have increased significantly due to the establishment of the
new Business Services Division during 1999. This operation makes direct
commercial loans and purchases loan participations from other financial
institutions. These participations in commercial real estate loans are reviewed
and approved based upon the same credit standards as direct commercial loans at
the Bank. Loans secured by commercial real estate properties are generally
larger and involve a greater degree of credit risk than one-to-four family
residential mortgage loans. Because payments on loans secured by commercial real
estate properties are often dependent on the successful
6
operation or management of the properties, repayment of such loans may be
subject to adverse conditions in the real estate market or by general economic
conditions. If the cash flow from the project is reduced (for example, if leases
are not obtained or renewed), the borrower's ability to repay the loan may be
impaired. To minimize the risks involved in originating such loans, the Bank
considers, among other things, the credit worthiness of the borrower, the
location of the real estate, the condition and occupancy levels of the security
and the quality of the organization managing the property.
The Bank originates and/or purchases construction loans on single-family
residential properties in its primary market areas. The loans are secured by
real estate, and most of the homes to be constructed are already subject to a
sales contract at the time the construction loan is made. The Bank's
construction loans generally range in size between $100,000 and $500,000, and
the Bank's commercial real estate loans range from $100,000 to $4,000,000.
Substantially all of the commercial and construction loans originated and/or
purchased by the Bank have either adjustable interest rates with maturities of
30 years or less or are loans with fixed interest rates and maturities of ten
years or less.
Loans involving construction financing present a greater level of risk than
loans for the purchase of existing homes since collateral value and construction
costs can only be estimated at the time the loan is approved. The Bank has
sought to minimize this risk by limiting construction lending to qualified
borrowers in its market area and by limiting the number of construction loans
outstanding at any time to individual builders. In addition, most of the Bank's
construction loans are made on homes that are pre-sold, for which permanent
financing is already arranged.
The Bank's underwriting criteria are designed to evaluate and minimize the
risks of each construction loan. Among other things, the Bank considers evidence
of the availability of permanent financing or a takeout commitment to the
borrower; the reputation of the borrower and his or her financial condition; the
amount of the borrower's equity in the project; independent appraisal and review
of cost estimates; pre-construction sale and leasing information; and cash flow
projections of the borrower.
CONSUMER LOANS. The consumer loans granted by the Bank have included loans
on automobiles and other consumer goods, loans secured by savings accounts and
secured and unsecured lines of credit.
Management believes that the shorter terms and the normally higher interest
rates available on various types of consumer loans have been helpful in
maintaining profitable spreads between average loan yields and costs of funds.
Consumer loans do, however, pose additional risks of collection when compared to
traditional types of
7
loans granted by thrift institutions such as residential first mortgage loans.
The Bank has sought to reduce this risk by primarily granting secured consumer
loans.
COMMERCIAL BUSINESS LENDING. Under applicable law, the Bank is permitted to
make secured and unsecured loans for commercial, corporate, business and
agricultural purposes, including issuing letters of credit and engaging in
inventory financing and commercial leasing activities. The Bank does not, as a
common practice, make unsecured commercial loans. The Bank began making and
purchasing collateral secured commercial loans in 1998. The total lease and
commercial portfolio at December 31, 2002 was $19.2 million.
ORIGINATIONS, PURCHASES AND SALES. Historically, most residential and
commercial real estate loans have been originated directly by the Bank through
salaried loan officers. Residential loan originations have been attributable to
referrals from real estate brokers and builders, depositors and walk-in
customers, and commissioned loan agents. The Bank also obtains consumer and
commercial loans from paid brokers. The Bank obtained $12.3 million of loans
from brokers and other financial institutions through loan participations in
2002. Commercial real estate and construction loan originations have also been
obtained by direct solicitation. Consumer loan originations are attributable to
walk-in customers who have been made aware of the Bank's programs by advertising
as well as direct solicitation.
The Bank has previously sold whole loans to other financial institutions
and institutional investors. Sales of loans generate income (or loss) at the
time of sale, produce future servicing income and provide funds for additional
lending and other purposes. When the Bank retains the servicing of loans it
sells, the Bank retains responsibility for collecting and remitting loan
payments, inspecting the properties, making certain insurance and tax payments
on behalf of borrowers and otherwise servicing those loans. The Bank typically
receives a fee of between 0.25% and 0.375% per annum of the loan's principal
amount for performing this service. The right to service a loan has economic
value and the Bank carries capitalized servicing rights on its books based on
comparable market values and expected cash flows. At December 31, 2002, the Bank
was servicing $177.4 million of loans for others. The aggregate book value of
capitalized servicing rights at December 31, 2002 was $1.2 million.
Management believes that purchases of loans and loan participations are
generally desirable, primarily when area mortgage demand is less than the supply
of funds available for local mortgage origination or when loan terms are
available in areas outside the Bank's local lending areas that are more
favorable to its investment requirements. Additionally, purchases of loans may
be made in order to diversify the Bank's lending portfolio. The
8
Bank's loan purchasing activities fluctuate significantly. The seller generally
performs the servicing of purchased loans. In order to cover servicing costs,
the service provider retains a portion of the interest being paid by the
borrower. In addition to whole loan purchases, the Bank also purchases
participation interests in loans. Both whole loans and participations are
purchased on a yield basis.
For additional information, see "Management's Discussion and Analysis --
Results of Operations" included in Item 7 of this Annual Report.
LOAN UNDERWRITING. During the loan approval process, the Bank assesses both
the borrower's ability to repay the loan and the adequacy of the underlying
security. Potential residential borrowers complete an application that is
submitted to a salaried loan officer. As part of the loan application process,
the Bank obtains information concerning the income, financial condition,
employment, and credit history of the applicant. In addition, qualified
appraisers inspect and appraise the property that is offered to secure the loan.
The Bank's loan officers and/or loan committee analyze the loan application
and the property to be used as collateral and subsequently approve or deny the
loan request. Individual salaried employees are authorized to approve loans up
to their individual lending limits and loan parameters. A committee consisting
of certain members of senior management must approve residential loans exceeding
$500,000, and commercial loans between $350,000 and $1,000,000. The Board of
Directors approves all loans in excess of $1,000,000. In connection with the
origination of single-family, residential adjustable rate loans, borrowers are
qualified at a rate of interest equal to the second year rate, assuming the
maximum increase. It is the policy of management to make loans to borrowers who
not only qualify at the low initial rate of interest, but who would also qualify
following an upward interest rate adjustment.
LOAN COMMITMENTS. Conventional loan commitments by the Bank are generally
granted for periods of up to 60 days. The total amount of the Bank's aggregate
outstanding commitments to originate real estate loans at December 31, 2002, was
approximately $7.4 million of residential mortgage commitments and approximately
$1.0 million of commercial commitments. It has been the Bank's experience that
few commitments expire un-funded.
LOAN FEE AND SERVICING INCOME. In addition to interest earned on loans, the
Bank receives income through servicing of loans and fees in connection with loan
originations, loan modifications, late payments, and changes of property
ownership and for miscellaneous services related to the loan. Income from these
activities is volatile and varies from period to period with the volume and type
of loans made.
9
When possible, the Bank charges loan origination fees on commercial loans
that are calculated as a percentage of the amount borrowed and are charged to
the borrower at the time of origination of the loan. These fees generally range
from none to 1.00 point (one point being equivalent to 1% of the principal
amount of the loan). In accordance with Statement of Financial Accounting
Standard No. 91, loan origination and commitment fees and certain direct loan
origination costs are deferred and the net amount amortized as an adjustment of
yield over the contractual life of the related loans.
For additional information, see Note 4 to the "Consolidated Financial
Statements" included under Item 8 of this Annual Report.
DELINQUENCIES. When a borrower defaults upon a required payment on a loan,
the Bank contacts the borrower and attempts to induce the borrower to cure the
default. A late payment notice is mailed to the borrower and a telephone contact
is made after a payment is 15 days past due. If the delinquency on a mortgage
loan exceeds 90 days and is not cured through the Bank's normal collection
procedures or an acceptable arrangement is not worked out with the borrower, the
Bank will institute measures to remedy the default, including commencing
foreclosure action.
NON-PERFORMING ASSETS AND ASSET CLASSIFICATION. Loans are reviewed on a
regular basis and are placed on a non-accrual status when, in the opinion of
management, the collection of additional interest is doubtful. Residential
mortgage loans are placed on non-accrual status when either principal or
interest is 90 days or more past due unless it is adequately secured and there
is reasonable assurance of full collection of principal and interest. Consumer
loans generally are charged off when the loan becomes over 120 days delinquent.
Commercial business and real estate loans are placed on non-accrual status when
the loan is 90 days or more past due. Interest accrued and unpaid at the time a
loan is placed on non-accrual status is charged against interest income.
Subsequent payments are applied to the outstanding principal balance.
Real estate acquired by the Bank as a result of foreclosure or by deed in
lieu of foreclosure is classified as real estate owned until such time as it is
sold. When such property is acquired, it is recorded at the lower of the unpaid
principal balance of the related loan or its fair value. Any subsequent
deterioration of the property is charged off directly to income, reducing the
value of the asset.
The following table sets forth information with respect to the Company's
aggregate non-performing assets at the dates indicated.
10
AT DECEMBER 31,
--------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- -------
(DOLLARS IN THOUSANDS)
Loans accounted for on a non-accrual basis:
Real Estate:
Residential.................................... $ 3,281 $ 818 $ 720 $ 703 $ 684
Commercial..................................... 2,269 1,348 36 226 15
Construction................................... -- -- -- -- --
Commercial........................................ 12,500 -- 8 11 --
Consumer.......................................... 257 12 37 231 46
-------- -------- -------- -------- -------
Total........................................... 18,307 2,178 801 1,171 745
-------- -------- -------- -------- -------
Accruing loans contractually past due 90
days or more:
Real Estate:
Residential.................................... 103 268 576 16 37
Commercial..................................... 28 -- -- -- --
Construction................................... -- -- 158 -- --
Commercial........................................ -- -- -- -- --
Consumer.......................................... 4 127 13 9 3
-------- -------- -------- -------- -------
Total........................................... 135 395 747 25 40
-------- -------- -------- -------- -------
Total of non-accrual and
90 days past due loans....................... $ 18,442 $ 2,573 $ 1,548 $ 1,196 $ 785
======== ======== ======== ======== =======
Percentage of total loans (excluding
mortgage-backed securities)..................... 5.89% 0.74% 0.39% 0.37% 0.30%
======== ======== ======== ======== =======
Other non-performing assets (1)..................... $ 525 $ 606 $ 125 $ -- $ 96
======== ======== ======== ======== =======
<FN>
____________
(1) Other non-performing assets represents property acquired through
foreclosure or repossession. This property is carried at the lower of its
fair market value or the principal balance of the related loan.
</FN>
The increase of $16.1 million in non-accrual loans during 2002 is primarily
due to participations in two pools of lease receivables for $10.9 million in
loans to a builder/development group and its related parties totaling $3.6
million.
The lease pools are in litigation. For more information please see "Item 3
- -- Legal Proceedings"
As noted above, the Bank has a number of real estate development/lot loans
and single family residential loans on existing properties with a
builder/developer group, and its related parties, that are currently in default
and bankruptcy. There appears to be a considerable number of fraudulent
transactions involved and there are multiple lien issues on a number of the
properties. The Bank is working closely with the workout specialist hired by the
bankruptcy trustee on liquidation of the properties involved in the bankruptcy
and we are negotiating with the borrower and its related parties and their
counsel for resolution of the remaining properties. The total outstanding
balance of the various loans totaled $3.6 million as of December 31, 2002.
11
During 2002, the Bank would have recorded gross interest income of $1.5
million on the loans set forth above as accounted for on a non-accrual basis, if
such loans had been current in accordance with their terms. Instead, the Bank
recorded interest income of $241,000 on those loans for the year.
For additional information regarding the Bank's problem assets and loss
provisions recorded thereon, see "Management's Discussion and Analysis" in Item
7 of this Annual Report.
RESERVES FOR LOSSES ON LOANS AND REAL ESTATE
In making loans, management recognizes the fact that credit losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan and, in the case of a secured loan, the quality of the security for the
loan.
It is management's policy to maintain reserves for estimated losses on
loans. The Bank's personnel provide general loan loss reserves based on, among
other things, estimates of the historical loan loss experience, evaluation of
economic conditions in general and in various sectors of the Bank's customer
base, and periodic reviews of loan portfolio quality. Specific reserves are
provided for individual loans where the ultimate collection is considered
questionable by management after reviewing the current status of loans which are
contractually past due and considering the net realizable value of the security
of the loan or guarantees, if applicable. It is management's policy to establish
specific reserves for estimated losses on delinquent loans when it determines
that losses are anticipated to be incurred on the underlying properties. At
December 31, 2002, the Bank's allowance for loan losses amounted to $8.7
million.
Future reserves may be necessary if economic conditions or other
circumstances differ substantially from the assumptions used in making the
initial determinations. There can be no assurance that regulators, in reviewing
the Bank's loan portfolio in the future, will not ask the Bank to increase its
allowance for loan losses, thereby negatively affecting its financial condition
and earnings.
12
The following table sets forth an analysis of the Company's aggregate
allowance for loan losses for the periods indicated.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at Beginning of Period..................... $ 1,730 $ 1,489 $ 1,534 $ 1,284 $ 1,163
-------- -------- -------- -------- --------
Charge-Offs:
Real Estate:
Residential.................................... 202 29 30 -- 12
Commercial..................................... -- -- 206 -- --
Construction................................... 24 -- -- -- --
Commercial business.............................. -- -- 252 -- --
Consumer......................................... 162 117 -- 98 153
-------- -------- -------- -------- --------
388 146 488 98 165
-------- -------- -------- -------- --------
Recoveries:
Real Estate:
Residential.................................... -- 12 -- -- --
Commercial..................................... -- -- -- -- --
Construction................................... -- -- -- -- --
Commercial business.............................. -- -- 3 4 --
Consumer......................................... 24 15 23 16 27
-------- -------- -------- -------- --------
24 27 26 20 27
-------- -------- -------- -------- --------
Net Charge-Offs.................................... (364) (119) (462) (78) (138)
Increase from Acquisition.......................... -- -- -- -- 100
Provision for Loan Losses.......................... 7,300 360 417 328 159
-------- -------- -------- -------- --------
Balance at End of Period............................ $ 8,666 $ 1,730 $ 1,489 $ 1,534 $ 1,284
======== ======== ======== ======== ========
Ratio of Net Charge-Offs to Average
Loans Outstanding During the Period.............. 0.11% 0.03% 0.12% 0.03% 0.05%
======== ======== ======== ======== ========
Ratio of Ending Allowance for
Loan Losses to Ending Loans...................... 2.77% 0.49% 0.37% 0.47% 0.49%
======== ======== ======== ======== ========
The provision for loan losses in 2002 increased to $7.3 million from
$360,000 from the prior year. This increase is primarily due to the non-accrual
loans in the table under the heading "Non-Performing Assets and Asset
Classification" earlier in this section. The lease pools had 50% reserves for
$5.5 million due to an expected lengthy litigation process (see Item 3 -- "Legal
Proceedings"). Due to the uncertainty of the outcome of the legal proceedings,
management estimates that at December 31, 2002 the potential loss could be up to
$10.9 million. Based on information available at December 31, 2002, a $5.5
million reserve was considered appropriate. The loans to the builder/developer
group, and its related parties had 25% reserves for $895,000. The remaining
reserves were
13
necessary to reflect management's view on the risk in the loan portfolio due to
the change in the portfolio mix. See also "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Loans --Credit
Quality".
Net charge-offs for the year ended December 31, 2002 increased from 2001.
Mortgage, construction, and consumer loan charge-offs increased $173,000,
$24,000 and $45,000 respectively from 2001. Net charge-offs for the year ended
December 31, 2001 decreased principally because there were no large charge-offs
of commercial mortgage or consumer loans as in 2000. During fiscal year 2000,
the Bank charged-off $172,000 on a loan which was acquired in the acquisition of
Cardinal State Bank in 1998 and which had been fully reserved for in 1999.
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,
------------------------------------------------------------------------------
2002 2001 2000
------------------------- ---------------------- -------------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ------------- ------ ------------- ------ -------------
(DOLLARS IN THOUSANDS)
Loans:
Real Estate Mortgage:
Commercial............................ $ 1,414 28% $ 617 17% $ 76 9%
Residential........................... 772 49 417 58 635 71
Construction.......................... 539 13 90 12 93 10
Commercial.............................. 5,618 6 185 5 8 2
Consumer................................ 323 4 421 8 677 8
--------- --- --------- --- --------- ---
Total Allowance for Loan Losses....... $ 8,666 100% $ 1,730 100% $ 1,489 100%
========= === ========= === ========= ===
AT DECEMBER 31,
----------------------------------------------------
1999 1998
-------------------------- -----------------------
PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ------------- ------ -------------
(DOLLARS IN THOUSANDS)
Loans:
Real Estate Mortgage:
Commercial............................ $ 58 7% $ 31 6%
Residential........................... 649 73 429 75
Construction.......................... 112 12 47 8
Commercial.............................. 11 -- 15 --
Consumer................................ 704 8 762 11
--------- --- --------- ---
Total Allowance for Loan Losses....... $ 1,534 100% $ 1,284 100%
========= === ========= ===
14
INVESTMENT ACTIVITIES
Interest and dividends on investment securities, mortgage-backed
securities, collateralized mortgage obligations, FHLB stock and other
investments provide the second largest source of income for the Company (after
interest on loans), constituting 18.3% of the Company's total interest income
(and dividends) for fiscal 2002. The Bank maintains its liquid assets at levels
believed adequate to meet requirements of normal banking activities and
potential savings outflows.
As an Indiana savings bank, the Bank is authorized to invest without
limitation in direct or indirect obligations of the United States, direct
obligations of a United States territory, an insular possession and direct
obligations of the state or a municipal corporation or taxing district in
Indiana. The Bank is also permitted to invest in bonds or other securities of a
national mortgage association and the stock and obligations of a Federal Home
Loan Bank. Indiana savings banks may also invest in collateralized mortgage
obligations to the same extent as national banks. An Indiana savings bank may
also purchase for its own account other investment securities under such limits
as the Department of Financial Institutions prescribes by rule provided that the
savings bank may not invest more than 10% of its equity capital in the
investment securities of any one issuer. Any Indiana savings bank may not invest
in speculative bonds, notes or other indebtedness which are defined as
securities and which are rated below the first four rating categories by a
generally recognized rating service or are in default. An Indiana savings bank
may purchase an unrated security if it obtains financial information adequate to
document the investment quality of the security.
The Company's investment portfolio consists primarily of obligations issued
by federal agencies such as FNMA, FHLB and the FFCB System, mortgage-backed
securities issued by GNMA, FNMA and FHLMC. The Company has also invested in
trust-preferred securities, mutual funds and maintains interest-bearing deposits
in other financial institutions (primarily the FHLBs). As a member of the FHLB
System, the Bank is also required to hold stock in the FHLBs of Indianapolis and
Cincinnati. At December 31, 2002, the Company did not have investments in the
securities of any single non-governmental issuer which exceeded 10% of
shareholders' equity. At December 31, 2002, the Company had one investment which
exceeded 10% of equity: a security issued by Shay Financial Services, Inc. with
a book value of $20.48 million and a market value of $20.53 million as of that
date. During the first quarter of 2003, the Company liquidated this investment.
15
During 2001, the Company substantially increased its portfolio of
mortgage-backed securities and collateralized mortgage obligations to offset
declines in the loan portfolio due to refinancings and calls of federal agencies
securities attributable in both cases to the radically declining interest rate
environment. As interest rates stabilized at the end of 2001, the estimated
lives of these securities increased significantly, exposing the Bank to
unacceptable levels of interest rate risk. The Company accordingly reclassified
these securities, effective December 31, 2001, from held-to-maturity to
available-for-sale and marked them to fair value, recording an accumulated other
comprehensive loss of $696,000. The Company disposed of these mortgage-backed
securities and collateralized mortgage obligation portfolios in the first
quarter of 2002 at an estimated after-tax loss of $1.9 million. All investments,
as of December 31, 2002, was classified as available-for-sale.
The following table sets forth the carrying value of the Company's
investments in federal agency obligations and mortgage-backed securities,
collaterized mortgage obligations and other investments at the dates indicated.
AT DECEMBER 31,
--------------------------------------------
2002 2001 2000
--------- --------- ---------
(IN THOUSANDS)
Federal agencies.......................... $ 8,227 $ 28,696 $ 87,901
Mortgage-backed securities and
collateral mortgage obligations........ 27,824 110,393 11,806
Interest-bearing deposits (1)............. 38,215 4,283 4,422
FHLB stock................................ 6,759 7,365 7,265
Mutual fund............................... 20,538 -- --
Other investments......................... 1,566 1,540 --
--------- --------- ---------
Total investments..................... $ 103,129 $ 152,277 $ 111,394
========= ========= =========
<FN>
_____________
(1) Consist of overnight deposits and short-term non-negotiable
certificates of deposit.
</FN>
The following table sets forth information regarding maturity distribution
and average yields for the Company's investment securities portfolio at December
31, 2002. The Company's federal agencies investment portfolio consists of
obligations issued by FNMA, FHLB, and the FFCB System. Other investments
consists of trust preferred securities and mutual funds.
