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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ----- ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ----- ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ TO __________
Commission File Number 000-21671
-------------
The National Bank of Indianapolis Corporation
---------------------------------------------
(Exact name of registrant as specified in its charter)
Indiana 35-1887991
- ------------------------ ---------------
(State of incorporation) I.R.S. Employer
Identification Number
107 N. Pennsylvania Street, Suite 700, Indianapolis, Indiana 46204
------------------------------------------------------------------
(Address of principal executive offices and zip code)
(317) 261-9000
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the 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
------- -------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule b-2 of the Exchange).
Yes No X
------- -------
As of August 1, 2003, there were 2,446,048 Common Shares outstanding.
Transitional Small Business Disclosure Format (Check one):
Yes No X
------- -------
Table of Contents
The National Bank of Indianapolis Corporation
Report on Form 10-Q
for Quarter Ended
June 30, 2003
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - June 30, 2003
and December 31, 2002.............................................1
Consolidated Statements of Income - Three Months
ended June 30, 2003 and 2002......................................2
Consolidated Statements of Income - Six Months
ended June 30, 2003 and 2002......................................3
Consolidated Statements of Cash Flows - Six Months
ended June 30, 2003 and 2002 .....................................4
Consolidated Statements of Shareholders' Equity - Six Months
ended June 31, 2003 and 2002......................................5
Notes to Consolidated Financial Statements......................6-9
Item 2. Management's Discussion and Analysis..........................10-17
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......18
Item 4. Controls and Procedures.......................................19-20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................21
Item 2. Changes in Securities............................................21
Item 3. Default Upon Senior Securities...................................21
Item 4. Submission of Matters to a Vote of Security Holders..............22
Item 5. Other Information ...............................................22
Item 6. Exhibits and Reports on Form 8-K.................................23
Signatures .................................................................23
The National Bank of Indianapolis Corporation
Consolidated Balance Sheets
June 30, December 31,
2003 2002
(Unaudited) (Note)
--------------------------------------
Assets
Cash and due from banks $ 52,562,030 $ 45,889,548
Reverse repurchase agreements 15,000,000 5,000,000
Federal funds sold 41,464,535 18,177,463
Investment securities
Available-for-sale securities 77,608,951 83,990,335
Held-to-maturity securities 10,625,595 30,092,736
--------------------------------------
Total investment securities 88,234,546 114,083,071
Loans 566,669,795 528,911,217
Less: Allowance for loan losses (7,612,834) (7,227,000)
--------------------------------------
Net loans 559,056,961 521,684,217
Premises and equipment 9,241,463 9,248,290
Accrued interest 3,614,992 3,974,258
Stock in federal banks 3,494,600 3,401,500
Other assets 4,854,559 5,056,126
--------------------------------------
Total assets $ 777,523,686 $ 726,514,473
======================================
Liabilities and shareholders' equity
Deposits:
Noninterest-bearing demand deposits $ 154,924,810 $ 137,575,932
Money market and savings deposits 334,237,327 305,605,133
Time deposits over $100,000 41,253,497 36,811,165
Other time deposits 65,874,505 64,350,290
--------------------------------------
Total deposits 596,290,139 544,342,520
Security repurchase agreements 70,664,752 74,273,774
FHLB advances 48,000,000 48,000,000
Subordinated debt 2,000,000 --
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 3,278,507 5,151,028
--------------------------------------
Total liabilities 733,733,398 685,267,322
Shareholders' equity:
Common stock, no par value:
Authorized shares - 3,000,000
Issued and outstanding shares; 2003 - 2,449,228;
2002 - 2,442,324 26,799,710 26,862,276
Unearned compensation (1,071,766) (1,218,746)
Additional paid in capital 2,675,142 2,562,990
Retained earnings 15,022,188 12,519,902
Accumulated other comprehensive income 365,014 520,729
--------------------------------------
Total shareholders' equity 43,790,288 41,247,151
--------------------------------------
Total liabilities and shareholders' equity $ 777,523,686 $ 726,514,473
======================================
Note: The balance sheet at December 31, 2002 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. See notes to consolidated financial statements.
