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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-21671
THE NATIONAL BANK OF INDIANAPOLIS CORPORATION
(Exact name of Registrant as Specified in its Charter)
Indiana 35-1887991
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
107 North Pennsylvania Street 46204
Indianapolis, Indiana (Zip Code)
(Address of Principal Executive Offices)
(317) 261-9000
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered Pursuant to Section 12(g) of the Act: Common Stock
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes [ ] No [X]
The aggregate market value of the common stock held by non-affiliates of
the registrant as of June 30, 2003 was approximately $52,707,551. The number of
shares of the registrant's Common Stock outstanding at March 26, 2004 was
2,347,129.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report, to the extent not set forth
herein, is incorporated herein by reference to the Registrant's definitive proxy
statement to be filed in connection with the annual meeting of shareholders to
be held in 2004.
Form 10-K Cross Reference Index
Item Disclosure Required Page
- ---- ------------------- ----
PART I
Item 1. Business 1
Item 2. Property 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 38
Item 8. Financial Statements and Supplementary Data 39
Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure 70
Item 9A. Controls and Procedures 70
PART III
Item 10. Directors and Executive Officers of the Registrant 71
Item 11. Executive Compensation 71
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 71
Item 13. Certain Relationships and Related Transactions 71
Item 14. Principal Accounting Fees and Services 71
Part IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 72
PART I
Item 1. Business
- -----------------
The Corporation. The National Bank of Indianapolis Corporation (the
"Corporation") was formed on January 29, 1993, for the purpose of forming a
banking institution in the Indianapolis, Indiana metropolitan area and holding
all of the shares of common stock of such banking institution. The Corporation
formed a national banking association named "The National Bank of Indianapolis"
(the "Bank") as a wholly-owned subsidiary.
The Bank was officially chartered by the OCC on December 8, 1993 and
opened for business to the public on December 21, 1993. The Bank's deposits are
insured by the FDIC. The Bank currently conducts its business through its
downtown headquarters located at 107 North Pennsylvania Street in Indianapolis,
at neighborhood bank offices located at 84th Street and Ditch Road in
northwestern Marion County and 82nd Street and Bash Road in northeastern Marion
County, in the Chamber of Commerce Building and AUL Office Complex in downtown
Indianapolis, at 49th Street and North Pennsylvania Street in northern Marion
County, Carmel Drive in Hamilton County, and Smith Valley Road and S.R. 135 in
Johnson County.
The Bank provides a full range of deposit, credit, and money
management services to its targeted market, which is small to medium size
businesses, affluent executive and professional individuals, and not-for-profit
organizations. In February of 1994, the Bank received full trust powers.
Management has sought to position the Bank to capitalize on the
customer disruption, dissatisfaction, and turn-over which it believes has
resulted from the acquisition of the three largest commercial banks located in
Indianapolis by out-of-state holding companies. On December 31, 2003, the
Corporation had consolidated total assets of $813 million and total deposits of
$638 million.
The key ingredients in the initial growth of the Bank have been an
aggressive business plan, an experienced Board of Directors and management team
and a seasoned group of bank employees. The basic strategy of the Bank continues
to emphasize the delivery of highly personalized services to the target client
base with an emphasis on quick response and financial expertise.
Business Plan Overview. The business plan of the Bank is based on
being a strong, locally owned bank providing superior service to a small group
of customers, which are primarily corporations with annual sales under $30
million, executives, professionals, and not-for-profit organizations. The Bank
provides highly personalized banking services with an emphasis on knowledge of
the particular financial needs and objectives of its clients and quick response
to customer requests. Because the management of the Bank is located in
Indianapolis, all credit and related decisions are made locally, thereby
facilitating prompt response. The Bank emphasizes both highly personalized
service at the customer's convenience and non-traditional delivery services that
do not require customers to frequent the Bank. This personal contact has become
a trademark of the Bank and a key means of differentiating the Bank from other
financial service providers.
The Bank offers a broad range of deposit services typically
available from most banks and savings associations, including checking accounts,
NOW accounts, savings and other kinds of deposits of various types (ranging from
daily money market accounts to longer term certificates of deposit). The Bank
also offers a full range of credit services, including commercial loans (such as
lines of credit, term loans, refinancings, etc.), personal lines of credit,
direct installment consumer loans, credit card loans, residential mortgage
loans, construction loans, and letters of credit. In addition, the Bank offers
full trust services. The Bank also has formed arrangements with outside
providers of tax and financial planning services to better accommodate its
customers.
