Attached files
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EX-21 - FIRST ROBINSON FINANCIAL CORP | v189014_ex21.htm |
EX-13 - FIRST ROBINSON FINANCIAL CORP | v189014_ex13.htm |
EX-31.2 - FIRST ROBINSON FINANCIAL CORP | v189014_ex31-2.htm |
EX-31.1 - FIRST ROBINSON FINANCIAL CORP | v189014_ex31-1.htm |
EX-32.1 - FIRST ROBINSON FINANCIAL CORP | v189014_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
þ ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
FOR
THE FISCAL YEAR ENDED MARCH 31, 2010
¨ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES
EXCHANGE ACT F 1934
Commission
File Number: 0-29276
FIRST
ROBINSON FINANCIAL CORPORATION
(Exact
Name of Registrant as specified in its Charter)
Delaware
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36-4145294
|
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(State
or other Jurisdiction of
Incorporation
or Organization)
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(I.R.S.
Employer Identification Nos.)
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501
East Main Street,
Robinson,
Illinois
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62454
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(Address
of Principal Executive Offices)
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(Zip
code)
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Registrants’
telephone number, including area code: 618-544-8621
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 $0.01 per share
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. ¨ Yes þ No
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 þ No
Indicate
by check mark whether the registrant: (1) 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. þ Yes ¨ No
Indicate
by check mark whether the registrant has submitted electronically
and posted on its corporate website, if any, every Interaction 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 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 definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act). (Check one):
Large Accelerated Filer
o
|
Accelerated Filer ¨
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Non-
Accelerated Filer ¨
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Smaller Reporting Company þ
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). ¨ Yes þ No
The
aggregate market value of the voting and non-voting common equity of the
Registrant held by non-affiliates as of March 31, 2010 was $8.4
million.
As of
June 16, 2010, there were 428,794 shares issued and outstanding of the
Registrant’s common stock.
DOCUMENTS
INCORPORATED BY REFERENCE
Part II
of Form 10-K - Portions of the Annual Report to Stockholders for the fiscal year
ended March 31, 2010.
Part III
of Form 10-K - Portions of Proxy Statement for the 2010 Annual Meeting of
Stockholders.
FORWARD-LOOKING
STATEMENTS
This
document, including information incorporated by reference, contains
“forward-looking statements” (as that term is defined in the Private Securities
Litigation Reform Act of 1995). These forward-looking statements may be
identified by the use of such words as: “believe”, “expect”, “anticipate”,
“intend”, “plan”, “estimate”, or words of similar meaning, or future or
conditional verbs such as “will,” “would,” “should,” “could,” or
“may.”
Examples
of forward-looking statements include, but are not limited to, estimates or
projections with respect to our future financial condition, results of
operations or business, such as:
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•
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projections
of revenues, income, earnings per share, capital expenditures, assets,
liabilities, dividends, capital structure, or other financial
items;
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•
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descriptions
of plans or objectives of management for future operations, products, or
services, including pending acquisition
transactions;
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•
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forecasts
of future economic performance; and
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•
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descriptions
of assumptions underlying or relating to any of the
foregoing.
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By their
nature, forward-looking statements are subject to risks and uncertainties. There
are a number of factors, many of which are beyond our control, that could cause
actual conditions, events, or results to differ significantly from those
described in the forward-looking statements.
Factors
which could cause or contribute to such differences include, but are not limited
to:
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•
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general
business and economic conditions on both a regional and national
level;
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•
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worldwide
political and social unrest, including acts of war and
terrorism;
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•
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increased
competition in the products and services we offer and the markets in which
we conduct our business;
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•
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the
interest rate environment;
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•
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fluctuations
in the capital markets, which may directly or indirectly affect our asset
portfolio;
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•
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legislative
or regulatory developments, including changes in laws concerning taxes,
banking, securities, insurance and other aspects of the financial services
industry;
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•
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technological
changes, including the impact of the
Internet;
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•
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monetary
and fiscal policies of the U.S. Government, including policies of the U.S.
Treasury and the Federal Reserve
Board;
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•
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accounting
principles, policies, practices or
guidelines.
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•
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deposit
attrition, operating costs, customer loss and business disruption greater
than the Company expects;
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•
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the
occurrence of any event, change or other circumstance that could result in
the Company’s failure to develop and implement successful capital raising
and debt restructuring plans.
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Any
forward-looking statements made in this report or incorporated by reference in
this report are made as of the date of this report, and, except as required by
applicable law, we assume no obligation to update the forward-looking statements
or to update the reasons why actual results could differ from those projected in
the forward-looking statements. You should consider these risks and
uncertainties in evaluating forward-looking statements and you should not place
undue reliance on these statements.
TABLE OF
CONTENTS
Page
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PART
I
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1
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ITEM
1.
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DESCRIPTION
OF BUSINESS
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1
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General
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1
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Market
Area
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1
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Lending
Activities
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2
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Asset
Quality
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11
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Investment
Activities
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16
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Trust
Services
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18
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Sources
of Funds
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19
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Subsidiary
Activities
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21
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Code
of Ethics
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22
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Competition
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22
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Regulation
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23
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Federal
and State Taxation
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34
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Employees
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35
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Recent
Accounting Pronouncements
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35
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ITEM
1A.
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RISK
FACTORS
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36
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Risks
Related to Recent Developments and the Banking Industry
Generally
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36
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Risks
Related to the Company’s Business
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38
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Risks
Related to the Company’s Stock
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42
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ITEM
1.B
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UNRESOLVED
STAFF COMMENTS
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43
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ITEM
2.
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DESCRIPTION
OF PROPERTY
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43
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ITEM
3.
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LEGAL
PROCEEDINGS
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44
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ITEM
4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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44
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PART
II
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45
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ITEM
5.
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MARKET
FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER
PURCHASES OF EQUITY SECURITIES
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45
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ITEM
6.
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SELECTED
FINANCIAL DATA
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45
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ITEM
7.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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45
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ITEM
7A.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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46
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ITEM
8.
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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46
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ITEM
9.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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46
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ITEM
9A(T).
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CONTROLS
AND PROCEDURES
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46
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Evaluation
of Disclosure Controls and Procedures
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46
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Management’s
Annual Report On Internal Control Over Financial Reporting
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47
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ITEM
9B.
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OTHER
INFORMATION
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47
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PART
III
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48
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ITEM
10.
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DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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48
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Directors
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48
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Executive
Officers
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48
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Compliance
with Section 16(A)
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48
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ITEM
11.
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EXECUTIVE
COMPENSATION
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48
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ITEM
12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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48
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Equity
Compensation Plan Information
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48
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ITEM
13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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49
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ITEM
14.
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PRINCIPAL
ACCOUNTING FEES AND SERVICES
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49
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ITEM
15.
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EXHIBITS
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50
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PART
I
ITEM
1.
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DESCRIPTION
OF BUSINESS
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General
The
Company. First Robinson Financial Corporation (the “Company”) was
incorporated under the laws of the State of Delaware in March 1997, at the
direction of the Board of Directors of First Robinson Savings and Loan
Association (the “Association”), the predecessor institution to First Robinson
Savings Bank, National Association (the “Bank”) for the purpose of serving as a
holding company of the Bank. The Company has no significant assets other than
the outstanding capital stock of the Bank. Unless otherwise indicated, all
activities discussed below are of the Bank.
The Bank.
The Bank is a national bank, the deposits of which are federally insured and
backed by the full faith and credit of the U.S. Government up to $250,000 per
insured account through December 31, 2013, and in the case of certain
non-interest-bearing accounts completely insured regardless of the dollar amount
through December 31, 2010 (although the FDIC has the authority to extend this
additional insurance coverage until December 31, 2011 without additional
rulemaking). The Bank is a community-oriented financial institution
that seeks to serve the financial needs of the residents and businesses in its
market area. The Bank considers Crawford County and surrounding
counties in Illinois and Knox County and surrounding counties in Indiana as its
market area. The principal business of the Bank has historically consisted of
attracting retail deposits from the general public and primarily investing those
funds in one- to four-family residential real estate loans and, to a lesser
extent, consumer loans, commercial and agricultural real estate loans and
commercial business and agricultural finance loans. At March 31,
2010, substantially all of the Bank’s real estate mortgage loans, were secured
by properties located in the Bank’s market area. The Bank also invests in
securities issued by U.S. government sponsored enterprises (“GSE”), GSE
residential mortgage-backed securities, equity securities and other permissible
investments.
The Bank
currently offers a variety of deposit accounts having a wide range of interest
rates and terms. The Bank’s deposits include statement savings, NOW accounts,
certificate accounts, IRA accounts, limited accounts and non-interest bearing
accounts. The Bank
generally solicits deposits in its primary market area. The Bank
typically does not accept any brokered deposits.
The
Bank’s revenues are derived principally from interest income, including interest
on loans, deposits in other banks and mortgage-backed securities and other
investments.
Market
Area
The Bank
currently has four offices in Crawford County, Illinois, consisting of three
full service offices and one drive-up facility, located in Robinson, Palestine
and Oblong, Illinois and one full service office located in Vincennes,
Indiana.
1
Robinson,
Palestine and Oblong, Illinois are located in Crawford County, Illinois,
approximately 150 miles east of St. Louis, Missouri and 35 miles northwest of
Vincennes, Indiana. Vincennes is located in southwestern Indiana and is the
county seat of Knox County. The major employers in the Crawford
County, Illinois area include Marathon Petroleum Company LLC, The Hershey
Company, Robinson Correctional Facility, Dana Corporation, Crawford Memorial
Hospital and E.H. Baare Corporation. The major employers in the Knox
County, Indiana area include Good Samaritan Hospital, Vincennes University,
Vincennes Community School Corporation, Fubota Indiana of America Corporation,
Gemtron Corporation and Packaging Corporation of America.
The Bank, and therefore the Company, is
dependent upon the economy of its market area for continued success, since the
vast majority of its loans are located in the Bank’s market area. See Note 4 of
Notes to Consolidated Financial Statements.
Lending
Activities
General.
The Bank’s loan portfolio consists primarily of conventional, first mortgage
loans secured by one- to four-family residences and, to a lesser extent,
consumer loans, commercial and agricultural real estate loans, commercial
business and agricultural finance loans and multi-family real estate and
construction loans. At March 31, 2010, the Bank’s gross loans
outstanding totaled $103.2 million, of which $46.6 million, or 45.1%, were
one- to four-family residential mortgage loans. This amount also
includes one- to four-family loans held for sale of $88,000 and home equity
loans totaling $3.8 million. Of the one- to four-family mortgage
loans outstanding at that date, 22.4% were fixed-rate loans, and 77.6% were
adjustable-rate loans. At that same date, construction and development property
loans totaled $5.1 million, or 5.0%, of the Bank’s total loan portfolio.
Also at that date, the Bank’s multi-family real estate, commercial and
agricultural real estate loans totaled $20.9 million, or 20.3%, of the Bank’s
total loan portfolio of which 79.3% were adjustable-rate loans and 20.7% were
fixed-rate loans. Loans to State and Municipal Governments totaled $1.9 million,
or 1.8%, of the Bank’s total loan portfolio as of March 31, 2010. At
that same date, consumer and other loans totaled $9.8 million, or 9.5%, of
the Bank’s total loan portfolio. At March 31, 2010,
commercial business and agricultural finance loans totaled $18.9 million,
or 18.3%, of the Bank’s total loan portfolio, of which 42.3% were fixed-rate
loans and 57.7% adjustable-rate loans. See Note 4 of Notes to
Consolidated Financial Statements.
The
Bank’s loans to one borrower limit is generally limited to the greater of 15% of
unimpaired capital and surplus or, if a bank’s lending limit under this
calculation would be less than $500,000, a bank may make loans and extensions of
credit to one borrower at one time in an amount not to exceed
$500,000. See “Regulation — Federal Regulation of National
Banks.” Pursuant to certain lending provisions in the regulations of
the Office of the Comptroller of the Currency (“OCC”) for defined eligible
banks, however, the Bank may lend up to 25% of its unimpaired capital and
surplus to one borrower for loans secured by one-to-four family residential real
estate, loans secured by small businesses or small farm loans. The
total outstanding amount of the Bank’s loans or extensions of credit made to all
of its borrowers under the special limits in these regulations may not exceed
100% of the Bank’s unimpaired capital and surplus. Loans to
affiliates and their related interests are not eligible for this
program. See Note 14 of Notes to Consolidated Financial Statements
for information regarding loans to affiliates. At March 31, 2010, the
maximum amount which the bank could have lent under its standard 15% lending
limit to any one borrower and the borrowers related interests was approximately
$2.0 million. At March 31, 2010, the Bank had three borrowers with
outstanding balances and available lines of credit that exceeded the 15% legal
lending limit but was within the 25% special legal lending limit for eligible
banks. At March 31, 2010, the Bank had no loans or groups of loans to related
borrowers with outstanding balances in excess of
$3.4 million.
2
The Bank’s five largest lending
relationships at March 31, 2010 were as follows: (i) $4.4 million in loans
and available lines of credit to an individual and his closely held entities of
which $1.5 million was participated with other lenders and which is secured
by real estate, oil production and leaseholds, inventory, equipment, and
personal guarantees; (ii) $4.3 million in loans and available lines of
credit to a heavy equipment operator of which $2.5 million was participated
with other lenders and which is secured by real estate, equipment, inventory,
accounts receivable and personal guarantees; (iii) $3.0 million
in loans and available lines of credit to a commercial business secured by
inventory and accounts receivable; (iv) $2.8 million in loans and available
lines of credit to a farmer secured by real estate, crops and farm machinery;
and (v) $1.4 million in loans and available lines of credit to a to a
farmer secured by real estate, crops and farm machinery. At
March 31, 2010, all of these loans, which totaled $15.9 million in the
aggregate, of which $4.0 million was participated to other lenders, were
performing in accordance with their terms.
Loan Portfolio
Composition. The following information concerning the composition of the
Bank’s loan portfolios in dollar amounts and in percentages (before deductions
for loans in process, deferred fees and discounts and allowances for losses) as
of the dates indicated.
March 31,
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||||||||||||||||
2010
|
2009
|
|||||||||||||||
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||
(Dollars in Thousands)
|
||||||||||||||||
Real Estate Loans:
|
||||||||||||||||
One-
to four-family, held for sale.
|
$ | 88 | 0.08 | % | $ | 392 | 0.43 | % | ||||||||
One-
to four-family.
|
46,466 | 45.02 | 43,511 | 48.16 | ||||||||||||
Multi-family
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2,780 | 2.69 | 1,242 | 1.38 | ||||||||||||
Commercial
and agricultural
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18,155 | 17.59 | 14,793 | 16.37 | ||||||||||||
Construction
or development
|
5,130 | 4.97 | 2,624 | 2.90 | ||||||||||||
Total
real estate loans
|
72,619 | 70.35 | 62,562 | 69.24 | ||||||||||||
Other Loans:
|
||||||||||||||||
Government
Loans:
|
||||||||||||||||
State
& Municipal
|
1,885 | 1.83 | 2,172 | 2.40 | ||||||||||||
Consumer
and other loans
|
9,834 | 9.53 | 7,783 | 8.62 | ||||||||||||
Commercial
business and agricultural finance loans
|
18,883 | 18.29 | 17,835 | 19.74 | ||||||||||||
Total
other
|
30,602 | 29.65 | 27,790 | 30.76 | ||||||||||||
Total
loans
|
103,221 | 100.00 | % | 90,352 | 100.00 | % | ||||||||||
Less:
|
||||||||||||||||
Loans
in process
|
2,093 | 2,811 | ||||||||||||||
Deferred
loan fees
|
4 | 4 | ||||||||||||||
Allowance
for losses
|
973 | 780 | ||||||||||||||
Total
loans receivable, net
|
$ | 100,151 | $ | 86,757 |
3
The
following schedule illustrates the interest rate sensitivity of the Bank’s loan
portfolio at March 31, 2010. Loans which have adjustable or renegotiable
interest rates are shown as maturing in the period during which the contract
reprices; however, $36.9 million in adjustable rate loans have reached
their contractual floor rate. These loans then report
at their maturity date. The schedule does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses.
