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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
FORM 10-Q
(Mark One)
For the quarterly period ended March 31, 2012 OR
For the transition period from to Commission File Number: 0-18392
AMERIANA BANCORP
(Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code: (765) 529-2230 Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “ accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x At May 11, 2012, the registrant had 2,988,952 shares of its common stock outstanding.
Table of ContentsTable of Contents
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Table of ContentsPART I – FINANCIAL INFORMATION Consolidated Condensed Balance Sheets (In thousands, except share data)
See notes to consolidated condensed financial statements
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Table of ContentsConsolidated Condensed Statements of Income (In thousands, except per share data) (Unaudited)
See notes to consolidated condensed financial statements
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Table of ContentsAmeriana Bancorp Consolidated Condensed Statements of Income (In thousands, except per share data) (Unaudited)
See notes to consolidated condensed financial statements
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Table of ContentsConsolidated Condensed Statements of Comprehensive Income (In thousands, except per share data) (Unaudited)
See notes to consolidated condensed financial statements
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Table of ContentsConsolidated Condensed Statement of Shareholders’ Equity For the Three Months Ended March 31, 2012 (In thousands, except per share data) (Unaudited)
See notes to consolidated condensed financial statement.
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Table of ContentsConsolidated Condensed Statements of Cash Flows (In thousands) (Unaudited)
See notes to consolidated condensed financial statements.
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Table of ContentsAMERIANA BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) NOTE A – BASIS OF PRESENTATION The consolidated condensed financial statements include the accounts of Ameriana Bancorp (the “Company”) and its wholly-owned subsidiary Ameriana Bank (the “Bank”). The Bank has two wholly-owned subsidiaries, Ameriana Insurance Agency and Ameriana Financial Services, Inc. The unaudited interim consolidated condensed financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and disclosures required by generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of management, the financial statements reflect all adjustments (comprised only of normal recurring adjustments and accruals) necessary to present fairly the Company’s financial position and results of operations and cash flows. The consolidated condensed balance sheet of the Company as of December 31, 2011 has been derived from the audited consolidated balance sheet of the Company as of that date. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results to be expected in the full year or for any other period. These statements should be read in conjunction with the consolidated financial statements and related notes which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. NOTE B – SHAREHOLDERS’ EQUITY On March 26, 2012, the Board of Directors declared a quarterly cash dividend of $0.01 per share. This dividend, totaling approximately $29,000, was accrued for payment to shareholders of record on April 6, 2012 and was paid on April 27, 2012. No stock options were exercised during the first quarter of 2012. NOTE C – EARNINGS PER SHARE Earnings per share were computed as follows:
Options to purchase 163,482 and 169,482 shares of common stock at exercise prices of $9.25 to $15.56 per share were outstanding at March 31, 2012 and 2011, respectively, but were not included in the computation of diluted earnings per share because the options were anti-dilutive, in that the exercise prices of the options exceeded the market value of the Company’s stock for the periods presented.
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Table of ContentsNOTE D – INVESTMENT SECURITIES The following tables provide the composition of investment securities at March 31, 2012 and December 31, 2011 (dollars in thousands):
The amortized cost and fair value of securities available for sale at March 31, 2012 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Mortgage-backed pass-through securities: The contractual cash flows of those investments are guaranteed by either Ginnie Mae, a U.S. Government agency, or by Fannie Mae and Freddie Mac, U.S. Government-sponsored entities, institutions which the U.S. Government has affirmed its commitment to support. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Municipal Securities: The municipal securities at March 31, 2012 consisted of non-rated local issue tax increment revenue bonds that were issued during the third quarter of 2011 with the proceeds being used primarily to redeem notes held by Ameriana Bank. Mutual fund: The mutual fund balance at March 31, 2012 consisted of an investment in the CRA Qualified Investment mutual fund, whose portfolio composition is primarily in debt securities with an average credit quality rating of AAA.
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Table of ContentsCertain investment securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at March 31, 2012 and December 31, 2011 were $6,431,000 and $4,199,000, respectively, which was approximately 15.3% and 9.6%, respectively, of the Company’s investment portfolio at these dates. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified. The following table shows the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2012 and December 31, 2011 (dollars in thousands):
Investment securities with a total market value of $9,301,000 and $9,369,000 were pledged at March 31, 2012 and December 31, 2011, respectively, to secure a repurchase agreement. A gross gain of $89,000 resulting from sales of available-for-sale securities was realized during the three-month period ended March 31, 2012, with a tax expense of $30,000, compared to a gross gain of $52,000 for the three-month period ended March 31, 2011, with a tax expense of $18,000. NOTE E – LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES (Dollars in Thousands)
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Table of ContentsThe risk characteristics of each loan portfolio segment are as follows: Commercial Real Estate: These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Bank’s commercial real estate portfolio are diverse in terms of type and geographic location. Management monitors and evaluates commercial real estate loans based on collateral and risk grade criteria. As a general rule, the Bank avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. Construction Real Estate: Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Bank until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, timely completion and sale of the property, governmental regulation of real property, general economic conditions and the availability of long-term financing. Commercial Loans and Leases: Commercial loans and leases are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Residential and Consumer: With respect to residential loans that are secured by one-to four-family residences and are generally owner occupied, the Bank generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in one-to four-family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers. Municipal: Municipal loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. Most municipal loans are secured by the full faith and credit of the municipality. The availability of funds for the repayment of these loans may be substantially dependent on the ability of the municipality to collect taxes or other revenue. Allowance for Loan and Lease Losses Methodology: Bank policy is designed to ensure that an adequate allowance for loan and lease losses (“ALLL”) will be maintained. Primary responsibility for ensuring that the Bank has processes in place to consistently assess the adequacy of the ALLL rests with the Board. The Board has charged the Chief Credit Officer (“CCO”) with responsibility for establishing the methodology to be used and to assess the adequacy of the ALLL quarterly. The methodology will be reviewed and affirmed by the Loan Review Officer. Quarterly the Board will review recommendations from the CCO to adjust the allowance as appropriate.
