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

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-21671

THE NATIONAL BANK OF INDIANAPOLIS CORPORATION

(Exact name of Registrant as Specified in its Charter)

Indiana		35-1887991
(State or Other Jurisdiction of		(I.R.S. Employer Identification No.)
Incorporation or Organization)
107 North Pennsylvania Street		46204
Indianapolis, Indiana		(Zip Code)
(Address of Principal Executive Offices)

(317) 261-9000
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ

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. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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 the 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. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2010, was approximately $60,717,866. The number of shares of the registrant’s Common Stock outstanding March 11, 2011 was 2,317,750.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this Report on Form 10-K, to the extent not set forth herein, is incorporated herein by reference to the Registrant’s definitive proxy statement to be filed in connection with the annual meeting of shareholders to be held on June 16, 2011.

 

 

Form 10-K Cross Reference Index

		Page
PART I
Item 1. Business			1
Item 1A. Risk Factors			12
Item 1B. Unresolved Staff Comments			18
Item 2. Properties			18
Item 3. Legal Proceedings			18
Item 4. (Removed and Reserved)			19
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			19
Item 6. Selected Financial Data			21
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 7A. Quantitative and Qualitative Disclosures about Market Risk			48
Item 8. Financial Statements and Supplementary Data			50
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure			85
Item 9A. Controls and Procedures			85
Item 9B. Other Information			86
PART III
Item 10. Directors, Executive Officers and Corporate Governance			86
Item 11. Executive Compensation			86
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			86
Item 13. Certain Relationships and Related Transactions, and Director Independence			86
Item 14. Principal Accounting Fees and Services			86
PART IV
Item 15. Exhibits, Financial Statement Schedules			87
Signatures			89
EX-21.00
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I

Item 1.		Business

The Corporation. The National Bank of Indianapolis Corporation (the “Corporation”) was formed as an Indiana corporation on January 29, 1993, for the purpose of forming a banking institution in the Indianapolis, Indiana metropolitan area and holding all of the shares of common stock of such banking institution. The Corporation formed a national banking association named “The National Bank of Indianapolis” (the “Bank”) as a wholly-owned subsidiary.

The Bank opened for business to the public on December 20, 1993. The Bank’s deposits are insured by the FDIC. The Bank currently conducts its business through twelve offices, including its downtown headquarters located at 107 North Pennsylvania Street in Indianapolis, and its neighborhood bank offices located at:

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8451 Ditch Road, Indianapolis, in northwestern Marion County;

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6807 East 82nd Street, Indianapolis, in northeastern Marion County;

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Chamber of Commerce building at 320 North Meridian Street in downtown Indianapolis;

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4930 North Pennsylvania Street, Indianapolis, in northern Marion County;

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One America Office Complex in downtown Indianapolis;

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650 East Carmel Drive, Carmel, in Hamilton County;

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1689 West Smith Valley Road, Greenwood, in Johnson County;

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10590 North Michigan Road, Carmel, in Hamilton County;

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2714 East 146th Street, Carmel, in Hamilton County;

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2410 Harleston Street, Carmel, in Hamilton County; and

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11701 Olio Road, Fishers, in Hamilton County.

The Bank provides a full range of deposit, credit, and money management services to its targeted market, which is small to medium size businesses, affluent executive and professional individuals, and not-for-profit organizations. The Bank has full trust powers.

Management initially sought to position the Bank to capitalize on the customer disruption, dissatisfaction, and turn-over which it believed had resulted from the acquisition of the three largest commercial banks located in Indianapolis by out-of-state holding companies. Management is now focused on serving the local markets with an organization which is not owned by an out-of-state company and whose decisions are made locally. On December 31, 2010, the Corporation had consolidated total assets of $1.4 billion and total deposits of $1.2 billion.

Management believes that the key ingredients in the growth of the Bank have been a well-executed business plan, an experienced Board of Directors and management team and a seasoned group of bank employees. The basic strategy of the Bank continues to emphasize the delivery of highly personalized services to the target client base with an emphasis on quick response and financial expertise.

Business Plan Overview. The business plan of the Bank is based on being a strong, locally owned bank providing superior service to a defined group of customers, which are primarily corporations with annual sales under $100 million, executives, professionals, and not-for-profit organizations. The Bank provides highly personalized banking services with an emphasis on knowledge of the particular financial needs and objectives of its clients and quick response to customer requests. Because the management of the Bank is located in Indianapolis, all credit and related decisions are made locally, thereby facilitating prompt response. The Bank emphasizes both highly personalized service at the customer’s convenience and non-traditional delivery services that do not require customers to frequent the Bank. This personal contact has become a trademark of the Bank and a key means of differentiating the Bank from other financial service providers.

The Bank offers a broad range of deposit services typically available from most banks and savings associations, including interest and non-interest bearing checking accounts, savings and other kinds of deposits of various types (ranging from daily money market accounts to longer term certificates of deposit). The Bank has emphasized paying competitive interest rates on deposit products.

The Bank also offers a full range of credit services, including commercial loans (such as lines of credit, term loans, refinancings, etc.), personal lines of credit, direct installment consumer loans, credit card loans, residential mortgage loans, construction loans, and letters of credit. Lending strategies focus primarily on commercial loans to small and medium size businesses and non profit organizations as well as personal loans to executives and professionals.

The residential mortgage lending area of the Bank offers conforming, jumbo, portfolio, and Community Reinvestment Act mortgage products. The Bank utilizes secondary market channels it has developed for sale of those mortgage products described above. Secondary market channels include FNMA, as well as private investors identified through wholesale entities. Consumer lending is directed to executive and professional clients through residential mortgages, credit cards, and personal lines of credit to include home equity loans.

The Bank has a full-service Wealth Management division, which offers trust, estate, retirement and money management services.

The Market. The Bank derives a substantial proportion of its business from the Indianapolis, Indiana Metropolitan Statistical Area (“Indianapolis MSA”).

Competition. The Bank’s service area is highly competitive. There are numerous financial institutions operating in the Indianapolis MSA marketplace, which provide strong competition to the Bank. In addition to the challenge of attracting and retaining customers for traditional banking services offered by commercial bank competitors, significant competition also comes from savings and loans associations, credit unions, finance companies, insurance companies, mortgage companies, securities and brokerage firms, money market mutual funds, loan production offices, and other providers of financial services in the area. These competitors, with focused products targeted at highly profitable customer segments, compete across geographic boundaries and provide customers increasing access to meaningful alternatives to banking services in nearly all significant products. The increasingly competitive environment is a result primarily of changes in regulations, changes in technology, product delivery systems and the accelerating pace of consolidation among financial service providers. These competitive trends are likely to continue. The Bank’s ability to maintain its historical levels of financial performance will depend in part on the Bank’s ability over time to expand its scope of available financial services as needed to meet the needs and demands of its customers. The Bank competes in this marketplace primarily on the basis of highly personalized service, responsive decision making, and competitive pricing.

Employees. The Corporation and the Bank have 274 employees, of which 267 are full-time equivalent employees. The Bank has employed persons with substantial experience in the Indianapolis MSA banking market. The average banking experience level for all Bank employees is in excess of 15 years.

Lending Activity. The Bank’s lending strategy emphasizes a high quality, well-diversified loan portfolio. The Bank’s principal lending categories are commercial, commercial mortgage, residential mortgage, private banking/personal, and home equity. Commercial loans include loans for working capital, machinery and equipment purchases, premises and equipment acquisitions and other corporate needs. Residential mortgage lending includes loans on first mortgage residential properties. Private banking loans include secured and unsecured personal lines of credit as well as home equity loans.

Commercial loans typically entail a thorough analysis of the borrower and its management, occasional review of its industry, current and projected financial condition and other factors. Credit analysis involves cash flow analysis, collateral, the type of loan, loan maturity, terms and conditions, and various loan-to-value ratios as they relate to loan policy. The Bank typically requires commercial borrowers to have annual financial statements prepared by independent accountants and may require such financial statements to be audited or reviewed by accountants. The Bank generally requires appraisals or evaluations in connection with loans secured by real estate. Such appraisals or evaluations are usually obtained prior to the time funds are advanced. The Bank also often requires personal guarantees from principals involved with closely-held corporate borrowers.

Generally, the Bank requires loan applications or personal financial statements from its personal borrowers on loans that the Bank originates. Loan officers or credit analysts complete a debt to income analysis, an analysis of the borrower’s liquidity, and an analysis of collateral, if appropriate, that should meet established standards of lending policy.

The Bank maintains a comprehensive loan policy that establishes guidelines with respect to all categories of lending. In addition, loan policy sets forth lending authority for each loan officer. The Loan Committee of the Bank reviews all loans in excess of $500 thousand. Any loan in excess of a lending officer’s lending authority, up to $2 million, must receive the approval of the Chief Executive Officer (“CEO”), Chief Lending Officer (“CLO”), Chief Credit Officer, Commercial Lending Manager, or Chief Client Officer. Loans in excess of $2 million but less than $6 million must be approved by the Loan Committee prior to the Bank making such loan. The Board of Directors Loan Policy Committee is not usually required to approve loans unless they are above $6 million. Commercial loans are assigned a rating based on creditworthiness and are monitored for improvement or deterioration. Consumer loans are monitored by delinquency trends. The consumer portfolios are assigned an average weighted risk grade based on specific risk characteristics. Loans are made primarily in the Bank’s designated market area.

REGULATION AND SUPERVISION

Both the Corporation and the Bank operate in highly regulated environments and are subject to supervision and regulation by several governmental regulatory agencies, including the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Office of the Comptroller of the Currency (the “OCC”), and the Federal Deposit Insurance Corporation (the “FDIC”). The laws and regulations established by these agencies are generally intended to protect depositors, not shareholders. Changes in applicable laws, regulations, governmental policies, income tax laws and accounting principles may have a material effect on the Corporation’s business and prospects. The following summary is qualified by reference to the statutory and regulatory provisions discussed.