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The Bank's growth in deposits is attributable in part to the efforts
of its staff who provide personal banking services to the Bank's customers. In
addition, the Bank has emphasized paying competitive interest rates on deposit
products. Finally, the Bank has offered savings and certificate of deposit
products with competitive rates to larger depositors in an effort to minimize
the operating costs of obtaining these deposits. Lending strategies focus
primarily on commercial loans to small and medium size businesses as well as
personal loans to executives and professionals.
In the residential mortgage lending area, the Bank offers regular,
jumbo and CRA mortgage products. The Bank has developed a secondary market for
its residential mortgage loans. Consumer lending is directed to executive and
professional clients through residential mortgages, credit cards, and personal
lines of credit to include home equity loans.
The Market. The Bank derives a substantial proportion of its
business from the Indianapolis Metropolitan Statistical Area ("MSA"), Indiana
area. Indianapolis has been ranked by a number of national publications as a
"top" Midwestern city.
Competition. The Bank's service area is highly competitive. There
are numerous financial institutions operating in the Indianapolis MSA
marketplace, which provide strong competition to the Bank. In addition to the
challenge of attracting and retaining customers for traditional banking services
offered by commercial bank competitors, significant competition also comes from
savings and loans associations, credit unions, finance companies, insurance
companies, mortgage companies, securities and brokerage firms, money market
mutual funds, loan production offices, and other providers of financial services
in the area. The Gramm-Leach-Bliley Act of 1999, effective March 11, 2000, has
changed the competitive environment in which the Bank conducts business. See
"Financial Modernization Legislation" below. These competitors with focused
products targeted at highly profitable customer segments, compete across
geographic boundaries and provide customers increasing access to meaningful
alternatives to banking services in nearly all significant products. The
increasingly competitive environment is a result primarily of changes in
regulations, changes in technology, product delivery systems and the
accelerating pace of consolidation among financial service providers. These
competitive trends are likely to continue. The Bank's ability to maintain its
history of strong financial performance will depend in part on the Bank's
ability over time to expand its scope of available financial services as needed
to meet the needs and demands of its customers. The Bank competes in this
marketplace primarily on the basis of highly personalized service, responsive
decision making, and competitive pricing.
Employees. The Corporation and the Bank has 180 employees, of which
173 are full-time equivalent employees. The Bank has employed persons with
substantial experience in the Indianapolis MSA banking market. The average
banking experience level for all Bank employees is in excess of 14 years.
Lending Activity. The Bank's lending strategy emphasizes a high
quality, well-diversified loan portfolio. The Bank's principal lending
categories are commercial, residential mortgage, private banking/personal, and
home equity. Commercial loans include loans for working capital, machinery and
equipment purchases, premises and equipment acquisitions and other corporate
needs. Residential mortgage lending includes loans on first mortgage residential
properties. Private banking loans include secured and unsecured personal lines
of credit as well as home equity loans.
Commercial loans typically entail a thorough analysis of the
borrower, its industry, current and projected economic conditions and other
factors. Credit analysis involves collateral, the type of loan, loan maturity,
terms and conditions, and various loan to value ratios as they relate to loan
policy. The Bank typically requires commercial borrowers to have annual
financial statements prepared by independent accountants and may require such
financial statements to be audited or reviewed by accountants. The Bank
generally requires appraisals or evaluations in connection with loans secured by
real estate. Such appraisals or evaluations are usually obtained prior to the
time funds are advanced. The Bank also often requires personal guarantees from
principals involved with closely-held corporate borrowers.
2
The Bank requires loan applications and personal financial
statements from its personal borrowers on loans that the Bank originates. Loan
officers complete a debt to income analysis that should meet established
standards of lending policy.
