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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X Annual report under section 13 or 15(d) of the Securities Exchange Act
- --- of 1934 [Fee Required] for the fiscal year ended 12/31/02
Transition report under section 13 or 15(d) of the Securities Exchange
- --- Act of 1934 [No Fee Required] for the transition period from
______________ to _______________
Commission file number 000-21671
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The National Bank of Indianapolis Corporation
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(Exact name of registrant as specified in its charter)
Indiana 35-1887991
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
107 North Pennsylvania Street, Suite 700, Indianapolis, IN 46204
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (317) 261-9000
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Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None
- -------------------------------- ------------------------------------------
Securities to be registered under Section 12(g) of the Act:
Common Stock
- --------------------------------------------------------------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 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
--- ---
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy of
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices such stock, as of a specified date within the past 60 days.
(See definition of affiliate in Rule 12b-2 of the Exchange Act). $45,941,310
Note.--If determining whether a person is an affiliate will involve an
unreasonable of effort and expense, the issuer may calculate the aggregate
market value of the common equity held by non-affiliates on the basis of
reasonable assumptions, if the assumptions are stated.
(Applicable only to corporate registrants) State the number of shares
outstanding of each of the issuer's classes of common equity, as of the latest
practicable date. 2,443,024 @ 3/25/03
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Documents incorporated by reference. None
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Transitional Small Business Disclosure Format (Check one): Yes No X
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Form 10-K Cross Reference Index
Item Disclosure Required Page
Cautionary Statement Regarding Forward-Looking Information 1
PART I
Item 1. Business 2
Item 2. Property 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder 12
Matters
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial Condition 14
And Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 33
Item 7B. Report of Management on Internal Control 35
Item 8. Financial Statements and Supplementary Data 36
Item 9. Changes In and Disagreements With Accountants on Accounting 64
and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant 64
Item 11. Executive Compensation 67
Item 12. Security Ownership and Certain Beneficial Owners and Management 76
Item 13. Certain Relationships and Related Transactions 80
Item 14. Controls and Procedures 81
Part IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 82
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This discussion contains certain forward-looking statements that are
subject to risks and uncertainties and includes information about possible or
assumed future results of operations. Many possible events or factors could
affect our future financial results and performance. This could cause results or
performance to differ materially from those expressed in our forward-looking
statements. Words such as "expects," "anticipates," "believes," "estimates,"
variations of such words and other similar expressions are intended to identify
such forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions which are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in, or implied by, such
forward-looking statements. Readers should not rely solely on the
forward-looking statements and should consider all uncertainties and risks
discussed throughout this discussion. These statements are representative only
on the date hereof.
The possible events or factors include the following: our loan
growth is dependent on economic conditions, as well as various discretionary
factors, such as decisions to sell or purchase certain loans or loan portfolios;
syndications or participations of loans; retention of residential mortgage
loans; and the management of borrower, industry, product and geographic
concentrations and the mix of the loan portfolio. The rate of charge-offs and
provision expense can be affected by local, regional and international economic
and market conditions, concentrations of borrowers, industries, products and
geographic locations, the mix of the loan portfolio and management's judgments
regarding the collectibility of loans. Liquidity requirements may change as a
result of fluctuations in assets and liabilities and off-balance sheet
exposures, which will impact our capital and debt financing needs and the mix of
funding sources. Decisions to purchase, hold or sell securities are also
dependent on liquidity requirements and market volatility, as well as on- and
off-balance sheet positions. Factors that may impact interest rate risk include
local, regional and international economic conditions, levels, mix, maturities,
yields or rates of assets and liabilities, utilization and effectiveness of
interest rate contracts and the wholesale and retail funding sources of the
Bank. We are also exposed to the potential of losses arising from adverse
changes in market rates and prices which can adversely impact the value of
financial products, including securities, loans, deposits, debt and derivative
financial instruments, such as futures, forwards, swaps, options and other
financial instruments with similar characteristics.
In addition, the banking industry in general is subject to various
monetary and fiscal policies and regulations, which include those determined by
the Federal Reserve Board, the Office of the Comptroller of the Currency
("OCC"), the Federal Deposit Insurance Corporation ("FDIC"), state regulators
and the Office of Thrift Supervision, whose policies and regulations could
affect our results. Other factors that may cause actual results to differ from
the forward-looking statements include the following: competition with other
local, regional and international banks, thrifts, credit unions and other
non-bank financial institutions, such as investment banking firms, investment
advisory firms, brokerage firms, investment companies and insurance companies,
as well as other entities which offer financial services, located both within
and outside the United States and through alternative delivery channels such as
the World Wide Web; interest rate, market and monetary fluctuations; inflation;
market volatility; general economic conditions and economic conditions in the
geographic regions and industries in which we operate; introduction and
acceptance of new banking-related products, services and enhancements; fee
pricing strategies, mergers and acquisitions and our ability to manage these and
other risks.
1
PART I
Item 1. Business
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The Corporation. The National Bank of Indianapolis Corporation (the
"Corporation") was formed 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 entitled "The National Bank of
Indianapolis" (the "Bank") as a wholly-owned subsidiary.
The Bank was officially chartered by the OCC on December 8, 1993 and
opened for business to the public on December 21, 1993. The Bank's deposits are
insured by the FDIC. The Bank currently conducts its business through its
downtown headquarters located at 107 North Pennsylvania Street in Indianapolis,
at neighborhood bank offices located at 84th Street and Ditch Road in
northwestern Marion County and 82nd Street and Bash Road in northeastern Marion
County, in the Chamber of Commerce Building and AUL Office Complex in downtown
Indianapolis, at 49th Street and North Pennsylvania Street in northern Marion
County, Carmel Drive in Hamilton County, and Smith Valley Road and S.R. 135 in
Johnson 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. In February of 1994, the Bank received full trust powers.
Management has sought to position the Bank to capitalize on the
customer disruption, dissatisfaction, and turn-over which it believes has
resulted from the acquisition of the three largest commercial banks located in
Indianapolis by out-of-state holding companies. On December 31, 2002, the
Corporation had consolidated total assets of $727 million and total deposits of
$544 million.
The key ingredients in the initial growth of the Bank have been an
aggressive 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 small group
of customers, which are primarily corporations with annual sales under $30
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 checking accounts,
NOW accounts, savings and other kinds of deposits of various types (ranging from
daily money market accounts to longer term certificates of deposit). 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. In addition, the Bank offers
full trust services. The Bank also has formed arrangements with outside
providers of tax and financial planning services to better accommodate its
customers.
The Bank's growth in deposits is attributable in part to the efforts
of its staff who provide personal banking services to the Bank's customers. In
addition, the Bank has emphasized paying competitive interest rates on deposit
products. Finally, the Bank has offered
2
savings and certificate of deposit products with competitive rates to larger
depositors in an effort to minimize the operating costs of obtaining these
deposits. Lending strategies focus primarily on commercial loans to small and
medium size businesses as well as personal loans to executives and
professionals.
In the residential mortgage lending area, the Bank offers regular,
jumbo and CRA mortgage products. The Bank has developed a secondary market for
its residential mortgage loans. 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 Market. The Bank derives a substantial proportion of its
business from the Indianapolis Metropolitan Statistical Area ("MSA), Indiana
area. Indianapolis has been ranked by a number of national publications as a
"top" Midwestern city.
Competition. The Bank's service area is highly competitive. There
are numerous financial institutions operating in the Marion County marketplace.
In addition to competition from commercial banks, 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. The Bank competes in this marketplace primarily on the
basis of highly personalized service, responsive decision making, and
competitive pricing.
Employees. The Bank has 176 employees, of which 167 are full-time
employees. The Bank has employed persons with substantial experience in the
Indianapolis banking market. The average banking experience level for all Bank
employees is in excess of 12 years.
Lending Activity. The Bank's lending strategy emphasizes a high
quality, well-diversified loan portfolio. The Bank's principal lending
categories are commercial, 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, its industry, current and projected economic conditions and other
factors. Credit analysis involves 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.
The Bank requires loan applications and personal financial
statements from its personal borrowers on loans that the Bank originates. Loan
officers complete a debt to income analysis 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 $250,000. Any loan in excess of a lending
officer's lending authority, up to $1,500,000, must receive the approval of the
Chief Executive Officer ("CEO"), Chief Lending Officer ("CLO"), or Senior Vice
President - Corporate Banking ("SVP"). Loans in excess of $1,500,000 but less
than $4,000,000 must be approved by the Loan Committee prior to the Bank making
such loan. The Board of Directors Loan Policy Committee is not required to
approve loans unless they are above $4,000,000 or are loans to directors or
executive officers. All loans are assigned a numerical rating based on
creditworthiness and are monitored for improvement or deterioration.
3
Loans are made primarily in the Bank's designated market area.
Bank Holding Company Regulation. The Corporation is registered as a
bank holding company and is subject to the regulations of the Board of Governors
of the Federal Reserve System ("Federal Reserve") under the Bank Holding Company
Act of 1956, as amended ("BHCA"). Bank holding companies are required to file
periodic reports with and are subject to periodic examination by the Federal
Reserve. The Federal Reserve has the authority to issue cease-and-desist orders
against a bank holding company and nonbank subsidiaries if it determines that
activities of such entities represent an unsafe and unsound practice or a
violation of law.
The Corporation is prohibited by the BHCA from acquiring direct or
indirect control of more than 5% of the outstanding shares of any class of
voting stock or substantially all of the assets of any bank or merging or
consolidating with another bank holding company without prior approval of the
Federal Reserve. In addition, the Corporation may not acquire direct or indirect
control of a savings association without the prior approval of the Federal
Reserve and the Office of Thrift Supervision. Additionally, the Corporation is
prohibited by the BHCA from engaging in or from acquiring ownership or control
of more than 5% of the outstanding shares of any class of voting stock of any
company engaged in a nonbanking business unless such business is determined by
the Federal Reserve to be so closely related to banking as to be a proper
incident thereto. The BHCA does not place territorial restrictions on the
activities of such nonbanking-related activities.
The Federal Reserve has issued regulations under the BHCA requiring
a bank holding company to serve as a source of financial and managerial strength
to its subsidiary banks. It is the policy of the Federal Reserve that, pursuant
to this requirement, a bank holding company should stand ready to use its
resources to provide adequate capital funds to its subsidiary banks during
periods of financial stress or adversity. Additionally, under the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), a bank holding
company is required to guarantee the compliance of any insured depository
institution subsidiary that may become "undercapitalized" (as defined in the
statute) with the terms of any capital restoration plan filed by such subsidiary
with its appropriate federal banking agency, up to the lesser of (i) an amount
equal to 5% of the institution's total assets at the time the institution became
undercapitalized, or (ii) the amount that is necessary (or would have been
necessary) to bring the institution into compliance with all applicable capital
standards as of the time the institution fails to comply with such capital
restoration plan. As a result of these policies, the Corporation may be required
to commit resources to its subsidiary bank in circumstances where it might not
otherwise do so.
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 $150 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,
noncumulative 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, 2002 are shown below:
4
Tier 1 Capital to Risk-Weighted Assets 10.0%
Total Risk Based Capital to Risk-Weighted Assets 11.3%
Tier 1 Leverage Ratio 7.5%
Bank Regulation. The Bank is 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 deposits of the Bank are
insured by the Bank Insurance Fund ("BIF") administered by the FDIC and are
subject to the FDIC's rules and regulations respecting the insurance of
deposits. See "--Deposit Insurance."
Both federal and state law extensively regulate various aspects of
the banking business such as reserve requirements, truth-in-lending and
truth-in-savings disclosure, equal credit opportunity, fair credit reporting,
trading in securities and other aspects of banking operations. Current federal
law also requires banks, among other things to make deposited funds available
within specified time periods.
Under federal and Indiana law, the Bank may establish an additional
banking location anywhere in Indiana. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 allows bank holding companies to acquire banks
anywhere in the United States subject to certain state restrictions, and permits
an insured bank to merge with an insured bank in another state without regard to
whether such merger is prohibited by state law. Additionally, an out-of-state
bank may acquire the branches of an insured bank in another state without
acquiring the entire bank; provided, however, that the law of the state where
the branch is located permits such an acquisition. Bank holding companies may
merge existing bank subsidiaries located in different states into one bank.
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.
An insured bank subsidiary may act as an agent for an affiliated
bank or thrift in offering limited banking services (receive deposits, renew
time deposits, close loans, service loans and receive payments on loan
obligations) both within the same state and across state lines.
Dividend Limitations. Under Federal Reserve supervisory policy, a
bank holding company generally should not maintain its existing rate of cash
dividends on common shares unless (i) the organization's net income available to
common shareholders over the past year has been sufficient to fully fund the
dividends, and (ii) the prospective rate of earnings retention appears
consistent with the organization's capital needs, asset quality, and overall
financial condition. The FDIC also has authority under the Financial
Institutions Supervisory Act to prohibit a bank from paying dividends if, in its
opinion, the payment of dividends would constitute an unsafe or unsound practice
in light of the financial condition of the bank. The Corporation's Board of
Directors has not yet declared any dividends and does not anticipate that it
will do so in the immediate future. In addition, there can be no assurance as to
when, if ever, the Corporation will declare and pay any cash dividends.
Under federal law, the Bank must comply with various restrictions
applicable to its ability to pay dividends. 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.
5
The most stringent capital requirement affecting the Bank, however,
are those established by the prompt corrective action provisions of FDICIA,
which are discussed below. At December 31, 2002, the Bank's total risk-based
capital, Tier 1 risk-based capital and leverage capital exceeded the amounts
required to be designated "well capitalized."
Lending Limits. Under federal law, the total loans and extension of
credit by a national bank to a borrower outstanding at one time and not fully
secured may not exceed 15% of such bank's capital and unimpaired surplus. An
additional amount up to 10% of the bank's capital and unimpaired surplus may be
loaned to the same borrower if such loan is fully secured by readily marketable
collateral having a market value, as determined by reliable and continuously
available price quotations, at least equal to the amount of such additional
loans outstanding. If a loan is secured by United States obligations, such as
treasury bills, bonds, or notes guaranteed by the federal government, it is not
subject to the bank's legal lending limit.
Affiliates. The Bank is subject to Sections 22(h), 23A and 23B of
the Federal Reserve Act, which restrict financial transactions between banks and
affiliated companies limits credit transactions between a bank and its executive
officers and its affiliates, prescribes terms and conditions for bank affiliate
transactions deemed to be consistent with safe and sound banking practices, and
restricts the types of collateral security permitted in connection with a bank's
extension of credit to an affiliate.
Prompt Corrective Action. The FDIC has adopted regulations to
implement "prompt corrective action" with respect to banks which do not meet
minimum capital requirements. Among other things, the regulations define the
relevant capital measures for the five capital categories. An institution is
deemed to be "well capitalized" if it has a total risk-based capital ratio of
10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a
leverage ratio of 5% or greater, and is not subject to a regulatory order,
agreement or directive to meet and maintain a specific capital level for any
capital measure. An institution is deemed to be "adequately capitalized" if it
has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based
capital ratio of 4% or greater, and generally a leverage ratio 4% or greater. An
institution is deemed to be "undercapitalized" if it has a total risk-based
capital ratio of less than 8%, a Tier 1 risk-based capital ratio of less than
4%, or generally a leverage ratio of less than 4%. An institution is deemed to
be "significantly undercapitalized" if it has a total risk-based capital ratio
of less than 6%, a Tier 1 risk-based capital ratio of less than 3%, or a
leverage ratio of less than 3%. An institution is deemed to be "critically
undercapitalized" if it has a ratio of tangible equity (as defined in the
regulations) to total assets that is equal to or less than 2%.
"Undercapitalized" banks are subject to growth limitations and are
required to submit a capital restoration plan. A bank's compliance with such
plan is required to be guaranteed by any company that controls the
undercapitalized institution as described above. If an "undercapitalized" bank
fails to submit an acceptable plan, it is treated as if it is significantly
undercapitalized. "Significantly undercapitalized" banks are subject to one or
more of a number of requirements and restrictions, including an order by the
FDIC to sell sufficient voting stock to become adequately capitalized,
requirements to reduce total assets and case receipt of deposits from
correspondent banks, and restrictions on compensation of executive officers.
"Critically undercapitalized" institutions may not, beginning 60 days after
becoming "critically undercapitalized", make any payment of principal or
interest on certain subordinated debt or extend credit for a highly leveraged
transaction or enter into any transaction outside the ordinary course of
business. In addition, "critically undercapitalized" institutions are subject to
appointment of a receiver or conservator.
Safety and Soundness Guidelines. 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
6
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.
Deposit Insurance. The Bank's deposits are insured up to $100,000
per insured account by the BIF. As an institution whose deposits are insured by
the BIF, the Bank is not currently required to pay deposit insurance premiums to
BIF but was required to pay $22,119 for the Financing Corporation (FICO)
assessment for the first quarter in 2003. The Bank's deposit insurance
assessments may increase depending upon the risk category and subcategory, if
any, to which the Bank is assigned by the FDIC. Any increase in insurance
assessments could have an adverse effect on the Bank's earnings.
Bank Capital Requirements. 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 100 to 200 basis points.
Certain regulatory capital ratios under the OCC's risk-based capital
guidelines for the Bank at December 31, 2002 are shown below:
Tier 1 Capital to Risk-Weighted Assets.................... 8.9%
Total Risk-Based Capital to Risk-Weighted Assets.......... 10.1%
Tier 1 Leverage Ratio..................................... 6.6%
In 1996, the FDIC, along with the OCC and the Federal Reserve,
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.
7
The OCC, the Federal Reserve and the FDIC have issued final
regulations further revising their 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.
8
Financial Modernization Legislation: The Gramm Leach Bliley Act.
Effective as of March 11, 2000, the Gramm-Leach-Bliley Act:
(i) allows bank holding companies meeting management,
capital and CRA standards to engage in a substantially
broader range of non-banking activities then was
previously permissible, including insurance underwriting
and agency, and underwriting and making merchant banking
investments in commercial and financial companies;
(ii) allows insurers and other financial services companies
to acquire banks and thrifts;
(iii) removes various restrictions that previously applied to
bank holding company ownership of securities firms and
mutual fund advisory companies; and
(iv) establishes the overall regulatory structure applicable
to bank holding companies that also engage in insurance
and securities operations.
In order for a bank holding company to engage in the broader range
of activities that are permitted by the Gramm-Leach-Bliley Act, (1) all of its
depository institutions must be well capitalized and well managed and (2) it
must file a declaration with the Federal Reserve Board that it elects to be a
"financial holding company". In addition, to commence any new activity permitted
by the Gramm-Leach-Bliley Act, each insured depository institution of the
financial holding company must have received at least a "satisfactory" rating in
its most recent examination under the Community Reinvestment Act.
The Gramm-Leach-Bliley Act also modified laws related to financial
privacy. The new financial privacy provisions generally prohibit financial
institutions, including the Bank, from disclosing nonpublic personal financial
information to third parties unless customers have the opportunity to "opt out"
of the disclosure.
The Company does not believe that the Gramm-Leach-Bliley Act will
have any immediate, material impact on its operations. However, to the extent
that the Gramm-Leach-Bliley Act permits commercial banks, securities firms and
insurance companies to affiliate, the Act may have the effect of increasing the
amount of competition that the Company faces from other companies offering
financial products, many of which may have substantially more financial
resources.
Additional Matters.
------------------
Sarbanes-Oxley Act. On July 30, 2002, President George W. Bush signed into
law the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"). The
Sarbanes-Oxley Act implements a broad range of corporate governance and
accounting measures for public companies designed to promote honesty and
transparency in corporate America and better protect investors from the type of
corporate and accounting scandals that have occurred during the past year. The
Sarbanes-Oxley Act's principal legislation includes:
o the creation of an independent accounting oversight board;
o auditor independence provisions which restrict non-audit services
that accountants may provide to their audit clients;
o additional corporate governance and responsibility measures,
including the requirement that the chief executive officer and chief
financial officer certify financial statements;
o the forfeiture of bonuses or other incentive-based compensation and
profits from the sale of an issuer's securities by directors and
senior officers in the twelve month period following initial
publication of any financial statements that later require
restatement;
o an increase the oversight of, and enhancement of certain
requirements relating to audit committees of public companies and
how they interact with the company's independent auditors;
9
o requirement that audit committee members must be independent and are
absolutely barred from accepting consulting, advisory or other
compensatory fees from the issuer;
o requirement that companies disclose whether at least one member of
the committee is a "financial expert" (as such term will be defined
by the Securities and Exchange Commission) and if not, why not;
o expanded disclosure requirements for corporate insiders, including
accelerated reporting of stock transactions by insiders and a
prohibition on insider trading during pension blackout periods;
o a prohibition on personal loans to directors and officers, except
certain loans made by insured financial institutions;
o disclosure of a code of ethics and filing a Form 8-K for a change or
waiver of such code;
o mandatory disclosure by analysts of potential conflicts of interest;
and
o a range of enhanced penalties for fraud and other violations.