1
The National Bank of Indianapolis Corporation
Consolidated Statements of Income
(Unaudited)
Three months ended
June 30
2003 2002
----------------------------------
Interest income:
Interest and fees on loans $ 7,836,100 $ 7,563,667
Interest on investment securities 694,755 954,125
Interest on federal funds sold 137,153 186,201
Interest on reverse repurchase agreements 22,199 57,132
----------------------------------
Total interest income 8,690,207 8,761,125
Interest expense:
Interest on deposits 2,223,953 2,360,412
Interest on repurchase agreements 112,516 189,297
Interest on FHLB advances 629,822 722,794
Interest on long term debt 96,922 360,910
----------------------------------
Total interest expense 3,063,213 3,633,413
----------------------------------
Net interest income 5,626,994 5,127,712
Provision for loan losses 300,000 450,000
----------------------------------
Net interest income after provision for loan losses 5,326,994 4,677,712
Other operating income:
Trust fees and commissions 330,622 600,588
Building rental income 126,905 117,093
Service charges and fees on deposit accounts 613,985 525,746
Net gain on sale of mortgage loans 458,615 292,524
Interchange income 139,366 132,087
Other income 381,867 309,159
----------------------------------
Total operating income 2,051,360 1,977,197
Other operating expenses:
Salaries, wages and employee benefits 2,959,716 2,651,202
Occupancy expense 345,522 367,611
Furniture and equipment expense 221,416 214,506
Professional services 215,012 174,314
Data processing 338,599 326,438
Business development 229,780 192,051
Valuation of allowance for mortgage servicing rights 150,787 --
Other expenses 917,501 616,938
----------------------------------
Total other operating expenses 5,378,333 4,543,060
----------------------------------
Net income before tax 2,000,021 2,111,849
Federal and state income tax 794,561 837,032
----------------------------------
Net income after tax $ 1,205,460 $ 1,274,817
==================================
Basic earnings per share $ 0.51 $ 0.54
==================================
Diluted earnings per share $ 0.48 $ 0.51
==================================
See notes to consolidated financial statements.
2
The National Bank of Indianapolis Corporation
Consolidated Statements of Income
(Unaudited)
Six months ended
June 30
2003 2002
-----------------------------------
Interest income:
Interest and fees on loans $ 15,465,073 $ 14,996,679
Interest on investment securities 1,533,908 1,667,682
Interest on federal funds sold 225,886 319,636
Interest on reverse repurchase agreements 35,996 209,965
-----------------------------------
Total interest income 17,260,863 17,193,962
Interest expense:
Interest on deposits 4,107,820 4,917,432
Interest on repurchase agreements 234,673 381,971
Interest on FHLB advances 1,252,723 1,437,648
Interest on long term debt 457,797 721,785
-----------------------------------
Total interest expense 6,053,013 7,458,836
-----------------------------------
Net interest income 11,207,850 9,735,126
Provision for loan losses 600,000 900,000
-----------------------------------
Net interest income after provision for loan losses 10,607,850 8,835,126
Other operating income:
Trust fees and commissions 895,715 1,171,925
Building rental income 265,029 235,096
Service charges and fees on deposit accounts 1,238,104 1,043,863
Net gain on sale of mortgage loans 821,471 407,143
Interchange income 272,401 260,112
Other 658,682 525,830
-----------------------------------
Total operating income 4,151,402 3,643,969
Other operating expenses:
Salaries, wages and employee benefits 5,982,952 5,247,616
Occupancy expense 716,795 731,993
Furniture and equipment expense 435,628 450,923
Professional services 438,981 380,975
Data processing 668,126 648,670
Business development 473,333 402,826
Valuation of allowance for mortgage servicing rights 277,176 --
Other expenses 1,623,516 1,239,293
-----------------------------------
Total other operating expenses 10,616,507 9,102,296
-----------------------------------
Net income before tax 4,142,745 3,376,799
Federal and state income tax 1,640,459 1,346,516
-----------------------------------
Net income after tax $ 2,502,286 $ 2,030,283
===================================
Basic earnings per share $ 1.06 $ 0.92
===================================
Diluted earnings per share $ 0.99 $ 0.86
===================================
See notes to consolidated financial statements.