The Bank maintains a comprehensive loan policy that establishes
guidelines with respect to all categories of lending. In addition, loan policy
sets forth lending authority for each loan officer. The Loan Committee of the
Bank reviews all loans in excess of $250,000. Any loan in excess of a lending
officer's lending authority, up to $1,500,000, must receive the approval of the
Chief Executive Officer ("CEO"), Chief Lending Officer ("CLO"), or Senior Vice
President - Corporate Banking ("SVP"). Loans in excess of $1,500,000 but less
than $4,000,000 must be approved by the Loan Committee prior to the Bank making
such loan. The Board of Directors Loan Policy Committee is not required to
approve loans unless they are above $4,000,000 or are loans to directors or
executive officers. All loans are assigned a numerical rating based on
creditworthiness and are monitored for improvement or deterioration.
Loans are made primarily in the Bank's designated market area.
Bank Holding Company Regulation. The Corporation is registered as a
bank holding company and is subject to the regulations of the Board of Governors
of the Federal Reserve System ("Federal Reserve") under the Bank Holding Company
Act of 1956, as amended ("BHCA"). Bank holding companies are required to file
periodic reports with and are subject to periodic examination by the Federal
Reserve. The Federal Reserve has the authority to issue cease-and-desist orders
against a bank holding company and nonbank subsidiaries if it determines that
activities of such entities represent an unsafe and unsound practice or a
violation of law.
The Corporation is prohibited by the BHCA from acquiring direct or
indirect control of more than 5% of the outstanding shares of any class of
voting stock or substantially all of the assets of any bank or merging or
consolidating with another bank holding company without prior approval of the
Federal Reserve. In addition, the Corporation may not acquire direct or indirect
control of a savings association without the prior approval of the Federal
Reserve and the Office of Thrift Supervision. Additionally, the Corporation is
prohibited by the BHCA from engaging in or from acquiring ownership or control
of more than 5% of the outstanding shares of any class of voting stock of any
company engaged in a nonbanking business unless such business is determined by
the Federal Reserve to be so closely related to banking as to be a proper
incident thereto. The BHCA does not place territorial restrictions on the
activities of such nonbanking-related activities.
The Federal Reserve has issued regulations under the BHCA requiring
a bank holding company to serve as a source of financial and managerial strength
to its subsidiary banks. It is the policy of the Federal Reserve that, pursuant
to this requirement, a bank holding company should stand ready to use its
resources to provide adequate capital funds to its subsidiary banks during
periods of financial stress or adversity. Additionally, under the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), a bank holding
company is required to guarantee the compliance of any insured depository
institution subsidiary that may become "undercapitalized" (as defined in the
statute) with the terms of any capital restoration plan filed by such subsidiary
with its appropriate federal banking agency, up to the lesser of (i) an amount
equal to 5% of the institution's total assets at the time the institution became
undercapitalized, or (ii) the amount that is necessary (or would have been
necessary) to bring the institution into compliance with all applicable capital
standards as of the time the institution fails to comply with such capital
restoration plan. As a result of these policies, the Corporation may be required
to commit resources to its subsidiary bank in circumstances where it might not
otherwise do so.
Capital Adequacy Guidelines for Bank Holding Companies. The Federal
Reserve, as the regulatory authority for bank holding companies, has adopted
capital adequacy guidelines for bank holding companies. Bank holding companies
with assets in excess of $150 million must comply with the Federal Reserve's
risk-based capital guidelines which require a minimum ratio of total capital to
risk-weighted assets (including certain off-balance sheet activities such as
standby letters of credit) of 8%. At least half of the total required capital
must
3
be "Tier 1 capital," consisting principally of common stockholders' equity,
noncumulative perpetual preferred stock, a limited amount of cumulative
perpetual preferred stock and minority interest in the equity accounts of
consolidated subsidiaries, less certain goodwill items. The remainder ("Tier 2
capital") may consist of a limited amount of subordinated debt and
intermediate-term preferred stock, certain hybrid capital instruments and other
debt securities, cumulative perpetual preferred stock, and a limited amount of
the general loan loss allowance. In addition to the risk-based capital
guidelines, the Federal Reserve has adopted a Tier 1 (leverage) capital ratio
under which the bank holding company must maintain a minimum level of Tier 1
capital to average total consolidated assets of 3% in the case of bank holding
companies which have the highest regulatory examination ratings and are not
contemplating significant growth or expansion. All other bank holding companies
are expected to maintain a ratio of at least 1% to 2% above the stated minimum.