Recent Developments

The Dodd-Frank Act. On July 21, 2010, financial regulatory reform legislation entitled the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act will likely result in dramatic changes across the financial regulatory system, some of which became effective immediately and some of which will not become effective until various future dates. Implementation of the Dodd-Frank Act will require many new rules to be issued by various federal regulatory agencies over the next several years. There will be a significant amount of uncertainty regarding the overall impact of this new law on the financial services industry until final rulemaking is complete. The ultimate impact of this law could have a material adverse impact on the financial services industry as a whole and on our business, results of operations, and financial condition. Provisions in the legislation that affect deposit insurance assessments, payment of interest on demand deposits, and interchange fees could increase the costs associated with deposits and place limitations on certain revenues those deposits may generate. The Dodd-Frank Act also includes provisions that, among other things, will:

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Centralize responsibility for consumer financial protection by creating a new agency, the Bureau of Consumer Financial Protection, responsible for implementing, examining, and enforcing compliance with federal consumer financial laws.

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Create the Financial Stability Oversight Council that will recommend to the Federal Reserve increasingly strict rules for capital, leverage, liquidity, risk management, and other requirements as companies grow in size and complexity.

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Require the OCC to seek to make its capital requirements for national banks countercyclical so that capital requirements increase in times of economic expansion and decrease in times of economic contraction.

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Restrict the preemption of state law by federal law and disallow subsidiaries and affiliates of national banks from availing themselves of such preemption.

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Provide mortgage reform provisions regarding a customer’s ability to repay, restricting variable-rate lending by requiring that the ability to repay variable-rate loans be determined by using the maximum rate that will apply during the first five years of a variable-rate loan term, and making more loans subject to provisions for higher cost loans and new disclosures. In addition, certain compensation for mortgage brokers based on certain loan terms will be restricted.

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Require financial institutions to make a reasonable and good faith determination that borrowers have the ability to repay loans for which they apply. If a financial institution fails to make such a determination, a borrower can assert this failure as a defense to foreclosure.

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Require financial institutions to retain a specified percentage (5% or more) of certain non-traditional mortgage loans and other assets in the event that they seek to securitize such assets.

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Change the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminate the ceiling on the size of the Deposit Insurance Fund (“DIF”), and increase the floor on the size of the DIF, which generally will require an increase in the level of assessments for institutions with assets in excess of $10 billion.

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Make permanent the $250,000 limit for federal deposit insurance and provide unlimited federal deposit insurance until January 1, 2013 for noninterest-bearing demand transaction accounts at all insured depository institutions.

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Implement corporate governance revisions, including with regard to executive compensation, say on pay votes, proxy access by shareholders, and clawback policies which apply to all public companies, not just financial institutions.

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Repeal the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transactions and other accounts.

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Amend the Electronic Fund Transfer Act (“EFTA”) to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.

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Limit the hedging activities and private equity investments that may be made by various financial institutions.

As noted above, the Dodd-Frank Act requires that the federal regulatory agencies draft many new regulations which will implement the foregoing provisions as well as other provisions contained in the Dodd-Frank Act, the ultimate impact of which will not be known for some time.

S.A.F.E. Act Requirements. On July 28, 2010, the OCC jointly issued final rules with the Federal Reserve, the Office of Thrift Supervision, FDIC, Farm Credit Administration, and National Credit Union Administration which require residential mortgage loan originators who are employees of institutions regulated by the foregoing agencies, including national banks, to meet the registration requirements of the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 ( the “S.A.F.E. Act” ). The S.A.F.E. Act requires residential mortgage loan originators who are employees of regulated financial institutions to be registered with the Nationwide Mortgage Licensing System and Registry, a database created by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators to support the licensing of mortgage loan originators by the states. Employees of regulated financial institutions are generally prohibited from originating residential mortgage loans unless they are registered. According to the final rule, due to various system modifications and enhancements required to make the existing system capable to accept Federal Registrants, the system was not able to accept Federal Registrants until January 31, 2011. The Bank must register its employees before July 31, 2011 to be in compliance with the final rule.

The Corporation

The Bank Holding Company Act. Because the Corporation owns all of the outstanding capital stock of the Bank, it is registered as a bank holding company under the federal Bank Holding Company Act of 1956 and is subject to periodic examination by the Federal Reserve and required to file periodic reports of its operations and any additional information that the Federal Reserve may require.

Investments, Control, and Activities. With some limited exceptions, the Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve before acquiring another bank holding company or acquiring more than five percent of the voting shares of a bank (unless it already owns or controls the majority of such shares).

Bank holding companies are prohibited, with certain limited exceptions, from engaging in activities other than those of banking or of managing or controlling banks. They are also prohibited from acquiring or retaining direct or indirect ownership or control of voting shares or assets of any company which is not a bank or bank holding company, other than subsidiary companies furnishing services to or performing services for their subsidiaries, and other subsidiaries engaged in activities which the Federal Reserve determines to be so closely related to banking or managing or controlling banks as to be incidental to these operations. The Bank Holding Company Act does not place territorial restrictions on the activities of such nonbanking-related activities.

Bank holding companies which meet certain management, capital, and Community Reinvestment Act of 1977 (“CRA”) standards may elect to become a financial holding company, which would allow them to engage in a substantially broader range of nonbanking activities than is permitted for a bank holding company, including insurance underwriting and making merchant banking investments in commercial and financial companies.

The Corporation does not currently plan to engage in any activity other than owning the stock of the Bank.

Capital Adequacy Guidelines for Bank Holding Companies. The Federal Reserve, as the regulatory authority for bank holding companies, has adopted capital adequacy guidelines for bank holding companies. Bank holding companies with assets in excess of $500 million must comply with the Federal Reserve’s risk-based capital guidelines which require a minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities such as standby letters of credit) of 8%. At least half of the total required capital must be “Tier 1 capital”, consisting principally of common stockholders’ equity, non-cumulative perpetual preferred stock, a limited amount of cumulative perpetual preferred stock and minority interest in the equity accounts of consolidated subsidiaries, less certain goodwill items. The remainder (“Tier 2 capital”) may consist of a limited amount of subordinated debt and intermediate-term preferred stock, certain hybrid capital instruments and other debt securities, cumulative perpetual preferred stock, and a limited amount of the general loan loss allowance. In addition to the risk-based capital guidelines, the Federal Reserve has adopted a Tier 1 (leverage) capital ratio under which the bank holding company must maintain a minimum level of Tier 1 capital to average total consolidated assets of 3% in the case of bank holding companies which have the highest regulatory examination ratings and are not contemplating significant growth or expansion. All other bank holding companies are expected to maintain a ratio of at least 1% to 2% above the stated minimum.

Certain regulatory capital ratios for the Corporation as of December 31, 2010, are shown below:

Tier 1 Capital to Risk-Weighted Assets			9.7	%
Total Risk Based Capital to Risk-Weighted Asset			11.4	%
Tier 1 Leverage Ratio			6.7	%

Dividends. The Federal Reserve’s policy is that a bank holding company experiencing earnings weakness should not pay cash dividends exceeding its net income or which could only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. Additionally, the Federal Reserve possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies.

Source of Strength. In accordance with Federal Reserve policy, the Corporation is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances in which the Corporation might not otherwise do so.

The Bank

General Regulatory Supervision. The Bank is a national bank organized under the laws of the United States of America and is subject to the supervision of the OCC, whose examiners conduct periodic examinations of national banks. The Bank must undergo regular on-site examinations by the OCC and must submit quarterly and annual reports to the OCC concerning its activities and financial condition.

The deposits of the Bank are insured by the DIF administered by the FDIC and are subject to the FDIC’s rules and regulations respecting the insurance of deposits. See “Deposit Insurance”.

Lending Limits. Under federal law, the total loans and extensions of credit by a national bank to a borrower outstanding at one time and not fully secured may not exceed 15 percent of the bank’s capital and unimpaired surplus. In addition, the total amount of outstanding loans and extensions of credit to any borrower outstanding at one time and fully secured by readily marketable collateral may not exceed 10 percent of the unimpaired capital and unimpaired surplus of the bank (this limitation is separate from and in addition to the above limitation). If a loan is secured by United States obligations, such as treasury bills, it is not subject to the bank’s legal lending limit.

Deposit Insurance. Due to the recent difficult economic conditions in the United States, deposit insurance per account owner was increased from $100,000 to $250,000 through December 31, 2013. The Dodd-Frank Act has now made this change in deposit insurance permanent and, as a result, each account owner’s deposits will be insured up to $250,000 by the FDIC.

In addition, the FDIC adopted an optional Temporary Liquidity Guarantee Program (“TLGP”) in October of 2008 by which, for a fee, non-interest bearing transaction accounts received unlimited FDIC insurance coverage through December 31, 2010 and certain senior unsecured debt issued by institutions and their holding companies would be guaranteed by the FDIC through December 31, 2012. The Corporation elected to participate in both the unlimited non-interest bearing transaction account coverage and the unsecured debt guarantee program.

Under the Transaction Account Guarantee Program (“TAGP”), the FDIC provided unlimited deposit insurance coverage initially through December 31, 2009 for non-interest bearing transaction accounts (typically business checking accounts) and certain funds swept into non-interest bearing savings accounts. Institutions that participated in the TAGP paid a 10 basis points fee (annualized) on the balance of each covered account in excess of $250,000, while the additional deposit insurance was in place. The FDIC authorized an extension of the TAGP through December 31, 2010 for institutions participating in the original TAGP, unless an institution opted out of the extension period. During the extension period, fees increased to 15 to 25 basis points depending on an institution’s risk category for deposit insurance purposes. Importantly, the Dodd-Frank Act now provides for unlimited deposit insurance coverage on non-interest bearing transaction accounts, including Interest On Lawyer Trust Accounts but excluding interest-bearing NOW accounts, without an additional fee at insured institutions such as the Bank through December 31, 2012.

