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EX-21.1 - AMERIANA BANCORPv216762_ex21.htm
EX-23 - AMERIANA BANCORPv216762_ex23.htm
EX-32 - AMERIANA BANCORPv216762_ex32.htm
EX-31.1 - AMERIANA BANCORPv216762_ex31-1.htm
EX-10.2 - AMERIANA BANCORPv216762_ex10-2.htm
EX-10.1 - AMERIANA BANCORPv216762_ex10-1.htm
EX-31.2 - AMERIANA BANCORPv216762_ex31-2.htm
EX-10.5 - AMERIANA BANCORPv216762_ex10-5.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549

FORM 10-K
 
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                to               

Commission file number: 0-18392

AMERIANA BANCORP
(Exact Name of Registrant as Specified in Its Charter)
 
Indiana
 
35-1782688
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)
     
2118 Bundy Avenue, New Castle, Indiana
 
47362-1048
(Address of Principal Executive Offices)
 
(Zip Code)

Registrant’s telephone number, including area code: (765) 529-2230

Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $1.00 per share
 
The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES ¨  NO x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of  the Act.  YES ¨  NO x

Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES x  NO ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES ¨  NO ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
 
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.  (Check one):
 
Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
x
(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 x

The aggregate market value of the registrant’s common stock held by nonaffiliates of the registrant at June 30, 2010 was approximately $11.5 million.  For purposes of this calculation, shares held by the directors and executive officers of the registrant are deemed to be held by affiliates.

At March 31, 2011, the registrant had 2,988,952 shares of its common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of Proxy Statement for the 2011 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form 10-K.

 
 

 
 
INDEX

   
Page
PART I
     
Item 1.
Business
1
Item 1A.
Risk Factors
27
Item 1B.
Unresolved Staff Comments
32
Item 2.
Properties
32
Item 3.
Legal Proceedings
33
Item 4.
[Removed and Reserved]
33
     
PART II
     
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
34
Item 6.
Selected Financial Data
35
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operation
37
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
56
Item 8.
Financial Statements and Supplementary Data
57
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
95
Item 9A.
Controls and Procedures
95
Item 9B.
Other Information
95
     
PART III
     
Item 10.
Directors, Executive Officers and Corporate Governance
96
Item 11.
Executive Compensation
96
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
96
Item 13.
Certain Relationships and Related Transactions, and Director Independence
97
Item 14.
Principal Accountant Fees and Services
97
     
PART IV
     
Item 15.
Exhibits and Financial Statement Schedules
97

 
i

 
 
Forward-Looking Statements
 
This report contains certain “forward-looking statements” within the meaning of the federal securities laws.  These statements are not historical facts, rather statements based on Ameriana Bancorp’s current expectations regarding its business strategies, intended results and future performance.  Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions.  Such statements are subject to certain risks and uncertainties including changes in economic conditions in the Company’s market area, including real estate values, changes in policies by regulatory agencies, the outcome of litigation, fluctuations in interest rates, demand for loans in the Company’s market area, and competition that could cause actual results to differ materially from historical earnings and those presently anticipated or projected.  Additional factors that may affect our results are discussed in this annual report on Form 10-K under “Item 1A.  Risk Factors.”  The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.  The Company advises readers that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.
 
The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions, that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
 
PART I
 
Item 1.  Business                                
 
General
 
The Company.  Ameriana Bancorp (the “Company”) is an Indiana chartered bank holding company subject to regulation and supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) under the Bank Holding Company Act of 1956 (the “BHCA”).  The Company became the holding company for Ameriana Bank (the “Bank”) in 1990.  The Company also holds a minority interest in a limited partnership organized to acquire and manage real estate investments, which qualify for federal tax credits.  References to “we,” “us” and “our” refer to Ameriana Bancorp and/or the Bank, as appropriate.
 
The Bank.  The Bank began operations in 1890.  Since 1935, the Bank has been a member of the Federal Home Loan Bank (the “FHLB”) System.  Its deposits are insured to applicable limits by the Deposit Insurance Fund, administered by the Federal Deposit Insurance Corporation (the “FDIC”).  On June 29, 2002, the Bank converted to an Indiana savings bank and adopted the name “Ameriana Bank and Trust, SB.  On July 31, 2006, the Bank closed its Trust Department and adopted the name “Ameriana Bank, SB.”  On June 1, 2009, the Bank converted its charter from an Indiana savings bank to an Indiana commercial bank and adopted its present name, “Ameriana Bank.”  The charter conversion did not involve significant financial or regulatory changes and has not affected the Bank’s activities.  The Bank is subject to regulation by the Indiana Department of Financial Institutions (the “DFI”) and the FDIC.  The Bank conducts business through its main office at 2118 Bundy Avenue, New Castle, Indiana and through twelve branch offices located in New Castle, Middletown, Knightstown, Morristown, Greenfield, Anderson, Avon, McCordsville, Carmel, Fishers, Westfield and New Palestine, Indiana and a loan production office in Carmel, Indiana.  The Bank offers a wide range of consumer and commercial banking services, including:  (1) accepting deposits; (2) originating commercial, mortgage, consumer and construction loans; and (3) through its subsidiaries, providing investment and brokerage services and insurance services.
 
The Bank has two wholly-owned subsidiaries, Ameriana Insurance Agency (“AIA”) and Ameriana Financial Services, Inc. (“AFS”).  AIA provides insurance sales from offices in New Castle, Greenfield and Avon, Indiana.  AFS operates a brokerage facility in conjunction with LPL Financial.  A third wholly-owned subsidiary, Ameriana Investment Management, Inc. (“AIMI”), had been responsible for managing investment securities for the Bank.  AIMI was liquidated by the Bank effective December 31, 2009, and the investment securities were merged into the Bank.

 
1

 
 
The principal sources of funds for the Bank’s lending activities include deposits received from the general public, funds borrowed from the FHLB of Indianapolis, principal amortization and prepayment of loans.  The Bank’s primary sources of income are interest and fees on loans and interest on investments.  The Bank has from time to time purchased loans and loan participations in the secondary market.  The Bank also invests in various federal and government agency obligations and other investment securities permitted by applicable laws and regulations, including mortgage-backed, municipal and mutual fund securities.  The Bank’s principal expenses are interest paid on deposit accounts and borrowed funds and operating expenses.
 
Competition.  The geographic markets we serve are highly competitive for deposits, loans and other financial services, including retail brokerage services and insurance.  Our direct competitors include traditional banking and savings institutions, as well as other non-bank providers of financial services, such as insurance companies, brokerage firms, mortgage companies and credit unions located in the Bank’s market area.  Additional significant competition for deposits comes from money market mutual funds and corporate and government debt securities, and internet banks.
 