Real Estate
|
||||||||||||||||||||||||||||||||||||||||||||||||
One- to Four-Family and
Construction/Development
|
Multi-family and
Commercial and
Agriculture
|
Obligations of State &
Municipal Governments
|
Consumer and Other
|
Commercial Business
and
Agricultural Finance
|
Total
|
|||||||||||||||||||||||||||||||||||||||||||
Amount
|
Weighted
Average
Rate
|
Amount
|
Weighted
Average
Rate
|
Amount
|
Weighted
Average
Rate
|
Amount
|
Weighted
Average
Rate
|
Amount
|
Weighted
Average
Rate
|
Amount
|
Weighted
Average
Rate
|
|||||||||||||||||||||||||||||||||||||
(Dollars
in Thousands)
|
||||||||||||||||||||||||||||||||||||||||||||||||
Due
During
Years
Ending
March
31,
|
||||||||||||||||||||||||||||||||||||||||||||||||
2011(1)
|
$ | 7,121 | 6.21 | % | $ | 4,280 | 4.32 | % | $ | 190 | 1.31 | % | $ | 670 | 6.98 | % | $ | 9,885 | 4.16 | % | $ | 22,146 | 4.91 | % | ||||||||||||||||||||||||
2012
and 2013
|
3,782 | 6.42 | 3,880 | 5.51 | 1,025 | 5.08 | 2,572 | 7.83 | 2,581 | 5.92 | 13,840 | 6.24 | ||||||||||||||||||||||||||||||||||||
2014
and 2015
|
4,786 | 6.55 | 3,114 | 5.52 | 402 | 4.32 | 4,786 | 6.52 | 5,207 | 4.71 | 18,295 | 5.80 | ||||||||||||||||||||||||||||||||||||
After
2015
|
35,995 | 5.92 | 9,661 | 5.84 | 268 | 3.76 | 1,806 | 6.29 | 1,210 | 6.29 | 48,940 | 5.92 | ||||||||||||||||||||||||||||||||||||
Total
|
$ | 51,684 | 6.06 | % | $ | 20,935 | 5.42 | % | $ | 1,885 | 4.35 | % | $ | 9,834 | 6.85 | % | $ | 18,883 | 4.69 | % | $ | 103,221 | 5.62 | % |
(1)
|
Includes
demand loans, loans having no stated maturity and overdraft
loans.
|
4
The total
amount of loans due after March 31, 2010 which have predetermined interest
rates is $37.2 million, while the total amount of loans due after such dates
which have floating or adjustable interest rates is $66.0 million, a portion of
which have reached their contractual floor rate and are shown in the above table
at their contractual maturity.
Underwriting
Standards. All of the Bank’s lending is subject to its written
underwriting standards and loan origination procedures. Decisions on loan
applications are made on the basis of detailed applications and, if applicable,
property valuations. Properties securing real estate loans made by the Bank are
generally appraised by Board-approved independent appraisers. In the loan
approval process, the Bank assesses the borrower’s ability to repay the loan,
the adequacy of the proposed security, the employment stability of the borrower
and the credit-worthiness of the borrower.
The Bank
requires evidence of marketable title and lien position or appropriate title
insurance on all loans secured by real property. The Bank also requires fire and
extended coverage casualty insurance in amounts at least equal to the lesser of
the principal amount of the loan or the value of improvements on the property,
depending on the type of loan. As required by federal regulations, the Bank also
requires flood insurance to protect the property securing its interest if such
property is located in a designated flood area.
Management
reserves the right to change the amount or type of lending in which it engages
to adjust to market or other factors.
One- To-
Four-Family Residential Mortgage Lending. Residential loan
originations are generated by the Bank’s marketing efforts, its present
customers, walk-in customers, and referrals from real estate
brokers. Historically, the Bank has focused its lending efforts
primarily on the origination of loans secured by one- to four-family residential
mortgages in its market area. At March 31, 2010, the Bank’s one- to
four-family residential mortgage loans, including loans held for sale totaled
$46.6 million, or 45.1%, of the Bank’s gross loan portfolio, of which $85,000
was non-performing at that date.
The Bank offers both adjustable and
fixed rate mortgage loans. For the year ended March 31, 2010, the
Bank originated $58.3 million of real estate loans, of which $42.2 million
were secured by one- to four-family residential real estate, $5.8 million
was secured by one- to four-family or commercial constructions and land loans,
$7.8 million was secured by commercial or agricultural real estate, and
$2.5 million was secured by multi-family residential real
estate. Substantially all of the Bank’s one- to four-family
residential mortgage originations are secured by properties located in its
market area.
5
The Bank
offers adjustable-rate mortgage loans at rates and on terms determined in
accordance with market and competitive factors. The Bank currently
originates adjustable-rate mortgage loans with a term of up to 30 years. The Bank offers
six-month and one-year adjustable-rate mortgage loans, and residential mortgage
loans that are fixed for three years or five years, then adjustable annually
after that with a stated interest rate margin generally over the one-year
Treasury Bill Index. Increases or decreases in the interest rate of
the Bank’s adjustable-rate loans is generally limited to 200 basis points at any
adjustment date and 600 basis points over the life of the loan. As a
consequence of using caps, the interest rates on these loans may not be as rate
sensitive as the Bank’s liabilities. The Bank qualifies borrowers for
adjustable-rate loans based on the initial interest rate of the loan and by
reviewing the highest possible payment in the first seven years of the
loan. As a result, the risk of default on these loans may increase as
interest rates increase. See “Asset Quality — Non-Performing
Assets.” At March 31, 2010, the total balance of one-to four-family
adjustable-rate loans was $36.1 million, or 35.0%, of the Bank’s gross loan
portfolio. See “—
Originations, Purchases and Sales of Loans.”
The Bank
offers fixed-rate mortgage loans with a term of up to 30 years. At
March 31, 2010, the total balance of one- to four-family fixed-rate loans was
$10.4 million, or 10.4%, of the Bank’s gross loan portfolio. The Bank also offers
U.S. Department of Agriculture (“USDA”) Guaranteed Rural Housing Loans to
borrowers that meet certain income limitations with minimal to no down
payment. These loans are 30-year fixed rate loans with a 90%
guarantee from USDA. At March 31, 2010, the total balance of USDA
Guaranteed Rural Housing Loans was $308,000, or 0.3%, of the Bank’s gross loan
portfolio. During the fiscal year ended March 31, 2010, the Bank sold $4.8
million in USDA Guaranteed Rural Housing Loans. The Bank provides
servicing on $7.2 million of these Rural Housing Loans. In April 2007, the Bank
began offering USDA Rural Housing Loans where servicing is retained with a 44
basis point fee. See “— Originations, Purchases and Sales of
Loans.” The Bank will generally lend up to 80% of the lesser of the
appraised value or purchase price of the security property on owner occupied
one- to four-family loans. Residential loans do not include
prepayment penalties, are non-assumable (other than government-insured or
guaranteed loans), and do not produce negative amortization. Real estate loans
originated by the Bank contain a “due on sale” clause allowing the Bank to
declare the unpaid principal balance due and payable upon the sale of the
security property. The Bank utilizes private mortgage
insurance.
The majority of the fixed rate loans
currently originated by the Bank are underwritten and documented pursuant to the
guidelines of the Federal Home Loan Bank of Chicago’s (the “FHLB”) Mortgage
Partnership Finance (“MPF”) program. Effective January 1, 1999, the
Bank joined the MPF program offered by the FHLB. This program is a
secondary mortgage market structure under which the FHLB purchased and funded
eligible mortgage loans from or through participating banks and, in certain
instances, the FHLB purchased participations in pools of eligible mortgage loans
from other Federal Home Loan Banks. The FHLB announced, however, that
it would no longer enter into new master commitments except for immaterial
amounts of MPF loans that primarily support affordable housing and are
guaranteed by a federal government entity. MPF loans purchased after
November 1, 2008 are now concurrently sold to Fannie Mae as a third-party
investor pursuant to a program announced in September 2008, whereby Fannie Mae
will purchase 30- 20- and 15-year fixed rate mortgage loans from the
FHLB. Fannie Mae will purchase loans channeled through the MPF X-tra
Program. Participating banks generally retain the right to service
these loans.
At March
31, 2010, the Company's home equity loans amounted to $3.8 million, or 3.7%, of
the total loan portfolio. These loans are secured by the underlying equity in
the borrower's residence, and accordingly, are reported with the one-to-four
family real estate loans. As a result, the Company generally requires
loan-to-value ratios of 90% or less after taking into consideration the first
mortgage held by the Company. These loans typically have fifteen-year
terms with an interest rate adjustment monthly.
6
Multi-Family
Lending. The Bank offers one-year adjustable-rate multi-family
loans for terms of up to 20 years. The Bank will generally lend up to
80% of the value of the collateral securing the loan. At March 31,
2010, the Bank had $2.8 million of multi-family real estate loans, or 2.7% of
the Bank’s gross loan portfolio. All of these loans were performing in
accordance with their terms at that date.
Multi-family
lending is generally considered to involve a higher level of credit risk than
one- to four-family residential lending. This greater risk in
multi-family lending is due to several factors, including the concentration of
principal in a limited number of loans and borrowers, the effect of general
economic conditions on income producing properties and the increased difficulty
of evaluating and monitoring these types of loans. Furthermore, the
repayment of loans secured by multi-family real estate is typically dependent
upon the successful operation of the related real estate project. If
the cash flow from the project is reduced (for example, if leases are not
obtained or renewed, or a bankruptcy court modifies a lease term, or a major
tenant is unable to fulfill its lease obligations), the borrower’s ability to
repay the loan may be impaired.
Commercial and
Agricultural Real Estate Lending. The Bank also originates commercial and
agricultural real estate loans. At March 31, 2010 approximately
$18.1 million, or 17.6% of the Bank’s gross loan portfolio, was comprised
of commercial and agricultural real estate loans. Of this amount,
approximately $3.0 million, or 16.7%, of these loans were fixed-rate commercial
and agricultural real estate loans and approximately $15.1 million, or
83.3%, were adjustable-rate loans. At March 31, 2010, $32,000 of
these loans were non-performing. The largest commercial or agricultural real
estate loan was a $3.5 million line of credit of which $1.5 million was
participated to another institution.
The Bank
will generally lend up to 80% of the value of the collateral securing the loan
with varying maturities up to 20 years with re-pricing periods ranging from
daily to one year. In underwriting these loans, the Bank currently analyzes the
financial condition of the borrower, the borrower’s credit history, and the
reliability and predictability of the cash flow generated by the
business. The Bank generally requires personal guaranties on
corporate borrowers. Appraisals on properties securing commercial and
agricultural real estate loans originated by the Bank are primarily performed by
independent appraisers. The Bank also offers small business loans,
which are generally guaranteed up to 90% by various governmental
agencies.
Commercial
and agricultural real estate loans generally present a higher level of risk than
loans secured by one- to four-family residences. This greater risk is
due to several factors, including the concentration of principal in a limited
number of loans and borrowers, the effect of general economic conditions on
income and the increased difficulty of evaluating and monitoring these types of
loans. Furthermore, the repayment of loans secured by commercial and
agricultural real estate is typically dependent upon the successful operation of
the business. If the cash flow from the project is reduced, the
borrower’s ability to repay the loan may be impaired.
7
Construction
Lending. The Bank had $5.1 million in construction loans for one- to
four- family residences, commercial property and land loans, or 5.0%, of the
total loan portfolio at March 31, 2010. Of the $5.1 million in construction
loans, approximately $3.4 million, or 65.6%, were at a fixed rate of interest
and approximately $1.8 million, or 34.4%, were at an adjustable rate of
interest. The Bank offers construction loans to individuals for the
construction of one- to four-family residences or commercial
buildings. Following the construction period, these loans may become
permanent loans.
Construction
lending is generally considered to involve a higher level of credit risk since
the risk of loss on construction loans is dependent largely upon the accuracy of
the initial estimate of the individual property’s value upon completion of the
project and the estimated cost (including interest) of the
project. If the cost estimate proves to be inaccurate, the Bank may
be required to advance funds beyond the amount originally committed to permit
completion of the project. The Bank conducts periodic inspections of
the construction project to help mitigate this risk.
State and
Municipal Government Loans. The Bank originates both fixed and
adjustable loans for state and municipal governments. At March 31,
2010, the Bank’s loans to state and municipal governments totaled
$1.9 million, or 1.8% of the total loan portfolio, of which 71.4% were
fixed and 28.6% were adjustable. Loans to state and
municipal governments are generally at a lower rate than consumer or commercial
loans due to the tax-free nature of municipal loans.
For
underwriting purposes, the Bank does not require financial documentation as long
as the loan is to the general obligation of the local
entity. However, proper documentation in the entity’s minutes, from a
board meeting when a quorum was present, that indicate the approval to seek a
loan and the authorized individuals to sign for the loan are
required.
Consumer and
Other Lending. The Bank offers secured and unsecured consumer
and other loans. Secured loans may be collateralized by a variety of asset
types, including automobiles, mobile homes, equity securities, and
deposits. The Bank currently originates substantially all of its
consumer and other loans in its primary market area. At March 31,
2010, the Bank’s consumer and other loan portfolio totaled $9.8 million,
or 9.5%, of its gross loan portfolio, of which 99.5% were fixed-rate
loans.
A
significant component of the Bank’s consumer loan portfolio consists of new and
used automobile loans. These loans generally have terms that do not exceed five
years. Generally, loans on vehicles are made in amounts up to 110% of
the sales price or the value as quoted in BlackBook USA, whichever is
least. At March 31, 2010, the Bank’s automobile loans totaled
$8.0 million, or 7.8%, of the Bank’s gross loan portfolio. These loans were
originated predominately on a direct lending basis. However, during
the current fiscal year the Company began originating automobile loans on an
indirect basis. At March 31, 2010, indirect automobile loans totaled
$717,000 of the $8.0 million automobile loans.
8
Consumer
and other loan terms vary according to the type and value of collateral, length
of contract and creditworthiness of the borrower. The underwriting
standards employed by the Bank for consumer loans include an application, a
determination of the applicant’s payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. Although creditworthiness of the applicant is a primary
consideration, the underwriting process also includes a comparison of the value
of the security, if any, in relation to the proposed loan amount.
