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ASBI > SEC Filings for ASBI > Form 10-K on 25-Mar-2014All Recent SEC Filings

Show all filings for AMERIANA BANCORP



Annual Report

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

Who We Are

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

We are headquartered in New Castle, Indiana. We conduct business through our main office at 2118 Bundy Avenue, New Castle, Indiana, through eleven branch offices located in New Castle, Middletown, Knightstown, Morristown, Greenfield, Anderson, Avon, Fishers, Carmel, Westfield and New Palestine, Indiana. On October 13, 2012, the Bank closed the banking center at its McCordsville location. The facility continues to house lending personnel who were moved to that location 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 Knightstown, Indiana. On July 1, 2009, AIA purchased the book of business of Chapin-Hayworth Insurance Agency Inc. located in New Castle, Indiana, and on July 27, 2011 purchased the insurance book of business of Koontz Insurance & Financial Services also located in New Castle, Indiana. AFS had offered insurance products through its ownership of an interest in Family Financial Life Insurance Company ("Family Financial"), New Orleans, Louisiana, which offers a full line of credit-related insurance products. On May 22, 2009, the Company announced that AFS had liquidated its 16.67% interest in Family Financial, and recorded a pre-tax gain of $192,000 from the transaction. AFS also operates a brokerage facility in conjunction with LPL Financial that provides non-bank investment product alternatives to its customers and the general public. A third Bank subsidiary, Ameriana Investment Management, Inc. ("AIMI"), had managed part of the Company's investment portfolio. Following a cost/benefit analysis, AIMI was liquidated effective December 31, 2009, and the portfolio under management was transferred to the Bank. The Company holds a minority interest in a limited partnership, House Investments, organized to acquire and manage real estate investments which qualify for federal tax credits.

What We Do

The Bank is a community-oriented financial institution. Our principal business consists of attracting deposits from the general public and investing those funds primarily in mortgage loans on single-family residences, multi-family loans, construction loans, commercial real estate loans, and, to a lesser extent, commercial and industrial loans, small business loans, home improvement loans, and consumer loans. We have from time-to-time purchased loans and loan participations in the secondary market. We also invest in various federal and government agency obligations and other investment securities permitted by applicable laws and regulations, including mortgage-backed, municipal and equity securities. We offer customers in our market area time deposits with terms from three months to seven years, interest-bearing and noninterest-bearing checking accounts, savings accounts and money market accounts. Our primary source of borrowings is FHLB advances. Through our subsidiaries, we engage in insurance 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 borrowing portfolios. Our loan portfolio typically earns more interest than the investment portfolio, and our deposits typically have a lower average rate than FHLB advances. Several factors affect our net interest income. These factors include the loan, investment, deposit, and borrowing portfolio balances, their composition, the length of their maturity, re-pricing characteristics, liquidity, credit, and interest rate risk, as well as market and competitive conditions.

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Financial Challenges and Expansion

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 the Indianapolis metropolitan area. These banking centers are focused on generating new deposit and lending relationships, where significant opportunities exist to win market share from smaller institutions lacking the depth of financial products and services, and from large institutions that have concentrated on large business customers.

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 the Indianapolis metropolitan area, including construction of a new full-service banking center in Plainfield on property purchased by the Bank in early 2008, was put on hold due to the economic environment. The Bank purchased two vacant banking centers in the Hamilton County Indianapolis metropolitan area in June 2013, and is in the process of determining the appropriate time to open each office, as well as building on the Plainfield property, based on the Bank's long-term expansion strategy.

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 moved slowly through 2013. The severity of this environment and its consequences to the industry created many new formidable challenges for bankers.

Executive Overview of 2013

The Company recorded net income of $2.2 million, or $0.73 per share, for 2013, compared to net income of $1.8 million, or $0.62 per share, for 2012. The growth in earnings for 2013 was due primarily to an improvement in the Bank's credit metrics, which was reflected in a $390,000 reduction in the provision for loan losses, and a $486,000 decrease in the net loss from sales and write-downs of other real estate owned. Following is additional summary information for the year:

• Consistent with its capital contingency plan, the Company paid a de minimis quarterly dividend of $0.01 per share, or $0.04 per share for the year.

• The Company's tangible common equity ratio at December 31, 2013 was 7.97%.