Although we anticipate that we will incur additional expense in complying
with the provisions of the Sarbanes-Oxley Act and the resulting regulations,
management does not expect that such compliance will have a material impact on
our results of operations or financial condition.
USA Patriot Act. On October 26, 2001, President George W. Bush signed the
United and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (the "USA Patriot Act"). 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, suspicious activities and
currency transaction reporting; and currency crimes.
In addition to the matters discussed above, the Corporation and the Bank
are subject to additional regulation of their activities, including a variety of
consumer protection regulations affecting their lending, deposit and collection
activities and regulations affecting secondary mortgage market activities.
The earnings of financial institutions, including the Corporation and the
Bank, are also affected by general economic conditions and prevailing interest
rates, both domestic and foreign and by the monetary and fiscal policies of the
U.S. Government and its various agencies, particularly the Federal Reserve.
Additional legislation and administrative actions affecting the banking
industry may be considered by the United States Congress, the Indiana General
Assembly and various regulatory agencies, including those referred to above. It
cannot be predicted with certainty whether such legislation of administrative
action will be enacted or the extent to which the banking industry in general or
the Corporation and the Bank in particular would be affected thereby.
10
Item 2. Property
- -----------------
The Bank purchased the downtown office building which houses its
main office as well as the Corporation's main office at 107 North Pennsylvania
Street in December 1998. It was previously being leased from an affiliate of one
of the directors of the Corporation and the Bank.
The Bank opened its first neighborhood bank office in February 1995
at 84th and Ditch Road. The Bank also opened a neighborhood bank office at 82nd
and Bash Road on the northeast side of Indianapolis in December 1995. The Bank
owns the land and the premises for both of these offices. In March 1996, the
Bank opened an office in the Chamber of Commerce building at 320 N. Meridian
Street in the downtown Indianapolis area. The Bank leases the premises at this
banking office. In March 1998, the Bank opened an office at 4930 North
Pennsylvania Street and leases the premises at this banking office. In June
1999, the Bank opened an office in the AUL Office Complex located at One
American Square in the downtown Indianapolis area. The Bank leases the premises
at this banking center. In September 2000, the Bank opened an office at 650 East
Carmel Drive in Carmel. This office is located in Hamilton County which is north
of Indianapolis. The Bank leases the premises at this banking office. In July
1997, the Bank purchased a parcel of land in Greenwood for future business
development. In October 2001, the Bank opened an office at 1675 West Smith
Valley Road in Greenwood. The Bank leases the premises at this banking office.
The Bank has installed a remote ATM at the Indianapolis City Market,
University of Indianapolis, TGI Friday's at Keystone Crossing, and Meridian Mark
II Office Complex. These remote ATMs provide additional banking convenience for
the customers of the Bank, and generate an additional source of fee income for
the Bank.
Item 3. Legal Proceedings
- --------------------------
Neither the Corporation nor the Bank are involved in any pending
legal proceedings at this time, other than routine litigation incidental to its
business.
Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
None.
11
PART II
Item 5. Market Price for Registrant's Common Equity and Related Stockholder
Matters.
- ----------------------------------------------------------------------------
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. These are
occasional trades as a result of private negotiations not involving a broker or
a dealer. The table below lists the high and low prices per share of which
management is aware of during 2002 and 2001. 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 Company, these prices would
not necessarily reflect the prices which the shares would trade in an active
market.
Price per Share
---------------
Quarter High Low
------- ---- ---
2002 2001 2002 2001
First Quarter $25.50 $24.50 $25.50 $23.00
Second Quarter $27.75 $25.00 $27.00 $24.50
Third Quarter $28.00 $25.50 $28.00 $25.50
Fourth Quarter $29.00 $25.50 $28.50 $25.50
The Corporation had 647 shareholders on record as of December 31,
2002.
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.
12
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 (in
000's), except per share data.
Year Ended December 31
2002 2001 2000 1999 1998
--------------------------------------------------------
Consolidated Operating Data:
Interest income $ 35,095 $ 38,801 $ 35,319 $ 26,247 $ 21,052
Interest expense 14,061 20,953 19,786 14,355 12,367
Net interest income 21,034 17,848 15,533 11,892 8,685
Provision for loan losses 1,500 1,440 1,440 1,010 680
Net income after provision for loan losses 19,534 16,408 14,093 10,882 8,005
Other income 7,475 5,923 4,278 3,363 2,041
Non-interest expense 19,452 16,821 14,002 11,198 8,168
Income before income taxes 7,557 5,510 4,369 3,047 1,878
Applicable income taxes 3,000 2,140 1,719 1,217 198
Net income 4,557 3,370 2,650 1,830 1,680
Consolidated Balance Sheet Data (at end of period):
Total assets $726,514 $670,697 $533,767 $429,501 $358,600
Total investment securities 117,485 39,049 89,379 55,660 79,707
Total loans 528,911 452,060 361,602 311,478 227,848
Allowance for loan losses 7,227 5,987 4,701 3,393 2,626
Deposits 544,343 506,125 410,434 345,008 297,914
Shareholders' equity 41,247 28,470 24,660 21,636 19,355
Weighted average shares outstanding 2,289 1,917 1,908 1,889 1,868
Per Share Data:
Basic net income (loss) per common share (1) $ 1.99 $ 1.76 $ 1.39 $ 0.97 $ 0.90
Cash dividends declared 0 0 0 0 0
Book value (2) 16.89 14.48 12.60 11.09 10.14
Other Statistics and Operating Data:
Return on average assets 0.7% 0.5% 0.6% 0.5% 0.6%
Return on average equity 12.2% 12.7% 11.4% 8.9% 9.3%
Net interest margin (3) 3.2% 3.0% 3.5% 3.2% 3.0%
Average loans to average deposits 90.8% 90.8% 90.3% 83.4% 74.6%
Allowance for loan losses to loans at end of period 1.4% 1.3% 1.3% 1.1% 1.2%
Allowance for loan losses to non-performing loans . 223.8% 717.0% 518.8% 881.5% N/A
Non-performing loans to loans at end of period 0.6% 0.2% 0.3% 0.1% 0.0%
Net charge-offs to average loans 0.1% 0.0% 0.0% 0.1% 0.0%
Number of offices 8 8 7 6 5
Number of full and part-time employees 176 165 144 127 96
Number of Shareholders of Record 647 634 640 619 579
Capital Ratios:
Average shareholders' equity to average assets 5.4% 4.3% 4.8% 5.1% 5.9%
Equity to assets 5.7% 4.2% 4.6% 5.0% 5.4%
Total risk-based capital ratio (Bank only) 10.1% 10.6% 11.1% 10.2% 9.3%
(1) Based upon weighted average shares outstanding during the period.
(2) Based on Common Stock outstanding at the end of the period.
(3) Net interest income as a percentage of average interest-earning assets.
13
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, 2002, 2001 and 2000 and should be read in conjunction with
the Corporation's Consolidated Financial Statements and Notes thereto included
elsewhere herein.
Results of Operations
Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001 and
Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000
The Corporation's results of operations depend primarily on the
level of its net interest income, 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. The Corporation had net income of $4,556,836 for the year
ended December 31, 2002 compared to net income of $3,370,043 for the year ended
December 31, 2001 and net income of $2,649,749 for the year ended December 31,
2000. This change is primarily due to the growth of the Bank allowing for more
interest earning assets and net interest income compared to the same period
during 2001 and 2000, thereby offsetting more of the operating expenses.
The Bank experienced exceptional growth during the past three years.
Total assets increased $55,817,383 or 8.3% to $726,514,473 for the year ended
December 31, 2002 from $670,697,090 for the year ended December 31, 2001 and
total assets increased from $533,766,826 for the year ended December 31, 2000.
This growth is in part due to an increase in customers as a result of a local
merger of People's Bank with Fifth/Third in 1999 - 2000 and the addition of
experienced lenders to the staff.
Net Interest Income
- -------------------
Net interest income increased $3,185,177 or 17.8% to $21,033,723 for
the year ended December 31, 2002, from $17,848,546 for the year ended December
31, 2001 and from $15,532,985 for the year ended December 31, 2000. Total
interest income decreased $3,706,106 or 9.6% to $35,095,300 for the year ended
December 31, 2002 from $38,801,406 for the year ended December 31, 2001 and from
$35,318,668 for the year ended December 31, 2000. The decrease in interest
income is due to significant interest rate decreases by the Federal Reserve in
2001. Prime rate decreased 475 basis points during 2001. Prime rate was 4.25% at
December 31, 2002 compared to 4.75% at December 31, 2001 and 9.50% at December
31, 2000. Average total loans for the year ended December 31, 2002 was
approximately $484,000,000 compared to approximately $403,000,000 for the year
ended December 31, 2001 and approximately $331,000,000 for the year ended
December 31, 2000. The increase in the average total loans was offset by the
decrease in the interest rate. The loan portfolio produces the highest yield of
all earning assets. The increased loan growth is the result of new clients and
the addition of experienced lenders to the staff. Investment portfolio income
decreased $2,471,187 or 40.2% to $3,683,093 for the year ended December 31,
2002, as compared to $6,154,280 for the year ended December 31, 2001, as
compared to $5,718,341 for the year ended December 31, 2000. Interest on
investment securities decreased due to a lower interest rate environment in 2002
compared to previous years. The weighted average rate of the investment
portfolio was 2.82% for the year ended December 31, 2002 compared to 4.71% and
6.33% for the years ended December 31, 2001 and 2000, respectively. The average
investment securities portfolio was approximately $131,000,000 for the years
ended December 31, 2002 and December 31, 2001 compared to an average balance of
approximately $90,000,000 for the year ended December 31, 2000. Interest on
federal funds sold decreased $472,357 or 45.2% to $573,328 for the year ended
December 31, 2002 from $1,045,685 for the year ended December 31, 2001 and from
$1,355,758 for the year ended December 31, 2000. The decrease is due lower
interest rates in 2002 compared to previous years. The weighted average rate was
1.64% for the year ended December 31, 2002 compared to a weighted average rate
of 3.78% and 6.29% for the years
14
ended December 31, 2001 and 2000, respectively. The average balance for federal
funds sold was approximately $35,000,000 for the year ended December 31, 2002
compared to approximately $28,000,000 for the year ended December 31, 2001 and
approximately $22,000,000 for the year ended December 31, 2000. Interest on
reverse repurchase agreements decreased $557,320 or 69.4% to $245,442 for the
year ended December 31, 2002 from $802,762 for the year ended December 31, 2001
and $0 for the year ended December 31, 2000. The decrease is the result of a
decrease in the average of reverse repurchase agreements of approximately
$12,000,000 to $16,000,000 for the year ended December 31, 2002 from $28,000,000
for the year ended December 31, 2001 and $0 for the year ended December 31,
2000. The decrease is also due to lower interest rates in 2002 as compared to
2001. The weighted average rate was approximately 1.58% for the year ended
December 31, 2002 compared to a weighted average rate of 2.85% for the year
ended December 31, 2001.
Total interest expense decreased $6,891,283 or 32.9% to $14,061,577
for the year ended December 31, 2002, from $20,952,860 for the year ended
December 31, 2001 and from $19,785,683 for the year ended December 31, 2000.
This decrease is due to significant decreases in interest rates in 2001 and
additional decreases in 2002. During 2001, prime rate decreased 475 basis points
and decreased an additional 50 basis points during 2002. Total interest bearing
liabilities averaged approximately $548,000,000 for the year ended December 31,
2002 as compared to approximately $503,000,000 for the year ended December 31,
2001 and approximately $378,000,000 for the year ended December 31, 2000. The
average cost of interest bearing liabilities for the year ended December 31,
2002 was approximately 2.6% as compared of 4.2% for the year ended December 31,
2001 and 5.2% for the year ended December 31, 2000. This rate decrease is due to
an overall rate decrease in the market and due to the run off of higher priced
deposits being replaced by lower priced deposits.
15
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, 2002, 2001 and
2000 (in 000's):
2002 2001 2000
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:
Federal Funds $ 34,992 $ 573 1.64% $ 27,630 $ 1,045 3.78% $ 21,550 $ 1,356 6.29%
Reverse Repurchase Agreements 15,548 245 1.58% 28,178 803 2.85% - - -
Investments 130,832 3,683 2.82% 130,763 6,154 4.71% 90,361 5,718 6.33%
Loans (gross) 483,562 30,593 6.33% 403,365 30,799 7.64% 331,240 28,245 8.53%
----------------------------------------------------------------------------------------
Total earning assets $ 664,934 $ 35,094 5.28% $ 589,936 $ 38,801 6.58% $ 443,151 $ 35,319 7.97%
Non-earning assets 44,413 42,174 37,938
----------- ----------- -----------
Total assets $ 709,347 $ 632,110 $ 481,089
=========== =========== ===========
Liabilities:
Interest bearing DDA $ 57,430 $ 574 1.00% $ 48,646 $ 696 1.43% $ 39,209 $ 749 1.91%
Savings 248,487 4,162 1.67% 193,111 6,694 3.47% 150,245 7,724 5.14%
CD's under $100,000 57,954 2,496 4.31% 62,361 3,625 5.81% 59,673 3,520 5.90%
CD's over $100,000 36,840 1,421 3.86% 40,177 2,326 5.79% 36,975 2,212 5.98%
Individual Retirement Accounts 10,885 492 4.52% 9,827 579 5.89% 8,628 518 6.00%
Repurchase Agreements 70,121 752 1.07% 92,603 3,156 3.41% 53,507 3,004 5.61%
FHLB Advances 48,926 2,721 5.56% 41,393 2,434 5.88% 18,699 1,143 6.11%
Long Term Debt 13,500 1,444 10.70% 13,500 1,443 10.69% 9,730 916 9.41%
----------------------------------------------------------------------------------------
Total Interest Bearing Liabilities $ 544,143 $ 14,062 2.58% $ 501,618 $ 20,953 4.18% $ 376,666 $ 19,786 5.25%
Non-Interest Bearing Liabilities 116,295 88,130 71,003
Other Liabilities 3,726 3,967 3,378
----------- ----------- -----------
Total Liabilities $ 664,164 $ 593,715 $ 451,047
Equity 45,183 38,395 30,042
----------- ----------- -----------
Total Liabilities & Equity $ 709,347 $ 632,110 $ 481,089
=========== =========== ===========
Interest Income $ 35,094 5.28% $ 38,801 6.58% $ 35,319 7.97%
Interest Expense 14,062 2.58% 20,953 4.18% 19,786 5.25%
------------------- -------------------- -------------------
Net Interest Income/Spread $ 21,032 2.69% $ 17,848 2.40% $ 15,533 2.72%
=================== ==================== ===================
Contribution of Non-Interest Bearing Funds 0.47% 0.63% 0.79%
Net Interest Margin 3.16% 3.03% 3.51%
======= ======== =======
Average balances computed using daily actual balances.
16
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 (in 000's):
Year Ended December 31
2002 Changes from 2001 2001 Changes from 2000 2000 Changes from 1999
Net Due to Due to Net Due to Due to Net Due to Due to
Change Rate Volume Change Rate Volume Change Rate Volume
Interest earning assets:
Federal funds sold $ (472) $ (593) $ 121 $ (311) $ (541) $ 230 $ 169 $ 316 $ (147)
Reverse repurchase agreements (558) (359) (199) 803 -- 803 -- -- --
Investment securities (2,471) (2,473) 2 436 (1,465) 1,901 1,298 809 489
Loans (206) (5,280) 5,074 2,554 (2,953) 5,507 7,605 1,944 5,661
--------------------------------------------------------------------------------------------
TOTAL $(3,707) $(8,704) $ 4,997 $ 3,482 $(4,959) $ 8,441 $ 9,072 $ 3,069 $ 6,003
Interest bearing liabilities:
Demand deposits $ (122) $ (210) $ 88 $ (53) $ (188) $ 135 $ 278 $ 86 $ 192
Savings deposits (2,532) (3,460) 928 (1,030) (2,516) 1,486 2,417 1,145 1,272
CDs under $100,000 (1,129) (939) (190) 105 (51) 156 25 309 (284)
CDs over $100,000 (905) (776) (129) 114 (71) 185 249 238 11
Individual retirement accounts (87) (135) 48 61 (10) 71 128 42 86
Repurchase agreements (2,404) (2,163) (241) 152 (1,180) 1,332 1,401 430 971
FHLB Advances 287 (132) 419 1,291 (43) 1,334 336 49 287
Long term debt 1 1 -- 527 124 403 597 79 518
--------------------------------------------------------------------------------------------
TOTAL $(6,891) $(7,813) $ 922 $ 1,167 $(3,936) $ 5,103 $ 5,431 2,378 3,053
--------------------------------------------------------------------------------------------
Net change in Net Interest Income $ 3,184 $ (891) $ 4,075 $ 2,315 $(1,023) $ 3,338 $ 3,641 $ 691 $ 2,950
============================================================================================
NOTE: Due to Rate Increase was calculated by taking the change in the rate times
the prior year average balance.
Due to Volume Increase was calculated by taking the change in average
balance times the prior year rate.
17
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 potential 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 potential losses based upon internal credit evaluations of loan
portfolios and particular loans. Loans are principally to borrowers in central
Indiana.
Twelve months ended
December 31,
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
Beginning of Period $5,986,965 $4,700,672 $3,392,587 $2,626,279 $1,963,040
Provision for loan losses 1,500,000 1,440,000 1,440,000 1,010,000 680,000
Losses charged to the reserve
Commercial 207,716 102,315 139,294 225,000 24,406
Real Estate 21,800 18,772 30,168 27,452 5,079
Installment 2,052 10,766 16,052 -- --
Credit Cards 53,661 46,468 12,351 -- 276
---------- ---------- ---------- ---------- ----------
285,229 178,321 197,865 252,452 29,761
Recoveries
Commercial 17,024 23,868 65,281 3,760 13,000
Real Estate -- -- -- 5,000 --
Installment 266 463 266 -- --
Credit Cards 7,974 283 403 -- --
---------- ---------- ---------- ---------- ----------
25,264 24,614 65,950 8,760 13,000
---------- ---------- ---------- ---------- ----------
End of Period $7,227,000 $5,986,965 $4,700,672 $3,392,587 $2,626,279
========== ========== ========== ========== ==========
Allowance as a % of Loans 1.37% 1.32% 1.30% 1.09% 1.15%
Other Operating Income
- ----------------------
Other operating income for the year ended December 31, 2002,
increased $1,552,889 or 26.2% to $7,475,462 from $5,922,573 for the year ended
December 31, 2001 and from $4,277,930 for the year ended December 31, 2000. The
increase in other operating income is primarily due to an increase in service
charges and fees on deposit accounts of $576,724 or 35.0% to $2,226,686 for the
year ended December 31, 2002 from $1,649,962 for the year ended December 31,
2001 and from $902,147 for the year ended December 31, 2000. This increase is
attributable to the increase in average demand deposit accounts of approximately
$95,000,000 to approximately $427,000,000 for the year ended December 31, 2002
from approximately $332,000,000 for the year ended December 31, 2001 and an
increase of approximately $71,000,000 from approximately $261,000,000 for the
year ended December 31, 2000. The increase in other operating income is also
attributable to an increase in trust fees of $271,168 or 13.2% to $2,323,032 for
the year ended December 31, 2002 from $2,051,864 for the year ended December 31,
2001 and from $1,670,431 for the year ended December 31, 2000. The increase in
trust
18
income is attributable to a general increase in the average trust fee charged.
Also, contributing to the increase in other operating income is the net gain on
the sale of mortgage loans of $705,611 for the year ended December 31, 2002
compared to a net gain on the sale of mortgage loans of $435,058 for the year
ended December 31, 2001. This compares to a net loss on the sale of mortgage
loans of $1,008 for the year ended December 31, 2000. This is due to the ability
to sell a bulk of mortgages that were generated during 2002 and 2001 as a result
of lower interest rates.