The TLGP also included the Debt Guarantee Program (“DGP”), under which the FDIC guarantees certain senior unsecured debt issued by FDIC-insured institutions and their holding companies. Under the DGP, upon a default by an issuer of FDIC-guaranteed debt, the FDIC will continue to make scheduled principal and interest payments on the debt. The unsecured debt must have been issued on or after October 14, 2008 and not later than October 31, 2009, and the guarantee is effective through the earlier of the maturity date (or mandatory conversion date) or December 31, 2012, although the debt may have a maturity date beyond December 31, 2012. Depending on the maturity of the debt, the nonrefundable DGP guarantee fee ranges from 50 to 100 basis points (annualized) for covered debt outstanding until the earlier of maturity or December 31, 2012. The FDIC also established an emergency debt guarantee facility through April 30, 2010 through which institutions that are unable to issue non-guaranteed debt to replace maturing senior unsecured debt because of market disruptions or other circumstances beyond their control may apply on a case-by-case basis to issue FDIC-guaranteed senior unsecured debt. The FDIC guarantee of any debt issued under this emergency facility would be subject to an annualized assessment rate equal to a minimum of 300 basis points. The Dodd-Frank Act also authorizes the FDIC to guarantee debt of solvent institutions and their holding companies in a manner similar to the DGP; however, the FDIC and the Federal Reserve must make a determination that there is a liquidity event that threatens the financial stability of the United States and the United States Department of the Treasury (“Treasury Department”) must approve the terms of the guarantee program.

The Bank’s deposits are insured up to the applicable limits under the DIF. The FDIC maintains the DIF by assessing depository institutions an insurance premium. Pursuant to the Dodd-Frank Act, the FDIC is required to set a DIF reserve ratio of 1.35% of estimated insured deposits and is required to achieve this ratio by September 30, 2020. Also, the Dodd-Frank Act has eliminated the 1.50% ceiling on the reserve ratio and provides that the FDIC is no longer required to refund amounts in the DIF that exceed 1.50% of insured deposits.

Under the FDIC’s risk-based assessment system, insured institutions are required to pay deposit insurance premiums based on the risk that each institution poses to the DIF. An institution’s risk to the DIF is measured by its regulatory capital levels, supervisory evaluations, and certain other factors. An institution’s assessment rate depends upon the risk category to which it is assigned. As noted above, pursuant to the Dodd-Frank Act, the FDIC will calculate an institution’s assessment level based on its total average consolidated assets during the assessment period less average tangible equity (i.e., Tier 1 capital) as opposed to an institution’s deposit level which was the previous basis for calculating insurance assessments. Pursuant to the Dodd-Frank Act, institutions will be placed into one of four risk categories for purposes of determining the institution’s actual assessment rate. The FDIC will determine the risk category based on the institution’s capital position (well capitalized, adequately capitalized, or undercapitalized) and supervisory condition (based on exam reports and related information provided by the institution’s primary federal regulator).

Prior to the passage of the Dodd-Frank Act, assessments for FDIC deposit insurance ranged from 7 to 77 basis points per $100 of assessable deposits. On May 22, 2009, the FDIC imposed a special assessment of five basis points on each institution’s assets minus Tier 1 capital as of June 30, 2009, which was payable to the FDIC on September 30, 2009. The Bank paid a total of $557 thousand related to the special assessment. No institution may pay a dividend if it is in default on its federal deposit insurance assessment. The Bank paid a total FDIC assessment of $2.1 million in 2010.

Also during 2009, the FDIC adopted a rule requiring each insured institution to prepay on December 30, 2009 the estimated amount of its quarterly assessments for the fourth quarter of 2009 and all quarters through the end of 2012 (in addition to the regular quarterly assessment for the third quarter which was due on December 30, 2009). The prepaid amount is recorded as an asset with a zero risk weight and the institution will continue to record quarterly expenses for FDIC deposit insurance. Collection of the prepayment amount does not preclude the FDIC from changing assessment rates or revising the risk-based assessment system in the future. If events cause actual assessments during the prepayment period to vary from the prepaid amount, institutions will pay excess assessments or receive a rebate of prepaid amounts not fully utilized after the collection of assessments due in June 2013. The amount of the Bank’s prepayment was $6.0 million.

In connection with the Dodd-Frank Act’s requirement that insurance assessments be based on assets, the FDIC recently issued the final rule that provides that assessments be based on an institution’s average consolidated assets (less average tangible equity) as opposed to its deposit level. The FDIC has stated that the new assessment schedule, which will be effective as of April 1, 2011, should result in the collection of assessment revenue that is approximately revenue neutral compared to the current method of calculating assessments. Pursuant to this new rule, the assessment base will be larger than the current assessment base, but the new rates are lower than current rates, ranging from approximately 2.5 basis points to 45 basis points (depending on applicable adjustments for unsecured debt and brokered deposits) until such time as the FDIC’s reserve ratio equals 1.15%. Once the FDIC’s reserve ratio equals or exceeds 1.15%, the applicable assessment rates may range from 1.5 basis points to 40 basis points.

In addition to the FDIC insurance premiums, the Bank is required to make quarterly payments on bonds issued by the Financing Corporation (“FICO”), an agency of the Federal government established to recapitalize a predecessor deposit insurance fund. These assessments will continue until the FICO bonds are repaid.

On January 12, 2010, the FDIC announced that it would seek public comment on whether financial institutions with compensation plans that encourage risky behavior should be charged higher deposit assessment rates than such financial institutions would otherwise be charged.

Transactions with Affiliates and Insiders. Pursuant to Sections 23A and 23B of the Federal Reserve Act and Regulation W, the Bank is subject to limitations on the amount of loans or extensions of credit to, or investments in, or certain other transactions with, affiliates (including the Corporation) and insiders and on the amount of advances to third parties collateralized by the securities or obligations of affiliates. Furthermore, within the foregoing limitations as to amount, each covered transaction must meet specified collateral requirements. Compliance is also required with certain provisions designed to avoid the taking of low quality assets. The Bank is also prohibited from engaging in certain transactions with certain affiliates and insiders unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.

Extensions of credit by the Bank to its executive officers, directors, certain principal shareholders, and their related interests must:

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be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties; and

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not involve more than the normal risk of repayment or present other unfavorable features.

The Dodd-Frank Act also included specific changes to the law related to the definition of a “covered transaction” in Sections 23A and 23B and limitations on asset purchases from insiders. With respect to the definition of a “covered transaction,” the Dodd-Frank Act now defines that term to include the acceptance of debt obligations issued by an affiliate as collateral for an institution’s loan or extension of credit to another person or company. In addition, a “derivative transaction” with an affiliate is now deemed to be a “covered transaction” to the extent that such a transaction causes an institution or its subsidiary to have a credit exposure to the affiliate. A separate provision of the Dodd-Frank Act states that an insured depository institution may not “purchase an asset from, or sell an asset to” a bank insider (or their related interests) unless (1) the transaction is conducted on market terms between the parties and (2) if the proposed transaction represents more than 10 percent of the capital stock and surplus of the insured institution, it has been approved in advance by a majority of the institution’s non-interested directors.

Dividends. Under federal law, the Bank may pay dividends from its undivided profits in an amount declared by its Board of Directors, subject to prior approval of the OCC if the proposed dividend, when added to all prior dividends declared during the current calendar year, would be greater than the current year’s net income and retained earnings for the previous two calendar years.

Federal law generally prohibits the Bank from paying a dividend to the Corporation if the Bank would thereafter be undercapitalized. The FDIC may prevent the Bank from paying dividends if the Bank is in default of payment of any assessment due to the FDIC. In addition, payment of dividends by a bank may be prevented by the applicable federal regulatory authority if such payment is determined, by reason of the financial condition of such bank, to be an unsafe and unsound banking practice. In addition, the Bank is subject to certain restrictions imposed by the Federal Reserve on extensions of credit to the Corporation, on investments in the stock or other securities of the Corporation, and in taking such stock or securities as collateral for loans.

Community Reinvestment Act. The CRA requires that the OCC evaluate the records of the Bank in meeting the credit needs of its local community, including low and moderate income neighborhoods. These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. Failure to adequately meet these criteria could result in the imposition of additional requirements and limitations on the Bank.

Capital Regulations. The OCC has adopted risk-based capital ratio guidelines to which the Bank is subject. The guidelines establish a systematic analytical framework that makes regulatory capital requirements more sensitive to differences in risk profiles among banking organizations. Risk-based capital ratios are determined by allocating assets and specified off-balance sheet commitments to four risk weighted categories, with higher levels of capital being required for the categories perceived as representing greater risk.

These guidelines divide a bank’s capital into two tiers. The first tier (Tier 1) includes common equity, certain non-cumulative perpetual preferred stock (excluding auction rate issues) and minority interests in equity accounts of consolidated subsidiaries, less goodwill and certain other intangible assets (except mortgage servicing rights and purchased credit card relationships, subject to certain limitations). Supplementary (Tier 2) capital includes, among other items, cumulative perpetual and long-term limited-life preferred stock, mandatory convertible securities, certain hybrid capital instruments, term subordinated debt and the allowance for loan and lease losses, subject to certain limitations, less required deductions. Banks are required to maintain a total risk-based capital ratio of 8%, of which 4% must be Tier 1 capital. The OCC may, however, set higher capital requirements when a bank’s particular circumstances warrant. Banks experiencing or anticipating significant growth are expected to maintain capital ratios, including tangible capital positions, well above the minimum levels.

In addition, the OCC established guidelines prescribing a minimum Tier 1 leverage ratio (Tier 1 capital to adjusted total assets as specified in the guidelines). These guidelines provide for a minimum Tier 1 leverage ratio of 3% for banks that meet certain specified criteria, including that they have the highest regulatory rating and are not experiencing or anticipating significant growth. All other banks are required to maintain a Tier 1 leverage ratio of 3% plus an additional cushion of at least 1% to 2% basis points.

Certain actual regulatory capital ratios under the OCC’s risk-based capital guidelines for the Bank at December 31, 2010, are shown below:

Tier 1 Capital to Risk-Weighted Assets			9.4	%
Total Risk-Based Capital to Risk-Weighted Assets			11.2	%
Tier 1 Leverage Ratio			6.5	%

The federal bank regulators, including the OCC, also have issued a joint policy statement to provide guidance on sound practices for managing interest rate risk. The statement sets forth the factors the federal regulatory examiners will use to determine the adequacy of a bank’s capital for interest rate risk. These qualitative factors include the adequacy and effectiveness of the bank’s internal interest rate risk management process and the level of interest rate exposure. Other qualitative factors that will be considered include the size of the bank, the nature and complexity of its activities, the adequacy of its capital and earnings in relation to the bank’s overall risk profile, and its earning exposure to interest rate movements. The interagency supervisory policy statement describes the responsibilities of a bank’s board of directors in implementing a risk management process and the requirements of the bank’s senior management in ensuring the effective management of interest rate risk. Further, the statement specifies the elements that a risk management process must contain.