WITHIN 1 YEAR 1-5 YEARS 5-10 YEARS OVER 10 YEARS TOTAL
-------------- -------------- -------------- --------------- ---------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Federal agencies........ $ 4,090 4.6% $ 4,137 3.8% $ -- --% $ -- --% $ 8,227 4.2%
Mutual fund............. $20,538 2.6% $ -- -- % $ -- --% $ -- --% $20,538 2.6%
Other Investments....... $ -- -- % $ -- -- % $ -- --% $1,566 8.9% $ 1,566 8.9%
16
The Company's mortgage-backed securities include both fixed- and
adjustable-rate securities. At December 31, 2002, the Company's mortgage-backed
securities consisted of the following:
CARRYING AVERAGE
AMOUNT RATE
-------- --------
(DOLLARS IN THOUSANDS)
Variable rate:
Repricing in one year or less.............. $ 3,717 5.57%
Fixed-rate:
Maturing in five years or less............. 12 8.06
Maturing in five to ten years.............. 3,901 5.86
Maturing in more than ten years............ 20,194 5.59
------- ----
Total................................. $27,824 5.62%
======= ====
SOURCES OF FUNDS
GENERAL. Savings accounts and other types of deposits have traditionally
been an important source of the Bank's funds for use in lending and for other
general business purposes. In addition to deposit accounts, the Bank derives
funds from loan repayments, loan sales, borrowings and operations. The
availability of funds from loan sales is influenced by general interest rates
and other market conditions. Borrowings may be used on a short-term basis to
compensate for reductions in deposits or deposit inflows at less than projected
levels and may be used on a longer-term basis to support expanded lending
activities.
DEPOSITS. The Bank attracts both short-term and long-term deposits from the
general public by offering a wide assortment of deposit accounts and interest
rates. The Bank offers regular savings accounts, NOW accounts, money market
accounts, fixed-interest-rate certificates with varying maturities, and
negotiated-rate jumbo certificates with various maturities. The Bank also offers
tax-deferred individual retirement, Keogh retirement, and simplified employer
plan retirement accounts.
17
As of December 31, 2002, approximately 33.4%, or $134 million, of the
Bank's aggregate deposits consisted of various savings and demand deposit
accounts from which customers are permitted to withdraw funds at any time
without penalty.
Interest earned on passbook and statement accounts is paid from the date of
deposit to the date of withdrawal and compounded semi-annually for the Bank.
Interest earned on NOW and money market deposit accounts is paid from the date
of deposit to the date of withdrawal and compounded and credited monthly.
Management establishes the interest rate on these accounts.
The Bank also makes available to its depositors a number of certificates of
deposit with various terms and interest rates to be competitive in its market
area. These certificates have minimum deposit requirements as well.
18
The following table sets forth the change in dollar amount of deposits in
the various types of deposit accounts offered by the Bank between the dates
indicated.
INCREASE INCREASE
BALANCE AT (DECREASE) BALANCE AT (DECREASE) BALANCE AT
DECEMBER 31, FROM PRIOR DECEMBER 31, FROM PRIOR DECEMBER 31,
2002 YEAR 2001 YEAR 2000
------------------ --------- ----------------- --------- ---------------
(DOLLARS IN THOUSANDS)
Savings deposits.................... $ 33,990 8.45% $ 1,343 $ 32,647 7.92% $ (2,040) $ 34,687 9.44%
NOW accounts........................ 39,344 9.78 (1,297) 40,641 9.85 2,948 37,693 10.25
Money market deposit accounts....... 61,127 15.20 13,441 47,686 11.56 9,401 38,285 10.41
Certificate accounts:
Certificates $100,000 and more.... 45,510 11.32 (14,853) 60,363 14.64 17,324 43,039 11.71
Fixed-rate certificates:
12 months or less.............. 183,885 45.72 122,347 61,538 14.92 6,200 55,338 15.05
13-24 months................... 15,327 3.81 (81,706) 97,033 23.53 8,949 88,084 23.96
25-36 months................... 10,251 2.55 2,466 7,785 1.89 (6,974) 14,759 4.02
37 months or greater........... 10,247 2.55 (51,935) 62,182 15.08 9,408 52,774 14.36
Variable-rate certificate:
18 months...................... 2,506 0.62 (32) 2,538 0.61 (398) 2,936 0.80
---------- ------ --------- -------- ------ --------- --------- ------
$ 402,187 100.00% $ (10,226) $412,413 100.00% $ 44,818 $ 367,595 100.00%
========== ====== ========= ======== ====== ========= ========= ======
19
The variety of deposit accounts offered by the Bank has permitted it to be
competitive in obtaining funds and has allowed it to respond with flexibility
to, but without eliminating the threat of, disintermediation (the flow of funds
away from depository institutions such as savings institutions into direct
investment vehicles such as government and corporate securities). In addition,
the Bank has become much more subject to short-term fluctuation in deposit
flows, as customers have become more interest rate conscious. The ability of the
Bank to attract and maintain deposits and its costs of funds have been, and will
continue to be, significantly affected by money market conditions. The Bank
currently offers a variety of deposit products as options to the customer. They
include non-interest-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. During the past year, MMDAs
increased, which may be due favorable rates and funds leaving the stock markets.
The following table sets forth the Company's average aggregate balances and
interest rates. Average balances in 2002 are calculated from actual daily
balances. Average balances for 2001 and 2000 are derived from balances which
management does not believe are materially different from daily balances (actual
daily balances could not be obtained without undue effort and expense).
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2002 2001 2000
-------------------- ------------------- -------------------
AVERAGE AVERAGE AVERAGE
AVERAGE RATE AVERAGE RATE AVERAGE RATE
BALANCE PAID BALANCE PAID BALANCE PAID
------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Interest-bearing demand
deposits.................... $ 78,490 2.01% $ 60,791 2.93% $ 58,598 3.49%
Savings deposits............... 34,003 1.16 33,321 1.68 36,584 2.01
Time deposits.................. 284,259 4.48 276,924 5.89 250,343 5.82
---------- ---- ---------- ---- ---------- ----
Total interest bearing
deposits............... 396,752 3.71% 371,036 5.03% 345,525 5.02%
Non-interest-bearing demand ==== ==== ====
and savings deposits........ 19,448 16,494 16,269
---------- ---------- ----------
Total deposits............ $ 416,200 $ 387,530 $ 361,794
========== ========== ==========
20
The following table sets forth the aggregate time deposits in the Company
classified by rates as of the dates indicated.
AT DECEMBER 31,
---------------------------------------------
2002 2001 2000
---------- --------- ---------
(IN THOUSANDS)
Less than 4%.............................. $ 154,387 $ 63,358 $ 478
4% - 5.99%............................... 52,643 109,842 84,009
6% - 7.99%............................... 60,696 118,224 172,429
8% - 9.99%............................... -- 15 14
--------- --------- ---------
$ 267,726 $ 291,439 $ 256,930
========= ========= =========
The following table sets forth the amount and maturities of the Company's
time deposits at December 31, 2002.
AMOUNT DUE
-------------------------------------------------------------------------
LESS THAN MORE THAN
RATE ONE YEAR 1-2 YEARS 2-3 YEARS 3 YEARS TOTAL
---- --------- --------- --------- ---------- -----
(IN THOUSANDS)
Less than 4%.................... $ 125,835 $ 19,766 $ 4,110 $ 4,676 $ 154,387
4% - 5.99%...................... 11,853 8,764 13,596 18,430 52,643
6% - 7.99%...................... 54,915 1,188 4,493 100 60,696
8% - 9.99%...................... -- -- -- -- --
--------- ---------- ---------- ---------- ----------
$ 192,603 $ 29,718 $ 22,199 $ 23,206 $ 267,726
========= ========== ========== ========== ==========
The following table indicates the amount of the Company's certificates of
deposit and other deposits of $100,000 or more by time remaining until maturity
at December 31, 2002.
SAVINGS, NOW
CERTIFICATES AND MMDA
MATURITY PERIOD OF DEPOSIT DEPOSITS
--------------- ------------- -------------
(IN THOUSANDS)
Three months or less......................... $ 6,837 $ 32,563
Over three through six months................ 13,766 --
Over six through twelve months............... 11,948 --
Over twelve months........................... 12,959 --
--------- ----------
Total................................. $ 45,510 $ 32,563
========= ==========
21
BORROWINGS. Deposits are the primary sources of funds for the Bank's
lending and investment activities and for its general business purposes. The
Bank also uses advances (borrowings) from the Federal Home Loan Bank ("FHLB") to
supplement its supply of lendable funds, to meet deposit withdrawal requirements
and to extend the terms of its liabilities. FHLB advances are typically secured
by the Bank's FHLB stock, a portion of first mortgage loans, investment
securities and overnight deposits. At December 31, 2002, the Bank had $5.6
million of FHLB advances outstanding.
The FHLBs function as central reserve banks providing credit for savings
institutions and certain other member financial institutions. As a member, the
Bank is required to own capital stock in its FHLB and is authorized to apply for
advances on the security of such stock and certain of its home mortgages and
other assets (principally, securities which are obligations of, or guaranteed
by, the United States) provided certain standards related to creditworthiness
have been met.
The Company had notes payable in the total amount of $840,000 at December
31, 2002. Included in this amount was a note payable to a third party financial
institution with a current balance of $750,000 and bearing interest at 4.25% at
December 31, 2002, the proceeds of which were used to finance stock repurchases
during 1999. The remainder of notes payable with balances of $90,000, $180,000
and $271,000 at December 31, 2002, 2001 and 2000, respectively, are 6.0% notes
payable to former stockholders of Cardinal State Bank.
The following table sets forth certain information regarding borrowings
from the FHLBs at the dates and for the periods indicated.
AT OR FOR THE YEAR
YEAR ENDED DECEMBER 31,
--------------------------------
2002 2001 2000
---- ---- ----
(DOLLARS IN THOUSANDS)
Amounts outstanding at end of period:
FHLB advances ....................... $ 5,592 $ 87,653 $138,751
Weighted average rate paid on:
FHLB advances ....................... 6.83% 5.51% 6.54%
Maximum amount of borrowings outstanding
at any month end:
FHLB advances ....................... $ 75,105 $128,497 $138,751
Approximate average amounts outstanding:
FHLB advances ....................... $ 43,813 $ 84,080 $106,657
Approximate weighted average rate paid on:
FHLB advances ....................... 6.39% 6.50% 6.73%
22
AVERAGE BALANCE SHEET
The following table sets forth certain information relating to the
Company's aggregate average yield on assets and average cost of liabilities for
the periods indicated. Such yields and costs are derived by dividing income or
expenses by the average balance of assets or liabilities, respectively, for the
periods presented. Average balances in 2002 are calculated from actual daily
balances. Average balances for 2001 and 2000 are derived from balances which
management does not believe are materially different from daily balances (actual
daily balances could not be obtained without undue effort and expense).
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
2002 2001
------------------------------ -----------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------- -------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loan portfolio (1).............. $342,240 $24,473 7.15% $ 376,157 $30,005 7.98%
Mortgage-backed securities...... 56,644 3,196 5.64 31,768 2,225 7.00
Short-term investments and
other interest-earning
assets (2)..................... 74,610 2,304 3.09 74,186 4,940 6.66
-------- ------- ------ --------- ------- ------
Total interest-earning
assets..................... 473,494 29,973 6.33 482,111 37,170 7.71
Noninterest-earning assets....... 40,566 42,722
-------- ---------
Total assets................. $514,060 $ 524,833
======== =========
Interest-bearing liabilities:
Deposits....................... $396,752 $14,712 3.71 $ 371,036 18,663 5.03%
FHLB advances.................. 43,813 2,798 6.39 84,080 5,466 6.50
Notes payable.................. 841 31 3.69 1,562 114 7.30
-------- ------- ------ --------- ------- ------
Total interest-bearing
liabilities................ 441,406 17,541 3.97 456,678 24,243 5.31
Noninterest-bearing liabilities.. 30,621 ------- ------ 25,549 ------- ------
-------- ---------
Total liabilities............ 472,027 482,227
Shareholders' equity............. 42,033 42,606
-------- ---------
Total liabilities and
shareholders' equity....... $514,060 $ 524,833
======== =========
Net interest income.............. $12,432 $12,927
======= =======
Interest rate spread............. 2.36% 2.40%
====== ======
Net yield on interest-earning
assets......................... 2.63% 2.68%
====== ======
Ratio of average interest-earning
assets to average interest-
bearing liabilities............. 107.27% 105.57%
====== ======
FOR THE YEAR ENDED DECEMBER 31,
---------------------------
2000
---------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
------- -------- -------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loan portfolio (1).............. $371,349 $ 29,663 7.99%
Mortgage-backed securities...... 13,016 910 6.99
Short-term investments and
other interest-earning
assets (2)..................... 98,410 6,750 6.86
-------- -------- -----
Total interest-earning
assets..................... 482,775 37,323 7.73
Noninterest-earning assets....... 40,518
---------
Total assets................. $ 523,293
=========
Interest-bearing liabilities:
Deposits....................... $345,525 17,337 5.02
FHLB advances.................. 106,657 7,187 6.74
Notes payable.................. 2,456 204 8.31
-------- -------- -----
Total interest-bearing
liabilities................ 454,638 24,728 5.44
Noninterest-bearing liabilities.. 27,615 -------- -----
--------
Total liabilities............ 482,253
Shareholders' equity............. 41,040
--------
Total liabilities and
shareholders' equity....... $523,293
========
Net interest income.............. $ 12,595
========
Interest rate spread............. 2.29%
======
Net yield on interest-earning
assets......................... 2.61%
======
Ratio of average interest-earning
assets to average interest-
bearing liabilities............. 106.19%
======
<FN>
_________
(1) Excludes income earned on late charges and inspection fees. Average
balances include non-accrual loans.
(2) Includes interest-bearing deposits in other financial institutions,
investment securities and FHLB stock.
</FN>
23
TRUST ACTIVITIES
During 1999, the Bank began offering trust, investment and estate planning
services through its Ameriana Trust and Investment Management Services division.
Trust services consist of personal trusts, testamentary trusts, investment
agency accounts (discretionary and directed), guardianships, rollover IRA's
(discretionary and directed) and estates (personal representative). These
accounts are offered to customers within the Bank's service areas in Indiana and
Ohio. Trust account balances of $75,000 and more can profitably be managed by
the Bank. At December 31, 2002, the Bank had $14.6 million in trust assets under
management.
SUBSIDIARY ACTIVITIES
The Bank has two direct 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
offers insurance products through its ownership of an interest in Family
Financial Life Insurance Company, New Orleans, Louisiana, which offers a full
line of credit, related insurance products. In 2002, AFS acquired a 20.9%
ownership interest in Indiana Title Insurance Company, LLC through which it
offers title insurance. AFS also operates a brokerage facility in conjunction
with Linsco/Private Ledger.
At December 31, 2002, the Bank's investments in its subsidiaries were
approximately $4.3 million, consisting of direct equity investments.
Indiana savings banks may acquire or establish subsidiaries that engage in
activities permitted to be performed by the savings bank itself or permitted to
operating subsidiaries of national banks. Under FDIC regulations, a subsidiary
of a state bank may not engage as principal in any activity that is not of a
type permissible for a subsidiary of a national bank unless the FDIC determines
that the activity does not impose a significant risk to the affected insurance
fund.
24
COMPETITION
The Bank experiences substantial competition both in attracting and
retaining savings deposits and in the making of mortgage and other loans. Direct
competition for savings deposits comes from other savings institutions,
commercial banks, and credit unions located in the Bank's market area.
Additional significant competition for savings deposits comes from money market
mutual funds and corporate and government debt securities.
The primary factors in competing for loans are interest rates and loan
origination fees and the range of services offered by the various financial
institutions. Competition for origination of real estate loans normally comes
from other thrift institutions, commercial banks, mortgage bankers, mortgage
brokers and insurance companies. The Bank has been able to compete effectively
in its market area.
The Bank has offices in Henry, Hancock, Hendricks, Shelby and Madison
Counties in Indiana and in Hamilton County, Ohio. In addition to the financial
institutions, which have offices in these counties, the Bank competes with
several commercial banks and savings institutions in surrounding counties, many
of which have assets, which are substantially larger than the Bank.
REGULATION AND SUPERVISION
REGULATION AND SUPERVISION OF THE COMPANY
GENERAL. The Company is a bank holding company subject to regulation by the
Federal Reserve Board under the BHCA. As a result, the activities of the Company
are subject to certain limitations, which are described below. In addition, as a
bank holding company, the Company is required to file annual and quarterly
reports with the Federal Reserve Board and to furnish such additional
information as the Federal Reserve Board may require pursuant to the BHCA. The
Company is also subject to regular examination by the Federal Reserve Board.
ACQUISITIONS. With certain exceptions, the BHCA prohibits a bank holding
company from acquiring direct or indirect ownership or control of more than 5%
of the voting shares of a company that is not a bank or a bank holding company,
or from engaging directly or indirectly in activities other than those of
banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities, which, by statute or by Federal Reserve Board regulation or
order, have been identified as activities closely related to the business of
banking. The activities of the Company are subject to these legal and regulatory
limitations under the BHCA and the related Federal Reserve Board regulations.
Notwithstanding the
25
Federal Reserve Board's prior approval of specific nonbanking activities, the
Federal Reserve Board has the power to order a holding company or its
subsidiaries to terminate any activity, or to terminate its ownership or control
of any subsidiary, when it has reasonable cause to believe that the continuation
of such activity or such ownership or control constitutes a serious risk to the
financial safety, soundness or stability of any bank subsidiary of that holding
company.
Under the BHCA, a bank holding company must obtain the prior approval of
the Federal Reserve Board before (1) acquiring direct or indirect ownership or
control of any voting shares of any bank or bank holding company if, after such
acquisition, the bank holding company would directly or indirectly own or
control more than 5% of such shares; (2) acquiring all or substantially all of
the assets of another bank or bank holding company; or (3) merging or
consolidating with another bank holding company. Satisfactory financial
condition, particularly with regard to capital adequacy, and satisfactory
Community Reinvestment Act ("CRA") ratings generally are prerequisites to
obtaining federal regulatory approval to make acquisitions.
Under the BHCA, any company must obtain approval of the Federal Reserve
Board prior to acquiring control of the Company or the Bank. For purposes of the
BHCA, "control" is defined as ownership of more than 25% of any class of voting
securities of the Company or the Bank, the ability to control the election of a
majority of the directors, or the exercise of a controlling influence over
management or policies of the Company or the Bank. In addition, the Change in
Bank Control Act and the related regulations of the Federal Reserve Board
require any person or persons acting in concert (except for companies required
to make application under the BHCA), to file a written notice with the Federal
Reserve Board before such person or persons may acquire control of the Company
or the Bank. The Change in Bank Control Act defines "control" as the power,
directly or indirectly, to vote 25% or more of any voting securities or to
direct the management or policies of a bank holding company or an insured bank.
Under Indiana banking law, prior approval of the Department of Financial
Institutions is also required before any person may acquire control of an
Indiana stock savings bank, bank or bank holding company. The Department will
issue a notice approving the transaction if it determines that the persons
proposing to acquire the savings bank or bank holding company are qualified in
character, experience and financial responsibility, and the transaction does not
jeopardize the interests of the public.
26
CAPITAL REQUIREMENTS. The Federal Reserve Board has adopted guidelines
regarding the capital adequacy of bank holding companies, which require bank
holding companies to maintain specified minimum ratios of capital to total
assets and capital to risk-weighted assets. See "-- Capital Requirements."
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 pursuant to FDICIA, the Federal Reserve Board may prohibit a bank
holding company from paying any dividends if the holding company's bank
subsidiary is classified as "undercapitalized." See "-- Prompt Corrective
Regulatory Action."
STOCK REPURCHASES. As a bank holding company, the Company is required to
give the Federal Reserve Board prior written notice of any purchase or
redemption of its outstanding equity securities if the gross consideration for
the purchase or redemption, when combined with the net consideration paid for
all such purchases or redemptions during the preceding 12 months, is equal to
10% or more of the Company's consolidated net worth. The Federal Reserve Board
may disapprove such a purchase or redemption if it determines that the proposal
would violate any law, regulation, Federal Reserve Board order, directive, or
any condition imposed by, or written agreement with, the Federal Reserve Board.
This requirement does not apply to bank holding companies that are
"well-capitalized," received one of the two highest examination ratings at their
last examination and are not the subject of any unresolved supervisory issues.
SARBANES-OXLEY ACT OF 2002. On July 30, 2002, the President signed into law
the Sarbanes-Oxley Act of 2002 (the "Act"), which mandated a variety of reforms
intended to address corporate and accounting fraud. The Act provides for the
establishment of a new Public Company Accounting Oversight Board ("PCAOB"),
which will enforce auditing, quality control and independence standards for
firms that audit SEC-reporting companies and will be funded by fees from all SEC
reporting companies. The Act imposes higher standards for auditor independence
and restricts provision of consulting services by auditing firms to companies
they audit. Any non-audit services
27
being provided to an audit client will require preapproval by the Company's
audit committee members. In addition, certain audit partners must be rotated
periodically. The Act requires chief executive officers and chief financial
officers, or their equivalent, to certify to the accuracy of periodic reports
filed with the SEC, subject to civil and criminal penalties if they knowingly or
willfully violate this certification requirement. In addition, under the Act,
counsel will be required to report evidence of a material violation of the
securities laws or a breach of fiduciary duty by a company to its chief
executive officer or its chief legal officer, and, if such officer does not
appropriately respond, to report such evidence to the audit committee or other
similar committee of the board of directors or the board itself.
Longer prison terms will also be applied to corporate executives who
violate federal securities laws, the period during which certain types of suits
can be brought against a company or its officers has been extended, and bonuses
issued to top executives prior to restatement of a company's financial
statements are now subject to disgorgement if such restatement was due to
corporate misconduct. Executives are also prohibited from trading during
retirement plan "blackout" periods, and loans to company executives are
restricted. In addition, a provision directs that civil penalties levied by the
SEC as a result of any judicial or administrative action under the Act be
deposited in a fund for the benefit of harmed investors. Directors and executive
officers must also report most changes in their ownership of a company's
securities within two business days of the change.
The Act also increases the oversight and authority of audit committees of
publicly traded companies. Audit committee members must be independent and are
barred from accepting consulting, advisory or other compensatory fees from the
issuer. In addition, all SEC reporting companies must disclose whether at least
one member of the committee is a "financial expert" (as such term is defined by
the SEC rules) and if not, why not. Audit committees of publicly traded
companies will have authority to retain their own counsel and other advisors
funded by the company. Audit committees must establish procedures for the
receipt, retention and treatment of complaints regarding accounting and auditing
matters and procedures for confidential, anonymous submission of employee
concerns regarding questionable accounting or auditing matters.