In December 1998, the Bank purchased the downtown office building at
107 North Pennsylvania Street which houses its main office as well as the
Corporation's main office. For the year ended December 31, 2002, building rental
income increased to $480,375 from $474,298 for the year ended December 31, 2001
and decreased from $683,984 for the year ended December 31, 2000. The decrease
in 2001 over 2000 was due to the Bank occupying more space in the building in
2000 than in 2001. The slight increase in 2002 over 2001 was due to new tenants
in the building.
Other Operating Expenses
- ------------------------
Other operating expenses for the year ended December 31, 2002
increased $2,631,550 or 15.6% to $19,452,070 from $16,820,520 for the year ended
December 31, 2001 and increased $2,818,812 or 20.1% for the year ended December
31, 2001 from $14,001,708 for the year ended December 31, 2000. Salaries, wages
and employee benefits increased $1,892,892 or 20.2% to $11,278,361 for the year
ended December 31, 2002 from $9,385,469 for the year ended December 31, 2001 and
increased $1,441,822 or 18.2% from the year ended December 31, 2001 from
$7,943,647 for the year ended December 31, 2000. This increase is primarily due
to the increase in the number of employees to 167 full time equivalents at
December 31, 2002 from 153 full time equivalents at December 31, 2001 and from
138 full time equivalents at December 31, 2000. Occupancy expense increased
$31,842 for the year ended December 31, 2002 over the same period the previous
year and it increased $204,336 for the year ended December 31, 2001 over the
same period the previous year primarily due to the additional expense related to
the operations of the building at 107 North Pennsylvania Street and the opening
of new banking offices in Carmel in September 2000 and in Greenwood in October
2001. Furniture and equipment expense increased $19,881 for the year ended
December 31, 2002 over the same period the previous year and it increased
$127,264 for the year ended December 31, 2001 over the same period the previous
year primarily due to the additional expense associated with opening of the new
banking offices offset by decreases in expenses related to fully depreciated
assets at the older banking centers and main office. Professional services
expense decreased $107,623 or 12.6% to $743,508 for the year ended December 31,
2002 from $851,131 for the year ended December 31, 2001 and increased $130,165
or 18.1% for the year ended December 31, 2001 from $720,966 for the year ended
December 31, 2000. The decrease in 2002 was due to lower courier service costs.
The increase in 2001 and 2000 was due to consulting fees incurred for the
development and implementation of Private Portrait, the Bank's internet banking
web site. Also contributing to the increase was accounting fees and the courier
service. Data processing expenses increased $103,416 for the year ended December
31, 2002 over the same period the previous year and also increased $264,318 for
the year ended December 31, 2001 over the same period the previous year
primarily due to increased service bureau fees relating to increased transaction
activity by the Bank and trust department. Business Development increased
$73,510 for the year ended December 31, 2002 over the same period the previous
year and increased $162,019 for the year ended December 31, 2001 over the same
period the previous year. The increase is due to customer entertaining and
public relations.
19
Tax (Benefit)/Expense
- ---------------------
The Corporation applies a federal income tax rate of 34% and a state
tax rate of 8.5% in the computation of tax expense. The provision for income
taxes consisted of the following:
2002 2001 2000
---------------------------------------
Current tax expense $3,636,852 $2,646,904 $2,262,449
Deferred tax benefit (636,573) (506,348) (542,991)
---------------------------------------
$3,000,279 $2,140,556 $1,719,458
=======================================
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Deferred tax
assets are recognized for the estimated tax effects attributable to deductible
temporary differences and operating loss carryforwards, net of any valuation
allowances for amounts which may not be realized by the Corporation.
The components of the Corporation's net deferred tax assets in the
consolidated balance sheet as of December 31 are as follows:
2002 2001
-------------------------
Deferred tax assets:
Allowance for loan losses $2,862,615 $2,371,437
Other 590,068 436,561
-------------------------
Total deferred tax assets 3,452,683 2,807,998
Deferred tax liability:
Mortgage servicing rights (308,995) (293,952)
Other (333,296) (40,197)
-------------------------
Total deferred tax liabilities (642,291) (334,149)
-------------------------
Net deferred tax assets $2,810,392 $2,473,849
=========================
Effects of Inflation
Inflation can have a significant effect on the operating results of
all industries. This is especially true in industries with a high proportion of
fixed assets and inventory. However, management believes that these factors are
not as critical in the banking industry. Inflation does, however, have an impact
on the growth of total assets and the need to maintain a proper level of equity
capital.
Interest rates are significantly affected by inflation, but it is
difficult to assess the impact since neither the timing nor the magnitude of the
changes in the various inflation indices coincides with changes in interest
rates. There is, of course, an impact on longer-term earning assets; however,
this effect continues to diminish as investment maturities are shortened and
interest-earning assets and interest-bearing liabilities shift from fixed rate,
long-term to rate-sensitive, short-term.
20
Liquidity and Interest Rate Sensitivity
The Corporation must maintain an adequate liquidity position in
order to respond to the short-term demand for funds caused by withdrawals from
deposit accounts, extensions of credit and for the payment of operating
expenses. Maintaining this position of adequate liquidity is accomplished
through the management of a combination of liquid assets; those which can be
converted into cash and access to additional sources of funds. Primary liquid
assets of the Corporation are cash and due from banks, federal funds sold,
investments held as available for sale and maturing loans. Federal funds sold
represent the Corporation's primary source of immediate liquidity and were
maintained at a level adequate to meet immediate needs. Federal funds sold
averaged approximately $35,000,000, $28,000,000 and $22,000,000 for the twelve
months ended December 31, 2002, 2001 and 2000 respectively. Reverse repurchase
agreements may serve as a source of liquidity, but are primarily used as
collateral for customer balances in overnight repurchase agreements. The average
balance was approximately $16,000,000 and $28,000,000 and $0 for the twelve
months ended December 31, 2002, 2001 and 2000 respectively. Maturities in the
Corporation's loan and investment portfolios are monitored regularly to avoid
matching short-term deposits with long-term loans and investments. Other assets
and liabilities are also monitored to provide the proper balance between
liquidity, safety, and profitability. This monitoring process must be continuous
due to the constant flow of cash which is inherent in a financial institution.
The Corporation actively manages its interest rate sensitive assets
and liabilities to reduce the impact of interest rate fluctuations. At December
31, 2002, the Corporation's rate sensitive liabilities exceeded rate sensitive
assets due within one year by $2,113,011. At December 31, 2001, the
Corporation's rate sensitive liabilities exceeded rate sensitive assets due
within one year by $22,540,294.
The purpose of the Bank's Investment Committee is to manage and
balance interest rate risk, to provide a readily available source of liquidity
to cover deposit runoff and loan growth, and to provide a portfolio of safe,
secure assets of high quality that generate a supplemental source of income in
concert with the overall asset/liability policies and strategies of the Bank.
The Bank holds securities of the U.S. Government and its agencies
along with asset-backed securities, collateralized mortgage obligations,
municipals, and Federal Home Loan Bank and Federal Reserve Bank stock. In order
to properly manage market risk, credit risk and interest rate risk, the Bank has
guidelines it must follow when purchasing investments for the portfolio and
adherence to these policy guidelines are reported monthly to the board of
directors.
A portion of the Bank's investment securities consist of
asset-backed securities (in previous years) and collateralized mortgage
obligations. The Bank limits the level of these securities that can be held in
the portfolio to a specified percentage of total average assets. Also,
asset-backed securities collateralized by receivables other than mortgages will
not have a stated final maturity greater than seven years. In addition, only
credit card receivables or mortgage-related securities rated "AA" or better by
Standard & Poor's or an equivalent rating by another rating agency, will be
purchased.
All mortgage-related securities must pass the FFIEC stress test.
This stress test determines if price volatility under a 200 basis point interest
rate shock for each security exceeds a benchmark 30 year mortgage-backed
security. If the security fails the test, it is considered high risk and the
Bank will not purchase it. All mortgage-related securities purchased and
included in the investment portfolio will be subject to the FFIEC test as of
December 31 each year to determine if they have become high risk holdings. If a
mortgage-related security becomes high risk, it will be evaluated by the Bank's
Investment Committee to determine if the security should be liquidated. At
December 31, 2002 and 2001 the Bank held one high risk mortgage-related
security.
The Bank's investment portfolio also consists of bank-qualified
municipal securities. Municipal securities purchased are limited to the first
three (3) grades of the rating agencies. The grade is reviewed each December 31
to verify that the grade has not deteriorated below
21
the first three (3) grades. The Bank may purchase non-rated general obligation
municipals, but the credit strength of the municipality must be evaluated by the
Bank's Credit Department. Generally, municipal securities from each issuer will
be limited to $1 million, never to exceed 10% of the Bank's tier 1 capital and
will not have a stated final maturity date of greater than ten (10) years.
The average yield on the Bank's investment portfolio is as follows
as of December 31,
2002 2001 2000
---- ---- ----
U.S. Treasuries 2.47% 5.41% 5.92%
U.S. Government agencies 2.85% 5.37% 6.24%
Collateralized mortgage obligations 3.31% 5.35% 6.63%
Asset-backed securities - - 6.11%
Municipals 7.32% 7.32% 7.10%
Other securities 2.14% 3.72% 6.42%
With the exception of securities of the U.S. Government and U.S. Government
agencies and corporations, the Corporation had no other securities with a book
or market value greater than 10% of shareholders' equity as of December 31,
2002, 2001 and 2000.
22
The following is a summary of available-for-sale securities and
held-to-maturity securities:
Available-for-Sale Securities
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
-----------------------------------------------------
December 31, 2002
U.S. Treasury securities $ 2,100,309 $ 13,230 $ 275 $ 2,113,264
U.S. Government agencies 79,930,066 845,676 -- 80,775,742
Collateralized mortgage obligations 1,097,683 3,646 -- 1,101,329
-----------------------------------------------------
$83,128,058 $ 862,552 $ 275 $83,990,335
=====================================================
December 31, 2001
U.S. Treasury securities $ 2,113,700 $ 12,385 $ -- $ 2,126,085
U.S. Government agencies 23,262,121 88,863 -- 23,350,984
Collateralized mortgage obligations 1,775,838 3,578 11 1,779,405
-----------------------------------------------------
$27,151,659 $ 104,826 $ 11 $27,256,474
=====================================================
December 31, 2000
U.S. Treasury securities $13,988,088 $ -- $ 13,828 $13,974,260
U.S. Government agencies 58,695,209 37,591 25,477 58,707,323
Collateralized mortgage obligations 4,355,124 4,455 2,188 4,357,391
-----------------------------------------------------
$77,038,421 $ 42,046 $ 41,493 $77,038,974
=====================================================
Held-to-Maturity Securities
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
-----------------------------------------------------
December 31, 2002
Collateralized mortgage obligations $24,333,493 $ 339,440 $ 12,644 $24,660,289
Municipals 5,534,243 552,233 -- 6,086,476
Other securities 225,000 10,391 -- 235,391
-----------------------------------------------------
$30,092,736 $ 902,064 $ 12,644 $30,982,156
=====================================================
December 31, 2001
Collateralized mortgage obligations $ 2,696,147 $ 6,816 $ 21,832 $ 2,681,131
Municipals 5,494,504 184,573 -- 5,679,077
Other securities 200,000 1,925 1,028 200,897
-----------------------------------------------------
$ 8,390,651 $ 193,314 $ 22,860 $ 8,561,105
=====================================================
December 31, 2000
Collateralized mortgage obligations $ 4,351,982 $ 2,752 $ 19,048 $ 4,335,686
Municipals 5,456,729 157,334 -- 5,614,063
Other securities 441,661 9,476 2,307 448,830
-----------------------------------------------------
$10,250,372 $ 169,562 $ 21,355 $10,398,579
=====================================================
23
As part of managing liquidity, the Corporation monitors its loan to
deposit ratio on a daily basis. At December 31, 2002 the ratio was 97.2 percent
and as of December 31, 2001 the ratio was 89.3 percent which is within the
Corporation's acceptable range.
The following table shows the composition of the Bank's loan
portfolio as of the dates indicated (in 000's):
December 31,
------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
----------------- ----------------- ------------------ ----------------- -----------------
TYPES OF LOANS
Commercial $182,994 34.6% $150,101 33.2% $166,881 34.2% $135,897 43.6% $102,427 45.0%
Construction 21,107 4.0% 17,027 3.8% 8,733 2.4% 14,472 4.6% 5,347 2.3%
Commercial Mortgage 113,399 21.4% 82,256 18.2% 53,095 14.7% 34,726 11.1% 21,990 9.7%
Residential Mortgage 163,034 30.8% 151,874 33.6% 116,064 37.8% 109,787 35.3% 86,095 37.8%
Installment 35,934 6.8% 37,493 8.3% 2,320 6.9% 2,084 0.7% 1,607 0.7%
Credit Card 2,056 0.4% 1,811 0.4% 1,709 0.5% 1,556 0.5% 1,179 0.5%
Other 10,387 2.0% 11,498 2.5% 12,800 3.5% 12,956 4.2% 9,202 4.0%
-------- -------- -------- -------- --------
Total - Gross $528,911 100.0% $452,060 100.0% $361,602 100.0% $311,478 100.0% $227,847 100.0%
====== ====== ====== ====== ======
Allowance (7,227) (5,987) (4,701) (3,393) (2,626)
Total - Net $521,684 $446,073 $356,901 $308,085 $225,221
======== ======== ======== ======== ========
24
The following table shows the composition of the commercial loan
category by industry type as of the dates indicated (in $000's):
December 31,
------------
2002 2001 2000
---- ---- ----
Type Amount % Amount % Amount %
- ---- ------ - ------ - ------ -
Agriculture, Foresty & Fishing $ -- 0.0% $ -- 0.0% $ 49 0.0%
Mining 794 0.4% 2,291 1.5% 371 0.2%
Construction 13,814 7.5% 9,127 6.1% 767 0.5%
Manufacturing 12,139 6.6% 10,964 7.4% 8,085 4.8%
Wholesale Trade 21,649 11.8% 19,535 13.1% 9,241 5.5%
Retail Trade 11,372 6.2% 7,561 5.0% 12,210 7.3%
Transportation 4,544 2.5% 2,425 1.6% 1,838 1.1%
Information 1,464 0.8% 2,878 1.9% -- 0.0%
Finance & Insurance 5,275 2.9% 6,808 4.5% 41,854 25.2%
Real Estate and Rental & Leasing 29,602 16.2% 22,645 15.1% -- 0.0%
Professional, Scientific & Technical Services 22,788 12.5% 11,475 7.6% -- 0.0%
Administrative and Support, Waste Management &
Remediation Services 1,254 0.7% 1,333 0.9% 104 0.1%
Educational Services 1,966 1.1% 1,893 1.3% -- 0.0%
Health Care & Social Assistance 15,932 8.7% 12,338 8.2% -- 0.0%
Arts, Entertainment & Recreation 2,835 1.5% 2,394 1.6% -- 0.0%
Accommodation & Food Services 10,385 5.7% 7,869 5.2% -- 0.0%
Other Services 27,183 14.9% 28,565 19.0% 92,362 55.3%
------------------ ------------------ -------------------
$182,994 100.0% $150,101 100.0% $166,881 100.0%
================== ================== ===================
25
The following table shows the composition of the Bank's deposit portfolio as of
the dates indicated (in 000's):
December 31
-----------
2002 2001 2000
---- ---- ----
% of % of % of
Amount Total Amount Total Amount Total
------------------- ------------------- -------------------
TYPES OF DEPOSITS
Demand $137,576 31.04% $ 94,874 23.82% $ 84,977 28.41%
MMDA/Savings 305,605 68.96% 303,375 76.18% 214,168 71.59%
------------------- ------------------- -------------------
Total Demand Deposits 443,181 100.00% 398,249 100.00% 299,145 100.00%
======== ======== ========
CDs < $100,000 53,872 53.25% 61,724 57.22% 62,076 55.78%
CDs > $100,000 35,988 35.57% 35,755 33.14% 39,873 35.83%
Individual Retirement Accounts 11,302 11.17% 10,397 9.64% 9,340 8.39%
------------------- ------------------- -------------------
Total Certificates of Deposit 101,162 100.00% 107,876 100.00% 111,289 100.00%
======== ======== ========
--------- --------- ---------
Total Deposits $544,343 $506,125 $410,434
========= ========= =========
The Corporation experienced an increase in cash and cash
equivalents, its primary source of liquidity, of $11,045,188 during 2002. During
2001, it experienced a decrease of $21,792,118. The primary financing activity
for 2002 was deposit growth which provided net cash of $38,217,157 and security
repurchase agreements which provided net cash of $5,922,142. The primary
financing activity for 2001 was deposit growth which provided net cash of
$95,691,810 and security repurchase agreements which provided net cash of
$10,890,378. Lending used $77,110,879 during 2002 and $90,612,302 during 2001.
The Corporation's management believes its liquidity sources are adequate to meet
its operating needs and does not know of any trends, events or uncertainties
that may result in a significant adverse effect on the Corporation's liquidity
position.
26
The following table illustrates the projected maturities and the
repricing mechanisms of the major asset/liabilities categories of the
Corporation as of December 31, 2002, based on certain assumptions. Prepayment
rate assumptions have been made for the residential loans secured by real estate
portfolio. Maturity and repricing dates for investments have been projected by
applying the assumptions set forth below to contractual maturity and repricing
dates.
0 - 180 181 - 365 1 - 2 2 - 3 3 -5
days days years years years
---- ---- ----- ----- -----
Interest Earning Assets:
Fed Funds/ Overnight Time $ 27,627,463
Reverse repurchase agreements 5,000,000
Investments 41,497,870 19,577,404 47,273,556 50,000 75,000
Loans
Commercial & Industrial
Fixed 16,647,875 10,928,704 14,423,189 11,397,262 9,660,366
Variable 112,237,492
Commercial Loans Secured by Real Estate
Fixed 28,143,530 9,456,660 16,986,350 18,717,720 21,920,184
Variable 2,727,054
Residential Loans Secured by Real Estate
Fixed 1,556,126 1,556,127 3,112,479 3,110,657 6,221,312
Variable 108,054,954 6,814,962 6,942,041 11,248,558 17,763,609
Other
Fixed 742,529 649,596 1,132,030 856,965 1,334,130
Variable 32,608,440 10,387,764 -- -- --
--------------------------------------------------------------------------------------
Total Interest Earning Assets $ 376,843,333 $ 59,371,217 $ 89,869,645 $ 45,381,162 $ 56,974,601
Non-Interest Earning Assets
--------------------------------------------------------------------------------------
Total Assets $ 376,843,333 $ 59,371,217 $ 89,869,645 $ 45,381,162 $ 56,974,601
======================================================================================
Interest Bearing Liabilities:
Demand Deposits $ 176,607
Interest Bearing Demand 66,814,924
Savings Deposits
Money Market Accounts 231,496,828
Certificate of Deposits 24,478,460 10,710,978 13,894,220 6,952,406 5,168,878
Jumbo CDs 19,118,842 5,257,148 7,422,085 1,980,136 2,828,685
Repurchase Agreements 74,273,774
FHLB Advances 6,000,000 10,000,000 8,000,000 21,000,000
Company obligated mandatorily redeemable
preferred capital securities of
subsidiary
trust holding solely the junior
subordinated
debentures of the parent company
--------------------------------------------------------------------------------------
Total Interest Bearing Liabilities $ 416,359,435 $ 21,968,126 $ 31,316,305 $ 16,932,542 $ 28,997,563
Non-Interest Bearing Liabilities
Equity
--------------------------------------------------------------------------------------
Total Liabilities & Shareholders' Equity $ 416,359,435 $ 21,968,126 $ 31,316,305 $ 16,932,542 $ 28,997,563
======================================================================================
Interest Sensitivity Gap per Period $ (39,516,102) $ 37,403,091 $ 58,553,340 $ 28,448,620 $ 27,977,038
Cumulative Interest Sensitivity Gap $ (39,516,102) $ (2,113,011) $ 56,440,329 $ 84,888,949 $ 112,865,987
Interest Sensitivity Gap as a Percentage
of Earning Assets -5.82% 5.51% 8.62% 4.19% 4.12%
Cumulative Sensitivity Gap as a
Percentage of Earning Assets -5.82% -0.31% 8.31% 12.50% 16.62%
5 + Non-interest
years Earning Total
----- ------- -----
Interest Earning Assets:
Fed Funds/ Overnight Time $ 27,627,463
Reverse repurchase agreements 5,000,000
Investments 9,010,741 117,484,571
Loans
Commercial & Industrial
Fixed 5,124,307 2,574,795 70,756,498
Variable 112,237,492
Commercial Loans Secured by Real Estate
Fixed 15,447,106 -- 110,671,550
Variable 2,727,054
Residential Loans Secured by Real Estate
Fixed 17,106,473 32,663,174
Variable -- 653,720 151,477,844
Other
Fixed 3,233 662,918 5,381,401
Variable -- -- 42,996,204
---------------------------------------------------
Total Interest Earning Assets $ 46,691,860 $ 3,891,433 $ 679,023,251
Non-Interest Earning Assets 47,491,222 47,491,222
---------------------------------------------------
Total Assets $ 46,691,860 $ 51,382,655 $ 726,514,473
===================================================
Interest Bearing Liabilities:
Demand Deposits $ 137,399,325 $ 137,575,932
Interest Bearing Demand 66,814,924
Savings Deposits 7,293,381 7,293,381
Money Market Accounts 231,496,828
Certificate of Deposits 3,145,348 64,350,290
Jumbo CDs 204,269 36,811,165
Repurchase Agreements 74,273,774
FHLB Advances 3,000,000 48,000,000
Company obligated mandatorily redeemable 13,500,000 13,500,000
preferred capital securities of
subsidiary
trust holding solely the junior
subordinated
debentures of the parent company
---------------------------------------------------
Total Interest Bearing Liabilities $ 19,849,617 $ 144,692,706 $ 680,116,294
Non-Interest Bearing Liabilities 5,151,028 5,151,028
Equity 41,247,151 41,247,151
---------------------------------------------------
Total Liabilities & Shareholders' Equity $ 19,849,617 $ 191,090,885 $ 726,514,473
===================================================
Interest Sensitivity Gap per Period $ 26,842,243 $(139,708,230)
Cumulative Interest Sensitivity Gap $ 139,708,230 $ --
Interest Sensitivity Gap as a Percentage
of Earning Assets 3.95% -20.57%
Cumulative Sensitivity Gap as a
Percentage of Earning Assets 20.57% 0.00%
27
Critical Accounting Policy
The allowance for loan losses is established through provisions for
loan losses charged against income. Loans deemed to be uncollectible are charged
against the allowance for loan losses, and subsequent recoveries, if any, are
credited to the allowance. The allowance for loan losses related to loans that
are identified as impaired is based on discounted cash flows using the loan's
initial effective interest rate, or the fair value of the collateral for certain
collateral dependent loans. The Corporation collectively evaluates consumer
loans and loans secured by real estate for impairment as homogeneous loan
groups.
