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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 SEPTEMBER 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 12b-2 of the Exchange).
Yes No X
------- --------
As of October 27, 2003, there were 2,352,429 Common Shares outstanding.
Table of Contents
The National Bank of Indianapolis Corporation
Report on Form 10-Q
for Quarter Ended
September 30, 2003
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - September 30, 2003
and December 31, 2002..............................................1
Consolidated Statements of Income - Three Months
ended September 30, 2003 and 2002..................................2
Consolidated Statements of Income - Nine Months
ended September 30, 2003 and 2002..................................3
Consolidated Statements of Cash Flows - Nine Months
ended September 30, 2003 and 2002 .................................4
Consolidated Statements of Shareholders' Equity - Nine Months
ended September 30, 2003 and 2002..................................5
Notes to Consolidated Financial Statements......................6-11
Item 2. Management's Discussion and Analysis...........................12-22
Item 3. Quantitative and Qualitative Disclosures about Market Risk........23
Item 4. Controls and Procedures........................................24-25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................26
Item 2. Changes in Securities.............................................26
Item 3. Default Upon Senior Securities....................................26
Item 4. Submission of Matters to a Vote of Security Holders...............27
Item 5. Other Information ................................................27
Item 6. Exhibits and Reports on Form 8-K..................................27
Signatures ..................................................................28
The National Bank of Indianapolis Corporation
Consolidated Balance Sheets
September 30, December 31,
2003 2002
(Unaudited) (Note)
-------------------------------------------
Assets
Cash and due from banks $ 37,193,764 $ 45,889,548
Reverse repurchase agreements 15,000,000 5,000,000
Federal funds sold 44,241,057 18,177,463
Investment securities
Available-for-sale securities 95,748,980 83,990,335
Held-to-maturity securities 5,790,552 30,092,736
-------------------------------------------
Total investment securities 101,539,532 114,083,071
Loans 581,814,146 528,911,217
Less: Allowance for loan losses (7,847,386) (7,227,000)
-------------------------------------------
Net loans 573,966,760 521,684,217
Premises and equipment 9,095,215 9,248,290
Accrued interest 3,347,414 3,974,258
Stock in federal banks 3,526,000 3,401,500
Other assets 5,774,623 5,056,126
-------------------------------------------
Total assets $ 793,684,365 $ 726,514,473
===========================================
Liabilities and shareholders' equity
Deposits:
Noninterest-bearing demand deposits $ 145,752,433 $ 137,575,932
Money market and savings deposits 360,224,770 305,605,133
Time deposits over $100,000 46,169,036 36,811,165
Other time deposits 67,501,700 64,350,290
-------------------------------------------
Total deposits 619,647,939 544,342,520
Security repurchase agreements 68,254,096 74,273,774
FHLB advances 42,000,000 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 3,849,687 5,151,028
-------------------------------------------
Total liabilities 749,251,722 685,267,322
Shareholders' equity:
Common stock, no par value:
Authorized shares - 3,000,000
Issued and outstanding shares; 2003 - 2,440,104;
2002 - 2,442,324 26,494,844 26,862,276
Unearned compensation (994,348) (1,218,746)
Additional paid in capital 2,683,546 2,562,990
Retained earnings 16,317,586 12,519,902
Accumulated other comprehensive income (loss) (68,985) 520,729
-------------------------------------------
Total shareholders' equity 44,432,643 41,247,151
-------------------------------------------
Total liabilities and shareholders' equity $ 793,684,365 $ 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
September 30
2003 2002
-----------------------------------
Interest income:
Interest and fees on loans $7,699,013 $7,810,435
Interest on investment securities 699,993 1,060,513