The primary factors in competing for loans are interest rates and loan origination fees, and the range of services offered by the various financial institutions.  Competition for origination of loans normally comes from commercial banks, savings institutions, mortgage bankers, mortgage brokers and insurance companies.
 
The Bank has banking offices in Henry, Hancock, Hendricks, Shelby, Madison, and Hamilton Counties in Indiana.  The Bank competes with several commercial banks and savings institutions in the Bank’s primary service area and in surrounding counties, many of which have capital and assets that are substantially larger than the Bank.
 
The Company expects competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry.  Technological advances, for example, have lowered barriers to entry into the industry, allowed banks to expand their geographic reach by providing services over the Internet and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks.  Changes in federal law permit affiliation among banks, securities firms and insurance companies, which promotes a competitive environment in the financial services industry.  Competition for deposits and the origination of loans could limit the Company’s growth in the future.
 
Available Information
 
The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are made available free of charge on the Company’s website, www.ameriana.com, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission.  Information on the Company’s website should not be considered a part of this Form 10-K.
 
Lending Activities
 
General.  The principal lending activity of the Bank has been the origination of conventional first mortgage loans secured by residential property and commercial real estate, and commercial loans and consumer loans.  The residential mortgage loans have been predominantly secured by single-family homes and have included construction loans.
 
The Bank may originate or purchase whole loans or loan participations secured by real estate located in any part of the United States.  Notwithstanding this nationwide lending authority, the majority of the Bank’s mortgage loan portfolio is secured by real estate located in Henry, Hancock, Hamilton, Hendricks, Madison, Shelby, Delaware and Marion counties in Indiana.

 
2

 

The following table sets forth information concerning the Bank’s loans by type of loan at the dates indicated.

    
At December 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
   
Amount
   
%
   
Amount
   
%
   
Amount
   
%
   
Amount
   
%
   
Amount
   
%
 
   
(Dollars in thousands)
 
Real estate loans:
 
 
 
Commercial
  $ 94,595       29.79 %   $ 104,231       31.92 %   $ 98,173       30.13 %   $ 83,282       27.88 %   $ 62,112       24.48 %
Residential
    167,162       52.63       161,035       49.31       160,553       49.27       139,980       46.86       125,424       49.43  
Construction
    26,817       8.44       30,943       9.47       39,281       12.05       48,880       16.36       47,984       18.91  
Commercial loans and leases
    22,360       7.04       23,580       7.22       21,215       6.51       18,665       6.25       12,446       4.90  
Municipal loans
    2,718       0.86       2,781       0.85       2,218       0.68       2,945       0.99              
Consumer loans
    3,943       1.24       4,003       1.23       4,424       1.36       4,959       1.66       5,789       2.28  
Total
    317,595       100.00 %     326,573       100.00 %     325,864       100.00 %     298,711       100.00 %     253,755       100.00 %
                                                                                 
Less:
                                                                               
Undisbursed loan proceeds
    443               1,005               386               1,892               1,769          
Deferred loan fees (expenses), net
    225               19               (48 )             (131 )             98          
Allowance for loan losses
    4,212               4,005               2,991               2,677               2,616          
Subtotal
    4,880               5,029               3,329               4,438               4,483          
Total
  $ 312,715             $ 321,544             $ 322,535             $ 294,273             $ 249,272          
 
 
3

 
 
The following table shows, at December 31, 2010, the Bank’s loans based on their contractual terms to maturity.  Demand loans, loans having no stated schedule of repayments and no stated maturity and overdrafts are reported as due in one year or less.  Contractual principal repayments of loans do not necessarily reflect the actual term of the loan portfolio.  The average life of mortgage loans is substantially less than their contractual terms because of loan prepayments and because of enforcement of due-on-sale clauses, which give the Bank the right to declare a loan immediately due and payable if, among other things, the borrower sells the real property subject to the mortgage and the loan is not repaid.  The average life of mortgage loans tends to increase, however, when current mortgage loan rates substantially exceed rates on existing mortgage loans.
 
   
Amounts of Loans Which Mature in
 
                
2016 and
       
    
2011
    2012 – 2015    
Thereafter
   
Total
 
   
(In thousands)
 
Type of Loan:
                         
Residential and commercial real estate mortgage
  $ 12,526     $ 18,473     $ 230,758     $ 261,757  
Construction
    15,562       1,815       9,440       26,817  
Other
    9,939       12,850       6,232       29,021  
Total
  $ 38,027     $ 33,138     $ 246,430     $ 317,595  

The following table sets forth the dollar amount of the Company’s aggregate loans due after one year from December 31, 2010, which have predetermined interest rates and which have floating or adjustable interest rates.
 
   
Fixed
Rate
   
Adjustable
Rate
   
Total
 
    
(In thousands)
 
Residential and commercial real estate mortgage
  $ 160,011     $ 89,220     $ 249,231  
Construction
    6,438       4,816       11,254  
Other loans
    17,327       1,756       19,083  
Total
  $ 183,776     $ 95,792     $ 279,568  

Residential Real Estate and Residential Construction Lending.  The Bank originates loans on one-to four-family residences.  The original contractual loan payment period for residential mortgage loans originated by the Bank generally ranges from ten to 30 years.  Because borrowers may refinance or prepay their loans, they normally remain outstanding for a shorter period.  The Bank normally sells a portion of its newly originated fixed-rate mortgage loans in the secondary market and retains all adjustable-rate loans in its portfolio.  The decision to sell fixed-rate mortgage loans is determined by management based on available pricing and balance sheet considerations.  The Bank also originates hybrid mortgage loans.  Hybrid mortgage loans carry a fixed-rate for the first three to ten years, and then convert to an adjustable-rate thereafter.  The residential mortgage loans originated and retained by the Bank in 2010 were composed primarily of fixed-rate loans and, to a lesser extent, hybrid loans that have a fixed-rate for five or seven years and adjust annually to the one-year constant maturity treasury rate thereafter.  The overall strategy is to maintain a low risk mortgage portfolio that helps to diversify the Bank’s overall asset mix.
 
The Bank makes construction/permanent loans to borrowers to build one-to four-family owner-occupied residences with terms of up to 30 years.  These loans are made as interest-only loans for a period typically of 12 months, at which time the loan converts to an amortized loan for the remaining term.  The loans are made typically as adjustable-rate mortgages, which may be converted to a fixed-rate loan for sale in the secondary market at the request of the borrower if secondary market guidelines have been met.  Residential real estate construction loans were $2.3 million, or 8.6% of the construction loan portfolio at December 31, 2010 compared to $7.9 million, or 25.7% at December 31, 2009.
 