The allowance for loan losses is maintained at a level believed
adequate by management to absorb inherent losses in the loan portfolio. The
determination of the allowance is based on factors which, in management's
judgment, deserve recognition under existing economic conditions in estimating
possible loan losses. This evaluation is inherently subjective as it requires
material estimates including the amounts and timing of future cash flows
expected to be received on impaired loans that may be susceptible to significant
change. The allowance is increased by provisions for loan losses charged against
income and reduced by net charge-offs.
The allowance for loan losses is allocated to each loan category
based on the Bank's peer median charge off percentages by loan category added to
actual reserves maintained for non-performing or specifically identified loans
needing a reserve. Any remaining allowance is then allocated back to each loan
category based on that category's percentage of the total loan portfolio.
Although the loan loss reserve is allocated by loan category, the entire
allowance is available to cover any loan loss that may occur.
The following table shows the dollar amount of the allowance for
loan losses using management's estimate by loan category (in $000's):
Loan Loss Reserve Allocation
December 31,
------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Commercial $5,173 $4,792 $3,246 $1,452 $1,209
Construction 82 21 49 142 59
Commercial Mortgage 437 104 297 342 250
Residential Mortgage 906 499 779 1,088 975
Installment 156 72 43 22 18
Credit Card 61 55 70 15 13
Other 412 444 217 132 102
Year 2000 -- -- -- 200 --
-------------------------------------------
$7,227 $5,987 $4,701 $3,393 $2,626
===========================================
Management considers the present allowance to be appropriate and
adequate to cover losses inherent in the loan portfolio based on the current
economic environment. However, future economic changes cannot be predicted.
Deterioration in economic conditions could result in an increase in the risk
characteristics of the loan portfolio and an increase in the provision for loan
losses.
28
The following table presents a summary of non-performing assets as
of December 31, ($000):
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
----------------- ----------------- ----------------- ---------------- ----------------
Non-Accrual Loans
- -----------------
Commercial $1,605 49.7% $ 335 40.1% $ 595 65.7% $ 272 70.6% $ -- 0.0%
Construction -- 0.0% -- 0.0% -- 0.0% -- 0.0% -- 0.0%
Commercial Mortgage -- 0.0% 184 22.0% -- 0.0% -- 0.0% -- 0.0%
Residential Mortgage 1,624 50.3% 303 36.3% 288 31.8% 86 22.3% -- 0.0%
Installment -- 0.0% 13 1.6% 23 2.5% 27 7.0% -- 0.0%
Credit Card -- 0.0% -- 0.0% -- 0.0% -- 0.0% -- 0.0%
----------------- ----------------- ----------------- ---------------- ----------------
Total $3,229 100.0% $ 835 100.0% $ 906 100.0% $ 385 100.0% $ -- 0.0%
================= ================= ================= ================ ================
Loans 90 Days Past Due -
Still Accruing $ 9 $ 5 $ -- $ 385 $ --
Restructured due to troubled
conditions of the borrower $2,902 $ -- $ -- $ -- $ --
29
The following table summarizes the Corporation's non-performing loans.
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Loan Type
- ---------
Commercial
# of loans 11 7 11 2 1
Interest income recognized $ 111,591 $ 9,534 $ 55,432 $ 43,771 $ --
Additional interest income if loan had been accruing $ 54,952 $ 25,191 $ 65,435 $ 1,897 $ 2,041
Installment
# of loans -- 1 3 1 --
Interest income recognized $ -- $ -- $ 1,760 $ 1,615 $ --
Additional interest income if loan had been accruing $ -- $ 1,545 $ 2,176 $ 1,921 $ --
Residential mortgage loans
# of loans 12 6 5 1 1
Interest income recognized $ 18,650 $ 1,925 $ 7,095 $ 4,563 $ --
Additional interest income if loan had been accruing $ 34,598 $ 24,785 $ 16,454 $ 1,483 $ 1,327
Credit cards
# of loans -- -- 4 -- --
Interest income recognized $ -- $ -- $ 167 $ -- $ --
Additional interest income if loan had been accruing $ -- $ -- $ 1,821 $ -- $ --
Restructured loans $2,901,600 $ -- $ -- $ -- $ --
30
Capital Resources
The Corporation's only source of capital since commencing operations
has been from issuance of common stock, results of operations, issuance of long
term debt to a non-affiliated third party, and the issuance of company obligated
mandatorily redeemable preferred capital securities.
The Corporation maintains a Revolving Credit Agreement with Harris
Trust and Savings Bank in the amount of $5,000,000, of which none has been
drawn, that will mature September 28, 2003.
In September 2000, the Trust, which is wholly owned by the
Corporation, issued $13,500,000 of company obligated mandatorily redeemable
capital securities. The proceeds from the issuance of the capital securities and
the proceeds from the issuance of the common securities of $418,000 were used by
the Trust to purchase from the Corporation $13,918,000 Fixed Rate Junior
Subordinated Debentures. The capital securities mature September 7, 2030, and
have a fixed interest rate of 10.60%. The net proceeds received by the
Corporation from the sale of capital securities were used for general corporate
purposes.
The Bank has incurred indebtedness pursuant to FHLB advances as
follows:
Amount Rate Maturity
------ ---- --------
$ 6,000,000 5.66% 09/04/2003
5,000,000 5.39% 02/26/2004
5,000,000 5.15% 04/23/2004
5,000,000 5.14% 08/01/2005
3,000,000 5.39% 10/03/2005
5,000,000 5.43% 03/16/2006
5,000,000 5.32% 05/08/2006
8,000,000 4.19% 07/24/2007
3,000,000 5.57% 08/13/2007
3,000,000 5.55% 10/02/2008
-------------
$48,000,000
The Bank may add indebtedness of this nature in the future if determined to be
in the best interest of the Bank.
31
Capital for the Bank is above well-capitalized regulatory
requirements at December 31, 2002. Pertinent capital ratios for the Bank as of
December 31, 2002 are as follows:
Well Adequately
Actual Capitalized Capitalized
------ ----------- -----------
Tier 1 risk-based capital ratio 8.9% 6.0% 4.0%
Total risk-based capital ratio 10.1% 10.0% 8.0%
Leverage ratio 6.6% 5.0% 4.0%
Dividends from the Bank to the Corporation may not exceed the
undivided profits of the Bank (included in consolidated retained earnings)
without prior approval of a federal regulatory agency. In addition, Federal
banking laws limit the amount of loans the Bank may make to the Corporation,
subject to certain collateral requirements. No loans were made during 2002 by
the Bank to the Corporation, but a dividend of $650,000 was declared and made
during 2002. No dividends were declared, or loans made, during 2001 by the Bank
to the Corporation.
Forward-Looking Statements
The sections that follow, Quantitative and Qualitative Disclosures
about Market Risk, contain certain forward-looking statements (as defined in the
Private Securities Litigation Reform Act of 1995). These forward-looking
statements involve significant risks and uncertainties including changes in
general economic and financial market conditions, the Corporation's ability to
execute its business plans. Although the Corporation believes the expectations
reflected in such forward-looking statements are reasonable, actual results may
differ materially.
32
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------
Market risk is the risk of loss due to adverse changes in market
prices and rates. The Corporation's market risk arises primarily from interest
rate risk inherent in its lending and deposit taking activities. Management
actively monitors and manages its interest rate exposure.
The Corporation's profitability is affected by fluctuations in
interest rates. A sudden and substantial increase in interest rates may
adversely impact the Corporation's earnings to the extent that the interest
rates earned by assets and paid on liabilities do not change at the same speed,
to the same extent, or on the same basis. The Corporation monitors the impact of
changes in interest rates on its net interest income. The Corporation attempts
to maintain a relatively neutral gap between earning assets and liabilities at
various time intervals to minimize the effects of interest rate risk. The
Corporation also performs a 200 basis point upward and downward interest rate
shock and makes sure that there is not an adverse impact on its annual net
interest income.
The following table shows the impact of a 200 basis point upward
shock on the Corporation's Gap Report as of December 31, 2002 (in $000's):
Current Cost/Revenue
Under 1 Year Over 1 Year Total
------------ ----------- -----
Assets $19,952 $14,899 $34,851
Liabilities / Equity 6,802 3,965 10,767
------- ------- -------
Net Interest Income $13,150 $10,934 $24,084
Shock Calculation Cost/Revenue
Under 1 Year Over 1 Year Total
------------ ----------- -----
Assets $26,710 $14,966 $41,676
Liabilities / Equity 12,261 3,965 16,226
------- ------- -------
Net Interest Income $14,449 $11,001 $25,450
Summary:
Net interest income - current $24,084
Net interest income - shocked 25,450
-------
Change $ $ 1,366
Change % 5.37%
33
The following table shows the impact of a 200 basis point downward
shock on the Corporation's Gap Report as of December 31, 2002 (in $000's):
Current Cost/Revenue
Under 1 Year Over 1 Year Total
------------ ----------- -----
Assets $ 19,952 $ 14,899 $ 34,851
Liabilities / Equity 6,802 3,965 10,767
-------- -------- --------
Net Interest Income $ 13,150 $ 10,934 $ 24,084
Shock Calculation Cost/Revenue
Under 1 Year Over 1 Year Total
------------ ----------- -----
Assets $ 16,887 $ 13,642 $ 30,529
Liabilities / Equity 4,268 3,965 8,233
-------- -------- --------
Net Interest Income $ 12,619 $ 9,677 $ 22,296
Summary:
Net interest income - current $ 24,084
Net interest income - shocked 22,296
--------
Change $ $ (1,788)
Change % -8.02%
34
Item 7B. Report of Management on Internal Control
- --------------------------------------------------
The National Bank of Indianapolis Corporation is responsible for the
preparation, integrity, and fair presentation of the financial statements
included in this report. The consolidated financial statements and notes
included in the audited financial statements have been prepared in conformity
with accounting principles generally accepted in the United States and
necessarily include some amounts that are based on management's best estimates
and judgments.
We, as management of The National Bank of Indianapolis Corporation,
are responsible for establishing and maintaining effective internal controls
over financial reporting that are designed to produce reliable financial
statements in conformity with accounting principles generally accepted in the
United States. The system of internal control over financial reporting as it
relates to the financial statements contains self-monitoring mechanisms, and
compliance is tested and evaluated through a program of internal audits. Actions
are taken to correct potential deficiencies as they are identified. Any system
of internal control, no matter how well designed, has inherent limitations,
including the possibility that controls can be circumvented or overridden and
misstatements due to error or fraud may occur and not be detected. Also, because
of changes in condition, internal control effectiveness may vary over time.
Accordingly, even an effective system of internal control will provide only
reasonable assurance with respect to financial statement preparation.
The Audit Committee, consisting entirely of outside directors, meets
regularly with management, internal auditors and independent auditors, and
reviews audit plans and results, as well as management's action taken in
discharging responsibilities for accounting, financial reporting, and internal
controls. Ernst & Young LLP, independent auditors, and the internal auditors
have direct and confidential access to the Audit Committee at all times to
discuss the results of their examinations.
Management assessed the Corporation's system of internal control
over financial reporting as of December 31, 2002, in relation to criteria for
effective internal control over financial reporting as described in "Internal
Control - Integrated Framework," issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
believes that, as of December 31, 2002, its system of internal control over
financial reporting met those criteria.
35
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
Report of Independent Auditors
Board of Directors
The National Bank of Indianapolis Corporation
We have audited the accompanying consolidated balance sheets of The National
Bank of Indianapolis Corporation and subsidiaries as of December 31, 2002 and
2001, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
2002. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The National Bank
of Indianapolis Corporation and subsidiaries at December 31, 2002 and 2001, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Indianapolis, Indiana
January 24, 2003
36
The National Bank of Indianapolis Corporation
Consolidated Balance Sheets
December 31
2002 2001
-------------------------------
Assets
Cash and due from banks $ 45,889,548 $ 34,844,360
Reverse repurchase agreements 5,000,000 120,000,000
Federal funds sold 18,177,463 14,254,204
Available-for-sale securities 83,990,335 27,256,474
Held-to-maturity securities 30,092,736 8,390,651
-------------------------------
Total investment securities 114,083,071 35,647,125
Loans 528,911,217 452,060,303
Less: Allowance for loan losses (7,227,000) (5,986,965)
-------------------------------
Net loans 521,684,217 446,073,338
Premises and equipment 9,248,290 9,257,236
Accrued interest receivable 3,974,258 2,826,831
Stock in federal banks 3,401,500 3,401,500
Other assets 5,056,126 4,392,496
-------------------------------
Total assets $ 726,514,473 $ 670,697,090
===============================
Liabilities and shareholders' equity
Deposits:
Noninterest-bearing demand deposits $ 137,575,932 $ 94,874,420
Money market and saving deposits 305,605,133 303,375,408
Time deposits over $100,000 36,811,165 36,886,744
Other time deposits 64,350,290 70,988,791
-------------------------------
Total deposits 544,342,520 506,125,363
Security repurchase agreements 74,273,774 68,351,632
FHLB advances 48,000,000 50,000,000
Company obligated mandatorily redeemable preferred
capital securities of subsidiary trust holding solely
the junior subordinated debentures of the parent company 13,500,000 13,500,000
Other liabilities 5,151,028 4,250,093
-------------------------------
Total liabilities 685,267,322 642,227,088
Shareholders' equity:
Common stock, no par value:
Authorized shares; 2002 and 2001- 3,000,000
Issued and outstanding shares; 2002-2,442,324;
2001-1,965,944 26,862,276 20,883,428
Unearned compensation (1,218,746) (439,790)
Additional paid in capital 2,562,990 --
Retained earnings 12,519,902 7,963,066
Accumulated other comprehensive income 520,729 63,298
-------------------------------
Total shareholders' equity 41,247,151 28,470,002
-------------------------------
Total liabilities and shareholders' equity $ 726,514,473 $ 670,697,090
===============================
See accompanying notes.
37
The National Bank of Indianapolis Corporation
Consolidated Statements of Income
Years ended December 31
2002 2001 2000
---------------------------------------------
Interest income:
Interest and fees on loans $ 30,593,437 $ 30,798,679 $ 28,244,569
Interest on investment securities 3,683,093 6,154,280 5,718,341
Interest on federal funds sold 573,328 1,045,685 1,355,758
Interest on reverse repurchase agreements 245,442 802,762 --
---------------------------------------------
Total interest income 35,095,300 38,801,406 35,318,668
Interest expense:
Interest on deposits 9,144,476 13,919,427 14,723,423
Interest on repurchase agreements 752,464 3,156,276 3,003,715
Interest on FHLB advances 2,720,963 2,434,022 1,142,990
Interest on long-term debt 1,443,674 1,443,135 915,555
---------------------------------------------
Total interest expense 14,061,577 20,952,860 19,785,683
---------------------------------------------
Net interest income 21,033,723 17,848,546 15,532,985
Provision for loan losses 1,500,000 1,440,000 1,440,000
---------------------------------------------
Net interest income after provision for loan losses 19,533,723 16,408,546 14,092,985
Other operating income:
Trust fees and commissions 2,323,032 2,051,864 1,670,431
Service charges and fees on deposit accounts 2,226,686 1,649,962 902,147
Building rental income 480,375 474,298 683,984
Net gain (loss) on sale of mortgage loans 705,611 435,058 (1,008)
Interchange income 526,067 467,278 399,126
Other income 1,213,691 844,113 623,250
---------------------------------------------
Total other operating income 7,475,462 5,922,573 4,277,930
Other operating expenses:
Salaries, wages, and employee benefits 11,278,361 9,385,469 7,943,647
Occupancy expense 1,450,186 1,418,344 1,214,008
Furniture and equipment expense 895,505 875,624 748,360
Professional services 743,508 851,131 720,966
Data processing 1,288,961 1,185,545 921,227
Business development 735,212 661,702 499,683
Other expenses 3,060,337 2,442,705 1,953,817
---------------------------------------------
Total other operating expenses 19,452,070 16,820,520 14,001,708
---------------------------------------------
Net income before tax 7,557,115 5,510,599 4,369,207
Federal and state income tax 3,000,279 2,140,556 1,719,458
---------------------------------------------
Net income after tax $ 4,556,836 $ 3,370,043 $ 2,649,749
=============================================
Basic earnings per share $ 1.99 $ 1.76 $ 1.39
=============================================
Diluted earnings per share $ 1.88 $ 1.55 $ 1.24
=============================================
See accompanying notes.
38
The National Bank of Indianapolis Corporation
Consolidated Statements of Shareholders' Equity
Accumulated
Additional Other
Common Unearned Paid in Retained Comprehensive
Stock Compensation Capital Earnings Income (Loss) Total
--------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 20,534,340 $ (817,014) -- $ 1,943,274 $ (24,756) $ 21,635,844
Comprehensive income:
Net income -- -- -- 2,649,749 -- 2,649,749
Other comprehensive income
Net unrealized gain on
investments, net of tax
of $219 -- -- -- -- 25,090 25,090
------------
Total comprehensive income 2,674,839
Issuance of stock (8,791 shares) 176,820 (81,000) -- -- -- 95,820
Repurchase of stock (2,000 shares) (46,000) -- -- -- -- (46,000)
Compensation earned -- 299,303 -- -- -- 299,303
--------------------------------------------------------------------------------------
Balance at December 31, 2000 20,665,160 (598,711) -- 4,593,023 334 24,659,806
Comprehensive income:
Net income -- -- -- 3,370,043 -- 3,370,043
Other comprehensive income
Net unrealized gain on
investments, net of tax
of $41,298 -- -- -- -- 62,964 62,964
------------
Total comprehensive income 3,433,007
Issuance of stock (10,782 shares) 262,818 (47,422) -- -- -- 215,396
Repurchase of stock (1,800 shares) (44,550) -- -- -- -- (44,550)
Compensation earned -- 206,343 -- -- -- 206,343
--------------------------------------------------------------------------------------
Balance at December 31, 2001 20,883,428 (439,790) -- 7,963,066 63,298 28,470,002
Comprehensive income:
Net income -- -- -- 4,556,836 -- 4,556,836
Other comprehensive income
Net unrealized gain on
investments, net of tax
of $300,031 -- -- -- -- 457,431 457,431
------------
Total comprehensive income 5,014,267
Income tax benefit from exercise of
warrants & options -- -- 2,562,990 -- -- 2,562,990
Issuance of stock (477,479 shares) 6,009,648 (1,061,450) -- -- -- 4,948,198
Repurchase of stock (1,100 shares) (30,800) -- -- -- -- (30,800)
Compensation earned -- 282,494 -- -- -- 282,494
--------------------------------------------------------------------------------------
Balance at December 31, 2002 $ 26,862,276 $ (1,218,746) $ 2,562,990 $ 12,519,902 $ 520,729 $ 41,247,151
======================================================================================
See accompanying notes.