Interest on federal funds sold 102,040 140,734
Interest on reverse repurchase agreements 30,700 19,250
-----------------------------------
Total interest income 8,531,746 9,030,932
Interest expense:
Interest on deposits 1,602,482 2,223,055
Interest on repurchase agreements 70,024 202,031
Interest on FHLB advances 611,273 646,572
Interest on long term debt 649,105 360,944
-----------------------------------
Total interest expense 2,932,884 3,432,602
-----------------------------------
Net interest income 5,598,862 5,598,330
Provision for loan losses 300,000 300,000
-----------------------------------
Net interest income after provision for loan losses 5,298,862 5,298,330
Other operating income:
Trust fees and commissions 533,200 600,945
Building rental income 148,548 122,260
Service charges and fees on deposit accounts 607,592 582,255
Net gain on sale of mortgage loans 234,183 132,448
Interchange income 135,105 129,796
Other income 374,823 304,558
-----------------------------------
Total operating income 2,033,451 1,872,262
Other operating expenses:
Salaries, wages and employee benefits 3,084,318 2,856,382
Occupancy expense 346,368 352,810
Furniture and equipment expense 217,076 217,028
Professional services 246,110 168,092
Data processing 352,907 312,663
Business development 207,581 185,123
Valuation of allowance for mortgage servicing rights 15,300 88,181
Other expenses 721,187 875,302
-----------------------------------
Total other operating expenses 5,190,847 5,055,581
-----------------------------------
Net income before tax 2,141,466 2,115,011
Federal and state income tax 846,068 838,048
-----------------------------------
Net income after tax $1,295,398 $1,276,963
===================================
Basic earnings per share $ 0.55 $ 0.54
===================================
Diluted earnings per share $ 0.51 $ 0.51
===================================
See notes to consolidated financial statements.
2
The National Bank of Indianapolis Corporation
Consolidated Statements of Income
(Unaudited)
Nine months ended
September 30
2003 2002
-----------------------------------
Interest income:
Interest and fees on loans $23,164,086 $22,807,114
Interest on investment securities 2,233,901 2,728,195
Interest on federal funds sold 327,926 460,370
Interest on reverse repurchase agreements 66,696 229,215
-----------------------------------
Total interest income 25,792,609 26,224,894
Interest expense:
Interest on deposits 5,710,302 7,140,487
Interest on repurchase agreements 304,697 584,002
Interest on FHLB advances 1,863,996 2,084,220
Interest on long term debt 1,106,902 1,082,729
-----------------------------------
Total interest expense 8,985,897 10,891,438
-----------------------------------
Net interest income 16,806,712 15,333,456
Provision for loan losses 900,000 1,200,000
-----------------------------------
Net interest income after provision for loan losses 15,906,712 14,133,456
Other operating income:
Trust fees and commissions 1,428,915 1,772,870
Building rental income 413,577 357,356
Service charges and fees on deposit accounts 1,845,696 1,626,118
Net gain on sale of mortgage loans 1,055,654 539,591
Interchange income 407,506 389,908
Other 1,033,505 830,388
-----------------------------------
Total operating income 6,184,853 5,516,231
Other operating expenses:
Salaries, wages and employee benefits 9,067,270 8,103,998
Occupancy expense 1,063,163 1,084,803
Furniture and equipment expense 652,704 667,951
Professional services 685,091 549,067
Data processing 1,021,033 961,333
Business development 680,914 587,949
Valuation of allowance for mortgage servicing rights 292,476 88,181
Other expenses 2,344,703 2,114,595
-----------------------------------
Total other operating expenses 15,807,354 14,157,877
-----------------------------------
Net income before tax 6,284,211 5,491,810
Federal and state income tax 2,486,527 2,184,564
-----------------------------------
Net income after tax $ 3,797,684 $ 3,307,246
===================================
Basic earnings per share $ 1.61 $ 1.46
===================================
Diluted earnings per share $ 1.51 $ 1.37
===================================
See notes to consolidated financial statements.
