<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------ EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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TRANSITIONAL 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
------------------------------------------
(Exact name of registrant as specified in its charter)
Indiana 35-1782688
- ------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2118 Bundy Avenue, New Castle, Indiana 47362-1048
- -------------------------------------- ---------------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (765) 529-2230
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Securities registered pursuant to Section 12(b) of the Act: None
------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
---------------------------------------
(Title of Class)
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]
The aggregate market value of the voting stock held by non-affiliates
of the registrant based on the closing sales price of the registrant's common
stock as quoted on the NASDAQ National Market System on March 17, 1998 was
$58,452,839 (for purposes of this calculation, directors and executive officers
are not treated as "non-affiliates").
As of March 17, 1998, there were issued and outstanding 3,252,015 shares of
the registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Shareholders for the Fiscal Year Ended
December 31, 1997 ("Annual Report") (Part II).
2. Portions of Proxy Statement for the 1998 Annual Meeting of Shareholders
("Proxy Statement") (Part III).
<PAGE>
PART I
Item 1. Business
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General
The Company. Ameriana Bancorp (the "Company") was incorporated under
Indiana law in August 1989 for the purpose of becoming the holding company for
Ameriana Savings Bank, F.S.B., New Castle, Indiana (the "Bank"). On March 19,
1990, the Company acquired all of the Bank's outstanding common stock, and each
previously outstanding share of the Bank's common stock became a share of the
Company's common stock, in connection with the Bank's reorganization into the
holding company form of ownership.
On August 31, 1992, the Company acquired all of the outstanding common
stock of Deer Park Financial Corporation ("DPFC"), the former holding company
for Deer Park Federal Savings and Loan Association, Cincinnati, Ohio (the
"Association"). Subsequently, DPFC was dissolved and liquidated into the
Company, leaving the Association as a direct subsidiary of the Company.
The Company holds all of the stock of the Bank and Association and,
through them, operates two separate savings institutions. The information in
this report, including financial statements and related information, as of the
dates and for the periods before August 31, 1992 primarily relates to the Bank
and its subsidiaries and as of the dates and for the periods after August 31,
1992 primarily relates to the Bank and Association and their subsidiaries. In
this report, the Bank and Association are collectively referred to as the
"Institutions". In addition, the Company owns Indiana Title Insurance Company,
which provides title insurance services in Central Indiana. In 1995, the Company
invested $1,458,849 in 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 is a federally chartered savings bank which began
operations in 1890. Since 1935, the Bank has been a member of the Federal Home
Loan Bank System, and its savings deposits have been federally insured. On
February 25, 1987, the Bank converted to a capital stock savings bank.
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The Bank's main office is located at 2118 Bundy Avenue, New Castle,
Indiana. It also conducts business through six branch offices located in New
Castle, Middletown, Knightstown, Greenfield, Anderson and Avon, Indiana. In
1995, the Bank purchased land in Avon, Indiana on which the Bank constructed a
new branch in 1996, which opened for business on January 22, 1997. The Bank,
through a wholly owned subsidiary, also operates an insurance agency with
offices in New Castle, Greenfield and Avon, Indiana, has an ownership interest
in a life insurance underwriting firm located in New Orleans, Louisiana, and
offers a full line of investments and securities products through its brokerage
center.
The business of the Bank consists primarily of attracting deposits from
the general public and originating mortgage loans on single family residences,
and to a lesser extent on multi-family housing and commercial property. The Bank
also makes home improvement loans and consumer loans and through its subsidiary
engages in insurance and brokerage activities. The principal sources of funds
for the Bank's lending activities include deposits received from the general
public, 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 engaged from time to time in purchasing 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 securities. The
Bank's principal expenses are interest paid on deposit accounts and operating
expenses incurred in the operation of the Bank.
The Association. The Association is a federally chartered savings and
loan association which began operations in 1915. The Association has been a
member of the Federal Home Loan Bank System since 1933, and its savings deposits
have been federally insured since 1952. On February 26, 1988, the Association
converted to a capital stock savings and loan association.
The Association's main office is located at 7200 Blue Ash Road,
Cincinnati, Ohio. The Association formerly operated a branch office in
Cincinnati, but, after regulatory approval, closed it on March 27, 1996. The
Association operated a loan production office which was opened in 1996 and
closed in December 1997. The Association's primary market area includes Deer
Park and nearby communities in Hamilton county, as well as adjoining Butler,
Clermont and Warren counties.
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The business of the Association consists primarily of attracting
deposits from the general public and originating permanent and construction
first mortgage loans on one- to four-family residences, as well as second
mortgage loans on such properties and other types of consumer loans. The
Association also invests in mortgage-backed securities. The principal sources of
funds for the Association's lending activities include deposits received from
the general public, principal amortization and prepayment of loans. The
Association's primary sources of income are interest and fees on loans and
interest on investments. The Association's principal expenses are interest paid
on deposit accounts and operating expenses.
Proposed Legislative Changes. Legislation has been introduced in
Congress that provides for the elimination of the distinctions between banks and
thrifts under federal law. The legislation may require the automatic conversion
of all federally chartered savings associations such as the Bank and Association
into national banks by a specified deadline. It could impose activities
restrictions and restrictions on branches, and it could also compel the holding
companies of such institutions to be subject to the more restrictive regulations
that govern holding companies of banks rather than thrifts. The legislation
could restrict current or future activities of the Bank, the Association and the
Company, and it could increase regulatory compliance costs because of the new
regulatory structure to which the Bank, the Association and the Company would be
subject. Management cannot predict at this time whether any pending legislation
ultimately will be enacted in its current form or, if enacted, whether such
legislation would result in any significant adverse financial and tax effects.
Lending and Investment Activities
General. The principal lending activity of the Institutions has been
the origination of conventional first mortgage loans secured by residential
property and to a lesser extent 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 Institutions 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, Delaware and Marion counties
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in the state of Indiana, and the majority of the Association's mortgage loan
portfolio is secured by real estate located in Hamilton, Butler, Clermont and
Warren counties in the state of Ohio.
During the loan approval process, the Institutions assess both the
borrower's ability to repay the loan and the adequacy of the underlying
security. Potential residential borrowers complete an application which is
submitted to a salaried loan officer. As part of the loan application process,
the Institutions obtain information concerning the income, financial condition,
employment and credit history of the applicant. In addition, qualified
appraisers inspect and appraise the property which is offered to secure the
loan.
The Bank's loan committee, consisting of certain officers of the Bank,
analyzes the loan application and the property to be used as collateral and
subsequently approves or denies the loan request. If the loan amount is less
than $300,000, it must be approved by a loan committee consisting of certain
members of management. Loans of $300,000 or more but less than $500,000 must be
approved by a committee consisting of certain members of senior management. The
Board of Directors must approve all loans in excess of $500,000. In connection
with the origination of single family residential adjustable-rate mortgages
("ARMs"), 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. The
Association's loan committee, consisting of authorized officers of the
Association, may approve loan applications up to $250,000. The Association's
Board of Directors reviews and approves loan applications in excess of $250,000.
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The following table sets forth information concerning the Company's
aggregate loans by type of loan and security at the dates indicated.
Mortgage-backed securities are not included in this table.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------
1997 1996 1995
-------------------- --------------------- ---------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Type of Loan:
Conventional real estate loans:
Non-residential loans............... $ 4,930 1.64% $ 3,096 1.07% $ 3,670 1.35%
Residential loans................... 255,591 85.06 240,948 83.58 230,992 84.69
Consumer Loans:
Mobile home and auto loans.......... 31,218 10.39 31,706 11.00 29,735 10.90
Education loans..................... -- -- -- -- -- --
Loans secured by deposits........... 1,308 .44 1,395 .48 1,318 .48
Home improvement loans.............. 5,629 1.87 5,645 1.96 56 .02
Other............................... 1,777 .59 5,486 1.90 6,947 2.55
Leases.............................. 19 .01 24 .01 29 .01
---------- ------ ---------- ------ ------- ------
Total............................ 300,472 100.00% 288,300 100.00% 272,747 100.00%
---------- ====== ---------- ====== ------- ======
Less:
Loans in process.................... 4,876 4,495 5,463
Deferred loan fees.................. 44 100 215
Loan loss reserve................... 1,163 1,104 1,076
---------- ---------- ----------
Sub Total.......................... 6,083 5,699 6,754
---------- ---------- ----------
Total............................. $ 294,389 $ 282,601 $ 265,993
========== ========== ==========
Type of Security:
Residential
Single Family (1-4 units)........... $ 252,153 83.92% $ 238,440 82.71% $ 227,045 83.24%
5 or more dwelling units............ 3,438 1.14 2,508 .87 3,947 1.45
Other improved real estate........... 4,930 1.16 3,096 1.07 3,670 1.35
Commercial or industrial leases...... 19 .01 24 .01 29 .01
Deposit accounts..................... 1,308 .44 1,395 .48 1,318 .48
Mobile home and auto................. 31,218 10.39 31,706 11.00 29,735 10.90
Other................................ 7,406 2.46 11,131 3.86 7,003 2.57
---------- ------ ---------- ------ ---------- ------
Total............................. 300,472 100.00% 288,300 100.00% 272,747 100.00%
---------- ====== ---------- ====== ---------- ======
Less:
Loans in process.................... 4,876 4,495 5,463
Deferred loan fees.................. 44 100 215
Loan loss reserve................... 1,163 1,104 1,076
---------- ---------- ----------
Sub Total.......................... 6,083 5,699 6,754
---------- ---------- ----------
Total............................. $ 294,389 $ 282,601 $ 265,993
========== ========== ==========
<CAPTION>
At December 31,
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1994 1993
--------------------- ---------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Type of Loan:
Conventional real estate loans:
Non-residential loans............... $ 5,795 2.18% $ 6,960 3.00%
Residential loans................... 237,579 89.34 214,111 92.33
Consumer Loans:
Mobile home and auto loans.......... 15,671 5.89 4,300 1.85
Education loans..................... 255 .10 200 .09
Loans secured by deposits........... 1,249 .47 1,521 .66
Home improvement loans.............. 109 .04 24 .01
Other............................... 5,231 1.97 4,628 2.00
Leases.............................. 39 .01 144 .06
---------- ------ --------- ------
Total............................ 265,928 100.00% 231,888 100.00%
---------- ====== --------- ======
Less:
Loans in process.................... 5,389 3,948
Deferred loan fees.................. 398 519
Loan loss reserve................... 1,022 968
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Sub Total.......................... 6,809 5,435
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Total............................. $ 259,119 $ 226,453
========== =========
Type of Security:
Residential
Single Family (1-4 units)........... $ 234,601 88.22% $ 210,604 90.82%
5 or more dwelling units............ 2,978 1.12 3,507 1.51
Other improved real estate........... 5,795 2.18 6,960 3.00
Commercial or industrial leases...... 39 .01 144 .06
Deposit accounts..................... 1,249 .47 1,521 .66
Mobile home and auto................. 15,671 5.89 4,300 1.85
Other................................ 5,595 2.11 4,852 2.10
---------- ------ --------- ------
Total............................. 265,928 100.00% 231,888 100.00%
---------- ====== --------- ======
Less:
Loans in process.................... 5,389 3,948
Deferred loan fees.................. 398 519
Loan loss reserve................... 1,022 968
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Sub Total.......................... 6,809 5,435
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Total............................. $ 259,119 $ 226,453
========== =========
</TABLE>
5
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The following table shows, at December 31, 1997, the Company's aggregate
loans based on their contractual terms to maturity (mortgage-backed securities
are not included). Demand loans, loans having no stated schedule of repayments
and no stated maturity, and overdrafts are reported as due in one year or less.
Contractual principal repayments of loans do not necessarily reflect the actual
term of the loan portfolio. The average life of mortgage loans is substantially
less than their contractual terms because of loan prepayments and because of
enforcement of due-on-sale clauses, which give the Institutions 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
----------------------------------------------
2003 and
1998 1999 - 2002 Thereafter Total
-------- ----------- ------------ -------
(In thousands)
Type of Loan:
Real estate mortgage...... $ 1,376 $ 12,539 $ 246,606 $ 260,521
Other..................... 422 35,105 4,424 39,951
---------- ---------- --------- ----------
Total................... $ 1,798 $ 47,644 $ 251,030 $ 300,472
========== ========== ========= ==========
The following table sets forth the dollar amount of the Company's aggregate
loans due after one year from December 31, 1997 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....... $ 77,090 $ 182,055 $ 259,145
Other loans...................... 39,196 333 39,529
---------- --------- ---------
Total.......................... $ 116,286 $ 182,388 $ 298,674
========== ========= =========
Residential Real Estate Lending. The Institutions' primary lending
activities are the origination of loans on one-to-four family residential
dwelling units. The Institutions currently offer fixed-interest-rate first
mortgage 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
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mortgage market. The fixed-rate second mortgage loans provide for a maturity of
ten years and bear interest at a rate slightly higher than that borne by the
first mortgage loans. At the time the Institutions make a fixed-rate mortgage
loan, they determine whether the loan will be held in portfolio or sold, based
primarily on the interest rate and term of the loan. Once placed in portfolio,
loans are not sold. Loans originated for sale are promptly sold in the secondary
market. Mortgage loans in the amount of $30.5 million were originated for sale
during 1997 and $29.9 million were sold at a gain of $500,816. 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.
The Institutions emphasize the origination of ARMs for portfolio. The
Institutions currently offer several types of ARMs either as first-lien mortgage
loans or as second-lien mortgage loans which are adjustable semi-annually,
annually, or on three-year or five-year intervals and indexed to the yields on
comparable United States Treasury securities.
The Institutions limit the maximum loan-to-value ratio on one-to-four
family residential first mortgages to 95% of the appraised value with the
requirement that private mortgage insurance be obtained for loan-to-value ratios
in excess of 80%. The Institutions limit the loan-to-value ratio to 80% on
second mortgages on one-to-four family dwellings.
The Institutions' 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 Institutions' lending activities to date. Multi-family
residential structures are generally income producing properties. The
Institutions generally do not lend above 75% of the appraised values of
multi-family residences on first mortgage loans or above 70% on second mortgage
loans (including in the 70% amount any first mortgage loan outstanding against
the property).
Construction and Commercial Real Estate Lending. The Institutions
originate loans secured by existing commercial properties and construction loans
on residential real estate. The Institutions' commercial real estate loans are
secured by churches, nursing homes, hotels/motels, and other income-producing
properties. The Institutions originate construction loans on single family
residential properties in their primary market areas, and during fiscal 1997
construction loan originations amounted to $22.6 million. 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 Institutions'
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construction loans generally range in size between $50,000 and $500,000, and the
Institutions' commercial real estate loans range from $100,000 to $1,000,000.
Substantially all of the commercial and construction loans originated by the
Institutions have either adjustable interest rates with maturities of 30 years
or less or are loans with fixed interest rates and maturities of five years or
less. At December 31, 1997, the Bank had $3.7 million in outstanding
construction loans; the Association had $654,000 in outstanding construction
loans.
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
Institutions have sought to minimize this risk by limiting construction lending
to qualified borrowers in their respective market areas and by limiting the
number of construction loans outstanding at any time to individual builders. In
addition, most of the Institutions' construction loans are made on homes which
are pre-sold, for which permanent financing is already arranged.
The Institutions' underwriting criteria are designed to evaluate and
minimize the risks of each construction loan. Among other things, the
Institutions consider 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; preconstruction sale and
leasing information; and cash flow projections of the borrower.
The aggregate amount of loans which a federally chartered savings
institution may make on the security of liens on non-residential real property
generally may not exceed 400% of the institution's regulatory capital. These
limits on non-residential real property lending have not materially affected the
Institutions' respective lending activities.
Consumer Loans. Federally chartered thrift institutions are authorized
to make secured and unsecured consumer loans up to 35% of the institution's
assets. In addition, a federal thrift institution has lending authority above
the 35% category for certain consumer loans, such as home equity loans, property
improvement loans, mobile home loans and loans secured by savings accounts. The
consumer loans granted by the Institutions have included loans on automobiles
and other consumer goods, as well as education loans, loans secured by savings
accounts, credit cards, and secured and unsecured lines of credit. In 1997, the
Company continued to emphasize the origination of automobile loans as part of
its strategic plan. Competitive rates in the market place, however, have
resulted in automobile loans
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decreasing $500,000 in 1997 after increasing $2.0 million in 1996. Such loans
are originated both directly with customers and through automobile dealers in
the Company's lending areas.
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 collectibility when
compared to traditional types of loans granted by thrift institutions such as
residential first mortgage loans. The Institutions have sought to reduce this
risk by primarily granting secured consumer loans.
Commercial Business Lending. Under laws and regulations enacted during
the past several years, the Institutions are permitted to make secured and
unsecured loans for commercial, corporate, business and agricultural purposes,
including issuing letters of credit and engaging in inventory financing and
commercial leasing activities. The aggregate outstanding amount of such loans
generally may not exceed 10% of the Institutions' respective assets. The
Institutions do not, as a common practice, make unsecured commercial loans. The
Bank entered asset-based commercial lending, primarily commercial leasing, in
1986 but discontinued originations in this type of lending during 1989. The Bank
sold a portion of its leasing portfolio during 1989 and plans to divest itself
of the remaining portfolio either through normal repayment or sale. The
remaining portfolio at December 31, 1997 was $19,383, net of unearned finance
charges.
Originations, Purchases and Sales. Historically, all residential and
commercial real estate loans have been originated directly by the Institutions
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. Commercial real estate and
construction loan originations have been obtained by direct solicitation.
Consumer loan originations are attributable to walk-in customers who have been
made aware of the Institutions' programs by advertising, as well as direct
solicitation.
The Institutions have 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 Institutions retain the
servicing of loans they sell, the Institutions retain responsibility for
collecting and remitting loan payments, inspecting the properties, making
certain insurance and tax
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payments on behalf of borrowers and otherwise servicing those loans. The
Institutions typically receive a fee of between .25% and .50% per annum of the
loans' principal amount for performing this service. During 1997, the Bank sold
loans that were being serviced totaling $53.7 million at a gain of $96,410 and
bought loans to be serviced totaling $25.9 million. At December 31, 1997, the
Institutions were servicing $117 million of loans for others. Sales have been
primarily to the FHLMC.
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 Institutions' respective local lending areas
which are more favorable to their investment requirements. Additionally,
purchases of loans may be made in order to diversify the Institutions' lending
portfolios. The Institutions' loan purchasing activities fluctuate
significantly. The servicing of purchased loans is generally performed by the
seller. In order to cover servicing costs, a portion of the interest being paid
by the borrower is retained by the servicer. In addition to whole loan
purchases, the Institutions also purchase participation interests in loans. Both
whole loans and participations are purchased on a yield basis. As of December
31, 1997, $7.8 million, or 2.6%, of the Institutions' aggregate loans consisted
of purchased loans which were serviced by others.
The following table shows aggregate loans originated, purchased and
sold by the Company during the periods indicated.
Year Ended December 31,
---------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
Loans Originated:
Conventional real estate loans:
Construction loans..................... $ 22,607 $ 14,885 $ 12,616
Loans on existing property............. 28,508 32,115 17,733
Loans refinanced....................... 37,846 42,178 16,882
Other loans............................. 32,988 29,275 34,769
---------- ---------- ----------
Total loans originated................ 121,949 118,453 82,000
---------- ---------- ----------
Loans Purchased:
Real estate loans:
Conventional........................... 3,710 -- --
Mortgage-backed securities............. -- 2,532 4,964
---------- ---------- ----------
Total loans purchased................. 3,710 2,532 4,964
---------- ---------- ----------
Total loans originated and purchased..... $ 125,659 $ 120,985 $ 86,964
========== ========== ==========
Mortgage loans and leases sold........... $ 29,862 $ 18,359 $ 11,180
========== ========== ==========
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For additional information, see "Management's Discussion and Analysis --
Results of Operations" in Part II of this Report.
Loan Commitments. Conventional loan commitments by the Institutions are
granted for periods of up to 60 days. The total amount of the Institutions'
aggregate outstanding commitments to originate real estate loans at December 31,
1997, was approximately $8.6 million. It has been the Institutions' experience
that few commitments expire unfunded.
Loan Fee and Servicing Income. In addition to interest earned on loans, the
Institutions receive 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 Institutions charge loan origination fees which are
calculated as a percentage of the amount borrowed and are charged to the
borrower at the time of origination of the loan. The fees received in connection
with the origination of commercial real estate loans generally range from none
to 1.00 point (one point being equivalent to 1% of the principal amount of the
loan). The fees received in connection with the origination of conventional
one-to-four family mortgages typically range from none to 1.00 point. In
accordance with Statement of Financial Accounting Standards No. 91, loan
origination and commitment fees and certain direct loan origination costs are
deferred and the net amount amortized as an adjustment of yield over the
contractual life of the related loans.
For additional information, see Note 4 of the Consolidated Financial
Statements in Part II of this Report.
Delinquencies. When a borrower defaults upon a required payment on a loan,
the Institutions contact the borrower and attempt to induce the borrower to cure
the default. A late payment notice is mailed to the borrower after a payment is
10 days past due. An additional 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
Institutions' normal collection procedures or an acceptable arrangement is not
worked out with the borrower, the Institutions will institute measures to remedy
the default, including commencing a foreclosure action.
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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 they are 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 either applied to the outstanding principal
balance or recorded as interest income, depending on the assessment of the
ultimate collectibility of the loan.
Real estate acquired by the Institutions 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 provided for in an allowance for
loss on real estate owned.
The following table sets forth information with respect to the Company's
aggregate non-performing assets at the dates indicated. At December 31, 1997,
the Company had $791,000 of restructured loans or other problem loans for which
the Company had serious doubts as to the ability of the borrowers to comply with
the existing payment terms and conditions.
