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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-18392
AMERIANA BANCORP
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(Exact Name of Registrant as Specified in Its Charter)
Indiana 35-1782688
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2118 Bundy Avenue, New Castle, Indiana 47362-1048
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (765) 529-2230
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
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Indicate by check mark whether the registrant: (l) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X
-- --
At June 30, 2003, the registrant had 3,148,288 shares of its Common Stock, $1.00
per share, outstanding. The aggregate market value of voting stock held by
non-affiliates of the registrant at June 30, 2003 was approximately $39 million
based on the closing sale price of the registrant's Common Stock as listed on
the Nasdaq National Market as of the last business day of the registrant's most
recently completed second fiscal quarter. For purposes of this calculation,
directors and executive officers are not treated as "non-affiliates".
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Proxy Statement for the 2004 Annual Meeting of Shareholders
("Proxy Statement") (Part III).
PART I
Item 1. Business
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FORWARD-LOOKING STATEMENTS
When used in this Annual Report on Form 10-K (the "Annual Report"), the
words or phrases "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project" or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are subject to certain
risks and uncertainties including changes in economic conditions in the
Company's market area, changes in policies by regulatory agencies, the outcome
of litigation, fluctuations in interest rates, demand for loans in the Company's
market area, and competition that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake, and specifically disclaims any obligation,
to publicly release the result of any revisions, which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
GENERAL
THE COMPANY. Ameriana Bancorp (the "Company") is a bank holding company
subject to regulation and supervision by the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board") under the Bank Holding Company Act
of 1956 ("BHCA"). The Company became the holding company for the Bank in 1990.
The Company's principal subsidiary is Ameriana Bank and Trust, SB, an Indiana
chartered savings bank headquartered in New Castle, Indiana (the "Bank"). The
Company also holds a minority interest in a limited partnership organized to
acquire and manage real estate investments, which qualify for federal tax
credits.
THE BANK. The Bank began operations in 1890. Since 1935, the Bank has been
a member of the Federal Home Loan Bank ("FHLB") System. Its deposits are insured
to applicable limits by the Savings Association Insurance Fund ("SAIF"),
administered by the FDIC. Effective June 29, 2002, the Bank converted to an
Indiana savings bank and adopted its present name, "Ameriana Bank and Trust,
SB." As a result of the conversion, the Bank become subject to regulation by the
Indiana Department of Financial Institutions (the "DFI") and the Federal
1
Deposit Insurance Corporation ("FDIC") rather than by the Office of Thrift
Supervision and the Company became a bank holding company. The Bank's main
office is located at 2118 Bundy Avenue, New Castle, Indiana. The Bank also
conducts business through ten Indiana branch offices located in New Castle,
Middletown, Knightstown, Morristown, Greenfield, Anderson, Avon, McCordsville
and New Palestine, Indiana. The Bank has three direct wholly-owned subsidiaries,
Ameriana Insurance Agency ("AIA"), Ameriana Financial Services, Inc. ("AFS") and
Ameriana Investment Management, Inc. ("AIMI"). AIA provides insurance sales from
offices in New Castle, Greenfield and Avon, Indiana. AFS offers insurance
products through its ownership of an interest in Family Financial Life Insurance
Company, New Orleans, Louisiana, which offers a full line of credit, related
insurance products. AIMI manages the Company's investment portfolio. In 2002,
AFS acquired a 20.9% ownership interest in Indiana Title Insurance Company, LLC
through which it offers title insurance. AFS also operates a brokerage facility
in conjunction with Linsco/Private Ledger. The Bank maintains a website at
www.ameriana.com.
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The business of the Bank consists primarily of attracting deposits from the
general public and originating mortgage loans on single-family residences,
multi-family housing and commercial real estate. The Bank also makes home
improvement loans and consumer loans and, through its subsidiary, engages in
insurance and brokerage activities. The Bank has a Business Services Division
which provides specialized lending and other banking services for business
customers. As a result of the Business Services Division, commercial real estate
loan activity has increased significantly during 2003, 2002 and 2001.
The Bank operates a Trust Department, which provides trust, investment and
estate planning services. The principal sources of funds for the Bank's lending
activities include deposits received from the general public, funds borrowed
from the FHLB, principal amortization and prepayment of loans. The Bank's
primary sources of income are interest and fees on loans and interest on
investments. The Bank has from time to time purchased loans and loan
participations in the secondary market. The Bank also invests in various federal
and government agency obligations and other investment securities permitted by
applicable laws and regulations, including mortgage-backed, municipal and equity
securities. The Bank's principal expenses are interest paid on deposit accounts
and borrowed funds and operating expenses incurred in the operation of the Bank.
RECENT DEVELOPMENTS. On September 30, 2003, the Bank completed the sale of
its two Cincinnati-area branches located in Deer Park and Landen, Ohio and
recorded an after-tax gain of approximately $2,930,000 or $0.93 per diluted
share in the third quarter 2003. The transaction included the Bank's real
property related to the Deer Park branch and its leasehold on the premises for
the Landen branch. Additionally, the Bank conveyed most of
2
the consumer and commercial loans at those branches as part of the transaction,
as well as the branches' saving deposits, but retained and will continue to
service certain single family residential mortgages originated in those
locations.
On September 30, 2003, the Company charged-off the remaining balances of
two troubled equipment lease pools originated by Commercial Money Center, a now
bankrupt company, and recorded an after-tax loss of $3,534,000 or $1.12 per
diluted share for the year ended December 31, 2003 (see Item 3 -- "Legal
Proceedings").
REGULATORY ACTIONS. During the second quarter of 2002, the Bank entered
into a memorandum of understanding ("MOU") with the FDIC and the DFI. Among
other things, the MOU required the Bank to adopt written action plans with
respect to certain classified assets, revise its lending policies, require
greater financial information from borrowers, establish a loan review program
and certain other internal controls. For a more detailed discussion of the terms
and conditions of the MOU, see "Regulation and Supervision - Regulation and
Supervision of the Bank - Capital Requirements" below.
LENDING AND INVESTMENT ACTIVITIES
GENERAL. The principal lending activity of the Bank has been the
origination of conventional first mortgage loans secured by residential
property, commercial real estate, equity lines of credit and consumer loans. The
residential mortgage loans have been predominantly secured by single-family
homes and have included construction loans.
The Bank may originate or purchase whole loans or loan participations
secured by real estate located in any part of the United States. Notwithstanding
this nationwide lending authority, the majority of the Bank's mortgage loan
portfolio is secured by real estate located in Henry, Hancock, Hendricks,
Madison, Shelby, Delaware and Marion counties in the State of Indiana and in
Hamilton, Butler, Clermont and Warren counties in the State of Ohio.
3
The following table sets forth information concerning the Bank's aggregate
loans by type of loan at the dates indicated.
At December 31,
2003 2002 2001 2000 1999
------------------- ----------------- ------------------- -------------- -------------
Amount % Amount % Amount % Amount % Amount %
------ ----- ------ ----- ------ ----- ------ --- ------ ---
(Dollars in thousands)
Real estate mortgage loans:
Commercial........................ $ 79,621 37.19% $ 88,558 27.54% $ 61,678 16.91% $ 35,615 8.57% $ 22,411 6.51%
Residential loans................. 100,865 47.12 157,622 49.00 211,601 58.00 295,949 71.18 250,392 72.77
Construction loans................ 18,035 8.43 42,714 13.28 42,045 11.52 43,287 10.41 42,971 12.49
Commercial loans.................... 7,672 3.58 19,192 5.97 18,536 5.08 8,764 2.11 1,209 0.35
Consumer loans:
Mobile home and auto loans........ 5,191 2.42 10,092 3.14 15,941 4.37 20,767 5.00 16,373 4.77
Loans secured by deposits......... 811 0.38 1,130 0.35 1,348 0.37 1,598 0.38 1,392 0.40
Home improvement loans............ 206 0.10 248 0.08 403 0.11 321 0.08 1,577 0.46
Other............................. 1,661 0.78 2,043 0.64 13,294 3.64 9,431 2.27 7,762 2.26
--------- ------ --------- ------ --------- ------ -------- ------ -------- ------
Total.......................... 214,062 100.00% 321,599 100.00% 364,846 100.00% 415,732 100.00% 344,087 100.00%
--------- ======= --------- ====== --------- ====== -------- ====== -------- ======
Less:
Loans in process.................. 5,859 7,985 12,725 16,724 16,723
Deferred loan fees................ 318 362 8 (143) (129)
Loan loss reserve................. 3,744 8,666 1,730 1,489 1,534
--------- --------- --------- -------- --------
Subtotal......................... 9,921 17,013 14,463 18,070 18,128
--------- --------- --------- -------- --------
Total.......................... $ 204,141 $ 304,586 $ 350,383 $397,662 $325,959
========= ========= ========= ======== ========
4
The following table shows, at December 31, 2003, the Bank's aggregate loans
based on their contractual terms to maturity (mortgage-backed securities are not
included). Demand loans, loans having no stated schedule of repayments and no
stated maturity and overdrafts are reported as due in one year or less.
Contractual principal repayments of loans do not necessarily reflect the actual
term of the loan portfolio. The average life of mortgage loans is substantially
less than their contractual terms because of loan prepayments and because of
enforcement of due-on-sale clauses, which give the Bank the right to declare a
loan immediately due and payable in the event, among other things, that the
borrower sells the real property subject to the mortgage and the loan is not
repaid. The average life of mortgage loans tends to increase, however, when
current mortgage loan rates substantially exceed rates on existing mortgage
loans.
