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 by 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. On June 25, 2012, the Bank announced that a decision
had been made to discontinue banking center operations at the McCordsville
location with a proposed branch closing date of October 13, 2012. The facility
will continue to house lending personnel who were moved to that location when
the lease for the loan production office was terminated at the end of the first
quarter of 2012.
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.
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Executive Overview of the Second Quarter of 2012
The Company recorded net income of $453,000, or $0.15 per share, for the
three-month period ended June 30, 2012, its twelfth consecutive profitable
quarter.
• Consistent with its capital contingency plan, the Company paid only a
de minimis quarterly dividend of $0.01 per share.
• All three of the Bank's capital ratios at June 30, 2012 were
considerably above the levels required under regulatory
guidelines to
be considered "well capitalized," and exceeded the higher standards as
established in the Board resolution addressed below.
• Net interest income on a fully tax-equivalent basis for the second
quarter of 2012 decreased by $31,000, or 0.9%, from the same quarter
in 2011, notwithstanding a 0.8% increase in average interest-earning
assets over the same period a year earlier.
• Net interest margin of 3.69% on a fully tax-equivalent basis for the
second quarter of 2012 represented a decrease of 8 basis points from
the first quarter of 2012, and was five basis points lower than the
same period in 2011. The decrease was due primarily to an increase in
low yielding interest-bearing demand deposits at the Federal Reserve
Bank with excess funds that resulted from deposit growth coupled with
a decline in the loan portfolio.
• The Bank recorded a $380,000 provision for loan losses in the second
quarter of 2012, which was $125,000 greater than the $255,000
provision recorded for both the first quarter of 2012 and the second
quarter of 2011.
• Other income of $1.4 million for the second quarter of 2012
represented a $103,000 increase from the same quarter of 2011, and
included a $629,000 decrease in the net loss from sales and
write-downs of other real estate owned, partially offset by a $448,000
reduction in realized gains on available-for-sale investment
securities and an $86,000 decrease in income on other real estate
owned.
• Net losses in other real estate owned in the second quarter of
2012 totaled $15,000, compared with $644,000 in the same quarter
a year earlier that included a $678,000 write-down of a strip
commercial center.
• There were no sales of available-for-sale securities in the
second quarter of 2012.
• Other expense for the second quarter of 2012 of $3.9 million was
$375,000, or 8.7%, lower than the same quarter in 2011,
primarily as a
result of a $118,000 decrease in salaries and employee benefits
related mostly to positions eliminated through attrition, a $63,000
reduction in the cost of employees medical insurance expense, a
$298,000 reduction in other real estate owned expense due mostly to
the 2011 sale of an apartment complex, and to lower real
estate taxes
on other properties than the year earlier quarter that
included
$130,000 related to a recently acquired golf course and
residential
real estate development project.
• The Company had income before income taxes of $579,000 for the second
quarter of 2012, but recorded income tax expense of only $126,000,
which was due primarily to a significant amount of tax-exempt income
from bank-owned life insurance.
For the second quarter of 2012, total assets increased by $6.8 million, or 1.5%,
to $449.9 million from $443.1 million at March 31, 2012:
• Investments in interest-bearing demand deposits increased $9.3 million
from $22.1 million at March 31, 2012 to $31.4 million at June 30,
2012, of which $30.9 million was invested at the Federal Reserve Bank
of Chicago and $490,000 at the Federal Home Loan Bank of Indianapolis.
• A $1.4 million increase in the investment securities
available-for-sale portfolio during the second quarter of 2012 to
$43.5 million resulted from a $2.6 million purchase, coupled with a
$421,000 increase in unrealized gains exceeding principal payments on
mortgage-backed securities of $1.6 million.
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• Net loans receivable of $303.7 million at June 30, 2012 represented a
decrease of $6.1 million, or 2.0%, for the second quarter of 2012,
primarily due to a $7.4 million reduction in the commercial loan and
lease portfolio, which was primarily a result of the payoff of several
large loans.
• Total non-performing loans of $8.6 million, or 2.8% of total net loans
at June 30, 2012, represented a decrease of $30,000 from March 31,
2012.
• The allowance for loan losses of $4.1 million at June 30, 2012 was
1.33% of total loans and 47.8% of non-performing loans,
compared to
ratios of 1.28% and 46.8%, respectively, at March 31, 2012.