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Table of ContentsThe methodology employed by the CCO for each portfolio segment will at a minimum contain the following:
The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Bank over the twelve quarters prior to the most recent quarter. Management believes the historical loss experience methodology is appropriate in the current economic environment, as it captures loss rates that are comparable to the current period being analyzed. We also factor in the following qualitative considerations:
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Table of ContentsThe following tables present the balance and activity in allowance for loan losses and the recorded investment in loans and impairment methods as of March 31, 2012 (dollars in thousands): Allowance for Loan Losses and Recorded Investment in Loans For Three Months Ended March 31, 2012
The following table presents the balance and activity in allowance for loan losses as of March 31, 2011 (dollars in thousands): Allowance for Loan Losses For Three Months Ended March 31, 2011
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Table of ContentsThe following table presents the balance in allowance for loan losses and the recorded investment in loans and impairment methods as of December 31, 2011 (dollars in thousands): Allowance for Loan Losses and Recorded Investment in Loans For Year Ended December 31, 2011
A loan should be charged off at any point in time when it no longer can be considered a bankable asset, meaning collectable within the parameters of policy. The Bank shall not renew any loan, or put a loan on a demand basis, only to defer a problem, nor is it appropriate to attempt long-term recoveries while reporting loans as assets. An unsecured loan generally should be charged off no later than when it is 120 days past due as to principal or interest. For loans in the legal process of foreclosure against collateral of real and/or liquid value, the 120-day rule does not apply. Such charge-offs can be deferred until the foreclosure process progresses to the point where the Bank can adequately determine whether or not any ultimate loss will result. In similar instances where other legal actions will cause extraordinary delays, such as the settlement of an estate, yet collateral of value is realizable, the 120-day period could be extended. When a loan is unsecured or not fully collateralized, the loan should be charged off or written down to the documented collateral value rather than merely being placed on non-accrual status. All charge-offs and forgiveness of debt greater than $50,000 must be approved by the Loan Committee upon recommendation by the CCO. The Loan Committee consists of the Bank’s Chief Executive Officer, Chief Operating Officer, Chief Credit Officer, Chief Marketing Officer and Loan Review Officer. Charge-offs between $10,000 and $50,000 must be approved by the CCO. Decisions to defer the charge off of a loan must be approved by the CCO.
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Table of ContentsNarrative Description of Borrower Rating: Grade 1 – Highest Quality (Pass) This loan represents a credit extension of the highest quality. The borrower’s historic (at least five years) cash flows manifest extremely large and stable margins of coverage. Balance sheets are conservative, well capitalized, and liquid. After considering debt service for proposed and existing debt, projected cash flows continue to be strong and provide ample coverage. The borrower typically reflects broad geographic and product diversification and has broad access to alternative financial markets. Also included in this category may be loans secured by U.S. government securities, U.S. government agencies, highly rated municipal bonds, insured savings accounts, and insured certificates of deposit drawn on high quality banks. Grade 2 – Excellent Quality (Pass) This loan has a sound primary and secondary source of repayment. The borrower has proven access to alternative sources of financing. This loan carries a low level of risk, with minimal loss exposure. The borrower has the ability to perform according to the terms of the credit facility. The margins of cash flow coverage are strong. Loans secured by high quality traded stocks and lower grade municipal bonds (must still be investment grade). Grade 3 – Good Quality (Pass) This loan has a sound primary source of repayment. The borrower may have access to alternative sources of financing, but sources are not as widely available as they are to a higher graded borrower. This loan carries a normal level of risk, with minimal loss exposure. The borrower has the ability to perform according to the terms of the credit facility. The margins of cash flow coverage are satisfactory but vulnerable to more rapid deterioration than the higher quality loans. Real estate loans in this category display advance rates below the suggested maximum, debt coverage well in excess of the suggested level, or are leased beyond the loan term by a “credit” tenant. Grade 4 – Acceptable Quality (Pass) The borrower is a reasonable credit risk and demonstrates the ability to repay the debt from normal business operations. Risk factors may include reliability of margins and cash flows, liquidity, dependence on a single product or industry, cyclical trends, depth of management, or limited access to alternative financing sources. Historic financial information may indicate erratic performance, but current trends are positive. Quality of financial information is adequate, but is not as detailed and sophisticated as information found on higher graded loans. If adverse circumstances arise, the impact on the borrower may be significant. All small business loans extended based upon credit scoring should be classified in this category unless deterioration occurs, in which case they should bear one of the below mentioned grades. Grade 5 – Marginal Quality (Pass) The borrower is an acceptable credit risk and while it can demonstrate it has the ability to repay the debt from normal business operations, the coverage is not as strong as an Acceptable Quality loan. Weakness in one or more areas are defined. Risk factors would typically include a higher leverage position than desirable, low liquidity, weak or sporadic cash flow, the lack of reasonably current and complete financial information, and/or overall financial trends are erratic. Grade 6 – Elevated Risk, Management Attention (Watch) The borrower while at origination is not considered a high risk potential, there are characteristics related to the financial condition, and/or a level of concern regarding either or both the primary and secondary source of repayment, that may preclude this from being a pass credit. These credit facilities are considered “pass” credits but exhibit the potential of developing a more serious weakness in their operation going forward. Usually, a credit in this category will be upgraded or downgraded on further analysis within a short period of time. Grade 7 – Special Mention These credit facilities have developing weaknesses that deserve extra attention from the loan officer and other management personnel. If the developing weakness is not corrected or mitigated, there may be deterioration in the ability of the borrower to repay the Bank’s debt in the future. This grade should not be assigned to loans which bear certain peculiar risks normally associated with the type of financing involved, unless circumstances have caused the risk to increase to a level higher than would have been acceptable when the credit was originally approved. Loans where actual, not potential, weaknesses or problems are clearly evident and significant should generally be graded in one of the grade categories below.