12
<PAGE>
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Real Estate:
Residential....................................... $ 847 $ 694 $ 754 $ 339 $ 1,298
Commercial........................................ -- -- -- 144 --
Commercial business leases........................ 19 24 29 39 108
Consumer.......................................... 11 3 6 4 1
-------- -------- -------- -------- --------
Total........................................... 877 721 789 526 1,407
-------- -------- -------- -------- --------
Accruing loans contractually past due
90 days or more:
Real Estate:
Residential...................................... 61 279 515 122 290
Commercial....................................... 57 -- -- -- --
Commercial business leases....................... -- -- -- -- --
Consumer......................................... 7 36 25 15 13
-------- -------- -------- -------- --------
Total........................................... 124 315 540 137 303
-------- -------- -------- -------- --------
Total of non-accrual and
90 days past due loans....................... $ 1,002 $ 1,036 $ 1,329 $ 663 $ 1,710
======== ======== ======== ======== ========
Percentage of total loans (excluding
mortgage-backed securities)..................... .33% .36% .50% .25% .74%
======== ======= ======= ======= ========
Other non-performing assets (a)..................... $ 160 $ 101 $ 145 $ 182 $ 943
======== ======== ======== ======== ========
</TABLE>
- ---------------
(a) 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.
During 1997, the Company would have recorded gross interest income of
$63,299 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 Company
included interest income of $32,955 on those loans in its net income for the
year. For additional information regarding the Company's problem assets and loss
provisions recorded thereon, see "Management's Discussion and Analysis" in Part
II of this Report.
Federal regulations require that each savings institution shall
classify its assets on a regular basis. In addition, in connection with
examinations of savings institutions, OTS examiners have authority to identify
problem assets and, if appropriate, classify them. The regulation provides for
three asset classification categories (i.e., Substandard, Doubtful and Loss).
The regulations also have a Special Mention category, described as assets which
do not currently
13
<PAGE>
expose a savings institution to a sufficient degree of risk to warrant
classification but do possess credit deficiencies or potential weaknesses
deserving management's close attention. Assets classified as Substandard or
Doubtful require the institution to establish general allowances for loan
losses. If an asset or portion thereof is classified Loss, the savings
institution must either establish specified allowances for loan losses in the
amount of 100 percent of the portion of the asset classified Loss, or charge off
such amount. General loss allowances established to cover possible losses
related to assets classified Substandard or Doubtful may be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses do not qualify as regulatory capital. OTS examiners
may disagree with the savings institution's classifications and amounts
reserved. Based on management's review of the Institutions' assets at December
31, 1997, $335,000 and $6,000 of the Bank's assets were classified as
Substandard and Doubtful, $632,000 of the Association's assets were classified
as Substandard, and $237,000 and $1,614,000 of the Bank's and Association's
assets were designated as Special Mention, respectively.
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 and real estate acquired. General loan loss reserves are provided based
on, among other things, estimates of the historical loan loss experience,
evaluation of economic conditions in general and in various sectors of the
Institutions' respective customer bases, and periodic reviews of loan portfolio
quality by the Institutions' personnel. Specific reserves will be 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 and real estate owned when it
determines that losses are anticipated to be incurred on the underlying
properties. At December 31, 1997, the Bank's and Association's allowances for
loan losses amounted to $921,274 and $42,216, respectively.
14
<PAGE>
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 Institutions' loan portfolios in the future, will not ask the Institutions
to increase their allowance for loan losses, thereby negatively affecting their
financial condition and earnings.
The following table sets forth an analysis of the Company's aggregate
allowance for possible loan losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Period...................... $ 1,104 $ 1,076 $ 1,022 $ 968 $ 796
Charge Offs:
Real Estate:
Residential..................................... 31 1 44 66 50
Commercial...................................... -- -- -- -- 91
Commercial business leases........................ -- -- -- 78 26
Consumer.......................................... 170 51 42 27 36
-------- -------- -------- -------- --------
201 52 86 171 203
-------- -------- -------- -------- --------
Recoveries:
Real Estate:
Residential..................................... -- -- 2 17 19
Commercial...................................... -- -- -- 10 --
Commercial business leases........................ -- 10 -- 2 --
Consumer.......................................... 18 4 21 15 32
-------- -------- -------- -------- --------
18 14 23 44 51
-------- -------- -------- -------- --------
Net Loans Charged-Off............................... (183) (38) (63) (127) (152)
Provision for Possible Loan Losses.................. 242 66 117 181 324
-------- -------- -------- -------- --------
Balance at End of Period............................ $ 1,163 $ 1,104 $ 1,076 $ 1,022 $ 968
======== ======== ======== ======== ========
Ratio of Net Charge-Offs to Average
Loans Outstanding During the Period............... .06% .01% .02% .05% .07%
======== ======== ======== ======== ========
</TABLE>
15
<PAGE>
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 further losses and does not restrict the use of the allowance to
absorb losses in any category.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------
1997 1996 1995
------------------------ ----------------------- ------------------------
Percent of Percent of Percent of
Total Loans Total Loans Total Loans
in Each in Each in Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans:
Real Estate Mortgage............. $ 476 86% $ 496 85% $ 486 86%
Commercial business leases....... 19 -- 24 -- 34 --
Consumer......................... 668 14 584 15 556 14
-------- ---- -------- ---- ------- ---
Total Allowance for Loan
Losses........................ $ 1,163 100% $ 1,104 100% $ 1,076 100%
======== === ======== === ======= ===
<CAPTION>
At December 31,
-------------------------------------------------
1994 1993
---------------------- ----------------------
Percent of Percent of
Total Loans Total Loans
in Each in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Loans:
Real Estate Mortgage............. $ 508 92% $ 605 95%
Commercial business leases....... 34 -- 100 --
Consumer......................... 480 8 263 5
------- ---- -------- ----
Total Allowance for Loan
Losses........................ $ 1,022 100% $ 968 100%
======= === ======== ===
</TABLE>
16
<PAGE>
Investment Activities
Interest and dividends on investment securities, Federal Home Loan Bank
stock and interest-bearing deposits provides the second largest source of income
for the Company (after interest on loans and mortgage-backed securities),
constituting 12.9% of the Company's total interest income (and dividends) for
fiscal 1997. The Institutions maintain their liquid assets in excess of the
minimum requirements imposed by regulation at levels believed adequate to meet
requirements of normal banking activities and potential savings outflows. At
December 31, 1997, the Bank's and Association's liquidity ratios (liquid assets
as a percentage of net withdrawable savings and short-term borrowings) were
11.75% and 6.65%, respectively.
The Institutions have the authority to invest in various types of liquid
assets, including short-term United States Treasury obligations and securities
of various federal agencies, certificates of deposit at insured savings and
loans and banks, bankers' acceptances, and federal funds. The Institutions may
also invest a portion of their assets in certain commercial paper and corporate
debt securities. The Institutions are also authorized to invest in mutual funds
and stocks whose assets conform to the investments that the Institutions are
authorized to make directly.
At December 31, 1997, the market values of the Company's aggregate
investment securities, Federal Home Loan Bank stock and mortgage-backed
securities were approximately $35.3 million, $3.4 million and $30.2 million,
respectively. The following table sets forth the carrying value of the Company's
short-term investments, Federal Home Loan Bank stock, and mortgage-backed
securities at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Investment securities..................... $ 35,395 $ 50,744 $ 22,600
Interest-bearing deposits (a)............. 10,143 4,005 5,069
FHLB stock................................ 3,412 3,311 2,984
Mortgage-backed securities................ 29,996 38,542 45,014
-------- --------- --------
Total investments......................... $ 78,946 $ 96,602 $ 75,667
======== ========= ========
</TABLE>
- ------------------
(a) Consist of overnight deposits and short-term non-negotiable certificates
of deposit.
17
<PAGE>
The following table sets forth information regarding maturity
distribution and average yields for the Company's investment securities
portfolio at December 31, 1997.
<TABLE>
<CAPTION>
Within 1 Year 1-5 Years 5-10 Years Over 10 Years Total
-------------------- -------------------- ------------------ ------------------- --------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal agencies..... $ 5,000,000 6.00% $11,799,000 6.39% $ 200,000 7.25% $18,398,000 7.13% $35,395,000 6.72%
</TABLE>
18
<PAGE>
The Company's mortgage-backed securities include both fixed- and
adjustable-rate securities, though the Company emphasizes adjustable-rate
investments in order to enhance the interest rate sensitivity of its
interest-earning assets. At December 31, 1997, the Company's mortgage-backed
securities consisted of the following:
Carrying Average
Amount Rate
---------- -----
(Dollars in thousands)
Variable rate:
Repricing in one year or less .................. $19,697 7.50%
Fixed rate:
Maturing in five years or less ................. 3,249 6.38
Maturing in five to ten years .................. 399 8.16
Maturing in more than ten years ............... 6,651 7.77
---------- ----
Total ....................................... $29,996 7.45%
========== ====
As members of the Federal Home Loan Bank System, the Institutions must
maintain minimum levels of liquid assets which vary from time to time. See
"Regulation -- Federal Home Loan Bank System." Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to return on loans.
Sources of Funds
General. Savings accounts and other types of deposits have
traditionally been an important source of the Institutions' funds for use in
lending and for other general business purposes. In addition to deposit
accounts, the Institutions derive 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 Institutions attract both short-term and long-term
deposits from the general public by offering a wide assortment of deposit
accounts and interest rates. The Institutions offer regular passbook accounts,
NOW accounts, money market accounts, fixed-interest-rate certificates with
varying maturities, and negotiated-rate jumbo certificates with various
maturities. The Institutions also offer tax-deferred individual retirement,
Keogh retirement, and simplified employer plan retirement accounts.
19
<PAGE>
As of December 31, 1997, approximately 23.2%, or $74.7 million, of the
Institutions' 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
savings bank and quarterly for the Association. 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. The interest rate on these
accounts is established by management.
The Institutions also make available to their depositors a number of
certificates of deposit with various terms and interest rates to be competitive
in their respective market areas. These certificates have minimum deposit
requirements as well.
20
<PAGE>
The following table sets forth the change in dollar amount of savings
deposits in the various types of savings accounts offered by the Institutions
between the dates indicated.
<TABLE>
<CAPTION>
Increase Increase
Balance at (Decrease) Balance at (Decrease) Balance at
December 31, From Prior December 31, From Prior December 31,
1997 Year 1996 Year 1995
-------------------- ---------- ---------------------- ------------ -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook accounts................... $ 44,714 13.88% $ (2,072) $ 46,786 14.68% $ (869) $ 47,655 16.39%
NOW accounts........................ 22,197 6.89 1,812 20,385 6.40 823 19,562 6.73
Money market deposit accounts....... 7,798 2.42 (133) 7,931 2.49 (1,179) 9,110 3.13
Certificate accounts:
Jumbo certificates................ 24,032 7.46 6,827 17,205 5.40 17,107 98 .03
Fixed rate certificates:
12 months or less................ 76,040 23.60 (12,590) 88,630 27.81 4,927 83,703 28.78
13-24 months..................... 30,857 9.58 (2,926) 33,783 10.60 11,340 22,443 7.72
25-36 months..................... 60,496 18.77 27,226 33,270 10.44 1,141 32,129 11.05
37 months or greater............. 50,468 15.66 (13,760) 64,228 20.14 (5,053) 69,281 23.83
Variable rate certificate:
18 months........................ 5,615 1.74 (872) 6,487 2.04 (317) 6,804 2.34
---------- ------ ---------- ----------- ------- ---------- --------- ------
$ 322,217 100.00% $ 3,512 $ 318,705 100.00% $ 27,920 $ 290,785 100.00%
========== ====== ========== =========== ====== ========== ========= ======
</TABLE>
21
<PAGE>
The variety of deposit accounts offered by the Institutions has permitted
them to be competitive in obtaining funds and has allowed them 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 Institutions have become much more subject to short-term
fluctuation in deposit flows, as customers have become more interest rate
conscious. The ability of the Institutions to attract and maintain deposits and
their costs of funds have been, and will continue to be, significantly affected
by money market conditions. The Institutions currently offer a variety of
deposit products as options to the customer. They include noninterest-bearing
and interest-bearing NOW accounts, Passbook accounts, Money Market Demand
accounts, and Certificates of Deposit ranging in terms from three months to
seven years.
The following table sets forth the Company's average aggregate balances and
interest rates. Average balances are derived from balances which management does
not believe are materially different from daily balances (actual daily balances
cannot be obtained without undue effort and expense).
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------------------------------------------
1997 1996 1995
--------------------- ------------------------ -----------------------
Average Average Average
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
---------- ----- ---------- ----- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing
demand deposits.............. $ 28,331 1.59% $ 28,691 1.66% $ 28,977 1.80%
Savings deposits............... 45,529 2.50 48,556 2.59 49,160 2.68
Time deposits.................. 251,670 5.77 233,330 5.76 213,930 5.72
---------- ---------- ----------
$ 325,530 4.95 $ 310,577 4.89 $ 292,067 4.82
========== ========== ==========
</TABLE>
The following table sets forth the aggregate time deposits in the Company
classified by rates as of the dates indicated.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------
1997 1996 1995
------ ------ -----
(In thousands)
<S> <C> <C> <C>
Less than 4%.................. $ 101 $ 224 $ 1,940
4% - 5.99%.................. 153,211 161,862 113,540
6% - 7.99%.................. 92,849 77,787 90,175
8% - 9.99%.................. 1,346 3,730 8,803
---------- ----------- ----------
$ 247,507 $ 243,603 $ 214,458
========== =========== ==========
</TABLE>
22
<PAGE>
The following table sets forth the amount and maturities of the
Institutions' time deposits at December 31, 1997.
<TABLE>
<CAPTION>
Amount Due
--------------------------------------------------------------------------
Less Than More Than
Rate One Year 1-2 Years 2-3 Years 3 Years Total
---- --------- ---------- ----------- ----------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Less than 4%.................... $ 55 $ 18 $ 28 $ -- $ 101
4% - 5.99%...................... 123,886 14,532 12,648 2,145 153,211
6% - 7.99%...................... 42,851 15,226 27,892 6,880 92,849
8% - 9.99%...................... 962 367 17 -- 1,346
--------- ---------- ---------- ---------- ----------
$ 167,754 $ 30,143 $ 40,585 $ 9,025 $ 247,507
========= ========== ========== ========== ==========
</TABLE>
The following table indicates the amount of the Institutions' certificates
of deposit and other deposits of $100,000 or more by time remaining until
maturity at December 31, 1997.
<TABLE>
<CAPTION>
Passbook, NOW
Certificates and MMDA
Maturity Period of Deposit Deposits
--------------- ------------ --------------
(In thousands)
<S> <C> <C>
Three months or less......................... $ 19,518 $ 7,067
Over three through six months................ 12,233 --
Over six through twelve months............... 5,366 --
Over twelve months........................... 10,513 --
--------- ----------
Total................................... $ 47,630 $ 7,067
========= ==========
</TABLE>
The following table sets forth the aggregate savings activities of the
Company for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1997 1996 1995
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Net increase (decrease) before interest credited.......... $ (12,690) $ 12,928 $ (752)
Interest credited......................................... 16,202 14,992 14,098
---------- ---------- ----------
Net increase (decrease) in deposits..................... $ 3,512 $ 27,920 $ 13,346
========== ========== ==========
</TABLE>
Borrowings. Savings deposits are the primary sources of funds for the
Institutions' lending and investment activities and for their general business
purposes. The Bank and Association can also use advances (borrowings) from the
Federal Home Loan Banks of Indianapolis and Cincinnati, respectively, to
supplement their supplies of lendable funds, to meet deposit withdrawal
requirements and to extend the terms of their liabilities. Advances from the
Federal Home Loan Bank are typically secured by the Institutions' stock in its
Federal Home Loan Bank and a portion of the
23
<PAGE>
Institutions' first mortgage loans or investment securities. At December 31,
1997, the Bank and Association had $0 and $16.0 million, respectively, of
advances outstanding from the Federal Home Loan Banks of Indianapolis and
Cincinnati, respectively.
The Federal Home Loan Banks function as central reserve banks providing
credit for savings institutions and certain other member financial institutions.
As members, the Institutions are required to own capital stock in their Federal
Home Loan Bank and are authorized to apply for advances on the security of such
stock and certain of their 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.
24
<PAGE>
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 and average yields earned and rates paid at December 31,
1997. 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 are derived from balances which management does not
believe are materially different from daily balances (actual daily balances
cannot be obtained without undue effort and expense).
Year Ended
December 31,
At December 31, ------------
1997 1997
--------------------- ------------
Balance Rate Balance
-------- ---- -------
(Dollars in thousands)
Interest-earning assets:
Loan portfolio (a)....................... $ 294,389 8.00% $ 290,922
Mortgage-backed securities............... 29,996 7.46 34,005
Short term investments and other
interest-earning assets (b)............. 48,950 6.56 54,816
--------- ---- ---------
Total interest-earning assets......... 7.77 379,743
Noninterest-earning assets................ 17,532 16,940
--------- ---------
Total assets.......................... $ 390,868 $ 396,683
========= =========
Interest-bearing liabilities:
Deposits................................ $ 322,217 4.93 $ 325,530
FHLB advances........................... 16,016 6.04 19,791
--------- ---- ---------
Total interest-bearing liabilities:... 338,233 4.99 345,321
----
Noninterest-bearing liabilities........... 8,200 7,501
--------- ---------
Total liabilities..................... 346,433 352,821
Shareholders' equity...................... 44,435 43,861
--------- ---------
Total liabilities and shareholders'
equity.............................. $ 390,868 $ 396,683
========= =========
Net interest income.......................
Interest rate spread...................... 2.78%
====
Net yield on interest-earning assets......
Ratio of average interest-earning assets
to average interest-bearing liabilities.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------
1997 1996 1995
--------------------- -------------------------------- -------------------------------
Average Average Average Average
Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
-------- ---------- ------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loan portfolio (a)....................... $ 23,234 7.99% $ 276,752 $ 22,060 7.97% $ 268,110 $ 21,078 7.86%
Mortgage-backed securities............... 2,319 6.82 42,326 2,880 6.80 46,529 3,137 6.74
Short term investments and other
interest-earning assets (b)............. 3,780 6.90 54,846 3,627 6.61 20,427 1,393 6.82
--------- ---- --------- --------- ------ --------- --------- ------
Total interest-earning assets......... 29,333 7.72 373,924 28,567 7.64 335,066 25,608 7.64
Noninterest-earning assets................ 16,483 14,630
--------- ---------
Total assets.......................... $ 390,407 $ 349,696
========= =========
Interest-bearing liabilities:
Deposits................................ 16,114 4.95 $ 310,577 15,183 4.89 $ 292,067 14,079 4.82
FHLB advances........................... 1,231 6.22 25,987 1,522 5.86 4,586 289 6.31
--------- ---- --------- --------- ------ --------- --------- ------
Total interest-bearing liabilities:... 17,345 5.02 336,564 16,705 4.96 296,653 14,368 4.84
--------- ---- --------- ------ --------- ------
Noninterest-bearing liabilities........... 9,289 6,797
--------- ---------
Total liabilities..................... 345,853 303,450
Shareholders' equity...................... 44,554 46,246
--------- ---------
Total liabilities and shareholders'
equity.............................. $ 390,407 $ 349,696
========= =========
Net interest income....................... $ 11,988 $ 11,862 $ 11,240
========= ========= =========
Interest rate spread...................... 2.70% 2.68% 2.80%
==== ==== ====
Net yield on interest-earning assets...... 3.16% 3.17% 3.35%
==== ==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities. 109.97% 111.10% 112.95%
====== ====== ======
</TABLE>
(a) Excludes income earned on late charges and inspection fees. Average
balances include non-accrual loans.
(b) Includes interest-bearing deposits in other financial institutions,
investment securities and FHLB stock.
25
<PAGE>
Subsidiary Activities
As federally chartered savings institutions, the Institutions are permitted
to invest an amount equal to 2% of their respective assets in subsidiaries with
an additional investment of 1% of assets where such investment serves primarily
community, inner-city and community-development purposes. Under such limitations
at December 31, 1997, the Bank and Association were authorized to invest up to
approximately $9.4 million and $2.3 million, respectively, in the stock of or
loans to subsidiaries. In addition, institutions meeting regulatory capital
requirements and certain other tests, which the Institutions do, may invest up
to 50% of their regulatory capital in conforming first mortgage loans to
subsidiaries.
The Company owns all of the stock of the Bank and Association and operates
as a multiple thrift holding company. The Company also owns all of the stock of
Indiana Title Insurance Company, which provides title insurance services in the
communities it serves.
The Bank has one direct wholly-owned subsidiary, Ameriana Financial
Services, Inc. ("AFS"). AFS offers insurance products through (i) its ownership
of Ameriana Insurance Agency, New Castle, Indiana, a full service life and
casualty insurance agency, and (ii) its ownership of an interest in Family
Financial Life Insurance Company, New Orleans, Louisiana which offers a full
line of credit related insurance products. AFS also operates a brokerage
facility in conjunction with Linsco/Private Ledger. The Association has one
direct wholly-owned subsidiary, Deer Park Service Corporation, which operates a
brokerage facility in conjunction with Money Concepts/Pinnacle Financial
Advisors, Inc.
At December 31, 1997, the Bank's and Association's investments in, and
loans to, their subsidiaries were approximately $3.5 million and $4,000,
respectively, consisting of direct equity investments and lines of credit.
Savings institutions whose deposits are insured by the SAIF are required to
give the FDIC and the OTS 30 days' prior notice before establishing or acquiring
a new subsidiary, or commencing any new activity through an existing subsidiary.
Both the FDIC and the Director of the OTS have authority to order termination of
subsidiary activities determined to pose a risk to the safety or soundness of
the institution. In addition, regulatory capital requirements require savings
institutions to phase-out the amount of their investments in and extensions of
credit to subsidiaries engaged in activities not permissible to national banks
from capital in determining regulatory capital compliance. AFS' indirect
insurance underwriting activities are not permissible to national banks, but the
Bank does not anticipate that
26
<PAGE>
any resulting deduction from capital will materially affect its capital for
regulatory compliance purposes. See "Regulation -- Regulatory Capital
Requirements."
Competition
The Institutions experience 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 Institutions' respective
market areas. 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 Institutions have been able to compete
effectively in their respective market areas.
The Institutions have offices in Henry, Hancock, Hendricks and Madison
Counties in Indiana and in Hamilton County, Ohio. In addition to the financial
institutions which have offices in these counties, the Institutions compete with
several commercial banks and savings institutions in surrounding counties, many
of which have assets which are substantially larger than the Institutions'.