3
The National Bank of Indianapolis Corporation
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended
June 30
2003 2002
-----------------------------------
Operating Activities
Net Income $ 2,502,286 $ 2,030,283
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses 600,000 900,000
Depreciation and amortization 544,668 534,595
Valuation of allowance for mortgage servicing rights 277,176 --
Income tax benefit from exercise of warrants & options 112,152 2,551,107
Stock compensation -- --
Net accretion of investments 690,643 293,945
Unearned compensation amortization 197,130 88,971
(Increase) decrease in:
Accrued interest receivable 359,266 (1,168,196)
Other assets 26,524 (1,970,434)
Decrease in other liabilities (1,872,521) (1,117,649)
-----------------------------------
Net cash provided by operating activities 3,437,324 2,142,622
-----------------------------------
Investing Activities
Net change in federal funds sold (23,287,072) (28,702,712)
Net change in reverse repurchase agreements (10,000,000) 115,000,000
Proceeds from maturities of investment securities held
to maturity 19,281,948 938,628
Proceeds from maturities of investment securities available
for sale 36,628,711 34,850,337
Proceeds from sales of investment securities available for sale -- 9,998,502
Purchases of investment securities held to maturity (93,100) (23,771,563)
Purchases of investment securities available for sale (31,010,625) (92,995,634)
Net increase in loans (37,972,744) (29,954,026)
Purchases of bank premises and equipment (537,841) (261,514)
-----------------------------------
Net cash used by investing activities (46,990,723) (14,897,982)
-----------------------------------
Financing Activities
Net increase in deposits 51,947,619 30,666,427
Net increase in security repurchase agreements (3,609,022) (2,050,275)
Proceeds from issuance of long-term debt 2,000,000 --
Proceeds from issuance of stock 416,494 4,808,281
Repurchase of stock (529,210) --
-----------------------------------
Net cash provided by financing activities 50,225,881 33,424,433
-----------------------------------
Increase in cash and cash equivalents 6,672,482 20,669,073
Cash and cash equivalents at beginning of year 45,889,548 34,844,360
-----------------------------------
Cash and cash equivalents at end of period $ 52,562,030 $ 55,513,433
===================================
Interest paid $ 6,226,080 $ 7,321,534
===================================
Income taxes paid $ 2,393,413 $ 155,328
===================================
4
The National Bank of Indianapolis Corporation
Consolidated Statement of Shareholders' Equity
(Unaudited)
Accumulated
Additional and Other
Common Unearned Paid In Retained Comprehensive
Stock Compensation Capital Earnings Income TOTAL
--------------------------------------------------------------------------------------
Balance at December 31, 2001 $ 20,883,428 $ (439,790) $ -- $ 7,963,066 $ 63,298 $ 28,470,002
Comprehensive income:
Net income 2,030,283 2,030,283
Other comprehensive income
Net unrealized loss on investments,
net of tax of $136,768 208,518 208,518
------------
Total comprehensive income 2,238,801
Income tax benefit from exercise of warrants &
options 2,551,107 2,551,107
Issuance of stock (470,518 shares) 5,869,731 (1,061,450) 4,808,281
Compensation earned 88,971 88,971
--------------------------------------------------------------------------------------
Balance at June 30, 2002 $ 26,753,159 $ (1,412,269) $ 2,551,107 $ 9,993,349 $ 271,816 $ 38,157,162
======================================================================================
Balance at December 31, 2002 $ 26,862,276 $ (1,218,746) $ 2,562,990 $12,519,902 $ 520,729 $ 41,247,151
Comprehensive income:
Net income 2,502,286 2,502,286
Other comprehensive income
Net unrealized gain on investments,
net of tax of $102,134 (155,715) (155,715)
------------
Total comprehensive income 2,346,571
Income tax benefit from exercise of warrants &
options 112,152 112,152
Issuance of stock (24,055 shares) 466,644 (50,150) 416,494
Repurchase of stock (17,152 shares) (529,210) (529,210)
Compensation earned 197,130 197,130
--------------------------------------------------------------------------------------
Balance at June 30, 2003 $ 26,799,710 $ (1,071,766) $ 2,675,142 $ 15,022,188 $ 365,014 $ 43,790,288
======================================================================================
See notes to consolidated financial statements.