Certain regulatory capital ratios for the Corporation as of December
31, 2003 are shown below:
Tier 1 Capital to Risk-Weighted Assets 9.2%
Total Risk Based Capital to Risk-Weighted Assets 10.8%
Tier 1 Leverage Ratio 6.8%
Bank Regulation. The Bank is organized under the laws of the United
States of America and is subject to the supervision of the OCC, whose examiners
conduct periodic examinations of national banks. The deposits of the Bank are
insured by the Bank Insurance Fund ("BIF") administered by the FDIC and are
subject to the FDIC's rules and regulations respecting the insurance of
deposits. See "--Deposit Insurance."
Both federal and state law extensively regulate various aspects of
the banking business such as reserve requirements, truth-in-lending and
truth-in-savings disclosure, equal credit opportunity, fair credit reporting,
trading in securities and other aspects of banking operations. Current federal
law also requires banks, among other things to make deposited funds available
within specified time periods.
Under federal and Indiana law, the Bank may establish an additional
banking location anywhere in Indiana. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 allows bank holding companies to acquire banks
anywhere in the United States subject to certain state restrictions, and permits
an insured bank to merge with an insured bank in another state without regard to
whether such merger is prohibited by state law. Additionally, an out-of-state
bank may acquire the branches of an insured bank in another state without
acquiring the entire bank; provided, however, that the law of the state where
the branch is located permits such an acquisition. Bank holding companies may
merge existing bank subsidiaries located in different states into one bank.
With certain exceptions, a bank and a subsidiary may not extend
credit, lease or sell property or furnish any services or fix or vary the
consideration for the foregoing on the condition that (i) the customer must
obtain or provide some additional credit, property or services from, or to, any
of them, or (ii) the customer may not obtain some other credit, property or
service from a competitor, except to the extent reasonable conditions are
imposed to assure the soundness of credit extended.
An insured bank subsidiary may act as an agent for an affiliated
bank or thrift in offering limited banking services (receive deposits, renew
time deposits, close loans, service loans and receive payments on loan
obligations) both within the same state and across state lines.
Dividend Limitations. Under Federal Reserve supervisory policy, a
bank holding company generally should not maintain its existing rate of cash
dividends on common shares unless (i) the organization's net income available to
common shareholders over the past year has been sufficient to fully fund the
dividends, and (ii) the prospective rate of earnings retention appears
consistent with the
4
organization's capital needs, asset quality, and overall financial condition.
The FDIC also has authority under the Financial Institutions Supervisory Act to
prohibit a bank from paying dividends if, in its opinion, the payment of
dividends would constitute an unsafe or unsound practice in light of the
financial condition of the bank. The Corporation's Board of Directors has not
yet declared any dividends and does not anticipate that it will do so in the
immediate future. In addition, there can be no assurance as to when, if ever,
the Corporation will declare and pay any cash dividends.
Under federal law, the Bank must comply with various restrictions
applicable to its ability to pay dividends. In addition, the Bank is subject to
certain restrictions imposed by the Federal Reserve on extensions of credit to
the Corporation, on investments in the stock or other securities of the
Corporation, and in taking such stock or securities as collateral for loans.
The most stringent capital requirement affecting the Bank, however,
are those established by the prompt corrective action provisions of FDICIA,
which are discussed below. At December 31, 2003, the Bank's total risk-based
capital, Tier 1 risk-based capital and leverage capital exceeded the amounts
required to be designated "well capitalized."
Lending Limits. Under federal law, the total loans and extension of
credit by a national bank to a borrower outstanding at one time and not fully
secured may not exceed 15% of such bank's capital and unimpaired surplus. An
additional amount up to 10% of the bank's capital and unimpaired surplus may be
loaned to the same borrower if such loan is fully secured by readily marketable
collateral having a market value, as determined by reliable and continuously
available price quotations, at least equal to the amount of such additional
loans outstanding. If a loan is secured by United States obligations, such as
treasury bills, bonds, or notes guaranteed by the federal government, it is not
subject to the bank's legal lending limit.
Affiliates. The Bank is subject to Sections 22(h), 23A and 23B of
the Federal Reserve Act, which restrict financial transactions between banks and
affiliated companies limits credit transactions between a bank and its executive
officers and its affiliates, prescribes terms and conditions for bank affiliate
transactions deemed to be consistent with safe and sound banking practices, and
restricts the types of collateral security permitted in connection with a bank's
extension of credit to an affiliate.