3
The National Bank of Indianapolis Corporation
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended
September 30
2003 2002
--------------------------------
Operating Activities
Net Income $ 3,797,684 $ 3,307,246
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses 900,000 1,200,000
Depreciation and amortization 824,670 795,707
Valuation of allowance for mortgage servicing rights 292,476 88,181
Income tax benefit from exercise of warrants & options 120,556 2,551,107
Stock compensation 110,000 109,918
Net accretion of investments 799,324 699,886
Unearned compensation amortization 296,423 185,727
(Increase) decrease in:
Accrued interest receivable 626,844 (1,376,410)
Other assets (624,179) (1,073,695)
Decrease in other liabilities (1,301,341) (151,658)
--------------------------------
Net cash provided by operating activities 5,842,457 6,336,009
--------------------------------
Investing Activities
Net change in federal funds sold (26,063,594) (7,819,344)
Net change in reverse repurchase agreements (10,000,000) 115,000,000
Proceeds from maturities of investment securities held
to maturity 24,124,021 1,345,718
Proceeds from maturities of investment securities available
for sale 47,286,920 62,212,745
Proceeds from sales of investment securities available for sale 25,367,391 9,998,502
Purchases of investment securities held to maturity (124,500) (23,771,563)
Purchases of investment securities available for sale (86,010,625) (129,205,346)
Net increase in loans (53,182,543) (50,060,040)
Purchases of bank premises and equipment (671,595) (519,417)
--------------------------------
Net cash used by investing activities (79,274,525) (22,818,745)
--------------------------------
Financing Activities
Net increase in deposits 75,305,419 25,836,840
Net change in security repurchase agreements (6,019,678) 9,805,216
Net change in FHLB borrowings (6,000,000) (2,000,000)
Proceeds from issuance of long-term debt 2,000,000 -
Proceeds from issuance of stock 458,746 4,808,281
Repurchase of stock (1,008,203) (30,800)
--------------------------------
Net cash provided by financing activities 64,736,284 38,419,537
--------------------------------
Increase (decrease) in cash and cash equivalents (8,695,784) 21,936,801
Cash and cash equivalents at beginning of year 45,889,548 34,844,360
--------------------------------
Cash and cash equivalents at end of period $ 37,193,764 $ 56,781,161
================================
Interest paid $ 9,494,678 $ 11,262,803
================================
Income taxes paid $ 3,314,931 $ 155,328
================================
See notes to consolidated financial statements.
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 3,307,246 3,307,246
Other comprehensive income
Net unrealized gain on investments,
net of tax of $262,435 400,113 400,113
---------------
Total comprehensive income 3,707,359
Income tax benefit from exercise of
warrants & options 2,551,107 2,551,107
Issuance of stock (474,479 shares) 5,979,649 (1,061,450) 4,918,199
Repurchase of stock (1,100 shares) (30,800) (30,800)
Compensation earned 185,727 185,727
---------------------------------------------------------------------------------------
Balance at September 30, 2002 $ 26,832,277 $ (1,315,513) $ 2,551,107 $ 11,270,312 $ 463,411 $ 39,801,594
=======================================================================================
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 3,797,684 3,797,684
Other comprehensive income
Net unrealized loss on investments,
net of tax of $386,795 (589,714) (589,714)
---------------
Total comprehensive income 3,207,970
Income tax benefit from exercise of
warrants & options 120,556 120,556
Issuance of stock (30,306 shares) 640,771 (72,025) 568,746
Repurchase of stock (32,527 shares) (1,008,203) (1,008,203)
Compensation earned 296,423 296,423
---------------------------------------------------------------------------------------
Balance at September 30, 2003 $ 26,494,844 $ (994,348) $ 2,683,546 $ 16,317,586 $ (68,985) $ 44,432,643
=======================================================================================
See notes to consolidated financial statements.