Consumer
and other loans may entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured or are
secured by rapidly depreciable assets, such as automobiles. Further,
any repossessed collateral for a defaulted consumer loan may not provide an
adequate source of repayment of the outstanding loan balance as a result of the
greater likelihood of damage, loss or depreciation. In addition,
consumer loan collections are dependent on the borrower’s continuing financial
stability, and thus are more likely to be affected by adverse personal
circumstances. Furthermore, the application of various federal and
state laws, including bankruptcy and insolvency laws, may limit the amount which
can be recovered on such loans. At March 31, 2010, $5,000 of the
Bank’s consumer and other loans were non-performing. There can be no
assurances that additional delinquencies will not occur in the
future.
Commercial
Business and Agricultural Finance Lending. The Bank also
originates commercial and agricultural business loans. At March 31,
2010, approximately $18.9 million, or 18.3% of the Bank’s gross loan
portfolio, was comprised of commercial and agricultural business
loans. Of the $18.9 million, approximately $8.0 million, or
42.3%, were fixed-rate loans and approximately $10.9 million, or 57.7%,
were adjustable-rate loans. At March 31, 2010, $13,000 of the Bank’s commercial
and agricultural business loans were non-performing. The
largest commercial business loan was a $3.0 million line of
credit.
Unlike
residential mortgage loans, which generally are made on the basis of the
borrower’s ability to make repayment from his or her employment and other income
and which are secured by real property whose value tends to be more easily
ascertainable, commercial business and agricultural finance loans typically are
made on the basis of the borrower’s ability to make repayment from the cash flow
of the borrower’s business. As a result, the availability of funds
for the repayment of commercial business and agricultural finance loans may be
substantially dependent on the success of the business itself (which, in turn,
is likely to be dependent upon the general economic environment). The
Bank’s commercial business and agricultural finance loans are usually secured by
business or personal assets. However, the collateral securing the
loans may depreciate over time, may be difficult to appraise and may fluctuate
in value based on the success of the business. At March 31, 2010,
$103,000 of the Bank’s commercial business and agricultural finance loans were
unsecured.
The
Bank’s commercial business and agricultural finance lending policy includes
credit file documentation and analysis of the borrower’s character, capacity to
repay the loan, the adequacy of the borrower’s capital and collateral as well as
an evaluation of conditions affecting the borrower. Analysis of the
borrower’s past, present and future cash flows is also an important aspect of
the Bank’s current credit analysis. Nonetheless, such loans are
believed to carry higher credit risk than more traditional
investments.
9
Originations,
Purchases and Sales of Loans
Loan
originations are developed from continuing business with (i) depositors and
borrowers, (ii) soliciting realtors, (iii) builders, and
(iv) walk-in customers.
While the
Bank currently originates adjustable-rate and fixed-rate loans, its ability to
originate loans to a certain extent is dependent upon the relative customer
demand for loans in its market, which is affected by the interest rate
environment, among other factors. For the year ended March 31, 2010,
the Bank had total originations of $55.4 million in fixed-rate loans and
$26.0 million in adjustable-rate loans.
The Bank
sold $27.9 million in one- to four-family loans through market programs
during the year ended March 31, 2010. Sales of these loans
generally are beneficial to the Bank since these sales may produce future
servicing income, provide funds for additional lending and other investments and
increase liquidity. The Bank sells loans pursuant to forward sales
commitments and, therefore, an increase in interest rates after loan origination
and prior to sale should not adversely affect the Bank’s income at the time of
sale.
The
following table shows the loan origination, purchase, sale and repayment
activities of the Bank for the periods indicated.
10
Year Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
(Dollars in Thousands)
|
||||||||
Originations By
Type:
|
||||||||
Real
estate:
|
||||||||
One
to four-family
|
$ | 42,231 | $ | 34,768 | ||||
Multi-family
|
2,522 | 1,416 | ||||||
Commercial
and agricultural
|
7,769 | 5,437 | ||||||
Construction
and land development
|
5,757 | 2,857 | ||||||
Other:
|
||||||||
Consumer
and other loans
|
9,035 | 5,092 | ||||||
State
& Municipal Government
|
2,839 | 853 | ||||||
Commercial
business and agricultural finance
|
11,304 | 14,717 | ||||||
Total
loans originated
|
81,457 | 65,140 | ||||||
Purchases:
|
||||||||
Real
estate:
|
||||||||
Commercial
and agricultural
|
— | 500 | ||||||
Other:
|
||||||||
Commercial
business and agricultural finance
|
4,000 | — | ||||||
Other
loan
|
500 | 1,000 | ||||||
Total
loan purchases
|
4,500 | 1,500 | ||||||
Sales And
Repayments:
|
||||||||
Real
estate:
|
||||||||
One-
to four-family
|
27,856 | 19,614 | ||||||
Commercial
and agricultural
|
908 | — | ||||||
Other:
|
||||||||
Commercial
business and agricultural finance and other loans
|
633 | |||||||
Total
sales
|
28,764 | 20,247 | ||||||
Principal
reductions
|
44,136 | 33,455 | ||||||
Decreases
in other items, net
|
188 | 315 | ||||||
Net
increase in gross loans
|
$ | 12,869 | $ | 12,623 |
Asset
Quality
Delinquencies.
When a borrower fails to make a required payment on a loan, the Bank attempts to
cause the delinquency to be cured by contacting the borrower. In the
case of loans secured by real estate, reminder notices are sent to
borrowers. If payment is late, appropriate late charges are assessed
and a notice of late charges is sent to the borrower. If the loan is
between 60-90 days delinquent, the loan will generally be referred to the Bank’s
legal counsel for collection.
When a
loan becomes more than 90 days delinquent and collection of principal and
interest is considered doubtful, or is otherwise impaired, the Bank will
generally place the loan on non-accrual status and previously accrued interest
income on the loan is charged against current income.
11
Delinquent
consumer loans are handled in a manner similar to that described
above. The Bank’s procedures for repossession and sale of consumer
collateral are subject to various requirements under applicable consumer
protection laws.
The
following table sets forth the Bank’s loan delinquencies by type, by amount and
by percentage of type at March 31, 2010.
Loans Delinquent For:
|
||||||||||||||||||||||||||||||||||||||||||||||||
30-89 Days(1)
|
90 Days and Over(1)
|
Nonaccrual
|
Total Delinquent Loans
|
|||||||||||||||||||||||||||||||||||||||||||||
Number
|
Amount
|
Percent
of Loan
Category
|
Number
|
Amount
|
Percent
of Loan
Category
|
Number
|
Amount
|
Percent
of Loan
Category
|
Number
|
Amount
|
Percent
of Loan
Category
|
|||||||||||||||||||||||||||||||||||||
(Dollars in thousands)
|
||||||||||||||||||||||||||||||||||||||||||||||||
Real
Estate:
|
||||||||||||||||||||||||||||||||||||||||||||||||
One-
to four-family
|
2 | $ | 77 | 0.17 | % | — | $ | — | — | % | 4 | $ | 85 | 0.18 | % | 6 | $ | 162 | 0.35 | % | ||||||||||||||||||||||||||||
Commercial
business and agricultural finance
|
— | — | — | — | — | — | 1 | 32 | 0.18 | 1 | 32 | 0.18 | ||||||||||||||||||||||||||||||||||||
OtherLoans:
State & Municipal Gov’t
|
1 | 85 | 4.51 | — | — | — | — | — | — | 1 | 85 | 4.51 | ||||||||||||||||||||||||||||||||||||
Consumer
and others
|
3 | 21 | 0.21 | — | — | — | 1 | 5 | 0.05 | 4 | 26 | 0.26 | ||||||||||||||||||||||||||||||||||||
Commercial
business and agricultural finance
|
— | — | — | — | — | — | 1 | 13 | 0.07 | 1 | 13 | 0.07 | ||||||||||||||||||||||||||||||||||||
Total
|
6 | $ | 183 | 0.18 | % | — | $ | — | — | % | 7 | $ | 135 | 0.13 | % | 13 | $ | 318 | 0.31 | % |
(1) Loans are still
accruing.
12
Non-Performing
Assets. The table below sets forth the amounts and categories of
non-performing assets in the Bank’s loan portfolio. Loans are placed on
non-accrual status when the collection of principal and/or interest become
doubtful. Foreclosed assets include assets acquired in settlement of
loans.
Year Ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
(Dollars in thousands)
|
||||||||
Non-accruing
loans:
|
||||||||
One-
to four-family
|
$ | 85 | $ | 192 | ||||
Commercial
and agricultural real estate
|
32 | — | ||||||
Consumer
and other
|
5 | 14 | ||||||
Commercial
business and agricultural finance
|
13 | 29 | ||||||
Total
|
135 | 235 | ||||||
Foreclosed
assets:
|
||||||||
One-
to four-family
|
52 | 46 | ||||||
Total
|
52 | 46 | ||||||
Total
non-performing assets
|
$ | 187 | $ | 281 | ||||
Total
as a percentage of total assets
|
0.10 | % | 0.17 | % |
For the
year ended March 31, 2010, gross interest income which would have been recorded
had the non-accruing loans been current in accordance with their original terms
amounted to approximately $9,000. This represents $9,000
that would have been included in interest income on such loans for the year
ended March 31, 2010.
Classified
Assets. Federal regulations provide for the classification of
loans and other assets, such as debt and equity securities, considered by the
OCC to be of lesser quality, as “substandard,” “doubtful” or
“loss.” An asset is considered “substandard” if it is inadequately
protected by the current net worth and paying capacity of the obligor or the
collateral pledged, if any. “Substandard” assets include those
characterized by the “distinct possibility” that the insured institution will
sustain “some loss” if the deficiencies are not corrected. Assets
classified as “doubtful” have all of the weaknesses inherent in those classified
“substandard” with the added characteristic that the weaknesses present make
“collection or liquidation in full” on the basis of currently existing facts,
conditions and values, “highly questionable and improbable.” Assets classified
as “loss” are those considered “uncollectible” and of such little value that
their continuance as assets without the establishment of a specific loss reserve
is not warranted.
When an
insured institution classifies problem assets as either substandard or doubtful,
it may establish general allowances for losses in an amount deemed prudent by
management. General allowances represent loss allowances which have been
established to recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem assets. When an insured institution classifies problem assets
as “loss,” it is required either to establish a specific allowance for losses
equal to 100% of that portion of the asset so classified or to charge-off such
amount. An institution’s determination as to the classification of
its assets and the amount of its valuation allowances is subject to review by
the regulatory authorities, who may order the establishment of additional
general or specific loss allowances.
13
In
connection with the filing of its periodic reports with the OCC and in
accordance with its classification of assets policy, the Bank regularly reviews
loans in its portfolio to determine whether such assets require classification
in accordance with applicable regulations. On the basis of
management’s review of its assets, at March 31, 2010, the Bank had classified a
total of $919,000 of its assets as substandard and $139,000 as
doubtful. At March 31, 2010, total classified assets comprised $1.1
million, or 8.8%, of the Bank’s capital, and0.6% of the Bank’s total
assets.
Other Loans of
Concern. As of March 31, 2010, there were $3.9 million in loans
identified, but not classified, by the Bank with respect to which known
information about the possible credit problems of the borrowers or the cash
flows of the business have caused management to have some doubts as to the
ability of the borrowers to comply with present loan repayment terms and which
may result in the future inclusion of such items in the non-performing asset
categories.
The
Company had a commercial loan in the amount of $1.0 million to Bankers Bancorp,
Inc., a bank holding company, (“BBI”) secured by the common stock of Independent
Bankers’ Bank, an Illinois chartered commercial bank that provided correspondent
banking services to its clients (“IBB”). IBB was placed into
receivership in December 2009. The Company recorded a loss of $972,000 at the
end of the Company’s third quarter. No additional payments from the
FDIC with respect to this loan are expected. In addition to its loan
to BBI, the Company was a stockholder in BBI. The Company also
recognized a loss of $197,000 related to the cost basis of the equity security
in BBI.
Allowance For
Loan Losses. The allowance for loan losses is maintained at a level
which, in management’s judgment, is adequate to absorb credit losses inherent in
the loan portfolio. The amount of the allowance is based on
management’s evaluation of the collectibility of the loan portfolio, including
the nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans and economic
conditions. Allowances for impaired loans are generally determined
based on collateral values. The allowance is increased by a provision
for loan losses, which is charged to expense and reduced by charge-offs, net of
recoveries.
Real
estate properties acquired through foreclosure are recorded at the fair value
minus 20% of the fair value if the property is appraised at $50,000 or
less. If the property is appraised at greater than $50,000, then the
property is recorded at the fair value less 10% of the fair value. If
fair value at the date of foreclosure is lower than the balance of the related
loan, the difference will be charged-off to the allowance for loan losses at the
time of transfer. Valuations are periodically updated by management
and if the value declines, a specific provision for losses on such property is
established by a charge to operations. At March 31, 2010, the Bank
had 2 real estate property acquired through
foreclosure. Although management believes that it uses the best
information available to determine the allowance, unforeseen market conditions
could result in adjustments and net earnings could be significantly affected if
circumstances differ substantially from the assumptions used in making the final
determination. Future additions to the Bank’s allowance for loan
losses will be the result of periodic loan, property and collateral reviews and
thus cannot be predicted in advance. In addition, federal regulatory
agencies, as an integral part of the examination process, periodically review
the Bank’s allowance for loan losses. Such agencies may require the
Bank to increase the allowance, or change the classification that the Bank has
assigned to various assets, based upon its judgment of the information available
to it at the time of its examination. At March 31, 2010, the Bank had
a total allowance for loan losses of $973,000, representing 0.97% of the Bank’s
loans, net. See Note 4 of Notes to Consolidated Financial
Statements.
14
The
distribution of the Bank’s allowance for losses on loans at the dates indicated
is summarized as follows:
March 31,
|
||||||||||||||||||||||||
2010
|
2009
|
|||||||||||||||||||||||
Amount of
Loan Loss
Allowance
|
Loan
Amounts by
Category
|
Percent
of Loans
in Each
Category to
Total Loans
|
Amount of
Loan Loss
Allowance
|
Loan
Amounts by
Category
|
Percent
of Loans
in Each
Category
to Total
Loans
|
|||||||||||||||||||
(Dollars in thousands)
|
||||||||||||||||||||||||
One-
to four-family including loans held for sale
|
$ | 72 | $ | 46,554 | 45.10 | % | $ | 66 | $ | 43,903 | 48.59 | % | ||||||||||||
Multi-family
|
— | 2,780 | 2.69 | — | 1,242 | 1.38 | ||||||||||||||||||
Commercial
and agricultural real estate
|
593 | 18,155 | 17.59 | 458 | 14,793 | 16.37 | ||||||||||||||||||
Construction
or Development
|
— | 5,130 | 4.97 | — | 2,624 | 2.90 | ||||||||||||||||||
State
& Municipal Government Loans
|
— | 1,885 | 1.83 | — | 2,172 | 2.40 | ||||||||||||||||||
Consumer
and other loans
|
29 | 9,834 | 9.53 | 34 | 7,783 | 8.62 | ||||||||||||||||||
Commercial
business and agricultural finance
|
279 | 18,883 | 18.29 | 222 | 17,835 | 19.74 | ||||||||||||||||||
Unallocated
|
— | — | — | — | — | — | ||||||||||||||||||
Total
|
$ | 973 | $ | 103,221 | 100.00 | % | $ | 780 | $ | 90,352 | 100.00 | % |
15
The
following table sets forth an analysis of the Bank’s allowance for loan
losses.