5
The National Bank of Indianapolis
Corporation
Notes to Consolidated Financial Statements
June 30, 2003
Note 1: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include
the accounts of The National Bank of Indianapolis Corporation ("Corporation")
and its wholly-owned subsidiaries The National Bank of Indianapolis ("Bank"),
and NBIN Statutory Trust I ("the Trust"). All intercompany transactions between
the Corporation and its subsidiaries have been properly eliminated. The
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the six month period
ended June 30, 2003 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2003. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Corporation's Form 10-K for the year ended December 31, 2002.
Note 2: New Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board issued Interpretation
No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others (the Interpretation).
The Interpretation requires an issuer of a guarantee to recognize an initial
liability for the fair value of the obligations covered by the guarantee. The
adoption of this Interpretation did not have a material impact on the
Corporation's consolidated financial position or results of operations.
6
Note 3: Trust Preferred Securities
In September 2000, NBIN Statutory Trust I ("the Trust"), a Connecticut statutory
business trust 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 subordinated debentures are the sole assets of the Trust and the Corporation
owns all of the common securities of the Trust. Interest payments made on the
capital securities are reported as a component of interest expense on long-term
debt. The capital securities bear interest and mature as follows:
Fixed Interest
Rate Maturity Date
---- -------------
NBIN Statutory Trust I 10.60% September 7, 2030
The net proceeds received by the Corporation from the sale of the capital
securities were used for general corporate purposes.
Note 4: Exercise of Warrants and Options
During the first quarter of 2003, one director of the Corporation exercised
options to purchase 4,000 common shares. The exercise price was $10.00 and the
fair market value of the stock was $29.50.
During the second quarter, two directors and two officers exercised their
options to purchase 10,031 common shares. The exercise price ranged from $10.00
to $27.50 with a weighted average exercise price of $13.05 and the weighted fair
market value of the stock was $30.81.
Due to the exercise of these options in the first and second quarters of 2003,
the Corporation will
7
receive a deduction for tax purposes for the difference between the fair value
of the stock at the date of exercise and the exercise price. In accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock-Based
Compensation," the Corporation has recorded the income tax benefit of $112,152
as additional paid in capital as of June 30, 2003.
Note 5: Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share for the three and six month periods ended June 30, 2003 and 2002.
Three months ended Six months ended
June 30, June 30,
2003 2002 2003 2002
------------- ------------ ------------- ------------
Basic average shares outstanding 2,368,562 2,342,131 2,364,954 2,218,394
============= ============ ============= ============
Net income $1,205,460 $1,274,817 $2,502,286 $2,030,283
============= ============ ============= ============
Basic net income per common share $ 0.51 $ 0.54 $ 1.06 $ 0.92
============= ============ ============= ============
Diluted
Average shares outstanding 2,368,562 2,342,131 2,364,954 2,218,394
Nonvested restricted stock 49,200 48,300 49,200 48,300
Common stock equivalents
Net effect of the assumed exercise of stock options 88,074 77,575 88,074 77,575
Net effect of the assumed exercise of warrants 15,445 14,584 15,445 14,584
------------- ------------ ------------- ------------
Diluted average shares 2,521,281 2,482,590 2,517,673 2,358,853
============= ============ ============= ============
Net income $1,205,460 $1,274,817 $2,502,286 $2,030,283
============= ============ ============= ============
Diluted net income per common share $ 0.48 $ 0.51 $ 0.99 $ 0.86
============= ============ ============= ============
8
Note 6: Comprehensive Income
The following table sets forth the computation of comprehensive income for the
three and six month periods ended June 30, 2003 and 2002.
Three months ended Six months ended
June 30, June 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income $ 1,205,460 $ 1,274,817 $ 2,502,286 $ 2,030,283
Unrealized gains (losses) on securities,
net of tax (56,984) 263,338 (155,715) 208,518
----------- ----------- ----------- -----------
Comprehensive income $ 1,148,476 $ 1,538,155 $ 2,346,571 $ 2,238,801
=========== =========== =========== ===========
Note 7: 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.