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Table of ContentsGrade 8 – Substandard Loans and other credit extensions bearing this grade are considered to be inadequately protected by the current sound worth and debt service capacity of the borrower or of any pledged collateral. These obligations, even if apparently protected by collateral value, have well-defined weaknesses related to adverse financial, managerial, economic, market, or political conditions which have clearly jeopardized repayment of principal and interest as originally intended. Furthermore, there is the possibility that some future loss will be sustained by the Bank if such weaknesses are not corrected. Clear loss potential, however, does not have to exist in any individual assets classified as substandard. Grade 9 – Doubtful Loans and other credit extensions graded “9” have all the weaknesses inherent in those graded “8,” with the added characteristic that the severity of the weaknesses make collection or liquidation in full highly questionable or improbable based upon currently existing facts, conditions, and values. The probability of some loss is extremely high, but because of certain important and reasonably specific factors, the amount of loss cannot be determined. Such pending factors could include merger or liquidation, additional capital injection, refinancing plans, or perfection of liens on additional collateral. Loans in this classification should be placed in nonaccrual status, with collections applied to principal on the Bank’s books. Grade 10 – Loss Loans in this classification are considered uncollectible and cannot be justified as a viable asset of the Bank. This classification does not mean the loan has absolutely no recovery value, but that it is neither practical nor desirable to defer writing off this loan even though partial recovery may be obtained in the future. The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of March 31, 2012 and December 31, 2011 (dollars in thousands): Loan Portfolio Quality Indicators At March 31, 2012
Loan Portfolio Quality Indicators At December 31, 2011
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Table of ContentsFor all loan classes, the entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date. The following tables present the Company’s loan portfolio aging analysis as of March 31, 2012 and December 31, 2011 (dollars in thousands): Loan Portfolio Aging Analysis At March 31, 2012
Loan Portfolio Aging Analysis At December 31, 2011
Impaired Loans: For all loan classes, a loan is designated as impaired when, based on current information or events, it is probable that the Bank will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Payments with insignificant delays not exceeding 90 days outstanding are not considered impaired. Certain non-accrual and substantially delinquent loans may be considered to be impaired. Generally, loans are placed on non-accrual status at 90 days past due and accrued interest is reversed against earnings, unless the loan is well-secured and in the process of collection. The accrual of interest on impaired and non-accrual loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due. For all loan classes, when interest accrual is discontinued all unpaid accrued interest is reversed when considered uncollectible. When a loan is in a non-accrual status, all cash payments of interest are applied to loan principal. Should the loan be reinstated to accrual status, all cash payments of interest received while in non-accrual status will be taken into income over the remaining life of the loan using the level yield accounting method.
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Table of ContentsThe following table presents impaired loans as of March 31, 2012 (dollars in thousands): Impaired Loans At March 31, 2012
For all loan classes, interest income on loans individually classified as impaired is recognized on a cash basis after all past due and current principal payments have been made.
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Table of ContentsThe following table presents impaired loans as of March 31, 2011 (dollars in thousands): Impaired Loans At March 31, 2011
For all loan classes, interest income on loans individually classified as impaired is recognized on a cash basis after all past due and current principal payments have been made.
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Table of ContentsThe following table presents impaired loans for the year ended December 31, 2011 (dollars in thousands): Impaired Loans At December 31, 2011
For all loan classes, interest income on loans individually classified as impaired is recognized on a cash basis after all past due and current principal payments have been made.
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Table of ContentsNon-Accrual Loans: Any loan which becomes 90 days delinquent, or has the full collection of principal and interest in doubt, or a portion of principal has been charged off will immediately be placed on non-accrual status. The loan does not have to be placed on non-accrual if the charge-off is part of a Chapter 13 reaffirmation. At the time a loan is placed on non-accrual, all accrued but unpaid interest will be reversed from interest income. Placing the loan on non-accrual does not relieve the borrower of the obligation to repay interest. For all loan classes, when a loan is in a non-accrual status all cash payments of interest are applied to loan principal. A loan placed on non-accrual may be restored to accrual status when all delinquent principal and interest has been brought current, and the Bank expects full payment of the remaining contractual principal and interest including any previous charge-offs. The Bank requires a period of satisfactory performance of not less than six months before returning a non-accrual loan to accrual status. Should the loan be reinstated to accrual status, all cash payments of interest received while in non-accrual status will be taken into income over the remaining life of the loan using the level yield accounting method. The following table presents the Company’s non-accrual loans at March 31, 2012 and December 31, 2011 (dollars in thousands): Loans Accounted for on a Non-Accrual Basis
Total non-accrual loans at March 31, 2012 and December 31, 2011 included $2,322,000 and $1,706,000 of TDRs, respectively. Troubled Debt Restructurings: Our loan and lease portfolio includes certain loans that have been modified in a TDR, where economic concessions have been granted to borrowers who have experienced financial difficulties. These concessions typically result from loss mitigation efforts and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructuring and typically are returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period of at least six months. When we modify loans and leases in a TDR, we evaluate any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan or lease agreement, or use the current fair value of the collateral, less selling costs for collateral dependent loans. If we determine that the value of the modified loan is less than the recorded balance of the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through a specific allowance or charge-off to the allowance. In periods subsequent to modification, we evaluate all TDRs, including those that have payment defaults, for possible impairment and recognize impairment through the allowance.
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Table of ContentsLoans classified as a troubled debt restructuring during the three month period ended March 31, 2012, segregated by class, are shown in the table below (dollars in thousands). These modifications consisted primarily of interest rate concessions.
There were no troubled debt restructured loans that had payment defaults during the three month period ended March 31, 2012. Default occurs when a loan or lease is 90 days or more past due or transferred to non-accrual and is within 12 months of restructuring. NOTE F – CURRENT AND FUTURE ACCOUNTING MATTERS
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Table of Contents
NOTE G – RETIREMENT PLAN The Company entered into separate agreements with certain officers and directors that provide retirement benefits. The Company is recording an expense equal to the projected present value of the payment due at the full eligibility date. The liability for the plan at March 31, 2012 and December 31, 2011 was $1,973,000 and $1,949,000, respectively. The expense for the plan was $56,000 and $49,000 for the three-month periods ended March 31, 2012 and March 31, 2011, respectively. NOTE H – DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy has been established that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: Level 1 Quoted prices in active markets for identical assets or liabilities Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy. Recurring Measurements: Available-for-sale Securities Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. The security valued in Level 1 is a mutual fund.