Year Ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
(Dollars in thousands)
|
||||||||
Balance
at beginning of year
|
$ | 780 | $ | 727 | ||||
Charge-offs:
|
||||||||
One-
to four-family
|
136 | 28 | ||||||
Commercial
and agricultural real estate
|
— | 123 | ||||||
Consumer
and other loans
|
1,023 | 44 | ||||||
Commercial
business and agricultural finance
|
— | — | ||||||
Total:
|
1,159 | 195 | ||||||
Recoveries:
|
||||||||
One-
to four-family
|
4 | 1 | ||||||
Consumer
and other loans
|
51 | 27 | ||||||
Total:
|
55 | 28 | ||||||
Net
charge-offs
|
1,104 | 167 | ||||||
Additions
charged to operations
|
1,297 | 220 | ||||||
Balance
at end of year
|
$ | 973 | $ | 780 | ||||
Ratio
of net charge-offs during the year to average loans outstanding during the
year
|
1.18 | % | 0.21 | % | ||||
Ratio
of net charge-offs during the year to average non-performing
assets
|
487.03 | % | 58.22 | % |
Investment
Activities
General. The
Bank also invests in U.S. government sponsored enterprise (“GSE”) issued
residential mortgage-backed securities (“mortgage-backed securities”), GSE
securities, obligations of states or political subdivisions and other debt
securities. At March 31, 2010, mortgage-backed securities totaled
$36.5 million, or 65.8%, of the Bank’s total investment and mortgage-backed
securities portfolio. Government securities,
obligations of state and political subdivisions and other debt securities
totaled $18.9 million, or 34.2% of the Bank’s total investment and
mortgage-backed securities portfolio.
Historically,
the Bank has generally maintained liquid assets at levels believed adequate to
meet the requirements of normal operations, including repayments of maturing
debt and potential deposit outflows. Cash flow projections are
regularly reviewed and updated to assure that adequate liquidity is
maintained. A national bank is not subject to prescribed
requirements. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Liquidity and Capital
Resource.”
National
banking associations have the authority to invest in various types of liquid
assets, including U.S. Treasury obligations, securities of various federal
agencies, certain certificates of deposit of insured banks and savings
institutions, certain bankers’ acceptances, repurchase agreements and federal
funds. Subject to various restrictions, national banks may also
invest their assets in commercial paper, investment grade corporate debt
securities and mutual funds whose assets conform to the investments that a
national banking association is otherwise authorized to make
directly.
16
Generally,
the investment policy of the Bank, as established by the Board of Directors, is
to invest funds among various categories of investments and maturities based
upon the Bank’s liquidity needs, asset/liability management policies, investment
quality, marketability and performance objectives.
Investment
Securities. At March 31, 2010, the Bank’s investment
securities, excluding mortgage-backed securities, totaled $18.9 million, or
10.3% of its total assets. It has been the Bank’s general
policy to invest in obligations of state and political subdivisions, federal
agency obligations and other investment securities.
National
banks are restricted in investments in corporate debt and equity
securities. These restrictions include prohibitions against
investments in the debt securities of any one issuer in excess of 15% of the
Bank’s unimpaired capital and unimpaired surplus as defined by federal
regulations, which totaled $12.6 million as of March 31, 2010, plus an
additional 10% if the investments are fully secured by readily marketable
collateral. At March 31, 2010, the Bank was in compliance with
this regulation. See “Regulation — Federal Regulation of National
Banks” for a discussion of additional restrictions on the Bank’s investment
activities. See Note 3 of Notes to Consolidated Financial
Statements.
The
following table sets forth the composition of the Bank’s securities, all of
which are classified as available for sale.
March
31,
|
||||||||||||||||
2010
|
2009
|
|||||||||||||||
Market
Value
|
%
of
Total
|
Market
Value
|
%
of
Total
|
|||||||||||||
(Dollars
in thousands)
|
||||||||||||||||
U.S.
Government sponsored enterprises (“GSE”)
|
$ | 15,191 | 27.42 | % | $ | 9,992 | 17.87 | % | ||||||||
Mortgage-backed
securities, GSE, residential
|
36,472 | 65.84 | 40,901 | 73.13 | ||||||||||||
State
and political subdivisions
|
3,736 | 6.74 | 5,032 | 9.00 | ||||||||||||
Total
available for sale
|
$ | 55,399 | 100.00 | % | $ | 55,925 | 100.00 | % | ||||||||
Average
remaining life of investment and mortgage-backed
securities
|
15.48
Years
|
15.96
Years
|
||||||||||||||
Other
interest-earning assets:
|
||||||||||||||||
Federal
funds sold
|
7,852 | 69.32 | 7,572 | 91.39 | ||||||||||||
Interest-bearing
deposits with banks
|
3,475 | 30.68 | 713 | 8.61 | ||||||||||||
Total
other interest earnings investments
|
$ | 11,327 | 100.00 | % | $ | 8,285 | 100.00 | % |
17
The
Bank’s investment securities portfolio at March 31, 2010, contained no
securities of any issuer with an aggregate book value in excess of 10% of the
Bank’s retained earnings, excluding those issued by the U.S. government, or its
agencies.
First
Robinson’s investments, including the mortgage-backed securities portfolio, are
managed in accordance with a written investment policy adopted by the Board of
Directors.
OCC
guidelines, as well as those of the other federal banking regulators, regarding
investment portfolio policy and accounting require banks to categorize
securities and certain other assets as held for “investment,” “sale,” or
“trading.” In addition, the Bank has adopted ASC 320 which states
that securities available for sale are accounted for at fair value and
securities which management has the intent and the Bank has the ability to hold
to maturity are accounted for on an amortized cost basis. The Bank’s
investment policy has strategies for each type of security. At March
31, 2010, the Bank classified $55.4 million of its investments as available
for sale.
Mortgage-Backed
Securities. The Bank invests in U.S. government sponsored enterprise
obligations secured by residential properties. At March 31, 2010, the Bank’s
investment in mortgage-backed securities totaled $36.5 million or 19.9% of
its total assets. All of the mortgage-backed securities are
classified as available for sale. At March 31, 2010, the Bank did
not have a trading
portfolio.
The
following table sets forth the maturities of the Bank’s mortgage-backed
securities at March 31, 2010.
Due
in
|
||||||||||||||||||||
1
Year
or
Less
|
1
to
5
Years
|
5
to 10
Years
|
10
Years
or
More
|
Total
|
||||||||||||||||
Federal
Home Loan Mortgage Corporation
|
$ | 595 | $ | 244 | $ | 3,806 | $ | 5,727 | $ | 10,372 | ||||||||||
Weighted
Average Rate
|
3.28 | 4.29 | % | 4.97 | % | 4.51 | % | 4.60 | % | |||||||||||
Federal
National Mortgage Company
|
— | 1,394 | 1,650 | 17,901 | 20,945 | |||||||||||||||
Weighted
Average Rate
|
— | 4.07 | 4.49 | 4.82 | 4.74 | |||||||||||||||
Government
National Mortgage Company
|
— | — | 268 | 4,887 | 5,155 | |||||||||||||||
Weighted
Average Rate
|
— | — | 3.63 | 4.15 | 4.13 | |||||||||||||||
Total
|
$ | 595 | $ | 1,638 | $ | 5,724 | $ | 28,515 | $ | 36,472 | ||||||||||
Weighted
Average Rate
|
3.28 | 4.10 | % | 4.77 | % | 4.64 | % | 4.54 | % |
Trust
Services
A trust officer was hired by the Bank
in July 2008, and shortly thereafter the Bank began offering wealth management
and trust services to its higher net worth customers to assist them in
investment, tax and estate planning. The Bank offers these services
in a manner consistent with the principles of prudent and safe banking and in
compliance with applicable laws, rules, regulations and regulatory guidelines.
The Bank earns fees for managing client’s assets and providing trust
services. Revenues from wealth management and trust services
comprised less than 0.10% of the Banks revenue for the period during which such
services have been offered. Total assets held in Trust at March 31,
2010 were $1.2 million.
18
Sources of
Funds
General. The
Bank’s primary sources of funds are deposits, receipt of principal and interest
on loans and securities, interest earned on deposits with other banks, and other
funds provided from operations.
The Bank
has used FHLB advances to support lending activities and to assist in the Bank’s
asset/liability management strategy. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Asset/Liability
Management.” At March 31, 2010, the Bank had no FHLB
advances. The Bank had a credit enhancement reserve of $944,000
established with the FHLB for participation in the Mortgage Partnership Finance
(“MPF”) program. The MPF credit enhancement reserve reduced the
amount available to borrow from the FHLB of Chicago to
$24.2 million. The Company and Bank could also borrow up
to $5.0 million from a correspondent bank. The Bank has also established
borrowing capabilities with the Federal Reserve Bank of St.
Louis. See Notes 9 and 10 of Notes to Consolidated Financial
Statements.
At March
31, 2010, the Bank had $17.6 million in repurchase
agreements. See Note 8 of Notes to Consolidated Financial
Statements.
The
Company maintains a $2.5 million revolving line of credit note payable, of which
$1.7 million was outstanding at March 31, 2010 with an unaffiliated financial
institution. The note payable bears interest tied to the prime
commercial rate with a floor of 3.50%, the rate at March 31, 2010, matures on
September 30, 2010, and is secured by the stock of the Bank.
Deposits. The
Bank offers a variety of deposit accounts having a wide range of interest rates
and terms. The Bank’s deposits consist of statement savings accounts,
money market deposit accounts, NOW accounts, IRA accounts, and certificate
accounts. The certificate accounts currently range in terms from 90
days to 54 months. The Bank also offers a variable rate certificate
for children. The certificate matures on the child’s 18th
birthday. The Bank has a significant amount of deposits that will
mature within one year. However, management expects that virtually
all of the deposits will be renewed.
The Bank
relies primarily on advertising, competitive pricing policies and customer
service to attract and retain these deposits. Currently, the
Bank solicits deposits from its market area only, and does not use brokers to
obtain deposits. The flow of deposits is
influenced significantly by general economic conditions, changes in money market
and prevailing interest rates and competition.
The Bank
remains susceptible to short-term fluctuations in deposit flows as customers
have become more interest rate conscious. The Bank endeavors to
manage the pricing of its deposits in keeping with its profitability objectives
giving consideration to its asset/liability management. The ability
of the Bank to attract and maintain deposit accounts and certificates of
deposit, and the rates paid on these deposits, has been and will continue to be
significantly affected by market conditions.
19
The
following table sets forth the deposit flows at the Bank during the periods
indicated.
Year
Ended
March
31,
|
||||||||
2010
|
2009
|
|||||||
(Dollars
in thousands)
|
||||||||
Opening
balance
|
$ | 140,088 | $ | 103,898 | ||||
Deposits
|
1,005,121 | 1,027,901 | ||||||
Withdrawals
|
(998,515 | ) | (994,033 | ) | ||||
Interest
credited
|
2,618 | 2,322 | ||||||
Ending
balance
|
149,312 | 140,088 | ||||||
Net
increase
|
$ | 9,224 | $ | 36,190 | ||||
Percent
increase
|
6.58 | % | 34.83 | % |
The
following table sets forth the dollar amount of deposits in the various types of
deposit programs offered by the Bank for the periods indicated.
March
31,
|
||||||||||||||||
2010
|
2009
|
|||||||||||||||
Amount
|
Percent
of
Total
|
Amount
|
Percent
of
Total
|
|||||||||||||
(Dollars
in thousands)
|
||||||||||||||||
Transactions and Savings
Deposits:
|
||||||||||||||||
Non-interest
bearing demand (0.00%)
|
$ | 15,248 | 10.21 | % | $ | 12,828 | 9.16 | % | ||||||||
Statement
Savings and Money Market Accounts (0.50%)
|
22,863 | 15.31 | 22,443 | 16.02 | ||||||||||||
NOW
Accounts (2.06%)
|
53,512 | 35.84 | 43,752 | 31.23 | ||||||||||||
Total
non-certificates
|
91,623 | 61.36 | 79,023 | 56.41 | ||||||||||||
Certificates:
|
||||||||||||||||
0.40 –
1.99%
|
16,101 | 10.78 | % | 4,590 | 3.28 | % | ||||||||||
2.00 –
3.99%
|
30,405 | 20.36 | 33,733 | 24.08 | ||||||||||||
4.00 –
5.99%
|
11,183 | 7.48 | 22,742 | 16.23 | ||||||||||||
Total
certificates
|
57,689 | 38.64 | 61,065 | 43.59 | ||||||||||||
Total
deposits
|
$ | 149,312 | 100.00 | % | $ | 140,088 | 100.00 | % |
20
The
following table shows rate and maturity information for the Bank’s certificates
of deposit as of March 31, 2010.
0.40
-
1.99%
|
2.00-
3.99%
|
4.00-
5.99%
|
Total
|
Percent
of
Total
|
Weighted
Average
Rate
|
|||||||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||||||
Certificate
accounts maturing
In
quarter ending:
|
||||||||||||||||||||||||
June
30, 2010
|
$ | 8,106 | $ | 4,142 | $ | 2,348 | $ | 14,596 | 25.30 | % | 2.50 | % | ||||||||||||
September
30, 2010
|
2,652 | 3,602 | 238 | 6,492 | 11.25 | 2.22 | ||||||||||||||||||
December
31, 2010
|
1,636 | 145 | 1,858 | 3,639 | 6.31 | 2.69 | ||||||||||||||||||
March
31, 2011
|
2,201 | 973 | 2,112 | 5,286 | 9.16 | 2.72 | ||||||||||||||||||
June
30, 2011
|
268 | 5,082 | 323 | 5,673 | 9.83 | 3.59 | ||||||||||||||||||
September
30, 2011
|
716 | 3,003 | 580 | 4,299 | 7.45 | 2.88 | ||||||||||||||||||
December
31, 2011
|
83 | 5,044 | 586 | 5,713 | 9.90 | 2.98 | ||||||||||||||||||
March
31, 2012
|
99 | 3,270 | 344 | 3,713 | 6.44 | 2.63 | ||||||||||||||||||
June
30, 2012
|
81 | 2,568 | 901 | 3,550 | 6.16 | 2.83 | ||||||||||||||||||
September
30, 2012
|
42 | 71 | 746 | 859 | 1.49 | 4.40 | ||||||||||||||||||
December
31, 2012
|
22 | 80 | 30 | 132 | 0.23 | 2.93 | ||||||||||||||||||
March
31, 2013
|
62 | 255 | 16 | 333 | 0.58 | 2.87 | ||||||||||||||||||
Thereafter
|
133 | 2,170 | 1,101 | 3,404 | 5.90 | 3.35 | ||||||||||||||||||
Total
|
$ | 16,101 | $ | 30,405 | $ | 11,183 | $ | 57,689 | 100.00 | % | 3.34 | % | ||||||||||||
Percent
of total
|
27.91 | % | 52.71 | % | 19.38 | % | 100.00 | % |
The following table indicates the
amount of the Bank’s certificates of deposit and other deposits by time
remaining until maturity as of March 31, 2010.