The OCC has also issued final regulations further revising its risk-based capital standards to include a supervisory framework for measuring market risk. The effect of these regulations is that any bank holding company or bank which has significant exposure to market risk must measure such risk using its own internal model, subject to the requirements contained in the regulations, and must maintain adequate capital to support that exposure. These regulations apply to any bank holding company or bank whose trading activity equals 10% or more of its total assets, or whose trading activity equals $1 billion or more. Examiners may require a bank holding company or bank that does not meet the applicability criteria to comply with the capital requirements if necessary for safety and soundness purposes. These regulations contain supplemental rules to determine qualifying and excess capital, calculate risk-weighted assets, calculate market risk-equivalent assets and calculate risk-based capital ratios adjusted for market risk.

The Bank is also subject to the “prompt corrective action” regulations, which implement a capital-based regulatory scheme designed to promote early intervention for troubled banks. This framework contains five categories of compliance with regulatory capital requirements, including “well capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized”, and “critically undercapitalized”. As of December 31, 2010, the Bank was qualified as “well capitalized.” It should be noted that a bank’s capital category is determined solely for the purpose of applying the “prompt corrective action” regulations and that the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects. The degree of regulatory scrutiny of a financial institution increases, and the permissible activities of the institution decrease, as it moves downward through the capital categories. Bank holding companies controlling financial institutions can be required to boost the institutions’ capital and to partially guarantee the institutions’ performance.

USA Patriot Act. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA Patriot Act”) is intended to strengthen the ability of U.S. Law Enforcement to combat terrorism on a variety of fronts. The potential impact of the USA Patriot Act on financial institutions is significant and wide-ranging. The USA Patriot Act contains sweeping anti-money laundering and financial transparency laws and requires financial institutions to implement additional policies and procedures with respect to, or additional measures designed to address, any or all of the following matters, among others: money laundering and currency crimes, customer identification verification, cooperation among financial institutions, suspicious activities and currency transaction reporting.

Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) represents a comprehensive revision of laws affecting corporate governance, accounting obligations and corporate reporting. Among other requirements, the Sarbanes-Oxley Act established: (i) new requirements for audit committees of public companies, including independence and expertise standards; (ii) additional responsibilities regarding financial statements for the chief executive officers and chief financial officers of reporting companies; (iii) new standards for auditors and regulation of audits; (iv) increased disclosure and reporting obligations for reporting companies regarding various matters relating to corporate governance, and (v) new and increased civil and criminal penalties for violation of the securities laws.

Troubled Asset Relief Program Initiatives to Address Financial and Economic Crises. The Emergency Economic Stabilization Act of 2008 (“EESA”) was signed into law on October 3, 2008. EESA gave the Treasury Department broad authority to address the then-current deterioration of the United States economy, to implement certain actions to help restore confidence, stability, and liquidity to United States financial markets, and to encourage financial institutions to increase their lending to clients and to each other. EESA authorized the Treasury Department to purchase from financial institutions and their holding companies up to $700 billion in mortgage loans, mortgage-related securities, and certain other financial instruments, including debt and equity securities issued by financial institutions and their holding companies in a Troubled Asset Relief Program (“TARP”). The Treasury Department allocated $250 billion to the voluntary Capital Purchase Program (“CPP”) under TARP. TARP also included direct purchases or guarantees of troubled assets of certain financial institutions by the U.S. Government.

Under the CPP, the Treasury Department was authorized to purchase debt or equity securities from participating financial institutions. In connection therewith, each participating financial institution issued to the Treasury Department a warrant to purchase a certain number of shares of stock of the institution. During such time as the Treasury Department holds securities issued under the CPP, the participating financial institutions are required to comply with the Treasury Department’s standards for executive compensation and corporate governance and will have limited ability to increase the amounts of dividends paid on, or to repurchase, their common stock. The Corporation determined not to participate in the CPP.

On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”), more commonly known as the federal economic stimulus or economic recovery package, went into effect. ARRA includes a wide variety of programs intended to stimulate the United States economy and provide for extensive infrastructure, energy, health, and education needs. ARRA also imposes new executive compensation limits and corporate governance requirements on participants in the CPP in addition to those previously announced by the Treasury Department. Because the Corporation elected not to participate in the CPP, these limits and requirements do not apply to the Corporation.

Other Regulations

Federal law extensively regulates other various aspects of the banking business such as reserve requirements. Current federal law also requires banks, among other things to make deposited funds available within specified time periods. In addition, with certain exceptions, a bank and a subsidiary may not extend credit, lease or sell property or furnish any services or fix or vary the consideration for the foregoing on the condition that (i) the customer must obtain or provide some additional credit, property or services from, or to, any of them, or (ii) the customer may not obtain some other credit, property or service from a competitor, except to the extent reasonable conditions are imposed to assure the soundness of credit extended.

Interest and other charges collected or contracted by the Bank are subject to state usury laws and federal laws concerning interest rates. The Bank’s loan operations are also subject to federal and state laws applicable to credit transactions, such as the:

	•		Truth-In-Lending Act and state consumer protection laws governing disclosures of credit terms and prohibiting certain practices with regard to consumer borrowers;
	•		Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

•

Equal Credit Opportunity Act and other fair lending laws, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

•

Fair Credit Reporting Act of 1978 and Fair and Accurate Credit Transactions Act of 2003, governing the use and provision of information to credit reporting agencies;

•

Fair Debt Collection Practices Act, governing the manner in which consumer debts may be collected by collection agencies; and rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

The deposit operations of the Bank also are subject to the:

•

Customer Information Security Guidelines. The federal bank regulatory agencies have adopted final guidelines (the “Guidelines”) for safeguarding confidential customer information. The Guidelines require each financial institution, under the supervision and ongoing oversight of its Board of Directors, to create a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazards to the security or integrity of such information; protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer; and implement response programs for security breaches.

•

Electronic Funds Transfer Act and Regulation E. The Electronic Funds Transfer Act, which is implemented by Regulation E, governs automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking service.

•

Gramm-Leach-Bliley Act, Fair and Accurate Credit Transactions Act. The Gramm-Leach-Bliley Act, the Fair and Accurate Credit Transactions Act, and the implementing regulations govern consumer financial privacy, provide disclosure requirements and restrict the sharing of certain consumer financial information with other parties.

The federal banking agencies have established guidelines which prescribe standards for depository institutions relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings, compensation fees and benefits, and management compensation. The agencies may require an institution which fails to meet the standards set forth in the guidelines to submit a compliance plan. Failure to submit an acceptable plan or adhere to an accepted plan may be grounds for further enforcement action.

As noted above, the new Bureau of Consumer Financial Protection will have authority for amending existing consumer compliance regulations and implementing new such regulations. In addition, the Bureau will have the power to examine the compliance of financial institutions with an excess of $10 billion in assets with these consumer protection rules. The Bank’s compliance with consumer protection rules will be examined by the OCC since the Bank does not meet this $10 billion asset level threshold.

Enforcement Powers. Federal regulatory agencies may assess civil and criminal penalties against depository institutions and certain “institution-affiliated parties”, including management, employees, and agents of a financial institution, as well as independent contractors and consultants such as attorneys and accountants and others who participate in the conduct of the financial institution’s affairs.

In addition, regulators may commence enforcement actions against institutions and institution-affiliated parties. Possible enforcement actions include the termination of deposit insurance. Furthermore, regulators may issue cease-and-desist orders to, among other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnifications or guarantees against loss. A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take other actions as determined by the regulator to be appropriate.

Effect of Governmental Monetary Policies. The Corporation’s earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve Bank’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve have major effects upon the levels of bank loans, investments and deposits through its open market operations in United States government securities and through its regulation of the discount rate on borrowings of member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature or impact of future changes in monetary and fiscal policies.

Available Information

The Corporation files annual reports on Form 10-K, quarterly reports on Form 10-Q, proxy statements and other information with the Securities and Exchange Commission. Such reports, proxy statements and other information can be read and copied at the public reference facilities maintained by the Securities and Exchange Commission at the Public Reference Room, 100 F Street, NE, Washington, D.C. 20549. Information regarding the operation of the Public Reference Room may be obtained by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains a web site (http://www.sec.gov) that contains reports, proxy statements, and other information. The Corporation’s filings are also accessible at no cost on the Corporation’s website at www.nbofi.com.

Item 1A.		Risk Factors

Difficult conditions in the capital markets and the economy generally may materially adversely affect the Corporation’s business and results of operations

From December 2007 through June 2009, the U.S. economy was in recession. Business activity across a wide range of industries and regions in the U.S. was greatly reduced. Although economic conditions have begun to improve, certain sectors, such as real estate, remain weak and unemployment remains high. Local governments and many businesses are still in serious difficulty due to lower consumer spending and the lack of liquidity in the credit markets.

Market conditions also led to the failure or merger of several prominent financial institutions and numerous regional and community-based financial institutions. These failures, as well as projected future failures, have had a significant negative impact on the capitalization level of the deposit insurance fund of the FDIC, which, in turn, has led to a significant increase in deposit insurance premiums paid by financial institutions.

The Corporation’s financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services that the Corporation offers, is highly dependent upon the business environment in the markets where the Corporation operates and in the United States as a whole. A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, low unemployment, high business and investor confidence, and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment, natural disasters, or a combination of these or other factors.

During 2010, the business environment has continued to be adverse for many households and businesses in the United States and worldwide. While economic conditions in the United States and worldwide have begun to improve, there can be no assurance that this improvement will continue. Such conditions have affected, and could continue to adversely affect, the credit quality of the Corporation’s loans, results of operations and financial condition.

