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INDIANA COMMUNITY BANCORP 10-K 2010 Documents found in this filing:
SECURITIES & EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(Mark
One)
For
the fiscal year ended December 31, 2009
or
Transition
report pursuant to Section 13 or 15(d) or the Securities Exchange Act of
1934
For
the transition period from ___________ to _____________
Commission file number: 0-18847
INDIANA
COMMUNITY BANCORP
(Exact
name of registrant as specified in its charter)
Indiana 35-1807839
(State
or other jurisdiction(I.R.S.
Employer
of
incorporation or organization)Identification No.)
501 Washington Street,
Columbus, Indiana 47201
(Address
of Principal Executive Offices)(Zip Code)
Registrant’s
telephone number including area code: (812)
376-3323
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class: Name
of each exchange on which registered:
Common
Stock The
NASDAQ Stock Market LLC
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the
Securities
Act. YES [ ] NO
[X]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section
15(d) of
the Act.
YES [ ] NO [X]
Indicate
by check mark whether the Registrant (l) has filed all reports required to be
filed by Section 13
or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter
period
that the Registrant was required to file such reports) and (2) has been subject
to such filing
requirements
for the past 90 days. YES [X] NO [ ]
Indicate
by check mark whether the Registrant has submitted electronically and posted on
its corporate
Website,
if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of
Regulation
S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period
that the
Registrant was required to submit and post such
files. YES [ ] NO [ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K
(229.405
of this chapter) 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. [ ]
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer,
or a
smaller reporting company. See the definitions of “large accelerated
filer”, “accelerated filer” and “smaller
reporting
company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer [ ] Accelerated filer
[ ] Non-accelerated filer [X] Smaller
reporting company [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
YES [ ] NO
[X]
The
aggregate market value of the issuer's voting stock held by non-affiliates, as
of June 30, 2009, was $38.5
million.
The
number of shares of the registrant's Common Stock, no par value, outstanding as
of March 9, 2010, was 3,358,079 shares.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Annual Report to Shareholders for the year ended December 31, 2009, are
incorporated into Part II.
Portions
of the Proxy Statement for the annual meeting of shareholders to be held on
April 27, 2010, are incorporated
into Part
I and Part III.
FORWARD
LOOKING STATEMENTS
This Annual Report on Form 10-K (“Form
10-K”) contains statements, which constitute forward looking statements within
the meaning of the Private Securities Litigation Reform Act of
1995. These statements appear in a number of places in this Form 10-K
and include statements regarding the intent, belief, outlook, estimate or
expectations of the Company (as defined below), its directors or its officers
primarily with respect to future events and the future financial performance of
the Company. Readers of this Form 10-K are cautioned that any such
forward looking statements are not guarantees of future events or performance
and involve risks and uncertainties, and that actual results may differ
materially from those in the forward looking statements as a result of various
factors. The accompanying information contained in this Form 10-K
identifies important factors that could cause such differences. These
factors include changes in interest rates, loss of deposits and loan demand to
other financial institutions, substantial changes in financial markets, changes
in real estate values and the real estate market, regulatory changes, the
effects of economic conditions resulting from the current turmoil in the
financial services industry, including depressed demand in the housing market,
changes in the financial condition of the issuers of the Company’s investments
and borrowers, changes in the economic condition of the Company’s market area,
increases in compensation and employee expenses or unanticipated results in
pending legal proceedings.
PART
I
Item
1. Business
General
Indiana Community Bancorp (the
"Company" or "ICB") is an Indiana corporation organized as a bank holding
company authorized to engage in activities permissible for a bank holding
company. The principal asset of the Company consists of 100% of the
issued and outstanding capital stock of Indiana Bank and Trust Company (the
“Bank”).
Indiana Bank and Trust Company began
operations in Seymour, Indiana under the name New Building and Loan Association
in 1908. The Bank received its federal charter and changed its name
to Home Federal Savings and Loan Association in 1950. On November 9,
1983, Home Federal Savings and Loan Association became a federal savings bank
and its name was changed to Home Federal Savings Bank. On January 14, 1988, Home
Federal Savings Bank converted to stock form and on March 1, 1993, Home Federal
Savings Bank reorganized by converting each outstanding share of its common
stock into one share of common stock of the Company, thereby causing the Company
to be the holding company of Home Federal Savings Bank. On December
31, 2001 the Bank, a member of the Federal Reserve System, completed a charter
conversion to an Indiana commercial bank. On September 24, 2002, the
Company announced a change in its fiscal year end from June 30 to December
31. On October 22, 2002, Home Federal Savings Bank changed its name
to HomeFederal Bank.
On March 1, 2008, HomeFederal Bank
changed its name to Indiana Bank and Trust Company. The Bank
currently provides services through its main office at 501 Washington Street in
Columbus, Indiana, eighteen full service branches located in south central
Indiana and the STAR network of automated teller machines at fourteen locations
in Seymour, Columbus, North Vernon, Osgood, Salem, Madison, Batesville,
Greensburg, Greenwood and Indianapolis. As a result, the Bank serves
primarily Bartholomew, Jackson, Jefferson, Jennings, Scott, Ripley, Decatur,
Marion, Johnson and Washington Counties in Indiana. The Bank also
participates in the nationwide electronic funds transfer networks known as Plus
System, Inc. and Cirrus System.
Online banking and telephone banking
are also available to the Bank customers. Online Banking services,
including Online Bill Payment, are accessed through the Company’s website, www.myindianabank.com. In
addition to online banking services, the Company also makes available, free of
charge at the website, the Company’s annual report on Form 10-K, its proxy
statement, quarterly reports on Form 10-Q, current reports on Form 8-K and any
amendments to those reports filed pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 as soon as reasonably practicable after such
material is electronically filed with the SEC. The information on the
Company’s website is not incorporated into this Form 10-K.
Management analyzes the operation of
Indiana Community Bancorp assuming one operating segment, community banking
services. The Bank directly, and through its subsidiaries indirectly,
offers a wide range of consumer and commercial community banking
services. These services include: (i) residential real estate loans;
(ii) commercial and commercial real estate loans; (iii) checking accounts; (iv)
regular and term savings accounts and savings certificates; (v) consumer loans;
(vi) debit cards; (vii) business credit cards; (viii) Individual Retirement
Accounts and Keogh plans; (ix) trust services; and (x) commercial demand deposit
accounts.