Beginning six months after the SEC determines that the PCAOB is able to
carry out its functions, it will be unlawful for any person that is not a
registered public accounting firm ("RPAF") to audit an SEC-reporting company.
Under the Act, a RPAF is prohibited from performing statutorily mandated audit
services for a company if such company's chief executive officer, chief
financial officer, comptroller, chief accounting officer or any person
28
serving in equivalent positions has been employed by such firm and participated
in the audit of such company during the one-year period preceding the audit
initiation date. The Act also prohibits any officer or director of a company or
any other person acting under their direction from taking any action to
fraudulently influence, coerce, manipulate or mislead any independent public or
certified accountant engaged in the audit of the Company's financial statements
for the purpose of rendering the financial statement's materially misleading.
The Act also requires the SEC to prescribe rules requiring inclusion of an
internal control report and assessment by management in the annual report to
shareholders. The Act requires the RPAF that issues the audit report to attest
to and report on management's assessment of the Company's internal controls. In
addition, the Act requires that each financial report required to be prepared in
accordance with (or reconciled to) generally accepted accounting principles and
filed with the SEC reflect all material correcting adjustments that are
identified by a RPAF in accordance with generally accepted accounting principles
and the rules and regulations of the SEC.
Although the Company anticipates it will incur additional expense in
complying with the provisions of the Act and the related rules, management does
not expect that such compliance will have a material impact on the Company's
financial condition or results of operations.
REGULATION AND SUPERVISION OF THE BANK
GENERAL. The Bank is subject to extensive regulation by the Department of
Financial Institutions and the FDIC. The lending activities and other
investments of the Bank must comply with various regulatory requirements. The
Department of Financial Institutions and FDIC periodically examine the Bank for
compliance with various regulatory requirements. The Bank must file reports with
the 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. Certain of
these regulatory requirements are referred to below or appear elsewhere herein.
CAPITAL REQUIREMENTS. Under FDIC regulations, state-chartered banks that
are not members of the Federal Reserve System are required to maintain a minimum
leverage capital requirement consisting of a ratio of Tier 1 capital to total
assets of 3% if the FDIC determines that the institution is not anticipating or
experiencing significant growth and has well-diversified risk, including no
undue interest rate risk exposure, excellent asset quality, high liquidity, good
earnings and in general a strong banking organization, rated composite 1 under
the Uniform Financial Institutions Rating System (the CAMELS rating system)
established by the Federal Financial
29
Institutions Examination Council. For all but the most highly rated institutions
meeting the conditions set forth above, the minimum leverage capital ratio is 3%
plus an additional "cushion" amount of at least 100 to 200 basis points with a
minimum leverage capital requirement of not less than 4%. Tier 1 capital is the
sum of common stockholders' equity, noncumulative perpetual preferred stock
(including any related surplus) and minority interests in consolidated
subsidiaries, minus all intangible assets (other than certain mortgage servicing
assets, purchased credit card relationships, credit-enhancing interest-only
strips and certain deferred tax assets) minus identified losses, investments in
certain financial subsidiaries and nonfinancial equity investments.
In addition to the leverage ratio (the ratio of Tier I capital to total
assets), state-chartered nonmember banks must maintain a minimum ratio of
qualifying total capital to risk-weighted assets of at least 8% of which at
least four percentage points must be Tier 1 capital. Qualifying total capital
consists of Tier 1 capital plus Tier 2 or supplementary capital items. Tier 2
capital items include allowances for loan losses in an amount of up to 1.25% of
risk-weighted assets, cumulative preferred stock and preferred stock with a
maturity of over 20 years, certain other capital instruments and up to 45% of
pretax net unrealized holding gains on equity securities. The includable amount
of Tier 2 capital cannot exceed the institution's Tier 1 capital. Qualifying
total capital is further reduced by the amount of the bank's investments in
banking and finance subsidiaries that are not consolidated for regulatory
capital purposes, reciprocal cross-holdings of capital securities issued by
other banks, most intangible assets and certain other deductions. Under the FDIC
risk-weighted system, all of a bank's balance sheet assets and the credit
equivalent amounts of certain off-balance sheet items are assigned to one of
four broad risk weight categories from 0% to 100%, based on the risks inherent
in the type of assets or item. The aggregate dollar amount of each category is
multiplied by risk weight assigned to that category. The sum of these weighted
values equals the bank's risk-weighted assets.
At December 31, 2002, the Bank's ratio of Tier 1 capital to total assets
was 7.96%, its ratio of Tier 1 capital to risk-weighted assets was 12.61% and
its ratio of total risk-based capital to risk-weighted assets was 13.89%.
During the second quarter of 2002, the Bank entered into a memorandum of
understanding ("MOU") with the FDIC and the Indiana Department of Financial
Institutions ("DFI"). Among other things, the MOU required the Bank to adopt
written action plans with respect to certain classified assets, revise its
lending policies in accordance with examiner recommendations, require greater
financial information from borrowers, establish a loan review program, document
Board review of the adequacy of loan losses, formulate a plan for improving the
Bank's
30
profitability, review staffing needs with particular emphasis on loan
administration, strengthen certain internal controls and audit coverage and
address other regulatory compliance issues raised in the most recent examination
report by the FDIC and DFI. While the MOU is in effect, the Bank must maintain
Tier 1 capital at or above 7% of assets.
The Company's Board of Directors have adopted resolutions providing that
the Company will not cause the Bank to pay dividends if its Tier 1 capital would
be less than 7% thereafter, that the Company will not incur additional debt
without prior Federal Reserve approval, and that the Company will not purchase
any treasury stock. The resolutions remain in effect until the MOU is lifted.
The Company believes that the Company and the Bank have taken all actions
specified in the MOU and Board resolutions within the timeframes specified. The
Company does not believe the MOU or Board resolutions will materially affect the
operations of the Company or the Bank. A failure to comply with either the MOU
or resolutions could lead to the initiation of formal enforcement action by the
FDIC, DFI and the Federal Reserve.
DIVIDEND LIMITATIONS. The Bank may not pay dividends on its capital stock
if its regulatory capital would thereby be reduced below the amount then
required for the liquidation account established for the benefit of certain
depositors of the Bank at the time of its conversion to stock form.
Earnings of the Bank appropriated to bad debt reserves and deducted for
Federal income tax purposes are not available for payment of cash dividends or
other distributions to stockholders without payment of taxes at the then current
tax rate by the Bank on the amount of earnings removed from the reserves for
such distributions. See "Federal and State Taxation."
Under FDIC regulations, the Bank is prohibited from making any capital
distributions if after making the distribution, the Bank would have: (i) a total
risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-based capital
ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0%. For
additional information about dividend limitations see Note 11 in the
Consolidated Financial Statements.
DEPOSIT INSURANCE. The Bank is required to pay assessments to the FDIC for
insurance of its deposits by the SAIF based on a percentage of its insured
deposits. Under the FDIA, the FDIC is required to set semi-annual assessments
for SAIF-insured institutions at a rate determined by the FDIC to be necessary
to maintain the designated reserve ratio of the SAIF at 1.25% of estimated
insured deposits or at a higher percentage of insured deposits that the FDIC
determines to be justified for that year by circumstances raising a significant
risk of
31
substantial future losses to the SAIF. In the event that the SAIF should fail to
meet its statutory reserve ratio, the FDIC would be required to set semi-annual
assessment rates for SAIF members that are sufficient to increase the reserve
ratio to 1.25% within one year or in accordance with such other schedule that
the FDIC adopts by regulation to restore the reserve ratio in not more than 15
years.
The assessment rate for an insured depository institution is determined by
the assessment risk classification assigned to the institution by the FDIC based
on the institution's capital level and supervisory evaluations. Based on the
data reported to regulators for date closest to the last day of the fourth month
preceding the semi-annual assessment period, institutions are assigned to one of
three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as in the prompt
corrective action regulations. See "-- Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund.
The FDIC has adopted an assessment schedule for SAIF deposit insurance
pursuant to which the assessment rate for well-capitalized institutions with the
highest supervisory ratings have been reduced to zero and institutions in the
worst risk assessment classification will be assessed at the rate of 0.27% of
insured deposits. At December 31, 2002, the Bank is considered well capitalized.
In addition, FDIC-insured institutions are required to pay assessments to the
FDIC to help fund interest payments on certain bonds issued by the Financing
Corporation ("FICO"), an agency of the federal government established to finance
takeovers of insolvent thrifts.
PROMPT CORRECTIVE REGULATORY ACTION. Under FDICIA, the federal banking
regulators are required to take prompt corrective action if an insured
depository institution fails to satisfy certain minimum capital requirements,
including a leverage limit, a risk-based capital requirement, and any other
measure deemed appropriate by the federal banking regulators for measuring the
capital adequacy of an insured depository institution. All institutions,
regardless of their capital levels, are restricted from making any capital
distribution or paying any management fees if the institution would thereafter
fail to satisfy the minimum levels for any of its capital requirements. An
institution that fails to meet the minimum level for any relevant capital
measure (an "undercapitalized institution") may be: (i) subject to increased
monitoring by the appropriate federal banking regulator; (ii) required to submit
an acceptable capital restoration plan within 45 days; (iii) subject to asset
growth
32
limits; and (iv) required to obtain prior regulatory approval for acquisitions,
branching and new lines of businesses. The capital restoration plan must include
a guarantee by the institution's holding company that the institution will
comply with the plan until it has been adequately capitalized on average for
four consecutive quarters, under which the holding company would be liable up to
the lesser of 5% of the institution's total assets or the amount necessary to
bring the institution into capital compliance as of the date it failed to comply
with its capital restoration plan. A "significantly undercapitalized"
institution, as well as any undercapitalized institution that does not submit an
acceptable capital restoration plan, may be subject to regulatory demands for
recapitalization, broader application of restrictions on transactions with
affiliates, limitations on interest rates paid on deposits, asset growth and
other activities, possible replacement of directors and officers, and
restrictions on capital distributions by any bank holding company controlling
the institution. Any company controlling the institution may also be required to
divest the institution or the institution could be required to divest
subsidiaries. The senior executive officers of a significantly undercapitalized
institution may not receive bonuses or increases in compensation without prior
approval and the institution is prohibited from making payments of principal or
interest on its subordinated debt. In their discretion, the federal banking
regulators may also impose the foregoing sanctions on an undercapitalized
institution if the regulators determine that such actions are necessary to carry
out the purposes of the prompt corrective provisions. If an institution's ratio
of tangible capital to total assets falls below the "critical capital level"
established by the appropriate federal banking regulator, the institution will
be subject to conservatorship or receivership within specified time periods.
Under the implementing regulations, the federal banking regulators
generally measure an institution's capital adequacy on the basis of its total
risk-based capital ratio (the ratio of its total capital to risk-weighted
assets), Tier 1 risk-based capital ratio (the ratio of its core capital to
risk-weighted assets) and leverage ratio (the ratio of its core capital to
adjusted total assets). The following table shows the capital ratios required
for the various prompt corrective action categories.
ADEQUATELY SIGNIFICANTLY
WELL CAPITALIZED CAPITALIZED UNDERCAPITALIZED UNDERCAPITALIZED
---------------- ----------- ---------------- ----------------
Total risk-based
capital ratio 10.0% or more 8.0% or more Less than 8.0% Less than 6.0%
Tier 1 risk-based
capital ratio 6.0% or more 4.0% or more Less than 4.0% Less than 3.0%
Leverage ratio 5.0% or more 4.0% or more * Less than 4.0% * Less than 3.0%
<FN>
___________
* 3.0% if institution has a composite 1 CAMELS rating.
</FN>
33
A "critically undercapitalized" institution is defined as an institution that
has a ratio of "tangible equity" to total assets of less than 2.0%. Tangible
equity is defined as core capital plus cumulative perpetual preferred stock (and
related surplus) less all intangible assets other than qualifying supervisory
goodwill and certain purchased mortgage servicing rights. The FDIC may
reclassify a well capitalized depository institution as adequately capitalized
and may require an adequately capitalized or undercapitalized institution to
comply with the supervisory actions applicable to institutions in the next lower
capital category (but may not reclassify a significantly undercapitalized
institution as critically undercapitalized) if the FDIC determines, after notice
and an opportunity for a hearing, that the savings institution is in an unsafe
or unsound condition or that the institution has received and not corrected a
less-than-satisfactory rating for any CAMELS rating category.
SAFETY AND SOUNDNESS GUIDELINES. Under FDICIA, as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each federal banking agency is required to establish safety and soundness
standards for institutions under its authority. In 1995, these agencies,
including the FDIC, released interagency guidelines establishing such standards
and adopted rules with respect to safety and soundness compliance plans. The
guidelines require depository institutions to maintain internal controls and
information systems and internal audit systems that are appropriate for the
size, nature and scope of the institution's business. The guidelines also
establish certain basic standards for loan documentation, credit underwriting,
interest rate risk exposure, and asset growth. The guidelines further provide
that depository institutions should maintain safeguards to prevent the payment
of compensation, fees and benefits that are excessive or that could lead to
material financial loss, and should take into account factors such as comparable
compensation practices at comparable institutions. If the agency determines that
a depository institution is not in compliance with the safety and soundness
guidelines, it may require the institution to submit an acceptable plan to
achieve compliance with the guidelines. A depository institution must submit an
acceptable compliance plan to the agency within 30 days of receipt of a request
for such a plan. Failure to submit or implement a compliance plan may subject
the institution to regulatory sanctions.
Additionally under FDICIA, as amended by the CDRI Act, the federal banking
agencies established standards relating to asset quality and earnings. Under the
guidelines a depository institution should maintain systems, commensurate with
its size and the nature and scope of its operations, to identify problem assets
and prevent deterioration in those assets as well as to evaluate and monitor
earnings and ensure that earnings are
34
sufficient to maintain adequate capital and reserves. Management believes that
the asset quality and earnings standards will not have a material effect on the
operations of the Bank.
UNIFORM LENDING STANDARDS. As required by FDICIA, the federal banking
agencies have adopted regulations that require banks to adopt and maintain
written policies establishing appropriate limits and standards for extensions of
credit that are secured by liens or interests in real estate or are made for the
purpose of financing permanent improvements to real estate. These policies must
establish loan portfolio diversification standards, prudent underwriting
standards, including loan-to-value limits that are clear and measurable, loan
administration procedures and documentation, approval and reporting
requirements. A bank's real estate lending policy must reflect consideration of
the Interagency Guidelines for Real Estate Lending Policies (the "Real Estate
Lending Guidelines") that have been adopted by the banking agencies. The Real
Estate Lending Guidelines, among other things, call upon depository institutions
to establish internal loan-to-value limits for real estate loans that should not
exceed supervisory loan-to-value limits for the various types of real estate
loans. The Real Estate Lending Guidelines state, however, that it may be
appropriate in individual cases to originate or purchase loans with
loan-to-value ratios in excess of the supervisory loan-to-value limits. The Bank
does not believe that the Real Estate Lending Guidelines will materially affect
its lending activities.
RESERVE REQUIREMENTS. Under Federal Reserve Board regulations, the Bank
currently must maintain average daily reserves equal to 3% of net transaction
accounts up to $42.1 million plus 10% on the remainder. This percentage is
subject to adjustment by the Federal Reserve Board. Because required reserves
must be maintained in the form of vault cash or in a non-interest bearing
account at a Federal Reserve Bank, the effect of the reserve requirement is to
reduce the amount of the institution's interest-earning assets. At December 31,
2002, the Bank met applicable Federal Reserve Board reserve requirements.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the Federal Home
Loan Bank System, which consists of 12 regional Federal Home Loan Banks governed
and regulated by the Federal Housing Finance Board ("FHFB"). As a member, the
Bank is required to purchase and hold stock in the FHLB of Indianapolis in an
amount equal to the greater of 1% of its aggregate unpaid home loan balances at
the beginning of the year or an amount equal to 5% of FHLB advances outstanding,
whichever is greater. As of December 31, 2002, the Bank held stock in the FHLB
of Indianapolis in the amount $5.8 million was in compliance with the above
requirement.
35
The FHLB of Indianapolis serves as a reserve or central bank for the member
institutions within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of FHLB System. It makes loans
(i.e., advances) to members in accordance with policies and procedures
established by the FHLB System and the Board of Directors of the FHLB of
Indianapolis.
The Bank is also a member of the FHLB of Cincinnati due to remaining
borrowings after the merger of Ameriana-Ohio and the Bank. As of December 31,
2002, the Bank held stock in the FHLB of Cincinnati in the amount of $939,000
and was in compliance with requirements of membership.
LOANS TO EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS. Loans to
directors, executive officers and principal stockholders of a state non-member
bank like the Bank must be made on substantially the same terms as those
prevailing for comparable transactions with persons who are not executive
officers, directors, principal stockholders or employees of the Bank unless the
loan is made pursuant to a compensation or benefit plan that is widely available
to employees and does not favor insiders. Loans to any executive officer,
director and principal stockholder together with all other outstanding loans to
such person and affiliated interests generally may not exceed 15% of the bank's
unimpaired capital and surplus and all loans to such persons may not exceed the
institution's unimpaired capital and unimpaired surplus. Loans to directors,
executive officers and principal stockholders, and their respective affiliates,
in excess of the greater of $25,000 or 5% of capital and surplus (up to
$500,000) must be approved in advance by a majority of the board of directors of
the bank with any "interested" director not participating in the voting. State
non-member banks are prohibited from paying the overdrafts of any of their
executive officers or directors unless payment is made pursuant to a written,
pre-authorized interest-bearing extension of credit plan that specifies a method
of repayment or transfer of funds from another account at the bank. Loans to
executive officers may not be made on terms more favorable than those afforded
other borrowers and are restricted as to type, amount and terms of credit. In
addition, Section 106 of the BHCA prohibits extensions of credit to executive
officers, directors, and greater than 10% stockholders of a depository
institution by any other institution which has a correspondent banking
relationship with the institution, unless such extension of credit is on
substantially the same terms as those prevailing at the time for comparable
transactions with other persons and does not involve more than the normal risk
of repayment or present other unfavorable features.
TRANSACTIONS WITH AFFILIATES. A state non-member bank or its subsidiaries
may not engage in "covered transactions" with any one affiliate in an amount
greater than 10% of such bank's capital stock and surplus, and for
36
all such transactions with all affiliates a state non-member bank is limited to
an amount equal to 20% of capital stock and surplus. All such transactions must
also be on terms substantially the same, or at least as favorable, to the bank
or subsidiary as those provided to a non-affiliate. The term "covered
transaction" includes the making of loans, purchase of assets, issuance of a
guarantee and similar other types of transactions. An affiliate of a state
non-member bank is any company or entity which controls or is under common
control with the state non-member bank and, for purposes of the aggregate limit
on transactions with affiliates, any subsidiary that would be deemed a financial
subsidiary of a national bank. In a holding company context, the parent holding
company of a state non-member bank (such as the Company) and any companies which
are controlled by such parent holding company are affiliates of the state
non-member bank. The BHCA further prohibits a depository institution from
extending credit to or offering any other services, or fixing or varying the
consideration for such extension of credit or service, on the condition that the
customer obtain some additional service from the institution or certain of its
affiliates or not obtain services of a competitor of the institution, subject to
certain limited exceptions.
INDIANA BANKING LAW
BRANCHING. An Indiana savings bank is entitled to establish one or more
branches de novo or by acquisition in any location or locations in Indiana. The
savings bank is required to file an application with the Department of Financial
Institutions. Approval of the application is contingent upon the Department's
determination that after the establishment of the branch, the savings bank will
have adequate capital, sound management and adequate future earnings.
LENDING LIMITS. Indiana savings banks are not subject to percentage of
asset or capital limits on their commercial, consumer and non-residential
mortgage lending, and accordingly, have more flexibility in structuring their
portfolios than federally chartered savings banks. However, the Bank is required
to maintain at least 60% of its assets in investments that would qualify it as a
domestic building and loan association under the Internal Revenue Code. At
December 31, 2002, the Bank was in compliance with this requirement.
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 Indiana Department
of Financial Institutions, the Bank would be permitted to exercise any right
granted to national banks.
37
FEDERAL AND STATE TAXATION
FEDERAL TAXATION. The Company and its subsidiaries file a consolidated
federal income tax return on a calendar year end. Saving Banks are subject to
the provisions of the Internal Revenue Code of 1986 (the "Code") in the same
general manner as other corporations. However, institutions such as the Bank
which met certain definitional tests and other conditions prescribed by the Code
benefited from certain favorable provisions regarding their deductions from
taxable income for annual additions to their bad debt reserve. For purposes of
the bad debt reserve deduction, loans were separated into "qualifying real
property loans," which generally were loans secured by interests in certain real
property, and nonqualifying loans, which were all other loans. The bad debt
reserve deduction with respect to nonqualifying loans was based on actual loss
experience. For tax years beginning before January 1, 1996, the amount of the
bad debt reserve deduction with respect to qualifying real property loans was
based upon actual loss experience (the "experience method") or a percentage of
taxable income determined without regard to such deduction (the "percentage of
taxable income method"). The Bank historically used whichever method resulted in
the highest bad debt reserve deduction in any given year.
Legislation that was effective for tax years beginning after December 31,
1995 requires institutions to recapture into taxable income over a six taxable
year period the portion of the tax loan loss reserve that exceeds the pre-1988
tax loan loss reserve. The Bank will no longer be allowed to use the percentage
of taxable income method for tax loan loss provisions, but would be allowed to
use the experience method of accounting for bad debts. There will be no future
effect on net income from the recapture because the taxes on these bad debts
reserves has already been accrued as a deferred tax liability.
The Company's federal income tax returns have not been audited in recent
years.
STATE TAXATION. The State of Indiana imposes a franchise tax which is
assessed on qualifying financial institutions, such as the Bank. The tax is
based upon federal taxable income before net operating loss carryforward
deductions (adjusted for certain Indiana modifications) and is levied at a rate
of 8.5% of adjusted taxable income.
The Company's state income tax returns have not been audited in recent
years.