5
The National Bank of Indianapolis
Corporation
Notes to Consolidated Financial Statements
September 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 nine month
period ended September 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
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation
of Variable Interest Entities. FIN 46 provides guidance on how to identify a
variable interest entity (VIE) and determine when the assets, liabilities,
non-controlling interests, and results of operations of a VIE are to be included
in an entity's consolidated financial statements. A VIE exists when either the
total equity investment at risk is not sufficient to permit the entity to
finance its activities by itself, or the equity investors lack one of three
characteristics associated with owning a controlling financial interest. Those
characteristics include the direct or indirect ability to make decisions about
an entity's activities through voting rights or similar rights, the obligation
to absorb the expected losses of an entity if they occur, and the right to
receive the expected residual returns of the entity if they occur.
The Corporation holds an investment in trust preferred securities that, for
purposes of FIN 46, are evaluated to determine whether consolidation or further
disclosure as a significant interest holder is required.
FIN 46 was effective immediately for new entities created or acquired after
February 1, 2003. The Corporation has no interest in any entities created nor
did it acquire any entities after February 1, 2003. FIN 46 will become effective
on December 15, 2003, for entities in which the Corporation held a variable
interest prior to February 1, 2003. Although management believes that FIN 46
will not have a material impact, management continues to evaluate its interests
acquired prior to February 1, 2003 to assess whether consolidation or further
disclosure of a VIE is required under FIN 46.
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.
7
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.
During the third quarter, two employees exercised their options to purchase
2,031 common shares. The exercise price ranged from $19.00 to $27.50 with a
weighted average exercise price of $20.80 and the weighted fair market value of
the stock was $31.25.
Due to the exercise of these options for the nine month period ending September
30, 2003, the Corporation will 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 $120,556 as additional paid in capital for the nine month
period ending September 30, 2003.
8
Note 5: Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share.
Three months ended Nine months ended
September 30, September 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Basic average shares outstanding 2,360,371 2,358,956 2,363,426 2,265,248
========== ========== ========== ==========
Net income $1,295,398 $1,276,963 $3,797,684 $3,307,246
========== ========== ========== ==========
Basic net income per common share $ 0.55 $ 0.54 $ 1.61 $ 1.46
========== ========== ========== ==========
Diluted
Average shares outstanding 2,360,371 2,358,956 2,363,426 2,265,248
Nonvested restricted stock 49,620 48,300 49,620 48,300
Common stock equivalents
Net effect of the assumed exercise of stock options 89,906 81,763 89,906 81,763
Net effect of the assumed exercise of warrants 15,562 14,800 15,562 14,800
---------- ---------- ---------- ----------
Diluted average shares 2,515,459 2,503,819 2,518,514 2,410,111
========== ========== ========== ==========
Net income $1,295,398 $1,276,963 $3,797,684 $3,307,246
========== ========== ========== ==========
Diluted net income per common share $ 0.51 $ 0.51 $ 1.51 $ 1.37
========== ========== ========== ==========
Note 6: Comprehensive Income
The following table sets forth the computation of comprehensive income.
Three months ended Nine months ended
September 30, September 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income $ 1,295,398 $ 1,276,963 $ 3,797,684 $ 3,307,246
Unrealized gains (losses) on securities, net of tax (433,999) 191,595 (589,714) 400,113
----------- ----------- ----------- -----------
Comprehensive income $ 861,399 $ 1,468,558 $ 3,207,970 $ 3,707,359
=========== =========== =========== ===========
9
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 Nine months ended
September 30, September 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income, as reported $1,295,398 $1,276,963 $3,797,684 $3,307,246
Add: stock-based compensation expense, net of 59,963 58,431 179,010 112,161
related taxes
Less: total stock-based compensation expense (115,140) (223,028) (232,953) (417,525)
determined under fair-value based method, net
of taxes
---------- ---------- ---------- ----------
Pro forma net income $1,240,221 $1,112,366 $3,743,741 $3,001,882
========== ========== ========== ==========
Earnings per share:
Basic, as reported $ 0.55 $ 0.54 $ 1.61 $ 1.46
Basic, pro forma $ 0.53 $ 0.47 $ 1.58 $ 1.33
Diluted, as reported $ 0.51 $ 0.51 $ 1.51 $ 1.37
Diluted, pro forma $ 0.49 $ 0.44 $ 1.49 $ 1.25
Note 8: Subsequent Events
In January 2003, the Board of Directors of the Corporation authorized a stock
repurchase program to provide liquidity to employees and directors that own
shares of common stock of the Corporation. Under this repurchase program, the
Corporation may spend up to $5,500,000 in individually negotiated transactions
to repurchase its shares from employees and directors who wish to sell. The
following repurchases from executive officers and/or directors of the
Corporation were made on the dates indicated below:
On October 15, 2003, the Corporation repurchased 59,500 shares from Morris L.