Loans involving construction financing present a greater level of risk than loans for the purchase of existing homes since collateral value and construction costs can only be estimated at the time the loan is approved.  The Bank has sought to minimize this risk by limiting construction lending to qualified borrowers in its market area and by limiting the number of construction loans outstanding at any time to individual builders.  In addition, many of the Bank’s construction loans are made on homes that are pre-sold, for which permanent financing is already arranged.

 
4

 

Home equity lines of credit have adjustable rates of interest that are indexed to the prime rate as published in The Wall Street Journal for terms of up to 10 years. The loans are originated with a total maximum loan-to-value ratio of 85% (including the first mortgage) of the appraised value of the property, and the Bank requires that it has a second lien position on the property.

In 2010, the Bank originated $50.0 million in residential real estate loans, including home equity loans.  The total included $5.4 million in adjustable-rate residential first mortgage loans, including hybrids, $37.1 million of fixed-rate first mortgage loans, $6.7 million of home equity credit lines and $792,000 of closed end second mortgage loans.  Sales of fixed-rate residential mortgage loans into the secondary market in 2010 and 2009 were $17.0 million and $19.2 million, respectively.  Gains on residential loan sales, including imputed gains on servicing rights, were $923,000 in 2010 compared with $408,000 in 2009.  $560,000 of the 2010 gains resulted from a bulk sale of $10.9 million of seasoned loans.
 
Commercial Real Estate and Commercial Real Estate Construction Lending.  The Bank originates loans secured by both owner-occupied and nonowner-occupied properties.  The Bank originates commercial real estate loans and purchases loan participations from other financial institutions.  These participations are reviewed and approved based upon the same credit standards as commercial real estate loans originated by the Bank.  At December 31, 2010, the Bank’s individual commercial real estate loan balances ranged from $4,000 to $5.1 million.  The Bank’s commercial real estate loans may have a fixed or variable interest rate.
 
Loans secured by commercial real estate properties are generally larger and involve a greater degree of credit risk than one-to four-family residential mortgage loans.  Because payments on loans secured by commercial real estate properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or by general economic conditions.  If the cash flows from the project are reduced (for example, if leases are not obtained or renewed), the borrower’s ability to repay the loan may be impaired.  To minimize the risks involved in originating such loans, the Bank considers, among other things, the creditworthiness of the borrower, the location of the real estate, the condition and occupancy levels of the security, the projected cash flows of the business, the borrower’s ability to service the debt and the quality of the organization managing the property.
 
Commercial real estate construction loans are made to developers for the construction of commercial properties, owner-occupied facilities, nonowner-occupied facilities and for speculative purposes.  These construction loans are granted based on a reasonable estimate of the time to complete the projects.  Commercial real estate construction loans made up $24.5 million, or 91.4% of the construction loan portfolio at December 31, 2010 compared to $23.0 million, or 74.3% at December 31, 2009.  As these loans mature they will either pay-off or roll to a permanent commercial real estate loan.
 
The Bank’s underwriting criteria are designed to evaluate and minimize the risks of each construction loan.  Among other things, the Bank considers evidence of the availability of permanent financing or a takeout commitment to the borrower; the reputation of the borrower and his or her financial condition; the amount of the borrower’s equity in the project; independent appraisal and review of cost estimates; pre-construction sale and leasing information; and cash flow projections of the borrower.
 
At December 31, 2010, the largest commercial real estate lending relationship was a credit secured by commercial office space, with an original commitment of $5.8 million and a current commitment of $5.1 million, and an outstanding balance of $5.1 million.  This credit was performing according to its original terms at December 31, 2010.  
 
Municipal Lending.  At December 31, 2010, the Bank’s loan portfolio included four municipal loans with approved credit limits totaling $4.4million and outstanding balances totaling $2.7 million.  The largest loan had a credit limit of $3.2 million and had an outstanding balance of $2.0 million at December 31, 2010.  This loan has a fixed-rate of interest, is non-amortizing, and has a maturity date in 2012.  This loan was performing according to its original terms at December 31, 2010.

 
5

 
 
Consumer Lending.  The consumer lending portfolio includes automobile loans and other consumer products.  The collateral is generally the asset defined in the purpose of the request.  The policies of the Bank are adhered to in our underwriting of consumer loans.
 
Management believes that the shorter terms and the normally higher interest rates available on various types of consumer loans have been helpful in maintaining profitable spreads between average loan yields and costs of funds.  Consumer loans may entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly.  In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower.  In addition, consumer loan collections depend on the borrower’s continuing financial stability, and therefore, are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.  Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.  The Bank has sought to reduce this risk by primarily granting secured consumer loans.
 
Commercial Lending.  The Bank lends to business entities for the short-term working capital, inventory financing, equipment purchases and other business financing needs.  The loans can be in the form of revolving lines of credit, commercial lines of credit or term debt.  The Bank also matches the term of the debt to the estimated useful life of the assets.
 
At December 31, 2010, the largest commercial relationship included seven credits with total commitments of $4.5 million and outstanding balances totaling $4.5 million that were secured by all business assets of the borrower.  All of the individual credits were performing according to their original terms at December 31, 2010.
 
Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property the value of which tends to be more easily ascertainable, commercial loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flows of the borrower’s business.  As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself.  Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.
 
Originations, Purchases and Sales.  Historically, most residential and commercial real estate loans have been originated directly by the Bank through salaried and commissioned loan officers.  Residential loan originations have been attributable to referrals from real estate brokers and builders, banking center staff, and commissioned loan agents.  In prior years, the Bank had also purchased residential and commercial loans from other financial institutions, but did not purchase any loans in 2010.  At December 31, 2010, balances outstanding for all loans acquired as participations or whole loan purchases totaled $21.0 million.  Commercial real estate and construction loan originations have also been obtained by direct solicitation.  Consumer loan originations are attributable to walk-in customers who have been made aware of the Bank’s programs by advertising as well as direct solicitation.
 
The Bank has previously sold whole loans and loan participations to other financial institutions and institutional investors, and sold $27.9 million of loans in 2010, including $10.9 million of seasoned performing single-family mortgage loans.  Sales of loans generate income (or loss) at the time of sale, produce future servicing income and provide funds for additional lending and other purposes.  When the Bank retains the servicing of loans it sells, the Bank retains responsibility for collecting and remitting loan payments, inspecting the properties, making certain insurance and tax payments on behalf of borrowers and otherwise servicing those loans.  The Bank typically receives a fee of between 0.25% and 0.375% per annum of the loan’s principal amount for performing these services.  The right to service a loan has economic value and the Bank carries capitalized servicing rights on its books based on comparable market values and expected cash flows.  At December 31, 2010, the Bank was servicing $115.9 million of loans for others.  The aggregate book value of capitalized servicing rights at December 31, 2010, net of a $19,000 valuation allowance, was $689,000.
 