38
EMPLOYEES
As of December 31, 2002, the Company and subsidiaries had approximately 185
full-time and 14 part-time employees. The employees are not represented by a
collective bargaining agreement. Management believes the Company and its
subsidiaries enjoy good relations with their personnel.
EXECUTIVE OFFICERS
AGE AT
NAME DECEMBER 31, 2002 PRINCIPAL POSITION
- ---- ----------------- ------------------
Harry J. Bailey 60 President and Chief Executive Officer of the Bank and the
Company
Timothy G. Clark 52 Executive Vice President and Chief Operating Officer of
the Bank and the Company
Bradley L. Smith 42 Senior Vice President - Treasurer and Chief Financial Officer
of the Bank and the Company effective April 2002.
Nancy A. Rogers 60 Senior Vice President - Marketing Services of
the Bank and Secretary of the Bank and the Company
Ted R. Girton 41 Senior Vice President - Credit Administration effective June 2002
Grover F. Archer 62 Senior Vice President - Retail Banking of the Bank
Deborah A. Bell 50 Senior Vice President - Information Technology of the Bank
Ronald M. Holloway 53 Senior Vice President - Lending Services of the Bank
Jan F. Wright 59 Senior Vice President - Business Services of the Bank
Unless otherwise noted, all officers have held the position described below
for at least the past five years.
HARRY J. BAILEY has been President of the Company and the Bank since May
1990 and was appointed Chief Executive Officer in December 1990. Mr. Bailey had
been the Executive Vice President and Chief Operating Officer of the Company
since its formation in 1989 and of the Bank since February 1984. He has been a
director of the Bank since 1987 and a director of the Company since its
formation.
TIMOTHY G. CLARK joined the Bank as Executive Vice President and Chief
Operating Officer on September 2, 1997. He was elected Executive Vice President
and Chief Operating Officer of the Company on October 23, 2000. He previously
held the position of Regional Executive and Area President at National City Bank
of Indiana in Seymour, Indiana for 5 years and prior to that held senior
management positions with Central National Bank in Greencastle, Indiana for 5
years and Hancock Bank & Trust in Greenfield, Indiana for 13 years.
39
BRADLEY L. SMITH, a certified public accountant, joined the Bank as a
Senior Vice President-Treasurer and Chief Financial Officer of the Bank and
Company on April 10, 2002. Prior to joining the Bank, he was the Executive Vice
President of Finance Center Federal Credit Union in Indianapolis where he had
been employed since 1992.
NANCY A. ROGERS was elected as Senior Vice President - Marketing Services
in March 1995 and was also appointed Secretary of the Company and the Bank in
1998. She has been employed at the Bank since 1964 and most recently served as
Vice President and Director of Advertising and Public Relations.
TED R. GIRTON was elected as Senior Vice President - Credit Administration
of the Bank in June 2002. Prior to joining the Bank, he was Vice President and
Head of Credit Administration for the Commercial Lending Unit at Union Federal
Bank in Indianapolis.
GROVER F. ARCHER joined the Bank as Senior Vice President - Retail Banking
in January 1999. Prior to joining the Bank he held the position of Area
President for one year, as Regional Administrative Manager for six years and
Senior Vice President and Director of Retail Banking for six years at National
City Bank of Indiana and its predecessor in Anderson, Indiana. Prior to that
time Mr. Archer was in senior management positions with Indiana Lawrence Bank in
North Manchester, Indiana for 16 years.
DEBORAH A. BELL was elected as Senior Vice President - Information
Technology in May 1998. She has been employed at the Bank since 1976 and most
recently served as Vice President and Director of Data Processing since 1991
after serving in that department since July 1985.
RONALD M. HOLLOWAY has been employed by the Bank since 1973 and was elected
Senior Vice President and Chief Lending Officer in December 1995. Mr. Holloway
previously was responsible for the Bank's loan servicing department.
JAN F. WRIGHT was elected as Senior Vice President - Business Services at
the Bank in January 1998 and prior to that served as Senior Vice President -
Branch Operations since March 1995. He previously held the position of Vice
President and Director of Loan Origination and Processing and has been employed
by the Bank since 1972.
40
ITEM 2. PROPERTIES
- ------------------
The following table sets forth the location of the Company's office
facilities at December 31, 2002 and certain other information relating to these
properties at that date.
YEAR TOTAL NET OWNED/ SQUARE
ACQUIRED INVESTMENT BOOK VALUE LEASED FEET
-------- ---------- ---------- ------ ------
(DOLLAR AMOUNTS IN THOUSANDS)
MAIN OFFICE:
2118 Bundy Avenue
New Castle, Indiana.......... 1958 $ 1,658 $ 459 Owned 20,500
BRANCH OFFICES:
1311 Broad Street
New Castle, Indiana.......... 1890 1,103 320 Owned 18,000
956 North Beechwood Street
Middletown, Indiana.......... 1971 322 72 Owned 5,500
22 North Jefferson
Knightstown, Indiana......... 1979 400 173 Owned 3,400
1810 North State Street
Greenfield, Indiana.......... 1995 1,200 997 Owned 5,800
99 Dan Jones Road
Avon, Indiana................ 1995 1,558 1,353 Owned 12,600
1754 East 53rd Street
Anderson, Indiana............ 1993 734 671 Owned 4,900
488 W. Main Street
Morristown, Indiana.......... 1998 353 313 Owned 2,600
7435 W. U.S. 52
New Palestine, Indiana....... 1999 944 858 Owned 3,300
7200 Blue Ash Road
Cincinnati, Ohio............. 1992 921 464 Owned 9,100
2894 W. U.S. 22 & 3
Maineville, Ohio............. 1998 84 54 Leased 1,300
AMERIANA INSURANCE
AGENCY, INC. AND TRUST
DEPARTMENT OF THE BANK
1908 Bundy Avenue
New Castle, Indiana.......... 1999 373 350 Owned 5,000
--------- ----------
Total.................. $ 9,650 $ 6,084
========= ==========
41
The Bank uses on-line processing terminals. Most of the data processing is
done by an in-house data processing center. At December 31, 2002, the total net
book value of the Company's offices and equipment (including leasehold
improvements) was $ 7.9 million.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Company's principal subsidiary, the Bank is involved in a variety of
litigation relating to its interests in two pools of equipment leases originated
by the Commercial Money Center, Inc. ("CMC"), a California based equipment
leasing company which is now in bankruptcy.
In June and September 2001, the Bank purchased two separate pools of lease
receivables totaling $12,003,000, consisting primarily of equipment leases. Each
lease within each pool is supported by a surety bond issued by one of two
insurance companies rated at least "A" by Moody's. The bonds guarantee payment
of all amounts due under the leases in the event of default by the lessee. Each
pool was sold by the terms of a Sales and Servicing Agreement which provides
that the insurers will service the leases. In each case the insurers have
assigned their servicing rights and responsibilities to Commercial Service
Center, a company which has now filed bankruptcy.
When the lease pools went into default, notice was given to each insurer.
One them made payments for a few months under a reservation of rights; the other
paid nothing. Both insurers claim they were defrauded by Commercial Money Center
(CMC), the company which sold the lease pools. Both are now denying
responsibility for payment. CMC has also filed for bankruptcy protection.
Many other financial institutions have purchased lease pools from CMC. All
of the lease pools are in default and in litigation. The Panel on Multidistrict
Litigation has taken control of the many actions and assigned them to the U.S.
District Court for the Northern District of Ohio, Eastern Division. A status
conference is scheduled for April 28, 2003. The cases are in the early stages of
discovery.
The Bank has also been named as a defendant in a suit filed by a group of
lessees in California state court against CMC, CSC, the banks that invested in
the CMC pools and the insurers that issued the surety bonds on the CMC pools.
The California suit alleges that the leases are usurious and un-collectable
under California law. None of the plaintiffs in the California suit is a lessee
in either of the lease pools purchased by the Bank.
The Company believes the surety bonds are enforceable against the insurers.
The current unpaid balance for the pools is $10,900,000. It is highly unlikely
that the litigation will be resolved in 2003.
42
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Report.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
- --------------------------------------------------------------------------------
The Company's common stock, par value $1.00 per share (the "Common Stock"),
is traded on the Nasdaq National MarketSM under the symbol "ASBI." As of March
18, 2003, the Company had 3,147,463 shares of Common Stock outstanding and had
640 stockholders of record and approximately 1,450 beneficial owners holding
shares in nominee or "street" name. The Company began paying quarterly dividends
during the fourth quarter of fiscal year 1987. The Company's ability to pay
dividends is dependent on dividends received from the Bank. See Note 12 to the
"Consolidated Financial Statements" included under Item 8 of this Annual Report
for a discussion of the restrictions on the payment of cash dividends by the
Company.
The following table sets forth the high, low and closing sales prices for
the Common Stock as reported on the Nasdaq National MarketSM and the cash
dividends declared on the Common Stock for each full quarterly period during the
last two fiscal years.
2002 2001
----------------------------------- -------------------------------------
DIVIDENDS DIVIDENDS
QUARTER ENDED: HIGH LOW CLOSE DECLARED HIGH LOW CLOSE DECLARED
- ------------- ---- --- ----- -------- ---- --- ----- ---------
March 31 $16.00 $13.50 $14.94 $0.16 $13.00 $10.31 $11.06 $0.15
June 30 15.10 13.85 14.54 0.16 14.01 10.35 13.49 0.15
September 30 14.20 12.10 13.25 0.16 13.75 12.00 12.75 0.15
December 31 13.25 10.71 11.48 0.16 13.80 11.75 13.40 0.16
43
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
- ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
at December 31,
- ---------------------------------------------------------------------------------------------------------------
Summary of Financial Condition 2002 2001 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------
Cash $ 7,481 $ 7,518 $ 14,609 $ 14,637 $ 7,545
Investment securities 58,155 140,629 99,707 102,705 71,798
Loans net of allowances for loan losses 304,586 350,383 397,662 325,959 261,813
Interest-bearing deposits, and stock
in Federal Home Loan Bank 44,974 11,648 11,687 11,136 45,081
Other assets 41,611 41,896 33,623 31,912 19,481
- ---------------------------------------------------------------------------------------------------------------
Total assets $ 456,807 $ 552,074 $ 557,288 $ 486,349 $ 405,718
- ---------------------------------------------------------------------------------------------------------------
Deposits noninterest-bearing $ 19,124 $ 24,257 $ 12,927 $ 16,308 $ 14,633
Deposits interest-bearing 383,063 388,156 354,668 339,451 319,356
Borrowings 6,432 88,583 141,172 82,872 17,551
Other liabilities 9,148 8,183 6,810 7,689 8,829
- ---------------------------------------------------------------------------------------------------------------
Total liabilities 417,767 509,179 515,577 446,320 360,369
Shareholders' equity 39,040 42,895 41,711 40,029 45,349
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 456,807 $ 552,074 $ 557,288 $ 486,349 $ 405,718
===============================================================================================================
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------
Summary of Earnings 2002 2001 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------
Interest income $ 29,973 $ 37,170 $ 37,323 $ 29,083 $ 28,301
Interest expense 17,541 24,243 24,728 16,749 15,993
Net interest income 12,432 12,927 12,595 12,334 12,308
Provision for loan losses 7,300 360 417 328 159
Other income 2,738 3,857 3,368 3,302 3,429
Other expense 13,464 11,159 10,820 10,509 9,655
- ---------------------------------------------------------------------------------------------------------------
Income (loss) before taxes (5,594) 5,265 4,726 4,799 5,923
Income taxes (2,519) 1,465 1,164 1,467 2,085
- ---------------------------------------------------------------------------------------------------------------
Net income(loss) $ (3,075) $ 3,800 $ 3,562 $ 3,332 $ 3,838
- ---------------------------------------------------------------------------------------------------------------
Basic earnings (loss)per share (1) $ (0.98) $ 1.21 $ 1.13 $ 0.98 $ 1.08
Diluted earnings (loss)per share (1) $ (0.98) $ 1.21 $ 1.13 $ 0.98 $ 1.06
- ---------------------------------------------------------------------------------------------------------------
Dividends declared per share (1) $ 0.64 $ 0.61 $ 0.60 $ 0.60 $ 0.59
- ---------------------------------------------------------------------------------------------------------------
Book value per share (1) $ 12.40 $ 13.63 $ 13.26 $ 12.72 $ 12.92
===============================================================================================================
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------
Other Selected Data 2002 2001 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------
Return on average assets (0.60)% 0.72% 0.68% 0.77% 0.98%
Return on average equity (7.32) 8.92 8.68 7.60 8.48
Ratio of average equity to average assets 8.18 8.12 7.84 10.17 11.60
Dividend payout ratio (2) NM(3) 50.41% 53.00% 61.22% 55.66%
Number of full-service bank offices 11 11 11 12 11
- ---------------------------------------------------------------------------------------------------------------
<FN>
(1) Restated to reflect the eleven-for-ten stock split in 1998.
(2) Based on total dividends per share declared and net income per share for
the year.
(3) NM - Not meaningful.
</FN>
44
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
GENERAL
- -------
The Company was incorporated under Indiana law for the purpose of becoming
the holding company for Ameriana Bank and Trust of Indiana. In 1990, the Company
acquired all of Ameriana Bank and Trust of Indiana common stock in connection
with its reorganization into the holding company form of ownership. In 1992, the
Company acquired Ameriana Bank of Ohio, F.S.B. ("ABO"). ABO was merged into
Ameriana Bank and Trust of Indiana in October 2000. On June 29, 2001, Ameriana
Bank and Trust of Indiana converted from a Federal savings bank to an Indiana
chartered state savings bank and changed its name to Ameriana Bank and Trust,
SB. At the same time, the Company contributed Ameriana Insurance Agency, Inc.
("AIA") to the Bank. AIA operates a general insurance agency in three locations.
The Bank has a brokerage operation through its wholly owned subsidiary Ameriana
Financial Services, Inc. ("AFS"). AFS also owns a partial interest in a life
insurance company and a title insurance company. In 1995, the Company purchased
a minority interest in a limited partnership organized to acquire and manage
real estate investments, which qualify for federal tax credits.
The largest components of the Company's total revenue and total expense are
interest income and interest expense, respectively. Consequently, the Company's
earnings are primarily dependent on its net interest income, which is determined
by (i) the difference between rates of interest earned on interest-earning
assets and rates paid on interest-bearing liabilities ("interest rate spread"),
and (ii) the relative amounts of interest-earning assets and interest-bearing
liabilities. Levels of other income and operating expenses also significantly
affect net income.
45
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The accounting and reporting policies of the Company are in accordance with
accounting principles generally accepted in the United States and conform to
general practices within the banking industry. The Company's significant
accounting policies are described in detail in the notes to the Company's
consolidated financial statements for the year ended December 31, 2002. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions. The
financial position and results of operations can be affected by these estimates
and assumptions and are integral to the understanding of reported results.
Critical accounting policies are those policies that management believes are the
most important to the portrayal of the Company's financial condition and
results, and they require management to make estimates that are difficult,
subjective, or complex.
ALLOWANCE FOR CREDIT LOSSES. The allowance for credit losses provides
coverage for probable losses inherent in the Company's loan portfolio.
Management evaluates the adequacy of the allowance for credit losses each
quarter based on changes, if any, in underwriting activities, the loan portfolio
composition (including product mix and geographic, industry or customer-specific
concentrations), trends in loan performance, regulatory guidance and economic
factors. This evaluation is inherently subjective, as it requires the use of
significant management estimates. Many factors can affect management's estimates
of specific and expected losses, including volatility of default probabilities,
rating migrations, loss severity and economic and political conditions. The
allowance is increased through provisions charged to operating earnings and
reduced by net charge-offs.
The Company determines the amount of the allowance based on relative risk
characteristics of the loan portfolio. The allowance recorded for commercial
loans is based on reviews of individual credit relationships and an analysis of
the migration of commercial loans and actual loss experience. The allowance
recorded for homogeneous consumer loans is based on an analysis of loan mix,
risk characteristics of the portfolio, fraud loss and bankruptcy experiences,
and historical losses, adjusted for current trends, for each homogeneous
category or group of loans. The allowance for credit losses relating to impaired
loans is based on the loan's observable market price, the collateral for certain
collateral-dependent loans, or the discounted cash flows using the loan's
effective interest rate.
Regardless of the extent of the Company's analysis of customer performance,
portfolio trends or risk management processes, certain inherent but undetected
losses are probable within the loan portfolio. This is due to several factors
including inherent delays in obtaining information regarding a customer's
financial condition or
46
changes in their unique business conditions, the judgmental nature of individual
loan evaluations, collateral assessments and the interpretation of economic
trends. Volatility of economic or customer-specific conditions affecting the
identification and estimation of losses for larger non-homogeneous credits and
the sensitivity of assumptions utilized to establish allowances for homogenous
groups of loans are among other factors. The Company estimates a range of
inherent losses related to the existence of these exposures. The estimates are
based upon the Company's evaluation of imprecision risk associated with the
commercial and consumer allowance levels and the estimated impact of the current
economic environment.
MORTGAGE SERVICING RIGHTS. Mortgage servicing rights ("MSRs") associated
with loans originated and sold, where servicing is retained, are capitalized and
included in other intangible assets in the consolidated balance sheet. The value
of the capitalized servicing rights represents the present value of the future
servicing fees arising from the right to service loans in the portfolio.
Critical accounting policies for MSRs relate to the initial valuation and
subsequent impairment tests. The methodology used to determine the valuation of
MSRs requires the development and use of a number of estimates, including
anticipated principal amortization and prepayments of that principal balance.
Events that may significantly affect the estimates used are changes in interest
rates, mortgage loan prepayment speeds and the payment performance of the
underlying loans. The carrying value of the MSRs is periodically reviewed for
impairment based on a determination of fair value. Impairment, if any, is
recognized through a valuation allowance and is recorded as amortization of
intangible assets.
GOODWILL AND OTHER INTANGIBLES. The Company records all assets and
liabilities acquired in purchase acquisitions, including goodwill and other
intangibles, at fair value as required by SFAS 141. Goodwill is subject, at a
minimum, to annual tests for impairment. Other intangible assets are amortized
over their estimated useful lives using straight-line and accelerated methods,
and are subject to impairment if events or circumstances indicate a possible
inability to realize the carrying amount. The initial goodwill and other
intangibles recorded and subsequent impairment analysis requires management to
make subjective judgments concerning estimates of how the acquired asset will
perform in the future. Events and factors that may significantly affect the
estimates include, among others, customer attrition, changes in revenue growth
trends, specific industry conditions and changes in competition.
47
FINANCIAL CONDITION
- -------------------
Total assets decreased $95.3 million or 17.3% to $456.8 million at December
31, 2002, from $552.1 million at December 31, 2001.
CASH AND CASH EQUIVALENTS
- -------------------------
Cash and cash equivalents increased $33.9 million to $45.7 million at
December 31, 2002 from $11.8 million at December 31, 2001. This was mainly due
to a decline in the loan portfolio during 2002. Mortgage loan refinancing was a
major factor for the decline. Due to the rate environment in 2002, the Bank sold
the majority of its fixed-rate originations.
SECURITIES
- ----------
Investment securities decreased approximately $82.4 million to $58.2
million at December 31, 2002, from $140.6 million at December 31, 2001. The
Bank's interest rate risk position for year-end 2001 exceeded the Bank's risk
parameters, primarily due to volatile collateralized mortgage obligations
("CMO"). In order to restructure the investment portfolio, securities were
reclassified from held-to-maturity to available-for sale effective December 31,
2001. The Bank disposed of most of the security portfolio in the first quarter
2002 for an after tax loss of approximately $1.9 million. The breakdown of the
securities sold by type, were agency bonds with a net book value of $25.1
million, for a pretax loss of $173,000, and CMOs with a net book value of $111.6
million, for a pretax loss of $3.0 million. The proceeds from the sale were used
to pay off Federal Home Loan Bank ("FHLB") advances of $17.9 million in the
first quarter 2002 and the Company reinvested the remainder in the first and
second quarters of 2002 in an adjustable rate mortgage ("ARM") mutual fund
comprised of adjustable rate mortgage-back securities ("MBS"), agencies and MBS
securities and which presented less interest rate risk than the liquidated
investments (see "Interest Rate Risk").
In September 2002, the Bank determined it could improve its net interest
margin by paying down the majority of FHLB advances with the sale of a similar
amount of investment securities. The Company sold an additional $44.6 million of
investments in the third quarter 2002 and realized a gain of approximately $1.2
million on the sale, which offset to some extent, the loss on disposition of
investments realized earlier in the year. The proceeds from this latest
investment sale were used to pay off higher-rate FHLB advances, which included a
prepayment penalty of approximately $1.1 million. These transactions, taken
together, had a net pre-tax income effect of about $111,000. Aside from the
de-leveraging effect, these transactions are expected to improve the
48
Company's net interest margin through the reduction of higher rate debt with
proceeds from the sale of lower earning investments.
The following table identify changes in the investment securities carrying
values:
(Dollars in thousands)
=============================================================================================================
2002 2001 $ Change % Change
-------------------------------------------------------------------------------------------------------------
Available for sale at December 31:
Mortgage-backed and
collateralized mortgage obligations $27,824 $110,393 $ (82,569) (74.80)%
Federal agencies 8,227 28,696 (20,469) (71.33)
Mutual fund 20,538 -- 20,538 NM(1)
Trust preferred 1,566 1,540 26 1.69
-------------------------------------------------------------------------------------------------------------
Totals $58,155 $140,629 $ (82,474) 58.65%
=============================================================================================================
(1) NM - Not meaningful.