Maurer, the Chief Executive Officer and a director of the Corporation, for an
aggregate of $1,889,125, or $31.75 per share.
10
On October 16, 2003, the Corporation repurchased 1,600 shares from Debra L.
Ross, the Chief Financial Officer of the Corporation, for an aggregate of
$50,800, or $31.75 per share.
On October 16, 2003, the Corporation repurchased 63,925 shares from Michael S.
Maurer, the Chairman of the Board of Directors of the Corporation, for an
aggregate of $2,029,618.70, or $31.75 per share.
11
Management's Discussion and Analysis
of Financial Condition and Results of Operation
Forward Looking Information
This section contains forward-looking statements. Forward-looking statements
give current expectations or forecasts of future events and are not guarantees
of future performance. The forward-looking statements are based on management's
expectations and are subject to a number of risks and uncertainties. Although
management believes the expectations reflected in such forward-looking
statements are reasonable, actual results may differ materially from those
expressed or implied in such statements. Risks and uncertainties that could
cause actual results to differ materially include, without limitation, the
Corporation's ability to execute its business plans; changes in general economic
and financial market conditions; changes in interest rates; changes in
competitive conditions; continuing consolidation in the financial services
industry; new litigation or changes in existing litigation; losses, customer
bankruptcy, claims and assessments; changes in banking regulations or other
regulatory or legislative requirements that impact the Corporation's business;
and changes in accounting policies and procedures as may be required by the
Financial Accounting Standards Board or other regulatory agencies. Additional
information concerning factors that could cause actual results to differ
materially from those expressed or implied in the forward-looking statements is
available in the Corporation's Annual Report on Form 10-K for the year ended
December 31, 2002.
Critical Accounting Policies
The Corporation's consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States and follow
general practices within the industries in which it operates. Application of
these principles requires management to make estimates, assumptions, and
judgments that affect the amounts reported in the financial statements and
accompanying notes. These estimates, assumptions, and judgments are based on
information available as of the date of the financial statements; accordingly,
as this information changes, the financial statements could reflect different
estimates, assumptions, and judgments. Certain policies
12
inherently have a greater reliance on the use of estimates, assumptions, and
judgments and as such have a greater possibility of producing results that could
be materially different than originally reported. Estimates, assumptions, and
judgments are necessary when assets and liabilities are required to be recorded
at fair value, when a decline in the value of an asset not carried on the
financial statements at fair value warrants an impairment write-down or
valuation reserve to be established, or when an asset or liability needs to be
recorded contingent upon a future event. Carrying assets and liabilities at fair
value inherently results in more financial statement volatility. The fair values
and the information used to record valuation adjustments for certain assets are
based either on quoted market prices or are provided by other third-party
sources, when available. When third-party information is not available,
valuation adjustments are estimated in good faith by management primarily
through the use of internal cash flow modeling techniques.
Based on the valuation techniques used and the sensitivity of financial
statement amounts to the methods, assumptions, and estimates underlying those
amounts, management has identified the determination of the allowance for loan
losses and the valuation of the mortgage servicing asset, to be the accounting
areas that require the most subjective or complex judgments, and as such could
be most subject to revision as new information becomes available.