Three months ended Six months ended
June 30, June 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income, as reported $ 1,205,460 $ 1,274,817 $ 2,502,286 $ 2,030,283
Add: stock-based compensation expense, net of 59,523 28,697 119,047 53,730
related taxes
Less: total stock-based compensation expense (114,276) (251,975) (228,467) (305,151)
determined under fair-value based method, net
of taxes
----------- ----------- ----------- -----------
Pro forma net income $ 1,150,707 $ 1,051,539 $ 2,392,866 $ 1,778,862
=========== =========== =========== ===========
Earnings per share:
Basic, as reported $ 0.51 $ 0.54 $ 1.06 $ 0.92
Basic, pro forma $ 0.49 $ 0.45 $ 1.01 $ 0.80
Diluted, as reported $ 0.48 $ 0.51 $ 0.99 $ 0.86
Diluted, pro forma $ 0.46 $ 0.42 $ 0.95 $ 0.75
9
Management's Discussion and Analysis
of Financial Condition and Results of Operation
Results of Operations
Six months ended June 30, 2003 Compared to the Six months ended June 30, 2002:
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 $2,502,286 for the six months
ended June 30, 2003 compared to a net income of $2,030,283 for the six months
ended June 30, 2002. 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 2002, thereby offsetting more of the operating expenses.
Net Interest Income
- -------------------
Net interest income increased $1,472,724 or 15.1% to $11,207,850 for the six
months ended June 30, 2003 from $9,735,126 for the six months ended June 30,
2002. Total interest income increased $66,901 for the six months ended June 30,
2003 to $17,260,863 from $17,193,962 for the six months ended June 30, 2002. The
increase in interest income is primarily a result of average total loans for the
six months ended June 30, 2003 being approximately $544,000,000 compared to
average total loans of approximately $466,000,000 for the six months ended June
30, 2002. The increased loan growth is the result of new clients and the
addition of experienced lenders to the staff. The loan portfolio produces the
highest yield of all earning assets. Investment portfolio income decreased
$133,774 or 8.0% to $1,533,908 for the six months ended June 30, 2003, as
compared to $1,667,682 for the six months ended June 30, 2002. The decrease in
interest on investment securities is primarily a result of the average
investment securities portfolio of approximately $117,000,000 for the six months
ended June 30, 2003 compared to an average of $126,000,000 for the six months
ended June 30, 2002. Interest on federal funds sold decreased $93,750 or 29.3%
from $319,636 for the six months ended June 30, 2002 to $225,886 for the six
months ended June 30, 2003. The decrease is
10
due to lower interest rates for the six months ended June 30, 2003 as compared
to the six months ended June 30, 2002. The average of federal funds sold for the
six months ended June 30, 2003 and 2002 was approximately $38,000,000. Interest
on reverse repurchase agreements decreased $173,969 or 82.9% from $209,965 for
the six months ended June 30, 2002 to $35,996 for the six months ended June 30,
2003. The decrease was the result of a decrease in the average of reverse
repurchase agreements of approximately $19,000,000 from $26,000,000 for the six
months ended June 30, 2002 to $7,000,000 for the six months ended June 30, 2003.
The decrease is also due to lower interest rates for the six months ended June
30, 2003 as compared to the six months ended June 30, 2002.
Total interest expense decreased $1,405,823 or 18.8% to $6,053,013 for the six
months ended June 30, 2003, from $7,458,836 for the six months ended June 30,
2002. This 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.
Total interest bearing liabilities averaged approximately $569,000,000 for the
six months ended June 30, 2003 as compared to approximately $547,000,000 for the
six months ended June 30, 2002. The average cost of interest bearing liabilities
was approximately 2.1% at June 30, 2003 compared to 2.7% at June 30, 2002.
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.
The provision for loan losses was $600,000 for the six months ended June 30,
2003 compared to $900,000 for the six months ended June 30, 2002. Based on
management's risk assessment and evaluation of the potential losses of the loan
portfolio,
11
management believes that the current allowance for loan losses is adequate to
provide for potential losses in the loan portfolio.