- 3 -
The Bank’s primary source of revenue is
interest from lending activities. Its principal lending activity is
the origination of commercial real estate loans secured by mortgages on the
underlying property and commercial loans through the cultivation of profitable
business relationships. These loans constituted 63.2% of the Bank’s
loans at December 31, 2009. The Bank also originates one-to-four
family residential loans, the majority of which are sold servicing
released. At December 31, 2009 one-to-four family residential loans
were 12.2% of the Bank’s lending portfolio. In addition, the Bank
makes secured and unsecured consumer related loans including consumer auto,
second mortgage, home equity, mobile home, and savings account
loans. At December 31, 2009, approximately 15.2% of its loans were
consumer-related loans. The Bank also makes construction loans, which
constituted 9.1% of the Bank's loans at December 31, 2009.
Loan
Portfolio Data
The
following two tables set forth the composition of the Bank’s loan portfolio by
loan type and security type as of the dates indicated. The third
table represents a reconciliation of gross loans receivable after consideration
of unearned income and the allowance for loan losses.
- 4 -
The
following tables summarize the contractual maturities for the Bank’s loan
portfolio (including participations) for the fiscal periods indicated and the
interest rate sensitivity of loans due after one year:
Residential
Mortgage Loans
The Bank is authorized to make
one-to-four family residential loans without any limitation as to interest rate
amount (within State usury laws) or number of interest rate
adjustments. Pursuant to federal regulations, if the interest rate is
adjustable, the interest rate must be correlated with changes in a readily
verifiable index. The Bank also makes residential and commercial
mortgage loans secured by mid-size multi-family dwelling units and apartment
complexes. The residential mortgage loans included in the Bank’s
portfolio are primarily conventional loans. As of December 31, 2009
$97.6 million, or 13.2%, of the Bank's total loan portfolio consisted of
residential first mortgage loans, $89.6 million, or 12.2%, of which were secured
by one-to-four family homes.
Many of the residential mortgage loans
currently offered by the Bank have adjustable rates. These loans generally have
interest rates that adjust (up or down) annually, with maximum rates that vary
depending upon when the loans are written and contractual floors and ceilings.
The adjustment for the majority of these loans is currently based upon the
weekly average of the one-year Treasury constant maturity rate.
The rates offered on the Bank's
adjustable-rate and fixed-rate residential mortgage loans are competitive with
the rates offered by other financial institutions in its south central and
central Indiana market area.
Although the Bank's residential
mortgage loans are written for amortization terms up to 30 years, due to
prepayments and refinancing, its residential mortgage loans in the past have
generally remained outstanding for a substantially shorter period of time than
the maturity terms of the loan contracts. Any residential mortgage
loan which has a loan-to-value ratio is excess of 80% requires credit
enhancement in the form of private mortgage insurance.
All of the residential mortgages the
Bank currently originates include "due on sale" clauses, which give the Bank the
right to declare a loan immediately due and payable in the event that, among
other things, the borrower sells or otherwise disposes of the real property
subject to the mortgage and the loan is not repaid. The Bank utilizes
the due on sale clause as a means of protecting the funds loaned by insuring
payoff on sale of the property collateralizing the loan.
- 5 -
Under applicable banking policies, the
Bank must establish loan-to-value ratios consistent with supervisory
loan-to-value limits. The supervisory limits are 65% for raw land
loans, 75% for land development loans, 80% for construction loans consisting of
commercial, multi-family and other non-residential construction, and 85% for
improved property. Multi-family construction includes condominiums
and cooperatives. A loan-to-value limit has been established at 90%
total loan-to-value for permanent mortgage or home equity loans on
owner-occupied one-to-four family residential property. However, for
any reason a loan with a loan-to-value ratio that equals or exceeds 90% at
origination, an institution should require appropriate credit enhancement in the
form of either mortgage insurance or readily marketable
collateral. The Board of Directors of the Bank approved a set of
loan-to-value ratios consistent with these supervisory limits.
It may be appropriate in individual
cases to originate loans with loan-to-value ratios in excess of the FDIC limits
based on the support provided by other credit factors. The aggregate
amount of all loans in excess of these limits should not exceed 100% of total
capital. Moreover, loans for all commercial, agricultural,
multi-family or other non-one-to-four family residential properties in excess of
the FDIC limits should not exceed 30% of total capital. As of
December 31, 2009, the Bank was in compliance with the above
limits.
Commercial
and Commercial Mortgage Loans
At December 31, 2009, 55.3% of the
Bank's total loan portfolio consisted of mortgage loans secured by commercial
real estate. Commercial construction and development loans were 8.2%
of the total loan portfolio. These properties consisted primarily of
condominiums, multi-family housing, office buildings, warehouses, motels,
shopping centers, nursing homes, manufacturing plants, and churches located in
central or south central Indiana. The commercial mortgage loans are generally
adjustable-rate loans, written for terms not exceeding 10 years, and generally
require an 80% loan-to-value ratio. Commitments for these loans in excess of
$5.0 million must be approved in advance by the Bank’s Board of
Directors. The largest such loan as of December 31, 2009 had a
balance of $9.8 million. At that date, virtually all of the Bank's
commercial real estate loans consisted of loans secured by real estate located
in Indiana.
Collateral for the Bank's commercial
loans includes accounts receivable, inventory, equipment, real estate, other
fixed assets, and securities. Terms of these loans are normally for
up to five years and have adjustable rates tied to the reported prime rate and
treasury indexes. As of December 31, 2009, $120.2 million, or 16.3%,
of the Bank's total loan portfolio consisted of commercial loans.
Generally, commercial and commercial
mortgage loans involve greater risk to the Bank than residential
loans. However, commercial and commercial mortgage loans generally
carry a higher yield and are made for a shorter term than residential
loans. Commercial and commercial mortgage loans typically involve
large loan balances to single borrowers or groups of related
borrowers. In addition, the payment experience on loans secured by
income-producing properties is typically dependent on the successful operation
of the related project and thus may be subject to adverse conditions in the real
estate market or in the general economy.
Construction
Loans
The Bank offers conventional short-term
construction loans. At December 31, 2009, 9.1% of the Bank's total
loan portfolio consisted of construction loans. Normally, a 95% or
less loan-to-value ratio is required from owner-occupants of residential
property, an 80% loan-to-value ratio is required from persons building
residential property for sale or investment purposes, and an 80% loan-to-value
ratio is required for commercial property. Construction loans are
also made to builders and developers for the construction of residential or
commercial properties on a to-be-occupied or speculative
basis. Construction normally must be completed in six to nine months
for residential loans. The largest such loan on December 31, 2009 was
$7.0 million.