39
The National Bank of Indianapolis Corporation
Consolidated Statements of Cash Flows
Years ended December 31
2002 2001 2000
-------------------------------------------------
Operating activities
Net income $ 4,556,836 $ 3,370,043 $ 2,649,749
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 1,500,000 1,440,000 1,440,000
Depreciation and amortization 1,056,034 1,070,855 935,882
Income tax benefit from exercise of warrants & options 2,562,990 -- --
Stock compensation 109,918 110,000 --
Net accretion of investments 1,151,094 (1,652,102) (1,349,135)
Unearned compensation amortization 282,494 206,343 299,303
(Increase) decrease in:
Accrued interest receivable (1,147,427) 616,672 (147,493)
Other assets (963,659) (802,469) (1,224,827)
Increase in:
Other liabilities 900,935 537,880 1,049,731
-------------------------------------------------
Net cash provided by operating activities 10,009,215 4,897,222 3,653,210
Investing activities
Net change in federal funds sold (3,923,259) 1,279,249 1,768,851
Net change in reverse repurchase agreements 115,000,000 (120,000,000) --
Proceeds from maturities of investment
securities held to maturity 1,797,727 3,954,061 2,953,285
Proceeds from maturities of investment
securities available for sale 62,376,100 175,020,797 191,818,216
Proceeds from sales of investment securities available for sale 9,998,502 -- --
Purchases of investment securities held to maturity (23,796,563) (3,363,863) (5,765,926)
Purchases of investment securities available for sale (129,205,346) (123,524,709) (221,333,698)
Net increase in loans (77,110,879) (90,612,302) (50,255,788)
Purchases of premises and equipment (1,047,088) (2,085,607) (1,252,697)
-------------------------------------------------
Net cash used by investing activities (45,910,806) (159,332,374) (82,067,757)
Financing activities
Net increase in deposits 38,217,157 95,691,810 65,425,432
Net change in security repurchase agreements 5,922,142 10,890,378 17,266,237
Net change in FHLB advances (2,000,000) 26,000,000 10,000,000
Proceeds from issuance of long-term debt -- -- 1,500,000
Repayment of long-term debt -- -- (7,500,000)
Proceeds from issuance of capital securities -- -- 13,500,000
Repurchase of stock (30,800) (44,550) (46,000)
Proceeds from issuance of stock 4,838,280 105,396 95,820
-------------------------------------------------
Net cash provided by financing activities 46,946,779 132,643,034 100,241,489
-------------------------------------------------
Increase (decrease) in cash and cash equivalents 11,045,188 (21,792,118) 21,826,942
Cash and cash equivalents at beginning of year 34,844,360 56,636,478 34,809,536
-------------------------------------------------
Cash and cash equivalents at end of year $ 45,889,548 $ 34,844,360 $ 56,636,478
=================================================
Interest paid $ 14,144,085 $ 21,217,998 $ 18,917,557
=================================================
Income taxes paid $ 405,325 $ 2,700,277 $ 2,209,100
=================================================
See accompanying notes.
40
1. Organization and Accounting Policies
Organization
The National Bank of Indianapolis Corporation (the Corporation) was incorporated
in the State of Indiana on January 29, 1993. The Corporation subsequently formed
a de novo national bank, The National Bank of Indianapolis (the Bank), and a
statutory trust, NBIN Statutory Trust I (the Trust). The Bank is a wholly owned
subsidiary and commenced operations in December, 1993. The Trust was formed in
September, 2000 as part of the issuance of capital securities. The Corporation
and the Bank engage in a wide range of commercial, personal banking, and trust
activities primarily in Central Indiana.
The consolidated financial statements include the accounts of the Corporation,
the Bank, and the Trust with intercompany balances and transactions eliminated.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and interest-bearing deposits.
Interest-bearing deposits are available on demand.
Investment Securities
Investments in debt securities are classified as held-to-maturity or
available-for-sale. Management determines the appropriate classification of the
securities at the time of purchase.
Debt securities are classified as held-to-maturity when the Corporation has the
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost.
Debt securities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are stated at fair value, with
the unrealized gains and losses, net of tax, reported as a separate component of
shareholders' equity.
41
1. Organization and Accounting Policies (continued)
Investment Securities (continued)
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization is included in interest income
from investments and is computed using a method which approximates the
level-yield method. Interest and dividends are included in interest income from
investments. Realized gains and losses, and declines in value judged to be
other-than-temporary are included in other income. The cost of securities sold
is based on the specific identification method.
Loans
Interest income on commercial, mortgage and certain installment loans is accrued
on the principal amount of such loans outstanding. Loans are placed on
non-accrual status when significant doubt exists as to the collectibility of
principal or interest.
Allowance for Loan Losses
The allowance for loan losses is established through provisions for loan losses
charged against income. Loans deemed to be uncollectible are charged against the
allowance for loan losses, and subsequent recoveries, if any, are credited to
the allowance. The allowance for loan losses related to loans that are
identified as impaired is based on discounted cash flows using the loan's
initial effective interest rate, or the fair value of the collateral for certain
collateral dependent loans. The Corporation collectively evaluates consumer
loans and loans secured by real estate for impairment as homogeneous loan
groups.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb inherent losses in the loan portfolio. The determination of
the allowance is based on factors which, in management's judgment, deserve
recognition under existing economic conditions in estimating possible loan
losses. This evaluation is inherently subjective as it requires material
estimates including the amounts and timing of future cash flows expected to be
received on impaired loans that may be susceptible to significant change. The
allowance is increased by provisions for loan losses charged against income and
reduced by net charge-offs.
42
1. Organization and Accounting Policies (continued)
Mortgage Servicing Rights
Mortgage servicing rights are recognized as separate assets when rights are
acquired through sale of financial assets. Capitalized servicing rights are
reported in other assets and are amortized into non-interest income in
proportion to, and over the period of, the estimated future net servicing income
of the underlying financial assets. Mortgage servicing rights are evaluated for
impairment based upon the fair value of the rights as compared to amortized
cost. Impairment is determined by stratifying rights by predominant
characteristics, such as interest rates and terms. Fair value is determined
using prices for similar assets with similar characteristics, when available, or
based upon discounted cash flows using market-based assumptions. Impairment is
recognized through a valuation allowance for an individual stratum, to the
extent that fair value is less than the capitalized amount for the stratum.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation computed
by the straight-line method over their useful lives or, for leasehold
improvements, the remaining lease term.
Comprehensive Income
Comprehensive income is defined as net income plus other comprehensive income,
which, under existing accounting standards includes unrealized gains and losses
on certain investments in debt and equity securities. Comprehensive income is
reported by the Corporation in the consolidated statements of shareholders'
equity.
Earnings Per Share
Basic earnings per share is computed by dividing net income applicable to common
shareholders by the weighted average numbers of shares of common shares
outstanding for the period. Diluted earnings per share is computed by dividing
an adjusted net income by the sum of the weighted average number of shares and
the potentially dilutive shares that could be issued through stock award
programs or convertible securities.
Fair Values of Financial Instruments
The fair values of financial instruments are estimated using relevant market
information and other assumptions. Fair value estimates involve uncertainties
and matters of significant judgment concerning several factors, especially in
the absence of broad markets for particular items.
43
1. Organization and Accounting Policies (continued)
Stock Based Compensation
Effective January 1, 2001, the Corporation compensates directors with cash and
stock. To employees, and to directors through December 31, 2000, the Corporation
grants stock options for a fixed number of shares with an exercise price which
approximates the fair value of shares at the date of grant. As discussed further
in Note 9.,expense for director and employee compensation under stock option
plans is based on Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," (APB 25), with expense reported only if options are
granted below market price at grant date. Pro forma disclosures of net income
and earnings per share are provided as if the fair value method of Financial
Accounting Standard Board (FASB) Statement No. 123 "Accounting for Stock Based
Compensation", as amended by FASB Statement No. 148, were used for stock-based
compensation.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over their vesting periods. The following table
illustrates the effect on net income and earnings per share if we had applied
the fair value recognition provisions of Statement No. 123 to stock-based
compensation.
2002 2001 2000
----------------------------------------
Net income, as reported $4,556,836 $3,370,043 $2,649,749
Add: stock-based compensation expense, net of related taxes
170,598 124,610 180,749
Less: total stock-based compensation expense determined under
fair-value-based method, net of taxes
(529,881) (253,831) (387,740)
----------------------------------------
Pro forma net income $4,197,553 $3,240,822 $2,442,758
========================================
Earnings per share:
Basic, as reported $ 1.99 $ 1.76 $ 1.39
Basic, pro forma $ 1.83 $ 1.69 $ 1.28
Diluted, as reported $ 1.88 $ 1.55 $ 1.24
Diluted, pro forma $ 1.73 $ 1.49 $ 1.14
44
1. Organization and Accounting Policies (continued)
Reclassifications
Certain amounts in the 2001 and 2000 financial statements have been reclassified
to conform with the 2002 presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
2. Restrictions on Cash and Due From Bank Accounts
The Corporation is required to maintain average reserve balances with the
Federal Reserve Bank or as cash on hand or on deposit with a correspondent bank.
The required amount of reserve was approximately $25,000 at December 31, 2002
and 2001.
3. Investment Securities
The following is a summary of available-for-sale securities and held-to-maturity
securities:
Available-for-Sale Securities
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
---------------------------------------------------------
December 31, 2002
U.S. Treasury securities $ 2,100,309 $ 13,230 $ 275 $ 2,113,264
U.S. Government agencies 79,930,066 845,676 -- 80,775,742
Collateralized mortgage obligations 1,097,683 3,646 1,101,329
---------------------------------------------------------
$83,128,058 $ 862,552 $ 275 $83,990,335
=========================================================
December 31, 2001
U.S. Treasury securities $ 2,113,700 $ 12,385 $ -- $ 2,126,085
U.S. Government agencies 23,262,121 88,863 -- 23,350,984
Collateralized mortgage obligations 1,775,838 3,578 $ 11 1,779,405
---------------------------------------------------------
$27,151,659 $ 104,826 $ 11 $27,256,474
=========================================================
45
3. Investment Securities (continued)
Held-to-Maturity Securities
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
---------------------------------------------------------
December 31, 2002
Collateralized mortgage obligations $24,333,493 $ 339,440 $ 12,644 $24,660,289
Municipals 5,534,243 552,233 -- 6,086,476
Other securities 225,000 10,391 -- 235,391
---------------------------------------------------------
$30,092,736 $ 902,064 $ 12,644 $30,982,156
=========================================================
December 31, 2001
Collateralized mortgage obligations $ 2,696,147 $ 6,816 $ 21,832 $ 2,681,131
Municipals 5,494,504 184,573 -- 5,679,077
Other securities 200,000 1,925 1,028 200,897
---------------------------------------------------------
$ 8,390,651 $ 193,314 $ 22,860 $ 8,561,105
=========================================================
Investment securities with a carrying value of approximately $71,000,000 and
$2,100,000 at December 31, 2002 and 2001, respectively were pledged as
collateral for bankruptcy accounts to the U.S. Department of Justice, Treasury
Tax and Loan, and securities sold under agreements to repurchase.
46
3. Investment Securities (continued)
The amortized cost and estimated fair value of debt and marketable equity
securities at December 31, 2002, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because the issuers
of the securities may have the right to prepay obligations without prepayment
penalties.
Estimated
Amortized Fair
Cost Value
--------------------------
Available-for-Sale
Due in one year or less $46,938,336 $47,223,221
Due after one year through five years 35,092,039 35,665,785
Collateralized mortgage obligations 1,097,683 1,101,329
--------------------------
$83,128,058 $83,990,335
==========================
Held-to-Maturity
Due after one year through five years $ 150,000 $ 156,605
Due after five years through ten years 5,609,243 6,165,262
Collateralized mortgage obligations 24,333,493 24,660,289
--------------------------
$30,092,736 $30,982,156
==========================
4. Loans and Allowance for Loan Losses
Loans consist of the following at December 31:
2002 2001
----------------------------
Residential loans secured by real estate $184,141,018 $168,900,807
Commercial loans secured by real estate 113,398,604 82,255,861
Other commercial and industrial loans 182,993,990 150,101,133
Loans to individuals for household, family,
and other consumer expenditures 48,377,605 50,802,502
----------------------------
Total loans $528,911,217 $452,060,303
============================
Activity in the allowance for loan losses was as follows:
2002 2001 2000
----------------------------------------
Beginning balance $5,986,965 $4,700,672 $3,392,587
Loans charged off (net) (259,965) (153,707) (131,915)
Provision for loan losses 1,500,000 1,440,000 1,440,000
----------------------------------------
Ending balance $7,227,000 $5,986,965 $4,700,672
========================================
47
4. Loans and Allowance for Loan Losses (continued)
At December 31, 2002 twenty-three loans with a combined balance of $3,229,000
were considered to be impaired. At December 31, 2001 thirteen loans with a
combined balance of $835,000 were considered to be impaired. The average
combined balance of impaired loans during 2002 and 2001 was $1,864,000 and
$973,000, respectively.
Loans are principally to borrowers in the Central Indiana area.
5. Premises and Equipment
Premises and equipment consist of the following at December 31:
2002 2001
----------------------------
Land and improvements $ 2,270,444 $2,270,444
Building and improvements 5,027,631 4,242,697
Construction in progress 244,564 489,649
Leasehold improvements 1,611,134 1,562,388
Furniture and equipment 5,993,658 5,535,165
----------------------------
15,147,431 14,100,343
Less accumulated depreciation and amortization (5,899,141) (4,843,107)
----------------------------
Net premises and equipment $9,248,290 $9,257,236
============================
Certain Corporation facilities and equipment are leased under various operating
leases. Rental expense under these leases was $245,629, $240,913, and $175,435
for 2002, 2001, and 2000, respectively.
Future minimum rental commitments under noncancelable leases are:
2003 $ 242,373
2004 224,224
2005 212,744
2006 157,469
2007 136,003
Thereafter 231,347
----------------
$1,204,160
================
48
6. Loan Servicing
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of mortgage loans
serviced for others was $80,021,212 and $69,216,879 at December 31, 2002 and
2001, respectively.
The balance of capitalized servicing rights, net of valuation allowances,
included in other assets at December 31, 2002 and 2001, was $780,093 and
$742,115, respectively. The valuation allowance related to these rights were
$261,174 and $0, respectively.
7. Deposits
At December 31, 2002 the stated maturities of time deposits are as follows:
Greater
Less than Than
$100,000 $100,000
-------------------------------
Mature in three months or less $16,033,990 $13,132,946
Mature after three months through six months 8,444,470 5,985,896
Mature after six months through twelve months 10,710,978 5,257,148
Mature in 2002 13,894,220 7,422,085
Mature in 2003 6,952,406 1,980,136
Thereafter 8,314,226 3,032,954
-------------------------------
$64,350,290 $36,811,165
===============================
8. Other Borrowings
Security repurchase agreements are short-term borrowings that generally mature
within one to three days from the transaction date. At December 31, 2002 and
2001 the weighted average interest rate on these borrowings was 1.08% and 3.43%,
respectively.
All of the FHLB advances have a fixed interest rate and require monthly interest
payments. The principal balances for each of the advances is due at maturity.
The advances are collateralized by a pledge covering certain of the
Corporation's mortgage loans.
49
8. Other Borrowings (continued)
A schedule of the FHLB advances as of December 31, 2002 is as follows:
Amount Rate Maturity
-----------------------------------------------
$6,000,000 5.66% 09/04/2003
5,000,000 5.39% 02/26/2004
5,000,000 5.15% 04/23/2004
5,000,000 5.14% 08/01/2005
3,000,000 5.39% 10/03/2005
5,000,000 5.43% 03/16/2006
5,000,000 5.32% 05/08/2006
8,000,000 4.19% 07/24/2007
3,000,000 5.57% 08/13/2007
3,000,000 5.55% 10/02/2008
---------------
$ 48,000,000
===============
The Corporation has a $5,000,000 Revolving Credit Agreement with Harris Trust
and Savings Bank maturing September 28, 2003. At December 31, 2002 and 2001, $0
was outstanding, respectively. Several interest rate options, including an
adjusted LIBOR rate, are available to the Corporation on any amounts drawn on
the line. Interest payments are due quarterly. The Corporation also pays a
commitment fee of .25% per annum on the average daily unused portion of the line
of credit. The line is collateralized by the issued and outstanding stock of the
Bank. In addition, this agreement requires the maintenance of certain ratios and
compliance with various other restrictive covenants.
In September of 2000, the Trust, which is wholly owned by the Corporation,
issued $13,500,000 of company obligated mandatorily redeemable capital
securities. The proceeds from the issuance of the capital securities and from
the issuance of related common securities of $418,000 were used by the Trust to
purchase from the Corporation $13,918,000 Fixed Rate Junior Subordinated
Debentures. The capital securities mature September 6, 2030, have a fixed
interest rate of 10.60%, and are guaranteed by the Bank. The net proceeds
received by the Corporation from the sale of the capital securities were used
for general corporate purposes. The indenture, dated September 7, 2000, requires
compliance with certain non-financial covenants.
50
9. Stock Option and Award and Employee Benefit Programs
The Board of Directors of the Corporation adopted stock option plans for
directors and key employees at the initial formation of the Bank in 1993. The
Board of Directors authorized 130,000 shares in 1993, 90,000 shares in 1996,
150,000 shares in 1999, and an additional 120,000 during 2002 to be reserved for
issuance under the Corporation's stock option plan. All of the options in these
plans remain exercisable for a period of 10 years from the date of issuance,
subject to the terms and conditions of the plans.
Shares subject to outstanding options are summarized as follows:
December 31
----------------------------------------------------------------------
2002 2001 2000
----------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
----------------------------------------------------------------------
Options outstanding at
beginning of year 315,500 $ 14.75 316,500 $ 14.65 287,500 $ 13.95
New options
granted 115,057 27.58 4,000 23.00 31,000 21.13
Options exercised (37,800) 12.25 -- -- -- --
Options forfeited (1,200) 19.00 (5,000) 15.33 (2,000) 19.00
--------- --------- ---------
Options outstanding at end
of year 391,557 $ 18.75 315,500 $ 14.75 316,500 $ 14.65
========= ========= =========
Exercisable at year end 260,300 $ 15.72 241,800 $ 13.47 220,500 $ 13.01
Weighted-average fair value of
options granted
during the year $ 11.06 $ 9.32 $ 9.77
As of December 31, 2002 total shares which may be purchased under the plans is
391,557 with option prices ranging from $10.00 to $27.75. The weighted-average
remaining contractual life of those options is six years.
51
9. Stock Option and Award and Employee Benefit Programs (continued)
The Board of Directors also approved a restricted stock plan in 1993. Shares
reserved by the Corporation for the restricted stock plan include 50,000 shares
in 1993, 20,000 shares in 1996, 40,000 in 1999 and an additional 55,000 shares
in 2002. Under this plan, shares were issued in the proceeding years as detailed
in the following table. The Corporation recorded each stock issuance in
shareholders' equity with an offsetting contra-equity account, unearned
compensation, equal to the fair market value of the shares at the grant date.
The unearned compensation is amortized over the vesting period.
Fiscal Number of
Year Shares Shares Unearned Vesting Date
Ended Issued Forfeited Compensation Schedule Fully Vested
- ---------------------------------------------------------------------------------------------------------
1994 48,000 1,500 $604,500 50% - July 1, 1998 July 1, 2000
25% - January 1, 1999
25% - July 1, 2000
1997 19,500 700 242,332 20% per year January 1, 2002
1998 1,000 - 14,000 20% per year January 1, 2003
1999 36,000 2,000 646,000 5 yr. cliff June 30, 2004
2000 5,000 - 100,000 5 yr. cliff March 16, 2005
2001 3,000 - 69,000 5 yr. cliff January 26, 2006
2002 1,500 - 37,500 5 yr. cliff June 11,2006
2002 6,500 - 178,750 4 yr. Cliff August 31, 2006
2002 30,800 500 845,200 5 yr. Cliff June 20, 2007
In consideration of their efforts in organizing the Corporation and the Bank,
two officers/directors of the Corporation were issued warrants on October 18,
1993 to purchase an additional 345,500 common shares. The warrants became
exercisable, subject to certain regulatory conditions and restrictions, on
October 18, 1994 and will remain exercisable for a period of ten years
thereafter at a purchase price of $10 per share. During 1995, the Corporation
issued warrants to purchase an additional 76,875 common shares at a purchase
price of $12.50 to one officer/director. The 1995 warrants expire on July 20,
2005.