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Table of ContentsLevel 2 securities include U.S. Government agency and U.S. Government-sponsored enterprise mortgage-backed securities. Level 2 securities are valued by a third party pricing service commonly used in the banking industry utilizing observable inputs, and the values are reviewed by the Bank’s management. The pricing provider utilizes evaluated pricing models that vary based on asset class. These models incorporate available market information including quoted prices of securities with similar characteristics and, because many fixed-income securities do not trade on a daily basis, apply available information through processes such as benchmark curves, benchmarking of like securities, sector grouping and matrix pricing. In addition, model processes, such as an option adjusted spread model is used to develop prepayment and interest rate scenarios for securities with prepayment features. The Company has reviewed the methodologies used by the third party and has determined that the securities are properly classified as Level 2. Level 3 securities consist of municipal securities and are valued by a third party who uses a discounted cash flow model to determine the price, and the values are reviewed by the Bank’s management. Management challenges the reasonableness of the assumptions used and reviews the methodology to ensure the estimated fair value complies with accounting standards generally accepted in the United States. The key inputs to the discounted cash flow model are the coupon, yield, and expected maturity date. Appropriate market yields are determined based on credit, structure, and related Wall Street trades, quotes, and issuances. The following table presents the fair value measurements of assets recognized in the accompanying balance sheet measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2012 and December 31, 2011 (dollars in thousands):
Transfers between Levels Transfers between levels did not occur during the three months ended March 31, 2012. Level 3 Reconciliation The following is a reconciliation of the beginning and ending balance for the three months ended March 31, 2012 of fair value measurements recognized in the accompanying balance sheet using significant unobservable (Level 3) inputs (dollars in thousands):
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Table of ContentsNonrecurring Measurements: Following is a description of valuation methodologies used for instruments measured at fair value on a non-recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy: Impaired Loans (Collateral Dependent) Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans. If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method. Other Real Estate Owned The fair value of the Company’s other real estate owned is determined using Level 3 inputs, which include current and prior appraisals and estimated costs to sell. The following table presents the fair value measurements of assets recognized in the accompanying balance sheet measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2012 and December 31, 2011. The totals represent only those impaired loans and other real estate owned as of that date that experienced a change in fair value since the beginning of the year (dollars in thousands):
Unobservable (Level 3) Inputs: The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements at March 31, 2012 (dollars in thousands):
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Table of ContentsSensitivity of Significant Unobservable Inputs The following is a discussion of the sensitivity of significant unobservable inputs, the interrelationships between those inputs and other unobservable inputs used in recurring fair value measurement and of how those inputs might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement. Municipal Securities The significant unobservable inputs used in the fair value measurement of the Company’s municipal securities are premiums for unrated securities and marketability yield adjustments. Significant increases (decreases) in either of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, changes in either of those inputs will not affect the other input. 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 may not be realized upon 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 (dollars in thousands):
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Table of ContentsThe following table presents the estimates of fair value of financial instruments and the level within the fair value hierarchy in which the fair value measurements fall (dollars in thousands):
The following methods and assumptions were used to estimate the fair value of each class of financial instrument: Cash and Cash Equivalents and Stock in FHLB: The carrying amounts reported in the consolidated balance sheets approximate those assets’ fair values. Loans Held for Sale: The carrying amounts reported in the consolidated balance sheets approximate those assets’ fair values. Loans: The fair values for loans are estimated using a discounted cash flow calculation that applies external interest rates used to price new similar loans to a schedule of aggregated expected monthly maturities on loans. Mortgage Servicing Rights: The initial amount recorded is an estimate of the fair value of the streams of net servicing revenues that will occur over the estimated life of the servicing arrangement, and the initial amount recorded is then amortized over the estimated life. Annually, a valuation of the servicing rights is performed by an independent third party and reviewed by the Bank’s management, with impairment, if any, recognized through a valuation allowance. The valuation is based on the discounted cash flow method utilizing Bloomberg’s Median Forecasted Prepayment Speeds for mortgage-backed securities assumed to possess enough similarities to the Bank’s servicing portfolio to facilitate a comparison. Interest and Dividends Receivable/Payable: The fair value of accrued interest and dividends receivable/payable approximates carrying values. Deposits: The fair values of non-maturity demand, savings, and money market accounts are equal to the amount payable on demand at the balance sheet date. Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on deposits to a schedule of aggregated expected monthly maturities on deposits.
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Table of ContentsBorrowings: 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. NOTE I – COLLATERAL FOR LETTERS OF CREDIT As of March 31, 2012, there were four outstanding letters of credit from the Federal Home Loan Bank of Indianapolis totaling $21.7 million that the Company had collateralized with residential mortgage loans. ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”) is designed to provide a narrative on our financial condition, results of operations, liquidity, critical accounting policies, off-balance sheet arrangements and the future impact of accounting standards. It is useful to read our MD&A in conjunction with the consolidated financial statements contained in Part I in this Quarterly Report on Form 10-Q (this “Form 10-Q”), our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (the “Form 10-K”), and our other reports on Forms 10-Q and 8-K and other publicly available information. FORWARD-LOOKING STATEMENTS This Form 10-Q may contain certain “forward-looking statements” within the meaning of the federal securities laws. These statements are not historical facts, rather statements based on Ameriana Bancorp’s (the “Company”) current expectations regarding its business strategies, intended results and future performance. Forward-looking statements are generally preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions. Such statements are subject to certain risks and uncertainties including changes in economic conditions in the Company’s market area, changes in policies by regulatory agencies, the outcome of litigation, fluctuations in interest rates and real estate property values in our market area, demand for loans and deposits in the Company’s market area, changes in the quality or composition of our loan portfolio, changes in accounting principles, laws and regulations, and competition that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. Additional factors that may affect our results are discussed in the Form 10-K under Part I, Item 1A- “Risk Factors” and in other reports filed with the Securities and Exchange Commission. The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Who We Are Ameriana Bancorp is an Indiana chartered bank holding company subject to regulation and supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) under the Bank Holding Company Act of 1956, as amended. The Company became the holding company for Ameriana Bank, an Indiana chartered commercial bank headquartered in New Castle, Indiana (the “Bank”), in 1990. The Company also holds a minority interest in a limited partnership organized to acquire and manage real estate investments, which qualify for federal tax credits. The Bank began operations in 1890. Since 1935, the Bank has been a member of the Federal Home Loan Bank (the “FHLB”) System. Its deposits are insured to applicable limits by the Deposit Insurance Fund, administered
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Table of Contentsby the Federal Deposit Insurance Corporation (the “FDIC”). In 2002, the Bank converted to an Indiana savings bank and adopted the name “Ameriana Bank and Trust, SB,” and became subject to regulation by the Indiana Department of Financial Institutions and the FDIC. In 2006, the Bank closed its Trust Department and adopted the name Ameriana Bank, SB. In 2009, the Bank converted to an Indiana chartered commercial bank and adopted the name Ameriana Bank. The Bank conducts business through its main office at 2118 Bundy Avenue, New Castle, Indiana and through twelve branch offices located in New Castle, Middletown, Knightstown, Morristown, Greenfield, Anderson, Avon, McCordsville, Carmel, Fishers, Westfield and New Palestine, Indiana. The Bank has two wholly-owned subsidiaries, Ameriana Insurance Agency (“AIA”) and Ameriana Financial Services, Inc. (“AFS”). AIA provides insurance sales from offices in New Castle, Greenfield and Avon, Indiana. AFS operates a brokerage facility in conjunction with LPL Financial that provides non-bank investment product alternatives to its customers and the general public. What We Do The Bank is a community-oriented financial institution. Our principal business consists of attracting deposits from the general public and investing those funds along with borrowed funds primarily in mortgage loans on single-family residences, multi-family loans, construction loans, commercial real estate loans, commercial and industrial loans and leases, and, to a lesser extent, consumer loans and loans to municipalities. We have from time to time purchased loans and loan participations in the secondary market. We also invest in various federal and government agency obligations and other investment securities permitted by applicable laws and regulations, including mortgage-backed, municipal and equity securities. We offer customers in our market area time deposits with terms ranging from three months to seven years, interest-bearing and noninterest-bearing checking accounts, savings accounts and money market accounts. Our primary source of borrowings is FHLB advances. Through our subsidiaries, we engage in insurance and investment and brokerage activities. Our primary source of income is net interest income, which is the difference between the interest income earned on our loan and investment portfolios and the interest expense incurred on our deposits and borrowings. Our loan portfolio typically earns more interest than the investment portfolio, and our deposits typically have a lower average rate than FHLB advances and other borrowings. Several factors affect our net interest income. These factors include loan, investment, deposit, and borrowing portfolio balances, their composition, the length of their maturity, re-pricing characteristics, liquidity, credit, and interest rate risk, as well as market and competitive conditions and the current interest rate environment. Executive Overview of the First Quarter of 2012 The Company recorded net income of $345,000, or $0.12 per share, for the three-month period ended March 31, 2012, and the results represented its eleventh consecutive profitable quarter.