The following table identifies the percentage composition of the investment
securities:
===============================================================================
2002 2001
-------------------------------------------------------------------------------
Available for sale at December 31:
Mortgage-backed and
collateralized mortgage obligations 47.8% 78.5%
Federal agencies 14.2 20.4
Mutual fund 35.3 --
Trust preferred 2.7 1.1
-------------------------------------------------------------------------------
Totals 100.0% 100.0%
===============================================================================
The following table identifies changes in net unrealized gains and losses in
investment securities:
(Dollars in thousands)
==============================================================================================
2002 2001 $ Change
----------------------------------------------------------------------------------------------
Available for sale at December 31:
Mortgage-backed and
collateralized mortgage obligations $573 $ (1,330) $ 1,903
Federal agencies 175 130 45
Mutual fund 61 -- 61
Trust preferred 66 40 26
----------------------------------------------------------------------------------------------
Totals $875 $ (1,160) $ 2,035
==============================================================================================
See Note 3 to the "Consolidated Financial Statements" for more information on
investment securities.
49
LOANS
- -----
The following table shows the percentage change of the loan portfolio by
category (loans in process and deferred fees are not included in this table):
(Dollars in thousands)
===============================================================================
2002 2001
-------------------------------------------------------------------------------
At year-end December 31:
Real estate mortgage loans:
Commercial loans 43.6% 73.2%
Residential loans (25.5) (28.5)
Construction loans 1.6 (2.9)
Commercial loans and leases 3.5 111.5
Consumer loans:
Mobile home and auto loans (36.7) (23.2)
Loans secured by deposits (16.2) (15.6)
Home improvement loans (38.5) 25.6
Other (84.6) 41.0
==============================================================================
The portfolio shift to commercial real estate loans continued in 2002 and
2001. Fixed-rate residential mortgage loans were sold in the secondary market in
2002 and 2001, which is the main cause for the decline in residential mortgage
loans. Proceeds from loans sold in the secondary markets were $113.0 million in
2002, and $86.8 million in 2001. Fixed mortgage loan rates have been at historic
lows during this two year period which has increased the volume of refinances.
The fixed-rate residential loans are sold to minimize the Bank's exposure to
interest rate risk. Due to the consumer demand for fixed-rate loans, the Bank's
residential loan portfolio has declined. The Bank generally retains loan
servicing on loans originated and sold in Indiana, and sells loans and loan
servicing rights for loans originated and sold in Ohio. Loans serviced by the
Bank for investors, primarily the Federal Home Loan Mortgage Corporation
("FHLMC") and Federal National Mortgage Association ("FNMA"), totaled
approximately $177 million in 2002 and $162 million in 2001. Loans sold and
subsequently serviced by the Bank generate a steady source of fee income with
servicing fees ranging from 0.25% to 0.375%.
In 2001, the Bank purchased two separate pools of lease receivables,
totaling $12.0. million, which is the reason for the substantial increase in
commercial loans and leases in 2001. In 2002 these two pools went into default.
Please see "Credit Quality" for additional information.
Consumer loans made up 4.21% and 8.49% of the total loan portfolio for
year-ends 2002 and 2001 respectively. Consumer loans declined $17.5 million to
$13.5 million at December 31, 2002 from $31.0 million at
50
December 31, 2001. The decline was due to reduced loan volume as market
competitive rates were below minimums established by the Company.
Total loan production was strong for 2002 and 2001. New loan production was
$217 million and $199 million in 2002 and 2001, respectively. Since the Bank
sells most of its fixed-rate mortgage loans in the secondary market, the loan
volume is not fully reflected in the balance sheet.
CREDIT QUALITY
- --------------
Non-performing assets, totaling $19.0 million, grew substantially in 2002.
This represents an increase of $15.8 million over the 2001 non-performing assets
total of $3.2 million. The main cause for the increase is related to two lease
pools totaling $10.9 million and related loans to a builder/developer of $3.6
million.
The two lease pools are supported by a surety bond issued by one of two
insurance companies rated at least "A" by Moody's. The bonds guarantee payment
of all amounts due under the leases in the event of default by the lessee. When
the lease pools went into default, notice was given to each insurer. One of them
made payments for a few months under a reservation of rights; the other paid
nothing. Both insurers claim they were defrauded by Commercial Money Center
(CMC), the company which sold the lease pools. Both are now denying
responsibility for payment. CMC has also filed for bankruptcy protection. The
current unpaid balance for the pools is $10,900,000. It is highly unlikely that
the litigation will be resolved during 2003. The Bank believes the surety bonds
are enforceable against the insurers.
The Bank also has a number of real estate development/lot loans and single
family residential loans on existing properties with a builder/developer group,
and its related parties, that are currently in default and bankruptcy. The Bank
is working closely with the workout specialist hired by the bankruptcy trustee
on liquidation of the properties involved in the bankruptcy and we are
negotiating with the borrower and their counsel for resolution of the remaining
properties. The total outstanding balance of the various loans totaled $3.6
million as of December 31, 2002.
51
The following table compares delinquent loans as a percentage of total loans:
=============================================================================================================
December 31, 2002 2001
-------------------------------------------------------------------------------------------------------------
90 days Non- 90 days Non-
30-89 and accrual 30-89 and accrual
days over(1) loans Totals days over(1) loans Total
-------------------------------------------------------------------------------------------------------------
Real Estate:
Residential 0.59% 0.03% 1.05% 1.83% 0.22% 0.08% 0.23% 0.46%
Commercial 0.22 0.01 0.72 0.79 -- -- 0.38 0.38
Construction 0.32 -- -- 0.32 -- -- -- --
Commercial loans 0.14 -- 0.51 0.65 -- -- -- --
Consumer loans 0.17 -- 0.08 0.25 0.08 0.04 -- 0.15
Leases -- -- 3.48 3.48 -- -- -- --
------------------------------------------------------------------------------------------------------------
Totals 1.44% 0.04% 5.85% 7.32% 0.30% 0.11% 0.61% 0.99%
=============================================================================================================
<FN>
__________
(1) Still accruing
</FN>
The increase in 30-89 day delinquencies is largely the result of a weak
economy. The 2002 non-accrual loans increased primarily due to the two lease
pools in default, and builder/developer loans related to one party, as
previously discussed.
The Bank's charged-off loans less recoveries were $364,000 and $119,000 in
2002 and 2001 respectively. The percentage of net charge-offs to average assets
were 0.07% and 0.03% in 2002 and 2001 respectively.
The Bank made structural changes in the lending area in 2002. The Bank
added the new position of Senior-Vice President of Credit Administration and
also added additional loan staff.
DEPOSITS
- --------
Interest rates paid on Bank deposits were near historic lows in 2002 as
market interest rates continued to fall. The federal funds interest rate, the
rate banks charge other banks on overnight loans was at a 41 year low. Fed fund
rates generally affect the prime lending rate, which was at a 44-year historic
low. The Federal Reserve has cut the fed funds rate a dozen times since 2001,
with the last rate cut of 0.50% in November 2002. Short term deposits (deposits
with maturities of one year or less, including certificate accounts, checking,
savings and money market accounts), comprised 80% of the Bank's deposit
portfolio as of year-end 2002, compared to 76% for the same period in 2001. With
such a high percentage of deposit accounts staying short-term, an increase in
rates in the near future may squeeze the Bank's net interest margin in the
short-term, since loans are slower to re-price at new market rates.
Deposits declined $10.2 million or 2.5% in 2002 for a year-end portfolio
balance of $402.2 million. The deposit portfolio at year-end 2001 was $412.4
million. The main reason for the decline is public fund certificates
52
(public funds include deposits from state and local municipal agencies),which
had a balance of $12.9 million at December 31, 2001. The Bank held no public
fund certificates at December 31, 2002. Public fund certificate balances may be
more volatile than Bank customer deposits. The following table shows deposit
changes by category:
(Dollars in thousands)
=============================================================================================================
2002 2001 $ Change % Change
-------------------------------------------------------------------------------------------------------------
December 31,
Savings deposits $33,990 $32,647 $ 1,343 4.1%
NOW accounts 39,344 40,641 (1,297) (3.2)
Money market accounts 61,127 47,686 13,441 28.2
Certificates $100,000 and more 45,510 60,363 (14,853) (24.6)
Other certificates 267,726 231,076 (8,860) (3.9)
------------------------------------------------------------------------------------------------------------
Totals $402,187 $412,413 $ (10,226) (2.5)%
=============================================================================================================
BORROWINGS
- ----------
Borrowings declined sharply in 2002. FHLB Advances declined $82.1 million
to $5.6 million at year-end 2002 from $87.7 million at year-end 2001. The
decline was due to de-leveraging strategies implemented by the Bank in September
2002. The borrowings were paid down from security sales (see "Securities" for
more information).
Notes Payable by the Company declined $90,000 to $840,000 at year-end 2002,
from $930,000 at year-end 2001. Included in this amount was a note payable to a
third party financial institution with a current balance of $750,000 and bearing
interest at 4.25% at December 31, 2002, the proceeds of which were used to
finance stock repurchases during 1999. The remainder of notes payable with a
balance of $90,000 and $180,000 at December 31, 2002 and 2001, respectively, are
6.0% notes payable to former stockholders of Cardinal State Bank.
53
INTEREST RATE RISK
- ------------------
The Bank is subject to interest rate risk to the degree that its
interest-bearing liabilities, primarily deposits and borrowings from the FHLB,
mature or reprice at different rates than its interest-earning assets. Although
having liabilities that mature or reprice more frequently on average than assets
may not be beneficial in times of rising interest rates, such an asset/liability
structure could result in higher net income during periods of declining interest
rates, unless offset by other factors.
The Asset/Liability Committee and the Board of Directors review the Bank's
exposure to interest rate changes and market risk on a quarterly basis. This
review is accomplished by the use of a cash flow simulation model using detailed
securities, loan, deposit, borrowings and market information to estimate fair
values of assets and liabilities using discounted cash flows. The difference
between the Bank's estimated fair value of assets and the estimated fair value
of liabilities, is the fair value of equity, also referred to as net present
value of equity ("NPV"). The change in the NPV is calculated at different
interest rate intervals. This tests the interest rate risk exposure from
movements in interest rates to determine the change in the Bank's NPV. The model
also tests the impact various interest rate scenarios have on net interest
income and net income over a stated period of time (one year for example).
The model uses a number of assumptions, including the relative levels of
market interest rates and prepayments or extension in maturity and repayment in
loans, MBS & CMO and certain types of callable investments. These computations
did not contemplate actions management may undertake to reposition the assets
and liabilities, and should not be relied upon as indicative of actual results.
In addition, certain shortcomings are inherent in the model of computing NPV.
Should interest rates remain or decrease below present levels, the portion of
adjustable rate loans could decrease in future periods due to loan refinancing
or payoff activity. In the event of an interest rate change, pre-payment levels
would likely be different from those assumed in the model and the ability of
borrowers to repay their adjustable rate loans may decrease during rising
interest rate environments.
54
The Bank's information below provides an assessment of the risk of NPV in
the event of sudden and sustained 200 basis point increases and decreases in the
prevailing interest rates as of December 31, 2002.
- ------------------------------------------------------------------------------------
NPV as Percent of
Net Portfolio Value Present Value of Assets
- ------------------------------------------------------------------------------------
Change Dollar Dollar Percent
in Rates Amount Change Change NPV Ratio Change
- ------------------------------------------------------------------------------------
(Dollars in thousands)
+200 bp * $36,812 $ (5,999) (14.01) % 8.61% (147) bp
Base or 0% 42,811 10.08%
- -200 bp 39,952 (2,859) (6.68) 9.65 (43) bp
<FN>
* basis points
</FN>
The Bank information below provides an assessment of the risk of NPV in the
event of sudden and sustained 200 basis point increases and decreases in the
prevailing interest rates as of December 31, 2001.
- ------------------------------------------------------------------------------------
NPV as Percent of
Net Portfolio Value Present Value of Assets
- ------------------------------------------------------------------------------------
Change Dollar Dollar Percent
in Rates Amount Change Change NPV Ratio Change
- ------------------------------------------------------------------------------------
(Dollars in thousands)
+200 bp * $ 6,035 $(31,953) (84.11)% 1.19% (570) bp
Base or 0% 37,988 6.89
- -200 bp 40,989 3,001 7.90 7.23 34 bp
<FN>
* basis points
</FN>
The interest rate risk position of the Bank for the prior period ending
December 31, 2002 was within the Bank's risk parameters specified in its
interest rate risk policy, which was updated in 2002.
The interest rate risk position of the Bank for the prior period ending
December 31, 2001 was reviewed by management. Management determined that a
significant deterioration had occurred in Company's CMO portfolio which resulted
in a large increase in the Company's exposure to future increases in interest
rate risk. Upon further review, management determined that the increase in the
exposure was significant enough to call into question the prudence of continuing
to hold the securities to maturity. In order to take the necessary action to
reduce this exposure, management decided to move the entire securities portfolio
from the "Held to Maturity" accounting classification to the "Available for
Sale" classification as of December 31, 2001.
In 2002, the Company determined that most of its investments no longer fit
its risk profile given the unsettled, uncertain and volatile nature of the
market and the possibility that interest rates could move against the portfolio.
The decelerating speed of prepayments on these instruments during the first
quarter of 2002 was remarkable, significantly extending the practical maturity
of the portfolio to a level that exceeded the Bank's risk parameters. The
alternatives to
55
taking immediate action to mitigate the potential losses, including long-term
funding strategies, hedging strategies and partial liquidations, were felt to be
inadequate in the circumstances. The Company decided to liquidate the majority
of the investment portfolio during the first quarter of 2002.
The proceeds from the liquidation of the Company's investments were first
applied towards repayment of short-term borrowings from the FHLB. This increased
the Company's flexibility to retain more of its self-originated loans in
portfolio and to purchase loan participations in the region, as they became
available. The balance of the proceeds were used to purchase short-term liquid
investments, including limited maturity MBS, which present less interest rate
risk than the liquidated investments, and an ARM mutual fund. The Company also
used some proceeds to invest in intermediate-term MBS to provide a balance to
its portfolio between interest rate risk reduction and maintenance of higher net
interest income levels.
YIELDS EARNED AND RATES PAID
- ----------------------------
The following tables set forth the weighted average yields earned on the
Company's interest-earning assets and the weighted average interest rates paid
on the Company's interest-bearing liabilities, together with the net yield on
interest-earning assets.
Year Ended December 31,
-------------------------------
Weighted Average Yield: 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
Loans 7.15% 7.98% 7.99%
MBS & CMO 5.64 7.00 6.99
Other interest-earning assets 3.09 6.66 6.86
All interest-earning assets 6.33 7.71 7.73
Weighted Average Cost:
- ----------------------------------------------------------------------------------------------------------------
Deposits 3.71 5.03 5.02
Federal Home Loan Bank advances 6.39 6.50 6.74
Notes payable 3.69 7.30 8.31
All interest-bearing liabilities 3.97 5.31 5.44
- ----------------------------------------------------------------------------------------------------------------
Interest Rate Spread (spread between weighted average yield on all
interest-earning assets and all interest-bearing liabilities) 2.36 2.40 2.29
- ----------------------------------------------------------------------------------------------------------------
Net Yield (net interest income as a percentage of average
interest-earning assets) 2.63 2.68 2.61
At December 31,
-------------------------------
Weighted Average Interest Rates: 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
Loans 6.88% 7.74% 8.16%
MBS & CMO 6.66 6.35 6.94
Total interest-earning assets 6.07 7.39 7.91
Deposits 3.04 4.40 5.25
Federal Home Loan Bank advances 6.83 5.58 6.54
Notes payable 4.44 6.20 8.67
Total interest-bearing liabilities 3.09 4.62 5.63
Interest rate spread 2.98 2.77 2.28
- ----------------------------------------------------------------------------------------------------------------
56
RATE/VOLUME ANALYSIS
- --------------------
The following table sets forth certain information regarding changes in
interest income, interest expense and net interest income of the Company for the
periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable
to: (1) changes in volume (changes in volume multiplied by old rate), and (2)
changes in rate (changes in rate multiplied by new volume). No material amounts
of loan fees or out-of-period interest is included in the table. Dollars are in
thousands.
Year Ended December 31
2002 vs. 2001 2001 vs. 2000
- -------------------------------------------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Changes in Due to Changes in
- -------------------------------------------------------------------------------------------------------------
Net Net
Volume Rate Change Volume Rate Change
- -------------------------------------------------------------------------------------------------------------
Interest income:
Loans $(2,705) $(2,827) $(5,532) $ 384 $ (42) $ 342
Other interest-earning assets 1,770 (3,435) (1,665) (350) (145) (495)
- -------------------------------------------------------------------------------------------------------------
Total interest-earning assets (935) (6,262) (7,197) 34 (187) (153)
- -------------------------------------------------------------------------------------------------------------
Interest Expense:
Deposits 2,272 (6,223) (3,951) 1,280 46 1,326
FHLB advances and notes payable (2,671) (80) (2,751) (1,595) (216) (1,811)
- -------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (399) (6,303) (6,702) (315) (170) (485)
- -------------------------------------------------------------------------------------------------------------
Change in net interest income $ (536) $ 41 $ (495) $ 349 $ (17) $ 332
=============================================================================================================
57
RESULTS OF OPERATIONS
PART 1 2002 COMPARED TO 2001
- ------------------------------
NET INCOME (LOSS)
- ------------------
Ameriana Bancorp had a net loss of $3.1 million for the year-end 2002, due
primarily to security losses and large loan provision expenses.
The Bank's interest rate risk position for year-end 2001 exceeded the
Bank's risk parameters primarily due to volatile CMOs. In March 2002, the Bank
disposed of $137 million in securities at a pretax loss of $3.2 million or
approximately $1.9 million after tax. The Bank has since revised its investment
policy and created an investment committee that approves all investments. (See
"Securities" for further information.)
The total provision for loans and lease losses increased substantially in
2002. Provision expense increased $6.9 million for a total provision expense of
$7.3 million in 2002. This increase was necessary to establish specific reserves
for the additional non-accrual loans, which increased by $16.1 million in 2002,
for a year-end total of $18.3 million. In 2002, the Bank set aside specific
reserves in the amount of $5.5 million for two lease pools with a principal
balance of $10.9 million at December 31, 2002, in addition to specific reserves
of $795,000 for business/development loans and its related parties with a
principal balance of $3.6 million at December 31, 2002. These specific reserves
account for $6.2 million of the $6.9 million increase in the provision for loan
and lease losses. The Bank also increased its general reserves due to the weak
economy, and to reflect the Bank's current risk in the loan portfolio due to the
change in the portfolio mix.
For a quarterly breakdown of earnings, see Note 18 to the "Consolidated
Financial Statements".
The table below shows selected performance data:
========================================================================================================================
2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
Net income (loss) (in thousands) $(3,075) $3,800 $3,562 $3,332 $3,838
Basic earnings (loss) per share (1) $ (0.98) $ 1.21 $ 1.13 $ 0.98 $ 1.08
Diluted earning (loss) per share (1) $ (0.98) $ 1.21 $ 1.13 $ 0.98 $ 1.06
Dividends declared per share (1) $ 0.64 $ 0.61 $ 0.60 $ 0.60 $ 0.59
Book value per share (1) $ 12.40 $13.63 $13.26 $12.72 $12.92
Return on average assets (0.60)% 0.72% 0.68% 0.77% 0.98%
Return on average equity (7.32)% 8.92% 8.68% 7.60% 8.48%
Ratio of average equity to average assets 8.18% 8.12% 7.84% 10.17% 11.60%
Dividend Payout Ratio(2) NM 50.41% 53.00% 61.22% 55.66%
Number of full-service bank offices 11 11 11 12 11
========================================================================================================================
<FN>
(1) Restated to reflect the eleven-for-ten stock split in 1998.
(2) Based on total dividends per share declared and net income per share for
the year. NM - not meaningful.
</FN>
58
NET INTEREST INCOME
- -------------------
The Company derives the majority of its income from net interest income.
The following table shows a breakdown of net interest income for 2002 compared
to 2001.
(Dollars in thousands)
====================================================================================================================
Years ended December 31, 2002 2001
- ---------------------------------------------------------------------------------------------------
Interest Yield Interest Yield Change
- -------------------------------------------------------------------------------------- -----------------------------
Interest and fees on loans $24,473 7.15% $30,005 7.98% $ (5,532)
Other interest income 5,500 4.19 7,165 6.76 (1,665)
- -------------------------------------------------------------------------------------- -----------------------------
Total interest income 29,973 6.33 37,170 7.71 (7,197)
- -------------------------------------------------------------------------------------- -----------------------------
Interest on deposits 14,712 3.71 18,663 5.03 (3,951)
Interest on borrowings 2,829 6.33 5,580 6.52 (2,751)
- -------------------------------------------------------------------------------------- -----------------------------
Total interest expense 17,541 3.97 24,243 5.31 (6,702)
- -------------------------------------------------------------------------------------- -----------------------------
Net interest income $12,432 -- $12,927 -- $(495)
====================================================================================================================
Net interest spread -- 2.36% -- 2.40% --
Net interest margin -- 2.63% -- 2.68% --
====================================================================================================================
Net interest income declined 3.8% or $495,000 in 2002. Most of the decrease
was volume-related. See "Rate/Volume Analysis" for more information. The net
interest spread, which is the mathematical difference between the yield on
average interest-earning assets and cost of interest-bearing liabilities, was
2.36% in 2002 and 2.40% in 2001. The net interest margin on interest-earning
assets, which is interest income as percent of average earning assets, was 2.63%
in 2002 and 2.68% in 2001.
The Bank de-leveraged the balance sheet in September 2002 by paying off
higher costing FHLB advances with lower yielding investments. Several high cost
certificates originated before 2002 re-priced at the current market. Yield on
securities declined when most of the security portfolio was sold in March 2002
due to the high level of interest rate risk and was subsequently replaced in
second quarter 2002 with lower yielding securities that posed a comparatively
lower level of interest rate risk. As a result, the net interest margin improved
0.42% to 3.04% for the fourth quarter 2002, from 2.62% for the fourth quarter
2001.
PROVISION FOR LOAN LOSSES
- -------------------------
The Company significantly increased the provision for loan losses for a
total provision expense of $7.3 million for 2002, compared to $360,000 in 2001.