Amounts of Loans Which Mature in
--------------------------------------------------------------------------------
2009 and
2004 2005 - 2008 Thereafter Total
-------- ----------- ------------ ----------
(In thousands)
Type of Loan:
Real estate mortgage....... $ 28,620 $ 18,417 $ 151,484 $ 198,521
Other...................... 6,011 7,930 1,600 15,541
---------- ---------- --------- ----------
Total................... $ 34,631 $ 26,347 $ 153,084 $ 214,062
========== ========== ========= ==========
The following table sets forth the dollar amount of the Company's
aggregate loans due after one year from December 31, 2003 which have
predetermined interest rates and which have floating or adjustable interest
rates (mortgage-backed securities are not included).
Fixed Adjustable
Rate Rate Total
----------- ----------- -----
(In thousands)
Real estate mortgage loans............. $ 39,821 $ 130,080 $ 169,901
Other loans............................ 8,245 1,285 9,530
---------- --------- ---------
Total................................ $ 48,066 $ 131,365 $ 179,431
========== ========= =========
RESIDENTIAL REAL ESTATE LENDING. The Bank's primary lending activities are
the origination of loans on one-to-four family residential dwelling units. The
Bank currently offers fixed-rate, first and second mortgage loans. The
fixed-rate mortgage loans provide for a maturity of ten to thirty years, with
the thirty-year loan bearing a slightly higher rate of interest. The terms of
the first mortgage loans generally conform to the guidelines established by the
Federal Home Loan Mortgage Corporation ("FHLMC") and are, therefore, saleable in
the secondary mortgage market. The Bank's fixed-rate second mortgage loans
provide for a maturity of up to 15 years and bear interest at a rate slightly
higher than that borne by the first mortgage loans. At the time the Bank makes a
fixed-rate mortgage loan, it determines whether the loan will be held in
portfolio or sold. Normally the Bank sells fixed-rate loans and
5
retains adjustable-rate loans. Once placed in portfolio, loans are not sold.
Loans originated for sale are promptly sold in the secondary market. Fixed-rate
mortgage loans in the amount of $150.3 million were originated for sale during
2003 and $154.5 million were sold at a gain of $1.9 million. Mortgage loans held
for sale are those loans that have been committed to be sold, but have not
closed as of the end of the year and were $730,000 at December 31, 2003.
The Bank emphasizes the origination of adjustable-rate mortgages ("ARMs")
for portfolio. The Bank currently offers several types of ARMs either as
first-lien mortgage loans or as second-lien mortgage loans that are adjustable
semi-annually, annually, or on three-year, five-year or seven-year intervals and
indexed to the yields on comparable United States Treasury securities.
The Bank limits the maximum loan-to-value ratio on one-to-four family
residential first mortgages to 97% of the appraised value with the requirement
that private mortgage insurance normally be obtained for loan-to-value ratios in
excess of 80%. The Bank limits the loan-to-value ratio to 89.9% on second
mortgages on one-to-four family dwellings.
The Bank's residential lending activities also include loans secured by
multi-family residential structures, which are structures consisting of over
four separate dwelling units. This has not constituted a significant portion of
the Bank's lending activities to date. Multi-family residential structures are
generally income-producing properties. The Bank generally does not lend above
80% of the appraised values of multi-family residences on first mortgage loans.
CONSTRUCTION AND COMMERCIAL REAL ESTATE LENDING. The Bank originates loans
secured by existing commercial properties and construction loans on residential
real estate. Churches, nursing homes, hotels/motels, and other income-producing
properties secure the Bank's commercial real estate loans. The Bank's Business
Services Division operation makes direct commercial real estate loans and
purchases loan participations from other financial institutions. These
participations in commercial real estate loans are reviewed and approved based
upon the same credit standards as direct commercial real estate loans at the
Bank. Loans secured by commercial real estate properties are generally larger
and involve a greater degree of credit risk than one-to-four family residential
mortgage loans. Because payments on loans secured by commercial real estate
properties are often dependent on the successful operation or management of the
properties, repayment of such loans may be subject to adverse conditions in the
real estate market or by general economic conditions. If the cash flow from the
project is reduced (for example, if leases are not obtained or renewed), the
borrower's ability to repay the loan may be impaired. To minimize the risks
involved in originating such loans, the Bank considers, among other things, the
credit worthiness
6
of the borrower, the location of the real estate, the condition and occupancy
levels of the security and the quality of the organization managing the
property.
The Bank originates and/or purchases construction loans on single-family
residential properties in its primary market areas. The loans are secured by
real estate, and most of the homes to be constructed are already subject to a
sales contract at the time the construction loan is made. The Bank's
construction loans generally range in size between $100,000 and $500,000, and
the Bank's commercial real estate loans range from $100,000 to $4,000,000.
Substantially all of the commercial real estate and construction loans
originated and/or purchased by the Bank have either adjustable interest rates
with maturities of 30 years or less or are loans with fixed interest rates and
maturities of ten years or less.
Loans involving construction financing present a greater level of risk than
loans for the purchase of existing homes since collateral value and construction
costs can only be estimated at the time the loan is approved. The Bank has
sought to minimize this risk by limiting construction lending to qualified
borrowers in its market area and by limiting the number of construction loans
outstanding at any time to individual builders. In addition, most of the Bank's
construction loans are made on homes that are pre-sold, for which permanent
financing is already arranged.
The Bank's underwriting criteria are designed to evaluate and minimize the
risks of each construction loan. Among other things, the Bank considers evidence
of the availability of permanent financing or a takeout commitment to the
borrower; the reputation of the borrower and his or her financial condition; the
amount of the borrower's equity in the project; independent appraisal and review
of cost estimates; pre-construction sale and leasing information; and cash flow
projections of the borrower.
CONSUMER LOANS. The consumer loans granted by the Bank have included loans
on automobiles and other consumer goods, loans secured by savings accounts and
secured and unsecured lines of credit.
Management believes that the shorter terms and the normally higher interest
rates available on various types of consumer loans have been helpful in
maintaining profitable spreads between average loan yields and costs of funds.
Consumer loans do, however, pose additional risks of collection when compared to
traditional types of loans granted by thrift institutions such as residential
first mortgage loans. The Bank has sought to reduce this risk by primarily
granting secured consumer loans.
COMMERCIAL BUSINESS LENDING. Under applicable law, the Bank is permitted to
make secured and unsecured loans for commercial, corporate, business and
agricultural purposes, including issuing letters of credit and
7
engaging in inventory financing and commercial leasing activities. The Bank does
not, as a common practice, make unsecured commercial loans. The total lease and
commercial portfolio at December 31, 2003 was $7.7 million.
ORIGINATIONS, PURCHASES AND SALES. Historically, most residential and
commercial real estate loans have been originated directly by the Bank through
salaried loan officers. Residential loan originations have been attributable to
referrals from real estate brokers and builders, depositors and walk-in
customers, and commissioned loan agents. The Bank also obtains consumer and
commercial loans from paid brokers. The Bank obtained $1.5 million of loans from
brokers and other financial institutions through loan participations in 2003.
Commercial real estate and construction loan originations have also been
obtained by direct solicitation. Consumer loan originations are attributable to
walk-in customers who have been made aware of the Bank's programs by advertising
as well as direct solicitation.
The Bank has previously sold whole loans to other financial institutions
and institutional investors. Sales of loans generate income (or loss) at the
time of sale, produce future servicing income and provide funds for additional
lending and other purposes. When the Bank retains the servicing of loans it
sells, the Bank retains responsibility for collecting and remitting loan
payments, inspecting the properties, making certain insurance and tax payments
on behalf of borrowers and otherwise servicing those loans. The Bank typically
receives a fee of between 0.25% and 0.375% per annum of the loan's principal
amount for performing this service. The right to service a loan has economic
value and the Bank carries capitalized servicing rights on its books based on
comparable market values and expected cash flows. At December 31, 2003, the Bank
was servicing $193.0 million of loans for others. The aggregate book value of
capitalized servicing rights at December 31, 2003 was $1.3 million.
Management believes that purchases of loans and loan participations are
generally desirable, primarily when area mortgage demand is less than the supply
of funds available for local mortgage origination or when loan terms are
available in areas outside the Bank's local lending areas that are more
favorable to its investment requirements. Additionally, purchases of loans may
be made in order to diversify the Bank's lending portfolio. The Bank's loan
purchasing activities fluctuate significantly. The seller generally performs the
servicing of purchased loans. In order to cover servicing costs, the service
provider retains a portion of the interest being paid by the borrower. In
addition to whole loan purchases, the Bank also purchases participation
interests in loans. Both whole loans and participations are purchased on a yield
basis.
For additional information, see "Management's Discussion and Analysis --
Results of Operations" included in Item 7 of this Annual Report.
8
LOAN UNDERWRITING. During the loan approval process, the Bank assesses both
the borrower's ability to repay the loan and the adequacy of the underlying
security. Potential residential borrowers complete an application that is
submitted to a salaried loan officer. As part of the loan application process,
the Bank obtains information concerning the income, financial condition,
employment, and credit history of the applicant. In addition, qualified
appraisers inspect and appraise the property that is offered to secure the loan.