6

 
 
Management believes that purchases of loans and loan participations are desirable when local mortgage demand is less than the local supply of funds available for mortgage originations or when loan terms available outside the Bank’s local lending areas are favorable to those available locally.  Additionally, purchases of loans may be made to diversify the Bank’s lending portfolio.  The Bank’s loan purchasing activities fluctuate significantly.  The seller generally performs the servicing of purchased loans.  The Bank utilizes the same underwriting and monitoring processes and standards for loans it purchases as it would for internally generated loans.  To cover servicing costs, the service provider retains a portion of the interest being paid by the borrower.  In addition to whole loan purchases, the Bank also purchases participation interests in loans.  Both whole loans and participations are purchased on a yield basis.
 
For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of this Form 10-K.
 
Loan Underwriting.  During the loan approval process, the Bank assesses both the borrower’s ability to repay the loan and the adequacy of the underlying security.  Potential residential borrowers complete an application that is submitted to a commissioned loan originator.  As part of the loan application process, the Bank obtains information concerning the income, financial condition, employment and credit history of the applicant.  In addition, qualified appraisers inspect and appraise the property that is offered to secure the loan.  The Bank’s underwriter or the Senior Vice President of Mortgage Banking approves or denies the loan request.
 
Consumer loan applications are evaluated using a multi-factor based scoring system or by direct underwriting.
 
Commercial loans that are part of a lending relationship exceeding $250,000 are submitted to the Bank’s credit analysts for review, financial analysis and for preparation of a Loan Approval Memorandum.  The Loan Committee, consisting of members of the Board or management appointed by the Board of Directors, must approve secured and unsecured loans between $1.0 million and $3.0 million, and $100,000 and $1.0 million, respectively.  The Board of Directors approves all loans that exceed Loan Committee authority and those that have an exception to the loan policy, and the Loan Committee approves all loans that have a variance to loan procedure.
 
In connection with the origination of single-family, residential adjustable-rate loans with the initial rate fixed for three years or less, borrowers are qualified at a rate of interest equal to the new rate at the first re-pricing date, assuming the maximum increase.  It is the policy of management to make loans to borrowers who not only qualify at the low initial rate of interest, but who would also qualify following an upward interest rate adjustment.
 
Loan Fee and Servicing Income.  In addition to interest earned on loans, the Bank receives income through servicing of loans, and fees in connection with loan originations, loan modifications, late payments, changes of property ownership and for other miscellaneous services related to the loan.  Income from these activities is volatile and varies from period to period with the volume and type of loans made.
 
When possible, the Bank charges loan origination fees on commercial loans that are calculated as a percentage of the amount borrowed and are charged to the borrower at the time of origination of the loan.  These fees generally range up to one point (one point being equivalent to 1% of the principal amount of the loan).  In accordance with Accounting Standards Codification 310, loan origination and commitment fees and certain direct loan origination costs are deferred and the net amount amortized as an adjustment of yield over the contractual life of the related loans.
 
For additional information, see Note 4 to the Consolidated Financial Statements included under Item 8 of this Form 10-K.
 
Delinquencies.  When a borrower defaults on a required payment on a non-commercial loan, the Bank contacts the borrower and attempts to induce the borrower to cure the default.  A late payment notice is mailed to the borrower and a telephone contact is made after a payment is fifteen days past due.  If the delinquency on a mortgage loan exceeds 90 days and is not cured through the Bank’s normal collection procedures or an acceptable arrangement is not worked out with the borrower, the Bank will institute measures to remedy the default, including commencing foreclosure action.  In the case of default related to a commercial loan, the contact is initiated by the commercial lender after a payment is ten days past due.  The Loan Committee reviews delinquency reports weekly and the Criticized Assets Committee reviews classified delinquent loans monthly.

 
7

 
 
The Bank follows the collection processes required by Freddie Mac, Fannie Mae and the Federal Home Loan Bank of Indianapolis to manage residential loans underwritten for the secondary market.  The collection practices for all other loans adhere with the Bank’s loan policies and regulatory requirements.  It is the Bank’s intention to be proactive in its collection of delinquent accounts while adhering to state and federal guidelines.
 
Nonperforming Assets and Asset Classification.  Loans are reviewed regularly and are placed on nonaccrual status when, in the opinion of management, the collection of additional interest is doubtful.  Residential mortgage loans are placed on nonaccrual status when principal or interest payments are 90 days or more past due unless it is adequately secured and there is reasonable assurance of full collection of principal and interest.  Consumer loans generally are charged off when the loan delinquency exceeds 120 days.  Commercial real estate loans and commercial loans are generally placed on nonaccrual status when the loan is 90 days or more past due.  Interest accrued and unpaid at the time a loan is placed on nonaccrual status is charged against interest income.  Subsequent payments are applied to the outstanding principal balance.
 
Real estate acquired by the Bank as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until such time as it is sold.  When such property is acquired, it is recorded at its fair value.  Any subsequent deterioration of the property is charged off directly to income, reducing the value of the asset.
 
The following table sets forth information with respect to the Company’s aggregate nonperforming assets at the dates indicated.
 
   
At December 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
   
(Dollars in thousands)
 
Loans accounted for on a nonaccrual basis:
                             
Real Estate:
                             
Residential
  $ 6,258     $ 3,810     $ 2,960     $ 1,465     $ 657  
Commercial
          841       1,766       303        
Construction
    4,184       4,219       1,454       870       2,616  
Commercial and leases
    731                          
Consumer
    14       12       38             53  
Total
    11,187       8,882       6,218       2,638       3,326  
                                         
Accruing loans contractually past due 90 days or more:
                                       
Real Estate:
                                       
Residential
    60       170                   71  
Consumer
          1       1             13  
Total
    60       171       1             84  
Total of nonaccrual and 90 days past due or more loans (1)
  $ 11,247     $ 9,053     $ 6,219     $ 2,638     $ 3,410  
                                         
Percentage of total loans
    3.54 %     2.78 %     1.91 %     0.88 %     1.35 %
                                         
Other nonperforming assets (2)
  $ 9,082     $ 5,517     $ 4,169     $ 2,517     $ 610  
                                         
Total nonperforming assets
  $ 20,329     $ 14,570     $ 10,388     $ 5,155     $ 4,020  
                                         
Percentage of total assets
    4.73 %     3.30 %     2.24 %     1.21 %     0.92 %
                                         
Troubled debt restructurings in nonaccrual total (1)
  $ 2,245     $     $     $     $  
                                         
Total troubled debt restructurings
  $ 8,393     $ 268     $     $     $  

(1)
Total nonaccrual loans at December 31, 2010 included $2.2 million of troubled debt restructurings, all of which were constructions loans.
(2)
Other nonperforming assets represent property acquired through foreclosure or repossession.  This property is carried at the lower of its fair market value or the principal balance of the related loan.