• Other real estate owned of $8.5 million at June 30, 2012 represented a
$923,000 increase from March 31, 2012 that resulted from the addition
of ten properties totaling $1.1 million, the sale of three properties
with a total book value of $151,000, and a $31,000 write-down.
• During the second quarter of 2012, total deposits increased by $6.3
million, or 1.8%, to $361.1 million, as the Bank maintained its strong
focus on nurturing existing and attracting new core deposit
relationships, while allowing the more rate-sensitive accounts to run
off. This strategy resulted in a $10.8 million increase in checking,
money market and savings balances, and a $4.5 million decrease in
certificates of deposit during the quarter ended June 30, 2012.
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:
• Adopt a capital plan to increase its Tier 1 Leverage Ratio to 8.50% by
June 30, 2010 and to maintain a Total Risk-Based Capital Ratio of 12.00%;
• Adopt a written plan to lower classified assets;
• Formulate and implement a written profit plan;
• Receive prior written consent from the FDIC and the Indiana Department of
Financial Institutions before declaring or paying any dividends;
• Strive to reduce total holdings of bank-owned life insurance; and
• Furnish quarterly progress reports regarding the Bank's compliance with
all provisions of the resolution.
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. On June
25, 2012, the Bank announced the closing of the McCordsville Banking Center
scheduled for October 13, 2012. The opening of the Fishers Banking Center in
2008, which is in close proximity to the McCordsville and Geist communities,
allowed Ameriana to serve the financial needs of its McCordsville customers from
a new convenient location. Ameriana is committed to developing a branch network
that meets the changing needs of customers while maximizing profitability for
its shareholders.
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 second
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.
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With the Bank's mantra of "Soundness. Profitability. Growth - in that order, no
exceptions," the priorities, culture and risk strategy of the Bank are focused
on asset quality and credit risk management. Despite the current economic
pressures, as well as the industry's challenges related to compliance and
regulatory requirements, tightened credit standards, and capital preservation,
management remains cautiously optimistic that business conditions 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 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:
• being our customer's first choice for financial advice and solutions;
• informing and educating customers on the basics of money management; and
• understanding and meeting customer's financial needs throughout their
life cycle.
Serving customers requires the commitment of all Ameriana Bank associates to
provide exceptional service and sound financial advice. We believe these
qualities 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 Company's
significant accounting policies are described in detail in the Notes to the
Company's Consolidated Financial Statements. The preparation of financial
statements in conformity with generally accepted accounting principles 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 loan 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,
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 risk
associated with the commercial and consumer allowance levels and the estimated
impact of the current economic environment.
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Mortgage Servicing Rights. Mortgage servicing rights ("MSRs") associated with
loans originated and sold, where servicing is retained, are capitalized and
included in other 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.
Under U.S. GAAP, a valuation allowance is required to be recognized if it is
"more likely than not" that a deferred tax asset will not be realized. The
determination of the realizability of the deferred tax asset is highly
subjective and dependent upon judgment concerning our evaluation of both
positive and negative evidence, our forecasts of future income, applicable tax
planning strategies, and assessments of current and future economic and business
conditions. Positive evidence includes the existence of taxes paid in available
carry-back years as well as the probability that taxable income will be
generated in future periods, while negative evidence includes any cumulative
losses in the current year and prior two years and general business and economic
trends. At June 30, 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 June 30, 2012.
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FINANCIAL CONDITION
Total assets of $449.9 million at June 30, 2012 represented an increase of $20.1
million, or 4.7%, 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 $28.0 million to $37.7 million at June 30,
2012 from the December 31, 2011 total of $9.7 million. Included in the total at
June 30, 2012 was $30.9 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 $343,000 to $43.5 million
at June 30, 2012 from $43.8 million at December 31, 2011. This decrease resulted
primarily from $4.9 million in sales and $3.2 million of principal repayments on
mortgage-backed securities, mostly offset by $7.4 million in purchases of
mortgage-backed securities and a $389,000 increase in unrealized gains. All
mortgage-backed securities in the portfolio, which totaled $39.3 million at
June 30, 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 $8.8 million, or 2.8%, to $303.7 million at
June 30, 2012 from $312.5 million at December 31, 2011, due mostly to a $7.4
million decrease in the commercial loan and lease portfolio to $23.6 million
that resulted primarily from the payoff of several large loans. The residential
mortgage loan portfolio increased $1.6 million to $166.0 million, as the Bank
put $9.8 million single-family loans into the portfolio from the total
production of $20.8 million during the second quarter. The Bank's
mortgage-banking strategy is reviewed regularly to ensure that it remains
consistent with the Bank's overall balance sheet management objectives.