Regulation
General. As federally chartered savings institutions, the Institutions are
subject to extensive regulation by the OTS. The lending activities and other
investments of the Institutions must comply with various federal regulatory
requirements. The OTS periodically examines the Institutions for compliance with
various regulatory requirements. The FDIC also has the authority to conduct
special examinations of SAIF members. The Institutions must file reports with
the OTS describing their activities and financial condition. The Institutions
are also subject to certain reserve requirements promulgated by the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"). This
supervision and regulation is intended primarily for the protection of
depositors. As a savings and loan holding company, the Company is subject to the
OTS' regulation, examination, supervision and reporting requirements. Certain of
these regulatory requirements are referred to below or appear elsewhere herein.
27
<PAGE>
Prompt Corrective Regulatory Action. Under the Federal Deposit Insurance
Corporation Improvement Act ("FDICIA"), the federal banking regulators are
required to take prompt corrective action if an insured depository institution
fails to satisfy certain minimum capital requirements. 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
did 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 could 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
action provisions. If an institution's ratio of tangible capital to total assets
falls below a "critical capital level," the institution will be subject to
conservatorship or receivership within 90 days unless periodic determinations
are made that forbearance from such action would better protect the deposit
insurance fund. Unless appropriate findings and certifications are made by the
appropriate federal bank regulatory agencies, a critically undercapitalized
institution must be placed in receivership if it remains critically
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<PAGE>
undercapitalized on average during the calendar quarter beginning 270 days after
the date it became critically undercapitalized.
Under implementing regulations, the federal banking regulators, including
the OTS, generally will measure a depository institution's capital adequacy on
the basis of the institution's 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). Under the regulations, a savings
institution that is not subject to an order or written directive to meet or
maintain a specific capital level will be deemed "well capitalized" if it also
has: (i) a total risk-based capital ratio of 10% or greater; (ii) a Tier 1
risk-based capital ratio of 6.0% or greater; and (iii) a leverage ratio of 5.0%
or greater. An "adequately capitalized" savings institution is an institution
that does not meet the definition of well capitalized and has: (i) a total
risk-based capital ratio of 8.0% or greater; (ii) a Tier 1 capital risk-based
ratio of 4.0% or greater; and (iii) a leverage ratio of 4.0% or greater (or 3.0%
or greater if the institution has a composite 1 OTS rating). An
"undercapitalized" savings institution is an institution that has (i) a total
risk-based capital ratio less than 8.0%; or (ii) a Tier 1 risk-based capital
ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0% (or 3.0% if
the institution has a composite 1 OTS rating). A "significantly
undercapitalized" savings institution is defined as an institution that has: (i)
a total risk-based capital ratio of less than 6.0%; or (ii) a Tier 1 risk-based
capital ratio of less than 3.0%; or (iii) a leverage ratio of less than 3.0%. A
"critically undercapitalized" savings institution is defined as an institution
that has a ratio of "tangible equity" core capital 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 intangibles other than qualifying
supervisory goodwill and certain purchased mortgage servicing rights. The OTS
may reclassify a well capitalized savings 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 OTS determines, after notice
and an opportunity for a hearing, that the institution is in an unsafe or
unsound condition or that the institution has received and not corrected a
less-than-satisfactory rating for any composite rating category. The
Institutions are classified as well capitalized under the regulations.
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<PAGE>
Standards for Safety and Soundness. FDICIA requires each federal bank
regulatory agency to prescribe, by regulation, safety and soundness standards
for institutions under its authority. In 1995, these agencies, including the
OTS, released Interagency Guidelines Establishing Standards for Safety and
Soundness and published a final rule establishing deadlines for submission and
review of safety and soundness compliance plans. The guidelines require savings
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 savings 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 OTS determines that a savings 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 savings institution must submit an acceptable compliance plan to
the OTS 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 and Association meet substantially
all the standards adopted in the interagency guidelines and, therefore, does not
believe that the implementation of these regulatory standards will materially
affect their operations.
Additionally, each federal banking agency is required to establish
standards relating to the adequacy of asset and earnings quality. In 1995, these
agencies, including the OTS, issued proposed guidelines relating to asset and
earnings quality. Under the proposed guidelines, a savings institution should
maintain systems, commensurate with its size and the nature and scope of its
operations, to identify problem assets and prevent deterioration in those assets
as well as to evaluate and monitor earnings and ensure that earnings are
sufficient to maintain adequate capital and reserves. Management does not
believe that the asset quality and earnings standards, in the form proposed by
the OTS, would have a material effect on the Bank or Association.
Federal Home Loan Bank System. The Institutions are members of the Federal
Home Loan Bank System. The Federal Home Loan Bank System consists of 12 regional
Federal Home Loan Banks subject to supervision and regulation by the Federal
Housing Finance Board ("FHFB"). The Federal Home Loan Banks provide a central
credit
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<PAGE>
facility primarily for member institutions. As members of the Federal Home Loan
Banks of Indianapolis and Cincinnati, the Institutions are required to acquire
and hold shares of capital stock in their respective Federal Home Loan Banks
amounts at least equal to the greater of 1% of the aggregate unpaid principal of
their residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each year, or 5% of outstanding advances
(borrowings) from the Federal Home Loan Banks, whichever is greater. The Bank
and Association were in compliance with this requirement at December 31, 1997,
with investments in Federal Home Loan Bank stock of $2.4 million and $1.0,
respectively.
The Federal Home Loan Banks serve as reserve or central banks for their
member institutions within their assigned regions. They are funded primarily
from proceeds derived from the sale of consolidated obligations of the Federal
Home Loan Bank System. They make advances to members in accordance with policies
and procedures established by the FHFB and their Boards of Directors. As of
December 31, 1997, the Bank and Association had $0 and $16.0 million,
respectively, of advances from their respective Federal Home Loan Banks.
Liquidity Requirements. The Institutions are required to maintain average
daily balances of liquid assets (cash, certain time deposits, bankers'
acceptances, specified obligations of the United States government, states or
federal agencies, shares in mutual funds with certain restricted investment
policies and highly rated corporate debt, and commercial paper) equal to a
monthly average of not less than a specified percentage (currently 4%) of their
respective net withdrawable savings deposits plus short-term borrowings.
Monetary penalties may be imposed for failure to meet liquidity requirements.
The liquidity ratios of the Bank and Association at December 31, 1997 were 11.7%
and 6.6%, respectively. The Institutions exceeded their monthly average
requirements in 1997. A substantial sustained decline in savings deposits could
adversely affect the Institutions' liquidity which could result in restricted
operations and additional borrowings from the Federal Home Loan Bank.
Insurance of Accounts. The Institutions are required to pay assessments
based on a percentage of their insured deposits to the FDIC for insurance of
their accounts by the FDIC through the SAIF. Under the Federal Deposit Insurance
Act, the FDIC is required to set semi-annual assessments for SAIF-insured
institutions at a level necessary to maintain the designated reserve ratio of
the SAIF to 1.25% of estimated insured deposits or to a higher percentage
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<PAGE>
of estimated insured deposits that the FDIC determines to be justified for that
year by circumstances indicating a significant risk of substantial future losses
to the SAIF.
Under the FDIC's risk-based deposit insurance assessment system, the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is 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 seventh 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. Subgroup A consists of financially sound institutions with only
a few minor weaknesses. Subgroup B consists of institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the institution and increased risk of loss to the deposit insurance fund.
Subgroup C consists of institutions that pose a substantial probability of loss
to the deposit insurance fund unless effective corrective action is taken.
For the past several semi-annual periods, institutions with SAIF-assessable
deposits, like the Institutions, were required to pay higher deposit insurance
premiums than institutions with deposits insured by the BIF. In order to
recapitalize the SAIF and address the premium disparity, the Deposit Insurance
Funds Act of 1996 authorized the FDIC to impose a one-time special assessment on
institutions with SAIF-assessable deposits based on the amount determined by the
FDIC to be necessary to increase the reserve levels of the SAIF to the
designated reserve ratio of 1.25% of insured deposits. Savings institutions were
assessed at the rate of 65.7 basis points based on the amount of their
SAIF-assessable deposits as of March 31, 1995. As a result of the special
assessment, the Bank and Association incurred a pre-tax expense of $1,532,000
and $347,000, respectively, during fiscal 1996.
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The FDIC has adopted a new assessment schedule for SAIF deposit insurance
pursuant to which the assessment rate for well-capitalized institutions with the
highest supervisory ratings is zero and institutions in the worst risk
assessment classification are assessed at the rate of 0.27% of insured deposits.
Until December 31, 1999, however, SAIF-insured institutions, will be required to
pay assessments to the FDIC at the rate of 6.5 basis points 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. During this period, BIF members will be assessed for these
obligations at the rate of 1.3 basis points. After December 31, 1999, both BIF
and SAIF members will be assessed at the same rate for FICO payments.
Each depository institution participating in a SAIF-to-BIF conversion
transaction is required to pay an exit fee to the SAIF equal to 0.90% of the
deposits transferred and an entrance fee to the BIF based on the current reserve
ratio of the BIF. A savings institution could adopt a commercial bank or savings
bank charter if the resulting bank remains a SAIF member.
The FDIC has adopted a regulation which provides that any insured
depository institution with a ratio of Tier 1 capital to total assets of less
than 2% will be deemed to be operating in an unsafe or unsound condition, which
would constitute grounds for the initiation of termination of deposit insurance
proceedings. The FDIC, however, will not initiate termination of insurance
proceedings if the depository institution has entered into and is in compliance
with a written agreement with its primary regulator, and the FDIC is a party to
the agreement, to increase its Tier 1 capital to such level as the FDIC deems
appropriate. Tier 1 capital is defined as 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 mortgage servicing rights and qualifying supervisory goodwill
eligible for inclusion in core capital under OTS regulations and minus
identified losses and investments in certain securities subsidiaries. Insured
depository institutions with Tier 1 capital equal to or greater than 2% of total
assets may also be deemed to be operating in an unsafe or unsound condition
notwithstanding such capital level. The regulation further provides that in
considering applications that must be submitted to it by savings institutions,
the FDIC will take into account whether the savings institution is meeting the
Tier 1 capital requirement for state non-member banks of 4% of total assets for
all but the most highly rated state non-member banks.
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<PAGE>
Qualified Thrift Lender Test. The Institutions are subject to OTS
regulations which use the concept of a Qualified Thrift Lender to determine
eligibility for Federal Home Loan Bank advances and for certain other purposes.
A savings institution that does not meet the Qualified Thrift Lender test must
either convert to a bank charter or comply with the following restrictions on
its operations: (i) the institution may not engage in any new activity or make
any new investment, directly or indirectly, unless such activity or investment
is permissible for a national bank; (ii) the branching powers of the institution
shall be restricted to those of a national bank; (iii) the institution shall not
be eligible to obtain any advances from its Federal Home Loan Bank; and (iv)
payment of dividends by the institution shall be subject to the rules regarding
payment of dividends by a national bank. Upon the expiration of three years from
the date the institution ceases to be a Qualified Thrift Lender, it must cease
any activity, and not retain any investment not permissible for a national bank
and immediately repay any outstanding Federal Home Loan Bank advances (subject
to safety and soundness considerations).
To qualify as a Qualified Thrift Lender, a savings institution must either
qualify as a "domestic building and loan association" under the Internal Revenue
Code or maintain at least 65% of its "portfolio" assets in Qualified Thrift
Investments. Portfolio assets are defined as total assets less intangibles,
property used by a savings institution in its business and liquidity investments
in an amount not exceeding 20% of assets. Qualified Thrift Investments consist
of: (i) loans, equity positions or securities related to domestic, residential
real estate or manufactured housing and educational, small business and credit
card loans and (ii) 50% of the dollar amount of residential mortgage loans
subject to sale under certain conditions but do not include any intangible
assets. Subject to a 20% of portfolio assets limit, however, savings
institutions are able to treat as Qualified Thrift Investments 200% of their
investments in loans to finance "starter homes" and loans for construction,
development or improvement of housing and community service facilities or for
financing small businesses in "credit-needy" areas. A savings institution must
maintain its status as a Qualified Thrift Lender for nine out of every 12
months. A savings institution that fails to maintain Qualified Thrift Lender
status will be permitted to requalify once and if it fails the Qualified Thrift
Lender Test a second time, it will become immediately subject to all penalties
as if all time limits on such penalties had expired. Failure to qualify as a
Qualified Thrift Lender results in a number of sanctions, including the
imposition of certain operating restrictions imposed on national banks and a
restriction on obtaining additional advances from the Federal Home Loan Bank
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<PAGE>
System. Upon failure to qualify as a Qualified Thrift Lender for two years, a
savings institution must convert to a commercial bank.
At December 31, 1997, approximately 93% and 97% of the Bank's and
Association's respective assets were invested in Qualified Thrift Investments as
currently defined, substantially in excess of the percentage required to qualify
them as Qualified Thrift Lenders.
Regulatory Capital Requirements. Under OTS regulations, savings
institutions must maintain "tangible" capital equal to at least 1.5% of adjusted
total assets, "core" capital equal to at least 3% of adjusted total assets and
"total" capital, a combination of core and "supplementary" capital, equal to at
least 8% of "risk-weighted" assets. In addition, the OTS has recently adopted
regulations which impose certain restrictions on savings institutions that have
a total risk-based capital ratio that is less than 8.0%, a ratio of Tier 1
capital to risk-weighted assets of less than 4.0% or a ratio of Tier 1 capital
to adjusted total assets of less than 4.0% (or 3.0% if the institution is rated
Composite 1 under the OTS examination rating system). See "-- Prompt Corrective
Regulatory Action." For purposes of the regulation, Tier 1 capital has the same
definition as core capital which is defined as common shareholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
related surplus, minority interests in the equity accounts of fully consolidated
subsidiaries, certain nonwithdrawable accounts and pledged deposits and
"qualifying supervisory goodwill." Core capital is generally reduced by the
amount of the savings institution's intangible assets for which no market
exists. Limited exceptions to the deduction of intangible assets are provided
for purchased mortgage servicing rights and qualifying supervisory goodwill.
Tangible capital is given the same definition as core capital but does not
include qualifying supervisory goodwill and is reduced by the amount of all the
savings institution's intangible assets with only a limited exception for
purchased mortgage servicing rights. Both core and tangible capital are further
reduced by an amount equal to the savings institution's debt and equity
investments in subsidiaries engaged in activities not permissible for national
banks, unless the subsidiaries are engaged in activities undertaken as agent for
customers or in mortgage banking activities, or the subsidiaries are depository
institutions or holding companies therefor.
Adjusted total assets are a savings institution's consolidated total
assets, as determined under generally accepted accounting principles, adjusted
for certain goodwill amounts, by a prorated portion of the assets of
subsidiaries in which the savings institution holds a minority interest and
which are not engaged in activities for which the capital rules require
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<PAGE>
deduction of its debt and equity investments. Adjusted total assets are reduced
by the amount of assets that have been deducted from capital, the portion of the
savings institution's investments in subsidiaries that must be netted against
capital under the capital rules and, for purposes of the core capital
requirement, by qualifying supervisory goodwill.
In determining compliance with the risk-based capital requirement, a
savings institution is allowed to use both core capital and supplementary
capital provided the amount of supplementary capital used does not exceed the
saving institution's core capital. Supplementary capital is defined to include
certain preferred stock issues, nonwithdrawable accounts and pledged deposits
that do not qualify as core capital, certain approved subordinated debt, certain
other capital instruments and a portion of the savings institution's general
loss allowances. Total core and supplementary capital are reduced by the amount
of certain high loan-to-value ratio land loans and non-residential construction
loans, and equity investments other than those deducted from core and tangible
capital.
The risk-based capital requirement is measured against the amount of
risk-weighted assets which equals the sum of the amount of each asset and
credit-equivalent amount of each off-balance sheet item after such asset or item
is multiplied by an assigned risk weight. Under the OTS risk-weighting system,
cash and securities backed by the full faith and credit of the U.S. government
are given a 0% risk weight. Mortgage-backed securities that qualify under the
Secondary Mortgage Enhancement Act, including those issued, or fully guaranteed
as to principal and interest, by the Federal National Mortgage Association or
the FHLMC are assigned a 20% risk weight. Single-family first mortgages not more
than 90 days past due with loan-to-value ratios under 80%, multi-family
mortgages (maximum 36 dwelling units) with loan-to-value ratios under 80% and
average annual occupancy rates over 80%, and certain qualifying loans for the
construction of one- to four-family residences pre-sold to home purchasers are
assigned a risk weight of 50%. Consumer loans and residential construction loans
are assigned a risk weight of 100%.
In determining compliance with the regulatory capital standards, all of a
savings institution's investments in and extensions of credit to any subsidiary
engaged in activities not permissible for a national bank are to be deducted
from the savings institution's capital. Certain subsidiaries are exempted from
this treatment, including any subsidiary engaged in impermissible activities
solely as agent for its customers (unless the FDIC determines otherwise),
subsidiaries engaged solely in mortgage banking, and subsidiary depository
institutions and holding companies therefor that were acquired prior to May 1,
1989. At December 31, 1997, the Bank had $3.5 million, or 10.4% of its total
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regulatory capital, invested in or lent to its subsidiary, AFS, which is
indirectly engaged in insurance underwriting activities not permissible to
national banks. Due to the relatively small percentage of the Bank's capital
invested in or lent to its subsidiary, the Bank does not anticipate that the
required deductions described above will have a material effect on the Bank's
capital or that the subsidiary will cease its insurance agency activities.
The table below represents the Institutions' historical capital position
relative to their various minimum regulatory capital requirements at December
31, 1997.
<TABLE>
<CAPTION>
The Bank The Association
--------------------------- ---------------------------
Percent of Percent of
Amount Assets (1) Amount Assets (1)
------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Tangible Capital........................... $ 33,263 10.6% $ 5,349 7.1%
Tangible Capital Requirement............... 4,725 1.5 1,127 1.5
--------- ------ --------- ------
Excess................................... $ 28,538 9.1% $ 4,222 5.6%
========= ====== ========= ======
Core Capital............................... $ 33,263 10.6% $ 5,349 7.1%
Core Capital Requirement................... 9,463 3.0 2,255 3.0
--------- ------ --------- ------
Excess................................... $ 23,800 7.6% $ 3,094 4.1%
========= ====== ========= ======
Total Capital (i.e., Core and
Supplementary Capital)................... $ 33,712 18.8% $ 5,552 14.4%
Risk-Based Capital Requirement............. 14,318 8.0 3,086 8.0
--------- ------ --------- ------
Excess................................... $ 19,394 10.8% $ 2,466 6.4%
========= ===== ========= ======
</TABLE>
- ------------
(1) Based on adjusted total assets for purposes of the tangible capital and
core capital requirements, and risk-weighted assets for purposes of the
risk-based capital requirement.
The OTS has proposed an amendment to its capital regulations
establishing a minimum core capital ratio of 3% for savings institutions rated
composite 1 under the OTS rating system. For all other savings institutions, the
minimum core capital ratio will be from 4% to 5%. In determining the amount of
additional core capital, the OTS will assess both the quality of risk management
systems and the level of overall risk in each individual savings institution
through the supervisory process on a case-by-case basis. As a result, while the
exact effect on the Institutions cannot be predicted at this time, based on the
OTS proposal, it is anticipated that the Bank's and Association's core capital
requirements could increase to between 4% and 5%.
The OTS requires savings institutions with more than a "normal" level
of interest rate risk to maintain additional total capital. A savings
institution's interest rate risk is measured in terms of the sensitivity of its
"net portfolio
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value" to changes in interest rates. Net portfolio value is defined, generally,
as the present value of expected cash inflows from existing assets and off-
balance sheet contracts less the present value of expected cash outflows from
existing liabilities. A savings institution will be considered to have a
"normal" level of interest rate risk exposure if the decline in its net
portfolio value after an immediate 200 basis point increase or decrease in
market interest rates (whichever results in the greater decline) is less than
two percent of the current estimated economic value of its assets. A savings
institution with a greater than normal interest rate risk is required to deduct
from total capital, for purposes of calculating its risk-based capital
requirement, an amount (the "interest rate risk component") equal to one-half
the difference between the institution's measured interest rate risk and the
normal level of interest rate risk, multiplied by the economic value of its
total assets.
The OTS calculates the sensitivity of a savings institution's net
portfolio value based on data submitted by the institution in a schedule to its
quarterly Thrift Financial Report and using the interest rate risk measurement
model adopted by the OTS. The amount of the interest rate risk component, if
any, to be deducted from a savings institution's total capital will be based on
the institution's Thrift Financial Report filed two quarters earlier. Savings
institutions with less than $300 million in assets and a risk-based capital
ratio above 12% are generally exempt from filing the interest rate risk schedule
with their Thrift Financial Reports. However, the OTS may require any exempt
savings institution that it determines may have a high level of interest rate
risk exposure to file such schedule on a quarterly basis. Based upon the Bank's
current level of interest rate risk exposure, it is not subject to additional
capital requirements. The Association's current level of interest rate risk,
however, does exceed the 2% of asset value limit at a 200 basis point
increase in market interest rates, but due to the Association's risk-based
capital ratio being over 12%, the Association is not required to deduct an
interest rate risk component from its total regulatory capital. The Association
also has not been required to file supplemental interest rate risk information
with the OTS.
In addition to requiring generally applicable capital standards for
savings institutions, the Director of OTS is authorized to establish the minimum
level of capital for a savings institution at such amount or at such ratio of
capital-to-assets as the Director determines to be necessary or appropriate for
such institution in light of the particular circumstances of the institution.
The Director of OTS may treat the failure of any savings institution to maintain
capital at or above such level as an unsafe or unsound practice and may issue a
directive requiring any savings institution which
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fails to maintain capital at or above the minimum level required by the Director
to submit and adhere to a plan for increasing capital. Such an order may be
enforced in the same manner as an order issued by the FDIC.