Six months ended
June 30,
2003 2002
---------- ----------
Beginning of Period $7,227,000 $5,986,965
Provision for loan losses 600,000 900,000
Losses charged to the reserve
Commercial 285,000 --
Real Estate -- 21,800
Installment 2,185 2,052
Credit Cards 7,778 41,589
---------- ----------
294,963 65,441
Recoveries
Commercial 77,435 --
Real Estate 2,350 --
Installment 62 150
Credit Cards 950 4,647
---------- ----------
80,797 4,797
---------- ----------
End of Period $7,612,834 $6,826,321
========== ==========
Allowance as a % of Loans 1.34% 1.42%
Loans past due over 30 days totaled $3,944,697 or 0.70% of total loans at June
30, 2003 compared to $7,727,925 or 1.60% of total loans at June 30, 2002.
Other Operating Income
- ----------------------
Other operating income for the six months ended June 30, 2003, increased
$507,433 or 13.9% to $4,151,402 from $3,643,969 for the six months ended June
30, 2002. The increase is primarily due to an increase in the net gain on the
sale of mortgage loans of $414,328 or 101.8% from $407,143 for the six months
ended June 30, 2002 to $821,471 for the six months ended June 30, 2003. This is
due to the ability to sell a bulk of mortgages that were generated during 2002
and 2003 as a result of
12
lower interest rates. Also contributing to the increase in other operating
income was service charges and fees on deposit accounts of $194,241 or 18.6%
from $1,043,863 for the six months ended June 30, 2002 to $1,238,104 for the six
months ended June 30, 2003. This increase is attributable to the increase in
average demand deposit accounts of $49,000,000 from approximately $419,000,000
at June 30, 2002 to approximately $468,000,000 at June 30, 2003. Rental income
from the other tenants in the Corporation's main office building increased
$29,933 or 12.7% to $265,029 for the six months ended June 30, 2003 from
$235,096 for the six months ended June 30, 2002. This is due to new tenants in
the building in 2003 compared to the same period the previous year. Interchange
income from debit and credit cards increased $12,289 or 4.7% from $260,112 for
the six months ended June 30, 2002 to $272,401 for the six months ended June 30,
2003. Trust fees and commissions decreased $276,210 or 23.6% from $1,171,925 for
the six months ended June 30, 2002 to $895,715 for the six months ended June 30,
2003. The decrease in trust income is attributable to the overall decline in the
stock and treasury markets and a change in accounting estimate related to the
accrual of fees.
Other Operating Expenses
- ------------------------
Other operating expenses for the six months ended June 30, 2003 increased
$1,514,211 or 16.6% to $10,616,507 from $9,102,296 for the six months ended June
30, 2002. Salaries, wages and employee benefits increased $735,336 or 14.0% to
$5,982,952 for the six months ended June 30, 2003 from $5,247,616 for the six
months ended June 30, 2002. This increase is primarily due to the increase in
the number of employees from 156 full time equivalents at June 30, 2002 to 172
full time equivalents at June 30, 2003. Occupancy expense decreased $15,198 or
2.1% to $716,795 for the six months ended June 30, 2003 from $731,993 for the
six months ended June 30, 2002. Furniture and equipment expense decreased
$15,295 or 3.4% to $435,628 for the six months ended June 30, 2003 from $450,923
for the six months ended June 30, 2002. This is due to lower depreciation costs
related to fully depreciated assets at the older banking centers and main
office. Professional services expense increased $58,006 or 15.2% from $380,975
for the six months ended June 30, 2002 to $438,981 for the six months ended June
30, 2003 due to increased accounting fees and courier service costs. Data
processing expenses increased $19,456 or 3.0% for the six months ended June 30,
2003 over the same period the previous year primarily due to increased service
bureau fees
13
relating to increased transaction activity by the Bank and trust department.
Business development increased $70,507 or 17.5% to $473,333 for the six months
ended June 30, 2003 from $402,826 for the six months ended June 30, 2002. This
is due to customer entertaining and public relations. Due to the overall lower
interest rates in 2002 and 2003, there were many refinances and the Corporation
had increased mortgage sales. During the third quarter of 2002, a valuation
reserve was established for the mortgage servicing rights asset. For the six
months ended June 30, 2003, an additional $277,176 was added to the valuation.