 
8

 
 
The Company’s nonperforming loans increased by $2.2 million in 2010.  The increase was primarily due to four credits totaling $4.0 million that included a $1.3 million commercial development loan, a $1.1 million residential condominium construction loan, and two loans totaling $1.6 million on section 42 low income housing tax credit properties.   Nonaccrual residential real estate loans increased to $6.3 million at December 31, 2010 from $3.8 million at December 31, 2009 due to continued weakness in the economy and value of the real estate in the markets that we serve.  We have analyzed our collateral position on these nonperforming loans using current appraisals and valuations, and have established reserves accordingly.  Nonperforming loans increased by $2.8 million in 2009.  The increase was primarily due to the classifications of a retail center loan in Fishers, Indiana and a warehouse/office building and adjoining commercial land loan in Indianapolis totaling $3.5 million and an increase in our single-family residential nonperforming loans.
 
Troubled debt restructurings increased from $268,000 at December 31, 2009 to $8.4 million at December 31, 2010.  This increase was primarily a result of continuing weak economic conditions and the Bank’s proactive efforts in instituting workout programs that maintain the borrower’s ability to generate cash flows sufficient to pay on a modified basis, and also project the ability to ultimately repay the entire debt under an improved business environment.   The total of $8.4 million at December 31, 2010 included a $4.5 million loan on a hotel in northern Indiana, three land development credits totaling $1.5 million, a $1.2 million loan on a residential condominium project, and nine single-family loans totaling $1.2 million.  As of December 31, 2010, the Bank had classified the hotel credit, one land development credit and the nine single-family loans totaling $6.2 million as substandard, and had classified the residential condominium project and the other two land development loans totaling $2.2 million as nonaccrual.  Total troubled debt restructurings of $268,000 on December 31, 2009 consisted of seven single-family loans, and were all classified substandard.
 
Interest income that would have been recorded for 2010 had nonaccruing loans been current in accordance with their original terms and had been outstanding throughout the period was $1.2 million.  The amount of interest related to nonaccrual loans included in interest income for 2010 was $513,000, of which $415,000 was paid by borrowers when the loans were not in a nonaccrual status.
 
For additional information regarding the Bank’s problem assets and loss provisions recorded thereon, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Form 10-K.
 
Reserves for Losses on Loans and Real Estate
 
In making loans, management recognizes that credit losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a secured loan, the quality of the security for the loan.
 
It is management’s policy to maintain reserves for estimated incurred losses on loans.  The Bank’s management establishes general loan loss reserves based on, among other things, historical loan loss experience, evaluation of economic conditions in general and in various sectors of the Bank’s customer base, and periodic reviews of loan portfolio quality.  Specific reserves are provided for individual loans where the ultimate collection is considered questionable by management after reviewing the current status of loans that are contractually past due and considering the net realizable value of the security of the loan or guarantees, if applicable.  It is management’s policy to establish specific reserves for estimated inherent losses on delinquent loans when it determines that losses are anticipated to be incurred on the underlying properties.  At December 31, 2010, the Bank’s allowance for loan losses amounted to $4.2 million.  Although there was a significant increase in nonperforming loans in the Bank’s loan portfolio during 2010 due primarily to the continuing weak economy, as a result of our review of collateral positions and historic loss ratios, management believes that the allowance for loan losses is adequate to cover all incurred and probable losses inherent in the portfolio at December 31, 2010.
 
Future reserves may be necessary if economic conditions or other circumstances differ substantially from the assumptions used in making the initial determinations.  Regulators, in reviewing the Bank’s loan portfolio, may require the Bank to increase its allowance for loan losses, thereby negatively affecting its financial condition and earnings.

 
9

 

The following table sets forth an analysis of the Bank’s aggregate allowance for loan losses for the periods indicated.

   
Year Ended December 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
   
(Dollars in thousands)
 
                               
Balance at beginning of period
  $ 4,005     $ 2,991     $ 2,677     $ 2,616     $ 2,835  
                                         
Charge-offs:
                                       
Real estate loans:
                                       
Commercial
    238       127             1       540  
Residential
    737       200       413       14       36  
Construction
    525       637             488        
Commercial loans
    398       212       503       538       16  
Consumer loans
    72       54       135       72       87  
Total charge-offs
    1,970       1,230       1,051       1,113       679  
                                         
Recoveries:
                                       
Real estate loans:
                                       
Residential
    16       1       9       1       9  
Commercial
                75             4  
Construction
    206       1                    
Commercial loans and leases
    4       47             2,772       108  
Consumer loans
    18       15       31       28       39  
Total recoveries
    244       64       115       2,801       160  
                                         
Net (charge-offs) recoveries
    (1,726 )     (1,166 )     (936 )     1,688       (519 )
                                         
Provision (credit) for loan losses
    1,933       2,180       1,250       (1,627 )     300  
                                         
Balance at end of period
  $ 4,212     $ 4,005     $ 2,991     $ 2,677     $ 2,616  
                                         
Ratio of net charge-offs (recoveries) to average loan outstanding during the period
    0.54 %     0.35 %     0.30 %     (0.62 )%     0.22 %
                                         
Allowance for loan losses to loans
    1.33 %     1.23 %     0.92 %     0.90 %     1.04 %

The Company had a provision for loan losses of $1.9 million for 2010 compared to a provision of $2.2 million in 2009.  Although net charge-offs for 2010 exceeded the total for 2009 and nonperforming loans at December 31, 2010 exceeded the total at December 31, 2009, the provision decreased in 2010.  The amount of provision necessary to maintain the allowance for loan losses as a percentage of total loans at a level required pursuant to the Company’s methodology was less in 2010, due to a larger provision in 2009 to increase the allowance for loan losses to an amount commensurate with the Company’s level of credit risk at that time.  The Company recorded a provision of $2.2 million in 2009, which increased  the allowance as a percentage of total loans by 31 basis points to 1.23% at December 31, 2009 from 0.92% at December 31, 2008.  The Company recorded a provision of $1.9 million in 2010, which increased the allowance as a percentage of total loans by 10 basis points from 1.23% at December 31, 2009 to 1.33% at December 31, 2010.  The 2010 provision was primarily due to a continuing elevated level of charge-offs and non-performing loans.  Total charge-offs were $2.0 million for 2010, which included partial charge-offs of the following credits, all in the Indianapolis market:  $338,000 related to a high-end single family home, $216,000 related to one investor’s four residential rental properties, $180,000 securing business assets of a flooring retailer, $160,000 related to a strip retail center and adjacent lots, and $158,000 related to a loan for a multi-use commercial building.  These charge-offs resulted from further deterioration of general economic conditions that occurred in 2010 as reflected by new appraisals or new valuations.  The 2009 provision was primarily a result of the increase in nonperforming loans due to increasing pressure of current economic conditions on credit quality and continued charge-offs.  Total charge-offs of $1.2 million for 2009 included the charge-off of $461,000 on one development loan for single-family building lots, a partial charge-off of $176,000 on a single-family residential subdivision development loan, charge-offs totaling $124,000 for two commercial loans, and a $189,000 charge-off on a credit secured by both commercial real estate and business assets.  See also “Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations – Loans – Credit Quality.”