The soundness of other financial institutions could adversely affect us

The ability of the Corporation 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 the market-wide liquidity problems and could lead to losses or defaults by the Corporation or by other institutions. Many of these transactions expose the Corporation to credit risk in the event of default of the Corporation’s counterparty or client. In addition, the Corporation’s credit risk may be adversely impacted when the collateral held by the Corporation cannot be realized upon or its liquidated price is 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 Corporation’s results of operations.

There can be no assurance that actions of the U.S. government, Federal Reserve and other governmental and regulatory bodies for the purpose of stabilizing the financial markets will achieve the intended effect

There has been much legislative and regulatory action in response to the financial crises affecting the banking system and financial markets. There can be no assurance, however, as to the actual impact that the legislation and its implementing regulations or any other governmental program will have on the financial markets or on the Corporation. The failure of these programs to help stabilize the financial markets and a continuation or worsening of current financial market conditions could materially and adversely affect the Corporation’s business, financial condition, results of operations, access to credit or the trading price of the Corporation’s common stock.

Contemplated and proposed legislation, state and federal programs, and increased government control or influence may adversely affect the Corporation by increasing the uncertainty on its lending operations and expose it to increased losses, including legislation that would allow bankruptcy courts to prevent modifications to mortgage loans on a debtor’s primary residence, moratoriums on a mortgager’s right to foreclose on property, and requirements that fees be paid to register other real estate owned property. Statutes and regulations may be altered which potentially increase the Corporation’s cost of service and underwrite mortgage loans.

Recently enacted and potential further financial regulatory reforms could have a significant impact on our business, financial condition and results of operations

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) into law. The Dodd-Frank Act is expected to have a broad impact on the financial services industry, including significant regulatory and compliance changes. Many of the requirements called for in the Dodd-Frank Act will be implemented over time and most will be subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on our operations is unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of business activities, require changes to certain business practices, impose more stringent capital, liquidity and leverage requirements or otherwise adversely affect the Corporation’s business. In particular, the potential impact of the Dodd-Frank Act on the Corporation’s operations and activities, both currently and prospectively, include, among others:

•

a reduction in the ability to generate or originate revenue-producing assets as a result of compliance with heightened capital standards;

•

increased cost of operations due to greater regulatory oversight, supervision and examination of banks and bank holding companies, and higher deposit insurance premiums;·

•

the limitation on the ability to raise new capital through the use of trust preferred securities, as any new issuances of these securities will no longer be included as Tier 1 capital going forward;

•

a potential reduction in fee income due to limits on interchange fees applicable to larger institutions which could effectively reduce the fees we can charge; and

•

the limitation on the ability to expand consumer product and service offerings due to anticipated stricter consumer protection laws and regulations.

Further, the Corporation may be required to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements under the Dodd-Frank Act, which may negatively impact results of operations and financial condition.

The Corporation cannot predict whether there will be additional proposed laws or reforms that would affect the U.S. financial system or financial institutions, whether or when such changes may be adopted, how such changes may be interpreted and enforced or how such changes may impact the Corporation’s financial condition and results of operations. However, the costs of complying with any additional laws or regulations could have a material adverse effect on the Corporation’s financial condition and results of operations.

The Corporation may be required to pay significantly higher Federal Deposit Insurance Corporation (FDIC) premiums in the future

Insured institution failures during the past several years, as well as deterioration in banking and economic conditions, have significantly increased FDIC loss provisions, resulting in a decline in the designated reserve ratio to historical lows. The FDIC expects the higher rate of insured institution failures to continue for the next few years compared to the past; thus, the reserve ratio may continue to decline. In addition the Dodd-Frank Act permanently implemented FDIC insurance coverage for all deposit accounts up to $250,000 and revised the insurance premium assessment base from all domestic deposits to the average of total assets less tangible equity. The minimum reserve ratio of the deposit insurance fund has been increased from 1.15% to 1.35%, with the increase to be covered by assessments on insured institutions with assets over $10 billion until the new reserve ratio is reached. If financial institution failures continue and the FDIC reserve continues to decline, actions taken by the FDIC to increase assessment rates or enact special assessments could have an adverse impact on the Corporation’s results of operations.

The Corporation is subject to interest rate risk

The Corporation’s earnings and cash flows are largely dependent upon the Corporation’s net interest income. Net interest income is the difference between interest income earned on interest earning assets such as loans and securities and interest expense paid on interest bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond the Corporation’s control, including general economic conditions and policies of various governmental and regulatory agencies. Changes in monetary policy, including changes in interest rates, could influence not only the interest that is received on loans and securities and the interest that is paid on deposits and borrowings, but such changes could also affect (i) the Corporation’s ability to originate loans and obtain deposits, and (ii) the fair value of the Corporation’s financial assets and liabilities. Currently, the Corporation is in a liability-sensitive position. Therefore, if interest rates increase, the rates paid on deposits and other borrowings will increase at a faster rate than the interest rates received on loans and other investments, resulting in a decline in the Corporation’s net interest margin. Also, in a rising interest rate environment, the Corporation may be unable to sell its lower-yielding mortgage loans, thus further impacting its ability to generate higher yielding loans. If this happens, earnings could be adversely affected. In addition, due to the current low interest rate environment, if interest rates further decrease, the Corporation’s liabilities will reprice downward more quickly than the Corporation’s assets. Because deposit pricing cannot become significantly lower than current levels, the Corporation’s net interest margin could decline in that case as well and earnings could be adversely affected.

The Corporation is subject to lending risk

There are inherent risks associated with the Corporation’s lending activities. These risks include, among other things, the impact of changes in interest rates and changes in the economic conditions in the markets where the Corporation operates as well as those across Indiana and the United States. Increases in interest rates and/or weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans. Credit issues may continue to broaden during 2011 depending on the severity and duration of the declining economy and the current credit cycle.

The Corporation is also subject to various laws and regulations that affect its lending activities. Failure to comply with applicable laws and regulations could subject the Corporation to regulatory enforcement action that could result in the assessment of significant civil money penalties against the Corporation.

The Corporation’s allowance for loan losses may be insufficient

The Corporation maintains an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, that represents management’s best estimate of probable incurred losses that are inherent within the existing portfolio of loans. The level of the allowance reflects management’s continuing evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires the Corporation to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of the Corporation’s control, may require an increase in the allowance for loan losses. In addition, bank regulatory agencies periodically review the Corporation’s allowance for loan losses and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for loan losses, the Corporation will need additional provisions to increase the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on the Corporation’s financial condition and results of operations.

The Corporation may foreclose on collateral property and would be subject to the increased costs associated with ownership of real property, resulting in reduced revenues and earnings

The Corporation may have to foreclose on collateral property to protect its investment and may thereafter own and operate such property, in which case it will be exposed to the risks inherent in the ownership of real estate. The amount that the Corporation as a mortgagee, may realize after a default is dependent upon factors outside of its 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) environmental remediation liabilities; (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, insurance, and maintenance costs, may adversely affect the income from the real estate. Therefore, the cost of operating real property may exceed the income earned from such property, and the Corporation may have to advance funds in order to protect its investment, or it may be required to dispose of the real property at a loss. These expenditures and costs could adversely affect the Corporation’s ability to generate revenues, resulting in reduced levels of profitability.

The Corporation operates in a highly competitive industry and market area

The Corporation faces substantial competition in all areas of its operations from a variety of different competitors, many of which are larger and may have more financial resources. Such competitors include banks and many other types of financial institutions, including, without limitation, savings and loans, credit unions, finance companies, brokerage firms, insurance companies, factoring companies and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of the Corporation’s competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than the Corporation can.

The Corporation’s ability to compete successfully depends on a number of factors, including, among other things:

•

The ability to develop, maintain and build upon long-term customer relationships based on top quality service, and safe, sound assets;

•

The ability to expand the Corporation’s market position;

•

The scope, relevance and pricing of products and services offered to meet customer needs and demands;

•

The rate at which the Corporation introduces new products and services relative to its competitors;

•

Customer satisfaction with the Corporation’s level of service; and

•

Industry and general economic trends.

Failure to perform in any of these areas could significantly weaken the Corporation’s competitive position, which could adversely affect the Corporation’s growth and profitability, which, in turn, could have a material adverse effect on the Corporation’s financial condition and results of operations.

The Corporation is subject to extensive government regulation and supervision

The Corporation, primarily through the Bank, is subject to extensive federal regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not shareholders. These regulations affect the Corporation’s lending practices, capital structure, investment practices, and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect the Corporation in substantial and unpredictable ways. Such changes could subject the Corporation to additional costs, limit the types of financial services and products the Corporation may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on the Corporation’s business, financial condition and results of operations. While the Corporation has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur.

The Corporation’s controls and procedures may fail or be circumvented

Management regularly reviews and updates the Corporation’s internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the Corporation’s controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Corporation’s business, results of operations and financial condition.

The Corporation is dependent on certain key management and staff

The Corporation relies on key personnel to manage and operate its business. The loss of key staff may adversely affect the Corporation’s ability to maintain and manage these portfolios effectively, which could negatively affect the Corporation’s revenues. In addition, loss of key personnel could result in increased recruiting and hiring expenses, which could cause a decrease in the Corporation’s net income.

The Corporation’s information systems may experience an interruption or breach in security

The Corporation relies heavily on communications and information systems to conduct its business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Corporation’s customer relationship management, general ledger, deposit, loan and other systems. While the Corporation has policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of its information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of the Corporation’s information systems could damage the Corporation’s reputation, result in a loss of customer business, subject the Corporation to additional regulatory scrutiny, or expose the Corporation to civil litigation and possible financial liability, any of which could have a material adverse effect on the Corporation’s financial condition and results of operations.

The Corporation has opened new offices

The Corporation has placed a strategic emphasis on expanding the Bank’s banking office network. Executing this strategy carries risks of slower than anticipated growth in the new offices, which require a significant investment of both financial and personnel resources. Lower than expected loan and deposit growth in new offices can decrease anticipated revenues and net income generated by those offices, and opening new offices could result in more additional expenses than anticipated and divert resources from current core operations.