Premises and equipment of $14.4 million at June 30, 2012 represented a $214,000
decrease from $14.7 million at December 31, 2011. The net decrease was a result
of $471,000 of depreciation and $21,000 in dispositions for the six months ended
June 30, 2012 exceeding capital expenditures of $278,000 for the period.
Goodwill was $656,000 at June 30, 2012, unchanged from December 31, 2011.
Goodwill of $457,000 relates to deposits associated with a banking center
acquired in 1998, and $199,000 is the result of three separate insurance
business acquisitions. The Bank's impairment tests reflected no impairment as of
June 30, 2012.
We have investments in life insurance on employees and directors with a balance
or cash surrender value of $26.6 million and $26.2 million at June 30, 2012 and
December 31, 2011, respectively. The non-taxable increase in cash surrender
value of this life insurance was $390,000 for the first six months of 2012,
compared to $424,000 for the same period a year earlier.
Other real estate owned of $8.5 million at June 30, 2012 represented a $923,000
increase over the total of $7.5 million at December 31, 2011. Eighteen additions
to other real estate owned totaling $1.4 million and the sale of six properties
with an aggregate book value of $296,000 occurred during the six-month period
ended June 30, 2012. The additions included eight single-family homes, eight
residential building lots and two parcels of undeveloped land. The sales
resulted in a gain of $51,000, and consisted of four single-family properties, a
residential building lot and a four unit commercial property. Write-downs of
other real estate owned during the six-month period ended June 30, 2012 totaled
$222,000, 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 $9.3 million at June 30, 2012 represented a $578,000 decrease
from December 31, 2011, that resulted primarily from a $281,000 reduction in
prepaid FDIC insurance premiums, a $118,000 decrease in other prepaid expenses,
and a $102,000 decrease in accrued interest and dividends receivable.
Total deposits of $361.1 million at June 30, 2012 represented an increase of
$23.9 million, or 7.1%, from $337.2 million at December 31, 2011, as the Bank
maintained its strong focus on nurturing existing and attracting new core
deposit relationships. During the first six months of 2012, checking, money
market and savings balances increased $24.5 million, while certificate of
deposit balances decreased $634,000. 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.
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Borrowings declined by $4.0 million during the first six months 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 $1.4 million at June 30, 2012 decreased $1.1 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 $35.5 million at June 30, 2012 represented a $1.0
million increase over the total of $34.5 million at December 31, 2011. The
increase resulted from net income of $798,000 and a $257,000 increase in
unrealized gains net of income tax related to the Bank's available-for-sale
investment securities portfolio, reduced by $60,000 in dividends declared during
the six 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
Second Quarter of 2012 compared to the Second Quarter of 2011
The Company recorded net income of $453,000, or $0.15 per diluted share, for the
second quarter of 2012, compared to net income of $270,000, or $0.09 per diluted
share, for the second 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 second quarter of 2012, but to a lesser degree than
they did in the same quarter of 2011. The earnings growth for the second quarter
of 2012 compared to the same quarter a year earlier was related primarily to a
$629,000 reduction in the net loss from sales and write-downs of other real
estate owned coupled with a $212,000 reduction in other real estate owned
expense net of income, partially offset by $448,000 in net realized gains from
sales of available-for-sale investment securities in the second quarter of 2011
compared with none in the second quarter of 2012, and a $125,000 increase in the
provision for loan losses compared to the year earlier quarter.
Net Interest Income
The Company's net interest income on a fully tax-equivalent basis of $3.6
million for the second quarter of 2012 represented a decrease of $31,000 or
0.9%, compared to the same period of 2011, notwithstanding that average
interest-earning assets totaled $388.1 million, a 0.8% increase over the same
period of 2011. Net interest margin on a fully tax-equivalent basis for the
second quarter of 2012 of 3.69% was five basis points lower than the year
earlier period. The Bank was able to stabilize net interest income and net
interest margin as it 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 second quarter of 2012 compared to
$46,000 for the same period of 2011, and resulted from municipal securities and
municipal loans. Tax-equivalent adjustments were $16,000 and $21,000 for the
second 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%.