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For the first quarter of 2012, total assets increased by $13.3 million, or 3.1%, to $443.1 million from $429.8 million at December 31, 2011:
Regulatory Action On July 26, 2010, following a joint examination by and discussions with the FDIC and the Indiana Department of Financial Institutions, the Board of Directors of the Bank adopted a resolution agreeing to, among other things:
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The Bank is currently in compliance with the provisions of the resolution. Strategic Issues To diversify the balance sheet and provide new avenues for loan and deposit growth, the Bank further expanded into Indianapolis, adding three full-service offices in 2008 and 2009 in the suburban markets of Carmel, Fishers and Westfield. As a result, half of the banking centers are located in Indianapolis. These banking centers are focused on generating commercial lending and relationship business, where significant opportunities exist to win market share from smaller institutions lacking capital strength and resources, and large institutions that have concentrated on large business customers. Although the expansion strategy initially negatively affected earnings, the Bank’s expansion into new markets is critical for its long-term sustainable growth. Additional expansion in Indianapolis, including construction of a new full-service banking center in Plainfield on property purchased by the Bank in early 2008, was put on hold primarily due to the economic environment. The economic climate became progressively difficult through most of 2008, as the world-wide financial crisis reached a peak in the second half of the year, and the subsequent economic recovery continued to move slowly through the first quarter of 2012. The severity of this environment and its consequences to the industry created many new formidable challenges for bankers. Earnings pressure is expected to continue as the weak economy continues to cause stress on credit quality. Deposit acquisition remains competitive; however, the Bank’s disciplined pricing has resulted in a significant reduction in its cost of deposits. The Bank’s pricing strategies, combined with the low interest rate environment, has positively impacted interest rate spread and net interest income. Reducing noninterest expense has been a priority of the Bank, and management has utilized aggressive cost control measures including freezing hiring, job restructuring and eliminating certain discretionary expenditures. With the Bank’s mantra of “Soundness. Profitability. Growth – in that order, no exceptions,” the priorities, culture and risk strategy of the Bank are focused on asset quality and credit risk management. Despite the current economic pressures, as well as the industry’s challenges related to compliance and regulatory requirements, tightened credit standards, and capital preservation, management remains cautiously optimistic that business conditions will improve over the longer term and is steadfast in the belief that the Company is well positioned to grow and enhance shareholder value as this recovery occurs. With a community banking history stretching back over 120 years, the Bank has built its strong reputation with community outreach programs and being a workplace of choice. By combining its rich tradition with its ability to provide its customers with financial advice and solutions, the Bank will accomplish its mission by:
Serving customers requires the commitment of all Ameriana Bank associates to provide exceptional service and sound financial advice. We believe these qualities will differentiate us from our competitors and increase profitability and shareholder value. CRITICAL ACCOUNTING POLICIES The accounting and reporting policies of the Company are maintained in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The
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Table of ContentsCompany’s significant accounting policies are described in detail in the Notes to the Company’s Consolidated Financial Statements. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The financial position and results of operations of the Company can be affected by these estimates and assumptions, and such estimates and assumptions are integral to the understanding of reported results. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company’s financial condition and results, and they require management to make estimates that are difficult, subjective or complex, and subject to change if actual circumstances differ from those that were assumed. The following are the Company’s critical accounting policies: Allowance for Loan Losses. The allowance for loan losses provides coverage for probable losses in the Company’s loan portfolio. Management evaluates the adequacy of the allowance for credit losses each quarter based on changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, including the level of non-performing, delinquent and classified loans, regulatory guidance and economic factors. This evaluation is inherently subjective, as it requires the use of significant management estimates. Many factors can affect management’s estimates of specific and expected losses, including volatility of default probabilities, rating migrations, loss severity and economic and political conditions. The allowance is increased through provisions charged to operating earnings and reduced by net charge-offs. The Company determines the amount of the allowance based on relative risk characteristics of the loan portfolio. The allowance recorded for commercial loans is based on reviews of individual credit relationships and an analysis of the migration of commercial loans and actual loss experience. The allowance recorded for noncommercial loans is based on an analysis of loan mix, risk characteristics of the portfolio, fraud loss and bankruptcy experiences and historical losses, adjusted for current trends, for each loan category or group of loans. The allowance for loan losses relating to impaired loans is based on the loan’s observable market price, the collateral for certain collateral-dependent loans, or the discounted cash flows using the loan’s effective interest rate. Regardless of the extent of the Company’s analysis of customer performance, portfolio trends or risk management processes, certain inherent but undetected losses are probable within the loan portfolio. This is due to several factors, including inherent delays in obtaining information regarding a customer’s financial condition or changes in their unique business conditions, the subjective nature of individual loan evaluations, collateral assessments and the interpretation of economic trends. Volatility of economic or customer-specific conditions affecting the identification and estimation of losses for larger, nonhomogeneous credits and the sensitivity of assumptions utilized to establish allowances for homogenous groups of loans are among other factors. The Company estimates a range of inherent losses related to the existence of these exposures. The estimates are based upon the Company’s evaluation of risk associated with the commercial and consumer allowance levels and the estimated impact of the current economic environment. Mortgage Servicing Rights. Mortgage servicing rights (“MSRs”) associated with loans originated and sold, where servicing is retained, are capitalized and included in other intangible assets in the consolidated balance sheet. The value of the capitalized servicing rights represents the present value of the future servicing fees arising from the right to service loans in the portfolio. Critical accounting policies for MSRs relate to the initial valuation and subsequent impairment tests. The methodology used to determine the valuation of MSRs requires the development and use of a number of estimates, including anticipated principal amortization and prepayments of that principal balance. Events that may significantly affect the estimates used are changes in interest rates, mortgage loan prepayment speeds and the payment performance of the underlying loans. The carrying value of the MSRs is periodically reviewed for impairment based on a determination of fair value. Impairment, if any, is recognized through a valuation allowance and is recorded as amortization of intangible assets. Valuation Measurements. Valuation methodologies often involve a significant degree of judgment, particularly when there are no observable active markets for the items being valued. Investment securities and residential mortgage loans held for sale are carried at fair value, as defined by FASB fair value guidance, which requires key judgments affecting how fair value for such assets and liabilities is determined. In addition, the outcomes of valuations have a direct bearing on the carrying amounts for goodwill and intangible assets. To determine the values of these assets and liabilities, as well as the extent to which related assets may be impaired, management makes assumptions and estimates related to discount rates, asset returns, prepayment rates and other factors. The use of different discount rates or other valuation assumptions could produce significantly different results, which could affect the Company’s results of operations. Income Tax Accounting. We file a consolidated federal income tax return. The provision for income taxes is based upon income in our consolidated financial statements. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on our deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date.