The provision is the amount that is added to the allowance for loan losses to
absorb inherent losses in the loan portfolio. Net loan charge-offs were $364,000
and $119,000 for the years 2002 and 2001, respectively. The allowance for loan
losses as a percent of loans was 2.77% at December 31, 2002 and 0.49% at
December 31, 2001, and represents management's best estimate of the inherent
losses in the loan portfolio. The provision increase in 2002 was necessary to
increase the allowance for loan and lease losses to a sufficient level of
specific and general reserves. Non-performing loans, which consists of
non-accrual loans, and loans delinquent over 90 days, substantially increased by
59
$15.8 million during 2002. Non performing loans were $18.4 million at December
31, 2002 and $2.6 million at December 31, 2001. The increase in non-performing
loans is mainly due to a few large loans. Please see "Credit Quality" for more
information.
The following table breaks out non-performing loans by category.
(Dollars in thousands)
=============================================================================================================
2002 2001 $ Change % Change
-------------------------------------------------------------------------------------------- ----------------
December 31,
Non-accrual loans $18,307 $2,178 $16,129 740.5%
Over 90 days delinquent still accruing 135 395 (260) (65.8)
-------------------------------------------------------------------------------------------------------------
Totals $18,442 $2,573 $15,869 616.8%
=============================================================================================================
The Company believes it has established an adequate allowance for loan
losses in accordance with generally accepted accounting principles. The
variation in the amount of provision charged against income is directly related
to changes in loan charge-offs, non-performing loans, loan delinquencies,
economic conditions in the Company's lending area and loan portfolio mix during
each year.
NON-INTEREST INCOME
- -------------------
Non-interest income was $2.7 million in 2002 and $3.9 million in 2001, for
an overall decrease of 29.01%. The main cause of the decline was due to the net
losses on securities sold in 2002 of $2.0 million (See "Securities" for more
information on securities sold in 2002). Excluding the security losses,
non-interest income would have improved 23.49%. Gains on sales of loans and
servicing rights improved to $1.4 million for 2002 from $804,000 for 2001, or an
increase of 77.00%. Interest rates have steadily declined since 2001 which has
created a higher demand from consumers for fixed-rate mortgage loans. Proceeds
from loans sold in the secondary market were $113.0 million in 2002 and $86.8
million in 2001. Other fees and service charges improved 4.07%, while brokerage
and insurance commissions were up 1.01%. The Bank invested in life insurance on
employees and directors, with a balance or cash surrender value of $18.9 million
and $18.0 million respectively at December 31, 2002 and 2001. The majority of
these policies were purchased in 1999, The nontaxable increase in cash surrender
value of life insurance was $897,000 in 2002 and $945,000 in 2001. Overall, the
increase in cash value of life insurance declined 5.08% in 2002 compared to
2001. Operating losses associated with the limited partnership amounted to a
gain of $92,000 in 2002 and a loss of $172,000 in 2001 and are included in other
income. The Company incurred an allocated gain of $191,000 and tax credit
recapture of $33,000 due to the termination of ownership in one of the
properties in 2002. The Company also reflected federal income tax credits of
$159,000 (after tax credit recapture) and $210,000 for the year ended December
31, 2002 and December 31 2001.
60
NON-INTEREST EXPENSE
- --------------------
Non-interest expense was $13.5 million 2002 and $11.2 million in 2001, for
an overall increase of 20.66%. The main cause of the increase was the penalties
paid on early payoff of FHLB advances in 2002 of $1.1 million (See "Securities"
for more information on FHLB advance payoffs in 2002). Excluding the advance
early payoff penalties, non-interest expense would have increased 11.10%. The
largest component of non-interest expense is salaries and employee benefits
which make up 56.44% of total non-interest expenses.
Salaries and employee benefits increased $879,000 to $7.6 million in 2002,
compared to $6.7 million in 2001. In 2002, the Bank paid a former executive
officer severance pay for a non-recurring expense of $289,000. The Bank's
employee retirement plan expense increased to $215,000 in 2002 from $5,000 in
2001. The retirement expense incurred in 2001 was for general administrative
expenses of the retirement fund. In 2001, the market generally provided enough
earnings to cover increases required in the employee retirement fund. With the
decline of the market, the Bank's retirement expense in 2002 rose substantially.
Other insurance benefits, comprised mainly of medical insurance, increased to
$1.0 million in 2002 from $748,000 in 2001, for an overall increase in insurance
benefits expense of $280,000. There were eleven new positions added during 2002
in several areas of the Bank. Please see Note 11 to the "Consolidated Financial
Statements" for more information regarding benefits.
Net occupancy and furniture and equipment expense was $1.7 million in 2002,
compared to $1.4 million in 2001, for an overall expense increase of $271,000 or
19.62% in 2001. The increase was mainly due to building and equipment
maintenance expense, utilities, equipment rental, and depreciation expense that
increased $74,000, $17,000, $22,000, $14,000 respectively in 2002 from 2001.
Data processing, printing and supplies, and all other expenses increased $79,000
or 0.03% in 2002 from 2001.
INCOME TAX EXPENSE
- ------------------
Income taxes was a credit of $2.5 million in 2002 compared to an expense of
$1.5million in 2001. The effective tax rate in was (45.0)% in 2002, and 27.8% in
2001. The 2002 income taxes was comprised of $796,000 expense for current taxes
and $3.3 million credit for deferred taxes. The 2001 income taxes was comprised
of $1.7 million expense for current taxes, and $229,000 credit for deferred
taxes. The deferred tax credits in 2002 were mainly due to the loan provision
expense in 2002. For both 2002 and 2001, the primary difference between the
effective tax rates and the statutory tax rates relate to
61
tax credits and cash value of life insurance. See Note 10 to the Consolidated
Financial Statements for more detail information.
PART 2 2001 COMPARED TO 2000
- ------------------------------
NET INCOME
- ----------
The Company's net income increased $238,000 or 6.68% to $3.8 million ($1.21
basis and diluted earnings per share) for the year ended December 31, 2001,
compared to $3.6 million ($1.13 basis and diluted earnings per share) for the
year ended December 31, 2000. The improvement in year 2001 income was primarily
due to increases in net interest income and other income due mostly to gains on
loans sold.
NET INTEREST INCOME
- -------------------
Net interest income increased by $332,000 in 2001 compared to 2000 and was
due to a greater decrease in interest costs of $485,000 or 1.96% compared to a
decrease in interest income of $153,000 or 0.41%. The average-interest earning
assets decreased only 0.14% to $482.1 million in 2001 from $482.8 million in
2000 and the interest-bearing liabilities increased only 0.45% to $456.7 million
in 2001 from $454.6 million in 2000. The total interest rate on average earning
assets decreased 2 basis points to 7.71% in 2001 from 7.73% in 2000. The
decrease in interest expense was due to increased volume and a small increase in
costs of deposits while correspondingly reducing FHLB advances and notes
payable. The total interest rate on average interest-bearing liabilities
decreased 13 basis points to 5.31% in 2001 from 5.44% in 2000. The decrease in
interest income was due to the increase in loans and MBS & CMO at lower interest
rates offset by calls on agency investment securities. The Company's net
interest spread increased 11 basis points to 2.40% in 2001 from 2.29% in 2000.
PROVISION FOR LOAN LOSSES
- -------------------------
The provision for loan losses was $360,000 in 2001 and $417,000 in 2000.
The provision is the amount that is added to the allowance for loan losses to
absorb inherent losses in the portfolio. The allowance for loan losses as a
percent of loans was 0.49% at December 31, 2001 and 0.37% at December 31, 2000,
and represents management's best estimate of losses inherent in the loan
portfolio. Net loan charge-offs were $119,000 and $462,000 for the years 2001
and 2000 respectively. Non-performing loans, which consists of non-accrual loans
and loans delinquent over 90 days, were $2.6 million and $1.5 million at
December 31, 2001 and 2000, respectively. The 2001 non-performing losses
included $1.3 million for a loan on an apartment complex that had an appraisal
for 130% of its carrying value.
62
The following table breaks out non-performing loans by category.
(Dollars in thousands)
=============================================================================================================
2001 2000 $ Change % Change
-------------------------------------------------------------------------------------------------------------
December 31,
Non-accrual loans $2,178 $801 $ 1,377 171.9%
Over 90 days delinquent still accruing 395 747 (352) (47.1)
-------------------------------------------------------------------------------------------------------------
Totals $2,573 $1,548 $ 1,025 66.2%
=============================================================================================================
The Company believes it has established an adequate allowance for loan
losses in accordance with generally accepted accounting principles. The
variation in the amount of provision charged against income is directly related
to changes in loan charge-offs, non-performing loans, loan delinquencies,
economic conditions in the Company's lending area and loan growth or reduction
during each year.
NON-INTEREST INCOME
Non-interest income was $3.9 million and $3.4 million for 2001 and 2000,
respectively. The 2001 gains on sales of loans and servicing rights of $804,000
were significantly higher than $103,000 in 2000. These changes reflected the
change in demand for fixed-rate real estate loans. In 2001 rates decreased all
year and the consumer wanted the fixed-rate residential mortgage loan which the
Bank sold to the secondary market. The average mortgage rates in 2000 were
higher and the consumer preferred the variable-rate residential mortgage loan
which are normally retained in portfolio. Included in other income are operating
losses associated with a limited partnership which amounted to $172,000 in 2001
and $101,000 in 2000. At the same time as these losses reflected as a reduction
in other income, the Company also reflected federal income tax credits of
$210,000 and $213,000 for the year ended December 31, 2001 and December 31,
2000. Brokerage and insurance commissions decreased slightly in both years with
$995,000 in 2001 and $1.1 million in 2000. The recession had a direct influence
on this income during 2001 and the latter part of 2000. The Bank invested in
life insurance on employees and directors, with a balance or cash surrender
value of $18.0 million and $17.1 million at December 31, 2001 and 2000,
respectively. The majority of the policies were purchased during 1999. The
nontaxable increase in cash surrender value of life insurance was $945,000 in
2001 and $972,000 in 2000. The 2000 income included a one-time adjustment of
$197,000 related to the value of insurance policies on two retired employees.
OTHER EXPENSE
Operating expenses were $11.2 million and $10.8 million for 2001 and 2000,
respectively. These yearly increases were due to normal increases as well as the
additional expense of operating a new trust department and commercial loan
department. Improvements made in data processing and the initial expense of
implementing check imaging were incurred in
63
2000. Data processing expense and other expenses in 2000 included additional
costs related to the merger of the two Banks during that year.
INCOME TAX EXPENSE
- ------------------
Income tax expense was $1.5 million in 2001 and $1.2 million in 2000. The
effective tax rate was 27.8% in 2001 and 24.6% in 2000. For both 2001 and 2000,
the primary differences between the effective tax rate and the statutory tax
rate relate to tax credits and cash surrender value of life insurance.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Historically, funds provided by operations, loan principal repayments and
new deposits have been the Company's principal sources of liquid funds. In
addition, the Company has the ability to obtain funds through the sale of new
mortgage loans and through borrowings from the FHLB system. At December 31,
2002, the Company's commitments for loans in process totaled $8.4 million and
conditional commitments for lines of credit receivable totaled $22.2 million. .
Management believes that the Company's liquidity and other sources of funds will
be sufficient to fund all outstanding commitments and other cash needs. A
portion of these commitments is for fixed-rate mortgage loans, which will be
sold immediately into the secondary market.
An amendment of the 1996 Stock Option Plan, which provides for the granting
of incentive and non-qualified stock options, was approved by the shareholders
in April 1998 and extended the plan's term to ten years and increased the number
of shares reserved under the plan from 176,000 to 352,000 shares. No options for
exercise of shares were done in 2001. Options for 9,713 shares in 2002 were
exercised. See Notes 1 and 11 to the "Consolidated Financial Statements" for the
pro forma effect on net income and option activity.
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
64
are directly affected by inflation, although interest rates may fluctuate in
response to perceived changes in the rate of inflation.
CURRENT ACCOUNTING ISSUES
- -------------------------
The Company adopted Statement of Financial Accounting Standards ("SFAS')
No. 142, Goodwill and Other Intangible Assets, on January 1, 2002. This
Statement establishes new accounting and reporting standards for acquired
goodwill and other intangible assets. The Statement addresses how intangible
assets that are acquired individually or with a group of other assets (but not
those acquired in a business combination) should be accounted for in financial
statements upon their acquisition. It also addresses how goodwill and other
intangible assets (including those acquired in a business combination) should be
accounted for after they have been initially recognized in the financial
statements. SFAS No. 142 was effective for the Company beginning January 1,
2002. Upon adoption of SFAS No. 142, the Company no longer amortizes goodwill
but makes an annual assessment of impairment loss. At December 31, 2002, no
impairment loss was identified.
The Company recently adopted SFAS No. 147, which amends SFAS No. No. 72,
Accounting for Certain Acquisitions of Banking or Thrift Institutions, and FASB
Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings and
Loan Association or a Similar Institution Is Acquired in a Business Combination
Accounted for by the Purchase Method. SFAS No. 72 and FASB Interpretation No. 9
provided interpretive guidance on the application of the purchase method to
acquisitions of financial institutions. Except for transactions between two or
more mutual enterprises, SFAS No. 147 removes acquisitions of financial
institutions from the scope of both SFAS No. 72 and Interpretation No. 9 and
requires that those transactions be accounted by in accordance with SFAS No.
141, Business Combinations, and No. 142, Goodwill and Other Intangible
Assets.147. In addition, SFAS No. 147 amends SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor- and borrower-relationship intangible assets and credit cardholder
intangible assets. Those intangible assets are subject to the same undiscounted
cash flow recoverability test and impairment loss recognition and measurement
provisions that SFAS No. 144 requires for other long-lived assets that are held
and used.
The effective date of SFAS No. 147 was October 1, 2002, with earlier
application relating to previously recognized unidentifiable intangible assets
permitted and did not have a significant impact on the Company upon adoption.
65
The Company recently adopted Accounting for Stock-Based Compensation --
Transition and Disclosure. SFAS No. 148, which amends FASB Statement No. 123,
Accounting for Stock-Based Compensation. SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require more prominent and
more frequent disclosures in financial statements about the effects of
stock-based compensation.
Under the provisions of SFAS No. 123, companies that adopted the fair value
based method were required to apply that method prospectively for new stock
option awards. This contributed to a "ramp-up" effect on stock-based
compensation expense in the first few years following adoption, which caused
concern for companies and investors because of the lack of consistency in
reported results. To address that concern, SFAS No. 148 provides two additional
methods of transition that reflect an entity's full complement of stock-based
compensation expense immediately upon adoption, thereby eliminating the ramp-up
effect.
SFAS No. 148 also improves the clarity and prominence of disclosures about
the pro-forma effects of using the fair value based method of accounting for
stock-based compensation for all companies -- regardless of the accounting
method used -- by requiring that the data be presented more prominently and in a
more user-friendly format in the footnotes to the financial statements. In
addition, SFAS No. 148 improves the timeliness of those disclosures by requiring
that this information be included in interim as well as annual financial
statements. In the past, companies were required to make pro-forma disclosures
only in annual financial statements.
The transition guidance and annual disclosure provisions of SFAS No. 148
are effective for fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002. The adoption of this
statement did not have a material effect on the Company's financial position or
results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- -------------------------------------------------------------------
Reference is made to the discussion captioned "Interest Rate Risk" in Item
7 of this Annual Report.
66
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors 68
Consolidated Balance Sheets at December 31, 2002 and 2001 69
Consolidated Statements of Income for Each of the Three Years in the
Period Ended December 31, 2002 70
Consolidated Statements of Shareholders' Equity for Each of the Three
Years in the Period Ended December 31, 2002 71
Consolidated Statements of Cash Flows for Each of the Three Years
in the Period Ended December 31, 2002 72
Notes to Consolidated Financial Statements 73
67
Independent Accountants' Report
To the Shareholders and
Board of Directors
Ameriana Bancorp
New Castle, Indiana
We have audited the accompanying consolidated balance sheets of Ameriana Bancorp
as of December 31, 2002 and 2001, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 2002. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements described above present
fairly, in all material respects, the consolidated financial position of
Ameriana Bancorp as of December 31, 2002 and 2001, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America.
As more fully discussed in Note 7, the Company changed its method of accounting
for goodwill in 2002.
/s/ BKD, LLP
Indianapolis, Indiana
February 3, 2003
68
Ameriana Bancorp
Consolidated Balance Sheets
(in thousands, except share data)
- ----------------------------------------------------------------------------------------------------------------------------
December 31
- ----------------------------------------------------------------------------------------------------------------------------
2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash on hand and in other institutions $ 7,481 $ 7,518
Interest-bearing demand deposits 38,215 4,283
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 45,696 11,801
Investment securities available for sale 58,155 140,629
Loans, net of allowance for loan losses of $8,666 and $1,730 304,586 350,383
Premises and equipment 7,901 6,919
Stock in Federal Home Loan Bank 6,759 7,365
Goodwill 1,291 1,291
Cash value of life insurance 18,932 18,035
Other assets 13,487 15,651
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $456,807 $552,074
============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 19,124 $ 24,257
Interest-bearing 383,063 388,156
- ----------------------------------------------------------------------------------------------------------------------------
Total deposits 402,187 412,413
Borrowings 6,432 88,583
Drafts payable 5,099 6,152
Other liabilities 4,049 2,031
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 417,767 509,179
- ----------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity
Preferred stock - 5,000,000 shares authorized and unissued
Common stock, $1.00 par value
Authorized 15,000,000 shares
Issued and outstanding - 3,147,463 and 3,146,616 shares 3,147 3,147
Additional paid-in capital 499 499
Retained earnings 34,856 39,945
Accumulated other comprehensive income (loss) 538 (696)
- -----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 39,040 42,895
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $456,807 $552,074
=============================================================================================================================
See notes to consolidated financial statements.
69
Ameriana Bancorp
Consolidated Statements of Operations
(in thousands, except share data)
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
- ----------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $24,473 $30,005 $29,663
Interest on mortgage-backed securities 3,196 2,225 910
Interest on investment securities 1,320 4,067 6,055
Other interest and dividend income 984 873 695
- -----------------------------------------------------------------------------------------------------------------------------
Total interest income 29,973 37,170 37,323
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 14,712 18,663 17,337
Interest on borrowings 2,829 5,580 7,391
- -----------------------------------------------------------------------------------------------------------------------------
Total interest expense 17,541 24,243 24,728
- ----------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 12,432 12,927 12,595
Provision for loan losses 7,300 360 417
- -----------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,132 12,567 12,178
- ----------------------------------------------------------------------------------------------------------------------------
OTHER INCOME
Other fees and service charges 1,073 1,031 939
Brokerage and insurance commissions 1,005 995 1,056
Net realized losses on sales of available-for-sale securities (2,025) -- --
Gains on sales of loans and servicing rights 1,423 804 103
Increase in cash value of life insurance 897 945 972
Other 365 82 298
- -----------------------------------------------------------------------------------------------------------------------------
Total other income 2,738 3,857 3,368
- ----------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSE
Salaries and employee benefits 7,599 6,720 6,383
Net occupancy expense 963 802 860
Furniture and equipment expense 689 579 607
Data processing expense 374 313 308
Printing and office supplies 309 330 290
Penalty on early payoff of FHLB advances 1,076 -- --
Other 2,454 2,415 2,372
- -----------------------------------------------------------------------------------------------------------------------------
Total other expense 13,464 11,159 10,820
- ----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (5,594) 5,265 4,726
Income taxes (2,519) 1,465 1,164
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (3,075) $ 3,800 $ 3,562
============================================================================================================================
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE $(.98) $1.21 $1.13
============================================================================================================================
See notes to consolidated financial statements.
70
Ameriana Bancorp
Consolidated Statements of Shareholders' Equity
(in thousands, except per share data)
- ---------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Additional Comprehensive
Common Paid-in Retained Income
Stock Capital Earnings (Loss) Total
- ---------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2000 $3,146 $492 $36,391 $40,029
Net income -- -- 3,562 3,562
Dividends declared ($.60 per share) -- -- (1,888) (1,888)
Exercise of stock options 1 7 -- 8
- ----------------------------------------------------------------------------------------- ------------------
Balance at December 31, 2000 3,147 499 38,065 41,711
Net income -- -- 3,800 3,800
Change in unrealized depreciation on
available-for-sale securities, net
of income tax benefit of $464 -- -- -- $(696) (696)
------------------
Comprehensive income 3,104
Dividends declared ($.61 per share) -- -- (1,920) -- (1,920)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 3,147 499 39,945 (696) 42,895
Net loss -- -- (3,075) -- (3,075)
Change in unrealized depreciation on
available-for-sale securities, net
of income tax expense of $801 -- -- -- 1,234 1,234
------------------
Comprehensive loss (1,841)
Exercise of stock options 9 128 -- -- 137
Purchase of common stock (9) (128) -- -- (137)
Dividends declared ($.64 per share) -- -- (2,014) -- (2,014)
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2002 $3,147 $499 $34,856 $538 $39,040
===========================================================================================================================
See notes to consolidated financial statements.