• At December 31, 2013, the Bank's tier 1 leverage ratio was 9.47%, the tier 1 risk-based capital ratio was 13.91%, and the total risk-based capital ratio was 15.16%. All three ratios were considerably above the levels required under regulatory guidelines to be considered "well capitalized."

• Although average interest-earning assets increased $3.6 million, or 0.9%, net interest income decreased $210,000, a 1.5% decline for 2013 compared to 2012 that was related to a nine basis points decrease in net interest margin that resulted primarily from weak loan demand that has continued to impact the industry.

• The Bank recorded a $755,000 provision for loan losses in 2013 compared to a $1.1 million provision in 2012 due to an elevated, but reduced level of non-performing loans that resulted from weak economic conditions.

• Total nonperforming loans of $5.1 million, or 1.60%, of total loans at December 31, 2013, represented a $2.5 million decrease from $7.6 million, or 2.39% of total loans at December 31, 2012.

• The allowance for loan losses was $4.0 million, or 1.26% of total loans at December 31, 2013, compared with $4.2 million, or 1.33% of total loans at December 31, 2012.

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• Other income of $5.8 million for 2013 was $620,000, or 12.0%, higher than the total for the prior year, due primarily to the $486,000 decrease in the net loss from sales and write-downs of other real estate owned to $35,000 for 2013 from $521,000 for 2012. The change in other income also included the following differences:

• Fees and service charges on deposit accounts of $2.5 million for 2013 represented a $139,000, or 6.0%, improvement over 2012 that was due primarily to an increase in the number of checking accounts that resulted from the Bank's continuing focus on growing core deposit relationships.

• A $110,000 increase in brokerage and insurance commissions to $1.6 million for 2013 included a $77,000 increase in commissions and fees earned by the Bank's investment services subsidiary that resulted primarily from a higher volume of sales.

• The Bank elected to sell more available-for-sale securities in 2013, with gains of $167,000 compared to gains of $89,000 for 2012.

• Due mostly to a nationwide slowdown in refinance activity in the latter part of 2013 compared to 2012, gains on sales of mortgage loans of $511,000 represented a $161,000 decrease from the prior year.

• Other expense for 2013 of $16.1 million was $268,000, or 1.7%, higher than 2012, due primarily to an increase in salaries and employee benefits. The change in other expense included the following differences:

• Total salaries and employee benefits of $9.0 million for 2013 represented an increase from 2012 of $278,000, or 3.2%, that resulted primarily from a $200,000 increase in the net cost of employee health insurance premiums and $104,000 of expense related to stock option grants, partly offset by a $46,000 decrease in funding costs for the frozen multi-employer defined benefit retirement plan.

• A $74,000 decrease in net occupancy expense that was related primarily to a $97,000 reduction in repairs and maintenance resulting mostly from replacing higher-priced contracts with existing or new contractors;

• A $105,000 increase in legal and professional fees that resulted primarily from $69,000 in recruitment fees related to additions to the Bank's commercial lending department;

• A $79,000 decrease in FDIC insurance premiums that resulted primarily from a reduction in the Bank's assessment rate;

• A $119,000 increase in data processing expense related primarily to our cost to support greater use of new technology by our customers; and

• A $79,000 decrease in other real estate owned expense to $361,000 that resulted primarily from a reduction in the number of foreclosed properties.

• The Company had income before income taxes of $2.9 million for 2013 and recorded income tax expense of $741,000, an effective rate of 25.3%, which was lower than the statutory rate due primarily to a significant amount of tax-exempt bank-owned life insurance.

The Company's total assets of $458.6 million at December 31, 2013 were up $12.8 million, or 2.9%, from $445.8 million at December 31, 2012:

• Net loans receivable were $312.0 million at December 31, 2013, a $1.2 million decrease from $313.2 million at December 31, 2012. The portfolio decline was due primarily to limited demand for commercial loan products resulting from the continuing weak economic conditions in the markets the Bank serves, and the Bank's decision to sell $14.9 million of current production single-family loans into the secondary market.

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• There was minimal change in the composition of the loan portfolio in 2013 that primarily related to a $3.5 million decrease in construction loans, a $1.7 million decrease in commercial loans, and a $334,000 decrease in consumer and municipal loans, partly offset by increases of $3.7 million in commercial real estate loans and $531,000 in residential real estate loans.

• Reflective of the effect of the low interest rate environment coupled with competitive pricing pressures, the 4.83% weighted-average rate for the loan portfolio at December 31, 2013 represented a 24 basis point decrease from 5.07% at December 31, 2012.