Consumer
Loans
Consumer-related loans, consisting of
second mortgage and home equity loans, mobile home loans, automobile loans,
loans secured by savings accounts and other consumer loans were $112.4 million
on December 31, 2009 or approximately 15.2% of the Bank's total loan
portfolio.
Second mortgage loans are made for
terms of 1 - 20 years, and are fixed-rate, fixed term or variable-rate line of
credit loans. The Bank's minimum for such loans is $5,000. The Bank
will loan up to 90% of the appraised value based on the product and borrower
qualifications of the property, less the existing mortgage
amount(s). As of December 31, 2009, the Bank had $40.7 million of
second mortgage loans, which equaled 5.5% of its total loan
portfolio. The Bank markets home equity credit lines, which are
adjustable-rate loans. As of December 31, 2009, the Bank had $56.4
million drawn on its home equity credit lines, or 7.6% of its total loan
portfolio, with $37.3 million of additional credit available to its borrowers
under existing home equity credit lines.
- 6 -
Automobile loans are generally made for
terms of up to six years. The vehicles are required to be for
personal or family use only. As of December 31, 2009, $9.7 million,
or 1.3%, of the Bank's total loan portfolio consisted of automobile
loans.
As of December 31, 2009, $423,000, or
0.1%, of the Bank's total loan portfolio consisted of mobile home
loans. The Bank discontinued the origination of mobile home loans
during the year 2008.
Loans secured by savings account
deposits may be made up to 95% of the pledged savings collateral at a rate 2%
above the rate of the pledged savings account or a rate equal to the Bank's
highest seven-year certificate of deposit rate, whichever is
higher. The loan rate will be adjusted as the rate for the pledged
savings account changes. As of December 31, 2009, $1.7 million, or
0.2%, of the Bank's total loan portfolio consisted of savings account
loans.
Although consumer-related loans
generally involve a higher level of risk than one-to-four family residential
mortgage loans, their relatively higher yields, lower average balance, and
shorter terms to maturity are helpful in the Bank's asset/liability
management.
Origination,
Purchase and Sale of Loans
The Bank originates residential loans
in conformity with standard underwriting criteria of the Federal Home Loan
Mortgage Corporation ("Freddie Mac"), the Federal National Mortgage Association
("Fannie Mae") and the Federal Home Loan Bank (“FHLB”), to assure maximum
eligibility for possible resale in the secondary market. Although the
Bank currently has authority to lend anywhere in the United States, it has
confined its loan origination activities primarily to the central and south
central Indiana area. The Bank's loan originations are generated
primarily from referrals from real estate brokers, builders, developers and
existing customers, newspaper, radio and periodical advertising, the internet
and walk-in customers. The Bank's loan approval process is intended
to assess the borrower's ability to repay the loan, the viability of the loan
and the adequacy of the value of the property that will secure the
loan.
The Bank studies the employment, credit
history, and information on the historical and projected income and expenses of
its individual mortgagors to assess their ability to repay its mortgage
loans. Additionally, the Bank utilizes Freddie Mac's Loan Prospector
and Fannie Mae’s Desktop Underwriter as origination, processing, and
underwriting tools. It uses independent appraisers to appraise the
property securing its loans. It requires title insurance evidencing
the Bank's valid lien on its mortgaged real estate and a mortgage survey or
survey coverage on all first mortgage loans and on other loans when
appropriate. The Bank requires fire and extended coverage insurance
in amounts at least equal to the value of the insurable improvements or the
principal amount of the loan, whichever is lower. It may also require
flood insurance to protect the property securing its interest. When
private mortgage insurance is required, borrowers must make monthly payments to
an escrow account from which the Bank makes disbursements for taxes and
insurance. Otherwise, such escrow arrangements are
optional.
The procedure for approval of loans on
property under construction is the same as for residential mortgage loans,
except that the appraisal obtained evaluates the building plans, construction
specifications and estimates of construction costs, in conjunction with the land
value. The Bank also evaluates the feasibility of the construction
project and the experience and track record of the builder or
developer.
Consumer loans are underwritten on the
basis of the borrower's credit history and an analysis of the borrower's income
and expenses, ability to repay the loan and the value of the collateral, if
any.
In order to generate loan fee income
and recycle funds for additional lending activities, the Bank seeks to sell
loans in the secondary market. Loan sales can enable the Bank to
recognize significant fee income and to reduce interest rate risk while meeting
local market demand. The Bank sold $185.9 million of loans in the fiscal year
ended December 31, 2009. The Bank's current lending policy is to sell
all conforming residential mortgage loans. Typically the Bank retains
loans that are non salable, non owner occupied, or in construction in its
portfolio. The Bank may sell participating interests in commercial
real estate loans in order to share the risk with other
lenders. Mortgage loans held for sale are carried at the lower of
cost or market value, determined on an aggregate basis. Loans are
sold with the servicing released on conforming loans, Veteran's Administration
("VA"), Federal Housing Administration ("FHA") and Indiana Housing Finance
Authority ("IHFA") loans.
- 7 -
Management believes that purchases of
loans and loan participations may be desirable and evaluates potential purchases
as opportunities arise. Such purchases can enable the Bank to take
advantage of favorable lending markets in other parts of the state, diversify
its portfolio and limit origination expenses. Any participation it
acquires in commercial real estate loans requires a review of financial
information on the borrower, a review of the appraisal on the property by a
local designated appraiser, an inspection of the property by a senior loan
officer, and a financial analysis of the loan. The seller generally performs
servicing of loans purchased. At December 31, 2009, others serviced
approximately 2.9%, or $21.4 million, of the Bank's gross loan
portfolio.
The
following table shows loan activity for the Bank during the periods
indicated:
A commercial bank generally may not
make any loan to a borrower or its related entities if the total of all such
loans by the commercial bank exceeds 15% of its capital (plus up to an
additional 10% of capital in the case of loans fully collateralized by readily
marketable collateral). The maximum amount that the Bank could have
loaned to one borrower and the borrower’s related entities at December 31, 2009,
under the 15% of capital limitation was $15.6 million. At that date,
the highest outstanding balance of loans by the Bank to one borrower and related
entities was approximately $12.6 million, an amount within such loans-to-one
borrower limitations.