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Table of ContentsUnder U.S. GAAP, a valuation allowance is required to be recognized if it is “more likely than not” that a deferred tax asset will not be realized. The determination of the realizability of the deferred tax asset is highly subjective and dependent upon judgment concerning our evaluation of both positive and negative evidence, our forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. Positive evidence includes the existence of taxes paid in available carry-back years as well as the probability that taxable income will be generated in future periods, while negative evidence includes any cumulative losses in the current year and prior two years and general business and economic trends. At March 31, 2012 and December 31, 2011, we determined that our existing valuation allowance was adequate, largely based on available tax planning strategies and our projections of future taxable income. Any reduction in estimated future taxable income may require us to increase the valuation allowance against our deferred tax assets. Any required increase to the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings. Positions taken in our tax returns may be subject to challenge by the taxing authorities upon examination. The benefit of an uncertain tax position is initially recognized in the financial statements only when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that is more likely than not of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts. Differences between our position and the position of tax authorities could result in a reduction of a tax benefit or an increase to a tax liability, which could adversely affect our future income tax expense. We believe our tax policies and practices are critical accounting policies because the determination of our tax provision and current and deferred tax assets and liabilities have a material impact our net income and the carrying value of our assets. We believe our tax liabilities and assets are adequate and are properly recorded in the consolidated financial statements at March 31, 2012. FINANCIAL CONDITION Total assets of $443.1 million at March 31, 2012 represented an increase of $13.3 million, or 3.1%, from the December 31, 2011 total of $429.8 million, and was due primarily to an increase in cash and cash equivalents resulting mostly from the Bank’s growth in deposit accounts. Cash and cash equivalents increased $17.5 million to $27.2 million at March 31, 2012 from the December 31, 2011 total of $9.7 million. Included in the total at March 31, 2012 was $22.0 million of interest-bearing demand deposits at the Federal Reserve Bank of Chicago. Cash and cash equivalents represent an immediate source of liquidity to fund loans or meet deposit outflows. Investment securities available-for-sale decreased by $1.7 million, or 3.9%, to $42.2 million at March 31, 2012 from $43.9 million at December 31, 2011. This decrease resulted primarily from $4.9 million in sales and $1.6 million of principal repayments on mortgage-backed securities, partially offset by $4.8 million in purchases of mortgage-backed securities. All mortgage-backed securities in the portfolio, which totaled $38.0 million at March 31, 2012, are insured by either Ginnie Mae, a U.S. Government agency, or by Fannie Mae or Freddie Mac, each a U.S. Government sponsored enterprise (“GSE”). Net loans receivable decreased by $2.7 million, or 0.9%, to $309.9 million at March 31, 2012 from $312.5 million at December 31, 2011, primarily due to a $2.0 million decrease in the residential mortgage loan portfolio to $162.4 million. This decline was impacted by the Bank’s mortgage banking strategy that involved selling $5.0 million of new production fixed-rate loans in the first three months of 2012. The residential mortgage loan strategy is reviewed regularly to ensure that it remains consistent with the Bank’s overall balance sheet management objectives. Premises and equipment of $14.5 million at March 31, 2012 represented a $152,000 decrease from $14.7 million at December 31, 2011. The net decrease was a result of $236,000 of depreciation for the three months ended March 31, 2012 exceeding net capital expenditures of $84,000 for the period. Goodwill was $656,000 at March 31, 2012, unchanged from December 31, 2011. $457,000 of the goodwill relates to deposits associated with a banking center acquired in 1998, and $199,000 is the result of three separate acquisitions of insurance businesses. The Bank’s impairment tests reflected that there was no impairment as of March 31, 2012.