The geographic concentration of the Corporation’s markets makes the Corporation’s business highly susceptible to local economic conditions

Unlike larger banking organizations that are more geographically diversified, the Corporation’s operations are currently concentrated in three counties located in central Indiana. As a result of this geographic concentration, the Corporation’s financial results depend largely upon economic conditions in these market areas. Deterioration in economic conditions in the Corporation’s market could result in one or more of the following:

•

an increase in loan delinquencies;

•

an increase in problem assets and foreclosures;

•

a decrease in the demand for the Corporation’s products and services; and

•

a decrease in the value of collateral for loans, especially real estate, in turn reducing customers’ borrowing power, the value of assets associated with problem loans and collateral coverage.

Future growth or operating results may require the Corporation to raise additional capital but that capital may not be available or it may be dilutive

The Corporation is required by federal and state regulatory authorities to maintain adequate levels of capital to support its operations. To the extent the Corporation’s future operating results erode capital or the Corporation elects to expand through loan growth or acquisition it may be required to raise capital. The Corporation’s ability to raise capital will depend on conditions in the capital markets, which are outside of its control, and on the Corporation’s financial performance. Accordingly, the Corporation cannot be assured of its ability to raise capital when needed or on favorable terms. If the Corporation cannot raise additional capital when needed, it will be subject to increased regulatory supervision and the imposition of restrictions on its growth and business. These could negatively impact the Corporation’s ability to operate or further expand its operations through acquisitions or the establishment of additional branches and may result in increases in operating expenses and reductions in revenues that could have a material adverse effect on its financial condition and results of operations.

The Corporation continually encounters technological change

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. The Corporation’s future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the Corporation’s operations. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on the Corporation’s business and, in turn, the Corporation’s financial condition and results of operations.

Item 1B.		Unresolved Staff Comments

None.

Item 2.		Property

The Bank owns the downtown office building which houses its main office as well as the Corporation’s main office at 107 North Pennsylvania Street, Indianapolis, Indiana. The Bank and the Corporation utilize nine floors of this ten-story building and lease the remainder to other business enterprises.

Location		Year Opened				Owned or Leased
Banking Centers:
107 North Pennsylvania			1993			Owned
Indianapolis, IN 46204
8451 Ditch Road			1995			Owned
Indianapolis, IN 46260
6807 82nd Street			1995			Owned
Indianapolis, IN 46250
320 North Meridian Street			1996			Leased
Indianapolis, IN 46204
4930 North Pennsylvania Street			1998			Owned
Indianapolis, IN 46205
One America Square, Suite 100			1999			Leased
Indianapolis, IN 46282
650 East Carmel Drive, Suite 100			2000			Leased
Carmel, IN 46032
1689 West Smith Valley Road			2001			Owned
Greenwood, IN 46142
10590 North Michigan Road			2005			Owned
Carmel, IN 46032
2714 East 146th Street			2008			Owned
Carmel, IN 46033
2410 Harleston Street			2008			Owned
Carmel, IN 46032
11701 Olio Road			2009			Owned
Fishers, IN 46038

The Bank has installed four remote ATMs at the following locations: Indianapolis City Market, Parkwood Crossing, Meridian Mark II Office Complex, and Angie’s List. These remote ATMs provide additional banking convenience for the customers of the Bank and generate an additional source of fee income for the Bank.

The Corporation’s properties are in good physical condition and are considered by the Corporation to be adequate to meet the needs of the Corporation and the Bank and the banking needs of the customers in the communities served.

Item 3.		Legal Proceedings

Neither the Corporation nor the Bank are involved in any material pending legal proceedings at this time, other than routine litigation incidental to its business.

Item 4.		(Removed and Reserved)

PART II

Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Shares of the common stock of the Corporation are not traded on any national or regional exchange or in the over-the-counter market. Accordingly, there is no established market for the common stock. There are occasional trades as a result of private negotiations which do not always involve a broker or a dealer. The table below lists the high and low prices per share, of which management is aware, during 2010 and 2009.

		Price Per Share
		High				Low
2010
First Quarter		$	50.00			$	35.91
Second Quarter			40.00				35.52
Third Quarter			44.00				35.84
Fourth Quarter			41.49				39.36
2009
First Quarter		$	50.00			$	35.65
Second Quarter			39.67				35.97
Third Quarter			39.90				38.97
Fourth Quarter			40.00				36.74

There may have been other trades at other prices of which management is not aware. Management does not have knowledge of the price paid in all transactions and has not verified the accuracy of those prices that have been reported to it. Because of the lack of an established market for the common shares of the Corporation, these prices would not necessarily reflect the prices at which the shares would trade in an active market.

The Corporation had 638 shareholders of record as of March 11, 2011.

The Corporation has not declared or paid any cash dividends on its shares of common stock since its organization in 1993. The Corporation and the Bank anticipate that earnings will be retained to finance the Bank’s growth in the immediate future. Future dividend payments by the Corporation, if any, will be dependent upon dividends paid by the Bank, which are subject to regulatory limitations, earnings, general economic conditions, financial condition, capital requirements, and other factors as may be appropriate in determining dividend policy.

During the fourth quarter of 2010, the Corporation sold common stock pursuant to the exercise of stock options to employees in the aggregate of 2,700 shares for $72 thousand. As previously reported in the Corporation’s prior filings with the Securities and Exchange Commission, the Corporation sold pursuant to the exercise by employees and directors of stock options an aggregate of 1,600 shares for $44 thousand during the third quarter of 2010, an aggregate of 5,600 shares for $134 thousand during the second quarter of 2010, and an aggregate of 5,300 shares for $131 thousand during the first quarter of 2010. All of these shares were sold in private placements pursuant to Section 4(2) of the Securities Act of 1933.

On November 20, 2008, the Board of Directors adopted a new three-year stock repurchase program for directors and employees. Under the new stock repurchase program, the Corporation may repurchase shares in individually negotiated transactions from time to time as such shares become available and spend up to $8 million to repurchase such shares over the three-year term. Subject to the $8 million limitation, the Corporation intends to purchase shares recently acquired by the selling shareholder pursuant to the exercise of stock options or the vesting of restricted stock, and limit its acquisition of shares which were not recently acquired by the selling shareholder pursuant to the exercise of stock options or the vesting of shares of restricted stock to no more than 10,000 shares per year. Under the new repurchase plan, the Corporation purchased 2,635 shares during 2010 and as of December 31, 2010, approximately $5.3 million is still available under the new repurchase plan. The stock repurchase program does not require the Corporation to acquire any specific number of shares and may be modified, suspended, extended or terminated by the Corporation at any time without prior notice. The repurchase program will terminate on December 31, 2011, unless earlier suspended or discontinued by the Corporation.

During 2010, the Corporation repurchased in the aggregate, 15,686 shares for an aggregate cost of approximately $606 thousand. The following table sets forth the issuer repurchases of equity securities that are registered by the Corporation pursuant to Section 12 of the Securities Exchange Act of 1934 during the fourth quarter of 2010 under new repurchase program:

Maximum

Number (or

Approximate

Total

Dollar Value)

Number of

of Shares that

Shares

May Yet Be

Purchased as

Purchased

Part of

Under the

Total

Publicly

Plans or

Number of

Average

Announced

Programs

Shares

Price Paid

Plans or

(Dollars in

Period

Purchased

per Share

Programs**

thousands)

October 1 – October 31, 2010

1,217

$

39.87

1,217

$

5,384

November 1 – November 30, 2010

1,600

$

40.99

1,600

$

5,319

December 1 – December 31, 2010

500

$

41.49

500

$

5,298

3,317

*

3,317

Item 6.		Selected Financial Data

The following table sets forth certain consolidated information concerning the Corporation for the periods and dates indicated and should be read in connection with, and is qualified in its entirety by, the detailed information and consolidated financial statements and related notes set forth in the Corporation’s audited financial statements included elsewhere herein for the years ended December 31, (dollars in thousands), except share, per share, and book value data:

		2010				2009				2008				2007				2006
Consolidated Operating Data:
Interest income		$	47,130			$	47,531			$	56,377			$	68,880			$	61,375
Interest expense			9,029				11,313				20,449				35,263				29,565
Net interest income			38,101				36,218				35,928				33,617				31,811
Provision for loan losses			4,279				11,905				7,400				904				1,086
Net interest income after provision for loan losses			33,822				24,313				28,528				32,713				30,725
Other operating income			14,248				12,903				11,204				9,834				8,356
Other operating expenses			43,522				38,354				34,706				30,800				28,595
Income (loss) before taxes			4,548				(1,138	)			5,026				11,747				10,486
Federal and state income tax (benefit)			762				(1,250	)			1,242				3,856				3,501
Net income			3,786				112				3,784				7,891				6,985
Consolidated Balance Sheet Data (at end of period):
Total assets		$	1,441,393			$	1,236,077			$	1,117,784			$	1,163,109			$	1,034,432
Total investment securities (including stock in Federal Banks)			193,418				165,368				143,694				137,174				150,137
Total loans			901,756				864,722				904,207				830,328				744,538
Allowance for loan losses			(15,134	)			(13,716	)			(12,847	)			(9,453	)			(8,513	)
Deposits			1,238,840				1,052,065				965,966				1,004,762				875,084
Shareholders’ equity			79,357				73,031				72,212				68,938				59,785
Weighted basic average shares outstanding			2,314				2,302				2,311				2,328				2,302
Per Share Data:
Diluted net income per common share (1)		$	1.59			$	0.05			$	1.58			$	3.27			$	2.90
Cash dividends declared			—				—				—				—				—
Book value (2)			34.24				31.65				31.48				29.63				25.88
Other Statistics and Operating Data:
Return on average assets			0.3	%			0.0	%			0.3	%			0.7	%			0.7	%
Return on average equity			5.0	%			0.2	%			5.3	%			12.3	%			12.7	%
Net interest margin (3)			3.1	%			3.2	%			3.4	%			3.3	%			3.4	%
Average loans to average deposits			78.7	%			85.5	%			88.5	%			82.3	%			85.9	%
Allowance for loan losses to loans at end of period			1.7	%			1.6	%			1.4	%			1.1	%			1.1	%
Allowance for loan losses to non-performing loans			135.5	%			90.8	%			146.4	%			164.1	%			119.0	%
Non-performing loans to loans at end of period			1.2	%			1.7	%			1.0	%			0.7	%			1.0	%
Net charge-offs/to average loans			0.3	%			1.2	%			0.5	%			0.0	%			0.1	%
Number of offices			12				12				11				9				9
Number of full and part-time employees			274				270				252				228				221
Number of Shareholders of Record			638				679				681				676				639
Capital Ratios:
Average shareholders’ equity to average assets			5.8	%			6.1	%			6.3	%			5.9	%			5.7	%
Equity to assets			5.5	%			5.9	%			6.5	%			5.9	%			5.8	%
Total risk-based capital ratio (Bank only)			11.2	%			10.9	%			10.5	%			10.6	%			10.7	%

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

The following discussion and analysis of the Corporation relates to the years ended December 31, 2010, 2009, and 2008 and should be read in conjunction with the Corporation’s Consolidated Financial Statements and Notes thereto included elsewhere herein.