Origination
and Other Fees
The Bank realizes income from loan
related fees for originating loans, collecting late charges and fees for other
miscellaneous loan services. The Bank charges origination fees that
range from 0% to 1.0% of the loan amount. The Bank also charges
processing fees of $150 to $225, underwriting fees from $0 to $150 and a $200
fee for any loan closed by the Bank personnel. In addition, the Bank
makes discount points available to customers for the purpose of obtaining a
discounted interest rate. The points vary from loan to loan and are
quoted on an individual basis. The Bank amortizes costs and fees
associated with originating a loan over the life of the loan as an adjustment to
the yield earned on the loan. Late charges are assessed fifteen days
after payment is due.
- 8 -
Non-performing Assets The Bank assesses late charges on real
estate related loans if a payment is not received by the 15th day following its
due date. Any borrower whose payment was not received by this time is
mailed a past due notice. At the same time the notice is mailed, the
delinquent account is downloaded to a PC- based collection system and assigned
to a specific collector. Initial attempts at contact are made by
branch personnel. The collector will attempt to make contact with the
customer via a phone call to resolve any problem that might exist. If
contact by phone is not possible, mail, in the form of preapproved form letters,
will be used commencing on the 30th day following a specific due
date. Between the 30th and 45th day following any due date, or at the
time a second payment has become due, if no contact has been made with the
customer, a personal visit will be conducted by a Collection Department employee
or the Loan Liquidation Specialist to interview the customer and inspect the
property to determine the borrower's ability to repay the
loan. Prompt follow up is a goal of the Collection Department with
any and all delinquencies.
When an advanced stage of delinquency
appears (generally around the 60th day of delinquency) and if repayment cannot
be expected within a reasonable amount of time, the Bank will make a
determination of how to proceed to protect the interests of both the customer
and the Bank. It may be necessary for the borrower to attempt to sell
the property at the Bank's request. If a resolution cannot be
arranged, the Bank will consider avenues necessary to obtain title to the
property which includes foreclosure and/or accepting a deed-in-lieu of
foreclosure, whichever may be most appropriate. However, the Bank
attempts to avoid taking title to the property if at all possible.
The Bank has acquired certain real
estate in lieu of foreclosure by acquiring title to the real estate and then
reselling it. The Bank performs an updated title check of the
property and, if needed, an appraisal on the property before accepting such
deeds.
On December 31, 2009, the Bank held
$12.6 million of real estate and other repossessed collateral acquired as a
result of foreclosure, voluntary deed, or other means. Such assets
are classified as "real estate owned" until sold. When property is so
acquired, it is recorded at fair market value less estimated cost to sell at the
date of acquisition, and any subsequent write down resulting from this is
charged to losses on real estate owned. Interest accrual ceases on
the date of acquisition. All costs incurred from the acquisition date
in maintaining the property are expensed. Significant improvements
made in the property that will have a documented positive effect in value may be
capitalized.
Consumer loan borrowers who fail to
make payments are contacted promptly by the Collection Department in an effort
to cure any delinquency. A notice of delinquency is sent 10 days
after any specific due date when no payment has been received. The
delinquent account is downloaded to a PC-based collection system and assigned to
a specific collector. Initial attempts at contact are made by branch
personnel. The loan collector will then attempt to contact the
borrower via a phone call after the 30th day of delinquency if satisfactory
arrangements for resolution have not been previously agreed upon.
Continued follow-up in the form of
phone calls, letters, and personal visits (when necessary) will be conducted to
resolve delinquency. If a consumer loan delinquency continues and
advances to the 60-90 days past due status, a determination will be made by the
Bank on how to proceed. When a consumer loan reaches 90 days past
due, the Bank determines the loan-to-value ratio by performing an inspection of
the collateral (if any). The Bank may initiate action to obtain the
collateral (if any), or collect the debt through available legal
remedies. Collateral obtained as a result of loan default is retained
by the Bank as an asset until sold or otherwise disposed.
The table below sets forth the amounts
and categories of the Bank's non-performing assets (non-accrual loans, loans
past due 90 days or more, real estate owned and other repossessed assets) for
the last five years. It is the policy of the Bank that all earned but
uncollected interest on conventional loans be reviewed monthly to determine if
any portion thereof should be classified as uncollectible, for any portion that
is due but uncollected for a period in excess of 90 days. The
determination is based upon factors such as the loan amount outstanding as a
percentage of the appraised value of the property and the delinquency record of
the borrower.
- 9 -
For
the year ended December 31, 2009, the income that would have been recorded under
original terms on the above non-accrual and restructured loans was $2.0 million
compared to actual income recorded of $406,000. At December 31, 2009,
the Bank had approximately $3.6 million in loans that were 30-89 days past
due. Total non-performing assets increased $6.7 million to $34.4
million at December 31, 2009. Total non performing loans decreased
$2.5 million to $21.8 million at December 31, 2009. However, the
decrease in non performing loans was offset by an increase in real estate owned
and other repossessed assets of $9.2 million to $12.6 million at December 31,
2009. As a result of the increase in the allowance for loan losses
combined with the decrease in non performing loans, the coverage ratio
(allowance for loan losses to non performing loans) increased to 60.2% at
December 31, 2009 from 35.3% at December 31, 2008. Total non
performing loans include $17.2 million in commercial and commercial mortgage
loans. Non performing commercial and commercial mortgage loans at
December 31, 2009 include 6 relationships that comprise $14.5 million or 84% of
the total non performing commercial and commercial mortgage
loans. These 6 relationships are as follows: 3
relationships totaling $8.4 million relate to residential land/condominium
development, 2 relationships totaling $2.7 million relate to retail land
development and 1 relationship totaling $3.4 million relates to a commercial
company and its principal owner. At December 31, 2009, a specific
reserve of $997,000 was included in the allowance for loan losses related to
these 6 relationships. In addition, non-performing residential
mortgage and second and home equity loans increased $394,000 and $102,000,
respectively. Other real estate owned at December 31, 2009 includes 4
properties/projects that total $11.7 million or 93% of the total balance
outstanding. These 4 properties/projects all relate to residential
land/condominium development.
Securities
The Bank's investment portfolio
consists primarily of mortgage-backed securities, collateralized mortgage
obligations, U.S. Treasury obligations, U.S. Government agency obligations,
corporate debt and municipal bonds. At December 31, 2009, December
31, 2008 and December 31, 2007, the Bank had approximately $153.7 million,
$95.6 million and $63.9 million in investments, respectively.