71
Ameriana Bancorp
Consolidated Statements of Cash Flows
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
- ------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ (3,075) $ 3,800 $ 3,562
Items not requiring (providing) cash
Provision for losses on loans 7,300 360 417
Depreciation and amortization 967 804 677
Increase in cash surrender value (897) (945) (972)
Mortgage loans originated for sale (110,756) (91,515) (9,238)
Proceeds from sale of mortgage loans 113,047 86,814 9,298
Gains on sale of loans and servicing rights (1,423) (804) (103)
Loss on sale of investments 2,025 -- --
Increase (decrease) in drafts payable (1,053) 3,053 (862)
Other adjustments 2,898 (2,297) (362)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 9,033 (730) 2,417
- ------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
- ------------------------------------------------------------------------------------------------------------------------------
Net change in interest-bearing time deposits -- -- 1,499
Purchase of investment securities held to maturity -- (131,430) (606)
Proceeds from maturities/calls of securities held to maturity -- 77,805 --
Principal collected on mortgage-backed securities held to maturity -- 11,445 3,720
Purchase of investment securities available for sale (131,339) -- --
Proceeds from sale of investment securities available for sale 179,218 -- --
Proceeds from maturities/calls of securities available for sale 6,207 -- --
Principal collected on mortgage-backed securities available for sale 28,038 -- --
Net change in loans 37,856 45,711 (72,769)
Net purchases of premises and equipment (1,589) (425) (636)
Purchase of Federal Home Loan Bank stock (69) (100) (2,924)
Proceeds from sale of Federal Home Loan Bank stock 675
Other investing activities 256 153 (1,509)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 119,253 3,159 (73,225)
- -------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
- ------------------------------------------------------------------------------------------------------------------------------
Net change in demand and passbook deposits 13,487 10,309 1,722
Net change in certificates of deposit (23,713) 34,509 11,764
Proceeds from borrowings 55,500 93,500 329,600
Repayment of borrowings (137,651) (146,089) (271,300)
Purchase of common stock (137) -- --
Exercise of stock options 137 -- 8
Cash dividends paid (2,014) (1,888) (1,888)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (94,391) (9,659) 69,906
- ------------------------------------------------------------------------------------------------------------------------------
CHANGE IN CASH AND CASH EQUIVALENTS 33,895 (7,230) (902)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 11,801 19,031 19,933
- -------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $45,696 $11,801 $19,031
==============================================================================================================================
See notes to consolidated financial statements.
72
Ameriana Bancorp
Notes to Consolidated Financial Statements
(table dollar amounts in thousands, except share data)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of Ameriana Bancorp (the "Company") and its wholly-owned subsidiary,
Ameriana Bank and Trust, SB ("ABT"), and ABT's wholly-owned subsidiaries,
Ameriana Financial Services, Inc., Indiana Title Insurance Company ("ITIC") and
Ameriana Insurance Agency, Inc. ITIC ceased operations at the close of business
on December 31, 2000. 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 thrift holding company whose principal activity is the
ownership and management of ABT and its subsidiaries. The Company provides
various banking services and engages in loan servicing activities for investors
and operates in a single significant business segment. ABT is subject to the
regulation of the Indiana Department of Financial Institutions and the Federal
Deposit Insurance Corporation. The Company's gross revenues are substantially
earned from the various banking services provided by ABT. The Company also earns
brokerage and insurance commissions from the services provided by the other
subsidiaries.
ABT generates loans and receives deposits from customers located primarily in
east central Indiana and southwestern Ohio. Loans are generally secured by
specific items of collateral including real property and consumer assets. The
Company has sold various loans to investors while retaining the servicing
rights.
CASH AND CASH EQUIVALENTS consist of cash on hand and in other institutions and
interest-bearing demand deposits.
INVESTMENT SECURITIES: Debt securities are classified as held to maturity when
the Company has the positive intent and ability to hold the securities to
maturity. Securities held to maturity are carried at amortized cost. Debt
securities not classified as held to maturity are classified as available for
sale. Securities available for sale are carried at fair value with unrealized
gains and losses reported separately in accumulated other comprehensive income,
net of tax.
Amortization of premiums and accretion of discounts are recorded using the
interest method as interest income from securities. Realized gains and losses
are recorded as net security gains (losses). Gains and losses on sales of
securities are determined on the specific-identification method.
STOCK IN FEDERAL HOME LOAN BANK ("FHLB") is stated at cost and the amount of
stock the Company is required to own is determined by regulation.
LOANS are carried at the principal amount outstanding. A loan is impaired when,
based on current information or events, it is probable that the Company will be
unable to collect all amounts due (principal and interest) according to the
contractual terms of the loan agreement. Payments with insignificant delays not
exceeding 90 days outstanding are not considered impaired. Certain nonaccrual
and substantially delinquent loans may be considered to be impaired. The Company
considers its investment in one-to-four family residential loans and installment
loans to be homogeneous and therefore excluded from separate identification of
evaluation of impairment. Interest income is accrued on the principal balances
of loans. The accrual of interest on impaired and nonaccrual loans is
discontinued when, in management's opinion, the borrower may be unable to meet
payments as they become due. When interest accrual is discontinued, all unpaid
accrued interest is reversed when considered uncollectible. Interest income is
subsequently recognized only to the extent cash payments are received. Certain
loan fees and direct costs are being deferred and amortized as an adjustment of
yield on the loans over the contractual lives of the loans. When a loan is paid
off or sold, any unamortized loan origination fee balance is credited to income.
73
Ameriana Bancorp
Notes to Consolidated Financial Statements
(table dollar amounts in thousands, except share data)
ALLOWANCE FOR LOAN LOSSES is maintained at a level believed adequate by
management to absorb inherent losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of the
portfolio including consideration of past loan loss experience, current economic
conditions, volume, growth and composition of the loan portfolio, the
probability of collecting all amounts due, and other relevant factors. Impaired
loans are measured by the present value of expected future cash flows, or the
fair value of the collateral of the loan, if collateral dependent. The allowance
is increased by provisions for loan losses charged against income. Loan losses
are charged against the allowance when management believes the uncollectibility
of a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. Management believes that as of
December 31, 2002, the allowance for loan losses is adequate based on
information currently available. A worsening or protracted economic decline in
the areas within which the Company operates would increase the likelihood of
additional losses due to credit and market risks and could create the need for
additional loss reserves.
PREMISES AND EQUIPMENT are stated at cost less accumulated depreciation.
Depreciation is computed principally by the straight-line method over the
estimated useful lives of the related assets. Maintenance and repairs are
expensed as incurred while major additions and improvements are capitalized.
GOODWILL is annually tested for impairment. If the implied fair value of
goodwill is lower than its carrying amount, goodwill impairment is indicated and
goodwill is written down to its implied fair value. Subsequent increases in
goodwill value are not recognized in the financial statements.
EARNINGS PER SHARE is computed by dividing net income by the weighted-average
number of common and potential common shares outstanding during each year.
MORTGAGE SERVICING RIGHTS on originated loans are capitalized by estimating the
fair value of the streams of net servicing revenues that will occur over the
estimated life of the servicing arrangement. Capitalized servicing rights, which
include purchased servicing rights, are amortized in proportion to and over the
period of estimated servicing revenues.
STOCK OPTIONS - The Company has a stock-based employee compensation plan, which
is described more fully in Note 11. The Company accounts for this plan under the
recognition and measurement principles of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. No stock-based employee compensation cost is reflected in net
income, as all options granted under the plan had an exercise price equal to the
market value of the underlying common stock on the grant date. The following
table illustrates the effect on net income and earnings per share if the Company
had applied the fair value provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, to
stock-based employee compensation.
- -----------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss), as reported $(3,075) $3,800 $3,562
Less: Total stock-based employee compensation cost determined
under the fair value based method, net of income taxes (25) -- (33)
- -----------------------------------------------------------------------------------------------------------------------------
Pro forma net income (loss) $(3,100) $3,800 $3,529
=============================================================================================================================
Basic and diluted earnings per share, as reported $(.98) $1.21 $1.13
Basic and diluted earnings per share, pro forma (.98) 1.21 1.12
74
Ameriana Bancorp
Notes to Consolidated Financial Statements
(table dollar amounts in thousands, except share data)
INCOME TAX in the consolidated statements of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes. The Company
and its subsidiaries file consolidated tax returns. The parent company and
subsidiaries are charged or given credit for income taxes as though separate
returns were filed.
RECLASSIFICATIONS of certain amounts in the 2001 and 2000 consolidated financial
statements have been made to conform to the 2002 presentation.
2. RESTRICTION ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserve funds in cash and/or on deposit with
the Federal Reserve Bank. The reserve required at December 31, 2002 was
$1,513,000. Interest-bearing demand deposits with the FHLB of $3,000,000 were
pledged to secure FHLB advances.
3. INVESTMENT SECURITIES
- -------------------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------------------------
Available for sale at December 31, 2002
Mortgage-backed securities and
collateralized mortgage obligations $ 27,251 $584 $ 11 $ 27,824
Federal agencies 8,052 175 -- 8,227
Equity securities 21,977 127 -- 22,104
- ------------------------------------------------------------------------------------------------------------------------
$ 57,280 $886 $ 11 $ 58,155
========================================================================================================================
Available for sale at December 31, 2001
Mortgage-backed securities and
collateralized mortgage obligations $111,723 $269 $1,599 $110,393
Federal agencies 28,566 176 46 28,696
Equity securities 1,500 40 -- 1,540
- ------------------------------------------------------------------------------------------------------------------------
$141,789 $485 $1,645 $140,629
========================================================================================================================
At December 31, 2002, federal agencies with a total amortized cost and market
value of $4,053,000 and $4,090,000, mature in 2003. At December 31, 2002,
federal agencies with a total amortized cost and market value of $3,999,000 and
$4,137,000, respectively, mature in 2004.
Investment securities with a total carrying value of $1,811,000 and $52,422,000
were pledged at December 31, 2002 and 2001 to secure FHLB advances.
Gross gains of $1,247,000 and gross losses of $3,272,000 resulting from sales of
available-for-sale securities were realized for 2002.
In 2001, the Company determined that because of its interest rate risk, it would
not be able to continue to hold its investment securities to maturity.
Accordingly, the Company transferred its held-to-maturity investments to
available for sale as of December 31, 2001, and recorded an accumulated other
comprehensive loss of $696,000 as of that date.
75
Ameriana Bancorp
Notes to Consolidated Financial Statements
(table dollar amounts in thousands, except share data)
4. LOANS
- ---------------------------------------------------------------------------------------
December 31
- ---------------------------------------------------------------------------------------
2002 2001
- ---------------------------------------------------------------------------------------
Residential mortgage loans $195,055 $234,858
Commercial mortgage loans 91,856 78,435
Installment loans 12,386 24,045
Commercial loans 21,172 26,160
Loans secured by deposits 1,130 1,348
- ---------------------------------------------------------------------------------------
321,599 364,846
- ----------------------------------------------------------------------------------------
Deduct
- ---------------------------------------------------------------------------------------
Undisbursed loan proceeds 7,985 12,725
Deferred loan costs, net 362 8
Allowance for loan losses 8,666 1,730
- ---------------------------------------------------------------------------------------
17,013 14,463
- ---------------------------------------------------------------------------------------
$304,586 $350,383
=======================================================================================
Loans being serviced by the Company for investors, primarily the Federal Home
Loan Mortgage Corporation and Federal National Mortgage Association, totaled
approximately $177,392,000, $162,017,000 and $144,000,000 as of December 31,
2002, 2001 and 2000. Such loans are not included in the preceding table.
The aggregate fair value of capitalized mortgage servicing rights at December
31, 2002 and 2001 is based on comparable market values and expected cash flows,
with impairment assessed based on portfolio characteristics including product
type, investor type and interest rates. No valuation allowance was necessary at
December 31, 2002 and 2001.
- ----------------------------------------------------------------------------------------------
Year Ended December 31
- ----------------------------------------------------------------------------------------------
2002 2001 2000
- ----------------------------------------------------------------------------------------------
Mortgage servicing rights
Balance at beginning of year $1,012 $ 847 $ 910
Servicing rights capitalized 597 416 44
Amortization of servicing rights (412) (251) (107)
- ----------------------------------------------------------------------------------------------
Balance at end of year $1,197 $1,012 $ 847
==============================================================================================
At December 31, 2002 and 2001, the Company had outstanding commitments to
originate loans of approximately $8,379,000 and $11,756,000, which were
primarily for adjustable-rate mortgages with rates that are determined just
prior to closing or fixed-rate mortgage loans with rates locked in at the time
of loan commitment. In addition, the Company had $22,231,000 and $19,949,000 of
conditional commitments for lines of credit receivables at December 31, 2002 and
2001. 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.
76
Ameriana Bancorp
Notes to Consolidated Financial Statements
(table dollar amounts in thousands, except share data)
5. Allowance for Loan Losses
- ------------------------------------------------------------------------------------------
Year Ended December 31
- ------------------------------------------------------------------------------------------
2002 2001 2000
- ------------------------------------------------------------------------------------------
Balance at beginning of year $1,730 $1,489 $1,534
Provision for losses 7,300 360 417
Net charge-offs
Charge-offs (388) (156) (488)
Recoveries 24 37 26
- ------------------------------------------------------------------------------------------
Net charge-offs (364) (119) (462)
- ------------------------------------------------------------------------------------------
Balance at end of year $8,666 $1,730 $1,489
==========================================================================================
At December 31, 2002, impaired loans totaled $16,669,000 with an allowance for
loan losses of $6,646,000.
Interest of $119,000 was recognized on average impaired loans of $11,076,000 for
2002. All interest recognized on impaired loans during 2002 was on a cash basis.
Impaired loans were immaterial at December 31, 2001 and during the years ended
December 31, 2001 and 2000.
At December 31, 2002 and 2001, accruing loans delinquent 90 days or more totaled
$135,000 and $395,000. Non-accruing loans at December 31, 2002 and 2001 were
$18,307,000 and $2,178,000.
6. PREMISES AND EQUIPMENT
- ----------------------------------------------------------------------------
December 31
- ----------------------------------------------------------------------------
2002 2001
- ----------------------------------------------------------------------------
Land $1,777 $1,396
Land improvements 580 513
Office buildings 7,682 7,415
Furniture and equipment 4,891 4,551
Automobiles 70 70
- ----------------------------------------------------------------------------
15,000 13,945
Less accumulated depreciation 7,099 7,026
- ----------------------------------------------------------------------------
$7,901 $6,919
============================================================================
7. GOODWILL
During 2002, the Company changed its method of accounting and financial
reporting for goodwill and other intangible assets by adopting the provisions of
SFAS 142. The effect of adopting the new method was to increase 2002 net income
by $120,000.
77
Ameriana Bancorp
Notes to Consolidated Financial Statements
(table dollar amounts in thousands, except share data)
8. Deposits
- ----------------------------------------------------------------------------------
December 31
- ----------------------------------------------------------------------------------
2002 2001
- ----------------------------------------------------------------------------------
Demand $ 100,471 $ 88,327
Savings 33,990 32,647
Certificates of $100,000 or more 45,510 60,363
Other certificates 222,216 231,076
- ----------------------------------------------------------------------------------
$402,187 $412,413
==================================================================================
Certificates maturing in years ending after December 31, 2002:
- -------------------------------------------------
2003 $192,603
2004 29,718
2005 22,199
2006 11,850
2007 10,458
Thereafter 898
- -------------------------------------------------
$267,726
=================================================
Interest paid on deposits approximated interest expense in 2002, 2001 and 2000.
9. BORROWINGS
Borrowings at December 31, 2002 and 2001 include Federal Home Loan Bank advances
totaling $5,592,000 and $87,653,000 with a weighted-average rate of 6.83% and
5.51%. The advances are secured by a combination of first-mortgage loans,
investment securities and overnight deposits. Some advances are subject to
restrictions or penalties in the event of prepayment.
Borrowings at December 31, 2002 and 2001 also include a note payable for
$750,000 to another financial institution with a rate of 4.25% and 6.25%. The
note is secured by the outstanding common stock of ABT. The note was due at July
24, 2002 and was renewed at that date to January 24, 2003.
A promissory note of $90,000 and $180,000 is included in borrowings at December
31, 2002 and 2001. The interest rate on the note is 6.0%.
Interest paid on borrowings was $3,092,000, $5,881,000, and $7,064,000 for 2002,
2001 and 2000.
78
Ameriana Bancorp
Notes to Consolidated Financial Statements
(table dollar amounts in thousands, except share data)
- -----------------------------------------------------------------------
Maturities in years ending December 31
2003 $1,802
2004 915
2005 3,301
2006 216
2007 170
Thereafter 28
- -----------------------------------------------------------------------
$6,432
=======================================================================
10. INCOME TAXES
- ------------------------------------------------------------------------------------------------
December 31
- ------------------------------------------------------------------------------------------------
2002 2001
- ------------------------------------------------------------------------------------------------
Deferred tax assets
Deferred compensation $ 294 $ 163
General loan loss reserves 3,428 669
Net unrealized loss on securities available for sale -- 464
Reserve for uncollected interest 534 --
Other 48 186
- ------------------------------------------------------------------------------------------------
4,304 1,482
- ------------------------------------------------------------------------------------------------
Deferred tax liabilities
FHLB stock dividends (515) (477)
Tax bad debt reserves (88) (146)
Purchase accounting adjustments (95) (153)
Deferred loan fees (91) (97)
Mortgage servicing rights (454) (358)
Net unrealized gains on securities available for sale (337) --
Other (105) (146)
- ------------------------------------------------------------------------------------------------
(1,685) (1,377)
- ------------------------------------------------------------------------------------------------
Net deferred tax asset $2,619 $ 105
================================================================================================
79
Ameriana Bancorp
Notes to Consolidated Financial Statements
(table dollar amounts in thousands, except share data)
The effective income tax rate on income from continuing operations is reconciled
to the statutory corporate tax rate as follows:
- -----------------------------------------------------------------------------------------------------
Year Ended December 31
- -----------------------------------------------------------------------------------------------------
2002 2001 2000
- -----------------------------------------------------------------------------------------------------
Statutory federal tax rate (34.0)% 34.0% 34.0%
State income taxes, net of federal tax benefit (4.5) 2.8 1.4
Tax credits (2.9) (4.0) (4.5)
Cash value of life insurance (5.5) (6.1) (7.0)
Other 1.9 1.1 .7
- ------------------------------------------------------------------------------------------------------
Effective tax rate (45.0)% 27.8% 24.6%
=====================================================================================================
The provision (credit) for income taxes consists of the following:
- -----------------------------------------------------------------------------
Year Ended December 31
- -----------------------------------------------------------------------------
2002 2001 2000
- -----------------------------------------------------------------------------
Federal
Current $ 702 $1,448 $1,172
Deferred (2,840) (205) (111)
- -----------------------------------------------------------------------------
(2,138) 1,243 1,061
- -----------------------------------------------------------------------------
State
Current 94 246 71
Deferred (475) (24) 32
- -----------------------------------------------------------------------------
(381) 222 103
- -----------------------------------------------------------------------------
$(2,519) $1,465 $1,164
=============================================================================
The Company paid $290,000, $969,000 and $1,624,000 of state and federal income
taxes in 2002, 2001 and 2000.
11. EMPLOYEE BENEFITS
The Company is a participating employer in a multi-employer defined-benefit
pension plan and a 401(k) plan. The plans cover substantially all full-time
employees of the Company. Since the defined-benefit pension plan is a
multi-employer plan, no separate actuarial valuations are made with respect to
each participating employer. Pension expense for the plans totaled $215,000,
$5,000, and $38,000 in 2002, 2001 and 2000, respectively.
The Company has arrangements that provide retirement and death benefits to
certain officers and directors. The accrual of benefits totaled $744,000,
$420,000 and $235,000 for 2002, 2001 and 2000. In connection with these and
other benefits, life insurance has been purchased with the proceeds from the
policies to be utilized for the payment of benefits.
80
Ameriana Bancorp
Notes to Consolidated Financial Statements
(table dollar amounts in thousands, except share data)
The Company has entered into employment agreements with certain officers that
provide for the continuation of salary and certain benefits for a specified
period of time under certain conditions. Under the terms of the agreements,
these payments could occur in the event of a change in control of the Company,
as defined, along with other specific conditions. The contingent liability under
these agreements is generally three times the annual salary of the officer.
Under the 1987 Stock Option Plan and the 1996 Stock Option and Incentive Plan
("1996 Plan"), which are accounted for under the recognition and measurement
principles of APB No. 25, Accounting for Stock Issued to Employees, and related
interpretations, the Company has granted options to individuals to purchase
common stock at a price equal to the fair market value at the date of grant,
subject to the terms and conditions of the plans. Plan terms permit certain
nonincentive stock options to be granted at less than market value at plan
committee discretion. Options vest and are fully exercisable when granted or
over an extended period subject to continuous employment or under other
conditions set forth in the plans. The period for exercising options shall not
exceed ten years from the date of grant. The plans also permit grants of stock
appreciation rights. An amendment of the 1996 Plan extended the plan's term by
five years and increased the number of shares reserved under the plan from
176,000 to 352,000 shares.
The following is a summary of the status of the Company's stock option plans and
changes in those plans as of and for the years ended December 31, 2002, 2001 and
2000.
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
- ----------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
WEIGHTED- Weighted- Weighted-
AVERAGE Average Average
OPTIONS SHARES EXERCISE PRICE Shares Exercise Price Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 203,510 $14.37 226,786 $14.31 255,505 $14.43
Granted 22,000 14.25 -- -- 1,000 10.63
Exercised (9,713) 14.15 -- -- (825) 9.43
Forfeited/expired (16,775) 17.81 (23,276) 13.81 (28,894) 14.01
--------------
------------- ---------------
Outstanding at end of year 199,022 14.27 203,510 14.37 226,786 14.31
============= =============== ==============
Options exercisable at year end 187,022 $14.27 201,750 $14.35 215,082 $14.32
Weighted-average fair value of
options granted during the year $1.58 -- $2.35
As of December 31, 2002, selected other information in exercise price ranges for
options outstanding and exercisable is as follows:
Outstanding Exercisable
- -------------------------------------------------------------------------- ------------------------------
Weighted- Weighted-Average Weighted-
Exercise Price Number Average Remaining Contractual Number Average
Range of Shares Exercise Price Life of Shares Exercise Price
- -------------------------------------------------------------------------- ------------------------------
$9.43 - 12.53 64,177 $12.46 3.1 years 64,177 $12.46
13.05 - 18.30 134,845 15.13 4.8 years 122,845 15.22
There were 177,442 shares under the 1996 Plan available for grant at December
31, 2002.
81
Ameriana Bancorp
Notes to Consolidated Financial Statements
(table dollar amounts in thousands, except share data)
Although the Company has elected to follow APB No. 25, SFAS No. 123 requires pro
forma disclosures of net income and earnings per share as if the Company had
accounted for its employee stock options under that Statement. The fair value of
each option grant was estimated on the grant date using an option-pricing model
with the following assumptions:
2002 2000
----------------------------------
Risk-free interest rates 3.3% 6.4%
Dividend yields 4.7% 5.3%
Expected volatility factors of market price of common stock 18.4% 27.9%
Weighted-average expected life of the options 10 YEARS 8 years
The pro forma effect on net income is disclosed in Note 1.