The Bank's loan officers and/or loan committee analyze the loan application
and the property to be used as collateral and subsequently approve or deny the
loan request. Individual salaried employees are authorized to approve loans up
to their individual lending limits and loan parameters. A committee consisting
of certain members of senior management must approve residential loans exceeding
$500,000, and commercial loans between $350,000 and $1,000,000. The Board of
Directors approves all loans in excess of $1,000,000. In connection with the
origination of single-family, residential adjustable-rate loans, borrowers are
qualified at a rate of interest equal to the second year rate, assuming the
maximum increase. It is the policy of management to make loans to borrowers who
not only qualify at the low initial rate of interest, but who would also qualify
following an upward interest rate adjustment.
LOAN COMMITMENTS. Conventional loan commitments by the Bank are generally
granted for periods of up to 60 days. The total amount of the Bank's aggregate
outstanding commitments to originate real estate loans at December 31, 2003, was
approximately $1.2 million of residential mortgage commitments and approximately
$1.7 million of commercial commitments. It has been the Bank's experience that
few commitments expire unfunded.
LOAN FEE AND SERVICING INCOME. In addition to interest earned on loans, the
Bank receives income through servicing of loans and fees in connection with loan
originations, loan modifications, late payments, and changes of property
ownership and for miscellaneous services related to the loan. Income from these
activities is volatile and varies from period to period with the volume and type
of loans made.
When possible, the Bank charges loan origination fees on commercial loans
that are calculated as a percentage of the amount borrowed and are charged to
the borrower at the time of origination of the loan. These fees generally range
from none to 1.00 point (one point being equivalent to 1% of the principal
amount of the loan). In accordance with Statement of Financial Accounting
Standard No. 91, loan origination and commitment fees and certain direct loan
origination costs are deferred and the net amount amortized as an adjustment of
yield over the contractual life of the related loans.
9
For additional information, see Note 4 to the "Consolidated Financial
Statements" included under Item 8 of this Annual Report.
DELINQUENCIES. When a borrower defaults upon a required payment on a loan,
the Bank contacts the borrower and attempts to induce the borrower to cure the
default. A late payment notice is mailed to the borrower and a telephone contact
is made after a payment is 15 days past due. If the delinquency on a mortgage
loan exceeds 90 days and is not cured through the Bank's normal collection
procedures or an acceptable arrangement is not worked out with the borrower, the
Bank will institute measures to remedy the default, including commencing
foreclosure action.
NON-PERFORMING ASSETS AND ASSET CLASSIFICATION. Loans are reviewed on a
regular basis and are placed on a non-accrual status when, in the opinion of
management, the collection of additional interest is doubtful. Residential
mortgage loans are placed on non-accrual status when either principal or
interest is 90 days or more past due unless it is adequately secured and there
is reasonable assurance of full collection of principal and interest. Consumer
loans generally are charged off when the loan becomes over 120 days delinquent.
Commercial business and real estate loans are placed on non-accrual status when
the loan is 90 days or more past due. Interest accrued and unpaid at the time a
loan is placed on non-accrual status is charged against interest income.
Subsequent payments are applied to the outstanding principal balance.
Real estate acquired by the Bank as a result of foreclosure or by deed in
lieu of foreclosure is classified as real estate owned until such time as it is
sold. When such property is acquired, it is recorded at the lower of the unpaid
principal balance of the related loan or its fair value. Any subsequent
deterioration of the property is charged off directly to income, reducing the
value of the asset.
10
The following table sets forth information with respect to the
Company's aggregate non-performing assets at the dates indicated.
At December 31,
-----------------------------------------------------------
2003 2002 2001 2000 1999
----- ------ ------ ------ ------
(Dollars in thousands)
Loans accounted for on a non-accrual basis:
Real Estate:
Residential.................................... $ 1,691 $ 3,281 $ 818 $ 720 $ 703
Commercial..................................... 3,390 2,269 1,348 36 226
Construction................................... 3,217 -- -- -- --
Commercial........................................ 85 12,500 -- 8 11
Consumer.......................................... -- 257 12 37 231
-------- -------- -------- -------- --------
Total........................................... 8,383 18,307 2,178 801 1,171
-------- -------- -------- -------- --------
Accruing loans contractually past due 90
days or more:
Real Estate:
Residential.................................... 74 103 268 576 16
Commercial..................................... -- 28 -- -- --
Construction................................... -- -- -- 158 --
Commercial........................................ -- -- -- -- --
Consumer.......................................... -- 4 127 13 9
-------- -------- -------- -------- --------
Total........................................... 74 135 395 747 25
-------- -------- -------- -------- --------
Total of non-accrual and
90 days past due loans....................... $ 8,457 $ 18,442 $ 2,573 $ 1,548 $ 1,196
======== ======== ======== ======== ========
Percentage of total loans (excluding
mortgage-backed securities)..................... 4.07% 5.89% 0.74% 0.39% 0.37%
======== ======== ======== ======== ========
Other non-performing assets (1)..................... $ 623 $ 525 $ 606 $ 125 $ --
======== ======== ======== ======== ========
- --------------------
(1) Other non-performing assets represents property acquired through
foreclosure or repossession. This property is carried at the lower of its
fair market value or the principal balance of the related loan.
The decrease of $9.9 million in non-accrual loans during 2003 is primarily
due to the charge-off of the two troubled equipment lease pools for $10.9
million (see Item 3 -- "Legal Proceedings").
The Bank has real estate development/lot loans and single family
residential loans on existing properties with a builder/developer group, and its
related parties, totaling $3.5 million at December 31, 2003, that are currently
in default and bankruptcy. There appears to be a considerable number of
fraudulent transactions involved and there are multiple lien issues on a number
of the properties. The Bank is working closely with the workout specialist hired
by the bankruptcy trustee on liquidation of the properties involved in the
bankruptcy and we are negotiating with the borrower and its related parties and
their counsel for resolution of the remaining properties.
11
During 2003, the Bank would have recorded gross interest income of $596,000
on the loans set forth above as accounted for on a non-accrual basis, if such
loans had been current in accordance with their terms. Instead, the Bank
recorded interest income of $71,000 on those loans for the year.
For additional information regarding the Bank's problem assets and loss
provisions recorded thereon, see "Management's Discussion and Analysis" in Item
7 of this Annual Report.
RESERVES FOR LOSSES ON LOANS AND REAL ESTATE
In making loans, management recognizes the fact that credit losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan and, in the case of a secured loan, the quality of the security for the
loan.
It is management's policy to maintain reserves for estimated losses on
loans. The Bank's personnel provide general loan loss reserves based on, among
other things, estimates of the historical loan loss experience, evaluation of
economic conditions in general and in various sectors of the Bank's customer
base, and periodic reviews of loan portfolio quality. Specific reserves are
provided for individual loans where the ultimate collection is considered
questionable by management after reviewing the current status of loans which are
contractually past due and considering the net realizable value of the security
of the loan or guarantees, if applicable. It is management's policy to establish
specific reserves for estimated losses on delinquent loans when it determines
that losses are anticipated to be incurred on the underlying properties. At
December 31, 2003, the Bank's allowance for loan losses amounted to $3.7
million.
Future reserves may be necessary if economic conditions or other
circumstances differ substantially from the assumptions used in making the
initial determinations. There can be no assurance that regulators, in reviewing
the Bank's loan portfolio in the future, will not ask the Bank to increase its
allowance for loan losses, thereby negatively affecting its financial condition
and earnings.
12
The following table sets forth an analysis of the Bank's aggregate
allowance for loan losses for the periods indicated.
Year Ended December 31,
----------------------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(Dollars in thousands)
Balance at Beginning of Period..................... $ 8,666 $ 1,730 $ 1,489 $ 1,534 $ 1,284
--------- -------- -------- -------- --------
Charge-Offs:
Real Estate:
Residential.................................... 182 202 29 30 --
Commercial..................................... 68 -- -- 206 --
Construction................................... -- 24 -- -- --
Commercial business.............................. 10,902 -- -- 252 --
Consumer......................................... 242 162 117 -- 98
--------- -------- -------- -------- --------
11,394 388 146 488 98
-------- -------- -------- -------- --------
Recoveries:
Real Estate:
Residential.................................... 1 -- 12 -- --
Commercial..................................... -- -- -- -- --
Construction................................... -- -- -- -- --
Commercial business.............................. -- -- -- 3 4
Consumer......................................... 31 24 15 23 16
--------- -------- -------- -------- --------
32 24 27 26 20
-------- -------- -------- -------- --------
Net Charge-Offs.................................... (11,362) (364) (119) (462) (78)
Increase from Acquisition.......................... -- -- -- -- --
Provision for Loan Losses.......................... 6,440 7,300 360 417 328
--------- -------- -------- -------- --------
Balance at End of Period............................ $ 3,744 $ 8,666 $ 1,730 $ 1,489 $ 1,534
======== ======== ======== ======== ========
Ratio of Net Charge-Offs to Average
Loans Outstanding During the Period.............. 4.25% 0.11% 0.03% 0.12% 0.03%
======== ======== ======== ======== ========
Ratio of Ending Allowance for
Loan Losses to Ending Loans...................... 1.80% 2.77% 0.49% 0.37% 0.47%
======== ======== ======== ======== ========
The provision for loan losses in 2003 decreased to $6.4 million from
$7.3 million from the prior year. The provision expense for both 2003 and 2002
was significantly higher than 1999 through 2001. The increases in 2002 and 2003
were primarily due to the non-accrual loans in the table under the heading
"Non-Performing Assets and Asset Classification" earlier in this section. The
two lease pools had 50% reserves at year-end 2002 due to an expected lengthy
litigation process, and the remaining 50% was charged off in 2003 due to
continuing uncertainty surrounding the prospects for eventual recovery from the
sureties (see Item 3 -- "Legal Proceedings"). The loans to the builder/developer
group, and its related parties had 25% reserves for $895,000 and $831,000 at
year-end 2002 and 2003 respectively. The remaining reserves were necessary to
reflect management's view on the risk in the loan
13
portfolio due to the change in the portfolio mix. See also "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Loans -- Credit Quality".