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Provision for Loan Losses
The following table sets forth an analysis of the Bank's allowance for loan
losses for the periods indicated:
(Dollars in thousands)
Three Months Ended June 30,
2012 2011 Balance at beginning of quarter $ 4,032 $ 4,416
Provision for loan losses 380
255
Charge-offs (324 ) (570 )
Recoveries 15 18
Net charge-offs (309 ) (552 )
Balance at end of period $ 4,103 $
4,119
Allowance to total loans 1.33 %
1.32 %
Allowance to non-performing loans 47.76 %
50.63 %
We recorded a provision for loan losses of $380,000 in the second quarter of
2012, a $125,000 increase over the $255,000 provision in the same quarter of
2011. The increased provision is reflective of the continuing pressure of
economic conditions on credit quality, including an elevated amount of
non-performing loans and charge-offs. Total charge-offs of $324,000 for the
second quarter of 2012 included loans with specific reserves totaling $322,000
at March 31, 2012.
The following table summarizes the Company's non-performing loans:
(Dollars in thousands)
June 30,
2012 2011
Loans accounted for on a non-accrual basis $ 8,392 $ 7,380
Accruing loans contractually past due 90 days or more 198 756
Total of non-accrual and 90 days or more past due loans
(1) $ 8,590 $ 8,136
Percentage of total net loans 2.79 % 2.62 %
Other non-performing assets (2) $ 8,468 $ 8,918
Total non-performing assets $ 17,058 $ 17,054
Percentage of total assets 3.79 % 3.88 %
Troubled debt restructurings in total of nonaccrual and
90 days or more past due loans (1)
$ 2,400 $ 1,123
Total troubled debt restructurings $ 11,859 $ 8,259
(1) Total non-accrual loans and accruing loans 90 days or more past due at
June 30, 2012 included $2.4 million of troubled debt restructurings, which
consisted of a $1.1 million residential construction loan, five residential
non- construction loans totaling $997,000, three commercial loans totaling
$318,000, and three consumer loans totaling $8,000.
(2) Other non-performing assets represent property acquired through foreclosure
or repossession. This property is carried at the lower of its fair market
value or its carrying value.
The allowance for loan losses of $4.1 million at June 30, 2012 was $16,000 lower
than a year earlier, and the allowance for loan losses to non-performing loans
ratio decreased from 50.63% at June 30, 2011 to 47.76% at June 30, 2012 due
primarily to a higher total of non-performing loans. Non-performing loans of
$8.6 million at June 30, 2012 represented a $454,000 increase from the total of
$8.1 million at June 30, 2011, but a $30,000 decrease from the end of the prior
quarter. It is management's opinion that the allowance for loan losses at
June 30, 2012 is adequate based on measurements of the credit risk in the entire
portfolio as of that date.
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Total charge-offs of $324,000 for the second quarter of 2012 included $246,000
related to deterioration in the market value of eleven properties acquired
through foreclosure during the quarter, and a $53,000 partial charge-off
resulting from a short sale of a commercial lot.
At June 30, 2012, the Bank had $11.9 million in loans categorized as troubled
debt restructurings, with twelve loans for $2.4 million also included in the
table above in the total for loans accounted for on a non-accrual basis. The
total of $11.9 million included a $4.5 million loan on a hotel in northern
Indiana, one other commercial real estate loan for $139,000, a $1.1 million loan
on a residential condominium project, twenty single-family residential property
loans totaling $2.7 million, a land development loan for $1.9 million, three
other land loans totaling $1.2 million, three commercial loans totaling
$318,000, and three consumer loans totaling $8,000.
Other Income
The Company recorded other income of $1.4 million for the second quarter of
2012, an increase of $103,000 from the total for the same period a year earlier
that resulted primarily from the net of the following changes:
• A $629,000 reduction in the net loss from sales and write-downs of other
real estate owned to $15,000 for the second quarter of 2012 from a net
loss of $644,000 for the second quarter of 2011 that included a $678,000
write-down of a strip commercial center;
• No sales of available-for-sale investment securities in the second quarter
of 2012, compared to sales in the year earlier quarter with net realized
gains of $448,000; and
• An $86,000 decrease in other real estate owned income to $60,000 that
resulted primarily from the sale of an apartment complex late in the
second quarter of 2011.
Other Expense
Total other expense of $3.9 million for the second quarter of 2012 was $375,000,
or 8.7%, lower than the second quarter of 2011, with the following major
differences:
• A $118,000 decrease in salaries and employee benefits resulting from the
elimination of positions primarily through attrition, and a $63,000
reduction in the cost of employees medical insurance expense, partially
offset by a $23,000 increase in funding costs for the frozen
multi-employer defined benefit retirement plan; and
• A $298,000 decrease in other real estate owned expense that resulted
primarily from the sale of an apartment complex, and lower real estate
expense on other properties than the year earlier quarter that included
$130,000 related to a recently acquired golf course and residential real
estate development project.