12. SHAREHOLDERS' EQUITY
The payment of dividends by the Company depends substantially upon receipt of
dividends from ABT, which is subject to various regulatory restrictions on the
payment of dividends. Under current regulations ABT may not declare or pay a
cash dividend or repurchase any of its capital stock if the effect thereof would
cause the net worth of this entity to be reduced below regulatory capital
requirements or the amount required for its liquidation accounts.
In addition, without prior approval, current regulations allow ABT 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 ABT to pay dividends in excess of this restriction
and the Company's Board of Directors have resolved not to cause ABT to pay
dividends if its Tier 1 capital would be less than 7% thereafter. At December
31, 2002, the shareholder's equity of ABT was $39,590,000 and approval is
required by the Indiana Department of Financial Institutions to pay dividends to
the Company.
13. EARNINGS (LOSS) PER SHARE
Year Ended December 31
- ------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
WEIGHTED- Weighted- Weighted-
AVERAGE PER SHARE Average Per Share Average Per Share
LOSS SHARES AMOUNT INCOME Shares Amount Income Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share
Income (loss) available to $(3,075) 3,147,301 $(.98) $3,800 3,146,616 $1.21 $3,562 3,146,451 $1.13
common shareholders ====== ===== =====
Effect Of Dilutive Stock Options -- -- -- 1,352 -- 110
-------------------- ---------------------- ----------------------
Diluted Earnings Per Share
Income available to common
shareholders and assumed
conversions $(3,075) 3,147,301 $(.98) $3,800 3,147,968 $1.21 $3,562 3,146,561 $1.13
===========================================================================================
Options to purchase 199,022 shares of common stock at exercise prices of $9.43
to $18.30 per share were outstanding at December 31, 2002 but were not included
in the computation of diluted earnings per share because the options were
anti-dilutive.
82
Ameriana Bancorp
Notes to Consolidated Financial Statements
(table dollar amounts in thousands, except share data)
14. OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes were as follows:
2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
Unrealized gains (losses) on securities available for sale $ 10 $(1,160)
Reclassification for realized amount included in income (2,025) --
- -----------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), before tax effect 2,035 (1,160)
Tax expense (benefit) 801 (464)
- ------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) $1,234 $ (696)
=============================================================================================================================
15. REGULATORY MATTERS
ABT 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, 2002 and 2001, ABT is
categorized as well capitalized and met all subject capital adequacy
requirements. There are no conditions or events since December 31, 2002, that
management believes have changed this classification.
83
Ameriana Bancorp
Notes to Consolidated Financial Statements
(table dollar amounts in thousands, except share data)
Actual and required capital amounts and ratios for ABT are as follows:
- ------------------------------------------------------------------------------------------------------------------------------
December 31, 2002
- -------------------------------------------------------------------------------------------------------------------------------
Required For
Adequate Capital(1) Actual Capital
- ------------------------------------------------------------------------------------------------------------------------------
Ratio Amount Ratio Amount
- ------------------------------------------------------------------------------------------------------------------------------
Total risk-based capital 1 (to risk-weighted assets) 8.0% 23,754 13.89% 41,255
Tier 1 capital (to risk-weighted assets) 4.0 11,877 12.61 37,455
Core capital 1 (to adjusted total assets) 3.0 14,109 7.96 37,455
Core capital 1 (to adjusted tangible assets) 2.0 9,406 7.96 37,455
Tangible capital (to adjusted total assets) 1.5 7,054 7.96 37,455
(1) As defined by regulatory agencies
- -----------------------------------------------------------------------------------------------------------------------------
December 31, 2001
- ------------------------------------------------------------------------------------------------------------------------------
Required For
Adequate Capital(1) Actual Capital
- -----------------------------------------------------------------------------------------------------------------------------
Ratio Amount Ratio Amount
- -----------------------------------------------------------------------------------------------------------------------------
Total risk-based capital 1 (to risk-weighted assets) 8.0% $26,903 13.0% $43,710
Tier 1 capital (to risk-weighted assets) 4.0 13,451 12.48 41,980
Core capital 1 (to adjusted total assets) 3.0 16,002 7.87 41,980
Core capital 1 (to adjusted tangible assets) 2.0 10,668 7.87 41,980
Tangible capital (to adjusted total assets) 1.5 8,001 7.87 41,980
(1) As defined by regulatory agencies
During the second quarter of 2002, ABT entered into a memorandum of
understanding (the "MOU") with the Federal Deposit Insurance Corporation (the
"FDIC") and the Indiana Department of Financial Institutions (the "DFI"). Among
other things, the MOU required ABT to adopt written action plans with respect to
certain classified assets, revise its lending policies in accordance with
examiner recommendations, require greater financial information from borrowers,
establish a loan review program, document Board review of the adequacy of loan
losses, formulate a plan for improving ABT's profitability, review staffing
needs with particular emphasis on loan administration, strengthen certain
internal controls and audit coverage and address other regulatory compliance
issues raised in the most recent examination report by the FDIC and DFI. While
the MOU is in effect, ABT must maintain Tier 1 capital at or above 7% of assets.
The Company's Board of Directors have adopted resolutions providing that the
Company will not cause ABT to pay dividends if its Tier 1 capital would be less
than 7% thereafter, that the Company will not incur additional debt without
prior Federal Reserve approval, and that the Company will not purchase any
treasury stock. The resolutions remain in effect until the MOU is lifted.
The Company believes that the Company and ABT have taken all actions specified
in the MOU and Board resolutions within the timeframes specified. The Company
does not believe the MOU or Board resolutions will materially affect the
operations of the Company or ABT. A failure to comply with either the MOU or
resolutions could lead to the initiation of formal enforcement action by the
FDIC, DFI and the Federal Reserve.
84
Ameriana Bancorp
Notes to Consolidated Financial Statements
(table dollar amounts in thousands, except share data)
ABT has qualified under provisions of the Internal Revenue Code that permit it
to deduct from taxable income a provision for bad debts which differs from the
provision for such losses charged against income. Accordingly, retained earnings
at December 31, 2002, includes an allocation of income to bad debt deductions of
approximately $11,883,000 for which no provision for federal income taxes has
been made. If, in the future, this portion of retained earnings is used for any
purpose other than to absorb bad debt losses, including redemption of bank stock
or excess dividends, or loss of "bank" status, federal income taxes may be
imposed at the then applicable rates. The unrecorded deferred income tax
liability on the above amount was approximately $4,000,000.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values are based on estimates using present value and other valuation
techniques in instances where quoted market prices are not available. These
techniques are significantly affected by the assumptions used, including
discount rates and estimates of future cash flows. As such, the derived fair
value estimates cannot be compared to independent markets and, further, may not
be realizable in an immediate settlement of the instruments. Accordingly, the
aggregate fair value amounts presented do not represent, and should not be
construed to represent, the underlying value of the Company.
The following table presents the estimates of fair value of financial
instruments:
- ---------------------------------------------------------------------------------------------------------
December 31
- ----------------------------------------------------------------------------------------------------------
2002 2001
- ----------------------------------------------------------------------------------------------------------
CARRYING FAIR Carrying Fair
VALUE VALUE Value Value
- ---------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 45,696 $ 45,696 $ 11,801 $ 11,801
Investment securities 58,155 58,155 140,629 140,629
Loans 304,586 309,792 350,383 346,395
Interest receivable 1,958 1,958 3,263 3,263
Stock in FHLB 6,759 6759 7,365 7,365
Cash surrender value of life insurance 18,932 18,932 18,035 18,035
Liabilities
Deposits 402,187 403,745 412,413 414,413
Borrowings 6,432 6,897 89,513 91,572
Interest payable 411 411 982 982
Drafts payable 5,099 5,099 6,152 6,152
85
Ameriana Bancorp
Notes to Consolidated Financial Statements
(table dollar amounts in thousands, except share data)
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
CASH AND CASH EQUIVALENTS, STOCK IN FHLB AND CASH SURRENDER VALUE OF LIFE
INSURANCE: The carrying amounts reported in the consolidated balance sheets
approximate those assets' fair values.
INVESTMENT SECURITIES: Fair values are based on quoted market prices.
LOANS: The fair values for loans are estimated using a discounted cash flow
calculation that applies interest rates used to price new similar loans to a
schedule of aggregated expected monthly maturities on loans.
INTEREST RECEIVABLE/PAYABLE: The fair value of accrued interest
receivable/payable approximates carrying values.
DEPOSITS: The fair values of interest-bearing demand and savings accounts are
equal to the amount payable on demand at the balance sheet date. Fair values for
certificates of deposit are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on deposits to a schedule of
aggregated expected monthly maturities on deposits. A core deposit intangible
component in the fair value estimate is not included, and although it would be
impractical from a cost-benefit standpoint to estimate that value, the Company
realizes that the dollar amount could be significant.
BORROWINGS: The fair value of borrowings is estimated using a discounted cash
flow calculation, based on borrowing rates for periods comparable to the
remaining terms to maturity of the borrowings.
DRAFTS PAYABLE: The fair value approximates carrying value.
17. PARENT COMPANY FINANCIAL INFORMATION
The following are condensed financial statements for the parent company,
Ameriana Bancorp, only:
- ---------------------------------------------------------------------------------------
December 31
- ---------------------------------------------------------------------------------------
BALANCE SHEETS 2002 2001
- ---------------------------------------------------------------------------------------
Assets
Cash $ -- $ 1
Advances to subsidiaries -- 1,341
Investment in ABT 39,590 42,896
Investments in affiliates 464 371
Other assets 360 6
- ---------------------------------------------------------------------------------------
$40,414 $44,615
=======================================================================================
Liabilities and shareholders' equity
Notes payable to subsidiaries $ -- $ 243
Notes payable, other 840 930
Other liabilities 534 547
Shareholders' equity 39,040 42,895
- ---------------------------------------------------------------------------------------
$40,414 $44,615
=======================================================================================
86
Ameriana Bancorp
Notes to Consolidated Financial Statements
(table dollar amounts in thousands, except share data)
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
- ----------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
Dividends from subsidiaries $1,500 $3,000 $2,888
Interest income 6 47 30
- -----------------------------------------------------------------------------------------------------------------------------
1,506 3,047 2,918
Operating expense 489 594 664
- ----------------------------------------------------------------------------------------------------------------------------
Income before income tax benefit and equity in undistributed
income of subsidiaries 1,017 2,453 2,254
Income tax benefit 356 511 521
- -----------------------------------------------------------------------------------------------------------------------------
1,373 2,964 2,775
Equity in undistributed income of subsidiaries and affiliates
(distributions in excess of equity in income) (4,448) 836 787
- -----------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ (3,075) $3,800 $3,562
============================================================================================================================
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
- ----------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income (loss) $(3,075) $3,800 $3,562
Items not requiring (providing) cash
Equity in undistributed income of subsidiaries and affiliates 4,448 (866) (787)
Other adjustments (368) 210 141
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,005 3,144 2,916
- ----------------------------------------------------------------------------------------------------------------------------
Investing Activities
Advance to subsidiaries 1,341 484 (722)
Proceeds from sale of premises and equipment -- -- 176
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 1,341 484 (546)
- ----------------------------------------------------------------------------------------------------------------------------
Financing Activities
Repayment of notes payable to subsidiaries (243) (250) (2,550)
Proceeds from other borrowings -- -- 2,500
Repayment of other borrowings (90) (1,491) (440)
Cash dividends paid (2,014) (1,888) (1,888)
Purchase of common stock (137) -- --
Proceeds from exercise of stock options 137 -- 8
- -----------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (2,347) (3,629) (2,370)
- ----------------------------------------------------------------------------------------------------------------------------
Change in cash (1) (1) --
Cash at beginning of year 1 2 2
- ----------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ -- $ 1 $ 2
============================================================================================================================
87
Ameriana Bancorp
Notes to Consolidated Financial Statements
(table dollar amounts in thousands, except share data)
18. QUARTERLY DATA (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
- ----------------------------------------------------------------------------------------------------------------------------
2002
TOTAL INTEREST INCOME $8,592 $7,476 $7,268 $6,637
TOTAL INTEREST EXPENSE 5,244 4,775 4,192 3,330
NET INTEREST INCOME 3,348 2,701 3,076 3,307
PROVISION FOR LOAN LOSSES 1,250 150 150 5,750
NET INCOME (2,050) 600 786 (2,411)
- ----------------------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED EARNINGS PER SHARE (.65) .19 .25 (.77)
- ----------------------------------------------------------------------------------------------------------------------------
DIVIDENDS DECLARED PER SHARE .16 .16 .16 .16
- ----------------------------------------------------------------------------------------------------------------------------
STOCK PRICE RANGE
HIGH 16.00 15.10 14.20 13.25
LOW 13.15 13.85 12.10 12.70
- ----------------------------------------------------------------------------------------------------------------------------
2001
Total interest income $9,927 $9,237 $8,664 $9,342
Total interest expense 6,619 6,243 5,768 5,613
Net interest income 3,308 2,994 2,896 3,729
Provision for loan losses 90 90 90 90
Net income 1,053 780 751 1,216
- ----------------------------------------------------------------------------------------------------------------------------
Basic and diluted earnings per share .33 .25 .24 .39
- ----------------------------------------------------------------------------------------------------------------------------
Dividends declared per share .15 .15 .15 .16
- ----------------------------------------------------------------------------------------------------------------------------
Stock price range
High 13.00 14.01 13.75 13.80
Low 10.31 10.35 12.00 11.75
- ----------------------------------------------------------------------------------------------------------------------------
88
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
For information concerning the directors of the Company, the information
contained under the section captioned "Proposal I -- Election of Directors" in
the Proxy Statement is incorporated herein by reference. For information
concerning the executive officers of the Company, see "Item 1. Business --
Executive Officers" under Part I of the Annual Report, which is incorporated
herein by reference.
For information concerning compliance with Section 16(a) of the Exchange
Act, see the section titled "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement, which is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors -- Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
- --------------------------------------------------------------------------------
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Information required by this item is incorporated herein by reference
to the section captioned "Voting Securities and Security Ownership" in
the Proxy Statement.
(b) SECURITY OWNERSHIP OF MANAGEMENT
Information required by this item is incorporated herein by reference
to the section captioned "Voting Securities and Security Ownership" in
the Proxy Statement.
(c) CHANGES IN CONTROL
The Company is not aware of any arrangements, including any pledge by
any person of securities of the Company, the operation of which may at
a subsequent date result in a change in control of the Company.
89
(d) Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth certain information with respect to the
Company's equity compensation plans.
(A) (B) (C)
NUMBER OF SECURITIES REMAINING
NUMBER OF SECURITIES TO BE AVAILABLE FOR FUTURE ISSUANCE
ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE UNDER EQUITY COMPENSATION
OUTSTANDING OPTIONS, PRICE OF OUTSTANDING PLANS (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS OPTIONS, WARRANTS AND RIGHTS REFLECTED IN COLUMN (A))
- ------------- ------------------------- ---------------------------- ------------------------------
Equity compensation plans
approved by security holders 199,022 14.27 177,442
Equity compensation plans not
approved by security holders -- -- --
------- ----- -------
Total 199,022 14.27 177,442
======= ===== =======
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Transactions with Management" in the Proxy Statement.
ITEM 14. CONTROLS AND PROCEDURES
- --------------------------------
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the Company's disclosure controls and procedures (as such term is
defined in Rule 13a-14(c) under the Exchange Act) as of a date within 90 days of
the date of filing of this Annual Report. Based upon such evaluation, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that such controls and procedures are effective to ensure that the information
required to be disclosed by the Company in the reports it files under the
Exchange Act is gathered, analyzed and disclosed with adequate timeliness.
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of the evaluation described above.
90
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
----------------------------------------------
(1) Financial Statements. The following consolidated financial
statements are filed under Item 8 hereof:
Report of Independent Auditors
Consolidated Balance Sheets at December 31, 2002 and 2001
Consolidated Statements of Income for Each of the Three Years in
the Period Ended December 31, 2002
Consolidated Statements of Shareholders' Equity for Each of the
Three Years in the Period Ended December 31, 2002
Consolidated Statements of Cash Flows for Each of the Three Years
in the Period Ended December 31, 2002
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules. All schedules for which provision
is made in the applicable accounting regulations are either not required under
the related instructions or are inapplicable, and therefore have been omitted.
(3) Exhibits. The following is a list of exhibits as part of this
Report and is also the Exhibit Index.
NO. DESCRIPTION
-- -----------
3 Ameriana Bancorp Articles of Incorporation and Bylaws --
incorporated herein by reference to the Company's Registration
Statement on Form S-4 filed with the SEC on September 18, 1989
10.1* Ameriana Bancorp 1987 Stock Option Plan incorporated herein by
reference to the Company's Registration Statement on Form S-8 filed
with the SEC on March 30, 1990; other option agreements with Charles
M. Drackett, Jr., Michael E. Kent and Ronald R. Pritzke incorporated
herein by reference to the Company's Registration Statement on
Form S-8 filed with the SEC on May 17, 1996
91
NO. DESCRIPTION
-- -----------
10.2* Employment Agreement, dated February 26, 2001, between Ameriana
Bank & Trust and Harry J. Bailey -- incorporated herein by reference
to the Company's Annual Report on Form 10-K filed with the SEC on
March 29, 2001
10.3* Employment Agreement, dated February 26, 2001, between
Ameriana Bank & Trust and Timothy G. Clark -- incorporated herein
by reference to the Company's Annual Report on Form 10-K filed with
the SEC on March 29, 2001
10.4* Ameriana Bank of Indiana, F.S.B. Director Supplemental Retirement
Program Director Agreement -- incorporated herein by reference to
the Company's Annual Report on Form 10-K filed with the SEC on March
30, 2000
10.5* Ameriana Bank of Indiana, F.S.B. Director Supplemental Retirement
Program Director Agreement, dated June 4, 1999, between Ameriana
Bank of Indiana, F.S.B. and Paul W. Prior -- incorporated herein
by reference to the Company's Annual Report on Form 10-K filed with
the SEC on March 30, 2000
10.6* Executive Supplemental Retirement Plan Agreement, dated May 6, 1999
between Ameriana Bank of Indiana, F.S.B. and Harry J. Bailey --
incorporated herein by reference to the Company's Annual Report
on Form 10-K filed with the SEC on March 30, 2000
10.7* Executive Supplemental Retirement Plan Agreement, dated May 6, 1999,
between Ameriana Bank of Indiana, F.S.B. and Timothy G. Clark --
incorporated herein by reference to the Company's Annual Report on
Form 10-K filed with the SEC on March 29, 2001
10.8* Change-in-Control Severance Agreement, dated February 26, 2001,
between Ameriana Bank and Trust and Nancy A. Rogers -- incorporated
herein by reference to the Company's Annual Report on Form 10-K
filed with the SEC on March 29, 2001
10.9* Change-in-Control Severance Agreement, dated February 26, 2001,
between Ameriana Bank and Trust and Jan F. Wright -- incorporated
herein by reference to the Company's Annual Report on Form 10-K
filed with the SEC on March 29, 2001
10.10* Change-in-Control Severance Agreement, dated February 26, 2001,
between Ameriana Bank and Trust and Deborah Bell - incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2001
92
NO. DESCRIPTION
-- -----------
10.11* Change-in-Control Severance Agreement, dated February 26, 2001,
between Ameriana Bank and Trust and Ronald M. Holloway --
incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2001
21 Subsidiaries
23 Consent of BKD, LLP
99 Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
_______
* Management contract or compensation plan or arrangement
(b) REPORTS ON FORM 8-K. The Company did not file any Current Reports on
-------------------
Form 8-K during the fourth quarter of the fiscal year covered by this Annual
Report.
(c) EXHIBITS. The exhibits required by Item 601 of Regulation S-K are
--------
either filed as part of this Report or incorporated by reference herein.
(d) FINANCIAL STATEMENTS AND SCHEDULES EXCLUDED FROM ANNUAL REPORT. There
---------------------------------------------------------------
are no other financial statements and financial statement schedules required by
Regulation S-X which are excluded from the Annual Report to Stockholders
pursuant to Rule 14a-3(b)(1) which are required to be included herein.
93
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 25, 2003 By: /s/ Harry J. Bailey
-------------------------------------
Harry J. Bailey
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
By: /s/ Harry J. Bailey March 25, 2003
---------------------------------------------
Harry J. Bailey
President, Chief Executive Officer
and Director
(Principal Executive Officer)
By: /s/ Bradley L. Smith March 25, 2003
---------------------------------------------
Bradley L. Smith
Senior Vice President - Treasurer
(Principal Financial and Accounting Officer)
By:
---------------------------------------------
Paul W. Prior
Chairman of the Board and Director
By: /s/ Donald C. Danielson March 26, 2003
---------------------------------------------
Donald C. Danielson
Director
By:
---------------------------------------------
Charles M. Drackett, Jr.
Director
By: /s/ R. Scott Hayes March 25, 2003
---------------------------------------------
R. Scott Hayes
Director
By:
---------------------------------------------
Michael E. Kent
Director
By: /s/ Ronald R. Pritzke March 25, 2003
---------------------------------------------
Ronald R. Pritzke
Director
CERTIFICATION
I, Harry J. Bailey, President and Chief Executive Officer of Ameriana
Bancorp, certify that:
1. I have reviewed this annual report on Form 10-K of Ameriana Bancorp;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
(c) Presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 25, 2003
/s/ Harry J. Bailey
-------------------------------------------
Harry J. Bailey
President and Chief Executive Officer
Certification
I, Bradley L. Smith, Senior Vice President and Principal Financial and
Accounting Officer of Ameriana Bancorp, certify that:
1. I have reviewed this annual report on Form 10-K of Ameriana Bancorp;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
(c) Presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 25, 2003
/s/ Bradley L. Smith
-----------------------------------------------
Bradley L. Smith
Senior Vice President and Principal Financial
and Accounting Officer