Net charge-offs for the year ended December 31, 2003 increased $11.0
million from 2002. The lease write-off in 2003 was $10.9 million. Net
charge-offs for the year ended December 31, 2002 increased $245,000 from 2001.
The following table sets forth a breakdown of the Company's aggregate
allowance for loan losses by loan category at the dates indicated. Management
believes that the allowance can be allocated by category only on an approximate
basis. The allocation of the allowance to each category is not necessarily
indicative of future losses and does not restrict the use of the allowance to
absorb losses in any category.
At December 31,
-------------------------------------------------------------------------------
2003 2002 2001
-------------------------- ------------------------ --------------------------
Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ------------- ------ ------------- ------ -------------
(Dollars in thousands)
Loans:
Real Estate Mortgage:
Commercial............................ $ 1,686 37% $ 1,414 28% $ 617 17%
Residential........................... 620 47 772 49 417 58
Construction.......................... 1,095 9 539 13 90 12
Commercial.............................. 192 4 5,618 6 185 5
Consumer................................ 151 3 323 4 421 8
--------- --- --------- --- --------- ---
Total Allowance for Loan Losses....... $ 3,744 100% $ 8,666 100% $ 1,730 100%
========= === ========= === ========= ===
At December 31,
-----------------------------------------------------------------------
2000 1999
------------------------------- -------------------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ------------- ------ --------------
(Dollars in thousands)
Loans:
Real Estate Mortgage:
Commercial.......................... $ 76 9% $ 58 7%
Residential......................... 635 71 649 73
Construction........................ 93 10 112 12
Commercial............................ 8 2 11 --
Consumer.............................. 677 8 704 8
----- --- ------- ---
Total Allowance for Loan Losses..... $ 1,489 100% $ 1,534 100%
===== === ===== ===
14
INVESTMENT ACTIVITIES
Interest and dividends on investment securities, mortgage-backed
securities, collateralized mortgage obligations, FHLB stock and other
investments provide the second largest source of income for the Bank (after
interest on loans), constituting 16.7% of the Bank's total interest income (and
dividends) for fiscal 2003. The Bank maintains its liquid assets at levels
believed adequate to meet requirements of normal banking activities and
potential savings outflows.
As an Indiana savings bank, the Bank is authorized to invest without
limitation in direct or indirect obligations of the United States, direct
obligations of a United States territory, an insular possession and direct
obligations of the state or a municipal corporation or taxing district in
Indiana. The Bank is also permitted to invest in bonds or other securities of a
national mortgage association and the stock and obligations of a Federal Home
Loan Bank. Indiana savings banks may also invest in collateralized mortgage
obligations to the same extent as national banks. An Indiana savings bank may
also purchase for its own account other investment securities under such limits
as the Department of Financial Institutions prescribes by rule provided that the
savings bank may not invest more than 10% of its equity capital in the
investment securities of any one issuer. Any Indiana savings bank may not invest
in speculative bonds, notes or other indebtedness which are defined as
securities and which are rated below the first four rating categories by a
generally recognized rating service or are in default. An Indiana savings bank
may purchase an unrated security if it obtains financial information adequate to
document the investment quality of the security.
The Bank's investment portfolio consists primarily of obligations issued by
federal agencies such as FNMA, FHLB and the FFCB System, mortgage-backed
securities issued by GNMA, FNMA and FHLMC. The Bank has also invested in
trust-preferred securities, municipal securities, mutual funds and maintains
interest-bearing deposits in other financial institutions (primarily the FHLBs).
As a member of the FHLB System, the Bank is also required to hold stock in the
FHLBs of Indianapolis and Cincinnati. At December 31, 2003, the Bank had two
investments which exceeded 10% of equity: securities issued by Shay Financial
Services, Inc. with book values of $5.1 million and $4.6 million and market
values of $5.0 million and $4.5 million as of that date.
15
During 2001, the Bank substantially increased its portfolio of
mortgage-backed securities and collateralized mortgage obligations to offset
declines in the loan portfolio due to refinancings and calls of federal agencies
securities attributable in both cases to the radically declining interest rate
environment. As interest rates stabilized at the end of 2001, the estimated
lives of these securities increased significantly, exposing the Bank to
unacceptable levels of interest rate risk. The Bank accordingly reclassified
these securities, effective December 31, 2001, from held-to-maturity to
available-for-sale and marked them to fair value, recording an accumulated other
comprehensive loss of $696,000. The Bank disposed of these mortgage-backed
securities and collateralized mortgage obligation portfolios in the first
quarter of 2002 at an estimated after-tax loss of $1.9 million. All investments,
as of December 31, 2003, was classified as available-for-sale.
The following table sets forth the carrying value of the Banks investments
in federal agency obligations and mortgage-backed securities, collaterized
mortgage obligations and other investments at the dates indicated.
At December 31,
-----------------------------------------
2003 2002 2001
------ ------ ------
(In thousands)
Federal agencies.......................... $ 78,423 $ 8,227 $ 28,696
Mortgage-backed securities and
collateral mortgage obligations........ 36,501 27,824 110,393
Interest-bearing deposits (1)............. 5,044 38,215 4,283
FHLB stock................................ 6,948 6,759 7,365
Mutual fund............................... 11,796 -- --
Municipal securities...................... 9,424 20,538 --
Other investments......................... 1,644 1,566 1,540
--------- --------- ---------
Total investments..................... $ 149,780 $ 103,129 $ 152,277
========= ========= =========
- ----------------------
(1) Consist of overnight deposits and short-term non-negotiable certificates of
deposit.
16
The following table sets forth information regarding maturity
distribution and average yields for the Bank's investment securities portfolio
at December 31, 2003. The Bank's federal agencies investment portfolio consists
of obligations issued by FHLMC, FHLB, and the FFCB System.
Within 1 Year 1-5 Years 5-10 Years Over 10 Years Total
------------- ------------ ------------ ------------- ------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Federal agencies......... $ 4,061 3.70% $74,362 2.98% -- -- -- -- $78,423 3.02%
Municipal Securities..... -- -- -- -- $3,205 3.46 $6,219 3.66% $ 9,424 3.59%
Mutual fund(1)........... $11,796 2.69% -- -- -- -- -- -- $11,796 2.69%
Trust preferred securities -- -- -- -- -- -- $1,644 8.09% $ 1,644 8.09%
(1) Note that these securities have no maturity date.
The Bank's mortgage-backed securities include both fixed and
adjustable-rate securities. At December 31, 2003, the Bank's mortgage-backed
securities consisted of the following:
Carrying Average
Amount Rate
-------- ------
(Dollars in thousands)
Variable-rate:
Repricing in one year or less........................... $ 2,923 3.45%
Fixed-rate:
Maturing in five years or less.......................... $ 17,822 2.84%
Maturing in five to ten years........................... $ 6,146 4.18%
Maturing in more than ten years......................... $ 9,610 5.65%
----------- ----
Total.............................................. $ 36,501 3.86%
=========== ====
SOURCES OF FUNDS
GENERAL. Savings accounts and other types of deposits have traditionally
been an important source of the Bank's funds for use in lending and for other
general business purposes. In addition to deposit accounts, the Bank derives
funds from loan repayments, loan sales, borrowings and operations. The
availability of funds from loan sales is influenced by general interest rates
and other market conditions. Borrowings may be used on a short-term basis to
compensate for reductions in deposits or deposit inflows at less than projected
levels and may be used on a longer-term basis to support expanded lending
activities.
DEPOSITS. The Bank attracts both short-term and long-term deposits from the
general public by offering a wide assortment of deposit accounts and interest
rates. The Bank offers regular savings accounts, NOW accounts, money market
accounts, fixed interest rate certificates with varying maturities, and
negotiated rate jumbo certificates
17
with various maturities. The Bank also offers tax-deferred individual
retirement, Keogh retirement, and simplified employer plan retirement accounts.
As of December 31, 2003, approximately 45.8%, or $158.5 million, of the
Bank's aggregate deposits consisted of various savings and demand deposit
accounts from which customers are permitted to withdraw funds at any time
without penalty.
Interest earned on passbook and statement accounts is paid from the date of
deposit to the date of withdrawal and compounded semi-annually for the Bank.
Interest earned on NOW and money market deposit accounts is paid from the date
of deposit to the date of withdrawal and compounded and credited monthly.
Management establishes the interest rate on these accounts.
The Bank also makes available to its depositors a number of certificates of
deposit with various terms and interest rates to be competitive in its market
area. These certificates have minimum deposit requirements as well.
18
The following table sets forth the change in dollar amount of deposits in
the various types of deposit accounts offered by the Bank between the dates
indicated.