Loans-to-One-Borrower Limitations. Savings institutions generally are
subject to the lending limits applicable to national banks. With certain limited
exceptions, an institution's loans and extensions of credit outstanding at one
time to a person and not fully secured shall not exceed 15% of the unimpaired
capital and surplus of the savings institution on an unsecured basis. Loans and
extensions of credit fully secured by certain readily marketable collateral may
represent an additional 10% of unimpaired capital and surplus. Savings
institutions are additionally authorized to make loans to one borrower, for any
purpose, in an amount not to exceed $500,000 or, by order of the Director of
OTS, in an amount not to exceed the lesser of $30,000,000 or 30% of unimpaired
capital and surplus to develop residential housing, provided: (i) the purchase
price of each single-family dwelling in the development does not exceed
$500,000; (ii) the savings institution is in compliance with the fully phased-in
regulatory capital standards; (iii) the loans comply with applicable
loan-to-value requirements; and (iv) the aggregate amount of loans made under
this authority does not exceed 150% of unimpaired capital and surplus. A savings
institution is also authorized to make loans to one borrower to finance the sale
of real property acquired in satisfaction of debts in an amount up to 50% of
unimpaired capital and surplus. The lending limits generally do not apply to
purchase money mortgage notes taken from the purchaser of real estate acquired
by the institution in satisfaction of debts previously contracted if no new
funds are advanced to the borrower and the savings institution is not placed in
a more detrimental position as a result of the sale. Certain types of loans are
exempted from the lending limits, including loans secured by savings deposits.
Management does not believe the foregoing loans-to-one-borrower limits
will have a substantial impact on the Institutions, except in the event of the
extension of lines of credit to borrowers who are in excess of the
loans-to-one-borrower limits. As to such borrowers, the Institutions would be
obliged to sell existing loans, enter into participation agreements, or not
enter into any additional loans pending reduction of outstanding loan balances
with such borrowers, before extending additional lines of credit. At
December 31, 1997, the maximum amounts the Bank and Association could lend to
one borrower under the 15% standard were $5.1 million and $838,000,
respectively. At that date, the Bank's and Association's largest loans to one
borrower were $3.0 million and $586,000, respectively.
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<PAGE>
Federal Reserve System. Pursuant to regulations of the Federal Reserve
Board, a thrift institution must maintain average daily reserves equal to 3% of
the first $47.8 million of transaction accounts, plus 10% of the remainder.
These percentages are 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, 1997, the Institutions met their respective reserve
requirements.
Savings and Loan Holding Companies. Since its acquisition of all of the
Bank's stock in March 1990, the Company has been a savings and loan holding
company within the meaning of the Home Owners' Loan Act. As such, the Company is
registered with the OTS and is subject to regulation, examination, supervision
and reporting requirements. Upon its acquisition of the Association in August
1992, the Company became a multiple savings and loan holding company subject to
additional regulatory requirements. As subsidiaries of the Company, the
Institutions are subject to certain restrictions in their dealings with the
Company and its affiliates.
The Home Owners' Loan Act generally prohibits a savings and loan
holding company, without prior approval of the Director of the OTS, from
(i) acquiring control of any other savings institution or savings and loan
holding company or acquiring all or substantially all of the assets thereof, or
(ii) acquiring or retaining more than 5% of the voting shares of a savings
institution or holding company thereof which is not a subsidiary. A savings and
loan holding company may not acquire as a separate subsidiary savings
institution which has principal offices outside of the state where the principal
office of its subsidiary institution is located, except (i) in the case of
certain emergency acquisitions approved by the FDIC, (ii) if the holding company
controlled (as defined) such institutions as of March 5, 1987, or (iii) when the
statutes of the state where an institution to be acquired is located
specifically authorize such an acquisition. Under certain circumstances a
savings and loan holding company is permitted to acquire, with the approval of
the Director of the OTS, up to 15% of previously unissued voting shares of an
undercapitalized savings institution for cash without that savings institution
being deemed controlled by the holding company. Except with the prior approval
of the Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may also acquire control of any savings institution, other
than a subsidiary of such holding company, or any other savings and loan holding
company.
40
<PAGE>
A bank holding company, upon receipt of appropriate approvals from the
Federal Reserve Board and the Director of the OTS, is authorized to acquire
control of any savings institution or holding company thereof wherever located.
Similarly, a savings and loan holding company may acquire control of a bank. A
savings institution acquired by a bank holding company (i) may, so long as the
thrift continues to meet the qualified thrift lender test, continue to branch to
the same extent as permitted to other non-affiliated savings institutions
similarly chartered in the state, and (ii) cannot continue any non-banking
activities not authorized for bank holding companies. Savings institutions
acquired by a bank holding company may, if located in a state where the bank
holding company is legally authorized to acquire a bank, be converted to the
status of a bank but deposit insurance assessments and payments continue to be
paid by the institution to the SAIF. A savings institution so converted to a
bank becomes subject to the branching restrictions applicable to banks. Under
certain circumstances, a savings institution acquired by a bank holding company
may be merged with an existing bank subsidiary of the holding company (deposit
insurance assessments and payments attributable to the merged savings
institution will continue to be those of and paid to SAIF pursuant to a
prescribed formula).
Transactions between savings institutions and any affiliate are
governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a
savings institution is any company or entity which controls, is controlled by or
is under common control with the savings institution. In a holding company
context, the parent holding company of a savings institution and any companies
(including other savings institutions) which are controlled by such parent
holding company are affiliates of the savings institution. Generally,
Sections 23A and 23B (i) limit the extent to which the savings institution or
its subsidiaries may engage in "covered transactions" with any one affiliate to
an amount equal to 10% of such institution's capital stock and surplus, and
contain an aggregate limit on all such transactions with all affiliates to an
amount equal to 20% of such capital stock and surplus, and (ii) require that all
such transactions be on terms substantially the same, or at least as favorable,
to the institution 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. In addition to the
restrictions imposed by Section 23A and 23B, no savings institution may (i) loan
or otherwise extend credit to an affiliate, except for an affiliate which
engages only in activities which are permissible for bank holding companies, or
(ii) purchase or invest in any stocks, bonds, debentures, notes or similar
41
<PAGE>
obligations of any affiliate, except for affiliates which are subsidiaries of
the savings institution. The Director of the OTS is granted the authority to
impose more stringent restrictions when appropriate for reasons of safety and
soundness.
Extensions of credit by savings institutions to executive officers,
directors and principal shareholders are subject to the restrictions set forth
in Section 22(h) of the Federal Reserve Act and the Federal Reserve Board's
Regulation O thereunder. Under Section 22(h), loans to an executive officer and
to holders of more than 10% of any class of a savings institution's voting
stock, and certain affiliated entities of either, may not exceed together with
all other outstanding loans to such person and affiliated entities the
institution's loan to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus and an additional 10% of such
capital and surplus for loans fully secured by certain readily marketable
collateral). Section 22(h) also prohibits loans, above amounts prescribed by the
appropriate federal banking agency, to directors, executive officers and holders
of more than 10% of any class of a savings institution's voting stock, and their
respective affiliates, unless such is approved in advance by a majority of the
board of directors of the institution with an "interested" director not
participating in the voting. The Federal Reserve Board has prescribed the loan
amount (which includes all other outstanding loans to such person), as to which
such prior board of director approval is required, as being the greater of
$25,000 or 5% of capital and surplus (up to $500,000). Further, Section 22(h)
and Regulation O require that loans to directors, executive officers and
principal shareholders be made on terms substantially the same as offered in
comparable transactions to other persons. Section 22(h) also generally prohibits
a savings institution from paying the overdrafts of any of its executive
officers or directors.
Savings institutions are also subject to the requirements and
restrictions of Section 22(g) of the Federal Reserve Act on loans to executive
officers (as implemented by the Federal Reserve Board's Regulation O) and the
restrictions of 12 U.S.C. (S)1972 on certain tying arrangements and extensions
of credit by correspondent banks. Section 22(g) of the Federal Reserve Act
requires that loans to executive officers or depository institutions not be made
on terms more favorable than those afforded other borrowers, requires approval
by the board of directors of a depository institution for extensions of credit
to executive officers of the institution, and imposes reporting requirements for
and additional restrictions on the type, amount and terms of credits to such
officers. Section 1972 prohibits a depository institution from extending credit
to or offering any other services, or fixing or varying the consideration for
such extensions of credit or service, on the condition that the customer obtain
some additional service from the institution or certain of its
42
<PAGE>
affiliates or not obtain services of a competitor of the institution, subject to
certain exceptions. Section 1972 also 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.
Prior to its acquisition of the Association in August 1992, the Company
operated as a unitary savings and loan holding company. There generally were no
restrictions on the business activities of the Company as a unitary savings and
loan holding company, or those of the Company's nonbanking subsidiaries. Upon
the Company's acquisition of the Association, the Company became a multiple
savings and loan holding company. As a result, the activities of the Company and
any of its subsidiaries (other than the Bank and Association) have thereafter
been subject to certain restrictions. The Home Owners' Loan Act limits the
business activities of multiple savings and loan holding companies and their
nonbanking subsidiaries to (i) furnishing or performing management services for
a subsidiary savings institution, (ii) conducting an insurance agency or escrow
business, (iii) holding, managing, or liquidating assets owned by or acquired
from a subsidiary savings institution, (iv) holding or managing properties used
or occupied by a subsidiary savings institution, (v) acting as trustee under
deeds of trust, (vi) those activities previously directly authorized by the
former Federal Savings and Loan Insurance Corporation by regulation as of
March 6, 1987 to be engaged in by multiple savings and loan holding companies or
(vii) subject to prior approval of the OTS, those activities authorized by the
Federal Reserve Board as permissible for bank holding companies, unless the OTS
prohibits or limits such activities for savings and loan holding companies. The
activities authorized by the OTS for multiple savings and loan holding companies
as of March 6, 1987 include a variety of activities including, among other
things, the origination, purchase, sale and servicing of various loans, the
provision of clerical services primarily for affiliates, the provision of
certain other management services to affiliates and other multiple holding
companies and the underwriting or reinsuring of credit life insurance in
connection with extensions of credit by a savings association subsidiary or
another savings and loan holding company or subsidiary thereof. The OTS has also
approved various real estate-related activities for multiple holding companies
including the acquisition of unimproved lots or the acquisition of unimproved
real estate for prompt development and subdivision, the development, subdivision
and construction of improvement of
43
<PAGE>
acquired real estate for sale or rental, the acquisition of improved real estate
and mobile homes to be held for rental or sale, the acquisition of improved real
estate for remodeling, rehabilitation, modernization, renovation or demolition
or rebuilding for sale or rental and the maintenance and management of improved
real estate. In the event any savings association subsidiary of a multiple
savings and loan holding company fails to satisfy the Qualified Thrift Lender
test and does not requalify within one year, however, the holding company would
be required to register as a bank holding company and become subject to the more
stringent activity limitations applicable to bank holding companies.
In addition to the foregoing restrictions, if the Director of the OTS
determines that there is reasonable cause to believe that the continuation by a
savings and loan holding company of an activity constitutes a serious risk to
the financial safety, soundness, or stability of its subsidiary savings
institutions, the Director of the OTS may impose such restrictions as deemed
necessary to address such risk, including limiting (i) payment of dividends by
the savings institution(s), (ii) transactions between the savings institution(s)
and their affiliates, and (iii) any activities of the savings institution(s)
that might create a serious risk that the liabilities of the holding company and
its affiliates may be imposed on the savings institution.
Federal and State Taxation
The Company and its subsidiaries file a consolidated federal income tax
return on a calendar year end. Consolidated returns have the effect of
eliminating intercompany distributions, including dividends, from the
computation of consolidated taxable income for the taxable year in which the
distributions occur. Any income of the Company and its other subsidiaries would
not be subject to the bad debt deductions allowed to the Institutions, whether
or not consolidated tax returns are filed. The Institutions, however, must
reduce their taxable incomes for purposes of computing their bad debt reserve
deductions under the percentage of taxable income method by their allocable
shares of loss attributable to the activities of non-thrift members of the
consolidated group if those members' activities are functionally related to the
activities of the Institutions.
Federal Taxation. Thrift institutions are subject to the provisions of
the Internal Revenue Code of 1986 (the "Code") in the same general manner as
other corporations. However, institutions such as the Bank and the Association
which meet certain definitional tests and other conditions prescribed by the
Code may benefit from certain favorable provisions regarding their deductions
from taxable income for annual additions to their bad debt reserve. For purposes
44
<PAGE>
of the bad debt reserve deduction, loans are separated into "qualifying real
property loans," which generally are loans secured by interests in certain real
property, and nonqualifying loans, which are all other loans. The bad debt
reserve deduction with respect to nonqualifying loans must be based on actual
loss experience. For tax years beginning before January 1, 1996, the amount of
the bad debt reserve deduction with respect to qualifying real property loans
may be based upon actual loss experience (the "experience method") or a
percentage of taxable income determined without regard to such deduction (the
"percentage of taxable income method"). The Bank and the Association
historically used whichever method resulted in the highest bad debt reserve
deduction in any given year.
Legislation that is effective for tax years beginning after
December 31, 1995 requires institutions to recapture into taxable income over a
six taxable year period the portion of the tax loan reserve that exceeds the
pre-1988 tax loan loss reserve. The Bank and the Association will no longer be
allowed to use the percentage of taxable income method for tax loan loss
provisions, but would be allowed to use the experience method of accounting for
bad debts. There will be no future effect on net income from the recapture
because the taxes on these bad debts reserves has already been accrued as a
deferred tax liability.
The legislation provides for a suspension of this recapture if the
institution meets the "residential loan requirement." This requirement is met if
the principal amount of residential loans that the institution originates during
its first taxable year after December 31, 1995, exceeds the average of the
principal amounts of residential loans made by the institution during the six
most recent taxable years beginning before January 1, 1996. If the requirement
is met, the recapture is suspended until a taxable year beginning after December
31, 1997. The Bank and the Association expect to meet this requirement for the
taxable year ended December 31, 1997.
Under the percentage of taxable income method, the bad debt reserve
deduction for qualifying real property loans was computed as a percentage, which
Congress has reduced from as much as 60% in prior years to 8% of taxable income,
with certain adjustments, effective for taxable years beginning after 1986. The
allowable deduction under the percentage of taxable income method (the
"percentage bad debt deduction") for taxable years beginning before 1987 was
scaled downward in the event that less than 82% of the total dollar amount of
the assets of an association were within certain designated categories. When the
percentage method bad debt deduction was lowered to 8%, the 82%
45
<PAGE>
qualifying assets requirement was lowered to 60%. For all taxable years, there
is no deduction in the event that less than 60% of the total dollar amount of
the assets of an association falls within such categories. Moreover, in such
case, the Institutions could be required to recapture, generally over a period
of up to four years, their existing bad debt reserve. As of December 31, 1997,
more than the required amount of the Institutions' total assets fell within such
category.
The bad debt deduction under the percentage of taxable income method
was subject to certain limitations. First, the amount added to the reserve for
losses on qualifying real property loans may not have exceeded the amount
necessary to increase the balance of such reserve at the close of the taxable
year to 6% of such loans outstanding at the end of the taxable year. Further,
the addition to the reserve for losses on qualifying real property loans could
not have exceeded the amount which, when added to that year's addition to the
bad debt reserve for losses on nonqualifying loans, equaled the amount by which
12% of total deposits or withdrawable accounts of depositors at year-end
exceeded the sum of surplus, undivided profits and reserves at the beginning of
the year. Finally, the percentage bad debt deduction under the percentage of
taxable income method was reduced by the deduction for losses on nonqualifying
loans.
Earnings appropriated to an institution's bad debt reserve and claimed
as a tax deduction are not available for the payment of cash dividends or for
distribution to shareholders (including distributions made on dissolution or
liquidation), unless such amount is included in taxable income, along with the
amount deemed necessary to pay the resulting federal income tax.
The Company's federal income tax returns have been audited through
1988.
State Taxation. The State of Indiana imposes a franchise tax which is
assessed on qualifying financial institutions, such as the Bank. The tax is
based upon federal taxable income before net operating loss carryforward
deductions (adjusted for certain Indiana modifications) and is levied at a rate
of 8.5% of adjusted taxable income. The Association is subject to an Ohio
franchise tax based on its net worth plus certain reserve amounts. Total net
worth for this purpose is reduced by certain exempt assets. The resulting net
taxable value is taxed at a rate of 1.5%. The Company's Indiana income tax
returns have been audited through 1989, and its Ohio franchise tax returns have
not been audited during the past five years. For additional information, see
Note 10 of the Consolidated Financial Statements in Part II of this Report.
46
<PAGE>
Employees
As of December 31, 1997, the Company and subsidiaries had approximately
122 full-time and 17 part-time employees. The employees are not represented by a
collective bargaining agreement. Management believes the Company and its
subsidiaries enjoy good relations with their personnel. Executive Officers
<TABLE>
<CAPTION>
Age at
Name December 31, 1997 Principal Position
- ---- ----------------- ------------------
<S> <C> <C>
Harry J. Bailey 55 President and Chief Executive Officer of the Bank and Company
Timothy G. Clark 47 Executive Vice President and Chief Operating Officer of the Bank
Ronald M. Holloway 48 Senior Vice President and Chief Lending Officer of the Bank
Ralph E. Kerwin 61 Senior Vice President, Deposit Services of the Bank
Michael C. Olson 48 President and Chief Executive Officer of the Association
Howard J. Pruim 53 Senior Vice President - Secretary of the Bank through retirement
on December 31, 1997 and Treasurer of the Bank through appointment of
Mr. Welling (see below) as Treasurer effective January 1, 1998.
Nancy A. Rogers 55 Senior Vice President - Marketing Services of the Bank and Secretary
of the Bank and Company (since retirement of Mr. Pruim effective
December 31, 1997 -- see above).
Richard E. Welling 52 Senior Vice President - Treasurer of the Bank and Company (since
retirement of Mr. Pruim effective January 1, 1998 -- see above).
Edward J. Wooton 44 Senior Vice President - Subsidiaries of the Bank
Jan F. Wright 54 Senior Vice President - Branch Operations of the Bank and Senior Vice
President of the Company
</TABLE>
Unless otherwise noted, all officers have held the position described
below for at least the past five years.
Harry J. Bailey has been President of the Company and the Bank since
May 1990 and was appointed Chief Executive Officer in December 1990. Mr. Bailey
had been the Executive Vice President and Chief Operating Officer of the Company
since its formation in 1989 and of the Bank since February 1984. He has been a
director of the Bank since 1987 and a director of the Company since its
formation.
47
<PAGE>
Timothy G. Clark joined the Bank as Executive Vice President and Chief
Operating Officer on September 2, 1997. He previously held the position of
Regional Executive and Area President at National City Bank of Indiana in
Seymour, Indiana for 5 years and prior to that held senior management positions
with Central National Bank in Greencastle, Indiana for 5 years and Hancock
Bank & Trust in Greenfield, Indiana for 13 years.
Ronald M. Holloway has been employed by the Bank since 1973 and was
elected Senior Vice President and Chief Lending Officer in December 1995.
Mr. Holloway previously was responsible for the loan servicing department of the
Bank.
Ralph E. Kerwin has been employed by the Bank since 1964 and heads the
funds acquisition function as Senior Vice President - Deposit Services.
Michael C. Olson was elected to the position of President and Chief
Executive Officer of the Association in March 1995. He was formerly Senior Vice
President - Branch Operations and Marketing of the Bank and the Chief Executive
Officer of Citizens Federal prior to its merger with the Bank in 1988. He has
been employed in the thrift industry since 1974.
Howard J. Pruim, a certified public accountant, retired effective
December 31, 1997. Before his retirement, Mr. Pruim had been Senior Vice
President Treasurer and Chief Financial Officer of the Bank since 1973 and had
been elected Corporate Secretary in 1991. He also directed the accounting, data
processing and personnel functions. For the previous seven years, he was with
Ernst and Young as an auditor.
Nancy A. Rogers was elected as Senior Vice President - Marketing
Services in March 1995 and was also appointed Secretary of the Company and the
Bank with the retirement of Mr. Pruim. She has been employed at the Bank since
1964 and most recently served as Vice President and Director of Advertising and
Public Relations.
Richard E. Welling, a certified public accountant, joined the Bank as a
Senior Vice President on December 1, 1997, and was appointed Treasurer of the
Company and the Bank with the retirement of Mr. Pruim. Prior to joining the
Bank, he was employed as Secretary, Treasurer and Chief Financial Officer of
AMBANC Corp. in Vincennes, Indiana, where he had been employed for eleven years.
48
<PAGE>
Edward J. Wooton joined the staff of the Bank in August 1985 as Senior
Vice President - Subsidiaries and directs diversified operations of the Bank. He
came to the Bank from the Management Advisory Services Group of Deloitte and
Touche, and prior to that he was an operations officer of a thrift institution
in the Chicago area. He was appointed Senior Vice President of the Company in
1989.
Jan F. Wright was elected as Senior Vice President - Branch Operations
in March 1995 and has been employed by the Bank since 1972. He previously held
the position of Vice President and Director of Loan Origination and Processing.
49
<PAGE>
Item 2. Properties
- -------------------
Offices and Other Material Properties
The following table sets forth the location of the Company's
office facilities at December 31, 1997 and certain other information relating to
these properties at that date.
<TABLE>
<CAPTION>
Year Total Net Owned/ Square
Acquired Investment Book Value Leased Feet
-------- ---------- ---------- ------ ----
<S> <C> <C> <C> <C> <C>
The Bank:
Main Office
2118 Bundy Avenue
New Castle, Indiana............. 1958 $ 3,290,795 $ 1,098,311 Owned 20,500
1311 Broad Street
New Castle, Indiana............. 1890 1,402,690 480,177 Owned 18,000
956 North Beechwood Street
Middletown, Indiana............. 1971 448,559 121,201 Owned 5,500
22 North Jefferson
Knightstown, Indiana............ 1979 578,580 210,487 Owned 3,400
1810 North State Street
Greenfield, Indiana............. 1995 1,491,810 1,219,504 Owned 5,800
99 Dan Jones Road
Avon, Indiana................... 1995 1,823,909 1,725,203 Owned 12,600
1754 East 53rd Street
Anderson, Indiana............... 1993 424,807 336,929 Owned 1,500
The Association:
7200 Blue Ash Road
Cincinnati, Ohio................ 1992 1,314,397 622,313 Owned 9,100
Ameriana Insurance Agency
2020 S. Memorial Drive
New Castle, Indiana............. 1987 217,981 95,080 Leased 1,200
------------- ------------
Total..................... $ 10,993,528 $ 5,909,205
============= ============
</TABLE>
The Institutions use on-line processing terminals. Most of the data
processing is done by an in-house data processing center. At December 31, 1997,
the total net book value of the Company's offices and equipment (including
leasehold improvements) was $5.9 million.