 
10

 
 
The following table sets forth a breakdown of the Company’s aggregate allowance for loan losses by loan category at the dates indicated.  Management believes that the allowance can be allocated by category only on an approximate basis.  The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.
 
   
At December 31,
 
    
2010
   
2009
   
2008
 
    
Amount
   
Percent of
Loans in Each
Category to
Total Loans
   
Amount
   
Percent of
Loans in Each
Category to
Total Loans
   
Amount
   
Percent of
Loans in Each
Category to
Total Loans
 
   
(Dollars in thousands)
 
Real estate loans:
                                   
Commercial
  $ 639       29.79 %   $ 661       31.92 %   $ 760       30.13 %
Residential
    1,584       52.63       1,262       49.31       521       49.27  
Construction
    1,254       8.44       1,269       9.47       686       12.05  
Commercial loans and leases
    657       7.04       686       7.22       729       6.51  
Municipal loans
          0.86             0.85             0.68  
Consumer loans
    78       1.24       127       1.23       295       1.36  
Total allowance for loan losses
  $ 4,212       100.00 %   $ 4,005       100.00 %   $ 2,991       100.00 %

   
At December 31,
 
    
2007
   
2006
 
    
Amount
   
Percent of
Loans in Each
Category to
Total Loans
   
Amount
   
Percent of
Loans in Each
Category to
Total Loans
 
    
(Dollars in thousands)
 
Real estate loans:
                       
Commercial
  $ 550       27.88 %   $ 716       24.28 %
Residential
    348       46.86       245       49.43  
Construction
    999       16.36       1,524       18.91  
Commercial loans and leases
    571       6.25       75       4.90  
Municipal loans
          0.99              
Consumer loans
    209       1.66       56       2.28  
Total allowance for loan losses
  $ 2,677       100.00 %   $ 2,616       100.00 %

Investment Activities
 
Interest and dividends on investment securities, mortgage-backed securities, FHLB stock and other investments provide the second largest source of income for the Bank (after interest on loans), constituting 7.6% of the Bank’s total interest income (and dividends) for 2010.  The Bank maintains its liquid assets at levels believed adequate to meet requirements of normal banking activities and potential savings outflows.
 
As an Indiana commercial bank, the Bank is authorized to invest without limitation in direct or indirect obligations of the United States, direct obligations of a United States territory, and direct obligations of the state or a municipal corporation or taxing district in Indiana.  The Bank is also permitted to invest in bonds or other securities of a national mortgage association and the stock and obligations of a Federal Home Loan Bank.  Indiana commercial banks may also invest in collateralized mortgage obligations to the same extent as national banks.  An Indiana commercial bank may also purchase for its own account other investment securities under such limits as the Department of Financial Institutions prescribes by rule, provided that the commercial bank may not invest more than 10% of its equity capital in the investment securities of any one issuer.  An Indiana commercial bank may not invest in speculative bonds, notes or other indebtedness that are defined as securities and that are rated below the first four rating categories by a generally recognized rating service, or are in default.  An Indiana commercial bank may purchase an unrated security if it obtains financial information adequate to document the investment quality of the security.

 
11

 
 
The Bank’s investment portfolio consists primarily of mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac. The Bank has also invested in municipal securities and mutual funds and maintains interest-bearing deposits in other financial institutions (primarily the FHLB of Indianapolis and the Federal Reserve Bank of Chicago).  As a member of the FHLB System, the Bank is also required to hold stock in the FHLB of Indianapolis.  The Bank did not own any security of a single issuer that had an aggregate book value in excess of 10% of its equity at December 31, 2010.
 
The following table sets forth the market value of the Bank’s investments in federal agency obligations, mortgage-backed securities, mutual funds, and municipal securities at the dates indicated.  All of these investments were available for sale.
 
   
At December 31,
 
   
2010
   
2009
 
   
(In thousands)
 
             
Ginnie Mae and GSE mortgage-backed pass-through securities
  $ 29,436     $ 24,992  
Ginnie Mae collateralized mortgage obligations
    5,341       5,820  
Municipal securities
    2,164       3,431  
Mutual funds
    1,667       1,598  
Total investment
  $ 38,608     $ 35,841  

The following table sets forth information regarding maturity distribution and average yields for the Bank’s investment securities portfolio at December 31, 2010.

    
Within 1 Year
   
1-5 Years
   
5-10 Years
   
Over 10 Years
   
Total
 
   
Amount
   
Yield
   
Amount
   
Yield
   
Amount
   
Yield
   
Amount
   
Yield
   
Amount
   
Yield
 
   
(Dollars in thousands)
 
                                                       
Municipal securities (1)
              $ 337       5.00 %               $ 1,827       6.11 %   $ 2,164       5.94 %
Mutual funds (2)
  $ 1,667       3.05 %                                         1,667       3.05 %
 
(1) 
Presented on a tax equivalent basis using a tax rate of 34%.
(2)
Mutual funds have no stated maturity date.

The Bank’s mortgage-backed securities, Ginnie Mae and GSE pass-throughs, and Ginnie Mae collateralized mortgage obligations, include both fixed and adjustable-rate securities.  At December 31, 2010, the Bank’s mortgage-backed securities consisted of the following:

   
Carrying
   
Average
 
   
Amount
   
Yield
 
   
(Dollars in thousands)
 
       
Adjustable-rate:
           
Repricing in one year or less
  $ 2,679       2.21 %
Repricing in more than one year
           
                 
Fixed-rate:
               
Maturing in five years or less
    13,660       2.27 %
Maturing in five to ten years
    15,087       3.57 %
Maturing in more than ten years
    3,351       4.11 %
Total
  $ 34,777       3.00 %

 
12

 
 
Sources of Funds
 
General.  Checking and savings accounts, certificates of deposit and other types of deposits are an important source of the Bank’s funds for use in lending and for other general business purposes.  In addition to deposit accounts, the Bank derives funds from loan repayments, loan sales, borrowings and operations.  The availability of funds from loan sales and repayments is influenced by general interest rates and other market conditions.  Borrowings may be used on a short-term basis to compensate for reductions in deposits or deposit inflows at less than projected levels and may be used on a longer-term basis to support expanded lending activities.
 