Maturity
|
||||||||||||||||||||
3
Months
or
Less
|
Over
3
to 6
Months
|
Over
6
to 12
Months
|
Over
12
months
|
Total
|
||||||||||||||||
Certificates
of deposit less than $100,000
|
$ | 5,963 | $ | 4,389 | $ | 6,556 | $ | 19,425 | $ | 36,333 | ||||||||||
Certificates
of deposit of $100,000 or more
|
1,793 | 1,078 | 2,369 | 8,251 | 13,493 | |||||||||||||||
Public
funds of $100,000 or more (1)
|
6,838 | 1,025 | — | — | 7,863 | |||||||||||||||
Total
certificates of deposit
|
$ | 14,596 | $ | 6,492 | $ | 8,925 | $ | 27,676 | $ | 57,689 |
(1)
|
Deposits
from governmental and other public
entities.
|
Subsidiary
Activities
As a
national bank, the Bank is able to invest unlimited amounts in subsidiaries that
are engaged in activities in which the parent bank may engage. In
addition, a national bank may invest limited amounts in subsidiaries that
provide banking services, such as data processing, to other financial
institutions. At March 31, 2010, the Bank had no
subsidiaries.
21
Code of
Ethics
A copy of
the Company’s Code of Ethics may be obtained in print, without charge, by any
stockholder upon written request to Secretary, c/o First Robinson Financial
Corporation, 501 East Main Street, Robinson, Illinois 62454 or it can be found
at www.frsb.net
in the Investor
Relations section under the About Us tab.
Competition
The Bank
faces strong competition, both in originating real estate, commercial and
consumer loans and in attracting deposits. Competition in originating loans
comes primarily from commercial banks and credit unions located in the Bank’s
market area. Commercial banks provide vigorous competition in consumer lending.
The Bank competes for real estate and other loans principally on the basis of
the quality of services it provides to borrowers, the interest rates and loan
processing fees it charges, and the types of loans it originates. See
“— Lending Activities.”
The Bank
attracts its deposits through its retail banking offices and through their
internet site at www.frsb.net. Therefore, competition for those deposits is
principally from retail brokerage offices, commercial banks and credit unions
located in their market area. The Bank competes for these deposits by offering a
variety of account alternatives at competitive rates and by providing convenient
business hours.
The Bank
primarily serves Crawford County and surrounding counties in Illinois and Knox
County and surrounding counties in Indiana. There are six commercial banks and
one credit union, other than the Bank, which compete for deposits and loans in
Crawford County. In Vincennes, there are seven commercial banks and
one credit union, other than the Bank, competing for deposits and
loans.
22
Regulation
General. The
Company is a registered bank holding company, subject to broad federal
regulation and oversight by the Board of Governors of the Federal Reserve Bank
(“FRB”). The Bank is a national bank, the deposits of which are
federally insured and backed by the full faith and credit of the U.S.
Government. Accordingly, the Bank and the Company are subject to
broad federal regulation and oversight extending to all their operations by the
OCC, the Federal Deposit Insurance Corporation (“FDIC”) and the
FRB. The Bank is also a member of the FHLB of Chicago. The
Bank is a member of the Deposit Insurance Fund (the “DIF”) and the deposits of
the Bank are insured up to applicable regulating limits by the
FDIC.
Certain
of these regulatory requirements and restrictions are discussed below or
elsewhere in this document. See Note 13 of Notes to Consolidated
Financial Statements.
Federal
Regulation of National Banks. The OCC has extensive authority
over the operations of national banks. As part of this authority, the
Bank is required to file periodic reports with the OCC and is subject to
periodic examinations by the OCC. All national banks are subject to a
semi-annual assessment, based upon the bank’s total assets, to fund the
operations of the OCC.
The OCC
also has extensive enforcement authority over all national banks, including the
Bank. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or removal
orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated for violations of laws and regulations as
well as unsafe or unsound practices. Other actions or inactions may
provide the basis for enforcement action, including misleading or untimely
reports filed with the OCC. Except under certain circumstances,
public disclosure of final enforcement actions by the OCC is
required.
The
Bank’s loans to one borrower limit is generally limited to the greater of 15% of
unimpaired capital and surplus or, if a bank’s lending limit under this
calculation would be less than $500,000, a bank may make loans and
extensions of credit to one borrower at one time in an amount not to exceed
$500,000. However, the Bank is allowed to utilize a program offered
by the OCC that permits it to exceed the 15% lending limit under certain
circumstances. The Bank may lend up to 25% of its unimpaired capital
and surplus to one borrower for loans secured by one-to-four family residential
real estate, loans secured by small businesses or small farm
loans. The total outstanding amount of the Bank’s loans or extensions
of credit made to all of its borrowers under the special limits of this program
may not exceed 100% of the Bank’s unimpaired capital and surplus. Loans to
affiliates and their related interests are not eligible for this
program. See “Lending Activities – General.”
The OCC,
as well as the other federal banking agencies, have adopted regulations and
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure, asset quality and earnings, and compensation and other
employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan. A failure to submit a plan
or to comply with an approved plan will subject the institution to further
enforcement action.
23
Recent
Legislation.
Federal
Economic Stabilization Programs. On October 3, 2008, President
Bush signed into law the Emergency Economic Stabilization Act of 2008 (“EESA”),
giving the US Treasury authority to take certain actions to restore liquidity
and stability to the U.S. banking markets. Based upon its authority
in the EESA, a number of programs to implement the EESA have been
announced. Those programs include the following:
|
•
|
Capital
Purchase Program (“CPP”). Pursuant to this program, the US
Treasury, on behalf of the US government, will purchase up to $250 billion
of preferred stock, along with warrants to purchase common stock, from
certain financial institutions, including bank holding companies, savings
and loan holding companies and banks or savings associations not
controlled by a holding company. The investment will have a
dividend rate of 5% per year, until the fifth anniversary of the US
Treasury’s investment and a dividend of 9%
thereafter.
|
During
the time the US Treasury holds securities issued pursuant to this program,
participating financial institutions will be required to comply with certain
provisions regarding executive compensation and corporate
governance. Participation in this program also imposes certain
restrictions upon an institution’s dividends to common shareholders and stock
repurchase activities. As of the date of this report, the Bank did
not elect to participate in the CPP.
|
•
|
Temporary
Liquidity Guarantee Program (“TLGP”). That program contained
both a debt guarantee component, whereby the FDIC guaranteed until
June 30, 2012, the senior unsecured debt issued by eligible financial
institutions between October 14, 2008 and October 31, 2009 (although a
limited, six-month emergency guarantee facility was established by the
FDIC whereby certain participating entities could apply to the FDIC for
permission to issue FDIC-guaranteed debt during the period from October
31, 2009 through April 30, 2010), and a transaction account guarantee
component, whereby the FDIC will insure 100% of non-interest bearing
deposit transaction accounts held at eligible financial institutions, such
as payment processing accounts, payroll accounts and working capital
accounts through December 31, 2010 (with the possibility of an additional
extension until December 31, 2011 if the FDIC invokes its authority to so
extend the program). The Bank opted out of the debt guarantee
component of the TLGP and thus did not pay any participation fees
associated therewith. The Bank is, however, participating in the
transaction account guarantee program and related extensions and will be
required to pay to the FDIC fees in connection with such
participation.
|
|
•
|
Temporary
increase in deposit insurance coverage. Pursuant to the EESA,
the FDIC temporarily raised the basic limit on federal deposit insurance
coverage from $100,000 to $250,000 per depositor. The EESA
provides that the basic deposit insurance limit will return to $100,000
after December 31, 2013 (although the increased coverage is permanent for
certain retirement accounts, including
IRAs).
|
24
|
•
|
Another
recently implemented program intended to stabilize the nation’s banking
system is the Term Asset-Backed Securities Loan Facility (the “TALF”)
promulgated by the Board of Governors of the Federal Reserve
System. The program, which became operational in March 2009, is
intended to increase credit availability and support economic activity by
facilitating renewed issuance of consumer and small business asset-backed
securities (“ABS”) and commercial mortgage-backed securities
(“CMBS”). Under TALF, the Federal Reserve Bank of New York will
finance the purchase of eligible ABS and CMBS by investors that own
eligible collateral so long as such investor maintains an account
relationship with a primary dealer. Generally, eligible ABS
must be newly issued, highly rated ABS collateralized by student loans,
auto loans, credit card loans, and loans guaranteed by the Small Business
Administration. Eligible CMBS must also meet certain
requirements, including: (i) it must entitle its holders to payments
of principal and interest throughout its remaining term, (ii) it must
bear interest at a fixed pass-through rate or at a rate based on the
weighted average of the underlying fixed mortgage rates, and (iii) it not
be junior to other securities with claims on the same pool of
loans. Minimum loan sizes under the TALF will be $10 million
and TALF loans will generally have a three year
maturity. Starting in June 2009, however, TALF loans secured by
SBA Pool Certificates, SBA Development Company Participation Certificates,
or ABS secured by student loans or commercial mortgages were permitted to
have a five-year maturity if the borrower so elects. The
Federal Reserve intends to cease making new loans securitized by CMBS on
June 30, 2010. Loans secured by other collateral ceased on
March 31, 2010.
|
Given the
current international, national and regional economic climate, it is unclear
what effect the provisions of the EESA, the American Recovery and Reinvestment
Act of 2009 (signed into law on February 17, 2009), and the programs listed
above will have with respect to the profitability and operations of both the
Company and the Bank. In addition, the US government, either through
the US Treasury or some other federal agency, may also advance additional
programs that could materially impact the profitability and operations of both
the Company and the Bank. The failure of these governmental efforts
to stabilize national and international markets could have a material effect on
the Company’s business, financial condition, results of operations or access to
the credit markets.
On May
20, the U.S. Senate approved an extensive overhaul of the financial services
industry by a vote of 59 to 39. Four Republicans joined with 53
Democrats and 2 Independents to support the bill; 2 Democrats voted against the
bill. The bill is now being debated by a joint conference committee
to be reconciled with a version of financial services reform that was passed by
the U.S. House of Representatives in December. The lengthy bill
contains numerous provisions that will affect the financial services industry in
ways both dramatic and subtle. It cannot be predicted with any
certainty as to when the joint conference committee will complete its work, what
the final version of financial services regulatory reform will include, or if
the provisions currently under consideration will pass both houses in congress
and become law.
25
The
Sarbanes-Oxley Act. While not a banking law per se, the
Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) implements a broad range
of corporate governance and accounting measures for public companies (including
publicly-held bank holding companies such as the Company) designed to promote
honesty and transparency in corporate America. The Sarbanes-Oxley
Act’s principal provisions, many of which have been interpreted through
regulations, provide for and include, among other things: (i) the creation
of an independent accounting oversight board; (ii) auditor independence
provisions that restrict non-audit services that accountants may provide to
their audit clients; (iii) additional corporate governance and
responsibility measures, including the requirement that the chief executive
officer and chief financial officer of a public company certify financial
statements; (iv) the forfeiture of bonuses or other incentive-based
compensation and profits from the sale of an issuer’s securities by directors
and senior officers in the twelve month period following initial publication of
any financial statements that later require restatement; (v) an increase in
the oversight of, and enhancement of certain requirements relating to, audit
committees of public companies and how they interact with the Company’s
independent auditors; (vi) requirements that audit committee members must
be independent and are barred from accepting consulting, advisory or other
compensatory fees from the issuer; (vii) requirements that companies
disclose whether at least one member of the audit committee is a ‘financial
expert’ (as such term is defined by the SEC) and if not discussed, why the audit
committee does not have a financial expert; (viii) expanded disclosure
requirements for corporate insiders, including accelerated reporting of stock
transactions by insiders and a prohibition on insider trading during pension
blackout periods; (ix) a general prohibition on personal loans to directors
and officers, except for certain loans made by subsidiary insured financial
institutions such as the Bank on non-preferential terms and in compliance with
other bank regulatory requirements; (x) disclosure of a code of ethics and
filing a Form 8-K for a change or waiver of such code; (xi) requirements
that management assess the effectiveness of internal control over financial
reporting and that the Company’s Independent Registered Public Accounting Firm
attest to the assessment; and (xii) a range of enhanced penalties for fraud
and other violations.
Pursuant to Section 302 of the
Sarbanes-Oxley Act, the Company’s Chief Executive Officer and the Chief
Financial Officer are required to certify that the Company’s quarterly and
annual reports filed with the SEC fairly present, in all material respects, the
operations and conditions of the Company. In addition, as required by
Section 404 of the Sarbanes-Oxley Act, management must make an assessment
regarding the effect of internal controls on financial reporting and the
Company’s external auditors must attest to such management assessment and
reports. The Company is considered a non-accelerated filer based on
criteria established by the SEC, and accordingly, beginning with its annual
report for the fiscal year ending March 31, 2008, the Company has been
required to provide management’s assessment of the effectiveness of its internal
control over financial reporting. Management’s assessment for the
fiscal year ending March 31, 2010 is included in Item 9A(T)
below. Because the Company is a smaller reporting company, its
independent registered public accounting firm is not yet required to issue its
attestation regarding the Company’s internal controls over financial
reporting.
The Company’s management has developed
policies, procedures and internal processes to ensure compliance with all
applicable provisions of the Sarbanes-Oxley Act. It is anticipated
that these and other requirements of the Sarbanes-Oxley Act will increase the
Company’s cost of doing business both in terms of the time and energy that its
board, committees and executives will have to expend, as well as in hard
dollars, although no prediction can be made at this time of how extensive the
increased costs will be.
26
The
Public-Private Partnership Investment Program for Legacy Assets. Announced
by the FRB and the FDIC on March 23, 2009, this program consists of two plans
(the Legacy Loan Program and the Legacy Securities Program) designed to assist
insured depository institutions in the sale of certain assets. The
Company will not participate in either program.
The
Homeowners Affordability and Stability Plan
(“HASP”). Announced in February, 2009, the HASP is a
$75.0 billion dollar federal program providing for loan modifications targeted
at borrowers who are at risk of foreclosure because their incomes are not
sufficient to meet their mortgage payments. It is anticipated that
this program will have minimal impact on the Company.
Privacy. The Bank is required by
statute and regulation to disclose privacy policies to the individuals
requesting information about the Bank’s products and services (the Bank’s
consumers) and, on an annual basis, to their customers. The privacy
notices provided with respect to this requirement provide Bank customers with
the ability to opt out of the sharing of their nonpublic personal information
with non-affiliated third parties. Information safeguards are also
required with respect to the Bank’s protection of non-public personal
information.
Other
Regulations. The Bank is also subject to numerous other
regulations with respect to its operation, including, but not limited to, the
Truth in Lending Act, the Truth in Savings Act, the Equal Credit Opportunity
Act, the Electronic Funds Transfer Act, the Fair Housing Act, the Home Mortgage
Disclosure Act, the Fair Debt Collection Practices Act, and the Fair Credit
Reporting Act. Changes in any regulation applicable to the operation
of the Bank are not predictable and could affect the Bank’s operations and
profitability.
Insurance
of Accounts and Regulation by the FDIC.
The Bank
is a member of the DIF, which is administered by the FDIC. Deposits
are insured up to applicable limits by the FDIC and such insurance is backed by
the full faith and credit of the U.S. Government. As insurer, the
FDIC imposes deposit insurance premiums and is authorized to conduct
examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from
engaging in any activity the FDIC determines by regulation or order to pose a
serious risk to the FDIC. The FDIC also has the authority to initiate
enforcement actions against banks after giving the OCC an opportunity to take
such action, and may terminate the deposit insurance if it determines that the
institution has engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.