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 represented the Corporation's
primary source of immediate liquidity and were maintained at a level adequate to
meet immediate needs. Federal funds sold averaged approximately $38,000,000 for
the six months ended June 30, 2003 and 2002. Reverse repurchase agreements may
serve as a source of liquidity, but are primarily used as collateral for
customer balances in overnight repurchase agreements. Maturities in the
Corporation's loan and investment portfolios are monitored regularly to manage
the maturity dates of deposits to coincide 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 June 30,
2003, the Corporation's rate sensitive assets exceeded rate sensitive
liabilities due within one year by $34,133,728.
14
As part of managing liquidity, the Corporation monitors its loan to deposit
ratio on a daily basis. At June 30, 2003 the ratio was 95.0 percent. The level
of loans to deposits is below the Corporation's internal limit for this ratio.
The Corporation experienced an increase in cash and cash equivalents, its
primary source of liquidity, of $6,672,482 during the first six months of 2003.
The primary financing activity of deposit growth provided net cash of
$51,947,619. Lending used $37,972,744, investments provided $24,806,934 and
increasing federal funds sold and reverse repurchase agreements used
$33,287,072. 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' liquidity position.
Capital Resources
The Corporation's only sources of capital since commencing operations have 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 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 incurred indebtedness in the amount of $5,000,000 pursuant to a
Subordinated Term Loan
15
Agreement with Harris Trust and Savings Bank dated June 6, 2003. The Bank can
make up to two advances against the term loan prior to June 6, 2004. The first
advance was made in the amount of $2,000,000 on June 6, 2003. The final maturity
date of the loan is June 6, 2010. The outstanding principal balance is due at
maturity, but prepayment of the principal balance is permitted prior to maturity
with prior consent from the Federal Reserve.
There are many different interest rate options available. Each floating rate
option is available for a fixed term of 1-3 months. The Bank is currently paying
Adjusted LIBOR plus 2.0% which equates to 3.29%. Interest payments are due at
the expiration of the fixed term option. The Bank made a $1,000,000 dividend to
the Corporation from the loan proceeds to accommodate the stock repurchase
program as discussed later on page 17.
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.
16
Capital for the Bank is at or above the well-capitalized regulatory requirements
at June 30, 2003. Pertinent capital ratios for the Bank as of June 30, 2003 are
as follows:
Well Adequately
Actual Capitalized Capitalized
------ ----------- -----------
Tier 1 risk-based capital ratio 8.6% 6.0% 4.0%
Total risk-based capital ratio 10.2% 10.0% 8.0%
Leverage ratio 6.5% 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 the six month period ended
June 30, 2003 or 2002 by the Bank to the Corporation. A dividend of $1,325,000
was declared and made by the Bank to the Corporation during the six month period
ended June 30, 2003. No dividends were declared during the six month period
ended June 30, 2002.
In January 2003, the Board of Directors of The National Bank of Indianapolis
Corporation authorized a stock repurchase program to provide liquidity to
shareholders. This program is effective through December 2003 unless terminated
earlier by the Board.
Under the program, the Corporation may spend up to $7,600,000 in individually
negotiated transactions to repurchase its shares from shareholders who wish to
sell. The repurchase program may be suspended or discontinued at any time if
management determines that additional purchases are not warranted or if the cost
of the repurchase program reaches $7,600,000.
The amount and timing of shares repurchased under the repurchase program, as
well as the specific price, will be determined by management after considering
market conditions, company performance and other factors.
At June 30, 2003, the remaining authority under this program was approximately
$6,900,000.
17
Quantitative and Qualitative Disclosures about Market Risk
The Corporation's exposure to market risk is primarily related to changes in
interest rates. Quantitative and qualitative disclosures about the Corporation's
market risk resulting from changes in interest rates are included in Item 7A. in
the Corporation's 2002 Annual Report on Form 10-K. There have been no material
changes in such risks or in the Corporation's asset/liability management program
during the quarter ended June 30, 2003. Liquidity and interest rate sensitivity
disclosures for the quarter ended June 30, 2003 are found on page 14 of this
report.
18
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 the end of
the period covered by this Form 10-Q, 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 Corporation 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 only be
reasonable assurance that any design will succeed in achieving its stated
goals under all potential future conditions; over time, control
19
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 as an exhibit to 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.