Deposits.  The Bank attracts both short-term and long-term retail deposits from the general public by offering a wide assortment of deposit accounts and interest rates.  The Bank offers regular savings accounts, interest-bearing (NOW) and noninterest-bearing checking accounts, money market accounts, fixed interest rate certificates with varying maturities and negotiated rate jumbo certificates with various maturities.  The Bank also offers tax-deferred individual retirement, Keogh retirement and simplified employer plan retirement accounts.
 
As of December 31, 2010, approximately 48.9%, or $165.2 million, of the Bank’s aggregate deposits consisted of various savings and demand deposit accounts from which customers are permitted to withdraw funds at any time without penalty.
 
Interest earned on statement accounts is paid from the date of deposit to the date of withdrawal and compounded semi-annually for the Bank.  Interest earned on NOW and money market deposit accounts is paid from the date of deposit to the date of withdrawal and compounded and credited monthly.  Management establishes the interest rate on these accounts weekly.
 
The Bank also makes available to its depositors a number of certificates of deposit with various terms and interest rates to be competitive in its market area.  These certificates have minimum deposit requirements as well.
 
In addition to retail deposits, the Bank may obtain certificates of deposit from the brokered market.  The Bank held $10.4 million of brokered certificates with a weighted average cost of 0.74% at December 31, 2010 and none at December 31, 2009.
 
The following table sets forth the change in dollar amount of deposits in the various types of deposit accounts offered by the Bank between the dates indicated.
 
               
Increase
 
   
Balance at
   
Balance at
   
(Decrease)
 
   
December 31,
   
December 31,
   
from Prior
 
   
2010
   
2009
   
Year
 
   
(Dollars in thousands)
       
       
Noninterest-bearing deposits
  $ 34,769       10.29 %   $ 29,531       8.73 %   $ 5,238       17.74 %
NOW deposits
    77,012       22.78       74,851       22.12       2,161       2.89  
Money market deposits
    24,551       7.26       26,584       7.85       (2,033 )     (7.65 )
Savings deposits
    28,836       8.53       24,522       7.25       4,314       17.59  
Certificate accounts:
                                               
Certificates of $100,000 and more
    44,481       13.16       52,515       15.52       (8,034 )     15.30  
Fixed-rate certificates:
                                               
12 months or less
    17,882       5.29       27,343       8.08       (9,461 )     (34.60 )
13-24 months
    60,387       17.87       63,324       18.72       (2,937 )     (4.64 )
25-36 months
    3,403       1.01       10,297       3.04       (6,894 )     (66.95 )
37 months or greater
    35,715       10.57       28,798       8.51       6,917       24.02  
Brokered certificates
    10,363       3.07                   10,363        
Variable-rate certificates:
                                               
18 months
    579       0.17       616       0.18       (37 )     (6.01 )
Total
  $ 337,978       100.00 %   $ 338,381       100.00 %   $ (403 )     (0.12 )%

 
13

 
 
The variety of deposit accounts offered by the Bank has permitted it to be competitive in obtaining funds and has allowed it to respond with flexibility to, but not eliminate, disintermediation (the flow of funds away from depository institutions such as savings institutions into direct investment vehicles such as government and corporate securities).  In addition, the Bank has become increasingly subject to short-term fluctuation in deposit flows, as customers have become more interest rate conscious.  The ability of the Bank to attract and maintain deposits and its costs of funds have been, and will continue to be, significantly affected by money market conditions.  The Bank currently offers a variety of deposit products, including noninterest-bearing and interest-bearing NOW accounts, savings accounts, money market deposit accounts (“MMDA”) and certificates of deposit ranging in terms from three months to seven years.
 
The following table sets forth the Bank’s average aggregate balances and interest rates.  Average balances in 2010, 2009 and 2008 are calculated from actual daily balances.
 
   
For the Years Ended December 31,
 
    
2010
   
2009
   
2008
 
          
Average
         
Average
         
Average
 
    
Average
   
Rate
   
Average
   
Rate
   
Average
   
Rate
 
    
Balance
   
Paid
   
Balance
   
Paid
   
Balance
   
Paid
 
    
(Dollars in thousands)
 
                                      
NOW deposits
  $ 73,598       0.47 %   $ 79,064       0.82 %   $ 62,438       1.43 %
Money market deposits
    25,698       0.48       29,259       0.74       30,951       1.82  
Savings deposits
    26,810       0.10       23,983       0.13       22,048       0.25  
Time deposits
    173,889       2.12       194,046       2.84       179,357       3.63  
Total interest-bearing deposits
    299,995       1.40       326,352       1.96       294,794       2.72  
Noninterest-bearing demand and savings deposits
    32,892               27,235               23,329          
Total deposits
  $ 332,887             $ 353,587             $ 318,123          

The following table sets forth the aggregate time deposits in the Bank classified by rates as of the dates indicated.

   
At December 31,
 
   
2010
   
2009
   
2008
 
   
(In thousands)
 
                   
Less than 2.00%
  $ 113,193     $ 76,024     $ 15,071  
2.00% - 3.99
    51,774       94,919       136,408  
4.00% - 5.99
    7,839       11,935       40,885  
6.00% - 7.99
    4       15       40  
    $ 172,810     $ 182,893     $ 192,404  

 
14

 
 
The following table sets forth the amount and maturities of the Bank’s time deposits at December 31, 2010.
 
   
Amount Due
 
    
Less Than
               
More Than
       
    
One Year
   
1-2 Years
   
2-3 Years
   
3 Years
   
Total
 
    
(In thousands)
 
                                
Less than 1.00%
  $ 35,768     $ 4,882     $     $     $ 40,650  
1.00% - 1.99%
    45,312       24,028       2,349       854       72,543  
2.00% - 3.99
    15,491       8,417       4,142       23,724       51,774  
4.00% - 5.99
    2,255       3,883       760       941       7,839  
6.00% - 7.99
    4                         4  
    $ 98,830     $ 41,210     $ 7,251     $ 25,519     $ 172,810  

The following table indicates the amount of the Bank’s certificates of deposit of $100,000 or more by time remaining until maturity at December 31, 2010.
 
Maturity Period
 
Brokered Certificates
of Deposit
   
Other Certificates of
$100,00 or more
   
Total Certificates of
$100,000 or more
 
         
(In thousands)
       
                   
Three months or less
  $     $ 4,613     $ 4,613  
Over three through six months
          5,247       5,247  
Over six through twelve months
    5,242       15,129       20,371  
Over twelve months
    5,121       19,492       24,613  
Total
  $ 10,363     $ 44,481     $ 54,844  

Borrowings.  Deposits are the primary sources of funds for the Bank’s lending and investment activities and for its general business purposes.  The Bank also uses advances from the FHLB to supplement its supply of lendable funds, to meet deposit withdrawal requirements and to extend the terms of its liabilities.  FHLB advances are typically secured by the Bank’s FHLB stock, a portion of first mortgage loans, investment securities and overnight deposits.  At December 31, 2010, the Bank had $34.0 million of FHLB advances outstanding.
 