Increase Increase
Balance at (Decrease) Balance at (Decrease) Balance at
December 31, From Prior December 31, From Prior December 31,
2003 Year 2002 Year 2001
------------------ ---------- ----------------- ------------ ------------------
(Dollars in thousands)
Savings deposits.................... $ 30,558 8.84% $ (3,432) $ 33,990 8.45% $ 1,343 $ 32,647 7.92%
NOW accounts........................ 43,162 12.48 3,818 39,344 9.78 (1,297) 40,641 9.85
Super NOW accounts.................. 36,545 10.57 36,545 -- -- -- -- --
Money market deposit accounts....... 48,238 13.95 (12,889) 61,127 15.20 13,441 47,686 11.56
Certificate accounts:
Certificates $100,000 and more.... 27,212 7.87 (18,298) 45,510 11.32 (14,853) 60,363 14.64
Fixed-rate certificates:
12 months or less.............. 49,837 14.42 (16,493) 66,330 16.49 4,792 61,538 14.92
13-24 months................... 42,705 12.35 (16,107) 58,812 14.62 (38,221) 97,033 23.53
25-36 months................... 14,228 4.12 7,036 7,192 1.79 (593) 7,785 1.89
37 months or greater........... 51,140 14.79 (36,465) 87,605 21.78 25,423 62,182 15.08
Variable-rate certificates:
18 months...................... 2,119 0.61 (158) 2,277 0.57 (261) 2,538 0.61
---------- ------ --------- -------- ------ --------- --------- ------
$ 345,744 100.00% $ (56,443) $402,187 100.00% $ (10,226) $ 412,413 100.00%
========== ====== ========= ======== ====== ========= ========= ======
19
The variety of deposit accounts offered by the Bank has permitted it to be
competitive in obtaining funds and has allowed it to respond with flexibility
to, but without eliminating the threat of, disintermediation (the flow of funds
away from depository institutions such as savings institutions into direct
investment vehicles such as government and corporate securities). In addition,
the Bank has become much more subject to short-term fluctuation in deposit
flows, as customers have become more interest rate conscious. The ability of the
Bank to attract and maintain deposits and its costs of funds have been, and will
continue to be, significantly affected by money market conditions. The Bank
currently offers a variety of deposit products as options to the customer. They
include noninterest-bearing and interest-bearing NOW accounts, interest-bearing
Super NOW accounts, savings accounts, Money Market Deposit Accounts ("MMDA") and
Certificates of Deposit ranging in terms from three months to seven years. In
September of 2003, the Bank sold its Cincinnati branch locations. This sale
included $38.3 million in Certificates of Deposits and $17.3 million in
checking, savings and money market deposit accounts. The Bank introduced a Super
NOW account in 2003 which had a portfolio balance of $36.5 million at December
31, 2003.
The following table sets forth the Bank's average aggregate balances and
interest rates. Average balances in 2003 and 2002 are calculated from actual
daily balances. Average balances for 2001 are derived from balances which
management does not believe are materially different from daily balances (actual
daily balances could not be obtained without undue effort and expense).
For the Year Ended December 31,
2003 2002 2001
--------------------- ---------------------- ----------------------
Average Average Average
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
------- ------- ------- ------- ------- -------
(Dollars in thousands)
Interest-bearing demand
deposits.................... $ 103,179 1.47% $ 78,490 2.01% $ 60,791 2.93%
Savings deposits............... 33,951 .69 34,003 1.16 33,321 1.68
Time deposits.................. 236,887 3.34 284,259 4.48 276,924 5.89
---------- ----- ---------- ----- ---------- ----
Total interest bearing
deposits............... 374,017 2.58% 396,752 3.71% 371,036 5.03%
===== ===== ====
Non-interest-bearing demand
and savings deposits........ 22,439 19,448 16,494
---------- ---------- ----------
Total deposits............ $ 396,456 $ 416,200 $ 387,530
========== ========== ==========
20
The following table sets forth the aggregate time deposits in the Bank
classified by rates as of the dates indicated.
At December 31,
--------------------------------------------
2003 2002 2001
------ ------ ------
(In thousands)
Less than 2%.............................. $ 77,121 $ 24,693 $ 12,984
2% - 3.99%............................... 75,293 129,697 54,762
4% - 5.99%............................... 33,448 52,644 105,139
6% - 7.99%............................... 1,379 60,692 118,554
--------- --------- ---------
$ 187,241 $ 267,726 $ 291,439
========= ========= =========
The following table sets forth the amount and maturities of the Bank's time
deposits at December 31, 2003.
Amount Due
----------------------------------------------------------------------------
Less Than More Than
Rate One Year 1-2 Years 2-3 Years 3 Years Total
---- -------- --------- --------- --------- -----
(In thousands)
Less than 2%.................... $ 68,151 $ 8,914 $ 56 $ -- $ 77,121
2% - 3.99%...................... 32,802 5,645 12,600 24,246 75,293
4% - 5.99%...................... 5,360 12,491 8,533 7,064 33,448
6% - 7.99%...................... 436 849 47 47 1,379
--------- ---------- ---------- ---------- ----------
$ 106,749 $ 27,899 $ 21,236 $ 31,357 $ 187,241
========= ========== ========== ========== ==========
The following table indicates the amount of the Bank's certificates of
deposit and other deposits of $100,000 or more by time remaining until maturity
at December 31, 2003.
Savings, NOW
Certificates and MMDA
Maturity Period of Deposit Deposits
--------------- ------------ ------------
(In thousands)
Three months or less......................... $ 4,682 $ 66,156
Over three through six months................ 5,529 --
Over six through twelve months............... 4,941 --
Over twelve months........................... 12,060 --
--------- ----------
Total................................. $ 27,212 $ 66,156
========= ==========
21
BORROWINGS. Deposits are the primary sources of funds for the Bank's
lending and investment activities and for its general business purposes. The
Bank also uses advances (borrowings) from the Federal Home Loan Bank ("FHLB") to
supplement its supply of lendable funds, to meet deposit withdrawal requirements
and to extend the terms of its liabilities. FHLB advances are typically secured
by the Bank's FHLB stock, a portion of first mortgage loans, investment
securities and overnight deposits. At December 31, 2003, the Bank had $9.6
million of FHLB advances outstanding.
The FHLB's function as central reserve banks providing credit for savings
institutions and certain other member financial institutions. As a member, the
Bank is required to own capital stock in its FHLB and is authorized to apply for
advances on the security of such stock and certain of its home mortgages and
other assets (principally, securities which are obligations of, or guaranteed
by, the United States) provided certain standards related to creditworthiness
have been met.
The Company had a note payable to a third party financial institution with
a current balance of $600,000 and bearing interest at 3.50% at December 31,
2003, the proceeds of which were used to finance stock repurchases during 1999.
The following table sets forth certain information regarding borrowings
from the FHLBs at the dates and for the periods indicated.
At or for the Year
Year Ended December 31,
--------------------------------------------
2003 2002 2001
------ ------ --------
(Dollars in thousands)
Amounts outstanding at end of period:
FHLB advances........................................ $ 9,630 $ 5,592 $ 87,653
Weighted average rate paid on:
FHLB advances........................................ 5.38% 6.83% 5.51%
Maximum amount of borrowings outstanding at any month end:
FHLB advances........................................ $ 9,698 $ 75,105 $ 128,497
Approximate average amounts outstanding:
FHLB advances........................................ $ 5,829 $ 43,813 $ 84,080
Approximate weighted average rate paid on:
FHLB advances........................................ 6.57% 6.39% 6.50%
22
AVERAGE BALANCE SHEET
The following table sets forth certain information relating to the
Company's aggregate average yield on assets and average cost of liabilities for
the periods indicated. Such yields and costs are derived by dividing income or
expenses by the average balance of assets or liabilities, respectively, for the
periods presented. Average balances for 2003 and 2002 are calculated from actual
daily balances. Average balances for 2001 are derived from balances which
management does not believe are materially different from daily balances (actual
daily balances could not be obtained without undue effort and expense).
For the Year Ended December 31,
----------------------------------------------------------------------------------------------
2003 2002 2001
----------------------------- ------------------------------- ------------------------------
Average Average Average
Average Interest/ Yield/ Average Interest/ Yield/ Average Interest/ Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost
------- --------- ------- ------- --------- ------- ------- --------- -------
(Dollars in thousands)
Interest-earning assets:
Loan portfolio.................. $267,119 $19,241 7.20% $ 342,240 $24,473 7.15% $376,157 $ 30,005 7.98%
Mortgage-backed securities...... 34,187 1,109 3.24 56,644 3,196 5.64 31,768 2,225 7.00
Short-term investments and other
interest-earning assets (1).... 101,941 2,746 2.69 74,610 2,304 3.09 74,186 4,940 6.66
-------- ------- ----- --------- ------- ----- -------- --------- -----
Total interest-earning assets 403,247 23,096 5.73 473,494 29,973 6.33 482,111 37,170 7.71
Noninterest-earning assets....... 49,247 40,566 42,722
-------- --------- --------
Total assets................. $452,494 $ 514,060 $ 524,833
======== ========= =========
Interest-bearing liabilities:
Deposits....................... $374,017 $ 9,656 2.58 $ 396,752 $14,712 3.71 $371,036 18,663 5.03%
FHLB advances.................. 5,829 383 6.57 43,813 2,798 6.39 84,080 5,466 6.50
Notes payable.................. 683 27 3.95 841 31 3.69 1,562 114 7.30
-------- ------- ----- --------- ------- ----- -------- --------- -----
Total interest-bearing
liabilities 380,529 10,066 2.65 441,406 17,541 3.97 456,678 24,243 5.31
------- ----- ------- ----- --------- -----
Noninterest-bearing liabilities.. 32,967 30,621 25,549
-------- --------- --------
Total liabilities............ 413,496 472,027 482,227
Shareholders' equity............. 38,998 42,033 42,606
-------- --------- --------
Total liabilities and
shareholders' equity....... $452,494 $ 514,060 $524,833
======== ========= ========
Net interest income.............. $13,030 $12,432 $ 12,927
======= ======= =========
Interest rate spread............. 3.08% 2.36% 2.40%
===== ===== =====
Net yield on interest-earning assets 3.23% 2.63% 2.68%
===== ===== =====
Ratio of average interest-earning
assets to average interest-bearing
liabilities.................... 105.97% 107.27% 105.57%
====== ====== ======
- --------------------
(1) Includes interest-bearing deposits in other financial institutions,
investment securities and FHLB stock.