During 2002, certain officers/directors of the Corporation exercised their
warrants/options to purchase 422,175 shares of common shares. The exercise price
ranged from $10.00 to $22.50 with a weighted average exercise price of $10.66
and the weighted average fair market value of the stock was $26.05.
52
9. Stock Option and Award and Employee Benefit Programs (continued)
The Corporation has elected to follow APB 25 and related Interpretations in
accounting for its director and employee stock options, restricted stock and
warrants. Under APB 25, because the exercise price of the Corporation's director
and employee stock options and warrants equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
See Note. 1 for the pro forma information regarding net income and earnings per
share as required by FASB Statement No. 123, which also requires that the
information be determined as if the Corporation has accounted for its stock
options, restricted stock and warrants granted under the fair value method of
that Statement. The fair value for the options and warrants was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted- average assumptions: a dividend yield of 0%; volatility factor of the
expected market price of the Corporation's common stock of .001; and an expected
life of the options of 10 years. The risk-free interest rate was estimated to be
5.2% to 5.66%, 5.33%, and 6.26% to 6.53% for 2002, 2001, and 2000, respectively.
The fair value for the restricted stock is estimated to equal the fair value of
unrestricted stock and be restricted for a weighted average of five years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Corporation's director and employee stock options, restricted stock and
warrants have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
director and employee stock options.
The Corporation has a trusteed 401(k) retirement savings plan covering
substantially all employees and encouraging employee contributions. Employer
contributions include Board of Director discretionary contributions and the
matching of a portion of employee contributions. The Corporation expensed
approximately $167,000, $146,000, and $98,000 for employer contributions to the
plan during 2002, 2001, and 2000, respectively.
53
10. Dividend and Loan Limitation and Regulatory Capital Ratios
Dividends from the Bank to the Corporation may not exceed the undivided profits
of the Bank (included in consolidated retained earnings) without prior approval
of a federal regulatory agency. In addition, Federal banking laws limit the
amount of loans the Bank may make to the Corporation, subject to certain
collateral requirements. No loans were made during 2002 or 2001 by the Bank to
the Corporation. The Bank declared $650,000 and $0 dividends to the Corporation
during 2002 and 2001, respectively.
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory-and possibly additional discretionary-actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain amounts and ratios (set forth in the table below)
of total and Tier 1 capital (as defined in the regulations) to risk-weighted
assets (as defined), and of total qualifying capital to total adjusted asset (as
defined). Management believes, as of December 31, 2002 and 2001, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 2002, the most recent notification from the Comptroller of
the Currency categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Bank must maintain minimum total risk-based, Tier 1 risk-based, and
leveraged capital ratios as set forth in the following table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
54
10. Dividend and Loan Limitation and Regulatory Capital Ratios (continued)
The Bank's actual capital amounts and ratios are also presented in the following
table.
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
------------------------------------------------------------------
As of December 31, 2002 Amount Ratio Amount Ratio Amount Ratio
----------- ----- ----------- ----- ----------- -----
Tier 1 Risk-Based Capital $47,501,118 8.9% $21,477,933 4.0% $32,216,900 6.0%
Total Risk-Based Capital 54,219,332 10.1% 42,955,867 8.0% 53,694,834 10.0%
Leveraged Capital 47,501,118 6.6% 28,755,905 4.0% 35,944,882 5.0%
As of December 31, 2001
Tier 1 Risk-Based Capital 41,413,685 9.4% 17,717,936 4.0% 26,576,905 6.0%
Total Risk-Based Capital 46,956,098 10.6% 35,435,873 8.0% 44,294,841 10.0%
Leveraged Capital 41,413,685 6.2% 26,669,813 4.0% 33,337,265 5.0%
11. Related Parties
Certain directors and principal shareholders of the Corporation, including their
families and companies in which they are principal owners, are loan customers of
and have other transactions with the Corporation or its subsidiary in the
ordinary course of business. The aggregate dollar amount of these loans was
approximately $8,770,311 and $7,251,832 on December 31, 2002 and 2001,
respectively. All of the loans made were on substantially the same terms,
including interest rate and collateral, as those prevailing at the time for
comparable transactions with unrelated parties. The amounts do not include loans
made in the ordinary course of business to companies in which officers or
directors of the Corporation are either officers or directors, but are not
principal owners, of such companies. During 2002, new loans to these parties
amounted to $2,201,228 and repayments amounted to $682,749.
55
12. Income Taxes
The Corporation applies a federal income tax rate of 34% and a state tax rate of
8.5% in the computation of tax expense or benefit. The provision for income
taxes consisted of the following:
2002 2001 2000
--------------------------------------------
Current tax expense $3,636,852 $2,646,904 $2,262,449
Deferred tax benefit (636,573) (506,348) (542,991)
--------------------------------------------
$3,000,279 $2,140,556 $1,719,458
============================================
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Deferred tax assets are
recognized for the estimated tax effects attributable to deductible temporary
differences and operating loss carryforwards, net of any valuation allowances
for amounts which may not be realized by the Corporation.
The components of the Corporation's net deferred tax assets in the consolidated
balance sheet as of December 31 are as follows:
2002 2001
---------------------------
Deferred tax assets:
Allowance for loan losses $ 2,862,615 $ 2,371,437
Other 590,068 436,561
---------------------------
Total deferred tax assets 3,452,683 2,807,998
Deferred tax liability:
Mortgage servicing rights (308,995) (293,952)
Other (333,296) (40,197)
---------------------------
Total deferred tax liabilities (642,291) (334,149)
---------------------------
Net deferred tax assets $ 2,810,392 $ 2,473,849
===========================
56
13. Commitments and Contingencies
A summary of the contractual amount of commitments to extend credit is as
follows:
2002 2001
----------------------------
Commercial credit lines $104,949,477 $ 88,237,003
Revolving home equity and credit card lines 63,441,970 61,865,125
Standby letters of credit 11,116,928 12,703,423
Other loans 2,379,428 2,041,660
----------------------------
$181,887,803 $164,847,211
============================
Commitments to extend credit are agreements to lend. Since many of the
commitments to extend credit may expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash-flow requirements.
Standby letters of credit are conditional commitments issued to guarantee the
performance of a customer to a third party. Standby letters of credit generally
are contingent upon the failure of the customer to perform according to the
terms of the underlying contract with the third party.
The credit risk associated with loan commitments and standby letters of credit
is essentially the same as that involved in extending loans to customers and is
subject to normal credit policies. Collateral may be obtained based on
management's credit assessment of the customer.
The Corporation has committed to invest $500,000 in the CSC Tax Credit Fund for
the purpose of obtaining future tax credits. The investment funds will be used
for the construction of low-income housing. The investment is non-interest
bearing, and receipt of future tax credits are subject to the investee's
fulfillment of requirements as set forth by the Indiana Housing Finance
Authority. The Corporation expects to receive the investment principal in
approximately 10-15 years. However, the receipt of the principal in the future
is not guaranteed.
57
14. Fair Value of Financial Instruments
FASB Statement No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. Statement No. 107 excludes certain financial
instruments and all non-financial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Corporation.
The following methods and assumptions were used by the Corporation in estimating
its fair value disclosures for financial instruments:
Cash and short-term investments: The carrying amounts reported in the
balance sheet for cash and short-term investments approximate those
assets' fair values due to the short maturity of those assets.
Investment securities (including collateral mortgage obligations and stock
in federal banks): Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans receivable: For variable-rate loans that re-price frequently and
with no significant change in credit risk, fair values are based on
carrying values. The fair values for all other loans are estimated using
discounted cash flow analyses, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit
quality. The carrying amount of accrued interest approximates its fair
value.
Deposits: The fair values disclosed for demand deposits, including
interest-bearing and non-interest bearing accounts, passbook savings, and
certain types of money market accounts are, by definition, equal to the
amount payable on demand at the reporting date (i.e., their carrying
amounts). Fair values for fixed-rate certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits.
58
14. Fair Value of Financial Instruments (continued)
Security Repurchase Agreements: The carrying amounts of borrowings under
repurchase agreements approximate their fair values due to variable interest
rates.
FHLB Advances: The fair value of FHLB advances are based upon discounted
cash flows using rates for similar advances with the same maturities.
Capital securities: The fair value of the preferred capital securities are
based upon discounted cash flows using rates for similar securities with
the same maturities.
Off-balances-sheet instruments: Due to variable interest rates, the fair
value of commitments to extend credit approximate the carrying value.
The estimated fair values of the Corporation's financial instruments at December
31 are as follows:
2002 2001
------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------------------------------------------
Assets
Cash and due from banks $ 45,889,548 $ 45,889,548 $ 34,844,360 $ 34,844,360
Federal funds sold 18,177,463 18,177,463 14,254,204 14,254,204
Reverse Repurchase Agreements
5,000,000 5,000,000 120,000,000 120,000,000
Investment securities available-for-sale
83,990,335 83,990,335 27,256,474 27,256,474
Investment securities held-to-maturity
30,092,736 30,982,156 8,390,651 8,561,105
Net loans 521,684,217 525,006,358 446,073,338 458,142,957
Stock in federal banks 3,401,500 3,401,500 3,401,500 3,401,500
Liabilities
Deposits 544,342,520 546,351,117 506,125,363 508,364,621
Security Repurchase Agreements
74,273,774 74,273,774 68,351,632 68,351,632
FHLB advances 48,000,000 50,671,440 50,000,000 51,452,244
Capital securities 13,500,000 14,866,537 13,500,000 14,754,919
Off-Balance-Sheet Instruments
Commitments to extend credit -- -- -- --
59
15. Earnings Per Share
Basic net income per common share is computed by dividing net income applicable
to common stock by the weighted average number of shares of common stock
outstanding during the period. Diluted net income per common share is computed
by dividing net income applicable to common stock by the weighted average number
of shares, non-vested stock and dilutive common stock equivalents outstanding
during the period. Common stock equivalents consist of common stock issuable
under the assumed exercise of warrants and stock options granted under the
Corporation's stock plans, using the treasury stock method. A computation of
earnings per share follows:
2002 2001 2000
--------------------------------------
Basic average shares outstanding 2,288,715 1,916,658 1,908,476
======================================
Net income $4,556,836 $3,370,043 $2,649,749
======================================
Basic net income per common share $ 1.99 $ 1.76 $ 1.39
======================================
Diluted
Average shares outstanding 2,288,715 1,916,658 1,908,476
Nonvested restricted stock 48,300 27,600 28,920
Common stock equivalents
Net effect of the assumed exercise
of stock options 77,518 80,040 69,164
Net effect of the assumed
exercise of warrants 14,581 149,521 138,227
--------------------------------------
Diluted average shares 2,429,114 2,173,819 2,144,787
======================================
Net income $4,556,836 $3,370,043 $2,649,749
======================================
Diluted net income per common share $ 1.88 $ 1.55 $ 1.24
======================================
60
16. Parent Company Financial Statements
The condensed financial statements of the Corporation, prepared on a parent
company unconsolidated basis, are presented as follows:
Balance Sheet
December 31
2002 2001
--------------------------
Assets
Cash $ 7,313,809 $ 642,034
Investment in subsidiaries 48,517,856 41,958,395
Other assets 395,564 389,000
--------------------------
Total assets $56,227,229 $42,989,429
==========================
Liabilities and shareholders' equity
Other liabilities $ 1,062,078 $ 601,427
Subordinated debt 13,918,000 13,918,000
--------------------------
Total liabilities 14,980,078 14,519,427
Shareholders' equity 41,247,151 28,470,002
--------------------------
Total liabilities and shareholders' equity $56,227,229 $42,989,429
==========================
Statements of Income
Years ended December 31
2002 2001 2000
-------------------------------------------
Interest income $ 65,119 $ 58,222 $ 154,624
Interest expense 1,443,674 1,443,135 915,555
Other operating expenses:
Unearned compensation amortization 282,494 206,343 299,303
Other expenses 316,483 285,162 52,661
-------------------------------------------
Total other operating expenses 598,977 491,505 351,964
-------------------------------------------
Net loss before tax benefit and equity in undistributed
net income of The National Bank of Indianapolis
(1,977,532) (1,876,418) (1,112,895)
Tax benefit 782,338 756,260 490,356
-------------------------------------------
Net loss before equity in undistributed net income of
The National Bank of Indianapolis (1,195,194) (1,120,158) (622,539)
Equity in undistributed net income of The National
Bank of Indianapolis 5,752,030 4,490,201 3,272,288
-------------------------------------------
Net income $ 4,556,836 $ 3,370,043 $ 2,649,749
===========================================
61
16. Parent Financial Statements (continued)
Statements of Cash Flows
Years ended December 31
2002 2001 2000
----------------------------------------------
Operating activities
Net income $ 4,556,836 $ 3,370,043 $ 2,649,749
Adjustments to reconcile net income to net cash provided
by operating activities:
Undistributed income of The National Bank of Indianapolis
(5,752,030) (4,490,201) (3,272,288)
Income tax benefit from exercise of options & warrants 2,562,990 -- --
Stock compensation 109,918 110,000 --
Unearned compensation amortization 282,494 206,343 299,303
(Increase) decrease in other assets (6,564) 49,019 (438,019)
Increase in other liabilities 460,651 106,341 382,895
----------------------------------------------
Net cash provided by (used by) operating activities 2,214,295 (648,455) (378,360)
Investing activities
Capital contribution to The National Bank of Indianapolis
(1,000,000) (1,000,000) (5,500,000)
Dividends from The National Bank of Indianapolis 650,000 -- --
Capital contribution to NBIN Statutory Trust I -- -- (418,000)
----------------------------------------------
Net cash used by investing activities (350,000) (1,000,000) (5,918,000)
Financing activities
Proceeds from issuance of stock 4,838,280 105,396 95,820
Repurchase of stock (30,800) (44,550) (46,000)
Proceeds of issuance of long-term debt -- -- 15,418,000
Repayment of long-term debt -- -- (7,500,000)
----------------------------------------------
Net cash provided by financing activities 4,807,480 170,846 7,967,820
----------------------------------------------
Increase (decrease) in cash and cash equivalents 6,671,775 (1,587,609) 1,671,460
Cash and cash equivalents at beginning of year 642,034 2,229,643 558,183
----------------------------------------------
Cash and cash equivalents at end of year $ 7,313,809 $ 642,034 $ 2,229,643
==============================================
62
17. Quarterly Results of Operations (Unaudited)
The following is a summary of the unaudited quarterly results of operations for
the years ended December 31, 2002 and 2001:
March 31 June 30 September 30 December 31
--------------------------------------------------------
2002
Interest income $ 8,432,837 $ 8,761,125 $ 9,030,932 $ 8,870,406
Interest expense 3,825,423 3,633,413 3,432,602 3,170,139
--------------------------------------------------------
Net interest income 4,607,414 5,127,712 5,598,330 5,700,267
Provision for loan losses 450,000 450,000 300,000 300,000
Other operating income 1,666,772 1,977,197 1,872,262 1,959,231
Other operating expense 4,559,236 4,543,060 5,055,581 5,294,193
--------------------------------------------------------
Net income before tax 1,264,950 2,111,849 2,115,011 2,065,305
Federal and state income tax 509,484 837,032 838,048 815,715
--------------------------------------------------------
Net income after tax $ 755,466 $ 1,274,817 $ 1,276,963 $ 1,249,590
========================================================
Basic earnings per share $ 0.36 $ 0.54 $ 0.54 $ 0.55
Diluted earnings per share $ 0.34 $ 0.51 $ 0.51 $ 0.52
2001
Interest income $10,105,609 $10,088,267 $ 9,782,393 $ 8,825,137
Interest expense 5,735,933 5,621,096 5,192,694 4,403,137
--------------------------------------------------------
Net interest income 4,369,676 4,467,171 4,589,699 4,422,000
Provision for loan losses 360,000 360,000 360,000 360,000
Other operating income 1,404,253 1,366,042 1,590,126 1,562,152
Other operating expense 4,045,373 4,059,737 4,389,298 4,326,112
--------------------------------------------------------
Net income before tax 1,368,556 1,413,476 1,430,527 1,298,040
Federal and state income tax 528,263 554,708 552,362 505,223
--------------------------------------------------------
Net income after tax $ 840,293 $ 858,768 $ 878,165 $ 792,817
========================================================
Basic earnings per share $ 0.44 $ 0.45 $ 0.46 $ 0.41
Diluted earnings per share $ 0.39 $ 0.40 $ 0.40 $ 0.36
63
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.
- --------------------------------------------------------------------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The following sets forth information as to each director and
executive officer of the Corporation and the Bank as of December 31, 2002,
including their ages, present principal occupations, other business experience
during the last five years and directorships in other publicly held companies.
Each individual's service with the Corporation and the Bank began at the
formation of the Corporation in 1993, unless otherwise noted. In addition, all
current directors of the Corporation are also current directors of the Bank.
Certain family relationships exist among the directors of the Corporation.
Michael S. Maurer and Morris L. Maurer are cousins. There are no arrangements or
understandings between any of the directors pursuant to which any of them have
been selected for their respective positions.
KATHRYN G. BETLEY - Age 60, Term Expires 2003. Ms. Betley, a
director, has been chairman of the board, secretary and co-owner of Romancing
the Seasons, a retail store located in Indianapolis, from 1989 through the
present. Ms. Betley is an active community volunteer in the Indianapolis area
and is involved with and serves on the boards of many civic organizations.
JAMES M. CORNELIUS - Age 59, Term Expires 2004. James M. Cornelius
serves as non-executive Chairman of the Board of Guidant Corporation, a leading
cardiac and vascular medical device company (New York Stock Exchange: GDT),
whose global headquarters are located in Indianapolis, Indiana. He was elected
Chairman of the Board of Directors, and its senior executive, in September 1994
when the Company was formed. Mr. Cornelius relinquished his executive
responsibilities in 2001, upon retirement after 33 years of combined service to
Guidant and Eli Lilly and Company.
From 1994 to 2001, Guidant sales had tripled to $2.5 billion, the
number of employees had grown from 5,000 to 10,000 and the Company's stock
market capitalization had increased from $1 billion to over $18 billion. Fortune
Magazine ranked Guidant 35th in their year 2001 list of "America's Most Admired
Companies" and has included Guidant in their annual listing of the "100 Best
Companies to Work for in America" on three occasions.
While at Eli Lilly and Company, Mr. Cornelius was a member of the
Board of Directors, its Executive Committee, and Chief Financial Officer from
1983 until joining Guidant. He was instrumental in the successful IPO and
subsequent split-off of Guidant as an independent company from Lilly. In 1978 he
was named the initial director of acquistions for Lilly's Medical Device and
Diagnostics Division (MDD), the predecessor group to Guidant. He served as
president and CEO of IVAC Corporation in San Diego, CA from 1980-82, previously
part of Lilly's MDD division.
In addition to Guidant, he serves on the public company Boards of
The Chubb Corporation, and Hughes Electronics. He was elected as the first
independent Director of the Israeli medical device start-up Given Imaging, now
listed on NASDAQ. He is also a member of the Board of Directors of American
United Mutual Insurance Holding Company and a founding Board member of The
National Bank of Indianapolis.
He was previously a member of the Board of Directors of Lilly
Industries, DowElanco, Indiana National Bank, Indiana Bell
64
Telephone Company, and CompuServe. He has been active as a Board member of
several Indianapolis civic organziations and has served United Way of Central
Indiana in multiple leadership positions. He is currently Treasurer of the Board
of Governors of the Indianapolis Museum of Art, a member of the Board of
Trustees at DePauw University, and is President of the Cornelius Family
Foundation.