The Federal Home Loan Banks function as central reserve banks providing credit for member financial institutions.  As a member, the Bank is required to own capital stock in the FHLB and is authorized to apply for advances on the security of such stock and certain of its home mortgages and other assets (principally, securities which are obligations of, or guaranteed by, the United States) provided certain standards related to creditworthiness have been met.  Borrowings decreased $12.4 million in 2010, as the Bank used $10.4 million in brokered certificates of deposit an alternative wholesale funding source, and also due to the restructuring strategy initiated in the second half of 2009 and continued in 2010 that resulted in a further reduction in the size of the Bank’s balance sheet.
 
On March 8, 2006, the Company formed Ameriana Capital Trust I (“Trust I”), a wholly owned statutory business trust.  The Company purchased 100% of the common stock of Trust I for $310,000.  Trust I issued $10.0 million in trust preferred securities and those proceeds combined with the $310,000 in proceeds of the common stock were used to purchase $10.3 million in subordinated debentures issued by the Company.  The subordinated debentures are unconditionally guaranteed by the Company and are the sole asset of Trust I.  The subordinated debentures bear a rate equal to the average of 6.71% and the three-month London Interbank Offered Rate (“LIBOR”) plus 150 basis points for the first five years following the offering.  After the first five years, the subordinated debentures will bear a rate equal to 150 basis points over the three-month LIBOR rate.  At December 31, 2010, the debentures had an interest rate of 4.26%.

 
15

 
 
The following table sets forth certain information regarding borrowings at the dates and for the periods indicated.
 
   
At or for the Year
 
   
Year Ended December 31,
 
   
2010
   
2009
   
2008
 
   
(Dollars in thousands)
 
                   
Amounts outstanding at end of period:
                 
FHLB advances
  $ 34,000     $ 46,375     $ 79,925  
Subordinated debentures
    10,310       10,310       10,310  
Repurchase agreement
    7,500       7,500       7,500  
Weighted average rate paid on:
                       
FHLB advances at end of period
    3.70 %     3.84 %     4.05 %
Subordinated debentures
    4.26       4.23       5.10  
Repurchase agreement
    4.42       4.42       4.42  
Maximum amount of borrowings outstanding at any month end:
                       
FHLB advances
  $ 46,375     $ 79,925     $ 89,925  
Subordinated debentures
    10,310       10,310       10,310  
Repurchase agreement
    7,500       7,500       7,500  
Approximate average amounts outstanding during period:
                       
FHLB advances
  $ 41,779     $ 61,244     $ 76,901  
Subordinated debentures
    10,310       10,310       10,310  
Repurchase agreement
    7,500       7,500       2,062  
Approximate weighted average rate during the period paid on:
                       
FHLB advances
    3.85 %     3.97 %     3.99 %
Subordinated debentures
    4.32       4.64       5.83  
Repurchase agreement
    4.42       4.42       4.42  

 
16

 
 
Average Balance Sheet
 
The following table sets forth certain information relating to the Bank’s average yield on assets and average cost of liabilities for the periods indicated.  Such yields and costs are derived by dividing income or expenses by the average balance of assets or liabilities, respectively, for the periods presented.  Interest/dividends from tax-exempt municipal loans and tax-exempt municipal securities have been increased by $100,000, $256,000, and $537,000 for 2010, 2009 and 2008, respectively, from the amount listed on the income statement to reflect interest income on a tax-equivalent basis.  Average balances for 2010, 2009 and 2008 are calculated from actual daily balances.
 
    
Years Ended December 31,
 
    
2010
   
2009
   
2008
 
    
Average
Balance
   
Interest/
Dividends
   
Average
Yield/
Cost
   
Average
Balance
   
Interest
Dividends
   
Average
Yield/
Cost
   
Average
Balance
   
Interest/
Dividends
   
Average
Yield/
Cost
 
    
(Dollars in thousands)
 
Interest-earning assets:
                                                     
Loan portfolio (1)
  $ 317,226     $ 18,519       5.84 %   $ 335,522     $ 19,434       5.79 %   $ 311,260     $ 19,823       6.37 %
Mortgage-backed securities
    31,604       1,210       3.83       48,078       2,258       4.70       44,808       2,260       5.04  
Other securities:
                                                                       
Taxable
    1,907       70       3.67       3,208       133       4.15       5,391       292       5.42  
Tax-exempt (2)
    2,604       149       5.72       9,765       575       5.89       22,444       1,270       5.66  
Short-term investments and other interest-earning assets (3)
    18,910       137       0.72       23,622       197       0.83       16,206       473       2.92  
Total interest-earning assets
    372,251       20,085       5.40       420,195       22,597       5.38       400,109       24,118       6.03  
Noninterest-earning assets
    60,702                       54,627                       49,521                  
Total assets
  $ 432,953                     $ 474,822                     $ 449,630                  
                                                                         
Interest-bearing liabilities:
                                                                       
Demand deposits and savings
  $ 126,106       498       0.39     $ 132,306       894       0.68     $ 115,437       1,512       1.31  
Certificate of deposits
    173,889       3,687       2.12       194,046       5,512       2.84       179,357       6,517       3.63  
Total interest-bearing deposits
    299,995       4,185       1.40       326,352       6,406       1.96       294,794       8,029       2.72  
Borrowings
    59,589       2,389       4.01       79,054       3,246       4.11       89,273       3,759       4.21  
Total interest-bearing liabilities
    359,584       6,574       1.83       405,406       9,652       2.38       384,067       11,788       3.07  
Noninterest-bearing liabilities
    40,126                       35,946                       32,304                  
Total liabilities
    399,710                       441,352                       416,371                  
Stockholders’ equity
    33,243                       33,470                       33,259                  
Total liabilities and stockholders’ equity
  $ 432,953                     $ 474,822                     $ 449,630                  
Net interest income
          $ 13,511                     $ 12,945                     $ 12,330          
Interest rate spread
                    3.57 %                     3.00 %                     2.96 %
Net tax-equivalent yield (4)
                    3.63 %                     3.08 %                     3.08 %
Ratio of average interest-earning assets to to average interest-bearing liabilities
                    103.52 %                     103.65 %                     104.18 %

(1)
Interest and average yield presented on a tax-equivalent basis using a tax-effective tax rate of 32% for municipal bank qualified tax-exempt loans subject to the Tax Equity and Fiscal Responsibility Act of 1982 penalty.  Nonaccrual loans are included in average loans outstanding
(2)
Interest and average yield presented on a tax-equivalent basis using a tax rate of 34%.
(3)
Includes interest-bearing deposits in other financial institutions, mutual funds, tr