23
TRUST ACTIVITIES
During 1999, the Bank began offering trust, investment and estate planning
services through its Ameriana Trust and Investment Management Services division.
Trust services consist of personal trusts, testamentary trusts, investment
agency accounts (discretionary and directed), guardianships, rollover IRA's
(discretionary and directed) and estates (personal representative). These
accounts are offered to customers within the Bank's service areas in Indiana.
Trust account balances of $75,000 and more can profitably be managed by the
Bank. At December 31, 2003, the Bank had $15.6 million in trust assets under
management.
SUBSIDIARY ACTIVITIES
The Bank has three direct wholly-owned subsidiaries; AFS, AIS and AIMI.
At December 31, 2003, the Bank's investments in its subsidiaries were
approximately $137.8 million, consisting of direct equity investments.
Indiana savings banks may acquire or establish subsidiaries that engage in
activities permitted to be performed by the savings bank itself or permitted to
operating subsidiaries of national banks. Under FDIC regulations, a subsidiary
of a state bank may not engage as principal in any activity that is not of a
type permissible for a subsidiary of a national bank unless the FDIC determines
that the activity does not impose a significant risk to the affected insurance
fund.
24
COMPETITION
The Bank experiences substantial competition both in attracting and
retaining savings deposits and in the making of mortgage and other loans. Direct
competition for savings deposits comes from other savings institutions,
commercial banks, and credit unions located in the Bank's market area.
Additional significant competition for savings deposits comes from money market
mutual funds and corporate and government debt securities.
The primary factors in competing for loans are interest rates and loan
origination fees and the range of services offered by the various financial
institutions. Competition for origination of real estate loans normally comes
from other thrift institutions, commercial banks, mortgage bankers, mortgage
brokers and insurance companies. The Bank has been able to compete effectively
in its market area.
The Bank has branch offices in Henry, Hancock, Hendricks, Shelby and
Madison Counties in Indiana. In addition to savings banks with offices in these
counties, the Bank competes with several commercial banks and savings
institutions in surrounding counties, many with assets which are substantially
larger than the Bank.
REGULATION AND SUPERVISION
REGULATION AND SUPERVISION OF THE COMPANY
GENERAL. The Company is a public company registered with the Securities and
Exchange Commission (the "SEC"), whose common stock trades on the Nasdaq Stock
Market, Inc. (the "Nasdaq") and it is a bank holding company subject to
regulation by the Federal Reserve Board under the BHCA. As a result, the
activities of the Company are subject to certain requirements and limitations,
which are described below. As a public reporting company, the Company is
required to file annual, quarterly and current reports with the SEC and as a
bank holding company, the Company is required to file annual and quarterly
reports with the Federal Reserve Board and to furnish such additional
information as the Federal Reserve Board may require pursuant to the BHCA. The
Company is also subject to regular examination by the Federal Reserve Board.
DIVIDENDS. The Federal Reserve Board has the power to prohibit dividends by
bank holding companies if their actions constitute unsafe or unsound practices.
The Federal Reserve Board has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the Federal Reserve Board's
view that a bank holding company should pay cash dividends only to the extent
that the company's net income for the past year is sufficient to cover both the
cash dividends and a rate of earnings retention that is consistent with the
company's capital needs, asset quality, and overall financial condition. The
Federal Reserve Board also indicated that it would be inappropriate for a bank
holding company experiencing serious financial problems to borrow funds to pay
25
dividends. Under the prompt corrective action regulations adopted by the Federal
Reserve Board pursuant to FDICIA, the Federal Reserve Board may prohibit a bank
holding company from paying any dividends if the holding company's bank
subsidiary is classified as "undercapitalized." See "Regulation and Supervision
of the Bank-- Prompt Corrective Regulatory Action."
STOCK REPURCHASES. As a bank holding company, the Company is required to
give the Federal Reserve Board prior written notice of any purchase or
redemption of its outstanding equity securities if the gross consideration for
the purchase or redemption, when combined with the net consideration paid for
all such purchases or redemptions during the preceding 12 months, is equal to
10% or more of the Company's consolidated net worth. The Federal Reserve Board
may disapprove such a purchase or redemption if it determines that the proposal
would violate any law, regulation, Federal Reserve Board order, directive, or
any condition imposed by, or written agreement with, the Federal Reserve Board.
This requirement does not apply to bank holding companies that are
"well-capitalized," "well-managed" and are not the subject of any unresolved
supervisory issues.
SARBANES-OXLEY ACT OF 2002 AND RELATED REGULATIONS. On July 30, 2002, the
Sarbanes-Oxley Act of 2002 ("SOX") was signed into law. SOX contains provisions
addressing corporate and accounting fraud which both amended the Securities
Exchange Act of 1934, as amended (the "Act") and directed the SEC to promulgate
rules. SOX provided for the establishment of a new Public Company Accounting
Oversight Board ("PCAOB"), to enforce auditing, quality control and independence
standards for firms that audit public reporting companies and will be funded by
fees from all public reporting companies. It is unlawful for any person that is
not a registered public accounting firm ("RPAF") to audit a public reporting
company. Under the Act, a RPAF is prohibited from performing statutorily
mandated audit services for a company if such company's chief executive officer,
chief financial officer, comptroller, chief accounting officer or any person
serving in equivalent positions has been employed by such firm and participated
in the audit of such company during the one-year period preceding the audit
initiation date. The SEC has prescribed rules requiring inclusion of an internal
control report and assessment by management in the annual report to
shareholders. SOX requires the RPAF that issues the audit report to attest to
and report on management's assessment of the Company's internal controls. In
addition, SOX requires that each financial report required to be prepared in
accordance with (or reconciled to) generally accepted accounting principles and
filed with the SEC reflect all material correcting adjustments that are
identified by a RPAF in accordance with generally accepted accounting principles
and the rules and regulations of the SEC. SOX requires chief executive officers
and chief financial officers, or their equivalent, to certify to the accuracy of
periodic reports
26
filed with the SEC, subject to civil and criminal penalties if they knowingly or
willfully violate this certification requirement.
SOX also increases the oversight and authority of audit committees of
publicly traded companies. SOX imposed higher standards for auditor independence
and restricts provisions of consulting services by auditing firms to companies
they audit. Any non-audit services (subject to a 5% de minimis exception) being
provided to an audit client require pre-approval by the Company's audit
committee members. Audit committee members must be independent and are barred
from accepting consulting, advisory or other compensatory fees from the issuer.
In addition, all public reporting companies must disclose whether at least one
member of the committee is an audit committee "financial expert" (as such terms
is defined by the SEC rules) and if not, why not. Audit committees of Company's
listed on the Nasdaq must be composed of three directors who meet the definition
of "independent" set forth both in NASD Rule 4200(a)(15) and Section 10A(m) and
Rule 10A-3 of the Act, and whose audit committee has a written charter
containing specific elements set forth in these same NASD and SEC rules and
sections. A Company with stock quoted on the Nasdaq that fails to be in
compliance with these audit committee requirements, as well as additional Nasdaq
requirements, will be delisted.
Due to SOX, longer prison terms will be applied to corporate executives who
violate federal securities laws, the period during which certain types of suits
can be brought against a company or its officers has been extended, and bonuses
issued to top executives prior to restatement of a company's financial
statements are now subject to disgorgement if such restatement was due to
corporate misconduct. Executives are also prohibited from trading during
retirement plan "blackout" periods, and loans to company executives are
restricted. In addition, a provision directs that civil penalties levied by the
SEC as a result of any judicial or administrative action under the Act be
deposited in a fund for the benefit of harmed investors.
Although the Company anticipates it will incur additional expense in
complying with the provisions of the Act and the related rules, management does
not expect that such compliance will have a material impact on the Company's
financial condition or results of operations.
ACQUISITIONS. With certain exceptions, the BHCA prohibits a bank holding
company from acquiring direct or indirect ownership or control of more than 5%
of the voting shares of a company that is not a bank or a bank holding company,
or from engaging directly or indirectly in activities other than those of
banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities, which, by statute or by Federal Reserve Board regulation or
order, have been identified
27
as activities closely related to the business of banking. The activities of the
Company are subject to these legal and regulatory limitations under the BHCA and
the related Federal Reserve Board regulations. Notwithstanding the Federal
Reserve Board's prior approval of specific non-banking activities, the Federal
Reserve Board has the power to order a holding company or its subsidiaries to
terminate any activity, or to terminate its ownership or control of any
subsidiary, when it has reasonable cause to believe that the continuation of
such activity or such ownership or control constitutes a serious risk to the
financial safety, soundness or stability of any bank subsidiary of that holding
company.