Income Tax Expense
The Company had income before income taxes of $579,000, but recorded an income
tax expense of only $126,000 for the second 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 $252,000 and
recorded a tax benefit of $18,000 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.
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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.
Six Months Ended June 30, 2012 compared to the Six Months Ended June 30, 2011
The Company recorded net income of $798,000, or $0.27 per diluted share, for the
first six months of 2012, an increase of $407,000 from net income of $391,000,
or $0.13 per diluted share, for the first six months of 2011.
The primary factor in the earnings improvement was a decrease in other expense
of $657,000, or 7.5%, compared to the first half of 2011 that resulted mostly
from a $239,000 reduction in salaries and employee benefits, and a $336,000
reduction in other real estate owned expense.
Net Interest Income
Net interest income on a fully tax-equivalent basis increased $50,000, or 0.7%,
to $7.1 million for the first six months of 2012 compared with $7.0 million for
the same period of 2011, primarily as a result of a $3.9 million, or 1.0%,
increase in the Bank's average interest-earning assets to $382.8 million for the
second quarter of 2012. The Company's net interest margin on a fully
tax-equivalent basis decreased 2 basis points to 3.73% for the first six months
of 2012 from 3.75% for the first six months of 2011.
Tax-exempt interest was $73,000 for the first six months of 2012 compared to
$97,000 for the same period of 2011. Our tax-exempt interest results from
holdings of bank-qualified municipal securities and municipal loans. The
tax-equivalent adjustments were $31,000 and $43,000 for the first six months of
2012 and 2011, respectively. The decrease in tax-exempt interest for the first
six months of 2012 compared to the same period of 2011 was due primarily to a
lower average balance of municipal loans.
Provision for Loan Losses
The following table sets forth an analysis of the Bank's allowance for loan
losses for the periods indicated:
(Dollars in thousands)
Six Months Ended June 30,
2012 2011
Balance at beginning of year $ 4,132 $ 4,212
Provision for loan losses 635 615
Charge-offs (689 ) (745 )
Recoveries 25 37
Net charge-offs (664 ) (708 )
Balance at end of period $ 4,103 $ 4,119
We had a provision for loan losses of $635,000 for the first six months of 2012,
compared to $615,000 for the same period in 2011. The 2012 provision represents
a $20,000, or 3.3%, increase from the six-month period a year earlier. The
increased provision is reflective of the continuing pressure of economic
conditions on credit quality, including an elevated amount of non-performing
loans and charge-offs. The allowance to total loans percentage was 1.33% at
June 30, 2012 and 1.30% at December 31, 2011, compared with 1.32% at June 30,
2011 and 1.33% at December 31, 2010.
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Other Income
Although the decrease of $6,000, or 0.2%, in other income to $2.6 million for
the six months of 2012 compared to the same period of 2011 was not material, it
resulted primarily from the net of the following major differences:
• A $484,000 decrease in the net loss from sales and write-downs of other
real estate owned to $171,000 for the six months of 2012, compared to
$655,000 for the same period a year earlier that included a $678,000
write-down of a strip commercial center. The total for the first six
months of 2012 included a $130,000 write-down of an uncompleted apartment
complex;
• A $411,000 decrease in net gains on sales of available-for-sale securities
from $500,000 for the first six months of 2011 from sixteen sales totaling
$27.2 million, to $89,000 in net gains for the six months of 2012 from two
sales totaling $4.9 million;
• A $218,000 decrease in rental income from OREO, that resulted primarily
from the mid-2011 sale of an apartment complex;
• A $147,000 increase in gains on sales of loans and servicing rights to$266,000 for the six months of 2012 from $119,000 for the same period a
year earlier, that resulted primarily from increased residential mortgage
lending activity; and
• A $115,000, or 11.5%, increase to $1.1 million in fees and service charges
on deposit accounts that was due primarily to a 9.4% increase in the
number of checking accounts since the end of the second quarter of 2011 that resulted from the Bank's continuing focus on growing core deposit
relationships.