Prompt Corrective Action. The FDIC has adopted regulations to
implement "prompt corrective action" with respect to banks which do not meet
minimum capital requirements. Among other things, the regulations define the
relevant capital measures for the five capital categories. An institution is
deemed to be "well capitalized" if it has a total risk-based capital ratio of
10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a
leverage ratio of 5% or greater, and is not subject to a regulatory order,
agreement or directive to meet and maintain a specific capital level for any
capital measure. An institution is deemed to be "adequately capitalized" if it
has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based
capital ratio of 4% or greater, and generally a leverage ratio 4% or greater. An
institution is deemed to be "undercapitalized" if it has a total risk-based
capital ratio of less than 8%, a Tier 1 risk-based capital ratio of less than
4%, or generally a leverage ratio of less than 4%. An institution is deemed to
be "significantly undercapitalized" if it has a total risk-based capital ratio
of less than 6%, a Tier 1 risk-based capital ratio of less than 3%, or a
leverage ratio of less than 3%. An institution is deemed to be "critically
undercapitalized" if it has a ratio of tangible equity (as defined in the
regulations) to total assets that is equal to or less than 2%.
"Undercapitalized" banks are subject to growth limitations and are
required to submit a capital restoration plan. A bank's compliance with such
plan is required to be guaranteed by any company that controls the
undercapitalized institution as described above. If an "undercapitalized" bank
fails to submit an acceptable plan, it is treated as if it is significantly
undercapitalized. "Significantly undercapitalized" banks are subject to one or
more of a number of requirements and restrictions, including an order by the
FDIC to sell sufficient voting stock to become adequately capitalized,
requirements to reduce total assets and case receipt of deposits from
correspondent
5
banks, and restrictions on compensation of executive officers. "Critically
undercapitalized" institutions may not, beginning 60 days after becoming
"critically undercapitalized", make any payment of principal or interest on
certain subordinated debt or extend credit for a highly leveraged transaction or
enter into any transaction outside the ordinary course of business. In addition,
"critically undercapitalized" institutions are subject to appointment of a
receiver or conservator.
Safety and Soundness Guidelines. The federal banking agencies have
established guidelines which prescribe standards for depository institutions
relating to internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, asset
quality, earnings, compensation fees and benefits, and management compensation.
The agencies may require an institution which fails to meet the standards set
forth in the guidelines to submit a compliance plan. Failure to submit an
acceptable plan or adhere to an accepted plan may be grounds for further
enforcement action.
Deposit Insurance. The Bank's deposits are insured up to $100,000
per insured account by the BIF. As an institution whose deposits are insured by
the BIF, the Bank is not currently required to pay deposit insurance premiums to
BIF but was required to pay $23,691 for the Financing Corporation (FICO)
assessment for the first quarter in 2004. The Bank's deposit insurance
assessments may increase depending upon the risk category and subcategory, if
any, to which the Bank is assigned by the FDIC. Any increase in insurance
assessments could have an adverse effect on the Bank's earnings.
Bank Capital Requirements. The OCC has adopted risk-based capital
ratio guidelines to which the Bank is subject. The guidelines establish a
systematic analytical framework that makes regulatory capital requirements more
sensitive to differences in risk profiles among banking organizations.
Risk-based capital ratios are determined by allocating assets and specified
off-balance sheet commitments to four risk weighted categories, with higher
levels of capital being required for the categories perceived as representing
greater risk.
These guidelines divide a bank's capital into two tiers. The first
tier (Tier 1) includes common equity, certain non-cumulative perpetual preferred
stock (excluding auction rate issues) and minority interests in equity accounts
of consolidated subsidiaries, less goodwill and certain other intangible assets
(except mortgage servicing rights and purchased credit card relationships,
subject to certain limitations). Supplementary (Tier 2) capital includes, among
other items, cumulative perpetual and long-term limited-life preferred stock,
mandatory convertible securities, certain hybrid capital instruments, term
subordinated debt and the allowance for loan and lease losses, subject to
certain limitations, less required deductions. Banks are required to maintain a
total risk-based capital ratio of 8%, of which 4% must be Tier 1 capital. The
OCC may, however, set higher capital requirements when a bank's particular
circumstances warrant. Banks experiencing or anticipating significant growth are
expected to maintain capital ratios, including tangible capital positions, well
above the minimum levels.