Overview

The primary source of the Bank’s revenue is net interest income from loans and deposits and fees from financial services provided to customers. Overall economic factors including market interest rates, business spending, and consumer confidence, as well as competitive conditions within the marketplace tend to influence business volumes.

The Corporation monitors the impact of changes in interest rates on its net interest income through its Asset/Liability Committee (“ALCO”) Policy. One of the primary goals of asset/liability management is to maximize net interest income and the net value of future cash flows within authorized risk limits. At December 31, 2010, the interest rate risk position of the Corporation was liability sensitive. Maintaining a liability sensitive interest rate risk position means that net income should decrease as rates rise and increase as rates fall.

In addition to net interest income, net income is affected by other non-interest income, other non-interest expense and the provision for loan losses. Other non-interest income increased for the year ended December 31, 2010, as compared to year ended December 31, 2009. The increase is primarily due to mortgage banking income. The increase in mortgage banking income was the result of an increase in gains recorded on mortgage loan sales for the year ended December 31, 2010, as compared to the year ended December 31, 2009. In addition to the increase in mortgage banking income, wealth management fees increased for the year ended December 31, 2010, as compared to the year ended December 31, 2009. The increase is attributable to an increase in the stock market for the year ended December 31, 2010, as compared to the year ended December 31, 2009, as well as new business. Other non-interest expense increased for the year ended December 31, 2010, as compared to the year ended December 31, 2009. The increase is due to an increase in salaries, wages and employee benefits during 2010 as compared to 2009, and non-performing asset expense for the year ended December 31, 2010, as compared to the year ended December 31, 2009. In addition, other expense increased for the year ended December 31, 2010, as compared to December 31, 2009 due to the Corporation recording a reserve as a result of a wire transfer inadvertently sent to the wrong beneficiary. The provision for loan losses decreased for the year ended December 31, 2010, as compared to December 31, 2009. The decrease is due to an overall improvement in loan quality and a decrease in charge offs relating to commercial real estate, construction, and commercial and industrial loans. Management performs an evaluation as to the amounts required to maintain an allowance adequate to provide for probable incurred losses inherent in the loan portfolio. The level of this allowance is dependent upon the total amount of past due and non-performing loans, general economic conditions and management’s assessment of probable incurred losses based upon internal credit evaluations of loan portfolios and particular loans. Typically, improved economic strength generally will translate into better credit quality in the banking industry. Management believes that the allowance for loan losses is adequate to absorb credit losses inherent in the loan portfolio as of December 31, 2010.

The risks and challenges that management believes will be important during 2011 are price competition for loans and deposits by competitors, marketplace credit effects, continued spread compression, a slow recovery of the local economy that could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans, and the lingering effects from the financial crisis in the U.S. market and foreign markets.

Results of Operations

Year Ended December 31, 2010, Compared to the Year Ended December 31, 2009, and the Year Ended December 31, 2009, Compared to the Year Ended December 31, 2008.

The Corporation’s results of operations depend primarily on the level of its net interest income, its provision for loan losses, its non-interest income and its operating expenses. Net interest income depends on the volume of and rates associated with interest earning assets and interest bearing liabilities which results in the net interest spread.

2010 compared with 2009

The Corporation had net income of $3.8 million for 2010 compared to net income of $112 thousand for 2009. The increase in net income is due to a decrease in the provision for loan losses and an increase in mortgage banking income and wealth management fees. The increase in net income is partially offset by an increase in non performing asset expense and salary, wages, and employee benefits.

The Bank experienced an increase in total assets in 2010 compared with 2009. Total assets increased $205 million or 17% to $1.4 million in 2010 from $1.2 million in 2009. The increase is primarily due to: an increase in cash and cash equivalents of $142 million or 93% to $294 million in 2010 from $152 million in 2009, an increase in investments of $28 million or 17% to $190 million in 2010 from $162 million in 2009, and an increase in loans of $36 million or 4% to $900 million in 2010 from $864 million in 2009.

2009 compared with 2008

The Corporation had net income of $112 thousand for 2009 compared to net income of $3.8 million for 2008. The decrease in net income is due to an increase in: the provision for loan losses, non performing asset expense, FDIC insurance expense, and salary, wages, and employee benefits. These increases in expenses were partially offset by a decrease in other operating expense and an increase in mortgage banking income.

The Bank experienced an increase in total assets in 2009 compared with 2008. Total assets increased $118 million or 11% to $1.2 million in 2009 from $1.l million in 2008. The increase is primarily due to: an increase in cash and cash equivalents of $121 million or 390% to $152 million in 2009 from $31 million in 2008, an increase in investments of $21 million or 15% to $162 million in 2009 from $141 million in 2008, and an increase in other real estate owned and repossessions of $5 million or 167% to $8 million in 2009 from $3 million in 2008. The increase is partially offset by a decrease in loans of $40 million or 4% to $864 million in 2009 from $904 million in 2008.

Net Interest Income

The following table details the components of net interest income for the years ended December 31, (dollars in thousands):

		2010				2009				Change				Change
Interest income:
Interest and fees on loans		$	42,471			$	42,217			$	254				0.6	%
Interest on investment securities taxable			2,172				3,011				(839	)			-27.9	%
Interest on investment securities nontaxable			2,070				2,068				2				0.1	%
Interest on federal funds sold			25				4				21				525.0	%
Interest on due from banks			392				231				161				69.7	%
Total interest income		$	47,130			$	47,531			$	(401	)			-0.8	%
Interest expense:
Interest on deposits		$	7,002			$	9,427			$	(2,425	)			-25.7	%
Interest on other short term borrowings			289				182				107				58.8	%
Interest on short term debt			183				121				62				51.2	%
Interest on long term debt			1,555				1,583				(28	)			-1.8	%
Total interest expense		$	9,029			$	11,313			$	(2,284	)			-20.2	%
Net interest income		$	38,101			$	36,218			$	1,883				5.2	%

2010 compared with 2009

Total average earning assets increased for 2010 as compared to 2009. The increase is primarily due to an increase in the average balance in interest bearing due from bank accounts, an increase in the average balance of non taxable investment securities and an increase in the average loan balances. Interest income increased for 2010 as compared to 2009 due to an increase in the average balances of interest bearing due from banks, federal funds sold and an increase in both the average balances and rates for non taxable investment securities and loans.

Total interest bearing liabilities increased for 2010 as compared to 2009. The increase is primarily due to an increase in the average balance in savings and interest bearing demand deposit accounts offset by a decrease in the average balance in CD’s over $100 thousand. Interest expense decreased primarily due to lower interest rates paid on interest bearing liabilities.

Net interest income increased for 2010 as compared to 2009. The increase is a result of an overall increase in earning assets. Net interest spread — FTE decreased to 3.10% for 2010 as compared to 3.13% for 2009 which is primarily due to a larger decline in the yield on earning assets than the decline in the cost of interest bearing liabilities. The net interest margin — FTE decreased to 3.24% for 2010 from 3.33% for 2009. The decrease is attributable to the decrease in the contribution of non-interest bearing funds to 0.14% for 2010 from 0.20% for 2009, as well as a decrease in the net interest spread — FTE.

The following table details the components of net interest income for the years ended December 31, (dollars in thousands):

										$				%
		2009				2008				Change				Change
Interest income:
Interest and fees on loans		$	42,217			$	48,988			$	(6,771	)			-13.8	%
Interest on investment securities taxable			3,011				3,979				(968	)			-24.3	%
Interest on investment securities nontaxable			2,068				2,047				21				1.0	%
Interest on federal funds sold			4				705				(701	)			-99.4	%
Interest on due from banks			231				510				(279	)			-54.7	%
Interest on reverse repurchase agreements			—				148				(148	)			-100.0	%
Total interest income		$	47,531			$	56,377			$	(8,846	)			-15.7	%
Interest expense:
Interest on deposits		$	9,427				17,979			$	(8,552	)			-47.6	%
Interest on other short term borrowings			182				544				(362	)			-66.5	%
Interest on FHLB advances and overnight borrowings			—				193				(193	)			-100.0	%
Interest on short term debt			121				16				105				656.3	%
Interest on long term debt			1,583				1,717				(134	)			-7.8	%
Total interest expense		$	11,313			$	20,449			$	(9,136	)			-44.7	%
Net interest income		$	36,218			$	35,928			$	290				0.8	%

2009 compared with 2008

Total average earning assets increased for 2009 as compared to 2008. The increase is primarily attributable to an increase in the average balance in interest bearing due from banks and an increase in average loans. Interest income decreased for 2009 as compared to 2008. The decrease is due to an overall lower interest rate environment in 2009 as compared to 2008 as a result of significant interest rate decreases by the Federal Reserve in 2008. Over the course of 2008, the prime interest rate decreased by 400 basis points to 3.25% from 7.25%.

Total average interest bearing liabilities increased for 2009 as compared to 2008. The increase is due primarily to an increase in average interest bearing demand deposits and average certificates of deposits. Interest expense decreased due to lower interest rates paid on interest bearing liabilities.