50
<PAGE>
Item 3. Legal Proceedings
- --------------------------
The Company and its subsidiaries are not a party to any material pending
legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
- --------------------------------------------------------------------------------
Matters
- -------
The information set forth (i) in Note 17 of the Notes to Consolidated
Financial Statements under "Item 7. Financial Statements" and (ii) under the
section titled "Market Information" in the Annual Report, which section is
included in the information furnished as Exhibit 13 hereof, is incorporated
herein by reference.
Item 6. Selected Financial Data
- --------------------------------
The information set forth under the section titled "Selected Financial
Data" in the Annual Report, which section is included in the information
furnished as Exhibit 13 hereof, is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
- -------------
The information set forth under the section titled "Management's Discussion
and Analysis" in the Annual Report, which section is included in the information
furnished as Exhibit 13 hereof, is incorporated herein by reference.
Item 7A. Quantative and Qualitative Disclosures About Market Risk.
- -----------------------------------------------------------------
The information required by this item contained in the section titled
"Management's Discussion and Analysis" in the Annual Report, which section is
included in the information furnished as Exhibit 13 hereof, is incorporated
herein by reference.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The Independent Auditor's Report and related consolidated financial
statements and notes in the Annual Report, which report, statements and notes
are included in the information furnished as Exhibit 13 hereof, are incorporated
herein by reference.
51
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure
- --------------------
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
For information concerning the directors of the Company, the information
contained under the section captioned "Proposal I -- Election of Directors" in
the Proxy Statement is incorporated herein by reference. For information
concerning the executive officers of the Company, see "Item 1. Business --
Executive Officers" under Part I of the Report, which is incorporated herein by
reference.
Item 11. Executive Compensation
- --------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors -- Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and
Security Ownership" in the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and
Security Ownership" in the Proxy Statement.
(c) Changes In Control
The Company is not aware of any arrangements, including any
pledge by any person of securities of the Company, the
operation of which may at a subsequent date result in a change
in control of the Company.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Transactions with Management" in the Proxy
Statement.
52
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
1. Report of Independent Auditor
2. Financial Statements
(a) Consolidated Statements of Condition at December 31,
1997 and 1996
(b) Consolidated Statements of Income for Each of the
Three Years in the Period Ended December 31, 1997
(c) Consolidated Statements of Shareholders' Equity for
Each of the Three Years in the Period Ended December
31, 1997
(d) Consolidated Statements of Cash Flows for Each of the
Three Years in the Period Ended December 31, 1997
(e) Notes to Consolidated Financial Statements
All schedules for which provision is made in the applicable
accounting regulations are either not required under the
related instructions or are inapplicable, and therefore have
been omitted.
3. Exhibits
3 Ameriana Bancorp Articles of Incorporation and
Bylaws -- incorporated herein by reference to the
Company's Registration Statement on Form S-4 filed
with the SEC on September 18, 1989
10.1 Ameriana Bancorp stock option plans and other option
agreements -- 1987 Stock Option Plan incorporated
herein by reference to the Company's Registration
Statement on Form S-8 filed with the SEC on March 30,
1990; 1996 Stock Option and Incentive Plan
incorporated herein by reference to the Company's
Registration Statement on Form S-8 filed with the SEC
on May 17, 1996; other option agreements with Charles
M. Drackett, Jr., Michael E. Kent and Ronald R.
Pritzke incorporated herein by reference to the
Company's Registration Statement on Form S-8 filed
with the SEC on May 17, 1996.
53
<PAGE>
10.2 Ameriana Bank, F.S.B. Employment Agreements with
Harry J. Bailey, Howard J. Pruim and Edward J. Wooton
-- agreements with Messrs. Bailey and Pruim
incorporated herein by reference to the Company's
Annual Report on Form 10-K filed with the SEC on
March 25, 1994; agreement with Mr. Wooton
incorporated herein by reference to the Company's
Annual Report on Form 10-K filed with the SEC on
March 28, 1995
10.3 Ameriana Bancorp Consulting Agreement with Paul W.
Prior --incorporated herein by reference to the
Company's Annual Report on Form 10-K filed with the
SEC on March 28, 1991.
13 Portions of Annual Report
21 Subsidiaries
23 Consent of Geo. S. Olive & Co. LLC
27 Financial Data Schedule
4. Reports on Form 8-K
The Company did not file a current report on Form 8-K during the fourth
quarter of the fiscal year covered by this report.
54
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, as of the date set
forth below.
AMERIANA BANCORP
Date: March 27, 1998 By:/s/ Harry J. Bailey
-------------------------------------
Harry J. Bailey
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
in the capacities indicated as of the date set forth above.
By: By:/s/ Harry J. Bailey
----------------------------- -------------------------------------
Paul W. Prior Harry J. Bailey
Chairman of the Board President, Chief Executive
Officer and a Director
(Principal Executive Officer)
By: /s/ Richard E. Welling By:/s/ Donald C. Danielson
----------------------------- -------------------------------------
Richard E. Welling Harry J. Bailey
Senior Vice President - Director
Treasurer
(Principal Financial and
Accounting Officer)
By: By:/s/ R. Scott Hayes
----------------------------- -------------------------------------
Charles M. Drackett, Jr. R. Scott Hayes
Director Director
By: By:/s/ Ronald R. Pritzke
--------------------------- -------------------------------------
Michael E. Kent Ronald R. Pritzke
Director Director
55
<PAGE>
EXHIBIT INDEX
Exhibit
3 Ameriana Bancorp Articles of Incorporation and Bylaws --
incorporated herein by reference to the Company's
Registration Statement on Form S-4 filed with the SEC on
September 18, 1989
10.1 Ameriana Bancorp stock option plans and other option
agreements --1987 Stock Option Plan incorporated herein by
reference to the Company's Registration Statement on Form S-8
filed with the SEC on March 30, 1990; 1996 Stock Option and
Incentive Plan incorporated herein by reference to the
Company's Registration Statement on Form S-8 filed with the
SEC on May 17, 1996; other option agreements with Charles M.
Drackett, Jr., Michael E. Kent and Ronald R. Pritzke
incorporated herein by reference to the Company's
Registration Statement on Form S-8 filed with the SEC on May
17, 1996
10.2 Ameriana Bank, F.S.B. Employment Agreements with Harry J.
Bailey, Howard J. Pruim and Edward J. Wooton -- agreements
with Messrs. Bailey and Pruim incorporated herein by
reference to the Company's Annual Report on Form 10-K filed
with the SEC on March 25, 1994; agreement with Mr. Wooton
incorporated herein by reference to the Company's Annual
Report on Form 10-K filed with the SEC on March 28, 1995
10.3 Ameriana Bancorp Consulting Agreement with Paul W. Prior --
incorporated by reference to the Company's Annual Report on
Form 10-K filed with the SEC on March 28, 1991.
13 Portions of Annual Report
21 Subsidiaries
23 Consent of Geo. S. Olive & Co. LLC
27 Financial Data Schedule
56
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------------------------------------
At December 31
- --------------------------------------------------------------------------------------------------------------
SUMMARY OF FINANCIAL CONDITION 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash $ 5,066 $ 4,939 $ 4,474 $ 5,513 $ 4,034
Interest-bearing deposits and investment
securities 45,537 54,749 27,669 11,303 22,016
Loans and mortgage-backed securities 324,386 321,142 311,007 307,496 288,625
Other assets 15,879 15,925 13,663 11,042 11,168
- --------------------------------------------------------------------------------------------------------------
Total assets $390,868 $396,755 $356,813 $335,354 $325,843
==============================================================================================================
- --------------------------------------------------------------------------------------------------------------
Deposits $322,217 $318,705 $290,785 $277,439 $276,811
Other liabilities 24,216 34,105 18,913 12,325 5,301
- --------------------------------------------------------------------------------------------------------------
Total liabilities 346,433 352,810 309,698 289,764 282,112
- --------------------------------------------------------------------------------------------------------------
Shareholders' equity 44,435 43,945 47,115 45,590 43,731
- --------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $390,868 $396,755 $356,813 $335,354 $325,843
==============================================================================================================
- --------------------------------------------------------------------------------------------------------------
Year Ended December 31
- --------------------------------------------------------------------------------------------------------------
SUMMARY OF EARNINGS 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
Interest income $ 29,332 $ 28,567 $ 25,608 $ 21,877 $ 22,515
Interest expense 17,345 16,705 14,368 10,647 11,290
- --------------------------------------------------------------------------------------------------------------
Net interest income 11,987 11,862 11,240 11,230 11,225
Provision for loan losses 242 66 117 181 324
Other income 2,864 2,433 2,214 2,589 2,548
Other expense 8,985 10,520 8,155 8,495 7,632
- --------------------------------------------------------------------------------------------------------------
5,624 3,709 5,182 5,143 5,817
Income taxes 1,992 1,305 1,945 1,881 2,257
- --------------------------------------------------------------------------------------------------------------
Income from continuing operations 3,632 2,404 3,237 3,262 3,560
Income from discontinued operations - - - 1,450 -
Income from change in accounting principle - - - - 127
- --------------------------------------------------------------------------------------------------------------
NET INCOME $ 3,632 $ 2,404 $ 3,237 $ 4,712 $ 3,687
==============================================================================================================
Basic earnings per share (1):
Income from continuing operations $ 1.12 $ .72 $ .92 $ .92 $ 1.01
Income from discontinued operations - - - .41 -
Income from change in accounting principle - - - - .04
- --------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE $ 1.12 $ .72 $ .92 $ 1.33 $ 1.05
==============================================================================================================
Diluted earnings per share (1):
Income from continuing operations $ 1.11 $ .71 $ .91 $ .90 $ .98
Income from discontinued operations - - - .40 -
Income from change in accounting principle - - - - .04
- --------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 1.11 $ .71 $ .91 $ 1.30 $ 1.02
- --------------------------------------------------------------------------------------------------------------
DIVIDENDS DECLARED PER SHARE (1) $ .62 $ .57 $ .48 $ .64 $ .41
==============================================================================================================
BOOK VALUE PER SHARE (1) $ 13.74 $ 13.35 $ 13.34 $ 12.97 $ 12.33
==============================================================================================================
- --------------------------------------------------------------------------------------------------------------
Year Ended December 31
- --------------------------------------------------------------------------------------------------------------
OTHER SELECTED DATA 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
Return on average assets .92% .62% .93% 1.43% 1.14%
Return on average equity 8.28 5.39 7.00 10.59 8.67
Ratio of average equity to average assets 11.06 11.41 13.22 13.54 13.12
Dividend payout ratio (2) 55% 78% 52% 49% 40%
Number of full-service offices:
Ameriana Savings Bank, FSB 7 6 6 6 5
Deer Park Federal Savings and Loan Association 1 1 2 2 2
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Restated to reflect three-for-two stock split declared in 1993 and four-
for-three stock split declared in 1996.
(2) Based on income from continuing operations and excluding special dividends.
2
<PAGE>
*****
Management's Discussion and Analysis
General
Ameriana Bancorp (the "Company") was incorporated under Indiana law for the
purpose of becoming the holding company for Ameriana Savings Bank, F.S.B.
("Ameriana"). In 1990, the Company acquired all of Ameriana's common stock in
connection with Ameriana's reorganization into the holding company form of
ownership. In 1992, the Company acquired Deer Park Federal Savings and Loan
Association ("Deer Park"). Collectively, Ameriana and Deer Park are referred to
as the "Institutions" in this discussion and analysis. In 1995, the Company
purchased a minority interest in a limited partnership organized to acquire and
manage real estate investments which qualify for federal tax credits.
The largest components of the Company's total revenue and total expense are
interest income and interest expense, respectively. Consequently, the Company's
earnings are primarily dependent on its net interest income, which is determined
by (i) the difference between rates of interest earned on interest-earning
assets and rates paid on interest-bearing liabilities ("interest rate spread"),
and (ii) the relative amounts of interest-earning assets and interest-bearing
liabilities. Net income also is significantly affected by levels of other income
and operating expenses.
Management believes that interest rate risk, i.e., the sensitivity of
income and net asset values to changes in interest rates, is one of the most
significant determinants of the Company's ability to generate future earnings.
Accordingly, the Company has implemented a long-range plan intended to minimize
the effect of changes in interest rates on operations. The asset and liability
management policies of the Company are designed to stabilize long-term net
interest income by managing the repricing terms, rates and relative amounts of
interest-earning assets and interest-bearing liabilities. The Company's
percentage of fixed-rate to adjustable-rate mortgage loans and short-term
balloon loans has maintained a relatively consistent percentage over the last
several years with fixed-rate loans becoming a lower percentage. The mix of
fixed-rate to adjustable-rate and short-term balloon loans has continued to
decline over the last several years with 1997 being 23% to 62%, 1996 being 26%
to 60%, 1995 being 24% to 64% and 1994 being 24% to 69%. This emphasis on
adjustable-rate loans is also affected by the interest rate cycle. As rates
decline to the bottom of recent historical rates, fixed-rate loans become more
advantageous to the consumer and the Company makes more fixed-rate mortgage
loans. These fixed-rate loans are then sold into the secondary market with the
Company retaining servicing rights. The Company sold $29,862,000 of fixed-
rate loans in 1997 compared with $18,359,000 in 1996 and $11,180,000 in 1995.
The Company also continues to emphasize automobile and other consumer loans as
part of its strategic plan of shortening loan maturities. Competitive rates in
the market place have resulted in these consumer loans decreasing by $4,214,000
at December 31, 1997, from a year ago. Although a concentration in
adjustable-rate and consumer loans may increase credit risk, the Company has not
experienced a significantly higher default ratio on this loan portfolio as
compared with its fixed-rate mortgage loan portfolio.
The Company's primary goal in the management of its liabilities is to
maintain the stability of deposit accounts. During the year ended December 31,
1997, the Company offered special rates on selected certificate accounts with
maturities approximating the expected duration or repricing frequency of its
current loan originations. In addition, the Company continued purchasing
negotiated-rate certificates primarily from local and county governmental
entities. The Company has been able to control its liability needs and deposits
increased $3,512,000 at December 31, 1997, over December 31, 1996, and
borrowings from the Federal Home Loan Bank were reduced by 40% to $16,016,000 at
December 31, 1997, from $26,549,000 at December 31, 1996. The Company continues
to experience competitive forces on its deposits from other institutions in the
marketplace, but the Company was able to compete with these investing
alternatives by providing additional investment choices for its customers
through its securities brokerage and insurance products.
The Company has continued to increase the level of non-interest-sensitive
fee income producing assets. These activities include an equity interest in a
life insurance company, a full-service general lines property and casualty
insurance agency, a title insurance company and a brokerage service.
As noted above, loans sold increased during 1997 over 1996, but servicing
of sold loans decreased to $117,000,000 from $145,000,000, respectively, due to
normal loan reductions and sales and purchases of servicing rights. The Bank
sold $53,692,000 of loan servicing rights for a gain of $96,410 during November
1997. The Bank also purchased $25,941,000 of loan servicing rights in October
1997.
Interest Sensitivity
The following table presents the Company's interest sensitivity gap between
interest-earning assets and interest-bearing liabilities at December 31, 1997.
This table assumes no prepayments of loans, no early redemption of
3
<PAGE>
*****
Management's Discussion and Analysis
securities at call dates, no early withdrawals of certificates of deposit and no
extension of deposit account sensitivity relating to core deposit stability.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
- -----------------------------------------------------------------------------------------------------------------------------
6 6 More
Months Months l to 3 3 to 5 5 to 10 l0 to 20 than
or Less to l Year Years Years Years Years 20 Years Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate Sensitive Assets:
- -----------------------------------------------------------------------------------------------------------------------------
Balloon and adjustable-
rate loans (1) $ 105,179 $ 42,147 $ 29,887 $ 11,755 $ 16,679 $ -- $ -- $ 205,647
Fixed-rate loans (1) 5,770 332 1,196 3,541 15,350 33,774 16,034 75,997
Other loans 12,728 455 9,445 21,897 3,633 670 -- 48,828
Other investments (2) 18,555 200 10,000 1,600 199 18,395 -- 48,949
- -----------------------------------------------------------------------------------------------------------------------------
Total 142,232 43,134 50,528 38,793 35,861 52,839 16,034 379,421
- -----------------------------------------------------------------------------------------------------------------------------
Rate Sensitive Liabilities:
- -----------------------------------------------------------------------------------------------------------------------------
Deposits:
Certificate accounts 121,978 48,383 68,634 4,702 3,810 -- -- 247,507
Money market
deposit accounts 8,385 -- -- -- -- -- -- 8,385
Passbook accounts 44,715 -- -- -- -- -- -- 44,715
NOW accounts 21,610 -- -- -- -- -- -- 21,610
- -----------------------------------------------------------------------------------------------------------------------------
Total Deposits 196,688 48,383 68,634 4,702 3,810 -- -- 322,217
FHLB advances 8,600 -- -- 809 6,607 -- -- 16,016
- -----------------------------------------------------------------------------------------------------------------------------
Total 205,288 48,383 68,634 5,511 10,417 -- -- 338,233
- -----------------------------------------------------------------------------------------------------------------------------
Asset/liability gap $ (63,056) $ (5,249) $ (18,106) $ 33,282 $ 25,444 $ 52,839 $ 16,034 $ 41,188
- -----------------------------------------------------------------------------------------------------------------------------
Additional Gap Information:
- -----------------------------------------------------------------------------------------------------------------------------
Gap as a percentage
of total assets (16.13)% (1.34)% (4.63)% 8.51% 6.51% 13.52% 4.10%
Cumulative gap $ (63,056) $ (68,305) $ (86,411) $ (53,129) $ (27,685) $ 25,154 $ 41,188
Cumulative gap as
a percentage of
total assets (16.13)% (17.48)% (22.11)% (13.59)% (7.08)% 6.44% 10.54%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes mortgage loans and mortgage-backed securities. Amounts are stated
without reductions of $6.083 million for deferred fees, unearned income,
undisbursed loan proceeds and allowance for loan losses.
(2) Includes investment securities, interest-bearing deposits and stock in
Federal Home Loan Bank.
Interest Rate Risk
Ameriana and Deer Park are subject to interest rate risk to the degree that
their interest-bearing liabilities, primarily deposits, mature or reprice at
different rates than their interest-earning assets. Although having liabilities
that mature or reprice less frequently on average than assets will be beneficial
in times of rising interest rates, such an asset/liability structure will result
in lower net income during periods of declining interest rates, unless offset by
other factors.
It is important to Ameriana and Deer Park to manage the relationship
between interest rates and the effect on their net portfolio value ("NPV"). This
approach calculates the difference between the present value of expected cash
flows from assets and the present value of expected cash flows from liabilities,
as well as cash flows from off-balance sheet contracts. Assets and liabilities
are managed within the context of the marketplace, regulatory limitations and
within its limits on the amount of change in NPV, which is acceptable given
certain interest rate changes.
The Office of Thrift Supervision ("OTS") issued a regulation, which uses a
net market value methodology to measure the interest rate risk exposure of
savings associations. Under this OTS regulation an institution's "normal" level
of interest rate risk in the event of an assumed change in interest rates is a
decrease in the institution's NPV in an amount not exceeding 2% of the present
value of its assets. Savings associations with over $300 million in assets or
less than a 12% risk-based capital ratio are required to file OTS Schedule CMR.
Data from Schedule CMR is used by the OTS to calculate changes in NPV (and the
related "normal" level of interest rate risk) based upon certain interest rate
changes (discussed below). Associations which do not meet either of the filing
requirements are not
4
<PAGE>
*****
Management's Discussion and Analysis
required to file OTS Schedule CMR, but may do so voluntarily. Ameriana, with
assets over $300 million, is required to file the schedule. As Deer Park does
not meet either of these requirements, it is not required to file Schedule CMR,
although it does so voluntarily. Under the regulation, associations which must
file are required to take a deduction (the interest rate risk capital component)
from their total capital available to calculate their risk based capital
requirement if their interest rate exposure is greater than "normal". The amount
of that deduction is one-half of the difference between (a) the institution's
actual calculated exposure to a 200 basis point interest rate increase or
decrease (whichever results in the greater pro forma decrease in NPV) and (b)
its "normal" level of exposure which is 2% of the present value of its assets.