DAVID R. FRICK - Age 58, Term Expires 2003. Mr. Frick, a director,
is the executive vice president and chief legal and administrative officer of
Anthem Insurance Companies, Inc. (a health care management and health insurance
company). He served as managing partner of Baker & Daniels, one of Indiana's
largest law firms, from 1987 through 1992. Mr. Frick was engaged in the private
practice of law from 1969 to 1976, when he became Corporation Counsel and Deputy
Mayor of the City of Indianapolis. Mr. Frick returned to the private practice of
law in 1982 in Indianapolis. Mr. Frick is a member of the Board of Managers of
Anthem Prescription Management LLC, President and Director of Anthem Blue Cross
and Blue Shield Foundations, Inc. Mr. Frick is also a director of Anthem Benefit
Administrators, Inc., Anthem East, Inc., Anthem Financial, Inc., Anthem Health
Plans of Connecticut, Inc., Anthem Health Plans of Maine, Inc., Anthem Health
Plans of New Hampshire, Inc., Anthem Life Insurance Company, Anthem Midwest,
Inc., Anthem West, Inc., Associated Group, Inc., The Anthem Companies, Inc.,
AdminaStar Federal, Inc., AllMed Financial Corp., HMO Colorado, Inc,. Health
Care Ventures, Inc., Health Initiatives, Inc., Lease Partners, Inc., Matthew
Thornton Health Plan, Inc., Matthew Thornton Insurance, Inc., Northeast
Consolidated Services, Inc., Occupational Healthcare Management Services, Inc.,
Raffensperger, Hughes & Co., Inc., Rocky Mountain Administrative Services
Company, Inc., Rocky Mountain Health Care Corporation, Rocky Mountain Hospital
and Medical Service, Inc.
ANDRE B. LACY - Age 63, Term Expires 2005. Mr. Lacy, a director,
began his career in 1961 with the predecessor of Lacy Diversified Industries,
Inc. as an analyst. Mr. Lacy held various positions with the company before
becoming chairman and chief executive officer of LDI, Ltd. (Limited Partnership)
and its subsidiaries. Its various entities include: Lacy Distributions, Inc.;
Major Video Concepts; Tucker-Rocky Distributing; Answer Products, Inc.; and
FinishMaster, Inc.
Mr. Lacy was a director of Merchants National Bank & Trust Company
and Merchants National Corporation/National City Corporation from 1979 through
1992. He also served as chairman of the Finance Committee and as a member of the
Executive Committee. Mr. Lacy is currently a director of IPALCO Enterprises,
Inc., Patterson Dental Co., Indianapolis Chamber of Commerce, Indiana Chamber of
Commerce, Economic Club of Indianapolis, Inc., Corporate Community Council,
Herff Jones, National Association of Wholesalers-Distributors; and FinishMaster,
Inc. He is also the Chairman of Community Leaders Allies for Superior Schools, a
Trustee of Hudson Institute, serves on the Board of Governors of United Way of
Central Indiana and is on the Board of Trustees of Rose-Hulman Institute of
Technology.
G. BENJAMIN LANTZ, JR. - Age 66, Term Expires 2004. Dr. Lantz, a
director, was president of the University of Indianapolis from 1988 through May
1998. He is currently retired and now serves as an independent consultant. He
served approximately 18 years in the administration of various colleges before
he became vice president, administration and development at NESCO, Inc., a
privately held manufacturing, real estate and engineering company located in
Mayfield Heights, Ohio. Dr. Lantz's responsibilities included supervision of
legal counsel and corporate recruitment. Dr. Lantz was also involved in
acquisitions and divestitures and locating, analyzing and negotiating and
conducting due diligence activities for the purchase of companies. Dr. Lantz
also monitored corporate activities for four companies. He is a director of
Administar Federal Inc.
WILLIAM J. LOVEDAY - Age 59, Term Expires 2004. Mr. Loveday, a
director, is currently the president and chief executive officer of Clarian
Health Partners, Inc. Mr. Loveday has served in that capacity since 1988. Mr.
Loveday is also a director of Indianapolis
65
Life Insurance Company, Indiana Health Industry Forum, Healthcare Research
Development Institute, Inc., IUPUI Board of Advisors, and Indiana Health and
Hospital Association. From 1983 to 1988, Mr. Loveday was executive vice
president and chief operating officer of Memorial Medical Center of Long Beach,
California.
MICHAEL S. MAURER - Age 60, Term Expires 2004. Mr. Maurer, the
chairman of the board of the Corporation and the Bank, was self-employed as an
attorney from 1969 through 1988. In 1987 Mr. Maurer became chief executive
officer and fifty percent owner of MYSTAR Corp., a broadcasting company which
owns Indianapolis radio stations WTPI-FM, WZPL-FM and WMyS-AM. In 1990 Mr.
Maurer became chief executive officer and fifty percent owner of IBJ Corp., a
publishing company which owns The Indianapolis Business Journal, The Court and
Commercial Record, Indiana Lawyer, and Senior Beacon. From April 1991 through
December 1992, Mr. Maurer served as a director and member of the Executive
Committee of Merchants National Bank/National City Bank, Indianapolis, Indiana.
Mr. Maurer is currently chairman of the board of MyStar Communications and IBJ
Corporation. He is also a director of Jewish Community Relations Council,
Indianapolis Chamber of Commerce, Central Indiana Corporate Partnership, Inc.,
Greater Indianapolis Progress Committee and is a member of Indiana Square, LLC.
MORRIS L. MAURER - Age 51, Term Expires 2005. Mr. Maurer is the
president, chief executive officer and a director of the Corporation and the
Bank. He was employed by Indiana National Bank/INB Financial Corporation from
1975 through 1992. In Mr. Maurer's capacity as senior vice president, he was
responsible for corporate-wide strategic planning, venture capital, chairman of
corporate and lead bank ALCO committees, mergers and acquisitions, and economic
research. As chief financial officer, Mr. Maurer was responsible for general
accounting, controller, investment, funds desk, security sales and brokerage
functions. In addition, Mr. Maurer was a member of the executive management
committee, and chairman of the state-wide bank integration committee. Mr. Maurer
is a director of Historic Landmarks Foundation of Indiana, serves as the
Treasurer of Indianapolis Civic Theatre and is a Trustee of Indianapolis Museum
of Art.
PHILIP B. ROBY - Age 59, Term Expires 2003. Mr. Roby is the
executive vice president, chief operating officer and a director of the
Corporation and the Bank and is also the chief lending officer of the Bank. He
began his career at Indiana National Bank in 1965 in its Management Training
Program. During the years between 1967 to 1973, Mr. Roby worked as a Commercial
Lending Officer and Correspondent Banking Officer at Indiana National Bank. In
1973, he was named manager of the Commercial Credit Department with
responsibility for the Commercial Credit Training Program in Commercial Loan
Analysis. In 1975, he became president of two real estate subsidiaries of the
parent holding company, Indiana National Financial Corporation.
From 1978 to 1990, he held the position of senior vice president and
division head of the Metropolitan Division. Mr. Roby served as a member of the
Commercial Loan Committee during this period. In 1990, Mr. Roby became president
of INB Banking Company, Northeast, an affiliate bank of INB Financial
Corporation, located in Fort Wayne, Indiana. Subsequent to the INB merger with
NBD Bancorp, he was elected executive vice president and senior commercial
lending officer for the Northeast Region of the merged bank and was also named
one of the eight members of the Senior Indiana Loan Committee of NBD Indiana,
Inc.
Mr. Roby currently serves as chairman of Noble Foundation, YMCA of
Greater Indianapolis, and Lynx Capital Corporation. In addition, Mr. Roby is a
board member of Marion County Commission on Youth, Greater Indianapolis Progress
Committee, Indiana Organ Procurement Organization, Inc., and Urban Economic
Development Initiative.
TODD H. STUART - Age 37, Term Expires 2005. Mr. Stuart, a director,
has been employed by Stuart's Household Furniture Moving & Storage, Inc., a
household and commercial moving, packing and warehousing business since 1983. As
vice president of the company, Mr. Stuart's responsibilities include sales,
daily operations and supervision of more than 40 employees. Mr. Stuart is a
director of Brightpoint, Inc. and is on the Board of Governors of the
Indianapolis Museum of Art.
66
DEBRA L. ROSS - Age 41. Ms. Ross is the chief financial officer of
the Corporation and the Bank. She was employed as a staff accountant at
KPMG-Peat Marwick from 1987 to 1989. From 1989 to 1993 she was employed by
Summit Bank as assistant vice president and assistant controller, where she was
responsible for developing and administering accounting policies and procedures,
regulatory reporting, financial analysis, budgeting, and directing and
supervising the activities of the accounting and cash management departments.
Executive Officers of the Corporation
- -------------------------------------
The executive officers of the Corporation, all of whom serve for a
one year term, consist of Michael S. Maurer, chairman of the board; Morris L.
Maurer, president and chief executive officer; Philip B. Roby, executive vice
president, chief operating officer and chief lending officer; and Debra L. Ross,
chief financial officer.
ITEM 11. Executive Compensation
- --------------------------------
Compensation of Directors
- -------------------------
To assist in attaining profitability, prior to 2001 Directors of the Corporation
and the Bank were compensated for their services as directors solely by the
grant of stock options. In June 1996 the Board of Directors adopted a resolution
providing that Directors be compensated with stock options each year having a
net present value of approximately $17,500 to $20,000 until such time as the
Directors are compensated with cash compensation. After analyzing the form and
amount of compensation paid to similarly situated companies, the Directors
determined that beginning in 2001, Directors would be compensated in the form of
cash and grants of stock. For 2002, Messrs. Cornelius, Frick, Lacy, Lantz,
Loveday and Stuart and Ms. Betley each were awarded 360 shares of stock and were
paid $833 per board meeting attended and $500 per committee meeting attended.
Michael S. Maurer, who is the Chairman of the Corporation but is not an employee
of the Corporation, received no cash compensation since the organization of the
Corporation until 2002. In recognition of this, Mr. Maurer was awarded options
in 2002 by the Board of Directors to purchase 29,000 shares, with an exercise
price equal $27.50 per share, which was the fair market value at the date of
grant. Mr. Maurer also received an additional $80,000 fee payment in 2002 for
his service as Chairman in 2001. Beginning in 2002, the Board of Directors
determined to pay Mr. Maurer an annual director fee composed of a cash payment
equal to $40,000 in January and a grant of shares of the Corporation equal to
$40,000 in July, which number of shares equaled 1,441 shares for 2002. Mr.
Maurer receives no other fees in his capacity as a director. Morris L. Maurer
and Philip B. Roby were not separately compensated for their services as
directors of the Corporation or the Bank.
67
Compensation Committee Report
- -----------------------------
Decisions on compensation of the Corporation?s executives are made
by the Compensation Committee of the Board, which also serves as the
Compensation Committee of the Bank. Each member of the Compensation Committee is
a non-employee director. All decisions of the Compensation Committee relating to
the compensation of the Corporation and the Bank's executive officers are
reviewed by the full Board.
Compensation Policies Toward Executive Officers
The Compensation Committee?s executive compensation policies are
designed to provide competitive levels of compensation to the executive officers
and to reward officers for individual performance and for performance of the
Corporation as a whole. Although there are established goals and standards
relating to performance of the Corporation, these goals and standards have not
been established solely for utilization in setting compensation of individual
employees. The Compensation Committee does, however, consider the Corporation
and the Bank's performance compared to the Annual Plan and compared to certain
established non-financial goals in setting compensation levels
Base Salary
Each executive officer is reviewed individually by the Compensation
Committee, which review includes an analysis of the performance of the
Corporation and the Bank. In addition, the review includes, among other things,
an analysis of the individual'?s performance during the past fiscal year,
focusing primarily upon the following aspects of the individual?'s job or
characteristics of the individual exhibited during the most recent fiscal year:
quality and quantity of work; supervisory skills; dependability; initiative;
attendance; overall skill level; and overall value to the Corporation.
Bonus Amounts
During 2002, the Board of Directors approved an incentive bonus plan
("Incentive Bonus Plan") for all employees of the Bank applicable only in 2002.
Under the terms of the Incentive Bonus Plan, all employees were entitled to
receive a bonus of up to 15% of their salary, depending upon the amount, if any,
by which the Bank exceeded its profit plan. An additional bonus in the aggregate
amount of $55,000 was awarded to Morris L. Maurer and Philip B. Roby for
exceptional individual performance in areas considered critical to the success
of the Bank. This bonus was based upon a review of compensation levels in other
financial institutions similar in size to the Corporation and the Bank, and a
comparison of the Corporation's performance compared to the 2002 goals for
growth in assets, loans, "wealth management" assets under management, net
income, and after consideration of non-financial performance, including the
results of regulatory examinations.
Other Compensation Plans
At various times in the past, the Corporation has adopted certain
broad-based employee benefit plans for all employees. Senior executives are
permitted to participate in these plans on the same terms as non-executive
employees who meet applicable eligibility criteria, subject to any legal
limitations on the amount that may be contributed or the benefits that may be
payable under the plans. These plans include such customary employee benefit
plans as medical insurance, life insurance, and a 401(k) plan.
Mr. Maurer's 2002 Compensation
Regulations of the Securities and Exchange Commission require that
the Compensation Committee disclose the Committee's basis for compensation
reported for any individual who served as the Chief Executive Officer during the
last fiscal year. Morris L. Maurer's
68
salary was determined in the same manner as discussed above for other senior
executives.
Members of the Compensation Committee:
William J. Loveday (Chairperson)
Michael S. Maurer
Andre B. Lacy
Todd H. Stuart
Compensation Committee Insider Participation
- --------------------------------------------
During the past fiscal year, none of the executive officers who
received compensation from the Corporation or the Bank served on the
Compensation Committee, except for Michael S. Maurer. Mr. Maurer did not
participate in any discussion with respect to his compensation from the
Corporation or the Bank, and was not present in the room during the discussion
by the Compensation Committee of his compensation.
69
Summary Compensation Table
- --------------------------
The following table sets forth for the fiscal year ending December
31, 2002 the cash compensation paid by the Corporation or the Bank, as well as
certain other compensation paid or awarded during those years, to the chief
executive officer and any other executive officer whose total annual salary and
bonus equaled or exceeded $100,000.
Annual Compensation (1) Long Term Compensation
- --------------------------------------------------------------------------------------------------------
Name and Principal Year Salary Bonus Restricted Securities All
Stock Underlying Other
Position ($) ($)(2) Awards Options/SARS Compensation
($)(3) (#) (4)
- --------------------------------------------------------------------------------------------------------
Morris L. Maurer, 2002 $222,308 $62,747 $111,000 9,500 $5,507
President and Chief 2001 $205,655 $53,726 $0 -0- $5,100
Executive Officer 2000 $189,069 $23,520 $0 -0- $3,740
- --------------------------------------------------------------------------------------------------------
Philip B. Roby, 2002 $193,567 $54,635 $83,250 7,500 $2,409
Executive Vice 2001 $181,769 $47,301 $0 -0- $2,028
President and Chief 2000 $168,923 $21,014 $0 -0- $3,740
Operating Officer
- --------------------------------------------------------------------------------------------------------
Debra L. Ross, Senior 2002 $99,238 $18,886 $41,625 4,000 $3,380
Vice President and 2001 $92,077 $13,349 $0 -0- $3,223
Chief Financial Officer 2000 $83,217 $15,352 $0 -0- $2,128
- --------------------------------------------------------------------------------------------------------
(1) While executive officers enjoy certain perquisites, such perquisites
are less than 5% of such officer's salary and bonus and are not
required to be reported.
(2) Amounts include amounts awarded under the Incentive Bonus Plan and
additional amounts deemed appropriate by the Board of Directors in
recognition of performance critical to the success of the Bank.
70
(3) The 2002 award reported in the table represents awards under the
1993 Restricted Stock Plan of the Corporation. One hundred percent
of these shares of restricted stock awarded in 2002 will vest on
June 20, 2007. The amounts in the table represent an assumed value
of $27.75 per share for 2002, which is the value determined by the
Board of Directors, without giving effect to the diminution in value
attributable to the restrictions on such stock. Dividends, if
declared by the Corporation, would be paid on the restricted shares
at the same time and rate as dividends paid to shareholders of
unrestricted shares. At December 31, 2002, the total number and
value (based on a value of $29.50 per share) of shares of restricted
stock held by the named executive officers were as follows: Mr.
Maurer (37,000 shares; $1,091,500); Mr. Roby (27,000 shares;
$796,500); and Ms. Ross (4,000 shares; $118,000). The assumed value
of $29.50 at December 31, 2002 is the value determined by the Board
of Directors for purposes of the Corporation's 401(k) Savings Plan
to be the "fair market value" of a share of the Corporation's Common
Stock at December 31, 2002, without giving effect to the diminution
in value attributable to the restrictions on such stock. Because
there is not an established trading market for the Common Stock, the
assumed price of $29.50 may not reflect the actual price which would
be paid for a share of the Common Stock in an active or established
trading market and should not necessarily be relied upon when
determining the value of a shareholder's investment.
(4) These amounts represent amounts contributed by the Corporation under
the Corporation's 401(k) plan.
Employee Benefit Plans
- ----------------------
Stock Plans
The Corporation has adopted a stock option program for directors of
the Corporation and the Bank, and a separate stock option program for officers
and key employees of the Corporation and the Bank. The Corporation has also
adopted a restricted stock plan for officers and employees of the Corporation
and the Bank. Under the option programs, options for an aggregate of 490,000
shares may be granted. A total of 165,000 shares have been reserved for issuance
under the restricted stock plan. The Board of Directors of the Corporation
believes these programs provide an important incentive to those who will be
instrumental to the success of the Corporation and of the Bank. A more detailed
description of each of the programs is set forth below.
1993 Employees' Stock Option Plan. This plan provides for the grant
of "incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code and the grant of nonqualified stock options (the "Plan"). The Plan
provides for the award of stock options to elected officers and key employees of
the Corporation and its subsidiaries, including the Bank, which currently is the
Corporation's only subsidiary. The exercise price for all options granted under
the Plan will not be less than the greater of $10.00 or the fair market value of
the Shares on the date of grant. The Plan will expire on May 31, 2008.
71
Options may be granted under the Plan only to officers and other key
employees who are in positions to make significant contributions to the success
of the Corporation. The Compensation Committee, consisting of outside directors
of the Corporation who are ineligible under the Plan to receive options
themselves, administers the Plan.
Options are exercisable in whole or in part upon such terms and
conditions as may be determined by the Compensation Committee, but in no event
will any incentive stock options be exercisable later than ten years after date
of grant.
A total of 340,000 shares has been reserved for issuance under the
Employee Stock Option Plan. As of March 25, 2003, there were 38,243 shares
available for issuance under the Plan.
Options Grants in Last Fiscal Year
The following table provides details regarding stock options granted
to Morris L. Maurer, Philip B. Roby, and Debra L. Ross in 2002. In addition, in
accordance with the rules of the Securities and Exchange Commission, there are
shown the hypothetical gains or "options spreads" that would exist for
respective options. These gains are based on assumed rates of annual compound
stock price appreciation of five percent (5%) and ten percent (10%) from the
date the options were granted over the full option term. Gains are reported net
of the option exercise price, but before any effect of taxes. In assessing these
values, it should be kept in mind that no matter what value is placed on a stock
option on the date of grant, its ultimate value will be dependent on the market
value of the Corporation's stock at a future date, and that value would depend
on the efforts of such executive to foster the future success of the Corporation
for the benefit of all shareholders. The amounts reflected in the table may not
necessarily be achieved.
- -----------------------------------------------------------------------------------------------------------------------------------
Percent of total Potential Realizable Value
Number of Shares options granted Market Price on at Assumed Rates of Stock
Underlying Options to employees in Exercise or Base Date of Grant Price Appreciation for
Name Granted Fiscal Year (%) Price ($/Share) ($/Share) Expiration Date Option Term
- -----------------------------------------------------------------------------------------------------------------------------------
5% ($) 10% ($)
- -----------------------------------------------------------------------------------------------------------------------------------
Morris L. Maurer 9,500 11.0% $27.75 $27.75 June 20, 2012 $165,792 $420,150
Philip B. Roby 7,500 9.7% $27.75 $27.75 June 20, 2012 $130,889 $331,698
Debra L. Ross 4,000 4.6% $27.75 $27.75 June 20, 2012 $69,807 $176,905
- -----------------------------------------------------------------------------------------------------------------------------------
72
Aggregate Fiscal Year-end Option Values Table
The following table shows the number of shares covered by both
exercisable and non-exercisable stock options by Messrs. M.L. Maurer and Roby
and Ms. Ross as of December 31, 2002. Also reported are the values for the
"in-the-money" options, which represent the positive spread between the exercise
price of any such existing stock options and the year-end assumed price of the
Common Stock. For purposes of the following table, the year-end price of the
stock was assumed to be $29.50, which is the value determined by the Board of
Directors for purposes of the Corporation's 401(k) Savings Plan to be the "fair
market value" of a share of the Corporation's Common Stock at December 31, 2002.