Other Expense
The Company recorded a $657,000, or 7.5%, decrease in total other expense to
$8.1 million for the first six months of 2012, compared to $8.7 million for the
first six months of 2011, due primarily to the following major differences:
• A $239,000 decrease in salaries and employee benefits resulting from the
elimination of positions primarily through attrition, and a $129,000
reduction in the cost of employees medical insurance expense, partially
offset by a $46,000 increase in funding costs for the frozen
multi-employer defined benefit retirement plan; and
• A $336,000 decrease in other real estate owned expense that resulted
primarily from the sale of an apartment complex, and lower real estate
expense on other properties than the year earlier quarter that included
$130,000 related to a recently acquired golf course and residential real
estate development project.
Income Tax Expense
The Company had income before income taxes of $1.0 million for the first six
months of 2012, but recorded income tax expense of only $204,000, a result of
tax-exempt income. The Company had income before income taxes of $309,000 for
the same period of 2011, but recorded an $82,000 income tax benefit that was
also a result of tax-exempt income. For both six month periods, the Bank had a
significant amount of tax-exempt income from BOLI, in addition to tax-exempt
income from municipal loans and municipal securities.
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.
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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
the 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 June 30, 2012, we had $15.2 million in loan commitments outstanding and $50.4
million of additional commitments for line of credit receivables. Certificates
of deposit due within one year of June 30, 2012 totaled $87.0 million, or 24.1%
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 June 30, 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
June 30, 2012 or 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 six months of 2012,
net loans receivable decreased by $8.8 million, or 2.8%.
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 $23.9 million, or 7.1%, and total FHLB
advances were reduced by $4.0 million, or 12.5%, during the first six 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 June 30, 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 June 30, 2012
that management believes have changed this classification.
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Actual, required, and well capitalized amounts and ratios for the Bank are as
follows:
June 30, 2012
Required For To Be
Actual Capital Adequate Capital Well Capitalized
Amount Ratio Amount Ratio Amount Ratio
Total risk-based capital ratio $ 43,520 14.27 % $ 24,397 8.00 % $ 30,497 10.00 %
(risk based capital to risk-weighted
assets)
Tier 1 risk-based capital ratio $ 39,654 13.00 % $ 12,199 4.00 % $ 18,298 6.00 %
(tier 1 capital to risk-weighted assets)
Tier 1 leverage ratio $ 39,654 8.96 % $ 13,279 3.00 % $ 22,131 5.00 %
(tier 1 capital to adjusted average
total assets)
December 31, 2011
Required For To Be
Actual Capital Adequate Capital Well Capitalized
Amount Ratio Amount Ratio Amount Ratio
Total risk-based capital ratio $ 42,874 13.58 % $ 25,258 8.00 % $ 31,573 10.00 %
(risk based capital to risk-weighted
assets)
Tier 1 risk-based capital ratio $ 38,883 12.32 % $ 12,629 4.00 % $ 18,944 6.00 %
(tier 1 capital to risk-weighted assets)
Tier 1 leverage ratio $ 38,883 9.23 % $ 12,633 3.00 % $ 21,055 5.00 %
(tier 1 capital to adjusted average
total assets)
Actual, required, and well capitalized amounts and ratios for the Company are as
follows:
June 30, 2012
Required For To Be
Actual Capital Adequate Capital Well Capitalized
Amount Ratio Amount Ratio Amount Ratio
Total risk-based capital ratio $ 43,768 14.21 % $ 24,649 8.00 $ 30,811 10.00 %
(risk based capital to risk-weighted
assets)
Tier 1 risk-based capital ratio $ 39,902 12.95 % $ 12,324 4.00 % $ 18,487 6.00 %
(tier 1 capital to risk-weighted assets)
Tier 1 leverage ratio $ 39,902 9.01 % $ 13,288 3.00 % $ 22,146 5.00 %
(tier 1 capital to adjusted average
total assets)
December 31, 2011
Required For To Be
Actual Capital Adequate Capital Well Capitalized
Amount Ratio Amount Ratio Amount Ratio
Total risk-based capital ratio $ 43,229 13.56 % $ 25,495 8.00 % $ 31,868 10.00 %
(risk based capital to risk-weighted
assets)
Tier 1 risk-based capital ratio $ 39,238 12.31 % $ 12,747 4.00 % $ 19,121 6.00 %
(tier 1 capital to risk-weighted assets)
Tier 1 leverage ratio $ 39,238 9.31 % $ 12,642 3.00 % $ 21,069 5.00 %
(tier 1 capital to adjusted average
total assets)
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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.