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.
13
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 mortgage servicing asset is established and accounted for based on
discounted cash flow modeling techniques which require management to make
estimates regarding the amount and timing of expected future cash flows,
including assumptions about loan repayment rates, credit loss experience, and
costs to service, as well as discount rates that consider the risk involved.
Because the values of these assets are sensitive to changes in assumptions, the
valuation of the mortgage servicing asset is considered a critical accounting
estimate.
Results of Operations
Nine months ended September 30, 2003 Compared to the Nine months ended September
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 $3,797,684 for the nine
months ended September 30, 2003 compared to a net income of $3,307,246 for the
nine months ended September 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.
14
Net Interest Income
- -------------------
Net interest income increased $1,473,256 or 9.6% to $16,806,712 for the nine
months ended September 30, 2003 from $15,333,456 for the nine months ended
September 30, 2002. Total interest income decreased $432,285 for the nine months
ended September 30, 2003 to $25,792,609 from $26,224,894 for the nine months
ended September 30, 2002. The decrease in interest income is primarily a result
of the drop in the prime rate. The prime rate was 4.00% at September 30, 2003
compared to 4.75% at September 30, 2002. Contributing to the overall increase in
net interest income is due to the average total loans for the nine months ended
September 30, 2003 being approximately $555,000,000 compared to average total
loans of approximately $475,000,000 for the nine months ended September 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 $494,294 or 18.1%
to $2,233,901 for the nine months ended September 30, 2003, as compared to
$2,728,195 for the nine months ended September 30, 2002. The decrease in
interest on investment securities is primarily a result of the average
investment securities portfolio of approximately $115,000,000 for the nine
months ended September 30, 2003 compared to an average of $130,000,000 for the
nine months ended September 30, 2002. Interest on federal funds sold decreased
$132,444 or 28.8% from $460,370 for the nine months ended September 30, 2002 to
$327,926 for the nine months ended September 30, 2003. Although the average of
federal funds sold for the nine months ended September 30, 2003 was
approximately $39,000,000, an increase of approximately $3,000,000 from
approximately $36,000,000 for the nine months ended September 30, 2002, the
interest rates were lower for the nine months ended September 30, 2003 as
compared to the nine months ended September 30, 2002. Interest on reverse
repurchase agreements decreased $162,519 or 70.9% from $229,125 for the nine
months ended September 30, 2002 to $66,696 for the nine months ended September
30, 2003. The decrease was the result of a decrease in the average of reverse
repurchase agreements of approximately $9,400,000 from $19,000,000 for the nine
months ended September 30, 2002 to $9,600,000 for the nine months ended
September 30, 2003. The decrease is also due to lower interest rates for the
nine months ended September 30, 2003 as compared to the nine months ended
September 30, 2002.
15
Total interest expense decreased $1,905,541 or 17.5% to $8,985,897 for the nine
months ended September 30, 2003, from $10,891,438 for the nine months ended
September 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
$578,000,000 for the nine months ended September 30, 2003 as compared to
approximately $547,000,000 for the nine months ended September 30, 2002. The
average cost of interest bearing liabilities was approximately 2.1% at September
30, 2003 compared to 2.7% at September 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 $900,000 for the nine months ended September
30, 2003 compared to $1,200,000 for the nine months ended September 30, 2002.
Based on management's risk assessment and evaluation of the potential losses of
the loan portfolio, management believes that the current allowance for loan
losses is adequate to provide for potential losses in the loan portfolio.
16
The following table sets forth the roll forward of the allowance for loan
losses.