The Bank's investment portfolio is
managed by its officers in accordance with an investment policy approved by the
Board of Directors. The Board reviews all transactions and activities
in the investment portfolio on a quarterly basis. The Bank does not
purchase corporate debt securities which are not rated in one of the top four
investment grade categories by one of several generally recognized independent
rating agencies. The Bank's investment strategy has enabled it to (i)
shorten the average term to maturity of its assets, (ii) improve the yield on
its investments, (iii) meet federal liquidity requirements and (iv) maintain
liquidity at a level that assures the availability of adequate
funds.
Effective March 31, 2002, the Bank
transferred the management of approximately $90 million in securities to its
wholly-owned subsidiary, Home Investments, Inc. Home Investments,
Inc., a Nevada corporation, holds, services, manages, and invests that portion
of the Bank’s investment portfolio as may be transferred from time to time by
the Bank to Home Investments, Inc. Home Investments, Inc’s investment
policy mirrors that of the Bank. At December 31, 2009, of the $153.7
million in consolidated investments owned by the Bank, $148.6 million was held
by Home Investments, Inc.
- 10 -
Source
of Funds
General
Deposits have traditionally been the
primary source of funds of the Bank for use in lending and investment
activities. In addition to deposits, the Bank derives funds from loan
amortization, prepayments, borrowings from the FHLB of Indianapolis and income
on earning assets. While loan amortization and income on earning
assets are relatively stable sources of funds, deposit inflows and outflows can
vary widely and are influenced by prevailing interest rates, money market
conditions and levels of competition. Borrowings may be used 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
activities. See "Source of Funds -- Borrowings."
Deposits
Consumer and commercial deposits are
attracted principally from within the Bank's primary market area through the
offering of a broad selection of deposit instruments including checking
accounts, fixed-rate certificates of deposit, NOW accounts, individual
retirement accounts, health savings accounts, savings accounts and commercial
demand deposit accounts. Deposit account terms vary, with the
principal differences being the minimum balance required, the amount of time the
funds remain on deposit and the interest rate. To attract funds, the
Bank may pay higher rates on larger balances within the same maturity
class.
Under regulations adopted by the FDIC,
well-capitalized insured depository institutions (those with a ratio of total
capital to risk-weighted assets of not less than 10%, with a ratio of core
capital to risk-weighted assets of not less than 6%, with a ratio of core
capital to total assets of not less than 5% and which have not been notified
that they are in troubled condition) may accept brokered deposits without
limitations. Undercapitalized institutions (those that fail to meet
minimum regulatory capital requirements) are prohibited from accepting brokered
deposits. Adequately capitalized institutions (those that are neither
well-capitalized nor undercapitalized) are prohibited from accepting brokered
deposits unless they first obtain a waiver from the FDIC. Under these
standards, the Bank would be deemed a well-capitalized
institution. At December 31, 2009, the Bank had no brokered
deposits.
An undercapitalized institution may not
solicit deposits by offering rates of interest that are significantly higher
than the prevailing rates of interest on insured deposits (i) in such
institution's normal market areas or (ii) in the market area in which such
deposits would otherwise be accepted.
The Bank on a periodic basis
establishes interest rates to be paid, maturity terms, service fees and
withdrawal penalties. Determination of rates and terms are predicated
on funds acquisition and liquidity requirements, rates paid by competitors,
growth goals, federal regulations, and market area of solicitation.
The
following table sets forth, by nominal interest rate categories, the composition
of deposits of the Bank at the dates indicated:
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The
following table sets forth the change in dollar amount of deposits in the
various accounts offered by the Bank for the periods indicated.
The
following table represents, by various interest rate categories, the amount of
deposits maturing during each of the three years following December 31, 2009,
and the percentage of such maturities to total deposits. Matured
certificates which have not been renewed as of December 31, 2009 have been
allocated based upon certain rollover assumptions.
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Included
in the deposit totals in the above table are savings certificates of deposit
with balances exceeding $100,000. The majority of these deposits are
from regular customers of the Bank. The following table provides a
maturity breakdown at December 31, 2009, of certificates of deposits with
balances greater than $100,000, by various interest rate
categories.
Borrowings The Bank relies upon advances
(borrowings) from the FHLB of Indianapolis to supplement its supply of lendable
funds, meet deposit withdrawal requirements and to extend the term of its
liabilities. This facility has historically been the Bank's major
source of borrowings. Advances from the FHLB of Indianapolis are
typically secured by the Bank's stock in the FHLB of Indianapolis, a portion of
the Bank’s investment securities and a portion of the Bank's mortgage
loans.
Each FHLB credit program has its own
interest rate, which may be fixed or variable, and a range of
maturities. Subject to the express limits in FIRREA, the FHLB of
Indianapolis may prescribe the acceptable uses to which these advances may be
put, as well as limitations on the size of the advances and repayment
provisions. At December 31, 2009, the Bank had advances totaling
$55.0 million outstanding from the FHLB of Indianapolis.
On September 15, 2006, the Company
entered into several agreements providing for the private placement of
$15,000,000 of Capital Securities due September 15, 2036 (the “Capital
Securities”). The Capital Securities were issued by the Company’s
Delaware trust subsidiary, Home Federal Statutory Trust I (the “Trust”), to JP
Morgan Chase formerly Bear, Sterns & Co., Inc. (the
“Purchaser”). The Company bought $464,000 in Common Securities (the
“Common Securities”) from the Trust. The proceeds of the sale of
Capital Securities and Common Securities were used by the Trust to purchase
$15,464,000 in principal amount of Junior Subordinated Debt Securities (the
“Debentures”) from the Company pursuant to an Indenture (the “Indenture”)
between the Company and Bank of America National Association, as trustee (the
“Trustee”).
The Common Securities and Capital
Securities will mature in 30 years, will require quarterly distributions and
will bear a floating variable rate equal to the prevailing three-month LIBOR
rate plus 1.65% per annum. Interest on the Capital Securities and Common
Securities is payable quarterly in arrears each December 15, March 15, June 15
and September 15. The Company may redeem the Capital Securities and
the Common Securities, in whole or in part, without penalty, on or after
September 15, 2011, or earlier upon the occurrence of certain events described
below with the payment of a premium upon redemption; provided, however, that
until December 12, 2011, while the U.S. Department of Treasury (the “Treasury”)
holds the preferred stock of the Company issued under the TARP Capital Purchase
Program such redemption may not occur without the consent of the
Treasury.