The increase in net interest income was a result of an increase in the net interest spread during 2009 as compared to 2008. The increase in the net interest spread was the result of a larger decline in the cost of interest bearing liabilities than the decline in the yield on earning assets during 2009 compared to 2008. The decrease in the contribution of non-interest bearing funds to 0.20% from 0.40% for the year ended December 31, 2009, as compared to December 31, 2008, caused an overall decrease in the net interest margin FTE to 3.33% from 3.48% for the year ended December 31, 2009, as compared to December 31, 2008.

The following table details average balances, interest income/expense and average rates/yields for the Bank’s earning assets and interest bearing liabilities for the years ended December 31, (tax equivalent basis/dollars in thousands):

		2010												2009												2008
						Interest				Average								Interest				Average								Interest				Average
		Average				Income/				Rate/				Average				Income/				Rate/				Average				Income/				Rate/
		Balance				Expense				Yield				Balance				Expense				Yield				Balance				Expense				Yield
Assets:
Interest bearing due from banks		$	155,472			$	392				0.25	%		$	91,295			$	231				0.25	%		$	20,645			$	509				2.47	%
Reverse repurchase agreements			1,000				—				0.01	%			1,000				—				0.01	%			4,197				148				3.53	%
Federal funds			9,934				25				0.25	%			2,646				4				0.15	%			31,530				705				2.24	%
Non taxable investment securities — FTE			56,533				3,200				5.66	%			56,070				3,140				5.60	%			55,178				3,046				5.52	%
Taxable investment securities			117,235				2,172				1.85	%			88,855				3,011				3.39	%			98,585				3,980				4.04	%
Loans (gross) — FTE			886,933				43,028				4.85	%			883,721				42,363				4.79	%			855,313				49,099				5.74	%
Total earning assets		$	1,227,107			$	48,817				3.98	%		$	1,123,587			$	48,749				4.34	%		$	1,065,448			$	57,487				5.40	%
Non-earning assets			89,564												83,573												63,335
Total assets		$	1,316,671											$	1,207,160											$	1,128,783
Liabilities:
Interest bearing DDA		$	205,541			$	474				0.23	%		$	160,233			$	600				0.37	%		$	116,999			$	1,206				1.03	%
Savings			514,703				2,903				0.56	%			472,181				3,448				0.73	%			495,956				9,698				1.96	%
CD’s under $100			66,974				1,156				1.73	%			63,609				1,665				2.62	%			66,256				2,547				3.84	%
CD’s over $100			114,953				2,005				1.74	%			129,325				3,160				2.44	%			101,008				3,806				3.77	%
Individual retirement accounts			22,666				464				2.05	%			19,980				554				2.77	%			18,737				722				3.85	%
Repurchase agreements and other secured short term borrowings			84,048				289				0.34	%			68,742				182				0.26	%			57,125				544				0.95	%
FHLB advances			—				—				—				—				—				—				7,336				193				2.63	%
Short-term debt			3,656				183				5.01	%			4,200				121				2.88	%			586				16				2.73	%
Subordinated debt			5,000				80				1.60	%			5,000				108				2.16	%			5,000				242				4.84	%
Long term debt			13,918				1,475				10.60	%			13,918				1,475				10.60	%			13,918				1,475				10.60	%
Total interest bearing liabilities		$	1,031,459			$	9,029				0.88	%		$	937,188			$	11,313				1.21	%		$	882,921			$	20,449				2.32	%
Non-interest bearing liabilities			202,808												188,594												167,121
Other liabilities			6,181												8,034												7,921
Total liabilities		$	1,240,448											$	1,133,816											$	1,057,963
Equity			76,223												73,344												70,820
Total liabilities & equity		$	1,316,671											$	1,207,160											$	1,128,783
Recap:
Interest income — FTE						$	48,817				3.98	%						$	48,749				4.34	%						$	57,487				5.40	%
Interest expense							9,029				0.88	%						$	11,313				1.21	%						$	20,449				2.32	%
Net interest income/spread — FTE						$	39,788				3.10	%						$	37,436				3.13	%						$	37,038				3.08	%
Contribution of non-interest bearing funds											0.14	%											0.20	%											0.40	%
Net interest margin — FTE											3.24	%											3.33	%											3.48	%

Notes to the average balance and interest rate tables:

•

Average balances are computed using daily actual balances.

•

The average loan balance includes loans held for sale, non-accrual loans and the interest recognized prior to becoming non-accrual is reflected in the interest income for loans.

•

Interest income on loans includes loan costs net of loan fees, of $(730) thousand, $(645) thousand, and $(713) thousand, for the years ended December 31, 2010, 2009, and 2008, respectively.

•

Net interest income on a fully taxable equivalent basis, the most significant component of the Corporation’s earnings, is total interest income on a fully taxable equivalent basis less total interest expense. The level of net interest income on a fully taxable equivalent basis is determined by the mix and volume of interest earning assets, interest bearing deposits and borrowed funds, and changes in interest rates.

•

Net interest spread is the difference between the fully taxable equivalent rate earned on interest earning assets less the rate expensed on interest bearing liabilities.

•

Net interest margin represents net interest income on a fully taxable equivalent basis as a percentage of average interest earning assets. Net interest margin is affected by both the interest rate spread and the level of non-interest bearing sources of funds, primarily consisting of demand deposits and shareholders’ equity.

•

Interest income on a fully taxable equivalent basis includes the additional amount of interest income that would have been earned on tax exempt loans and if investments in certain tax-exempt interest earning assets had been made in assets subject to federal taxes yielding the same after-tax income. Interest income on tax exempt loans and municipal securities has been calculated on a fully taxable equivalent basis using a federal and state income tax blended rate of 40%. The appropriate tax equivalent adjustments to interest income on loans was $557 thousand, $146 thousand, and $111 thousand for the years ended December 31, 2010; 2009, and 2008, respectively. The appropriate tax equivalent adjustments to interest income on municipal securities was $1.1 million, $1.1 million, and $999 thousand, for the years ended December 31, 2010, 2009, and 2008, respectively.

•

Management believes the disclosure of the fully taxable equivalent net interest income information improves the clarity of financial analysis, and is particularly useful to investors in understanding and evaluating the changes and trends in the Corporation’s results of operations. This adjustment is considered helpful in the comparison of a financial institution’s net interest income to that of another institution, as each will have a different proportion of tax-exempt interest from their earning asset portfolios.

The following table sets forth an analysis of volume and rate changes in interest income and interest expense of the Corporation’s average earning assets and average interest-bearing liabilities. The table distinguishes between the changes related to average outstanding balances of assets and liabilities (changes in volume holding the initial average interest rate constant) and the changes related to average interest rates (changes in average rate holding the initial average outstanding balance constant). The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

Net Interest Income Changes Due to Volume and Rates (dollars in thousands):

		2010 Changes from 2009												2009 Changes from 2008
		Net				Due to				Due to				Net				Due to				Due to
		Change				Rate				Volume				Change				Rate				Volume
Interest earning assets:
Interest bearing due from banks		$	161			$	(1	)		$	162			$	(278	)		$	(781	)		$	503
Reverse repurchase agreements			—				—				—				(148	)			—				(148	)
Federal funds			21				4				17				(701	)			(354	)			(347	)
Non taxable investment securities — FTE			60				34				26				94				44				50
Taxable investment securities			(839	)			(1,621	)			782				(969	)			(600	)			(369	)
Loans (gross) — FTE			665				511				154				(6,736	)			(8,322	)			1,586
TOTAL		$	68			$	(1,073	)		$	1,141			$	(8,738	)		$	(10,013	)		$	1,275
Interest bearing liabilities:
Interest bearing DDA		$	(126	)		$	(268	)		$	142			$	(606	)		$	(947	)		$	341
Savings deposits			(545	)			(835	)			290				(6,250	)			(5,806	)			(444	)
CDs under $100			(509	)			(593	)			84				(882	)			(784	)			(98	)
CDs over $100			(1,155	)			(832	)			(323	)			(646	)			(1,547	)			901
Individual retirement accounts			(90	)			(158	)			68				(168	)			(213	)			45
Repurchase agreements and other short-term secured borrowings			107				61				46				(362	)			(455	)			93
FHLB advances			—				—				—				(193	)			—				(193	)
Short-term debt			62				79				(17	)			105				1				104
Subordinated debt			(28	)			(28	)			—				(134	)			(134	)			—
TOTAL		$	(2,284	)		$	(2,574	)		$	290			$	(9,136	)		$	(9,885	)		$	749
Net change in net interest income		$	2,352			$	1,501			$	851			$	398			$	(128	)		$	526

Provision for Loan Losses

The amount charged to the provision for loan losses by the Bank is based on management’s evaluation as to the amounts required to maintain an allowance adequate to provide for probable incurred losses inherent in the loan portfolio. The level of this allowance is dependent upon the total amount of past due and non-performing loans, general economic conditions and management’s assessment of probable incurred losses based upon internal credit evaluations of loan portfolios and particular loans. Loans are principally to borrowers in central Indiana.

The following table details the components of loan loss reserve as of December 31, (dollars in thousands):

		2010				2009				2008				2007				2006
Beginning of Period		$	13,716			$	12,847			$	9,453			$	8,513			$	8,346
Provision for loan losses			4,279				11,905				7,400				904				1,086
Chargeoffs
Commercial & industrial			1,437				2,603				1,697				228				1,094
Commercial real estate			1,363				6,150				1,126				—				191
Construction			—				1,710				49				—				—
Residential			252				864				1,360				600				121
Consumer			36				21				64				50				51
Credit cards			61				84				97				4				28
			3,149				11,432				4,393				882				1,485
Recoveries
Commercial & industrial			119				343				187				814				412
Commercial real estate			5				—				—				—				—
Residential			152				20				174				67				154
Consumer			2				—				1				6				—
Credit cards			10				33				25				31				—
			288				396				387				918				566
End of Period		$	15,134			$	13,716			$	12,847			$	9,453			$	8,513
Allowance as a % of Loans			1.68	%			1.59	%			1.42	%			1.14	%			1.14	%