Under Indiana banking law, prior approval of the Indiana Department of
Financial Institutions is also required before any person may acquire control of
an Indiana stock savings bank, bank or bank holding company. The Department will
issue a notice approving the transaction if it determines that the persons
proposing to acquire the savings bank or bank holding company are qualified in
character, experience and financial responsibility, and the transaction does not
jeopardize the interests of the public.
FINANCIAL MODERNIZATION LEGISLATION. On November 12, 1999, legislation was
enacted which could have a far-reaching impact on the financial services
industry. The Gramm-Leach-Bliley Act ("GLB") authorizes affiliations between
banking, securities and insurance firms and authorizes bank holding companies
and national banks to engage in a variety of new financial activities. Among the
new activities that will be permitted to bank holding companies are securities
and insurance brokerage, securities underwriting, insurance underwriting and
merchant banking. The Federal Reserve Board, in consultation with the Secretary
of the Treasury, may approve additional financial activities. The GLB, however,
prohibits future acquisitions of existing unitary savings and loan holding
companies by firms which are engaged in commercial activities and limits the
permissible activities of unitary holding companies formed after May 4, 1999.
CAPITAL REQUIREMENTS. The Federal Reserve Board has adopted guidelines
regarding the capital adequacy of bank holding companies, which require bank
holding companies to maintain specified minimum ratios of capital to total
assets and capital to risk-weighted assets. See "--Regulation and Supervision of
Banks - Capital Requirements."
REGULATION AND SUPERVISION OF THE BANK
GENERAL. The Bank is subject to extensive regulation by the Indiana
Department of Financial Institutions ("DFI") and the FDIC. The lending
activities and other investments of the Bank must comply with various regulatory
requirements. The DFI and FDIC periodically examine the Bank for compliance with
various regulatory
28
requirements. The Bank must file reports with the DFI and the FDIC describing
its activities and financial condition. The Bank is also subject to certain
reserve requirements promulgated by the Federal Reserve Board. This supervision
and regulation is intended primarily for the protection of depositors. Certain
of these regulatory requirements are referred to below or appear elsewhere
herein.
CAPITAL REQUIREMENTS. Under FDIC regulations, state-chartered banks that
are not members of the Federal Reserve System are required to maintain a minimum
leverage capital requirement consisting of a ratio of Tier 1 capital to total
assets of 3% if the FDIC determines that the institution is not anticipating or
experiencing significant growth and has well-diversified risk, including no
undue interest rate risk exposure, excellent asset quality, high liquidity, good
earnings and in general a strong banking organization, rated composite 1 under
the Uniform Financial Institutions Rating System (the CAMELS rating system)
established by the Federal Financial Institutions Examination Council. For all
but the most highly rated institutions meeting the conditions set forth above,
the minimum leverage capital ratio is 3% plus an additional "cushion" amount of
at least 100 to 200 basis points with a minimum leverage capital requirement of
not less than 4%. Tier 1 capital is the sum of common stockholders' equity,
noncumulative perpetual preferred stock (including any related surplus) and
minority interests in consolidated subsidiaries, minus all intangible assets
(other than certain mortgage servicing assets, purchased credit card
relationships, credit-enhancing interest-only strips and certain deferred tax
assets) minus identified losses, investments in certain financial subsidiaries
and nonfinancial equity investments.
In addition to the leverage ratio (the ratio of Tier I capital to total
assets), state-chartered nonmember banks must maintain a minimum ratio of
qualifying total capital to risk-weighted assets of at least 8% of which at
least four percentage points must be Tier 1 capital. Qualifying total capital
consists of Tier 1 capital plus Tier 2 or supplementary capital items. Tier 2
capital items include allowances for loan losses in an amount of up to 1.25% of
risk-weighted assets, cumulative preferred stock and preferred stock with a
maturity of over 20 years, certain other capital instruments and up to 45% of
pretax net unrealized holding gains on equity securities. The includable amount
of Tier 2 capital cannot exceed the institution's Tier 1 capital. Qualifying
total capital is further reduced by the amount of the bank's investments in
banking and finance subsidiaries that are not consolidated for regulatory
capital purposes, reciprocal cross-holdings of capital securities issued by
other banks, most intangible assets and certain other deductions. Under the FDIC
risk-weighted system, all of a bank's balance sheet assets and the credit
equivalent amounts of certain off-balance sheet items are assigned to one of
four broad risk weight categories from 0% to 100%, based on the risks inherent
in the type of assets or item. The aggregate dollar amount of each category
29
is multiplied by risk weight assigned to that category. The sum of these
weighted values equals the bank's risk-weighted assets.
At December 31, 2003, the Bank's ratio of Tier 1 capital to total assets
was 9.38%, its ratio of Tier 1 capital to risk-weighted assets was 15.17% and
its ratio of total risk-based capital to risk-weighted assets was 16.42%.
During the second quarter of 2002, the Bank entered into a memorandum of
understanding ("MOU") with the FDIC and the DFI. Among other things, the MOU
required the Bank to adopt written action plans with respect to certain
classified assets, revise its lending policies in accordance with examiner
recommendations, require greater financial information from borrowers, establish
a loan review program, document Board review of the adequacy of loan losses,
formulate a plan for improving the Bank's profitability, review staffing needs
with particular emphasis on loan administration, strengthen certain internal
controls and audit coverage and address other regulatory compliance issues
raised in the most recent examination report by the FDIC and DFI. While the MOU
is in effect, the Bank must maintain Tier 1 capital at or above 7% of assets.
The Company's Board of Directors have adopted resolutions providing that
the Company will not cause the Bank to pay dividends if its Tier 1 capital would
be less than 7% thereafter, that the Company will not incur additional debt
without prior Federal Reserve approval, and that the Company will not purchase
any treasury stock. The resolutions remain in effect until the MOU is lifted.
The Company believes that the Company and the Bank have taken all actions
specified in the MOU and Board resolutions within the timeframes specified. The
Company does not believe the MOU or Board resolutions will materially affect the
operations of the Company or the Bank. A failure to comply with either the MOU
or resolutions could lead to the initiation of formal enforcement action by the
FDIC, DFI and the Federal Reserve.
DIVIDEND LIMITATIONS. The Bank may not pay dividends on its capital stock
if its regulatory capital would thereby be reduced below the amount then
required for the liquidation account established for the benefit of certain
depositors of the Bank at the time of its conversion to stock form. In addition,
the Bank may not pay dividends that exceed retained net income for the
applicable calendar year to date, plus retained net income for the preceding two
years without prior approval from the DFI. The Company's Board of Directors have
also resolved not to cause the Bank to pay dividends if its Tier 1 capital would
be less than 7% thereafter. At December 31, 2003, the shareholder's equity of
the Bank was $38.3 million and approval is required by the Indiana Department of
Financial Institutions to pay dividends to the Company.
30
Earnings of the Bank appropriated to bad debt reserves and deducted for
Federal income tax purposes are not available for payment of cash dividends or
other distributions to stockholders without payment of taxes at the then current
tax rate by the Bank on the amount of earnings removed from the reserves for
such distributions. See "Federal and State Taxation."
Under FDIC regulations, the Bank is prohibited from making any capital
distributions if after making the distribution, the Bank would have: (i) a total
risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-based capital
ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0%. For
additional information about dividend limitations see Note 12 in the
Consolidated Financial Statements.
DEPOSIT INSURANCE. The Bank is required to pay assessments to the FDIC for
insurance of its deposits by the SAIF based on a percentage of its insured
deposits. Under the FDIA, the FDIC is required to set semi-annual assessments
for SAIF-insured institutions at a rate determined by the FDIC to be necessary
to maintain the designated reserve ratio of the SAIF at 1.25% of estimated
insured deposits or at a higher percentage of insured deposits that the FDIC
determines to be justified for that year by circumstances raising a significant
risk of substantial future losses to the SAIF. In the event that the SAIF should
fail to meet its statutory reserve ratio, the FDIC would be required to set
semi-annual assessment rates for SAIF members that are sufficient to increase
the reserve ratio to 1.25% within one year or in accordance with such other
schedule that the FDIC adopts by regulation to restore the reserve ratio in not
more than 15 years.
The assessment rate for an insured depository institution is determined by
the assessment risk classification assigned to the institution by the FDIC based
on the institution's capital level and supervisory evaluations. Based on the
data reported to regulators for date closest to the last day of the fourth month
preceding the semi-annual assessment period, institutions are assigned to one of
three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as in the prompt
corrective action regulations. See "-- Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund.
The FDIC has adopted an assessment schedule for SAIF deposit insurance
pursuant to which the assessment rate for well-capitalized institutions with the
highest supervisory ratings have been reduced to zero and institutions in the
worst risk assessment classification will be assessed at the rate of 0.27% of
insured deposits. At
31
December 31, 2003, the Bank is considered well capitalized. In addition,
FDIC-insured institutions are required to pay assessments to the FDIC to help
fund interest payments on certain bonds issued by the Financing Corporation
("FICO"), an agency of the federal government established to finance takeovers
of insolvent thrifts.