• The Bank experienced a decrease of $1.5 million in the investment securities portfolio during 2013 to $40.1 million, which was due primarily to a decline in the market value of mortgage-backed pass-through securities and collateralized mortgage obligations that resulted from an increase in market interest rates during 2013.

• The Company had a $21.6 million increase in interest-bearing demand deposits at the Federal Reserve Bank of Chicago that was due primarily to growth in deposits and borrowings, coupled with declines in loans receivable and other interest-earning assets.

• Other real estate owned of $5.2 million at December 31, 2013 represented a decrease of $1.2 million from December 31, 2012, with the addition of three properties totaling $266,000, the sale of eighteen properties with a total book value of $1.1 million, and $283,000 in write-downs during the year.

• Total deposits of $362.7 million at December 31, 2013 represented an increase of $6.0 million, or 1.7%, for the year. Certificates of deposit grew $7.1 million, or 5.1%, to $145.6 million, while non-maturity deposits decreased $1.1 million, or 0.5%, to $217.1 million,

• The Bank achieved a 5 basis point reduction in the weighted average cost of interest-bearing deposits to 0.55% at December 31, 2013 from 0.60% at the end of 2012.

• Total borrowings increased by $5.0 million in 2013 to $50.8 million, due to the Bank adding a three year Federal Home Loan Bank note with a fixed interest rate of 0.77% and using the proceeds for partial funding of a leverage strategy that involved the purchase of $8.1 million of Ginnie Mae mortgage-backed securities.

Strategic Summary

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

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.

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With a community banking history stretching back more than 120 years, the Bank has built its strong reputation through community outreach programs and being a workplace of choice. By combining its rich tradition with exceptional customer service, the Bank will accomplish its mission by:

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

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

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

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

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

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

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

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

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

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

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

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Increase Market Share in Existing Markets and Expand into New Markets. Tremendous opportunity exists to expand our products and services per household with existing customers and attract new customers in both our existing and new markets. The Bank's expansion strategy in Indianapolis is well underway as a result of opening three well-situated locations in Hamilton County in 2008 and 2009, located just north of Marion County and Indianapolis. In addition, the Company purchased a site in Plainfield, which will enhance our presence on the west side of Indianapolis and our existing office in Avon. Construction of the Plainfield office has been put on hold until we have completed our development plans for the site. In June, the Bank purchased two vacant banking centers in the Hamilton County Indianapolis metropolitan area and is in the process of determining the appropriate time to open each office, based on the Bank's long-term expansion strategy. The Bank currently plans to continue the strategy of acquiring additional locations for development of full-service banking centers to increase our footprint in Marion County and surrounding Indianapolis metropolitan area and to boost our visibility in this market.

Critical Accounting Policies

The accounting and reporting policies of the Company are maintained in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The Company's significant accounting policies are described in detail in the Notes to the Company's Consolidated Financial Statements. The preparation of financial statements in conformity with generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions. The financial position and results of operations can be affected by these estimates and assumptions, and such estimates and assumptions are integral to the understanding of reported results. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company's financial condition and results, and they require management to make estimates that are difficult, subjective or complex.

Allowance for Loan Losses. The allowance for loan losses provides coverage for probable losses in the Company's loan portfolio. Management evaluates the adequacy of the allowance for credit losses each quarter based on changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, regulatory guidance and economic factors. This evaluation is inherently subjective, as it requires the use of significant management estimates. Many factors can affect management's estimates of specific and expected losses, including volatility of default probabilities, rating migrations, loss severity and economic and political conditions. The allowance is increased through provisions charged to operating earnings and reduced by net charge-offs.

The Company determines the amount of the allowance based on relative risk characteristics of the loan portfolio. The allowance recorded for commercial loans is based on reviews of individual credit relationships and an analysis of the migration of commercial loans and actual loss experience. The allowance recorded for noncommercial loans is based on an analysis of loan mix, risk characteristics of the portfolio, fraud loss and bankruptcy experiences and historical losses, adjusted for current trends, for each loan category or group of loans. The allowance for loan losses relating to impaired loans is based on the loan's observable market price, the collateral for certain collateral-dependent loans, or the discounted cash flows using the loan's effective interest rate.

Regardless of the extent of the Company's analysis of customer performance, portfolio trends or risk management processes, certain inherent but undetected losses are probable within the loan portfolio. This is due to 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

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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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