Presented below, as of December 31, 1997, is an analysis performed by the
OTS of Deer Park's interest rate risk as measured by changes in NPV for
instantaneous and sustained parallel shifts in the yield curve, in 100 basis
point increments, up and down 400 basis points. At December 31, 1997, 2% of the
present value of Deer Park's assets was approximately $1.5 million. Because the
interest rate risk of a 200 basis point increase in market rates (which was
greater than the interest rate risk of a 200 basis point decrease) was $1.9
million at December 31, 1997, Deer Park would have been required to make a
deduction of approximately $200 thousand from its total capital available to
calculate its risk based capital requirement if it had been subject to the OTS's
reporting requirements under this methodology.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
NPV as Percent of
Net Portfolio Value Present Value of Assets
- ---------------------------------------------------------------------------------------------------------------------------
Change Dollar Dollar Percent
in Rates Amount Change Change NPVRatio Change
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
+400 bp* $2,524 $-4,786 -65% 3.59% -591 bp
+300 bp 4,013 -3,298 -45% 5.55% -395 bp
+200 bp 5,392 -1,918 -26% 7.28% -222 bp
+100 bp 6,549 -762 -10% 8.65% -85 bp
0 bp 7,310 9.50%
-100 bp 7,648 338 +5% 9.82% +33 bp
-200 bp 7,658 348 +5% 9.76% +27 bp
-300 bp 7,691 381 +5% 9.73% +23 bp
-400 bp 7,986 676 +9% 9.99% +50 bp
</TABLE>
* basis points
Also presented below, as of December 31, 1997, is an analysis, performed by
the OTS, of Ameriana's interest rate risk as measured by changes in NPV for
instantaneous and sustained parallel shifts in the yield curve, in 100 basis
point increments, up and down 400 basis points. At December 31, 1997, 2% of the
present value of Ameriana's assets was approximately $6.5 million. Because the
interest rate risk of a 200 basis point increase in market rates (which was
greater than the interest rate risk of a 200 basis point decrease) was $5.6
million at December 31, 1997, Ameriana would not have been required to make a
deduction from its total capital available to calculate its risk based capital
requirement.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
NPV as Percent of
Net Portfolio Value Present Value of Assets
- ---------------------------------------------------------------------------------------------------------------------------
Change Dollar Dollar Percent
in Rates Amount Change Change NPVRatio Change
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
+400 bp* $28,061 $-14,699 -34% 9.28% -392 bp
+300 bp 32,907 -9,854 -23% 10.66% -254 bp
+200 bp 37,143 -5,617 -13% 11.80% -140 bp
+100 bp 40,513 -2,248 -5% 12.67% -53 bp
0 bp 42,761 13.20%
- -100 bp 44,258 1,497 +4% 13.52% +32 bp
- -200 bp 45,743 2,982 +7% 13.82% +63 bp
- -300 bp 47,740 4,980 +12% 14.25% +105 bp
- -400 bp 50,652 7,892 +18% 14.90% +170 bp
</TABLE>
* basis points
5
<PAGE>
*****
Management's Discussion and Analysis
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the methods of analysis presented above. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain
assets, such as adjustable-rate loans, have features, which restrict changes in
interest rates on a short-term basis and over the life of the asset. Further, in
the event of a change in interest rates, expected rates of prepayments on loans
and early withdrawals from certificates could likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their debt may decrease in the event of an interest rate increase.
The Company considers all of these factors in monitoring its exposure to
interest rate risk.
Yields Earned and Rates Paid
The following tables set forth the weighted average yields earned on the
Company's assets and the weighted average interest rates paid on the Company's
liabilities, together with the net yield on interest-earning assets.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
- ---------------------------------------------------------------------------------------------------------------------------
Weighted Average Yield: 1997 1996 l995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans and mortgage-backed securities 7.86% 7.82% 7.70%
Other interest-earning assets 6.90 6.61 6.82
All interest-earning assets 7.72 7.64 7.64
- ---------------------------------------------------------------------------------------------------------------------------
Weighted Average Cost:
- ---------------------------------------------------------------------------------------------------------------------------
Deposits 4.95 4.89 4.82
Federal Home Loan Bank advances 6.22 5.86 6.31
All interest-bearing liabilities 5.02 4.96 4.84
- ---------------------------------------------------------------------------------------------------------------------------
Interest Rate Spread (spread between weighted average yield on all
interest-earning assets and all interest-bearing liabilities) 2.70 2.68 2.80
- ---------------------------------------------------------------------------------------------------------------------------
Net Yield (net interest income as a percentage of average
interest-earning assets) 3.16 3.17 3.35
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
At December 31
- ---------------------------------------------------------------------------------------------------------------------------
Weighted Average Interest Rates: 1997 1996 l995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans and mortgage-backed securities 7.95% 7.92% 7.93%
Other interest-earning assets 6.56 6.92 6.37
Total interest-earning assets 7.77 7.77 7.79
Deposits 4.93 4.93 5.00
Federal Home Loan Bank advances 6.04 5.83 6.23
Total interest-bearing liabilities 4.99 5.00 5.06
Interest rate spread 2.78 2.77 2.73
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Rate/Volume Analysis
The following table sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to: (l) changes in volume
(changes in volume multiplied by old rate) and (2) changes in rate (changes in
rate multiplied by old volume). No material amounts of loan fees or
out-of-period interest is included in the table. Dollars are in thousands.
6
<PAGE>
*****
Management's Discussion and Analysis
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
- -----------------------------------------------------------------------------------------------------------------------------
l997 vs. l996 l996 vs. l995
- -----------------------------------------------------------------------------------------------------------------------------
INCREASE(DECREASE) Increase(Decrease)
DUE TO CHANGE IN Due to Change in
- -----------------------------------------------------------------------------------------------------------------------------
NET Net
VOLUME RATE CHANGE Volume Rate Change
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans and mortgage-backed securities $ 458 $ 154 $ 612 $ 344 $ 382 $ 726
Other interest-earning assets (2) 155 153 2,277 (43) 2,234
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 456 $ 309 $ 765 $ 2,621 $ 339 $ 2,960
- -----------------------------------------------------------------------------------------------------------------------------
Interest Expense:
Deposits $ 738 $ 193 $ 931 $ 903 $ 202 $ 1,105
FHLB advances (381) 90 (291) 1,254 (22) 1,232
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 357 $ 283 $ 640 $ 2,157 $ 180 $ 2,337
=============================================================================================================================
</TABLE>
Results of Operations
Net Interest Income: The Company's loan and mortgage-backed securities
portfolio increased 1.0% to $324,386,000 at December 31, 1997, from $321,142,000
at December 31, 1996. This portfolio had increased 3.3% at December 31, 1996,
from $311,007,000 at December 31, 1995. The mortgage-backed securities were
purchased in past years when investable funds exceeded demand for mortgage loans
in the Company's market area.
Loan originations were $121,949,000 in 1997 compared with $118,453,000 in
1996 and $82,000,000 in 1995. The $3,496,000 increase in 1997 over 1996 was
composed of increases of $7,722,000 in construction loans and $3,713,000 in
consumer loans and decreases of loan originations on existing property and
loans refinanced of $3,607,000 and $4,332,000, respectively. The $36,453,000
increase in loans in 1996 over 1995 were increases of $2,269,000 in construction
loans, $14,382,000 in loans on existing property, $25,296,000 on loans
refinanced and a decrease of $5,494,000 in consumer loans. Fixed-rate mortgage
loans in the amount of $29,862,000, $18,359,000 and $11,180,000 were originated
and sold into the secondary market during 1997, 1996 and 1995, respectively.
No purchases of mortgage-backed securities were made in 1997 as all of the
Company's investable funds were used in loan originations. During 1996 and 1995,
the Company purchased $2,532,000 and $4,964,000, respectively, in
mortgage-backed securities. All purchases have been in the form of 15-year
fixed-rate government agency insured securities.
Average interest-earning assets increased $5,819,0000 or 1.56% to
$379,743,000 in 1997 from $373,924,000 in 1996. The increase was in average
loans while average mortgage-backed securities decreased and short-term
investments and other interest-earning assets remained the same. Average
interest-bearing assets increased $38,858,000 or 11.6% in 1996 over $335,066,000
in 1995. The increase was in average loans and short-term investments while
mortgage-backed securities decreased. The Institutions took advantage of
borrowings from the Federal Home Loan Bank and leveraged the assets in both 1997
and 1996. These borrowed funds were used to acquire government backed bonds at a
spread to the cost of borrowed funds.
The average yield on the Company's total interest-earning assets was 7.72%
in 1997 and 7.64% in both 1996 and 1995. Total interest income was $29,332,000,
$28,567,000 and $25,608,000 for 1997, 1996 and 1995, respectively. The $766,000
increase in interest income in 1997 was $456,000 related to volume increases and
$309,000 related to rate increases while the $2,960,000 increase in 1996 was
$2,621,000 related to volume increases and $339,000 related to rate increases.
Average interest-bearing liabilities increased $8,757,000 or 2.60% to
$345,321,000 in 1997 from $336,564,000 in 1996. The increase was in average
deposits offset by a $6,196,000 or 23.84% decrease in Federal Home Loan Bank
borrowings. Average interest-bearing liabilities increased $39,911,000 or 13.45%
in 1996 over $296,653,000 in 1995. The increase was in both deposits and Federal
Home Loan Bank borrowings.
The average cost on the Company's total interest-bearing liabilities was
5.02% in 1997, 4.96% in 1996 and 4.84% in l995. Total interest expense was
$17,345,000, $16,705,000 and $14,368,000 for 1997, 1996 and 1995, respectively.
The $640,000 increase in interest expense in 1997 was due to volume increases of
$357,000 and rate increases of $283,000 while the $2,337,000 increase in 1996
was due to volume increases of $2,157,000 and rate increases of $180,000.
The net interest spread, which is the mathematical difference between the
yield on average interest-bearing assets and cost of interest-bearing
liabilities, was 2.70% in 1997, 2.68% in 1996 and 2.80% in 1995. The net yield,
which is interest income as percent of average earning assets, was 3.16% in
1997, 3.17% in 1996 and 3.35% in 1995.
7
<PAGE>
*****
Management's Discussion and Analysis
Provision for Loan Losses: The provision for loan losses was $242,000 in
1997, $66,000 in 1996 and $117,000 in l995. The provision is the expense that is
added to the allowance for loan losses for possible future charge-offs. The
allowance for loan loss was .40% of net loans at December 31, 1997, and
represents management's best estimate of possible charge-offs in the loan
portfolio. Loan charge-offs have historically been less than the annual
provision for loan losses. Non-performing assets (e.g. real estate owned,
non-accrual loans and loans 90 days or more past due) were $1,162,000,
$1,137,000 and $1,474,000 at December 31, 1997, 1996 and 1995, respectively. The
Company believes it has established an adequate allowance for loan losses in
accordance with generally accepted accounting principles.
Other Income: Other income was $2,864,000, $2,433,000 and $2,214,000 for
1997, 1996 and 1995, respectively. The increase in 1997 over 1996 was due mainly
to increased gains on sale of loans to the secondary market and to a gain on the
sale of servicing rights. Other income also increased because of a gain on the
sale of land. The land had been purchased for a branch sight and the excess land
was sold at a gain of $57,000. The increase in 1996 from 1995 was attributable
to increased volume in insurance and brokerage commissions and gains on the sale
of loans. Other income in 1995 included $117,000 for a gain from the sale of an
office building. Operating losses associated with the limited partnership
amounted to $164,000 in 1997 compared with $152,000 in 1996 and $13,000 in 1995.
Other Expense: Operating expenses were $8,985,000, $10,520,000 and
$8,155,000 for 1997, 1996 and 1995, respectively. The decrease in 1997 was due
to the lack of the one time special Savings Association Insurance Fund ("SAIF")
assessment and to the lower federal insurance premiums instituted after the
special assessment which both totaled $2,335,000 less in 1997 compared to 1996.
Salary and employee benefits and net occupancy expense increased due to the
opening of a new branch in Avon. The increase in 1996 reflected the special SAIF
assessment amounting to $1,879,000. In addition, compensation and occupancy
expense increases, amounting to $126,000 and $111,000, respectively, were in
large part a result of the Company's higher levels of loan originations,
brokerage commissions and establishing its market presence in the Indianapolis
market in anticipation of its branch opening in January 1997.
Income Tax Expense: Income tax expense increased to $1,992,000 for 1997
from $1,305,000 for 1996 and $1,944,000 for 1995. The effective tax rate has
remained consistent at 35.4% and 35.2% for 1997 and 1996, respectively, and the
increase in expense in 1997 is due to increased pretax net income. The effective
tax rate in 1995 was 37.5% and is higher because of the lower tax credits. The
federal tax credits are associated with the operating losses of the Company's
limited partnership investment, which were $183,000 in 1997, $115,000 in 1996
and $25,000 in 1995.
Liquidity and Capital Resources
The Institutions are required by regulation to maintain liquidity ratios at
certain minimum levels. The regulations specify the types of assets that qualify
for liquidity, which generally include cash, federal funds sold, certificates of
deposit and qualifying types of United States Treasury and agency securities and
other investments not pledged as collateral. Such investments serve as a source
of funds upon which the Institutions may rely to meet deposit withdrawals and
other short-term needs. The required level of such liquidity is calculated on a
"liquidity base" consisting of net withdrawable accounts plus borrowings due
within one year or less. Presently, the Institutions are required to maintain
liquid assets as described above of at least 4% of their liquidity base.
Liquidity ratios at December 31, 1997, l996 and l995 were 11.7%, 11.8% and
13.7%, respectively, for Ameriana and 6.6%, 4.7% and 4.9%, respectively, for
Deer Park. The Institutions have exceeded their monthly average liquidity
requirement for all periods presented.
Historically, funds provided by operations, loan principal repayments and
new deposits have been the Company's principal sources of liquid funds. In
addition, the Company has the ability to obtain funds through the sale of new
mortgage loans and through borrowings from the Federal Home Loan Bank system.
At December 31, 1997, the Company's commitments for loans in process
totaled $8,600,000. Management believes that the Company's liquidity and other
sources of funds will be sufficient to fund all outstanding commitments and
other cash needs. A good portion of these commitments are for fixed-rate
mortgage loans which will be sold immediately into the secondary market.
On February 26, 1996, the Board of Directors declared a four-for-three
stock split of the common stock outstanding at the close of business on March
15, 1996. In addition, the Company adopted the 1996 Stock Option Plan, which
provides for the granting of incentive and non-qualified stock options. The plan
reserved 160,000 shares of the Company's common stock for issuance in connection
with the exercise of options granted. Options for 29,853, 52,233 and 43,633
shares were exercised in 1997, 1996 and 1995, respectively. See note 11 to the
consolidated financial statements for option activity and the pro forma effect
on net income.
In June 1997, the Company's Board of Directors approved a one-year
repurchase program to acquire up to 10% of the Company's outstanding common
stock, approximately 300,000 shares, at a cumulative cost not to exceed
8
<PAGE>
*****
Management's Discussion and Analysis
$5,000,000. No shares were repurchased under this program in 1997. In 1997, 1996
and 1995, the Company repurchased 83,205, 234,825, and 26,000 shares,
respectively, under previous repurchase programs at a cost of $1,311,214,
$3,964,198 and $297,587, respectively.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented in this
report have been prepared in accordance with generally accepted accounting
principles. This requires the measurement of financial position and operating
results in terms of historical dollars without consideration of changes in the
relative purchasing power of money over time due to inflation.
Virtually all of the assets and liabilities of a financial institution are
monetary in nature. As a result, interest rates have a more significant impact
on a financial institution's performance than the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or at
the same rate as changes in the prices of goods and services, which are directly
affected by inflation, although interest rates may fluctuate in response to
perceived changes in the rate of inflation.
Current Accounting Issues
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per
Share, was issued in 1997 and was effective for interim and annual financial
statement periods ending after December 15, 1997. After adoption, all prior
periods earnings per share ("EPS") data presented must be restated to conform
with required information. This statement specified the computation,
presentation and disclosure requirements for EPS for entities with publicly held
common stock or potential common stock. SFAS No. 128 was issued to simplify the
computation of EPS and replaces Primary EPS and Fully Diluted EPS with Basic EPS
and Diluted EPS, respectively. It also requires dual presentation of Basic EPS
and Diluted EPS on the face of the income statement for all entities with
complex capital structures, such as the Company, and requires a reconciliation
of the numerator and denominator of the Basic EPS computation to the numerator
and denominator of the Diluted EPS computation. The Company adopted SFAS No. 128
during the fiscal quarter ended December 31, 1997.
SFAS No. 130, Reporting Comprehensive Income, was issued in 1997 and will
become effective for interim and annual financial periods beginning after
December 15, 1997. It establishes standards for the reporting of comprehensive
income and its components in financial statements. SFAS No. 130 is applicable to
all entities that provide a full set of financial statements. Entities that have
no items of other comprehensive income in any period are excluded from the scope
of this statement. The Company will adopt SFAS No. 130 for 1998.
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information, which supersedes SFAS No. 14, Financial Reporting for Segments of a
Business Enterprise, was issued in 1997 and will become effective for interim
and annual periods beginning after December 15, 1997. It establishes standards
for the way that public enterprises report information about operating segments
in annual financial statements and requires reporting of selected information
about operating segments in interim financial statements issued to the public.
It also establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. Due to the
recent issuance of this standard, management has been unable to fully evaluate
the impact, if any, that it may have on the Company's future financial statement
disclosures.
Year 2000 Issue
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium ("Year 2000") approaches. The Year
2000 problem is pervasive and complex as virtually every computer operation will
be affected in some way by the rollover of the two-digit year value to 00. The
issue is whether computer systems will properly recognize date-sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. The Company is utilizing both internal and external resources to identify,
correct or reprogram and test the systems for the Year 2000 compliance. It is
anticipated that all reprogramming efforts will be complete by December 31,
1998, allowing adequate time for testing. To date, confirmations have been
received from the Company's primary processing vendors indicating that plans
have and/or are being developed to address processing of transactions in the
Year 2000. Management does not expect expenses for Year 2000 compliance to have
a material impact on the Company's earnings.
9
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and
Board of Directors
Ameriana Bancorp
New Castle, Indiana
We have audited the accompanying consolidated statements of condition of
Ameriana Bancorp and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements described above present
fairly, in all material respects, the consolidated financial position of
Ameriana Bancorp and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Geo. S. Olive & Co. LLC
Indianapolis, Indiana
February 6, 1998, except for
the second paragraph of note 2,
as to which the date is February 27, 1998
<PAGE>
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
December 31
- ------------------------------------------------------------------------------------------------
ASSETS 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash on hand and in other institutions $ 5,066,177 $ 4,939,489
Interest-bearing deposits 10,142,903 4,004,551
Investment securities held to maturity 35,394,511 50,744,304
Stock in Federal Home Loan Bank 3,412,100 3,311,500
Mortgage-backed securities held to maturity 29,996,499 38,541,544
Mortgage loans held for sale 1,419,471 746,570
Loans receivable 294,133,100 282,957,495
Allowance for loan losses (1,163,490) (1,103,513)
- ------------------------------------------------------------------------------------------------
Net loans receivable 292,969,610 281,853,982
Real estate owned 159,994 101,401
Premises and equipment 5,909,205 5,621,332
Mortgage servicing rights 526,367 780,770
Investments in unconsolidated affiliates 1,578,365 1,746,695
Other assets 4,292,300 4,362,968
- ------------------------------------------------------------------------------------------------
Total assets $390,867,502 $396,755,106
================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits
Noninterest-bearing $ 8,746,447 $ 8,044,468
Interest-bearing 313,470,716 310,660,899
- ------------------------------------------------------------------------------------------------
Total deposits 322,217,163 318,705,367
Advances from Federal Home Loan Bank 16,015,615 26,548,603
Drafts payable 4,225,472 4,557,678
Advances by borrowers for taxes and insurance 955,121 951,902
Other liabilities 3,019,261 2,046,765
- ------------------------------------------------------------------------------------------------
Total liabilities 346,432,632 352,810,315
- ------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock (5,000,000 shares authorized; none issued)
Common stock ($1.00 par value; authorized 15,000,000 shares;
issued shares: 1997--3,233,207 and 1996--3,291,319) 3,233,207 3,291,319
Additional paid-in capital 7,571,955 8,645,273
Retained earnings--substantially restricted 33,629,708 32,008,199
- ------------------------------------------------------------------------------------------------
Total shareholders' equity 44,434,870 43,944,791
- ------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $390,867,502 $396,755,106
================================================================================================
</TABLE>
See accompanying notes.
10
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Year Ended December 31
- ------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest on loans $23,234,010 $22,060,098 $21,077,954
Interest on mortgage-backed securities 2,318,561 2,880,392 3,136,899
Interest on investment securities 3,307,166 2,987,237 489,958
Other interest and dividend income 473,076 639,761 903,216
- ------------------------------------------------------------------------------------------------------
Total interest income 29,332,813 28,567,488 25,608,027
- ------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits 16,114,262 15,183,543 14,078,877
Interest on Federal Home Loan Bank advances 1,231,172 1,521,693 289,184
- ------------------------------------------------------------------------------------------------------
Total interest expense 17,345,434 16,705,236 14,368,061
- ------------------------------------------------------------------------------------------------------
Net interest income 11,987,379 11,862,252 11,239,966
PROVISION FOR LOAN LOSSES 242,000 66,000 116,716
- ------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 11,745,379 11,796,252 11,123,250
- ------------------------------------------------------------------------------------------------------
OTHER INCOME:
Net loan servicing fees 319,000 328,804 314,803
Other fees and service charges 702,046 657,042 598,395
Brokerage and insurance commissions 1,179,728 1,197,628 978,956
Income (loss) on investments in unconsolidated affiliates (130,351) (121,760) 12,780
Gains on sales of loans and servicing rights 597,226 324,265 116,110
Other 196,180 46,836 192,854
- ------------------------------------------------------------------------------------------------------
Total other income 2,863,829 2,432,815 2,213,898
- ------------------------------------------------------------------------------------------------------
OTHER EXPENSE:
Salaries and employee benefits 5,090,073 4,752,664 4,636,449
Net occupancy expense 1,280,703 1,070,388 959,558
Federal insurance premium 204,634 660,608 652,245
Data processing expense 325,327 321,173 256,398
Savings Association Insurance Fund assessment - 1,878,897 -
Other 2,084,112 1,836,488 1,650,676
- ------------------------------------------------------------------------------------------------------
Total other expense 8,984,849 10,520,218 8,155,326
- ------------------------------------------------------------------------------------------------------
Income before income taxes 5,624,359 3,708,849 5,181,822
Income taxes 1,992,490 1,305,344 1,944,451
- ------------------------------------------------------------------------------------------------------
NET INCOME $ 3,631,869 $ 2,403,505 $ 3,237,371
======================================================================================================
BASIC EARNINGS PER SHARE $ 1.12 $ .72 $ .92
======================================================================================================
DILUTED EARNINGS PER SHARE $ 1.11 $ .71 $ .91
======================================================================================================
DIVIDENDS DECLARED PER SHARE $ .62 $ .57 $ .48
======================================================================================================
</TABLE>
See accompanying notes.