PROMPT CORRECTIVE REGULATORY ACTION. Under FDICIA, the federal banking
regulators are required to take prompt corrective action if an insured
depository institution fails to satisfy certain minimum capital requirements,
including a leverage limit, a risk-based capital requirement, and any other
measure deemed appropriate by the federal banking regulators for measuring the
capital adequacy of an insured depository institution. All institutions,
regardless of their capital levels, are restricted from making any capital
distribution or paying any management fees if the institution would thereafter
fail to satisfy the minimum levels for any of its capital requirements. An
institution that fails to meet the minimum level for any relevant capital
measure (an "undercapitalized institution") may be: (i) subject to increased
monitoring by the appropriate federal banking regulator; (ii) required to submit
an acceptable capital restoration plan within 45 days; (iii) subject to asset
growth limits; and (iv) required to obtain prior regulatory approval for
acquisitions, branching and new lines of businesses. The capital restoration
plan must include a guarantee by the institution's holding company that the
institution will comply with the plan until it has been adequately capitalized
on average for four consecutive quarters, under which the holding company would
be liable up to the lesser of 5% of the institution's total assets or the amount
necessary to bring the institution into capital compliance as of the date it
failed to comply with its capital restoration plan. A "significantly
undercapitalized" institution, as well as any undercapitalized institution that
does not submit an acceptable capital restoration plan, may be subject to
regulatory demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits,
asset growth and other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank holding company
controlling the institution. Any company controlling the institution may also be
required to divest the institution or the institution could be required to
divest subsidiaries. The senior executive officers of a significantly
undercapitalized institution may not receive bonuses or increases in
compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt. In their
discretion, the federal banking regulators may also impose the foregoing
sanctions on an undercapitalized institution if the regulators determine that
such actions are necessary to carry out the purposes of the prompt corrective
provisions. If an institution's ratio of tangible capital to total assets falls
below the "critical capital level"
32
established by the appropriate federal banking regulator, the institution will
be subject to conservatorship or receivership within specified time periods.
Under the implementing regulations, the federal banking regulators
generally measure an institution's capital adequacy on the basis of its total
risk-based capital ratio (the ratio of its total capital to risk-weighted
assets), Tier 1 risk-based capital ratio (the ratio of its core capital to
risk-weighted assets) and leverage ratio (the ratio of its core capital to
adjusted total assets). The following table shows the capital ratios required
for the various prompt corrective action categories.
Adequately Significantly
Well Capitalized Capitalized Undercapitalized Undercapitalized
---------------- ----------- ---------------- ----------------
Total risk-based
capital ratio 10.0% or more 8.0% or more Less than 8.0% Less than 6.0%
Tier 1 risk-based
capital ratio 6.0% or more 4.0% or more Less than 4.0% Less than 3.0%
Leverage ratio 5.0% or more 4.0% or more * Less than 4.0% * Less than 3.0%
- -----------
* 3.0% if institution has a composite 1 CAMELS rating.
A "critically undercapitalized" institution is defined as an institution that
has a ratio of "tangible equity" to total assets of less than 2.0%. Tangible
equity is defined as core capital plus cumulative perpetual preferred stock (and
related surplus) less all intangible assets other than qualifying supervisory
goodwill and certain purchased mortgage servicing rights. The FDIC may
reclassify a well capitalized depository institution as adequately capitalized
and may require an adequately capitalized or undercapitalized institution to
comply with the supervisory actions applicable to institutions in the next lower
capital category (but may not reclassify a significantly undercapitalized
institution as critically undercapitalized) if the FDIC determines, after notice
and an opportunity for a hearing, that the savings institution is in an unsafe
or unsound condition or that the institution has received and not corrected a
less-than-satisfactory rating for any CAMELS rating category.
SAFETY AND SOUNDNESS GUIDELINES. Under FDICIA, as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each federal banking agency was required to establish safety and soundness
standards for institutions under its authority. The interagency guidelines
require depository institutions to maintain internal controls and information
systems and internal audit systems that are appropriate for the size, nature and
scope of the institution's business. The guidelines also establish certain basic
standards for loan documentation, credit underwriting, interest rate risk
exposure, and asset growth. The guidelines further provide that depository
institutions should maintain safeguards to prevent the payment of compensation,
fees and benefits that are excessive or that could lead to material financial
loss, and should take into account factors such as comparable compensation
practices at comparable institutions. If the appropriate federal banking agency
determines
33
that a depository institution is not in compliance with the safety
and soundness guidelines, it may require the institution to submit an acceptable
plan to achieve compliance with the guidelines. A depository institution must
submit an acceptable compliance plan to its primary federal regulator within 30
days of receipt of a request for such a plan. Failure to submit or implement a
compliance plan may subject the institution to regulatory sanctions. Management
believes that the Bank meets all the standards adopted in the interagency
guidelines.
RESERVE REQUIREMENTS. Under Federal Reserve Board regulations, the Bank
currently must maintain average daily reserves equal to 3% of net transaction
accounts over $6.0 million up to $42.1 million, plus 10% on the remainder. This
percentage is subject to adjustment by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or in a
noninterest-bearing account at a Federal Reserve Bank, the effect of the reserve
requirement is to reduce the amount of the institution's interest-earning
assets. At December 31, 2003, the Bank met applicable Federal Reserve Board
reserve requirements.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the Federal Home
Loan Bank System, which consists of 12 regional Federal Home Loan Banks governed
and regulated by the Federal Housing Finance Board ("FHFB"). As a member, the
Bank is required to purchase and hold stock in the FHLB of Indianapolis in an
amount equal to the greater of 1% of its aggregate unpaid home loan balances at
the beginning of the year or an amount equal to 5% of FHLB advances outstanding,
whichever is greater. As of December 31, 2003, the Bank held stock in the FHLB
of Indianapolis in the amount $6.0 million was in compliance with the above
requirement.
The FHLB of Indianapolis serves as a reserve or central bank for the member
institutions within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of FHLB System. It makes loans
(i.e., advances) to members in accordance with policies and procedures
established by the FHLB System and the Board of Directors of the FHLB of
Indianapolis.
The Bank is also a member of the FHLB of Cincinnati due to remaining
borrowings after the merger of Ameriana-Ohio and the Bank. As of December 31,
2003, the Bank held stock in the FHLB of Cincinnati in the amount of $1.0
million and was in compliance with requirements of membership.
LOANS TO EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS. Loans to
directors, executive officers and principal stockholders of a state non-member
bank like the Bank must be made on substantially the same terms as those
prevailing for comparable transactions with persons who are not executive
officers, directors, principal stockholders or employees of the Bank unless the
loan is made pursuant to a compensation or benefit plan that is widely available
to employees and does not favor insiders. Loans to any executive officer,
director and
34
principal stockholder together with all other outstanding loans to such person
and affiliated interests generally may not exceed 15% of the bank's unimpaired
capital and surplus and all loans to such persons may not exceed the
institution's unimpaired capital and unimpaired surplus. Loans to directors,
executive officers and principal stockholders, and their respective affiliates,
in excess of the greater of $25,000 or 5% of capital and surplus (up to
$500,000) must be approved in advance by a majority of the board of directors of
the bank with any "interested" director not participating in the voting. State
non-member banks are prohibited from paying the overdrafts of any of their
executive officers or directors unless payment is made pursuant to a written,
pre-authorized interest-bearing extension of credit plan that specifies a method
of repayment or transfer of funds from another account at the bank. Loans to
executive officers may not be made on terms more favorable than those afforded
other borrowers and are restricted as to type, amount and terms of credit. In
addition, Section 106 of the BHCA prohibits extensions of credit to executive
officers, directors, and greater than 10% stockholders of a depository
institution by any other institution which has a correspondent banking
relationship with the institution, unless such extension of credit is on
substantially the same terms as those prevailing at the time for comparable
transactions with other persons and does not involve more than the normal risk
of repayment or present other unfavorable features.
TRANSACTIONS WITH AFFILIATES. A state non-member bank or its subsidiaries
may not engage in "covered transactions" with any one affiliate in an amount
greater than 10% of such bank's capital stock and surplus, and for all such
transactions with all affiliates a state non-member bank is limited to an amount
equal to 20% of capital stock and surplus. All such transactions must also be on
terms substantially the same, or at least as favorable, to the bank or
subsidiary as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
similar other types of transactions. An affiliate of a state non-member bank is
any company or entity which controls or is under common control with the state
non-member bank and, for purposes of the aggregate limit on transactions with
affiliates, any subsidiary that would be deemed a financial subsidiary of a
national bank. In a holding company context, the parent holding company of a
state non-member bank (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the state non-member
bank. The BHCA further prohibits a depository institution from extending credit
to or offering any other services, or fixing or varying the consideration for
such extension of credit or service, on the condition that the customer obtain
some additional service from the institution or certain of its affiliates or not
obtain services of a competitor of the institution, subject to certain limited
exceptions.
35
PATRIOT ACT. The Patriot Act is intended to strengthen U.S. law
enforcement's and the intelligence communities' abilities to work cohesively to
combat terrorism on a variety of fronts. The potential impact of the Patriot Act
on financial institutions of all kinds is significant and wide ranging. The
Patriot Act contains sweeping anti-money laundering and financial transparency
laws and imposes various regulations including standards for verifying client
identification at account opening, and rules to promote cooperation among
financial institutions, regulators and law enforcement entities in identifying
parties that may be involved in terrorism or money laundering.
36
INDIANA BANKING LAW
BRANCHING. An Indiana savings bank is entitled to establish one or more
branches de novo or by acquisition in any location or locations in Indiana. The
savings bank is required to file an application with the Department of Financial
Institutions. Approval of the application is contingent upon the Department's
determination that after the establishment of the branch, the savings bank will