Nine months ended
September 30,
2003 2002
---------- ----------
Beginning of Period $7,227,000 $5,986,965
Provision for loan losses 900,000 1,200,000
Losses charged to the reserve
Commercial 360,000 93,664
Real Estate 1,296 21,800
Installment 2,185 2,052
Credit Cards 14,904 42,158
---------- ----------
378,385 159,674
Recoveries
Commercial 81,321 16,324
Real Estate 16,438 --
Installment 62 237
Credit Cards 950 6,314
---------- ----------
98,771 22,875
---------- ----------
End of Period $7,847,386 $7,050,166
========== ==========
Allowance as a % of Loans 1.35% 1.41%
Loans past due over 30 days totaled $7,411,653 or 1.28% of total loans at
September 30, 2003 compared to $1,607,538 or 0.32% of total loans at September
30, 2002.
Other Operating Income
- ----------------------
Other operating income for the nine months ended September 30, 2003, increased
$668,622 or 12.1% to $6,184,853 from $5,516,231 for the nine months ended
September 30, 2002. The increase is primarily due to an increase in the net gain
on the sale of mortgage loans of $516,063 or 95.6% from $539,591 for the nine
months ended September 30, 2002 to $1,055,654 for the nine months ended
September 30, 2003. This is due to the ability to sell a bulk of mortgages that
were generated
17
during 2002 and 2003 as a result of lower interest rates. Also contributing to
the increase in other operating income was service charges and fees on deposit
accounts of $219,578 or 13.5% from $1,626,118 for the nine months ended
September 30, 2002 to $1,845,696 for the nine months ended September 30, 2003.
This increase is attributable to the increase in average demand deposit accounts
of $57,000,000 from approximately $422,000,000 at September 30, 2002 to
approximately $479,000,000 at September 30, 2003. Rental income from the other
tenants in the Corporation's main office building increased $56,221 or 15.7% to
$413,577 for the nine months ended September 30, 2003 from $357,356 for the nine
months ended September 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 $17,598 or 4.5% from $389,908 for the nine
months ended September 30, 2002 to $407,506 for the nine months ended September
30, 2003. Trust fees and commissions decreased $343,955 or 19.4% from $1,772,870
for the nine months ended September 30, 2002 to $1,428,915 for the nine months
ended September 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 nine months ended September 30, 2003 increased
$1,649,477 or 11.7% to $15,807,354 from $14,157,877 for the nine months ended
September 30, 2002. Salaries, wages and employee benefits increased $963,272 or
11.9% to $9,067,270 for the nine months ended September 30, 2003 from $8,103,998
for the nine months ended September 30, 2002. This increase is primarily due to
the increase in the number of employees from 159 full time equivalents at
September 30, 2002 to 173 full time equivalents at September 30, 2003. Occupancy
expense decreased $21,640 or 2.0% to $1,063,163 for the nine months ended
September 30, 2003 from $1,084,803 for the nine months ended September 30, 2002.
Furniture and equipment expense decreased $15,247 or 2.3% to $652,704 for the
nine months ended September 30, 2003 from $667,951 for the nine months ended
September 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 $136,024 or 24.8% from $549,067 for the nine months
ended September 30, 2002 to $685,091 for the nine months ended September 30,
2003 due to increased accounting fees, legal
18
fees, and courier service costs. Data processing expenses increased $59,700 or
6.2% for the nine months ended September 30, 2003 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 $92,965 or 15.8% to $680,914 for the nine months ended
September 30, 2003 from $587,949 for the nine months ended September 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. The
valuation of allowance for mortgage servicing rights increased $204,295 or
231.7% to $292,476 for the nine months ended September 30, 2003 from $88,181 for
the nine months ended September 30, 2002.
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 $39,000,000 for
the nine months ended September 30, 2003 an increase of approximately $3,000,000
from $36,000,000 for the nine months ended September 30, 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.
19
The Corporation actively manages its interest rate sensitive assets and
liabilities to reduce the impact of interest rate fluctuations. At September 30,
2003, the Corporation's rate sensitive liabilities exceeded rate sensitive
assets due within one year by $11,010,765.