11
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Additional
Common Paid-in Retained
Stock Capital Earnings Total
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $2,636,873 $13,018,937 $29,934,623 $45,590,433
Net income -- -- 3,237,371 3,237,371
Dividends declared -- -- (1,686,740) (1,686,740)
Purchase of common stock (19,500) (278,087) -- (297,587)
Exercise of stock options 31,030 240,182 -- 271,212
- ------------------------------------------------------------------------------------------
Balance at December 31, 1995 2,648,403 12,981,032 31,485,254 47,114,689
Net income -- -- 2,403,505 2,403,505
Dividends declared -- -- (1,880,560) (1,880,560)
Four-for-three stock split 831,319 (831,319) -- --
Purchase of common stock (234,825) (3,730,719) -- (3,965,544)
Exercise of stock options 46,422 226,279 -- 272,701
- ------------------------------------------------------------------------------------------
Balance at December 31, 1996 3,291,319 8,645,273 32,008,199 43,944,791
Net income -- -- 3,631,869 3,631,869
Dividends declared -- -- (2,010,360) (2,010,360)
Purchase of common stock (83,205) (1,228,009) -- (1,311,214)
Exercise of stock options 25,093 154,691 -- 179,784
- ------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $3,233,207 $ 7,571,955 $33,629,708 $44,434,870
==========================================================================================
</TABLE>
See accompanying notes.
12
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Year Ended December 31
- --------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 3,631,869 $ 2,403,505 $ 3,237,371
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for losses on loans and real estate owned 242,000 66,000 116,716
Depreciation and amortization 631,108 575,387 505,169
Equity in loss of limited partnership 163,810 152,555 12,908
Mortgage servicing rights amortization 118,853 122,813 57,028
Goodwill amortization 28,320 28,320 28,320
Deferred income taxes 129,036 128,907 287,796
Gains on sales of real estate owned (25,202) (12,241) (34,744)
Mortgage loans originated for sale (30,534,904) (19,105,599) (11,180,121)
Proceeds from sale of mortgage loans 30,362,818 18,683,294 11,296,231
Gains on sale of loans and servicing rights (597,226) (324,265) (116,110)
Decrease (increase) in other assets 39,495 (854,060) (555,077)
Increase (decrease) in drafts payable (332,206) 2,035,746 163,232
Increase (decrease) in other liabilities 823,068 (561,808) (178,628)
- --------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,680,839 3,338,554 3,640,091
- --------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
- --------------------------------------------------------------------------------------------------------
Purchase of investment securities held to maturity (6,800,000) (30,944,003) (15,899,938)
Proceeds from calls of securities held to maturity 22,150,000 2,800,000 300,000
Principal collected on mortgage-backed securities
held to maturity 8,423,491 8,856,215 8,183,421
Purchases of mortgage-backed securities held
to maturity -- (2,531,581) (4,963,547)
Net change in loans (11,664,366) (16,150,843) (7,301,920)
Mortgage servicing rights capitalized (416,555) (326,515) (358,271)
Proceeds from sales of mortgage servicing rights 648,516 -- --
Proceeds from sales of real estate owned 156,400 226,277 318,766
Net purchases of premises and equipment (780,025) (1,510,395) (696,203)
Investment in unconsolidated affiliate 4,564 -- (1,458,849)
Other investing activities (52,900) (326,974) (29,939)
- --------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 11,669,125 (39,907,819) (21,906,480)
- --------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
- --------------------------------------------------------------------------------------------------------
Decrease in demand and passbook deposits (392,297) (1,225,470) (5,324,173)
Increase in certificates of deposit 3,958,584 29,180,452 18,714,226
Advances from Federal Home Loan Bank 72,100,000 86,000,000 18,300,000
Repayment of Federal Home Loan Bank advances (82,632,988) (72,455,066) (11,378,981)
Proceeds from exercise of stock options 179,784 272,701 271,212
Purchase of common stock (1,311,214) (3,965,544) (297,587)
Cash dividends paid (1,986,793) (1,837,091) (2,291,261)
- --------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (10,084,924) 35,969,982 17,993,436
- --------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,265,040 (599,283) (272,953)
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 8,944,040 9,543,323 9,816,276
- --------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 15,209,080 $ 8,944,040 $ 9,543,323
========================================================================================================
</TABLE>
See accompanying notes.
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include
the accounts of Ameriana Bancorp (the "Company") and its wholly owned
subsidiaries: Ameriana Savings Bank ("Ameriana"), Deer Park Federal Savings and
Loan Association ("Deer Park"), Ameriana Financial Services, Inc., Indiana Title
Insurance Company and Ameriana Insurance Agency, Inc. All significant
intercompany accounts and transactions have been eliminated.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company is a thrift holding company whose principal activity is the
ownership and management of its thrift and other subsidiaries. The Company
provides various banking services and engages in loan servicing activities for
investors. The thrifts are subject to the regulation of the Office of Thrift
Supervision ("OTS"). The Company's gross revenues are substantially earned from
the various banking services provided by Ameriana and Deer Park. The Company
also earns brokerage and insurance commissions from the services provided by the
other subsidiaries.
Ameriana generates loans and receives deposits from customers located
primarily in east central Indiana. The economy of Ameriana's primary market,
while not dominated by any single employer, is significantly influenced by the
agriculture and automotive-related industries. Deer Park generates loans and
receives deposits from customers located primarily in southwestern Ohio. Loans
are generally secured by specific items of collateral including real property
and consumer assets. The Company has sold various loans to investors while
retaining the servicing rights.
Reclassifications: Certain reclassifications of 1996 and 1995 amounts have
been made to conform with the 1997 presentation.
Cash and Cash Equivalents: Cash and cash equivalents consist of cash on hand
and in other institutions and interest-bearing deposits.
Investment Securities: Debt securities are classified as held to maturity when
the Company has the positive intent and ability to hold the securities to
maturity. Securities held to maturity are carried at amortized cost.
Amortization of premiums and accretion of discounts are recorded using the
interest method as interest income from securities. Realized gains and losses
are recorded as net security gains (losses). Gains and losses on sales of
securities are determined on the specific-identification method.
Stock in Federal Home Loan Bank: Stock in the Federal Home Loan Bank ("FHLB")
is stated at cost and the amount of stock the Company is required to own is
determined by regulation.
Mortgage-Backed Securities: Mortgage-backed securities represent
participating interests in pools of long-term first mortgage loans originated
and serviced by the issuers of the securities. Mortgage-backed securities are
acquired and held for investment purposes and, accordingly, are stated at cost
adjusted for amortization of premiums and accretion of discounts, both computed
by methods which produce a level yield. The Company has the intent and ability
to hold these securities to maturity considering all foreseeable events and
conditions.
Mortgage Loans Held for Sale: Mortgage loans held for sale are carried at the
lower of aggregate cost or market. Net unrealized losses are recognized
through a valuation allowance for charges to income.
Loans Receivable: Loans receivable are carried at the principal amount
outstanding. A loan is impaired when, based on current information or events,
it is probable that the Company will be unable to collect all amounts due
(principal and interest) according to the contractual terms of the loan
agreement. Payments with insignificant delays not exceeding 90 days outstanding
are not considered impaired. Certain nonaccrual and substantially delinquent
loans may be considered to be impaired. The Company considers its investment in
one-to-four family residential loans and installment loans to be homogeneous
and therefore excluded from separate identification of evaluation of impairment.
Interest income is accrued on the principal balances of loans. The accrual of
interest on impaired and nonaccrual loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed when
considered uncollectible. Interest income is subsequently recognized only to
the extent cash payments are received. Certain loan fees and direct costs are
being deferred and amortized as an adjustment of yield on the loans over the
contractual lives of the loans. When a loan is paid off or sold, any
unamortized loan origination fee balance is credited to income.
Real Estate Owned: Real estate owned arises from loan foreclosure or deed in
lieu of foreclosure and is carried at the lower of cost (the unpaid balance at
the date of acquisition plus foreclosure and other related costs) or fair value.
Subsequent to acquisition, an allowance is recorded for any excess of carrying
value over fair value minus estimated selling costs. Costs of improvements made
to facilitate sales are capitalized; costs of holding the property are charged
to expense.
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENETS
Allowance for Loan Losses: The allowance for loan losses is maintained at a
level believed adequate by management to absorb potential losses in the loan
portfolio. Management's determination of the adequacy of the allowance is based
on an evaluation of the portfolio including consideration of past loan loss
experience, current economic conditions, volume, growth and composition of the
loan portfolio, the probability of collecting all amounts due, and other
relevant factors. Impaired loans are measured by the present value of expected
future cash flows, or the fair value of the collateral of the loan, if
collateral dependent. The allowance is increased by provisions for loan losses
charged against income.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. Management believes that as of
December 31, 1997, the allowance for loan losses is adequate based on
information currently available. A worsening or protracted economic decline in
the areas within which the Company operates would increase the likelihood of
additional losses due to credit and market risks and could create the need for
additional loss reserves.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed principally by the straight-
line method over the estimated useful lives of the related assets. Maintenance
and repairs are expensed as incurred while major additions and improvements are
capitalized.
Earnings per Share: Basic earnings per share is computed by dividing net
income by the weighted average number of common and potential common shares
outstanding during each year.
Stock Split: On February 26, 1996, the Board of Directors declared a four-
for-three stock split under which every three shares of the Company's common
stock outstanding at the close of business on March 15, 1996, were converted
into four shares of common stock. No fractional shares were issued; cash in lieu
of fractional shares was paid to shareholders. Per share and shares outstanding
amounts and stock option plan data for 1995 have been adjusted to give effect to
the four-for-three stock split.
Mortgage Servicing Rights: Mortgage servicing rights on originated loans are
capitalized by allocating the total cost of the mortgage loans between the
mortgage servicing rights and the loans based on their relative fair values.
Capitalized servicing rights, which include purchased servicing rights, are
amortized in proportion to and over the period of estimated servicing revenues.
Stock Options: Stock options are generally granted for a fixed number of
shares to employees with an exercise price equal to the fair value of the shares
at the date of grant. The Company accounts for and will continue to account for
these stock option grants in accordance with Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly,
recognizes no compensation expense for the stock option grants.
Income Taxes: Income tax in the consolidated statements of income includes
deferred income tax provisions or benefits for all significant temporary
differences in recognizing income and expenses for financial reporting and
income tax purposes. The Company and its subsidiaries file consolidated tax
returns. The parent company and subsidiaries are charged or given credit for
income taxes as though separate returns were filed.
2. PROPOSED TRANSACTIONS
In September 1997, the Company entered into a Reorganization and Merger
Agreement ("Agreement") to acquire the outstanding shares of common stock of the
Cardinal State Bank ("Cardinal"), Maineville, Ohio, for approximately
$3,750,000. Pursuant to the Agreement, holders of outstanding shares of
Cardinal will have the right to convert such shares into a combination of cash
and Company common stock and/or Company promissory notes. The transaction will
be recorded under the purchase method of accounting. Consummation of the
transaction is subject to approval by holders of Cardinal shares, the OTS and
bank regulatory agencies and is expected to be completed in May 1998. At
December 31, 1997, assets, deposits and equity capital of Cardinal were
$24,283,000, $21,697,000 and $2,425,000, respectively.
In September 1997, the Company also agreed to purchase certain assets and
assume certain liabilities, principally deposits, of the Morristown, Indiana
branch of National City Bank of Indiana. Consummation occurred on February 27,
1998. The transaction was recorded under the purchase method of accounting.
The Company acquired deposits totaling $12,388,000 for a premium of $868,000,
expected to be allocated to core deposit intangibles and goodwill.
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENETS
3. INVESTMENT SECURITIES
Investment securities held to maturity at December 31, 1997, included federal
agencies at an amortized cost of $35,395,000 with a fair value of approximately
$35,300,000 and gross unrealized gains and (losses) of $4,000 and $(99,000),
respectively. Investment securities at December 31, 1996, included federal
agencies at an amortized cost of $50,744,000 with a fair value of approximately
$49,794,000 and gross unrealized gains and (losses) of $18,000 and $(968,000),
respectively.
The amortized cost and fair value of securities held to maturity at December
31, 1997, by contractual maturity, are shown below. Expected maturities may
differ from contractual maturities because issuers may have the right to call or
prepay obligations without call or prepayment penalties.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
AMORTIZED FAIR
COST VALUE
- -----------------------------------------------------------------------
<S> <C> <C>
Maturity Distribution at December 31, 1997:
Due within one year $ 5,000,000 $ 5,000,000
Due in one through five years 11,799,000 11,802,000
Due after five through ten years 200,000 201,000
Due after ten years 18,396,000 18,297,000
- -----------------------------------------------------------------------
$35,395,000 $35,300,000
=======================================================================
</TABLE>
Investment securities with a total amortized cost of $10,897,000 and
$20,897,000 were pledged at December 31, 1997 and 1996, to secure FHLB advances.
4. LOANS AND MORTGAGE-BACKED SECURITIES
Loans receivable consist of the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
December 31
- -----------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------
<S> <C> <C>
Residential mortgage loans $254,171,680 $240,201,515
Commercial mortgage loans 4,929,752 3,095,546
Installment loans 38,623,118 42,837,100
Lease financing 19,383 23,933
Loans secured by deposits 1,308,257 1,394,658
- -----------------------------------------------------------------------
299,052,190 287,552,752
- -----------------------------------------------------------------------
Deduct:
- -----------------------------------------------------------------------
Undisbursed loan proceeds 4,875,813 4,495,420
Deferred loan fees, net 43,277 99,837
- -----------------------------------------------------------------------
4,919,090 4,595,257
- -----------------------------------------------------------------------
$294,133,100 $282,957,495
=======================================================================
</TABLE>
Loans being serviced for investors, primarily the Federal Home Loan Mortgage
Corporation and Federal National Mortgage Association, by the Company totaled
approximately $117,000,000 and $145,000,000 as of December 31, 1997 and 1996,
respectively. Such loans are not reflected in the preceding table.
In 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 122, Accounting for Mortgage Servicing Rights, which required
capitalization of retained mortgage servicing rights on originated and purchased
loans. SFAS No. 122 was superseded by SFAS No. 125, Accounting for Transfer and
Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 125
(as did SFAS No. 122) requires the assessment of impairment of capitalized
mortgage servicing rights. The aggregate fair value of capitalized mortgage
servicing rights approximated the carrying value at December 31, 1997 and 1996,
based on comparable market values and expected cash flows, with impairment
assessed based on portfolio characteristics including product type, investor
type and interest rates.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Year Ended December 31
- --------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage servicing rights:
Balance at beginning of year $ 780,770 $ 577,068 $275,825
Servicing rights capitalized 416,555 326,515 358,271
Servicing rights sold (552,105) - -
Amortization of servicing rights (118,853) (122,813) (57,028)
- --------------------------------------------------------------------------
Balance at end of year $ 526,367 $ 780,770 $577,068
==========================================================================
</TABLE>
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENETS
At December 31, 1997 and 1996, the Company had outstanding commitments to
originate loans of approximately $8,600,000 and $3,900,000, which were primarily
for adjustable-rate mortgage loans or fixed-rate mortgage loans with rates that
are determined just prior to closing. In addition, the Company had $13,509,000
and $8,100,000, respectively, of conditional commitments for lines of credit and
credit card receivables. Exposure to credit loss in the event of nonperformance
by the other party to the financial instruments for commitments to extend credit
is represented by the contractual or notional amount of those instruments. The
same credit policies are used in making such commitments as are used for
instruments that are included in the consolidated balance sheet. Commitments to
extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. Each customer's credit worthiness is evaluated on a case-by-
case basis. The amount of collateral obtained, if deemed necessary upon
extension of credit, is based on management's credit evaluation. Collateral
held varies but may include accounts receivable, inventory, property and
equipment, and income-producing commercial properties.
The fair value of mortgage-backed securities at December 31, 1997 and 1996,
was $30,164,000 and $38,710,000, respectively. Gross unrealized gains and
(losses) on mortgage-backed securities at December 31, 1997 and 1996, were
$315,000 and $(147,000), and $345,000 and $(177,000), respectively. Mortgage-
backed securities with a total amortized cost of $8,847,000 and $11,516,000,
were pledged at December 31, 1997 and 1996, to secure FHLB advances.
5. ALLOWANCE FOR LOSSES
Changes to the allowances for losses on loans and real estate owned are as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Year Ended December 31
- -----------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Loans:
Balance at beginning of year $1,103,513 $ 1,076,038 $1,022,294
Provision for losses 242,000 66,000 116,716
Net charge-offs:
Charge-offs (200,242) (51,970) (86,293)
Recoveries 18,219 13,445 23,321
- -----------------------------------------------------------------------------
Net charge-offs (182,023) (38,525) (62,972)
- -----------------------------------------------------------------------------
Balance at end of year $1,163,490 $ 1,103,513 $1,076,038
=============================================================================
Real estate owned:
Balance at beginning of year $ - $ - $ 16,000
Provision for losses - - -
Net charge-offs:
Charge-offs - - (16,000)
Recoveries - - -
- -----------------------------------------------------------------------------
Net charge-offs - - (16,000)
- -----------------------------------------------------------------------------
Balance at end of year $ - $ - $ -
=============================================================================
</TABLE>
6. PREMISES AND EQUIPMENT
Premises and equipment consists of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------
<S> <C> <C>
Land $ 1,240,892 $1,177,692
Land improvements 414,736 366,536
Office buildings 5,846,340 5,221,036
Furniture and equipment 3,424,872 2,970,193
Automobiles 66,688 48,313
- -------------------------------------------------------------------------
10,993,528 9,783,770
Less accumulated depreciation 5,084,323 4,162,438
- -------------------------------------------------------------------------
$ 5,909,205 $5,621,332
=========================================================================
</TABLE>
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENETS
7. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
Investments in unconsolidated affiliates include an investment in a limited
partnership of $1,125,377 and $1,293,751 at December 31, 1997 and 1996. This
investment represents a 6.4% equity in the partnership, which was organized to
acquire and manage real estate investments. Total cash contributed was
$1,458,849 in 1995. The Company recorded a net loss of $163,810, $152,555 and
$12,908 for 1997, 1996 and 1995 on its investment, and low income housing tax
credits of $183,200, $115,364 and $25,174. Available financial statements for
the partnership as of December 31, 1997 and 1996, reported total assets of
$24,085,704 and $31,035,185, total partners' equity of $18,590,389 and
$21,386,757, and for each of the three years in the period ended December 31,
1997, a net loss of $2,785,509, $1,732,056 and $440,730, with the losses
allocated based on the dates of partners' contributions and other factors.
In addition, the Company has invested $452,988 in a life insurance company.
Dividends from this affiliate for the years ended December 31, 1997, 1996 and
1995, were $33,459, $30,795 and $25,688, respectively. Commission income also
generated through this affiliate is included in Other Income.
8. DEPOSITS
Deposits consist of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
December 31
- ----------------------------------------------------------------------------
Type 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
Demand deposits $ 29,995,452 $ 28,316,507
Passbook deposits 44,714,378 46,785,620
Certificates of $100,000 or more 47,630,340 37,722,367
Other certificates 199,876,993 205,880,873
- ----------------------------------------------------------------------------
$322,217,163 $318,705,367
============================================================================
</TABLE>
Certificates maturing in years ending after December 31, 1997:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
<S> <C>
1998 $167,753,838
1999 30,142,564
2000 40,585,536
2001 2,918,971
2002 2,218,908
Thereafter 3,887,516
- ----------------------------------------------------------------------------
$247,507,333
============================================================================
</TABLE>
Interest paid on deposits approximated interest expense in 1997, 1996 and
1995.
9. BORROWINGS
Borrowings consist of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
December 31
- ----------------------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------
WEIGHTED Weighted
AVERAGE Average
AMOUNT RATE Amount Rate
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Advances from FHLB:
Maturities in years ending December 31:
1997 $ 17,900,000 5.69%
1998 $ 7,600,000 5.88%
1999 1,000,000 5.98
2001 809,168 6.30 985,777 6.30
2004 38,633 8.15 48,634 8.15
2005 3,769,808 6.60 4,342,914 6.60
2006 2,798,006 5.66 3,271,278 5.66
- ----------------------------------------------------------------------------------------------
$16,015,615 6.04 $ 26,548,603 5.86
==============================================================================================
</TABLE>
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENETS
Certain advances are secured by first-mortgage loans in an amount equal to at
least 150% of the advances. Other advances are secured by mortgage-backed
securities or investment securities. Advances are subject to restrictions or
penalties in the event of prepayment.
Interest paid on borrowings was $1,245,589, $1,495,037 and $274,515 for 1997,
1996 and 1995.
10. INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------
December 31
- ----------------------------------------------------------
1997 1996
- ----------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Deferred compensation $ 33,000 $ 52,000
General loan loss reserves 466,000 442,000
Other 83,000 98,000
- ----------------------------------------------------------
582,000 592,000
- ----------------------------------------------------------
Deferred tax liabilities:
FHLB stock dividends (294,000) (271,000)
Tax bad debt reserves (391,000) (393,000)
Purchase accounting adjustments (96,000) (105,000)
Deferred loan fees (74,000) (30,000)
Mortgage servicing rights (95,000) (38,000)
Other (46,000) (40,000)
- ----------------------------------------------------------
(996,000) (877,000)
- ----------------------------------------------------------
Net tax liabilities $(414,000) $(285,000)
==========================================================
</TABLE>
The effective income tax rate on income from continuing operations is
reconciled to the statutory corporate tax rate as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Year Ended December 31
- --------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal tax benefit 4.5 4.8 4.6
Tax credits (3.3) (3.1) (.5)
Other .2 (.5) (.6)
- --------------------------------------------------------------------------
Effective tax rate 35.4% 35.2% 37.5%
==========================================================================
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Year Ended December 31
- -------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $1,497,023 $ 934,021 $1,327,631
Deferred 112,679 102,062 252,687
- -------------------------------------------------------------------------
1,609,702 1,036,083 1,580,318
- -------------------------------------------------------------------------
State:
Current 366,431 242,416 329,024
Deferred 16,357 26,845 35,109
- -------------------------------------------------------------------------
382,788 269,261 364,133
- -------------------------------------------------------------------------
$1,992,490 $1,305,344 $1,944,451
=========================================================================
</TABLE>
The Company paid $1,460,000, $1,675,000 and $1,606,000 of state and federal
income taxes in 1997, 1996 and 1995, respectively.