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Table of ContentsWe have investments in life insurance on employees and directors with a balance or cash surrender value of $26.4 million and $26.2 million at March 31, 2012 and December 31, 2011, respectively. The non-taxable increase in cash surrender value of this life insurance was $192,000 for the first quarter of 2012, compared to $210,000 for the same period a year earlier. Although the Bank experienced write-downs, foreclosures and sales of other real estate owned during the first quarter of 2012, the total of $7.5 million at March 31, 2012 represented no change from December 31, 2011. Eight additions to other real estate owned totaling $336,000 and the sale of three properties with an aggregate book value of $144,000 occurred during the three-month period ended March 31, 2012. The additions included six single-family homes and two residential building lots. The sales resulted in gains totaling $35,000, and consisted of two single-family properties and a residential building lot. Write-downs of other real estate owned during the three-month period ended March 31, 2012 totaled $192,000, with $130,000 related to an uncompleted apartment project. Each of the write-downs was due to further deterioration of the property’s market value during the period. Other assets of $9.9 million at March 31, 2012, represented an $11,000 decrease from December 31, 2011. Due primarily to a first quarter tax payment of $250,000, the total for deferred tax assets increased $183,000. The prepaid FDIC insurance premiums balance was reduced by $138,000 during the quarter. Total deposits of $354.9 million at March 31, 2012 represented an increase of $17.6 million, or 5.2%, from $337.3 million at December 31, 2010, as the Bank maintained its strong focus on nurturing existing and attracting new core deposit relationships. During the first three months of 2012, checking, money market and savings balances increased $13.7 million, while certificate of deposit balances increased $3.9 million. The Bank has concentrated on strategies designed to grow total balances in multi-product deposit relationships, and continues to utilize pricing strategies designed to produce growth with an acceptable marginal cost for both existing and new deposits. Borrowings declined by $4.0 million during the first quarter of 2012 to $45.8 million, as the Bank repaid a Federal Home Loan Bank note that had been on the books for the first week of fiscal 2012 to meet a short-term funding need. Wholesale funding options and strategies are continuously analyzed to ensure that we retain sufficient sources of credit to fund all of the Bank’s needs, and to control funding costs by using this alternative to organic deposit account funding when appropriate. Drafts payable of $1.3 million at March 31, 2012 decreased $1.2 million from $2.5 million at December 31, 2011. This difference will vary and is a function of the dollar amount of checks issued near period end and the time required for those checks to clear. Total shareholders’ equity of $34.8 million at March 31, 2012 represented a $295,000 increase over the total of $34.5 million at December 31, 2011. The increase resulted from net income of $345,000, reduced by a $22,000 decrease in unrealized gains net of income tax related to the Bank’s available-for-sale investment securities portfolio, and $29,000 in dividends declared during the three month period. The Company and the Bank’s regulatory capital ratios were all considerably above the levels required under regulatory guidelines to be considered “well capitalized,” and exceeded the higher standards as established in the July 26, 2010 Board resolution. RESULTS OF OPERATIONS First Quarter of 2012 compared to the First Quarter of 2011 The Company recorded net income of $345,000, or $0.12 per diluted share, for the first quarter of 2012, compared to net income of $121,000, or $0.04 per diluted share, for the first quarter of 2011. Credit costs associated with a high level of non-performing assets that resulted from an extended period of weak economic conditions continued to adversely affect earnings during the first quarter of 2012, as they did in the same quarter of 2011. The earnings growth for the first quarter of 2012 compared to the same quarter a year earlier was related primarily to a $282,000 reduction in non-interest expense, coupled with an improvement in net interest income and a lower provision for loan losses, partially offset by a decrease in non-interest income. Net Interest Income The Company’s net interest income on a fully tax-equivalent basis of $3.5 million for the first quarter of 2012 represented an increase of $81,000 or 2.3%, compared to the same period of 2011, with average interest-earning assets totaling $377.5 million, a 1.3% increase over the same period of 2011. Net interest margin on a fully tax-equivalent
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Table of Contentsbasis for the first quarter of 2012 of 3.76% was one basis point higher than the year earlier period. The Bank benefited from certain market conditions that allowed it to decrease its cost of funds, primarily through the re-pricing of deposit accounts in a relatively stable low interest rate environment, while market conditions also contributed to a decrease in average yield on interest-earning assets. Tax-exempt interest was $37,000 for the first quarter of 2012 compared to $51,000 for the same period of 2011, and resulted from municipal securities and municipal loans. Tax-equivalent adjustments were $16,000 and $23,000 for the third quarter of 2012 and 2011, respectively. “Net interest income on a fully tax-equivalent basis” is calculated by increasing net interest income by an amount that represents the additional taxable interest income that would be needed to produce the same amount of after-tax income as the tax-exempt interest income included in net interest income for the period. “Net interest margin on fully tax-equivalent basis” is calculated by dividing annualized “net interest income on a fully tax-equivalent basis” by average interest-earning assets for the period. Our “fully tax-equivalent basis” calculations are based on a federal income tax rate of 34%. Provision for Loan Losses The following table sets forth an analysis of the Bank’s allowance for loan losses for the periods indicated:
We recorded a provision for loan losses of $255,000 in the first quarter of 2012, a $105,000 reduction from the $360,000 provision in the same quarter of 2011. Although the 2011 provision represents a significant decrease from the year earlier quarter, at its current level it is still reflective of the continuing pressure of economic conditions on credit quality, including an elevated amount of non-performing loans. The decrease in provision related primarily to a decrease in non-performing loans. Total charge-offs of $365,000 for the first quarter of 2012 included loans with specific reserves totaling $203,000 at December 31, 2011. The following table summarizes the Company’s non-performing loans:
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The allowance for loan losses of $4.0 million at March 31, 2012 was $384,000 lower than a year earlier, but the allowance for loan losses to non-performing loans ratio increased from 40.57% at March 31, 2011 to 46.78% at March 31, 2012 due to a lower total of non-performing loans. Non-performing loans of $8.6 million at March 31, 2012 represented a $2.3 million decrease from the total of $10.9 million at March 31, 2011, and a $208,000 decrease from the end of the prior quarter. It is management’s opinion that the allowance for loan losses at March 31, 2012 is adequate based on measurements of the credit risk in the entire portfolio as of that date. Total charge-offs of $365,000 for the first three months of 2012 included $192,000 related to deterioration in the market value of eight properties acquired through foreclosure during the quarter, and an $89,000 partial charge-off of a commercial loan. At March 31, 2012, the Bank had $9.3 million in loans categorized as a troubled debt restructuring, with nine loans for $2.3 million also included in the table above in the total for loans accounted for on a non-accrual basis. The total of $9.3 million included a $4.5 million loan on a hotel in northern Indiana, a $1.1 million loan on a residential condominium project, two other commercial real estate loans totaling $572,000, three commercial loans totaling $335,000, and loans on twenty-one single-family residential properties totaling $2.8 million. Other Income The Company recorded other income of $1.3 million for the first quarter of 2012, a decrease of $109,000 from the total for the same period a year earlier that resulted primarily from the net of the following changes:
Other Expense Total other expense of $4.1 million for the first quarter of 2012 was $282,000, or 6.4%, lower than the first quarter of 2011, with the following major differences:
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Table of ContentsIncome Tax Expense The Company had income before income taxes of $423,000, but recorded an income tax expense of only $78,000 for the first quarter of 2012 due to a significant amount of tax-exempt income, primarily from bank-owned life insurance. For the same quarter of 2011, the Company had income before income taxes of $57,000 and recorded a tax benefit of $64,000, that also resulted primarily from tax-exempt BOLI income. We have a deferred state tax asset that is primarily the result of operating losses sustained since 2003. We started recording a valuation allowance against our current period state income tax benefit in 2005 due to our concern that we may not be able to use more than the tax asset already recorded on the books without modifying the use of AIMI, our investment subsidiary, which was liquidated effective December 31, 2009. Operating income from AIMI was not subject to state income taxes under state law, and as a result was also a major factor in the growth of the deferred state tax asset. The Company also has a deferred federal tax asset that is composed of tax benefit from a net operating loss carry-forward and purchased tax credits. The federal loss carry-forward expires in 2026, and the tax credits begin to expire in 2023. The tax credits include alternative minimum tax credits, which have no expiration date. Management believes that the Company will be able to utilize the benefits recorded for loss carry-forwards and credits within the allotted time periods. In addition to the liquidation of AIMI, the Bank has initiated several strategies designed to expedite the use of both the deferred state tax asset and the deferred federal tax asset. Through sales of $34.5 million of municipal securities and only one purchase since December 31, 2006, that segment of the investment securities portfolio has been reduced to $2.4 million. The proceeds from these sales have been reinvested in taxable financial instruments. The Bank has periodically evaluated a sale/leaseback transaction that could result in a taxable gain on its office properties, and also allow the Bank to convert nonearning assets to assets that will produce taxable income. Additionally, the Bank is exploring options related to reducing its current investment in tax-exempt bank owned life insurance policies that involve the reinvestment of the proceeds in taxable financial instruments with a similar or greater risk-adjusted after-tax yield. Sales of banking centers not important to long-term growth objectives that would result in taxable gains and reduced operating expenses could be considered by the Bank. OFF-BALANCE SHEET ARRANGEMENTS In the normal course of operations, we engage in a variety of financial transactions that, in accordance with GAAP, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. We do not have any off-balance-sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. LIQUIDITY AND CAPITAL RESOURCES Liquidity is the ability to meet current and future obligations of a short-term nature. Historically, funds provided by operations, loan repayments and new deposits have been our principal sources of liquid funds. In addition, we have the ability to obtain funds through the sale of investment securities and mortgage loans, through borrowings from the FHLB system, and through the brokered certificates market. We regularly adjust the investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities and (4) the objectives of our asset/liability program. The Company is a separate entity and apart from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for the payment of dividends declared for its shareholders and the payment of interest on its subordinated debentures. At times, the Company has repurchased its stock. Substantially all of the Company’s operating cash is obtained from subsidiary dividends. Payment of such dividends to the Company by
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Table of Contentsthe Bank is limited under Indiana law. Additionally, as part of a resolution adopted by the Board of Directors of the Bank on July 26, 2010, the Bank cannot declare or pay any dividends without the prior written consent of the FDIC and the Indiana Department of Financial Institutions. See “Regulatory Action.” The Company believes that such restriction will not have an impact on the Company’s ability to meet its ongoing cash obligations. At March 31, 2012, we had $17.2 million in loan commitments outstanding and $45.6 million of additional commitments for line of credit receivables. Certificates of deposit due within one year of March 31, 2012 totaled $91.2 million, or 25.7% of total deposits. If these maturing certificates of deposit do not remain with us, other sources of funds must be used, including other certificates of deposit, brokered CDs, and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than currently paid on the certificates of deposit due on or before March 31, 2013. However, based on past experiences we believe that a significant portion of the certificates of deposit will remain. We have the ability to attract and retain deposits by adjusting the interest rates offered. We held no brokered CDs at March 31, 2012 and at December 31, 2011. Our primary investing activity, the origination and purchase of loans, is offset by the sale of loans and principal repayments. In the first three months of 2012, net loans receivable decreased by $2.7 million, or 0.9%. Financing activities consist primarily of activity in deposit accounts and FHLB advances. Deposit flows are affected by the overall level of interest rates, the interest rates and products we offer, and our local competitors and other factors. Total deposits increased by $17.6 million, or 5.2%, and total FHLB advances were reduced by $4.0 million, or 12.5%, during the first three months of 2012. The Bank is subject to various regulatory capital requirements set by the FDIC, including a risk-based capital measure. The Company is also subject to similar capital requirements set by the Federal Reserve Board. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. In addition, as part of a resolution adopted by the Board of Directors of the Bank on July 26, 2010, the Bank adopted a capital plan to increase its Tier 1 Leverage Ratio to 8.50% by June 30, 2010 and maintain a Total Risk-Based Capital Ratio of 12.00%, both of which the Bank has accomplished. See “Regulatory Action.” There are five capital categories defined in the regulations, ranging from well capitalized to critically under-capitalized. 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 March 31, 2012 and December 31, 2011, the Bank was categorized as “well capitalized” and met all subject capital adequacy requirements. There are no conditions or events since March 31, 2012 that management believes have changed this classification. Actual, required, and well capitalized amounts and ratios for the Bank are as follows: March 31, 2012
December 31, 2011
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Table of ContentsActual, required, and well capitalized amounts and ratios for the Company are as follows: March 31, 2012
December 31, 2011
AVAILABLE INFORMATION Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are made available free of charge on our website, www.ameriana.com, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission. Information on our website should not be considered a part of this Form 10-Q. ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Not applicable as issuer is a smaller reporting company. ITEM 4 – CONTROLS AND PROCEDURES As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in ensuring that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended, (1) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (2) is
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Table of Contentsaccumulated and communicated to our management, including our principal executive and principal financial officers as appropriate to allow timely discussions regarding required disclosures. It should be noted that the design of our disclosure controls and procedures is based in part upon certain reasonable assumptions about the likelihood of future events, and there can be no reasonable assurance that any design of disclosure controls and procedures will succeed in achieving its stated goals under all potential future conditions, regardless of how remote, but our principal executive and financial officers have concluded that our disclosure controls and procedures are, in fact, effective at a reasonable assurance level. There were no changes in the Company’s internal control over financial reporting during the three months ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Neither the Company nor the Bank is involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to the financial condition and results of operations of the Company. In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The Company did not repurchase any of its common stock during the quarter ended March 31, 2012, and at March 31, 2012 had no approved repurchase plans or programs. ITEM 3 – DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4 – MINE SAFETY DISCLOSURES Not Applicable Not Applicable
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Table of ContentsPursuant to the requirements 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.
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