Because there is not an established trading market for the Common Stock, the
assumed price of $29.50 may not reflect the actual price which would be paid for
shares of the Common Stock in an active or established trading market and should
not necessarily be relied upon when determining the value of a shareholder's
investment.
Number of Shares Underlying Value of Unexercised
Unexercised Options in-the-Money Options
at Fiscal Year End at Fiscal Year End
(#) ($)
- --------------------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- --------------------------------------------------------------------------------
Morris L. Maurer 42,500 14,500 $761,250 $69,125
Philip B. Roby 31,000 11,500 $550,500 $42,000
Debra L. Ross 1,200 4,800 $12,600 $15,400
- --------------------------------------------------------------------------------
1993 Directors' Stock Option Plan. In 1993, the Board of Directors
of the Corporation adopted a nonqualified stock option plan (the "Directors'
Plan") which provides for the grant of nonqualified stock options to those
individuals who are not officers or employees of the Corporation or the Bank and
who serve as directors (the "Outside Directors") of the Corporation or any of
its subsidiaries, including the Bank. The Plan will expire on May 31, 2003.
The Directors' Plan provides for the grant of nonqualified stock
options to acquire shares of the Corporation at a price equal to the greater of
$10.00 or the fair market value of the shares on the date of grant. A total of
150,000 shares has been reserved for issuance under the Directors' Plan. As of
March 25, 2003 there were 14,000 shares available for issuance under the
Directors' Plan.
The options under this program are exercisable for ten years from
the date of grant. In addition, the options will immediately become null and
void, without any action required by the Corporation or the Bank, the FDIC, the
OCC, or the Federal Reserve if the Federal Reserve, the FDIC, or the OCC issues
a directive or final order to the Corporation or the Bank requiring a
contribution of capital. Individuals become eligible to receive grants of
options under the Directors' Plan upon their election to a qualifying board of
directors but do not receive additional options because they are a member of
more than one such board.
1993 Restricted Stock Plan. On June 1, 1993, the Board of Directors
of the Corporation adopted a Restricted Stock Plan (the "Restricted Stock
Plan"), which provides for the grant of shares to officers and key employees of
the Corporation and the Bank.
The Restricted Stock Plan provides for the outright grant of shares,
subject to the vesting schedule set forth in the agreement between the recipient
and the Administrative Committee of the Restricted Stock Plan, to officers and
employees of the Corporation and the Bank. Grants under the Restricted Stock
Plan may be made only to officers and other employees who are in position to
make significant
73
contributions to the success of the Corporation. The Compensation Committee,
consisting of outside directors of the Corporation who are ineligible under the
Plan to receive grants of restricted stock, administers the Restricted Stock
Plan. Such committee has the authority to determine the number of grants to
issue and to whom such grants are made, what price, if any, will be required to
purchase shares of stock issued under the Restricted Stock Plan and the vesting
schedule of the restricted stock.
The Restricted Stock Plan provides for the issuance of up to 165,000
Shares. The plan expires on May 31, 2008. As of March 25, 2003, there were
16,700 shares available for issuance under the Restricted Stock Plan.
401(k) Savings Plan
The Corporation sponsors The National Bank of Indianapolis
Corporation 401(k) Savings Plan ("401(k) Plan") for the benefit of substantially
all of the employees of the Corporation and its subsidiaries. All employees of
the Corporation and its subsidiaries become participants in the 401(k) Plan
after completing one year of service for the Corporation or its subsidiaries and
attaining age 21.
Each participant may enter into a salary redirection agreement with
the Corporation or the Bank whereby the Corporation or the Bank redirects to the
participant's account in the 401(k) Plan an amount, on a pre-tax basis, equal to
not less than one percent (1%) or more than (50%) of the participant's
compensation, as defined in the 401(k) Plan. If a participant makes salary
redirection contributions to the 401(k) Plan, the Corporation will make a
matching contribution in the amount necessary to match 50% of the participant's
salary redirection contribution up to 6% of the participant's compensation, as
defined in the 401(k) Plan. The Board of Directors of the Corporation may, in
its discretion, make an additional matching contribution to the 401(k) Plan in
such amount as the Board may determine. In addition, the Corporation may fund
all or any part of its matching contributions with shares of its stock. The
Corporation also may, in its discretion, make a profit sharing contribution to
the 401(k) Plan.
An employee who has an interest in a qualified retirement plan with
a former employee may transfer the eligible portion of that benefit into a
rollover account in the 401(k) Plan. The participant may request that the
trustee invest up to 50% of the fair market value of the participant's rollover
contribution (valued as of the effective date of the contribution to the 401(k)
Plan) in whole and fractional shares of the Common Stock to the Corporation.
Benefits under the 401(k) Plan are distributable to participants or
their beneficiaries in a single lump sum payment.
Certain Other Transactions
- --------------------------
The Corporation's officers and directors, as well as firms and
companies with which they are associated, have had and will have banking
transactions with the Bank. It is the policy of the Bank that any credit
extended to such persons, firms and companies will be extended only in the
ordinary course of business and on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other persons, and will not involve more than the normal risk
of collectability or present other unfavorable features.
74
FIVE YEAR TOTAL SHAREHOLDER RETURN
The following indexed graph indicates the Corporation's total return
to its shareholders on its common stock for the past five years, assuming
dividend reinvestment, as compared to total return for the Russell 2000 Index
and the Peer Group Index (which is a line-of-business index prepared by an
independent third party consisting of stock of banks with assets between $500
million and $1 billion). The comparison of total return on investment for each
of the periods assumes that $100 was invested on January 1, 1998, in each of the
Corporation, the Russell 2000 Index, and the Peer Group Index. Shares of the
common stock of the Corporation are not traded on any national or regional
exchange or in the over-the-counter market and there is not established market
for the common stock. For purposes of the following graph, the year-end price of
the stock was assumed to be the value determined by the Board of Directors for
purposes of the Corporation's 401(k) Savings Plan to be the "fair market value"
of a share of the Corporation's Common Stock at December 31. Because there is
not an established trading market for the Common Stock, these assumed prices may
not reflect the actual price which would be paid for shares of the Common Stock
in an active or established trading market and should not necessarily be relied
upon when determining the value of a shareholder's investment.
[PERFORMANCE CHART APPEARS HERE]
Period Ending
-----------------------------------------------------------
Index 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02
- ------------------------------------------------------------------------------------------------------
National Bank of Indianapolis Corporation 100.00 125.00 142.86 164.29 185.71 210.71
Russell 2000 100.00 97.45 118.17 114.60 117.45 93.39
SNL $500M-$1B Bank Index 100.00 98.32 91.02 87.12 113.02 144.30
75
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
- ----------------------------------------------------------------------------
The following table sets forth as of March 25, 2003 the total number
of shares of Common Stock of the Corporation beneficially owned by each director
and executive officer of the Corporation and by all directors and executive
officers as a group. The number of shares shown as being beneficially owned by
each director and executive officer are those over which he or she has sole
voting or investment power, unless otherwise noted.
- --------------------------------------------------------------------------------
Name of Beneficial Owner Number of Shares Percent of Class
- --------------------------------------------------------------------------------
Kathryn G. Betley 13,635 (1) 0.6%
James M. Cornelius 32,260 (2) 1.3%
David R. Frick 24,010 1.0%
Andre B. Lacy 45,760 (3) 1.9%
G. Benjamin Lantz, Jr. 24,310 (3) 1.0%
William J. Loveday 12,160 (1) 0.5%
Michael S. Maurer 688,291 (4) 27.8%
Morris L. Maurer 166,910 (5) 6.6%
Philip B. Roby 71,997 (6) 2.9%
Todd H. Stuart 17,885 (7) 0.7%
Debra L. Ross 6,174 (8) 0.3%
Directors and executive officers as a group
(consisting of 11 individuals) 1,103,392 41.5%
- --------------------------------------------------------------------------------
(1) Includes 11,000 shares which such individual has the right to
acquire pursuant to the exercise of options. See "Employee Benefit
Plans -- 1993 Directors' Stock Option Plan."
(2) Includes 6,000 shares which such individual has the right to acquire
pursuant to the exercise of options. See "Employee Benefit Plans --
1993 Directors' Stock Option Plan."
(3) Includes 17,000 shares which such individual has the right to
acquire pursuant to the exercise of options. See "Employee Benefit
Plans--1993 Directors' Stock Option Plan."
(4) Includes 29,000 shares which such individual has the right to
acquire pursuant to the exercise of options. See "Employee Benefit
Plans--1993 Directors' Stock Option Plan"
(5) Includes 38,000 shares held jointly with the spouse of Mr. Maurer,
42,500 shares which Mr. Maurer has the right to acquire pursuant to
the exercise of stock options, 38,000 shares which Mr. Maurer has
the right to acquire pursuant to stock warrants, 37,000 shares of
restricted stock, and 1,910 shares in the 401(k) Plan allocated to
the account of Mr. Maurer. See "Employee Benefit Plans -- 1993
Employee Stock Option Plan," and "--1993 Restricted Stock Plan," and
" -- Warrants." Mr. Maurer received the warrants in 1993 in
consideration of his efforts in organizing the Corporation and the
Bank and for services to be rendered after the Bank began
operations. The warrants are exercisable and will remain exercisable
until 2003 at a purchase price of $10.00 per share, and will
immediately become null and void, without any action required by the
Corporation or the Bank, the Federal Deposit Insurance Corporation,
the Office of the Comptroller of the
76
Currency, or the Board of Governors of the Federal Reserve System
if any of these regulatory agencies issues a directive or final
order to the Corporation or the Bank requiring a contribution of
capital.
(6) Includes 9,900 shares held jointly with the spouse of Mr. Roby,
31,000 shares which Mr. Roby has the right to acquire pursuant to
the exercise of stock options, 27,000 shares of restricted stock,
and 1,597 shares in the 401(k) Plan allocated to the account of Mr.
Roby. See "Employee Benefit Plans -- 1993 Employee Stock Option
Plan" and "--1993 Restricted Stock Plan."
(7) Includes 14,000 shares which such individual has the right to
acquire pursuant to the exercise of options. See "Employee Benefit
Plans--1993 Directors' Stock Option Plan."
(8) Includes 1,200 shares which Ms. Ross has the right to acquire
pursuant to the exercise of stock options, 4,000 shares of
restricted stock, and 974 shares in the 401(k) Plan allocated to the
account of Ms. Ross. See "Employee Benefit Plans -- 1993 Employee
Stock Option Plan" and "--1993 Restricted Stock Plan."
77
PRINCIPAL SHAREHOLDERS
The following table contains information concerning individuals or
entities who, to the knowledge of the Corporation, beneficially owned on March
25, 2003, more than 5% of the Common Stock of the Corporation:
- -------------------------------------------------------------------------
Name and Address of
Beneficial Owner Shares Beneficially Owned Percent of Class
Michael S. Maurer 688,291 (1) 27.8%
Morris L. Maurer 166,910 (2) 6.6%
Eugene and Marilyn Glick 125,000 5.1%
- -------------------------------------------------------------------------
(1) Includes 29,000 shares which Mr. Maurer has the right to acquire
pursuant to the exercise of stock options. See "Employee Benefit
Plans--1993 Directors' Stock Option Plan."
(2) Includes 38,000 shares held jointly with the spouse of Mr. Maurer,
42,500 shares which Mr. Maurer has the right to acquire pursuant to
the exercise of stock options and 38,000 shares which Mr. Maurer has
the right to acquire pursuant to stock warrants, 37,000 shares of
restricted stock, and 1,910 shares in the 401(k) Plan allocated to
the account of Mr. Maurer. See "Employee Benefit Plans -- 1993
Employees' Stock Option Plan, and -- Warrants."
78
DISCLOSURE OF EQUITY COMPENSATION PLAN INFORMATION
AS OF DECEMBER 31, 2002
The following table provides information on all existing Stock Option
Plans and Restricted Stock Plans as of December 31, 2002.
- ---------------------------------------------------------------------------------------------------------------------
Plan category (a) (b) (c)
------------- Number of securities
remaining available for
future issuance under
Number of securities to Weighted-average equity compensation
be issued upon exercise exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected in
warrants and rights warrants and rights column (a))
Equity compensation plans approved by 391,557 (2) $18.75 74,843 (3) (4)
security holders (1)
Equity compensation plans not 38,000 (5) $10.00 -0-
approved by security holders
Total 429,557 $17.98 74,843 (3) (4)
- ---------------------------------------------------------------------------------------------------------------------
(1) Includes all outstanding Stock Option Plans and Restricted Stock Plans of
the Corporation.
(2) Includes securities to be issued upon the exercise of options under the
Stock Option Plans, and does not include any shares of outstanding restricted
stock.
(3) Includes 18,400 shares subject to issuance under the Restricted Stock Plan
and 56,443 shares subject to issuance under the Stock Option Plans.
(4) Not reflected in the above are shares which may be issued in connection with
the payment of directors' fees. In 2002, each non-employee Director of the
Corporation, other than the Chairman of the Board, received as payment, in part,
of director fees grants of 360 shares of the common stock of the Corporation
(for an aggregate number of 2,520 shares). In addition, the above does not
include shares which may be granted to the Chairman of the Board as payment, in
part, of his director fee (which were 1,441 shares in 2002). For a discussion of
these fees, see the portion of this report entitled "Director Compensation"
under Item 11 -- Executive Compensation.
(5) Represents shares subject to issuance upon the exercise of a ten-year
warrant granted to Mr. Maurer in 1993 in connection with his efforts in
organizing the Corporation in 1993.
79
Item 13. Certain Relationships and Related Transactions.
- ---------------------------------------------------------
The Corporation's officers and directors, as well as firms and
companies with which they are associated, have banking transactions with the
Bank. It is the policy of the Bank that any credit extended to such persons,
firms and companies will be extended only in the ordinary course of business and
on substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with other persons, and
will not involve more than the normal risk of collectability or present other
unfavorable features.
80
Item 14. Controls and Procedures.
---------------------------------
(a) Evaluation of Disclosure Controls and Procedures. The Corporation's
principal executive officer and principal financial officer have
concluded that the Corporation's disclosure controls and procedures
(as defined in Rule 13a-14(c) under the Securities Exchange Act of
1934, as amended), based on their evaluation of these controls and
procedures as of a date within ninety (90) days prior to the filing
date of this Form 10-K, are effective.
(b) Changes in Internal Controls. There have been no significant changes
in the Corporation's internal controls or in other factors that
could significantly affect these controls subsequent to the date of
the evaluation thereof, including any corrective actions with regard
to significant deficiencies and material weaknesses.
(c) Limitations on the Effectiveness of Controls. The Corporation's
management, including its principal executive officer and principal
financial officer, does not expect that the Corporation's disclosure
controls and procedures and other internal controls will prevent all
error and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the
design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of
fraud, if any, within the company have been detected. These inherent
limitations include the realities that judgments in decision-making
can be faulty, and that breakdowns can occur because of simple error
or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people,
or by management override of the control.
The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions; over time,
control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and
not be detected.
(d) CEO and CFO Certifications. Appearing immediately following the
Signatures section of this report there are Certifications of the
Corporation's principal executive officer and principal financial
officer. The Certifications are required in accord with Section 302
of the Sarbanes-Oxley Act of 2002 (the "Section 302
Certifications"). This Item of this report which you are currently
reading is the information concerning the Evaluation referred to in
the Section 302 Certifications and this information should be read
in conjunction with the Section 302 Certifications for a more
complete understanding of the topics presented.
81
Part IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on From 8-K
- --------------------------------------------------------------------------
(a) (1) The following consolidated financial statements are included in Item 8:
Page Number in
10-K
Independent Auditors' Report on Consolidated Financial Statements 36
Consolidated Balance Sheets December 31, 2002 and 2001 37
Consolidated Statements of Income 38
For the years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Shareholders' Equity 39
For the years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows 40
For the years ended December 31, 2002, 2001, and 2000
Notes to consolidated Financial Statements 41
(2) See response to Item 15 (a)(1). All other financial statement schedules
have been omitted because they are not applicable, or the required
information is shown in the consolidated financial statements or
notes thereto.
(3) List of Exhibits
Exhibit Number Description
- -------------- -----------
3a) Articles of Incorporation of the Corporation, filed as
Exhibit 3(i) to the Corporation's Form 10-QSB as of
September 30, 1995 are incorporated by reference and
Articles of Amendment filed as Exhibit 3(i) to the Form
10-K for the fiscal year ended December 31, 2001
3b) Bylaws of the Corporation, filed as Exhibit 3(ii) to the
Corporation's Form 10-Q as of September 30, 1996 are
incorporated by reference
10a) 1993 Key Employees' Stock Option Plan of the
Corporation, as amended, filed as Exhibit 10(a) to the
Corporation's Form 10-Q as of June 30, 2002 are
incorporated by reference
10b) 1993 Directors' Stock Option Plan of the Corporation, as
amended, filed as Exhibit 10(b) to the Corporation's
Form 10-Q as of June 30, 2001 are incorporated by
reference
10c) 1993 Restricted Stock Plan of the Corporation, as
amended, filed as Exhibit 10(c) to the Corporation's
Form 10-Q as of June 30, 2002 are incorporated by
reference
21 Subsidiaries of the Corporation
99.1 Chief Executive Officer Certification pursuant to 18
U.S.C. Section 1350
99.2 Chief Financial Officer Certification pursuant to 18
U.S.C. Section 1350
82
(b) No reports on Form 8-K were filed during the last quarter of the
fiscal year.
(c) See the list of exhibits in Item 15 (a) (3).
(d) No other financial statement schedules are required to be submitted.
83
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
(Registrant) The National Bank of Indianapolis Corporation
------------------------------------------------------------------
By (Signature and Title) /S/ Morris L. Maurer March 28, 2003
----------------------------- --------------
Morris L. Maurer, President & Date
Principal Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title) /S/ Morris L. Maurer March 28, 2003
-------------------------------------------------------
Morris L. Maurer, President & Date
Principal Executive Officer
By (Signature and Title) /S/ Philip B. Roby March 28, 2003
-------------------------------------------------------
Philip B. Roby, Executive Vice President Date
By (Signature and Title) /S/ Debra L. Ross March 28, 2003
-------------------------------------------------------
Debra L. Ross, Principal Financial Date
and Accounting Officer
By (Signature and Title) /S/ Michael S. Maurer March 28, 2003
-------------------------------------------------------
Michael S. Maurer, Chairman of the Board Date
By (Signature and Title) /S/ Kathryn G. Betley March 28, 2003
-------------------------------------------------------
Kathryn G. Betley, Director Date
By (Signature and Title) /S/ James M. Cornelius March 28, 2003
-------------------------------------------------------
James M. Cornelius, Director Date
By (Signature and Title) /S/ David R. Frick March 28, 2003
-------------------------------------------------------
David R. Frick, Director Date
By (Signature and Title) /S/ Andre B. Lacy March 28, 2003
-------------------------------------------------------
Andre B. Lacy, Director Date
By (Signature and Title) /S/ William J. Loveday March 28, 2003
-------------------------------------------------------
William J. Loveday, Director Date
By (Signature and Title) /S/ G. Benjamin Lantz March 28, 2003
-------------------------------------------------------
G. Benjamin Lantz, Director Date
By (Signature and Title) /S/ Todd H. Stuart March 28, 2003
-------------------------------------------------------
Todd H. Stuart, Director Date
84
CERTIFICATIONS
I, Morris L. Maurer, certify that:
1. I have reviewed this annual report on Form 10-K of The National Bank of
Indianapolis Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
/s/ Morris L. Maurer
-----------------------------------
Morris L. Maurer, President
and Chief Executive Officer
85
CERTIFICATIONS
I, Debra L. Ross, certify that:
1. I have reviewed this annual report on Form 10-K of The National Bank of
Indianapolis Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
/s/ Debra L. Ross
--------------------------------------
Debra L. Ross, Chief Financial Officer
86
Exhibit Index
- -------------
3(i) Articles of Incorporation of The National Bank of Indianapolis
Corporation and Articles of Amendment
3(ii) By-laws of The National Bank of Indianapolis Corporation
10(a) 1993 Key Employees' Stock Option Plan
10(b) 1993 Directors' Stock Option Plan
10(c) 1993 Restricted Stock Plan
21 Subsidiaries of The National Bank of Indianapolis Corporation
87