The Debentures bear interest at the
same rate and on the same dates as interest is payable on the Capital Securities
and the Common Securities. The Company has the option, as long as it
is not in default under the Indenture, at any time and from time to time, to
defer the payment of interest on the Debentures for up to twenty consecutive
quarterly interest payment periods. During any such deferral period,
or while an event of default exists under the Indenture, the Company may not
declare or pay dividends or distributions on, redeem, purchase, or make a
liquidation payment with respect to, any of its capital stock, or make payments
of principal, interest or premium on, or repay or repurchase, any other debt
securities that rank equal or junior to the Debentures, subject to certain
limited exceptions.
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The Debentures mature 30 years after
their date of issuance, and can be redeemed in whole or in part by the Company,
without penalty, at any time after September 15, 2011. The Company
may also redeem the Debentures upon the occurrence of a “capital treatment
event,” an “investment company event” or a “tax event” as defined in the
Indenture, but if such redemption occurs prior to September 15, 2011, a premium
will be payable to Debenture holders upon the
redemption. Notwithstanding the foregoing, until December 12, 2011,
while the Treasury holds the preferred stock of the Company issued under the
TARP Capital Purchase Program, redemption of the Debentures would require the
Treasury’s consent. The payment of principal and interest on the Debentures is
subordinate and subject to the right of payment of all “Senior Indebtedness” of
the Company as described in the Indenture.
Effective February 2, 2009, the Company
entered into a Credit Agreement with Cole Taylor Bank under which the Company
has the authority to borrow, repay and reborrow, up to $5 million during a
period ending June 14, 2010, none of which was used as of December 31,
2009. Advances are to bear interest at a floating variable rate equal
to the prevailing three-month LIBOR rate plus 2.25% per annum (2.5% on December
31, 2009); in no event shall the rate be less than 5.0%. Interest is
payable quarterly and the repayment of advances is secured by a pledge of the
Bank’s capital stock.
The
Company had a revolving note with Bank of America, N.A. with an available
balance of $17.5 million which matured February 15, 2009 and has now
expired.
The following table sets forth the
maximum amount of each category of short-term borrowings (borrowings with
remaining maturities of one year or less) outstanding at any month-end during
the periods shown and the average aggregate balances of short-term borrowings
for such periods.
The
following table sets forth the amount of short-term FHLB advances outstanding at
period end
during
the period shown and the weighted average rate of such FHLB
advances.
Subsidiaries
and Other Operations
The Bank organized a subsidiary under
Nevada law, Home Investments, Inc., (“HII”). Effective March 31,
2002, the Bank transferred the management of approximately $90 million in
securities to HII. Home Investments, Inc. holds, services, manages,
and invests that portion of the Bank’s investment portfolio as may be
transferred from time to time by the Bank to HII. Home Investments
Inc.’s, investment policy mirrors that of the Bank. At December 31,
2009, of the $153.7 million in consolidated investments owned by the Bank,
$148.6 million was held by Home Investments, Inc.
As of January 26, 2010, the Company
dissolved HomeFed Financial Corporation, (“HFF”), a subsidiary corporation
organized under Indiana law. At December 31, 2009, the Company’s
aggregate investment in HFF consisted of $722,000 in a cash
account. HFF had a 14% interest in Consortium Partners, a Louisiana
partnership, which owned 50% of the outstanding shares of the Family Financial
Holdings, Inc. of New Orleans, Louisiana ("Family Financial"). The
remaining 50% of the outstanding shares of Family Financial were owned
proportionately by the partners of Consortium Partners. HFF
liquidated its interest in Consortium Partners and Family Financial Holdings,
Inc. and received a liquidation payment of $671,000 in May of 2009.
- 14 -
The Bank has also engaged in
full-service securities brokerage services activities through an arrangement
with Raymond James Financial Services. During the third quarter of
2008, the Company chose to discontinue offering brokerage services through
Raymond James and the brokerage business was sold to the brokers who had been
serving these customers. For the year ended December 31, 2008, the
Bank received $1.4 million in commissions from its Raymond James financial
activities.
Employees
As of December 31, 2009, the Company
employed 212 persons on a full-time basis and 33 persons on a part-time or
temporary basis. None of the Company’s employees are represented by a
collective bargaining group. Management considers its employee
relations to be excellent.
Competition
The Bank operates in south central
Indiana and makes almost all of its loans to, and accepts almost all of its
deposits from, residents of Bartholomew, Jackson, Jefferson, Jennings, Johnson,
Scott, Ripley, Washington, Decatur and Marion counties in Indiana.
The Bank is subject to competition from
various financial institutions, including state and national banks, state and
federal thrift associations, credit unions and other companies or firms,
including brokerage houses, that provide similar services in the areas of the
Bank's home and branch offices. Also, in Seymour, Columbus, North
Vernon, Batesville, and the Greenwood area, the Bank must compete with banks and
savings institutions in Indianapolis. To a lesser extent, the Bank
competes with financial and other institutions in the market areas surrounding
Cincinnati, Ohio and Louisville, Kentucky. The Bank also competes
with money market funds that currently are not subject to reserve requirements,
and with insurance companies with respect to its Individual Retirement and
annuity accounts.
Under current law, bank holding
companies may acquire thrifts. Thrifts may also acquire banks under
federal law. Affiliations between banks and thrifts based in Indiana
have increased the competition faced by the Bank and the Company. See
“Branching and Acquisitions.”
The Gramm-Leach-Bliley Act allows
insurers and other financial service companies to acquire banks; removes various
restrictions that previously applied to bank holding company ownership of
securities firms and mutual fund advisory companies; and establishes the overall
regulatory structure applicable to bank holding companies that also engage in
insurance and securities operations. These provisions in the Act may
increase the level of competition the Bank faces from securities firms and
insurance companies.
The
primary factors influencing competition for deposits are interest rates, service
and convenience of office locations. Competition is affected by,
among other things, the general availability of lendable funds, general and
local economic conditions, current interest rate levels, and other factors that
are not readily predictable.
REGULATION
Both the Company and the Bank operate
in highly regulated environments and are subject to supervision, examination and
regulation by several governmental regulatory agencies, including the Board of
Governors of the Federal Reserve System (the “Federal Reserve”), the Federal
Deposit Insurance Corporation (the “FDIC”), and the Indiana Department of
Financial Institutions (the “DFI”). The laws and regulations established by
these agencies are generally intended to protect depositors, not shareholders.
Changes in applicable laws, regulations, governmental policies, income tax laws
and accounting principles may have a material effect on the Company’s business
and prospects. The following summary is qualified by reference to the statutory
and regulatory provisions discussed.