Deposit
Insurance. As an FDIC-insured institution, the Bank is
required to pay deposit insurance premium assessments to the FDIC based upon a
risk classification system established by the agency comprised of four
categories that are distinguished by capital ratios and supervisory
ratings. Each bank’s risk-based assessment category will be
determined, and assessments will be collected, on a quarterly
basis.
27
During
the year ended December 31, 2009, DIF assessments ranged from 7 basis
points to 77.5 basis points for every $100 of qualified deposits after
accounting for all possible adjustments. The Bank qualified for the
12.02 basis point deposit insurance rate in 2009. On May 22, 2009,
the FDIC adopted a final rule imposing a 5 basis point special assessment on
each insured depository institution’s assets minus Tier 1 capital as of June 30,
2009. The amount of the special assessment for any institution did
not exceed 10 basis points times the institution’s assessment base for the
second quarter 2009. The special assessment was collected on
September 30, 2009. Moreover, on November 12, 2009, the FDIC
announced that insured depository institutions would be required to prepay three
years of deposit insurance premiums by calendar year end. Under this
rule, the prepaid amount was based upon an estimate of the institution’s
assessment rate in effect on September 30, 2009, its third quarter 2009
assessment base, and an estimated increase in that assessment
base. Pursuant to this calculation, the Bank made a required payment
equal to 12.69 basis points per $100 of assessable deposits to the FDIC in the
amount of $ 774,000. Finally, on June 22, 2010, the FDIC announced a
uniform 3 basis point increase in FDIC insurance assessment rates effective
January 1, 2011. The FDIC stated that the increase in such premiums
is necessary to restore the DIF’s reserve ratio to the statutorily required
minimum of 1.15% during the first quarter of 2017.
The FDIC
has indicated that the Bank’s annual assessment rate for 2010 will be 12.43
basis points per $100 of deposits.
FICO
Assessments. DIF-insured institutions are required to pay a
quarterly Financing Corporation (FICO) assessment in order to fund the interest
on bonds issued to resolve thrift failures in the 1980s. These FICO
assessments are in addition to amounts assessed by the FDIC for deposit
insurance. During the calendar year ended December 31, 2009, the FICO
assessment rate for DIF members ranged between 1.02 basis points and 1.14 basis
points. The Bank’s FICO assessment expense for fiscal year ended
March 31, 2010 was $15,000. Management believes this expense will be
comparable for the fiscal year ended March 31, 2011.
National
Banks. The Bank is subject to, and in compliance with, the capital
regulations of the OCC. The OCC’s regulations establish two capital
standards for national banks: a leverage requirement and a risk-based capital
requirement. In addition, the OCC may, on a case-by-case basis,
establish individual minimum capital requirements for a national bank that vary
from the requirements which would otherwise apply under OCC
regulations. A national bank that fails to satisfy the capital
requirements established under the OCC’s regulations will be subject to such
administrative action or sanctions as the OCC deems appropriate.
The
leverage ratio adopted by the OCC requires a minimum ratio of “Tier 1 capital”
to adjusted total assets of 3% for national banks rated composite 1 under the
CAMELS rating system for banks. National banks not rated composite 1
under the CAMELS rating system for banks are required to maintain a minimum
ratio of Tier 1 capital to adjusted total assets of 4% to 5%, depending upon the
level and nature of risks of their operations. For purposes of the
OCC’s leverage requirement, Tier 1 capital generally consists of common
stockholders’ equity and retained income and certain non-cumulative perpetual
preferred stock and related income, except that no intangibles and certain
purchased mortgage servicing rights and purchased credit card relationships may
be included in capital.
28
The
risk-based capital requirements established by the OCC’s regulations require
national banks to maintain “total capital” equal to at least 8% of total
risk-weighted assets. For purposes of the risk-based capital
requirement, “total capital” means Tier 1 capital (as described above) plus
“Tier 2 capital,” provided that the amount of Tier 2 capital may not exceed the
amount of Tier 1 capital, less certain assets. The components of Tier
2 capital include certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets.
Under
this current regulatory scheme, Bank management believes that it will meet the
capital requirements set forth above. Economic downturns in the
Bank’s market, and other local and national events, however, could adversely
affect the Bank’s earnings, thereby affecting its ability to meet its capital
requirements.
Prompt
Corrective Action. The OCC is authorized and, under certain circumstances
required, to take certain actions against national banks that fail to meet their
capital requirements. The OCC is generally required to take action to
restrict the activities of an “undercapitalized institution” (generally defined
to be one with less than either a 4% leveraged ratio, a 4% Tier 1 risked-based
capital ratio or an 8% risk-based capital ratio). Any such
institution must submit a capital restoration plan and, until such plan is
approved by the OCC, may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OCC is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized
institutions.
Any
national bank that fails to comply with its capital plan or is “significantly
undercapitalized” (i.e., Tier 1 risk-based or leverage ratios of less than 3% or
a risk-based capital ratio of less than 6%) must be made subject to one or more
of additional specified actions and operating restrictions which may cover all
aspects of its operations and include a forced merger or acquisition of the
bank. A national bank that becomes “critically undercapitalized”
(i.e., a tangible capital ratio of 2% or less) is subject to further mandatory
restrictions on its activities in addition to those applicable to significantly
undercapitalized institutions. In addition, the OCC must appoint a
receiver (or conservator with the concurrence of the FDIC) for an institution,
with certain limited exceptions, within 90 days after it becomes critically
undercapitalized. Any undercapitalized institution is also subject to
the general enforcement authority of the OCC, including the appointment of a
conservator or a receiver.
The OCC
is also generally authorized to reclassify a bank into a lower capital category
and impose the restrictions applicable to such category if the institution is
engaged in unsafe or unsound practices or is in an unsafe or unsound
condition. At March 31, 2010, the Bank was categorized as well
capitalized under the OCC’s prompt corrective action regulations.
The
imposition by the OCC of any of these measures on the Bank may have a
substantial adverse effect on the Bank’s operations and profitability and the
value of the Company’s common stock.
29
Limitations
on Dividends and Other Capital Distributions.
The
Bank’s ability to pay dividends is governed by the National Bank Act and OCC
regulations. Under such statute and regulations, all dividends by a
national bank must be paid out of current or retained net profits, after
deducting reserves for losses and bad debts. The National Bank Act
further restricts the payment of dividends out of net profits by prohibiting a
national bank from declaring a cash dividend on its shares of common stock until
the surplus fund equals the amount of capital stock or, if the surplus fund does
not equal the amount of capital stock, until one-tenth of the bank’s net profits
for the preceding half year in the case of quarterly or semi-annual dividends,
or the preceding two half-year periods in the case of annual dividends, are
transferred to the surplus fund. In addition, the prior approval of
the OCC is required for the payment of a dividend if the total of all dividends
declared by a national bank in any calendar year would exceed the total of its
net profits for the year combined with its net profits for the two preceding
years, less any required transfers to surplus or a fund for the retirement of
any preferred stock.
The OCC
has the authority to prohibit the payment of dividends by a national bank when
it determines such payment to be an unsafe and unsound banking
practice. In addition, the bank would be prohibited by federal
statute and the OCC’s prompt corrective action regulations from making any
capital distribution if, after giving effect to the distribution, the bank would
be classified as “undercapitalized” under OCC regulations. See “—
Prompt Corrective Action.” Finally, the Bank would not be able to pay
dividends on its capital stock if its capital would thereby be reduced below the
remaining balance of the liquidation account established in connection with the
Bank’s conversion from mutual to stock form.
Accounting.
The OCC
requires that investment activities of a national bank be in compliance with
approved and documented investment policies and strategies, and must be
accounted for in accordance with accounting principles generally accepted in the
United States of America (“GAAP”). Accordingly, management must
support its classification of and accounting for loans and securities (i.e.,
whether held for investment, sale or trading) with appropriate documentation.
The Bank is in compliance with these requirements.
Community
Reinvestment Act.
Under the
Community Reinvestment Act (“CRA”), every FDIC-insured institution has a
continuing and affirmative obligation consistent with safe and sound banking
practices to help meet the credit needs of its entire community, including low-
and moderate-income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution’s discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA.
30
The CRA requires the OCC, in connection
with the examination of the institution, to assess the institution’s record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications, such as a merger or the establishment
of a branch, by the institution. An unsatisfactory rating may be used
as the basis for the denial of an application by the OCC. The Bank’s
CRA rating is “satisfactory.”
Transactions
with Affiliates.
Generally,
transactions between a national bank or its subsidiaries and its affiliates are
required to be on terms as favorable to the bank as transactions with
non-affiliates. In addition, certain of these transactions, such as
loans to an affiliate, are restricted to a percentage of the bank’s
capital. Affiliates of the bank include any company which is under
common control with the bank. In addition, the bank may not acquire the
securities of most affiliates. Subsidiaries of the bank are not
deemed affiliates. However, the Federal Reserve Board (the “FRB”) has
the discretion to treat subsidiaries of national banks as affiliates on a
case-by-case basis.
Certain
transactions with directors, officers or controlling persons (“Insiders”) are
also subject to conflict of interest rules enforced by the OCC. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, as a
general matter, loans to Insiders must be made on terms substantially the same
as for loans to unaffiliated individuals.
Federal
Reserve System.
The FRB
requires all depository institutions to maintain reserves at specified levels
against their transaction accounts (primarily checking and NOW checking
accounts). At March 31, 2010, the Bank $1.5 million in reserve and
had $172,000 in FRB stock, which was in compliance with these reserve
requirements.
Holding Company Regulation.
General.
The Company is a bank holding company registered with the FRB. Bank holding
companies are subject to comprehensive regulation by the FRB under the Banking
Holding Company Act (the “BHCA”), and the regulations of the FRB. As
a bank holding company, the Company is required to file reports with the FRB and
such additional information as the FRB may require, and will be subject to
regular examinations by the FRB. The FRB also has extensive
enforcement authority over bank holding companies, including, among other
things, the ability to assess civil money penalties, to issue cease and desist
or removal orders and to require that a holding company divest subsidiaries
(including its bank subsidiaries). In general, enforcement actions
may be initiated for violations of law and regulations and unsafe or unsound
practices.
Under FRB policy, a bank holding
company must serve as a source of financial and managerial strength for its
subsidiary banks. Under this policy the FRB may require, and has
required in the past, a holding company to contribute additional capital to an
undercapitalized subsidiary bank. Failure by a bank holding company
to act as a “source of strength” to its subsidiary bank could be deemed by the
FRB to be an unsafe and unsound banking practice, a violation of FRB regulation,
or both.
31
Under the
BHCA, a bank holding company must obtain FRB approval before:
(i) acquiring, directly or indirectly, ownership or control of any voting
shares of another bank or bank holding company if, after such acquisition, it
would own or control more than 5% of such shares (unless it already owns or
controls the majority of such shares); (ii) acquiring all or substantially
all of the assets of another bank or bank holding company; or (iii) merging
or consolidating with another bank holding company.
The BHCA
also prohibits a bank holding company, with certain exceptions, from acquiring
direct or indirect ownership or control of more than 5% of the voting shares of
any company which is not a bank or bank holding company, or from engaging
directly or indirectly in activities other than those of banking, managing or
controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by FRB regulation or order, have been identified as
activities closely related to the business of banking or managing or controlling
banks. The list of activities permitted by the FRB includes, among
other things, operating a savings institution, mortgage company, finance
company, credit card company or factoring company; performing certain data
processing operations; providing certain investment and financial advice;
underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; selling money orders, travelers’ checks and U.S. Savings Bonds; real
estate and personal property appraising; providing tax planning and preparation
services; and, subject to certain limitations, providing securities brokerage
services for customers.
Dividends. The FRB
previously issued a policy statement, with which the Bank is in compliance, on
the payment of cash dividends by bank holding companies, which expresses the
FRB’s view that a bank holding company should pay cash dividends only to the
extent that the Company’s net income for the past year is sufficient to cover
both the cash dividends and a rate of earning retention that is consistent with
the Company’s capital needs, asset quality and overall financial
condition. The FRB also indicated that it would be inappropriate for
a company experiencing serious financial problems to borrow funds to pay
dividends. Furthermore, under the prompt corrective action
regulations adopted by the FRB, the FRB may prohibit a bank holding company from
paying any dividends if the holding company’s bank subsidiary is classified as
“undercapitalized.” See “Regulation — Prompt Corrective
Action.”
Importantly,
in 2009, the FRB issued a set of specific factors the board of directors of a
bank holding company should consider before declaring a
dividend. Those factors include the following:
|
•
|
Overall
asset quality, potential need to increase reserves and write down assets,
and concentrations of credit;
|
|
•
|
Potential
for unanticipated losses and declines in asset
values;
|
|
•
|
Implicit
and explicit liquidity and credit commitments, including off-balance sheet
and contingent liabilities;
|
32
|
•
|
Quality
and level of current and prospective earnings, including earnings capacity
under a number of plausible economic
scenarios;
|
|
•
|
Current
and prospective cash flow and
liquidity;
|
|
•
|
Ability
to serve as an ongoing source of financial and managerial strength to
depository institution subsidiaries insured by the Federal Deposit
Insurance Corporation, including the extent of double leverage and the
condition of subsidiary depository
institutions;
|
|
•
|
Other
risks that affect the bank holding company’s financial condition and are
not fully captured in regulatory capital
calculations;
|
|
•
|
Level,
composition, and quality of capital;
and
|
|
•
|
Ability
to raise additional equity capital in prevailing market and economic
conditions.
|
Redemption. Bank holding
companies are required to give the FRB prior written notice of any purchase or
redemption of its outstanding equity securities if the gross consideration for
the purchase or redemption, when combined with the net consideration paid for
all such purchases or redemptions during the preceding 12 months, is equal to
10% or more of their consolidated net worth. The FRB may disapprove
such a purchase or redemption if it determines that the proposal would
constitute an unsafe or unsound practice or would violate any law, regulation,
FRB order, or any condition imposed by, or written agreement with, the
FRB. This notification requirement does not apply to any company that
meets the well-capitalized standard for commercial banks, is well managed and is
not subject to any unresolved supervisory issues.
Capital
Requirements. The FRB has
established capital requirements for bank holding companies that generally
parallel the capital requirements for national banks. For bank
holding companies with consolidated assets of less than $500 million, such
as the Company, compliance is measured on a case-by-case basis. See
“Regulation — National Banks.” The Company’s capital exceeds such
requirements.
Federal
Home Loan Bank System.
The Bank
is a member of the FHLB of Chicago, which is one of 12 regional FHLBs, that
administers the home financing credit function of savings
institutions. Each FHLB serves as a reserve or central bank for its
members within its assigned region. It is funded primarily from
proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with
policies and procedures, established by the board of directors of the FHLB,
which are subject to the oversight of the Federal Housing Finance Agency
(“FHFA”), an agency of the United States government. All advances
from the FHLB are required to be fully secured by sufficient collateral as
determined by the FHLB. In addition, all long-term advances are
required to provide funds for residential home financing.
33
As a
member, the Bank is required to purchase and maintain stock in the FHLB of
Chicago. At March 31, 2010, the Bank had $836,000 in FHLB
stock. The Bank made a subsequent purchase of an additional $43,000
in FHLB stock on April 7, 2010, which was in compliance with the stock
maintenance requirement.