As part of managing liquidity, the Corporation monitors its loan to deposit
ratio on a daily basis. At September 30, 2003 the ratio was 93.9 percent. The
level of loans to deposits is below the Corporation's internal limit for this
ratio.
The Corporation experienced a decrease in cash and cash equivalents, its primary
source of liquidity, of $8,695,784 during the first nine months of 2003. The
primary financing activity of deposit growth provided net cash of $75,305,419.
Lending used $53,182,543, investments provided $10,643,207 and increasing
federal funds sold and reverse repurchase agreements used $36,063,594. 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.
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, 2004.
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
20
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 entered into an agreement in the amount of $5,000,000 pursuant to a
Subordinated Term Loan 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 3-month LIBOR plus 2.0% which equates to 3.15%. Interest payments are
due at the expiration of the fixed term option. During June 2003, 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 pages 22 and 23.
The Bank has incurred indebtedness pursuant to FHLB advances as follows:
Amount Rate Maturity
------ ---- --------
$ 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
-------------
$42,000,000
=============
21
The Bank may add indebtedness of this nature in the future if determined to be
in the best interest of the Bank.
Capital for the Bank is at or above the well-capitalized regulatory requirements
at September 30, 2003. Pertinent capital ratios for the Bank as of September 30,
2003 are as follows:
Well Adequately
Actual Capitalized Capitalized
------ ----------- -----------
Tier 1 risk-based capital ratio 8.5% 6.0% 4.0%
Total risk-based capital ratio 10.1% 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 nine month period ended
September 30, 2003 or 2002 by the Bank to the Corporation. A dividend of
$1,650,000 was declared and made by the Bank to the Corporation during the nine
month period ended September 30, 2003 and dividends of $325,000 were declared
and made during the nine month period ended September 30, 2002.
In January 2003, the Board of Directors of the Corporation authorized a
repurchase program entitled "Program One" which covers employees and directors
and is effective through December 2005 unless terminated earlier by the Board.
Under Program One, the Corporation may spend up to $5,500,000 in individually
negotiated transactions to repurchase its shares from employees and directors
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 $5,500,000.
22
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 September 30, 2003, the remaining authority under Program One was
approximately $5,200,000.
In January 2003, the Board of the Corporation authorized a separate repurchase
program entitled "Program Two" which covers all other shareholders and is
effective through December 2003 unless terminated earlier by the Board. Under
Program Two, 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 September 30, 2003, the remaining authority under Program Two was
approximately $6,900,000.
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 September 30, 2003. Liquidity and interest rate
sensitivity disclosures for the quarter ended September 30, 2003 are found on
pages 19-20 of this report.
23
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
24
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 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.
25
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 the 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 officer of
the Corporation pursuant to the exercise of stock options by the
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 director
of the Corporation pursuant to the exercise of stock options by
the 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 director
of the Corporation pursuant to the exercise of stock options by
the 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 officer of
the Corporation pursuant to the exercise of stock options by the
officer.
On August 7, 2003, the Corporation sold a total of 1,600 shares
of common stock for an aggregate amount of $30,400 to one officer
of the Corporation pursuant to the exercise of stock options by
the officer.
On September 12, 2003, the Corporation sold a total of 431 shares
of common stock for an aggregate amount of $11,853 to one officer
of the Corporation pursuant to the exercise of stock options by
the 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
26
Item 4. Submission of Matters to a Vote of Security Holders - Not applicable
Item 5. Other Information - Not applicable
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) The registrant filed the following Current Reports on Form 8-K
during the quarter ended September 30, 2003.
Date Item Reported
---- -------------
August 11, 2003 Letter to Shareholders of the Registrant, dated
August 11, 2003
27
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: October 27, 2003
THE NATIONAL BANK OF INDIANAPOLIS CORPORATION
/s/ Debra L. Ross
----------------------------------------------
Debra L. Ross
Chief Financial Officer
28
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