20
Other Information
Item 1. Legal Proceedings
Neither The National Bank of Indianapolis Corporation nor its
subsidiaries are involved in any pending legal proceedings at this
time, other than routine litigation incidental to its business.
Item 2. Changes in Securities
(a) Not applicable.
(b) Not applicable.
(c) On March 26, 2003, the Corporation sold a total of 4,000 shares
of common stock for an aggregate amount of $40,000 to one
director of the Corporation pursuant to the exercise of stock
options by this director. On April 21, 2003, the Corporation sold
a total of 431 shares of common stock for an aggregate amount of
$11,853 to one of the officers of the Corporation pursuant to the
exercise of stock options by this officer. On May 19, 2003, the
Corporation sold a total of 4,000 shares of common stock for an
aggregate amount of $40,000 to one of the directors of the
Corporation pursuant to the exercise of stock options by this
director. On June 3, 2003, the Corporation sold a total of 1,000
shares of common stock for an aggregate amount of $10,000 to one
of the directors of the Corporation pursuant to the exercise of
stock options by this director. On June 19, 2003, the Corporation
sold a total of 4,600 shares of common stock for an aggregate
amount of $69,070 to one of the officers of the Corporation
pursuant to the exercise of stock options by this officer. All of
these shares were sold in private placements pursuant to Section
4(2) of the Securities Act of 1933.
(d) Not applicable.
Item 3. Defaults Upon Senior Securities - Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
On June 19, 2003 at 3:00 p.m. at the Corporation's offices at 107
North Pennsylvania Street, Indianapolis, Indiana the annual meeting of
shareholders was held. Two items were presented for consideration of
the shareholders.
21
The first item was the election of Kathryn G. Betley, David R. Frick,
and Philip B. Roby to the Board of Directors to serve for a term of
three years and until their successors are duly elected and qualified.
The vote tabulation for the election of Ms. Betley was 1,870,018 "for"
and 9,000 shares against; Mr. Frick was 1,868,143 "for" and 10,875
shares against; and, Mr. Roby was 1,879,018 "for" and 0 shares
against. The following directors terms continued after the meeting:
Ms. Kathryn G. Betley; James M. Cornelius; Mr. David R. Frick; Andre
B. Lacy; G. Benjamin Lantz, Jr.; William J. Loveday; Michael S.
Maurer; Morris L. Maurer; Philip R. Roby; and Todd H. Stuart.
The second item was the ratification of Ernst & Young LLP as the
Corporation's public accountants. This matter was approved by a vote
of 1,854,422 shares "for", 7,020 shares against, and 17,575 shares
abstained.
Item 5. Other Information - Not applicable
22
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3(i) Articles of Incorporation of the
Corporation, filed as Exhibit 3(i) to the
Corporation's Form 10-QSB filed as of
September 30, 1995 and Articles of Amendment
filed as Exhibit 3(i) to the Corporation's
Form 10-K as of December 31, 2001 are
incorporated by reference.
3(ii) 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.
10(a) 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.
10(b) 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.
10(c) 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.
31.1 Certificate of Chief Executive Officer pursuant
to Rule 15d-14(a) of the Securities Exchange Act
of 1934, as amended
31.2 Certificate of Chief Financial Officer pursuant to
Rule 15d-14(a) of the Securities Exchange Act of
1934, as amended
32.1 Chief Executive Officer Certification pursuant to
18 U.S.C. Section 1350
32.2 Chief Financial Officer Certification pursuant to
18 U.S.C. Section 1350
(b) No reports on Form 8-K were filed during the quarter of the fiscal
year for which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 7, 2003
THE NATIONAL BANK OF INDIANAPOLIS CORPORATION
/s/ Debra L. Ross
--------------------------------------
Debra L. Ross, Chief Financial Officer
23
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 Employee's Stock Option Plan*
10(b) 1993 Directors' Stock Option Plan*
10(c) 1993 Restricted Stock Plan*
31.1 Chief Executive Officer Certification pursuant to Rule 15d-14(a)
31.2 Chief Financial Officer Certification pursuant to Rule 15d-14(a)
32.1 Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350
32.2 Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350
*previously filed