The FHLB
of Chicago entered into a cease-and-desist order (“Order”) with the Federal
Housing Finance Board, the predecessor to the FHFA, its regulator, on October
10, 2007. Dividends were suspended by the FHLB of Chicago at the end
of the third quarter in 2007 and have not yet been reinstated as of the date of
this filing. Among other things, the Order provides that any proposed
divided must first be approved by the FHFA.
On July
23, 2008, the FHFB amended this cease-and-desist order to permit the FHLB of
Chicago to repurchase or redeem newly-issued capital stock to support new
advances, subject to certain conditions set forth in the Order. The
FHFB permitted this modification because it determined that permitting the FHLB
of Chicago to do this would help it to grow its advances business, and thereby,
improve its financial condition while preserving the stability of its existing
capital stock.
Under
federal law, the FHLBs are required to provide funds for the resolution of
troubled savings institutions and to contribute to low- and moderately priced
housing programs through direct loans or interest subsidies on advances targeted
for community investment and low- and moderate-income housing projects. These
contributions could have an adverse effect on the value of FHLB stock in the
future. A reduction in value of the Bank’s FHLB stock may result in a
corresponding reduction in the Bank’s capital.
Federal and State
Taxation
Federal
Taxation. In addition to the regular income tax, corporations generally
are subject to a minimum tax. An alternative minimum tax is imposed
at a minimum tax rate of 20% on alternative minimum taxable income, which is the
sum of a corporation’s regular taxable income (with certain adjustments) and tax
preference items, less any available exemption. The alternative
minimum tax is imposed to the extent it exceeds the corporation’s regular income
tax and net operating losses can offset no more than 90% of alternative minimum
taxable income.
The
Company and the Bank file a consolidated income tax return on the accrual basis
of accounting. Neither the Company nor the Bank have been audited by
the IRS with respect to federal income tax returns.
State
Taxation. The Company also is subject to various forms of state taxation
under the laws of Illinois as a result of the business it conducts in Illinois,
and under the laws of Indiana as a result of the business it conducts in
Indiana.
34
Employees
At March
31, 2010, the Company and the Bank had a total of 55 full-time and 13 part-time
employees. The Company’s and the Bank’s employees are not represented by any
collective bargaining group. Management considers its employee relations to be
good.
Recent
Accounting Pronouncements –
In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of
Financial Assets”- an amendment of FASB Statement No. 140” which was
codified into ASC Topic 860. Topic 860 will require more information
about transfers of financial assets, including securitization transactions, and
where companies have continuing exposure to the risks related to transferred
financial assets. Topic 860 also eliminates the concept of a
“qualifying special-purpose entity”, changes the requirements for derecognizing
financial assets and requires additional disclosures. Topic 860 was
effective as of the beginning of the Company’s first annual reporting period
that begins after November 15, 2009, for interim periods within that first
annual reporting period and for interim and annual reporting periods
thereafter. Earlier application is prohibited. The
recognition and measurement provisions of Topic 860 shall be applied to
transfers that occur on or after the effective date. The Company will
adopt Topic 860 on April 1, 2010, as required. The impact of the
adoption is not expected to be material.
In June,
2009, the FASB issued Statement of Financial Accounting Standards No. 167,
“Amendments to FASB
Interpretation No. 46(R)” which was codified into ASC Topic
810 Topic 810 changes how a company determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. The determination of whether a
company is required to consolidate an entity is based on, among other things, an
entity’s purpose and design and a company’s ability to direct the activities of
the entity that most significantly impact the entity’s economic
performance. Topic 810 will be effective as of the Company’s first
annual reporting period that begins after November 15, 2009, for interim periods
within that first annual reporting period and for interim and annual reporting
periods thereafter. Earlier adoption is prohibited. The
Company will adopt Topic 810 on April 1, 2010, as required. The
impact of the adoption is not expected to be material.
35
ITEM
1A.
|
RISK
FACTORS
|
The
Company’s business could be harmed by any of the risks noted below, or by other
risks not noted because they were not apparent to
management. Similarly, the trading price of the Company’s common
stock could decline, and stockholders may lose all or part of their investment.
In assessing these risks, you should also refer to the other information
contained in this annual report on Form 10-K, including the Company’s financial
statements and related notes.
Risks Related to Recent
Developments and the Banking Industry Generally
Recent
negative developments in the financial services industry and U.S. and global
credit markets may adversely impact the Company’s operations and
results.
Despite
signs that the nation as a whole is emerging from a recession environment, the
national and global economic downturn has resulted in extreme levels of market
volatility locally, nationally and internationally. Factors such as
consumer spending, business investment, government spending and inflation all
affect the business and economic environment and, ultimately, the profitability
of the Company. In an economic downturn characterized by higher
unemployment, lower family income, lower corporate earnings, lower business
investment and lower consumer spending, stock prices of financial institutions,
like ours, have been negatively affected, as has our ability, if needed, to
raise capital or borrow in the debt markets. Dramatic declines in the
housing market over the past three years, with falling home prices and
increasing foreclosures, unemployment and under-employment, have negatively
impacted the credit performance of real estate related loans and resulted in
significant write-downs of asset values by financial
institutions. These write-downs have caused many financial
institutions to seek additional capital, to reduce or eliminate dividends, to
merge with larger and stronger institutions and, in some cases, to
fail. This market turmoil and tightening of credit have led to an
increased level of commercial and consumer delinquencies, lack of consumer
confidence, increased market volatility and widespread reduction of business
activity generally. The resulting economic pressure on consumers and
lack of confidence in the financial markets may cause adverse changes in payment
patterns, causing increases in delinquencies and default rates, which may impact
our charge-offs and provision for loan losses.
As a
result of the economic slowdown, there is a strong potential for new federal or
state laws and regulations regarding lending and funding practices and liquidity
standards, and financial institution regulatory agencies are expected to be very
aggressive in responding to concerns and trends identified in
examinations. A continued weak economy, negative developments in the
financial services industry and the impact of new legislation, including that
currently being finalized in the U.S. Congress, could adversely impact our
operations, including our ability to originate or sell loans, and adversely
impact our financial performance.
36
There
can be no assurance that recently enacted legislation will help stabilize the
U.S. financial system.
As
discussed further above in Part I, Item 1 “Business — Regulation – Recent
Legislation – Federal Economic Stabilization Programs”, since October 2008,
numerous legislative actions have been taken in response to the financial crisis
affecting the banking system and financial markets. These programs
were implemented to help stabilize and provide liquidity to the financial
system. There can be no assurance, however, as to the actual impact
that stabilization programs, or any other governmental programs, will have on
the financial markets. The failure of these programs to stabilize the
financial markets and the continuation or worsening of current financial market
conditions could materially and adversely affect the Company’s business,
financial condition, results of operations, access to credit or the trading
price of the Company’s common stock.
The
soundness of other financial institutions could adversely affect
us.
The
Company’s ability to engage in routine funding transactions could be adversely
affected by the actions and commercial soundness of other financial
institutions. Financial services institutions are interrelated as a
result of trading, clearing, counterparty or other relationships. As
a result, defaults by, or even rumors or questions about, one or more financial
services institutions, or the financial services industry generally, have led to
market-wide liquidity problems and could lead to losses or defaults by us or by
other institutions. Many of these transactions expose the Company to
credit risk in the event of default of a counterparty or client. In
addition, the Company’s credit risk may be exacerbated when the collateral held
by the Company cannot be realized upon or is liquidated at prices not sufficient
to recover the full amount of the financial instrument
exposure. There is no assurance that any such losses would not
materially and adversely affect the Company’s results of
operations.
Recent
negative developments in the financial industry and the credit markets may
subject us to additional regulation.
As a
result of the recent global financial crisis, the potential exists for new
federal or state laws and regulations regarding lending and funding practices
and liquidity standards to be promulgated, and bank regulatory agencies are
expected to be active in responding to concerns and trends identified in
examinations. Negative developments in the financial industry and
credit markets, and the impact of new legislation in response to those
developments, may negatively impact the Company’s operations by restricting our
business operations, including our ability to originate or sell loans, and may
adversely impact the Company’s financial performance.
Changes
in economic and political conditions could adversely affect the Company’s
earnings, as the Company’s borrowers’ ability to repay loans and the value of
the collateral securing the Company’s loans decline.
The
Company’s success depends, to a certain extent, upon economic and political
conditions, local and national, as well as governmental monetary
policies. Conditions such as inflation, recession, unemployment,
changes in interest rates, money supply and other factors beyond the Company’s
control may adversely affect the Company’s asset quality, deposit levels and
loan demand and, therefore, the Company’s earnings. Because we have a
significant amount of real estate loans, decreases in real estate values could
adversely affect the value of property used as collateral. Adverse changes in
the economy may also have a negative effect on the ability of the Company’s
borrowers to make timely repayments of their loans, which would have an adverse
impact on the Company’s earnings. In addition, substantially all of
the Company’s loans are to individuals and businesses in the Company’s market
area. Consequently, any economic decline in the Company’s market area
could have an adverse impact on the Company’s earnings.
37
Changes
in interest rates could adversely affect the Company’s results of operations and
financial condition.
The
Company’s earnings depend substantially on the Company’s interest rate spread,
which is the difference between (i) the rates we earn on loans, securities
and other earning assets, and (ii) the interest rates we pay on deposits
and other borrowings. These rates are highly sensitive to many
factors beyond the Company’s control, including general economic conditions and
the policies of various governmental and regulatory authorities. For
additional information, see “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
We
operate in a highly regulated environment, and changes in laws and regulations
to which we are subject may adversely affect the Company’s results of
operations.
The
Company and the Bank operate in a highly regulated environment and are subject
to extensive regulation, supervision and examination by the OCC and the Board of
Governors of the Federal Reserve System. See “Business — Regulation”
herein. Applicable laws and regulations may change, and there is no
assurance that such changes will not adversely affect the Company’s
business. Such regulation and supervision govern the activities in
which an institution may engage, and are intended primarily for the protection
of banks and their depositors. Regulatory authorities have extensive
discretion in connection with their supervisory and enforcement activities,
including but not limited to the imposition of restrictions on the operation of
an institution, the classification of assets by the institution and the adequacy
of an institution’s allowance for loan losses. Any change in such
regulation and oversight, whether in the form of restrictions on activities,
regulatory policy, regulations, or legislation, including but not limited to
changes in the regulations governing national banks, could have a material
impact on the bank and the Company’s operations.
Changes
in technology could be costly.
The
banking industry is undergoing technological innovation at a fast pace. To keep
up with its competition, the Company needs to stay abreast of innovations and
evaluate those technologies that will enable it to compete on a cost-effective
basis. The cost of such technology, including personnel, can be high
in both absolute and relative terms. There can be no assurance, given
the fast pace of change and innovation, that the Company’s technology, either
purchased or developed internally, will meet or continue to meet the needs of
the Company.
Risks Related to the
Company’s Business
We
operate in an extremely competitive market, and the Company’s business will
suffer if we are unable to compete effectively.
In the
Company’s market area, the Bank encounters significant competition from other
commercial banks, a credit union, consumer finance companies, securities
brokerage firms, insurance companies, money market mutual funds and other
financial intermediaries. Many of the Bank’s competitors have
substantially greater resources and lending limits than we do and may offer
services that we do not or cannot provide. The Company’s
profitability depends upon the Company’s continued ability to compete
successfully in the Company’s market area.
38
The
loss of key members of the Company’s senior management team could adversely
affect the Company’s business.
We
believe that the Company’s success depends largely on the efforts and abilities
of the Company’s senior management. Their experience and industry
contacts significantly benefit us. The competition for qualified personnel in
the financial services industry is intense, and the loss of any of the Company’s
key personnel or an inability to continue to attract, retain and motivate key
personnel could adversely affect the Company’s business.
The
Company’s loan portfolio includes loans with a higher risk of loss.
The Bank
originates commercial loans, consumer loans, agricultural finance loans and
residential mortgage loans primarily within the Company’s market
areas. Commercial mortgage, commercial, and consumer loans may expose
a lender to greater credit risk than loans secured by residential real estate
because the collateral securing these loans may not be sold as easily as
residential real estate. These loans also have greater credit risk
than residential real estate for the following reasons:
|
·
|
Commercial Loans.
Repayment is dependent upon the successful operation of the borrower’s
business
|
|
·
|
Consumer Loans.
Consumer loans (such as personal lines of credit) are collateralized, if
at all, with assets that may not provide an adequate source of payment of
the loan due to depreciation, damage, or
loss.
|
|
·
|
Agricultural Finance
Loans. Repayment is dependent upon the successful operation of the
business, which are greatly dependent on many things outside the control
of either the Bank or the borrowers. These factor include
weather, commodity prices, and interest rates, among
others.
|
If
the Company’s actual loan losses exceed the Company’s allowance for loan losses,
the Company’s net income will decrease.
The
Company makes various assumptions and judgments about the collectibility of the
Company’s loan portfolio, including the creditworthiness of the Company’s
borrowers and the value of the real estate and other assets serving as
collateral for the repayment of the Company’s loans. Despite the
Company’s underwriting and monitoring practices, the Company’s loan customers
may not repay their loans according to their terms, and the collateral securing
the payment of these loans may be insufficient to pay any remaining loan
balance. We may experience significant loan losses, which could have
a material adverse effect on the Company’s operating results. Because
we must use assumptions regarding individual loans and the economy, the
Company’s current allowance for loan losses may not be sufficient to cover
actual loan losses, and increases in the allowance may be
necessary. We may need to significantly increase the Company’s
provision for losses on loans if one or more of the Company’s larger loans or
credit relationships becomes delinquent or if we continue to expand the
Company’s commercial real estate and commercial lending. In addition,
federal regulators periodically review the Company’s allowance for loan losses
and may require us to increase the Company’s provision for loan losses or
recognize loan charge-offs. Material additions to the Company’s allowance would
materially decrease the Company’s net income. We cannot assure you
that the Company’s monitoring procedures and policies will reduce certain
lending risks or that the Company’s allowance for loan losses will be adequate
to cover actual losses.
39
If
we foreclose on collateral property and own the underlying real estate, we may
be subject to the increased costs associated with the ownership of real
property, resulting in reduced revenues.
We may
have to foreclose on collateral property to protect the Company’s investment and
may thereafter own and operate such property, in which case we will be exposed
to the risks inherent in the ownership of real estate. The amount
that we, as a mortgagee, may realize after a default is dependent upon factors
outside of the Company’s control, including, but not limited to:
(i) general or local economic conditions; (ii) neighborhood values;
(iii) interest rates; (iv) real estate tax rates; (v) operating
expenses of the mortgaged properties; (vi) supply of and demand for rental
units or properties; (vii) ability to obtain and maintain adequate
occupancy of the properties; (viii) zoning laws; (ix) governmental
rules, regulations and fiscal policies; and (x) acts of God. Certain
expenditures associated with the ownership of real estate, principally real
estate taxes and maintenance costs, may adversely affect the income from the
real estate. Therefore, the cost of operating a real property may
exceed the rental income earned from such property, and we may have to advance
funds in order to protect the Company’s investment, or we may be required to
dispose of the real property at a loss. The foregoing expenditures
and costs could adversely affect the Company’s ability to generate revenues,
resulting in reduced levels of profitability.