Indiana
Community Bancorp
The Bank Holding Company Act.
Because the Company owns all of the outstanding capital stock of the Bank, it is
registered as a bank holding company under the federal Bank Holding Company Act
of 1956 and is subject to periodic examination by the Federal Reserve and
required to file periodic reports of its operations and any additional
information that the Federal Reserve may require.
- 15 -
Investments, Control, and
Activities. With some limited exceptions, the Bank Holding Company Act
requires every bank holding company to obtain the prior approval of the Federal
Reserve before acquiring another bank holding company or acquiring more than 5%
of the voting shares of a bank (unless it already owns or controls the majority
of such shares).
Bank holding companies are prohibited,
with certain limited exceptions, from engaging in activities other than those of
banking or of managing or controlling banks. They are also prohibited from
acquiring or retaining direct or indirect ownership or control of voting shares
or assets of any company which is not a bank or bank holding company, other than
subsidiary companies furnishing services to or performing services for their
subsidiaries, and other subsidiaries engaged in activities which the Federal
Reserve determines to be so closely related to banking or managing or
controlling banks as to be incidental to these operations. The Bank Holding
Company Act does not place territorial restrictions on such nonbank
activities.
The Gramm-Leach Bliley Act of 1999
allows a bank holding company to qualify as a “financial holding company” and,
as a result, be permitted to engage in a broader range of activities that are
“financial in nature” and in activities that are determined to be incidental or
complementary to activities that are financial in nature. The Gramm-Leach-Bliley
Act amends the Bank Holding Company Act of 1956 to include a list of activities
that are financial in nature, and the list includes activities such as
underwriting, dealing in and making a market in securities, insurance
underwriting and agency activities and merchant banking. The Federal Reserve is
authorized to determine other activities that are financial in nature or
incidental or complementary to such activities. The Gramm-Leach-Bliley Act also
authorizes banks to engage through financial subsidiaries in certain of the
activities permitted for financial holding companies.
In order for a bank holding company to
engage in the broader range of activities that are permitted by the
Gramm-Leach-Bliley Act (1) all of its depository institutions must be well
capitalized and well managed and (2) it must file a declaration with the Federal
Reserve that it elects to be a “financial holding company.” In
addition, to commence any new activity permitted by the Gramm-Leach-Bliley Act,
each insured depository institution of the financial holding company must have
received at least a “satisfactory” rating in its most recent examination under
the Community Reinvestment Act. The Company is not currently a financial holding
company.
Dividends. The Federal
Reserve’s policy is that a bank holding company experiencing earnings weaknesses
should not pay cash dividends exceeding its net income or which could only be
funded in ways that weaken the bank holding company’s financial health, such as
by borrowing. Additionally, the Federal Reserve possesses enforcement powers
over bank holding companies and their non-bank subsidiaries to prevent or remedy
actions that represent unsafe or unsound practices or violations of applicable
statutes and regulations. Among these powers is the ability to proscribe the
payment of dividends by banks and bank holding companies.
Source of Strength. In
accordance with Federal Reserve policy, the Company is expected to act as a
source of financial strength to the Bank and to commit resources to support the
Bank in circumstances in which the Company might not otherwise do
so.
Indiana
Bank and Trust Company
General Regulatory
Supervision. The Bank as an Indiana commercial bank and a member of the
Federal Reserve System is subject to examination by the DFI and the Federal
Reserve. The DFI and the Federal Reserve regulate or monitor virtually all areas
of the Bank’s operations. The Bank must undergo regular on-site examinations by
the Federal Reserve and DFI and must submit periodic reports to the Federal
Reserve and the DFI.
Lending Limits. Under Indiana
law, the Bank may not make a loan or extend credit to a single or related group
of borrowers in excess of 15% of its unimpaired capital and surplus. Additional
amounts may be lent, not in excess of 10% of unimpaired capital and surplus, if
such loans or extensions of credit are fully secured by readily marketable
collateral, including certain debt and equity securities but not including real
estate. At December 31, 2009, the Bank did not have any loans or extensions of
credit to a single or related group of borrowers in excess of its lending
limits.
Deposit Insurance. Deposits
in the Bank are insured by the Deposit Insurance Fund of the FDIC up to a
maximum amount, which is generally $250,000 per depositor until December 31,
2013, subject to aggregation rules. The Bank is subject to deposit insurance
assessments by the FDIC pursuant to its regulations establishing a risk-related
deposit insurance assessment system, based upon the institution’s capital levels
and risk profile. Under the FDIC’s risk-based assessment system, insured
institutions are assigned to one of four risk-weighted categories based on
supervisory evaluations, regulatory capital levels, and certain other factors
with less risky institutions paying lower assessments. An institution’s
assessment rate depends upon the category to which it is assigned. There are
also adjustments to a bank’s initial assessment rates based on levels of
long-term unsecured debt, secured liabilities in excess of 25% of domestic
deposits and, for certain institutions, brokered deposit levels. For 2009,
initial assessments ranged from 12 to 45 basis points of assessable deposits,
and the Bank is currently paying assessments at the rate of 15 basis points for
each $100 of insured deposits. The Bank is also subject to assessment for the
Financing Corporation (FICO) to service the interest on its bond obligations.
The amount assessed on individual institutions, including the Bank, by FICO is
in addition to the amount paid for deposit insurance according to the
risk-related assessment rate schedule. These assessments will continue until the
FICO bonds are repaid between 2017 and 2019. During 2009, the FICO assessment
rate ranged between 1.02 and 1.14 basis points for each $100 of insured deposits
per quarter. For the first quarter of 2010, the FICO assessment rate is 1.06
basis points. The Bank expensed deposit insurance assessments (including the
FICO assessments) of $1.8 million during the year ended December 31, 2009.
Future increases in deposit insurance premiums or changes in risk classification
would increase the Bank’s deposit related costs.
- 16 -
Due to the recent difficult economic
conditions, deposit insurance per account owner has been raised to $250,000 for
all types of accounts until December 31, 2013. In addition, the FDIC adopted an
optional Temporary Liquidity Guarantee Program by which, for a fee, noninterest
bearing transaction accounts would receive unlimited insurance coverage until
June 30, 2010 and, for a fee, certain senior unsecured debt issued by
institutions and their holding companies between October 13, 2008 and October
31, 2009 would be guaranteed by the FDIC through December 31, 2012. The Bank
made the business decision to participate in the unlimited noninterest bearing
transaction account coverage and the Bank and the Company elected to participate
in the unsecured debt guarantee program, but do not expect to issue any
guaranteed debt under the program. The assessments for unlimited noninterest
bearing transaction account coverage were 10 basis points per $100 of insured
deposits during 2009 and will be 15 basis points per $100 of insured deposits
during the first six months of 2010. The assessments for unsecured
debt guarantee program coverage ranged from 50 to 100 basis points per annum per
$100 of debt depending on the maturity of the debt.