11. EMPLOYEE BENEFITS
The Company is a participating employer in a multi-employer defined benefit
pension plan sponsored by the Pentegra Group (formerly known as the Financial
Institutions Retirement Fund) and a 401(k) plan also administered by the
Pentegra Group. The plans cover substantially all full-time employees of the
Company. Since
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the defined benefit pension plan is a multi-employer plan, no separate actuarial
valuations are made with respect to each participating employer. Contributions
for Ameriana's defined benefit plan have not been required since June 1987,
because the plan reached the Internal Revenue Service's full funding limitation.
Deer Park's plan requires cash contributions. Pension expense for the plans
totaled $18,400, $41,000 and $47,000 in 1997, 1996 and 1995, respectively.
Under the 1987 Stock Option Plan and the 1996 Stock Option and Incentive Plan
("1996 Plan"), the Company has granted options to individuals to purchase common
stock at a price equal to the fair market value at the date of grant, subject to
the terms and conditions of the plans. Plan terms permit certain nonincentive
stock options to be granted at less than market value at plan committee
discretion. Options vest and are fully exercisable when granted or over an
extended period subject to continuous employment or under other conditions set
forth in the plans. The period for exercising options shall not exceed ten
years from the date of grant. The plans also permit grants of stock
appreciation rights.
The 1996 Plan was amended in November 1997 to increase the number of shares
reserved under the Plan from 160,000 to 320,000 shares subject to the
shareholders' approval.
The following is a summary of the status of the Company's stock option plans
and changes in those plans as of and for the years ended December 31, 1997, 1996
and 1995. The number of shares and prices have been restated to give effect to
the Company's 1996 stock split.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Year Ended December 31
- ------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 124,900 $11.75 129,133 $ 8.30 134,366 $ 5.76
Granted 168,300 16.49 48,000 13.78 44,000 13.78
Exercised (29,853) 7.30 (52,233) 5.01 (43,633) 5.43
Forfeited/expired (10,720) 15.75 - - (5,600) 10.19
- ------------------------------------------------------------------------------------------------
Outstanding at end of year 252,627 15.26 124,900 11.75 129,133 8.30
================================================================================================
Options exercisable at year end 181,027 14.52 124,900 11.75 129,133 8.30
Weighted average fair value of
options granted during the year $ 3.50 $ 2.37 $2.63
</TABLE>
As of December 31, 1997, other information in exercise price ranges for
options outstanding and exercisable is as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
OUTSTANDING EXERCISABLE
- ---------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED AVERAGE WEIGHTED
EXERCISE PRICE NUMBER AVERAGE REMAINING CONTRACTUAL NUMBER AVERAGE
RANGE OF SHARES EXERCISE PRICE LIFE OF SHARES EXERCISE PRICE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 6.12 6,150 $ 6.12 1.0 years 6,150 $ 6.12
10.38 - 13.78 89,497 13.65 7.9 years 89,497 13.65
15.75 - 20.13 156,980 16.54 9.2 years 85,380 16.04
</TABLE>
During 1997, 1996 and 1995, shares totaling 4,760, 2,659 and 2,260 were
tendered as partial payment for shares exercised.
There were 155,620 shares under the 1996 Plan as amended in 1997 available for
grant at December 31, 1997, upon the shareholders' approval of the increase in
reserved shares.
SFAS No. 123, Stock-Based Compensation, was effective for the Company in 1996.
This Statement established a fair value based method of accounting for stock-
based compensation plans. Although the Company has elected to follow APB No.
25, SFAS No. 123 requires pro forma disclosures of net income and earnings per
share as if the Company
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENETS
had accounted for its employee stock options under that Statement. The fair
value of each option grant was estimated on the grant date using an option-
pricing model with the following assumptions:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rates 5.9-6.6% 6.0% 6.0%
Dividend yields 3.5% 4.1% 3.7%
Expected volatility factors of market price of common stock 15.0% 15.1% 15.5%
Weighted average expected life of the options 8 years 8 years 8 years
</TABLE>
Under SFAS No. 123, compensation cost is recognized in the amount of the
estimated fair value of the options and amortized to expense over the options'
vesting period. The pro forma effect on net income and earnings per share of
this Statement are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Net income As reported $3,631,869 $2,403,505
Pro forma 3,328,517 2,334,805
Basic earnings per share As reported 1.12 .72
Pro forma 1.03 .70
Diluted earnings per share As reported 1.11 .71
Pro forma 1.01 .69
</TABLE>
12. SHAREHOLDERS' EQUITY
In June 1997, the Company's Board of Directors approved a one-year stock
repurchase program to acquire up to 10% of the Company's outstanding common
stock, or approximately 300,000 shares, at a cumulative cost not to exceed
$5,000,000. No shares were repurchased under this program during 1997. The
Company repurchased shares during 1997, 1996 and 1995 under previous repurchase
programs. In addition, the Company retired 98 shares at a cost of $1,346 in
1996 in connection with its 1996 stock split.
The payment of dividends by the Company depends substantially upon receipt of
dividends from Ameriana and Deer Park, which are subject to various regulatory
restrictions on the payment of dividends. Under regulations of the OTS,
Ameriana and Deer Park may not declare or pay a cash dividend or repurchase any
of their capital stock if the effect thereof would cause the net worth of those
entities to be reduced below regulatory capital requirements or the amount
required for their liquidation accounts. Prior notice of any dividend is
required to be given to the OTS.
OTS regulations provide additional limitations on the extent to which a
savings institution may pay cash dividends or repurchase stock. The extent to
which such cash distributions are limited will depend upon which of three
categories (categories based upon capital levels) is applicable for the savings
institution. Ameriana and Deer Park are currently "tier one institutions" and,
therefore, are able to make cash distributions to the Company during any
calendar year up to 100% of their net income during that calendar year plus the
amount that would reduce by one-half their surplus capital (capital in excess of
Ameriana's and Deer Park's regulatory capital requirements) at the beginning of
the calendar year. Under these regulations, the maximum permissible dividends
at December 31, 1997, that Ameriana and Deer Park could pay are $8.0 million and
$1.4 million, respectively. Net worth of Ameriana and Deer Park at December 31,
1997, was $33.7 million and $5.4 million, respectively.
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENETS
13. Earnings Per Share
Earnings per share were computed as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
- -------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
Weighted Per Weighted Per Weighted Per
Average Share Average Share Average Share
Income Shares Amount Income Shares Amount Income Shares Amount
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic Earnings Per Share
Income available to
common shareholders $3,631,869 3,246,873 $1.12 $2,403,505 3,335,813 $.72 $3,237,371 3,511,257 $.92
===============================================================================================================================
Effect Of Dilutive Stock Options - 35,430 - 34,455 - 54,616
- -------------------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share
Income available to
common shareholders and
assumed conversions $3,631,869 3,282,303 $1.11 $2,403,505 3,370,268 $.71 $3,237,371 3,565,873 $.91
===============================================================================================================================
</TABLE>
14. REGULATORY CAPITAL AND INSURANCE FUND ASSESSMENT
Ameriana and Deer Park are subject to various regulatory capital requirements
administered by the federal banking agencies and are assigned to a capital
category. The assigned capital category is largely determined by three ratios
that are calculated according to the regulations. The ratios are intended to
measure capital relative to assets and credit risk associated with those assets
and off-balance sheet exposures. The capital category assigned can also be
affected by qualitative judgments made by regulatory agencies about the risk
inherent in the entity's activities that are not part of the calculated ratios.
There are five capital categories defined in the regulations, ranging from
well capitalized to critically undercapitalized. Classification in any of the
undercapitalized categories can result in actions by regulators that could have
a material effect on a bank's operations. At December 31, 1997 and 1996,
Ameriana and Deer Park are categorized as well capitalized and met all subject
capital adequacy requirements. There are no conditions or events since
December 31, 1997 that management believes have changed this classification.
Actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
December 31, 1997
- ----------------------------------------------------------------------------------------------------------------------------
AMERIANA DEER PARK
- ----------------------------------------------------------------------------------------------------------------------------
REQUIRED FOR ADEQUATE REQUIRED FOR ADEQUATE
CAPITAL/(1)/ ACTUAL CAPITAL CAPITAL/(1)/ ACTUAL CAPITAL
- ----------------------------------------------------------------------------------------------------------------------------
RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total risk-based capital /(1)/
(to risk-weighted assets) 8.0% $14,318,000 18.8% $33,712,000 8.0% $3,086,000 14.4% $5,552,000
Core capital /(1)/
(to adjusted tangible
assets) 3.0 9,450,000 10.6 33,263,000 3.0 2,255,000 7.1 5,349,000
Core capital /(1)/
(to adjusted total
assets) 3.0 9,463,000 10.6 33,263,000 3.0 2,255,000 7.1 5,349,000
</TABLE>
/(1)/ As defined by regulatory agencies
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENETS
Tangible capital at December 31, 1997, for Ameriana and Deer Park was
$33,263,000 and $5,349,000, which amounts were 10.6% and 7.1% of tangible assets
and exceeded the required ratio of 1.5%.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
December 31, 1996
- ----------------------------------------------------------------------------------------------------------------------------
Ameriana Deer Park
- ----------------------------------------------------------------------------------------------------------------------------
Required For Adequate Required For Adequate
Capital/(1)/ Actual Capital Capital/(1)/ Actual Capital
- ----------------------------------------------------------------------------------------------------------------------------
Ratio Amount Ratio Amount Ratio Amount Ratio Amount
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total risk-based capital /(1)/
(to risk-weighted assets) 8.0% $14,482,000 20.0% $36,237,000 8.0% $2,743,000 16.0% $5,475,000
Core capital /(1)/
(to adjusted tangible
assets) 3.0 9,715,000 11.1 35,828,000 3.0 2,176,000 7.3 5,295,000
Core capital /(1)/
(to adjusted total
assets) 3.0 9,737,000 11.0 35,828,000 3.0 2,178,000 7.3 5,295,000
</TABLE>
/(1)/ As defined by regulatory agencies
Tangible capital at December 31, 1996, for Ameriana and Deer Park was
$35,828,000 and $5,295,000, which amounts were 11.1% and 7.3% of tangible assets
and exceeded the required ratio of 1.5%.
The Company has qualified under provisions of the Internal Revenue Code which
permit the Company to deduct from taxable income a provision for bad debts which
differs from the provision for such losses charged against income. Accordingly,
retained earnings at December 31, 1997, includes an allocation of income to bad
debt deductions of approximately $11,883,000 for which no provision for federal
income taxes has been made. If, in the future, this portion of retained
earnings is used for any purpose other than to absorb bad debt losses, including
redemption of bank stock or excess dividends, or loss of "bank" status, federal
income taxes may be imposed at the then applicable rates. The unrecorded
deferred income tax liability on the above amount was approximately $4,000,000.
The deposits of the Company's thrift subsidiaries are presently insured by the
Savings Association Insurance Fund ("SAIF"). A recapitalization plan for the
SAIF was signed into law on September 30, 1996, which provided for a special
assessment on all SAIF-insured institutions to enable the SAIF to achieve its
required level of reserves. The assessment of .0657% was effected based on
deposits as of March 31, 1995. The Company's special assessment in 1996 totaled
approximately $1,879,000, before taxes, and was charged against 1996 income.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value disclosures of financial instruments are made to comply with the
requirements of SFAS No. 107, Disclosures About Fair Value of Financial
Instruments. The fair values are based on estimates using present value and
other valuation techniques in instances where quoted market prices are not
available. These techniques are significantly affected by the assumptions used,
including discount rates and estimates of future cash flows. As such, the
derived fair value estimates cannot be compared to independent markets and,
further, may not be realizable in an immediate settlement of the instruments.
Accordingly, the aggregate fair value amounts presented do not represent, and
should not be construed to represent, the underlying value of the Company.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENETS
The following table presents the estimates of fair value of financial
instruments (in thousands):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
December 31
- -----------------------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------------
CARRYING FAIR Carrying Fair
VALUE VALUE Value Value
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 5,066 $ 5,066 $ 4,939 $ 4,939
Interest-bearing deposits 10,143 10,143 4,005 4,005
Investment securities held to maturity 35,395 35,300 50,744 49,794
Mortgage-backed securities held to maturity 29,996 30,164 38,542 38,710
Loans receivable, including loans held
for sale, net 294,389 298,223 282,601 285,476
Interest receivable 2,723 2,723 2,668 2,668
Stock in FHLB 3,412 3,412 3,312 3,312
Liabilities:
Deposits 322,217 322,051 318,705 319,207
FHLB advances 16,016 16,001 26,549 26,431
Interest payable 401 401 506 506
Drafts payable 4,225 4,225 4,558 4,558
Advances by borrowers for taxes and insurance 955 955 952 952
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Cash, Interest-Bearing Deposits and Stock in Federal Home Loan Bank: The
carrying amounts reported in the consolidated statements of condition for cash
on hand and in other institutions, interest-bearing deposits and stock in
Federal Home Loan Bank approximate those assets' fair values.
Investment and Mortgage-Backed Securities: Fair values are based on quoted
market prices.
Loans Receivable: The fair values for loans receivable are estimated using a
discounted cash flow calculation that applies interest rates used to price new
similar loans to a schedule of aggregated expected monthly maturities on loans.
Interest Receivable/Payable: The fair value of accrued interest
receivable/payable approximates carrying values.
Deposits: The fair values of interest-bearing demand and savings accounts are
equal to the amount payable on demand at the balance sheet date. Fair values
for certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on deposits to a
schedule of aggregated expected monthly maturities on deposits. SFAS No. 107
does not allow for inclusion of a core deposit intangible component in the fair
value estimate, and although it would be impractical from a cost-benefit
standpoint to estimate that value, the Company realizes that the dollar amount
could be significant.
Federal Home Loan Bank Advances: The fair value of these borrowings are
estimated using a discounted cash flow calculation, based on current Federal
Home Loan Bank advance rates for periods comparable to the remaining terms to
maturity of these advances.
Drafts Payable and Advances by Borrowers for Taxes and Insurance: The fair
value approximates carrying value.
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENETS
16. PARENT COMPANY FINANCIAL INFORMATION
The following are condensed financial statements for the parent company,
Ameriana Bancorp, only:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
December 31
- -----------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CONDITION 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash $ 100,850 $ 881
Advances to subsidiaries 5,337,000 2,197,000
Investment in thrift subsidiaries 39,060,304 41,904,334
Investment in other subsidiaries and affiliates 1,356,345 1,472,268
Other assets 93,544 53,570
- -----------------------------------------------------------------------------------------------------------------------------------
$45,948,043 $45,628,053
===================================================================================================================================
Liabilities and shareholders' equity:
Note payable to subsidiary, net of discount $ 1,064,670 $ 1,260,476
Miscellaneous liabilities 448,503 422,786
Shareholders' equity 44,434,870 43,944,791
- -----------------------------------------------------------------------------------------------------------------------------------
$45,948,043 $45,628,053
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
- -----------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF INCOME 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividends from thrift subsidiaries $ 6,600,000 $ 3,300,000 $ 4,500,000
Interest income 152,952 160,361 162,594
- -----------------------------------------------------------------------------------------------------------------------------------
6,752,952 3,460,361 4,662,594
Operating expense 578,477 744,476 507,081
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income tax credit and equity in
undistributed income of subsidiaries 6,174,475 2,715,885 4,155,513
Income tax credit 412,785 409,528 199,465
- -----------------------------------------------------------------------------------------------------------------------------------
6,587,260 3,125,413 4,354,978
Equity in undistributed income of subsidiaries and affiliates
(distributions in excess of equity in income) (2,955,391) (721,908) (1,117,607)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 3,631,869 $ 2,403,505 $ 3,237,371
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
- -----------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net income $ 3,631,869 $ 2,403,505 $ 3,237,371
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income of subsidiaries and affiliates 2,955,391 721,908 1,117,607
Interest expense 108,756 121,940 -
Decrease (increase) in other assets (39,974) (49,818) 21,252
Increase (decrease) in miscellaneous liabilities 2,150 (25,537) (148,975)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 6,658,192 3,171,998 4,227,255
- -----------------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Advances to subsidiaries (3,140,000) - (1,809,000)
Repayment of advances to subsidiaries - 2,658,000 -
Investment in unconsolidated affiliate - - (100,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (3,140,000) 2,658,000 (1,909,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Repayment of note payable to subsidiary (300,000) (300,000) -
Cash dividends paid (1,986,793) (1,837,091) (2,291,261)
Purchase of common stock (1,311,214) (3,965,544) (297,587)
Proceeds from exercise of stock options 179,784 272,701 271,212
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (3,418,223) (5,829,934) (2,317,636)
- -----------------------------------------------------------------------------------------------------------------------------------
Increase in cash 99,969 64 619
Cash at beginning of year 881 817 198
- -----------------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 100,850 $ 881 $ 817
===================================================================================================================================
</TABLE>
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. QUARTERLY DATA (UNAUDITED)
Summarized quarterly financial data for 1997 and 1996 is as follows
(dollars in thousands, except for per share data):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
Total interest income $7,297 $7,413 $7,330 $7,293
Total interest expense 4,291 4,385 4,343 4,327
Net interest income 3,006 3,028 2,987 2,966
Provision for loan losses 36 51 60 95
Net Income 877 889 994 872
- --------------------------------------------------------------------------------
Basic earnings per share .27 .27 .31 .27
- --------------------------------------------------------------------------------
Diluted earnings per share .27 .27 .30 .27
- --------------------------------------------------------------------------------
Dividends declared per share .15 .15 .16 .16
- --------------------------------------------------------------------------------
Stock price range:
High 16.38 17.00 22.00 22.00
Low 15.50 15.25 16.25 18.75
- --------------------------------------------------------------------------------
1996
Total interest income $6,895 $7,029 $7,288 $7,355
Total interest expense 3,989 4,113 4,281 4,322
Net interest income 2,906 2,916 3,007 3,033
Provision for loan losses 18 21 24 3
Net Income (loss) 900 842 (234) 896
- --------------------------------------------------------------------------------
Basic earnings per share .26 .25 (.07) .27
- --------------------------------------------------------------------------------
Diluted earnings per share .26 .25 (.07) .27
- --------------------------------------------------------------------------------
Dividends declared per share .14 .14 .14 .15
- --------------------------------------------------------------------------------
Stock price range:
High 14.44 14.25 15.50 16.25
Low 13.31 12.88 13.25 14.00
================================================================================
</TABLE>
26
<PAGE>
****
Market Information
Ameriana Bancorp's common shares trade on the Nasdaq Stock market under the
symbol ASBI. As of March 27, 1998, the Company had approximately 2,000
shareholders, including beneficial owners holding shares in nominee or "street"
name.
See Note 12 to Consolidated Financial Statements for restrictions on the
payment of cash dividends.
<PAGE>
EXHIBIT 21
<TABLE>
<CAPTION>
Percentage State of
Subsidiaries (1) Owned Incorporation
- ---------------- ---------- -------------
<S> <C> <C>
Ameriana Savings Bank, F.S.B. (2) 100% United States
Deer Park Federal Savings and Loan Association (2) 100% United States
Indiana Title Insurance Company (2) 100% Indiana
Ameriana Financial Services, Inc. (3) 100% Indiana
Ameriana Insurance Agency, Inc. (4) 100% Indiana
Family Financial Life (5) 19% Louisiana
Deer Park Service Corporation (6) 100% Ohio
</TABLE>
- --------------------
(1) Operations of the Company's wholly-owned direct subsidiaries, the Bank,
the Association and Indiana Title, and the Bank's wholly-owned
subsidiary, AFS, are included in the Company's consolidated financial
statements attached as an exhibit to the Annual Report.
(2) First-tier subsidiary of the Company.
(3) Second-tier subsidiary of the Company 100% owned by the Bank, a first-
tier subsidiary of the Company.
(4) Third-tier subsidiary of the Company 100% owned by AFS, a second-tier
subsidiary of the Company 100% owned by the Bank, a first-tier
subsidiary of the Company.
(5) Third-tier subsidiary of the Company 1/10 owned through stock
investment and less than 1/10 owned through partnership interests of
AFS, a second-tier subsidiary of the Company 100% owned by the Bank, a
first-tier subsidiary of the Company.
(6) Second-tier subsidiary of the Company 100% owned by the Association, a
first-tier subsidiary of the Company.
<PAGE>
Exhibit 23
CONSENT OF GEO. S. OLIVE & CO. LLC
We consent to the incorporation by reference in the Registration Statements on
Form S-8's, File No. 33-31034 and File No. 333-4013, of our report dated
February 6, 1998 (except for the second paragraph of note 2, as to which the
date is February 27, 1998) contained in the 1997 Annual Report on Form 10-K of
American Bancorp.
/s/ Geo. S. Olive & Co. LLC
Geo. S. Olive & Co. LLC
Indianapolis, Indiana
March 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,066
<INT-BEARING-DEPOSITS> 10,143
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 68,803
<INVESTMENTS-MARKET> 68,876
<LOANS> 294,133
<ALLOWANCE> 1,163
<TOTAL-ASSETS> 390,868
<DEPOSITS> 322,217
<SHORT-TERM> 8,600
<LIABILITIES-OTHER> 8,200
<LONG-TERM> 7,416
0
0
<COMMON> 10,805
<OTHER-SE> 33,630
<TOTAL-LIABILITIES-AND-EQUITY> 390,868
<INTEREST-LOAN> 23,234
<INTEREST-INVEST> 5,626
<INTEREST-OTHER> 473
<INTEREST-TOTAL> 29,333
<INTEREST-DEPOSIT> 16,114
<INTEREST-EXPENSE> 17,345
<INTEREST-INCOME-NET> 11,988
<LOAN-LOSSES> 242
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,985
<INCOME-PRETAX> 5,624
<INCOME-PRE-EXTRAORDINARY> 3,632
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,632
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.11
<YIELD-ACTUAL> 3.16
<LOANS-NON> 877
<LOANS-PAST> 124
<LOANS-TROUBLED> 791
<LOANS-PROBLEM> 1,851
<ALLOWANCE-OPEN> 1,104
<CHARGE-OFFS> 201
<RECOVERIES> 18
<ALLOWANCE-CLOSE> 1,163
<ALLOWANCE-DOMESTIC> 1,163
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