Environmental
liability associated with commercial lending could have a material adverse
effect on the Company’s business, financial condition and results of
operations.
In the
course of the Company’s business, we may acquire, through foreclosure,
commercial properties securing loans that are in default. There is a
risk that hazardous substances could be discovered on those properties. In this
event, we could be required to remove the substances from and remediate the
properties at the Company’s cost and expense. The cost of removal and
environmental remediation could be substantial. We may not have
adequate remedies against the owners of the properties or other responsible
parties and could find it difficult or impossible to sell the affected
properties. These events could have a material adverse effect on the
Company’s business, financial condition and operating results.
40
If
the Company fails to maintain an effective system of internal control over
financial reporting, it may not be able to accurately report the Company’s
financial results or prevent fraud, and, as a result, investors and depositors
could lose confidence in the Company’s financial reporting, which could
adversely affect the Company’s business, the trading price of the Company’s
stock and the Company’s ability to attract additional deposits.
In order
to comply with the requirements of Section 404 of the Sarbanes-Oxley Act and SEC
rules and regulations, beginning with the Company’s annual report on Form 10-K
for the fiscal year ended March 31, 2008, we have included in our annual reports
filed with the SEC a report of the Company’s management regarding internal
control over financial reporting. In anticipation of preparing such
reports, we began in 2007 to document and evaluate the Company’s internal
control over financial reporting. Management retained outside
consultants to assist in (i) assessing and documenting the adequacy of the
Company’s internal control over financial reporting, (ii) improving control
processes, where appropriate, and (iii) verifying through testing that
controls are functioning as documented. If we fail to identify and
correct any significant deficiencies in the design or operating effectiveness of
the Company’s internal control over financial reporting or fail to prevent
fraud, current and potential stockholders and depositors could lose confidence
in the Company’s financial reporting, which could adversely affect the Company’s
business, financial condition and results of operations, the trading price of
the Company’s stock and the Company’s ability to attract additional
deposits.
A
breach of information security or compliance breach by one of our agents or
vendors could negatively affect the Company’s reputation and
business.
The Bank
depends on data processing, communication and information exchange on a variety
of computing platforms and networks and over the internet. We cannot
be certain all of the Company’s systems are entirely free from vulnerability to
attack, despite safeguards we have installed. Additionally, we rely
on and do business with a variety of third-party service providers, agents and
vendors with respect to the Company’s business, data and communications
needs. If information security is breached, or one of our agents or
vendors breaches compliance procedures, information could be lost or
misappropriated, resulting in financial loss or costs to us or damages to
others. These costs or losses could materially exceed the Company’s
amount of insurance coverage, if any, which would adversely affect the Company’s
business.
41
Risks Related to the
Company’s Stock
The
price of the Company’s common stock may be volatile, which may result in losses
for investors.
The
market price for shares of the Company’s common stock has been volatile in the
past, and several factors could cause the price to fluctuate substantially in
the future. These factors include:
•
|
announcements
of developments related to the Company’s
business,
|
•
|
fluctuations
in the Company’s results of
operations,
|
•
|
sales
of substantial amounts of the Company’s securities into the
marketplace,
|
•
|
general
conditions in the Company’s banking niche or the worldwide
economy,
|
•
|
a
shortfall in revenues or earnings compared to securities analysts’
expectations,
|
•
|
lack
of an active trading market for the common
stock,
|
•
|
commencement
of, or changes in analysts’ recommendations or projections,
and
|
•
|
the
Company’s announcement of new acquisitions or other
projects.
|
The
market price of the Company’s common stock may fluctuate significantly in the
future, and these fluctuations may be unrelated to the Company’s
performance. General market price declines or market volatility in
the future could adversely affect the price of the Company’s common stock, and
the current market price may not be indicative of future market
prices.
The
Company’s common stock is thinly traded, and thus your ability to sell shares or
purchase additional shares of the Company’s common stock will be limited, and
the market price at any time may not reflect true value.
Your
ability to sell shares of the Company’s common stock or purchase additional
shares largely depends upon the existence of an active market for the common
stock. The Company’s common stock is quoted on the Over the Counter
Bulletin Board. The volume of trades on any given day is light, and
you may be unable to find a buyer for shares you wish to sell or a seller of
additional shares you wish to purchase. In addition, a fair valuation
of the purchase or sales price of a share of common stock also depends upon
active trading, and thus the price you receive for a thinly traded stock, such
as the Company’s common stock, may not reflect its true value.
42
Federal
regulations may inhibit a takeover, prevent a transaction you may favor or limit
the Company’s growth opportunities, which could cause the market price of the
Company’s common stock to decline.
Certain
provisions of the Company’s charter documents and federal regulations could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of the
Company. In addition, we must obtain approval from regulatory
authorities before acquiring control of any other company.
We
may not be able to pay dividends in the future in accordance with past
practice.
We pay an
annual dividend to stockholders. The payment of dividends is subject to legal
and regulatory restrictions. Any payment of dividends in the future will depend,
in large part, on the Bank’s earnings, capital requirements, financial condition
and other factors considered relevant by the Company’s Board of
Directors.
ITEM
1B.
|
UNRESOLVED
STAFF COMMENTS
|
Not applicable.
ITEM
2.
|
DESCRIPTION
OF PROPERTY
|
The Bank
conducts its business through its main office and four branch offices, three of
which are located in Crawford County, Illinois, and one of which is located in
Knox County, Indiana. The Bank owns its main office and branch
offices. The total net book value of the Bank’s premises and
equipment (including land, buildings and leasehold improvements and furniture,
fixtures and equipment) at March 31, 2010 was approximately $4.0 million.
The following
table sets forth information relating to the Bank’s offices as of March 31,
2010.
43
Location
|
Date
Acquired
|
Total
Approximate
Square
Footage
|
Net Book Value of
Buildings and
Improvements at
March 31, 2010
|
|||||||
Main
Office:
|
||||||||||
501
East Main Street
|
1985
|
12,420 |
$
|
1.2
million
|
||||||
Robinson,
Illinois
|
||||||||||
Branch
Offices:
|
||||||||||
119
East Grand Prairie
|
1995
|
1,800 | 237,000 | |||||||
Palestine,
Illinois
|
||||||||||
102
West Main Street
|
1995
|
2,260 | 78,000 | |||||||
Oblong,
Illinois
|
||||||||||
Outer
East Main Street
|
1997
|
1,000 | 84,000 | |||||||
Oblong,
Illinois
|
||||||||||
615
Kimmel Road
|
2008
|
2,612 | 540,000 | |||||||
Vincennes,
Indiana
|
The
Company and the Bank believe that current facilities are adequate to meet the
present and foreseeable needs and are adequately covered by
insurance. See Note 5 of Notes to Consolidated Financial
Statements.
ITEM
3.
|
LEGAL
PROCEEDINGS
|
The Company and the Bank are involved,
from time to time, as plaintiff or defendant in various legal actions arising in
the normal course of its businesses. While the ultimate outcome of
these proceedings cannot be predicted with certainty, it is the opinion of
management, after consultation with counsel representing the Company and the
Bank in the proceedings, that the resolution of these proceedings should not
have a material effect on the Company’s results of operations on a consolidated
basis.
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
No matter
was submitted to a vote of security holders, through the solicitation of proxies
or otherwise, for the quarter ended March 31, 2010.
44
PART
II
ITEM
5.
|
MARKET
FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER
PURCHASES OF EQUITY SECURITIES
|
Pages 62
and 63 of the attached 2010 Annual Report to Stockholders are incorporated
herein by reference.
PURCHASES
OF EQUITY SECURITIES BY COMPANY (1)
Period
|
Total Number
of Shares
Purchased
|
Average Price
Paid per Share
|
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
|
Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs
|
||||||||||||
1/1/2010
– 1/31/2010
|
— | $ | — | — | 12,160 | |||||||||||
2/1/2010
– 2/28/2010
|
— | — | — | 12,160 | ||||||||||||
3/1/2010–
3/31/2010
|
335 | 35.25 | — | 12,160 | ||||||||||||
Total
|
335 | $ | 35.25 | — | 12,160 |
(1) On
July 23, 2009, the Board of Directors of the Company voted to approve the
extension and expansion of the repurchase program of its equity stock approved
on July 24, 2008. The Company may repurchase up to 10,000 additional
shares of the Company’s outstanding common stock in the open market or in
negotiated private transactions from time to time when deemed appropriate by
management. The increase represents approximately 2.5% of the Company’s issued
and outstanding shares. As of July 22, 2009, the Company had
repurchased 22,782 shares of its common stock out of the 26,892 shares that had
been previously authorized for repurchase leaving 4,110 remaining to be
purchased. As a result of these actions, the Company is currently
authorized to repurchase 14,110 shares of common stock. The program
has been extended to August 2, 2010 or the earlier of the completion
of the repurchase of the 14,110 shares. As of March 31, 2010
1,950 shares of the 14,110 have been purchased in the expanded program leaving
12,160 remaining to be purchased pursuant to this share repurchase
program.
ITEM
6.
|
SELECTED
FINANCIAL DATA
|
Pages 3
and 4 of the attached 2010 Annual Report to Stockholders are incorporated herein
by reference.
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Pages 5
through 22 of the attached 2010 Annual Report to Stockholders are incorporated
herein by reference.
45
ITEM
7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Pages 18
through 20 of the attached 2010 Annual Report to Stockholders are incorporated
herein by reference.
ITEM
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The
following information appearing in the Company’s Annual Report to Stockholders
for the year ended March 31, 2010, is incorporated by reference in this Annual
Report on Form 10-K as Exhibit 13.
Annual Report Section
|
Pages in
Annual Report
|
|
Report
of Independent Registered Public Accounting Firm
|
23
|
|
Consolidated
Balance Sheets for the Fiscal Years Ended March 31, 2010 and
2009
|
24
|
|
Consolidated
Statements of Operations for the Years Ended March 31, 2010 and
2009
|
25
|
|
Consolidated
Statements of Stockholders’ Equity for Years Ended March 31, 2010 and
2009
|
26
|
|
Consolidated
Statements of Cash Flows for the Years Ended March 31, 2010 and
2009
|
27
|
|
Notes
to Consolidated Financial Statements
|
29
|
With the
exception of the aforementioned information, the Company’s Annual Report to
Stockholders for the year ended March 31, 2010 is not deemed filed as part of
this Annual Report on Form 10-K.
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING
AND FINANCIAL DISCLOSURE
|
None.
ITEM
9A(T).
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures.
Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we evaluated the effectiveness of
the design and operation of our disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the
period covered by this report. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective in timely alerting them to the material information
relating to us required to be included in our periodic SEC
filings. There were no significant changes made in our internal
controls during the period covered by this report or, to our knowledge, in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
46
Management’s Annual Report
On Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. The Company’s internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. Our internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
Company’s assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management assessed the effectiveness
of the Company’s internal control over financial reporting as of March 31, 2010,
based on the criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission in “Internal Control-Integrated
Framework.” Based on the assessment, management determined that, as
of March 31, 2010, the Company’s internal control over financial reporting is
effective, based on those criteria.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
SEC that permit the Company to provide only the management’s report in this
annual report. Our
registered public accounting firm will be required to attest to the
effectiveness of the Company’s internal control over financial reporting in our
next annual report for the fiscal year ending March 31, 2011.
ITEM
9B.
|
OTHER
INFORMATION
|
Not
applicable.
47
PART
III
ITEM
10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
Directors
Information
concerning Directors of the Company is incorporated herein by reference from the
definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
July 22, 2010, a copy of which was filed with the SEC on June 25,
2010.
Executive
Officers
Information
concerning Executive Officers of the Company and the Bank is incorporated herein
by reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on July 22, 2010, a copy of which was filed with
the SEC on June 25, 2010.
Compliance with Section
16(A)
Information
concerning compliance with Section 16(a) of the Exchange Act is incorporated
herein by reference from the definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on July 22, 2010, a copy of which was filed with
the SEC on June 25, 2010.
ITEM
11.
|
EXECUTIVE
COMPENSATION
|
Information concerning executive
compensation is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held on July 22,
2010, a copy of which was filed with the SEC on June 25, 2010.
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
Equity Compensation Plan
Information
The
Company does not currently maintain any equity compensation plans.
Additional
information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held on July 22,
2010, a copy of which was filed with the SEC on June 25,
2010.
48
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
Information
concerning certain relationships and related transactions is incorporated herein
by reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on July 22, 2010, a copy of which was filed with
the SEC on June 25, 2010.
ITEM
14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
Information
concerning principal accounting fees and services is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on July 22, 2010, a copy of which was filed with
the SEC on June 25, 2010.
49
ITEM
15.
|
EXHIBITS
|
(a)
|
Exhibits
|
Exhibit
Number
|
Document
|
Reference to
Prior Filing or
Exhibit Number
Attached Hereto
|
|||
3(i)
|
Certificate
of Incorporation
|
*
|
|||
3(ii)
|
By-Laws
|
**
|
|||
4
|
Instruments
defining the rights of security holders, including
debentures
|
*
|
|||
10
|
Material
Contracts
|
None
|
|||
13
|
Annual
Report to Stockholders
|
13
|
|||
21
|
Subsidiaries
of Registrant
|
21
|
|||
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
31.1
|
|||
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
31.2
|
|||
32.1
|
Certification
of CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
32.1
|
*
|
Incorporated
by reference to the Company’s Registration Statement on Form S-1 filed
with the SEC on March 19, 1997 (File No.
333-23625).
|
**
|
Incorporated
by reference to the Company’s Form 10-KSB for the fiscal year ended March
31, 2008 filed with the SEC on June 30, 2008 (File No. 001-12969; Film No.
08924531).
|
50
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FIRST
ROBINSON FINANCIAL CORPORATION
|
||
Date: June
25, 2010
|
By:
|
/s/ Rick L. Catt
|
Rick
L. Catt, Director,
|
||
President
and Chief Executive
|
||
Officer
|
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By:
|
/s/ Rick L. Catt
|
By:
|
/s/ Jamie E. McReynolds
|
|
Rick
L. Catt,
|
Jamie
E. McReynolds,
|
|||
Director,
President and Chief
|
Vice
President, Chief Financial Officer
|
|||
Executive
Officer (Principal
Executive
|
and
Secretary
|
|||
and Operating
Officer)
|
(Chief
Financial and Accounting Officer)
|
|||
Date:
|
June
25, 2010
|
Date:
|
June
25, 2010
|
|
By:
|
/s/ Scott F. Pulliam
|
By:
|
/s/ J. Douglas Goodwine
|
|
Scott
F. Pulliam,
|
J.
Douglas Goodwine,
|
|||
Director
|
Director
|
|||
Date:
|
June
25, 2010
|
Date:
|
June
25, 2010
|
|
By:
|
/s/ Robin E. Guyer
|
By:
|
/s/ Steven E. Neeley
|
|
Robin
E. Guyer,
|
Steven
E. Neeley,
|
|||
Director
|
Director
|
|||
Date:
|
June
25, 2010
|
Date:
|
June
25, 2010
|
|
By:
|
/s/ William K. Thomas
|
|||
William
K. Thomas,
|
||||
Director
|
||||
Date:
|
June
25, 2010
|
51