The FDIC is authorized to set the
reserve ratio for the Deposit Insurance Fund at between 1.15% and 1.5% of
estimated insured deposits. The designated reserve ratio is currently 1.25%. As
a result of the deterioration in banking and economic conditions and recent
failures of banks, the reserve ratio was .22% as of June 30, 2009. The FDIC has
7 years to attain a reserve ratio of 1.15%. The FDIC adopted an interim rule
that imposed a special assessment of 20 basis points as of June 30, 2009, which
was collected on September 30, 2009. The special assessment for the Bank paid on
September 30, 2009, was 454,000.
On December 20, 2009, banks were
required to pay the third quarter FDIC assessment and to prepay estimated
insurance assessments for the years 2010 through 2012 on that date. The
pre-payment did not affect the Bank’s earnings on that date. The Bank
paid an aggregate of $5.5 million in premiums on December 30, 2009, $4.8 million
of which constituted prepaid premiums.
The Federal Deposit Insurance
Corporation has authority to increase insurance assessments. A significant
increase in insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of the bank. Management cannot
predict what insurance assessment rates will be in the future.
The FDIC may terminate the deposit
insurance of any insured depository institution if the FDIC determines, after a
hearing, that the institution has engaged or is engaging in unsafe or unsound
practices, is in an unsafe and unsound condition to continue operations or has
violated any applicable law, regulation, order or any condition imposed in
writing by, or written agreement with, the FDIC. The FDIC may also suspend
deposit insurance temporarily during the hearing process for a permanent
termination of insurance if the institution has no tangible
capital.
Transactions with Affiliates and
Insiders. The Bank is subject to limitations on the amount of loans or
extensions of credit to, or investments in, or certain other transactions with,
affiliates and on the amount of advances to third parties collateralized by the
securities or obligations of affiliates. Furthermore, within the foregoing
limitations as to amount, each covered transaction must meet specified
collateral requirements. Compliance is also required with certain provisions
designed to avoid the acquisition of low quality assets. The Bank is also
prohibited from engaging in certain transactions with certain affiliates unless
the transactions are on terms substantially the same, or at least as favorable
to such institution or its subsidiaries, as those prevailing at the time for
comparable transactions with nonaffiliated companies.
Extensions of credit by the Bank to its
executive officers, directors, certain principal shareholders, and their related
interests generally must be made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with third parties, and not involve more than the normal risk of
repayment or present other unfavorable features.
Dividends. Under Indiana law,
the Bank is prohibited from paying dividends in an amount greater than its
undivided profits, or if the payment of dividends would impair the Bank’s
capital. Moreover, the Bank is required to obtain the approval of the DFI and
the Federal Reserve for the payment of any dividend if the aggregate amount of
all dividends paid by the Bank during any calendar year, including the proposed
dividend, would exceed the sum of the Bank’s retained net income for the year to
date combined with its retained net income for the previous two years. For this
purpose, “retained net income” means the net income of a specified period,
calculated under the consolidated report of income instructions, less the total
amount of all dividends declared for the specified period.
- 17 -
Federal law generally prohibits the
Bank from paying a dividend to its holding company if the depository institution
would thereafter be undercapitalized. The FDIC may prevent an insured bank from
paying dividends if the bank is in default of payment of any assessment due to
the FDIC. In addition, payment of dividends by a bank may be prevented by the
applicable federal regulatory authority if such payment is determined, by reason
of the financial condition of such bank, to be an unsafe and unsound banking
practice.
Branching and Acquisitions.
Branching by the Bank requires the approval of the Federal Reserve and the DFI.
Under current law, Indiana chartered banks may establish branches throughout the
state and in other states, subject to certain limitations. Congress authorized
interstate branching, with certain limitations, beginning in 1997. Indiana law
authorizes an Indiana bank to establish one or more branches in states other
than Indiana through interstate merger transactions and to establish one or more
interstate branches through de novo branching or the acquisition of a branch.
There are some states where the establishment of de novo branches by
out-of-state financial institutions is prohibited.
Capital Regulations. The
federal bank regulatory authorities have adopted risk-based capital guidelines
for banks and bank holding companies that are designed to make regulatory
capital requirements more sensitive to differences in risk profiles among banks
and bank holding companies and account for off-balance sheet items. Risk-based
capital ratios are determined by allocating assets and specified off-balance
sheet commitments to four risk weighted categories of 0%, 20%, 50%, or 100%,
with higher levels of capital being required for the categories perceived as
representing greater risk.
The capital guidelines divide a bank
holding company’s or bank’s capital into two tiers. The first tier (“Tier I”)
includes common equity, certain non-cumulative perpetual preferred stock and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and certain other intangible assets (except mortgage servicing rights
and purchased credit card relationships, subject to certain limitations).
Supplementary (“Tier II”) capital includes, among other items, cumulative
perpetual and long-term limited-life preferred stock, mandatory convertible
securities, certain hybrid capital instruments, term subordinated debt and the
allowance for loan and lease losses, subject to certain limitations, less
required deductions. Banks and bank holding companies are required to maintain a
total risk-based capital ratio of 8%, of which 4% must be Tier I capital. The
federal banking regulators may, however, set higher capital requirements when a
bank’s particular circumstances warrant. Banks experiencing or anticipating
significant growth are expected to maintain capital ratios, including tangible
capital positions, well above the minimum levels.
Also required by the regulations is the
maintenance of a leverage ratio designed to supplement the risk-based capital
guidelines. This ratio is computed by dividing Tier I capital, net of all
intangibles, by the quarterly average of total assets. The minimum leverage
ratio is 3% for the most highly rated institutions, and 1% to 2% higher for
institutions not meeting those standards. Pursuant to the regulations, banks
must maintain capital levels commensurate with the level of risk, including the
volume and severity of problem loans, to which they are exposed.
- 18 -
The
following is a summary of the Company’s and the Bank’s regulatory capital and
capital requirements at December 31, 2009.
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