In addition, the OCC established guidelines prescribing a minimum
Tier 1 leverage ratio (Tier 1 capital to adjusted total assets as specified in
the guidelines). These guidelines provide for a minimum Tier 1 leverage ratio of
3% for banks that meet certain specified criteria, including that they have the
highest regulatory rating and are not experiencing or anticipating significant
growth. All other banks are required to maintain a Tier 1 leverage ratio of 3%
plus an additional cushion of at least 100 to 200 basis points.
Certain regulatory capital ratios under the OCC's risk-based capital
guidelines for the Bank at December 31, 2003 are shown below:
Tier 1 Capital to Risk-Weighted Assets 8.6%
Total Risk-Based Capital to Risk-Weighted Assets 10.2%
Tier 1 Leverage Ratio 6.4%
6
In 1996, the FDIC, along with the OCC and the Federal Reserve,
issued a joint policy statement to provide guidance on sound practices for
managing interest rate risk. The statement sets forth the factors the federal
regulatory examiners will use to determine the adequacy of a bank's capital for
interest rate risk. These qualitative factors include the adequacy and
effectiveness of the bank's internal interest rate risk management process and
the level of interest rate exposure. Other qualitative factors that will be
considered include the size of the bank, the nature and complexity of its
activities, the adequacy of its capital and earnings in relation to the bank's
overall risk profile, and its earning exposure to interest rate movements. The
interagency supervisory policy statement describes the responsibilities of a
bank's board of directors in implementing a risk management process and the
requirements of the bank's senior management in ensuring the effective
management of interest rate risk. Further, the statement specifies the elements
that a risk management process must contain.
The OCC, the Federal Reserve and the FDIC have issued final
regulations further revising their risk-based capital standards to include a
supervisory framework for measuring market risk. The effect of these regulations
is that any bank holding company or bank which has significant exposure to
market risk must measure such risk using its own internal model, subject to the
requirements contained in the regulations, and must maintain adequate capital to
support that exposure. These regulations apply to any bank holding company or
bank whose trading activity equals 10% or more of its total assets, or whose
trading activity equals $1 billion or more. Examiners may require a bank holding
company or bank that does not meet the applicability criteria to comply with the
capital requirements if necessary for safety and soundness purposes. These
regulations contain supplemental rules to determine qualifying and excess
capital, calculate risk-weighted assets, calculate market risk equivalent assets
and calculate risk-based capital ratios adjusted for market risk.
Financial Modernization Legislation: The Gramm-Leach- Bliley Act. Effective as
of March 11, 2000, the Gramm-Leach-Bliley Act:
(i) allows bank holding companies meeting management,
capital and CRA standards to engage in a substantially
broader range of non-banking activities then was
previously permissible, including insurance underwriting
and agency, and underwriting and making merchant banking
investments in commercial and financial companies;
(ii) allows insurers and other financial services companies
to acquire banks and thrifts;
(iii) removes various restrictions that previously applied to
bank holding company ownership of securities firms and
mutual fund advisory companies; and
(iv) establishes the overall regulatory structure applicable
to bank holding companies that also engage in insurance
and securities operations.
In order for a bank holding company to engage in the broader range
of activities that are permitted by the Gramm-Leach-Bliley Act, (1) all of its
depository institutions must be well capitalized and well managed and (2) it
must file a declaration with the Federal Reserve Board that it elects to be a
"financial holding company". In addition, to commence any new activity permitted
by the Gramm-Leach-Bliley Act, each insured depository institution of the
financial holding company must have received at least a "satisfactory" rating in
its most recent examination under the Community Reinvestment Act.
The Gramm-Leach-Bliley Act also modified laws related to financial
privacy. The new financial privacy provisions generally prohibit financial
institutions, including the Bank, from disclosing nonpublic personal financial
information to third parties unless customers have the opportunity to "opt out"
of the disclosure.
The Corporation does not believe that the Gramm-Leach-Bliley Act
will have any immediate, material impact on its operations. However, to the
extent that the Gramm-Leach-Bliley Act permits commercial banks, securities
firms and insurance companies to affiliate,
7
the Act may have the effect of increasing the amount of competition that the
Company faces from other companies offering financial products, many of which
may have substantially more financial resources.
Additional Matters.
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Sarbanes-Oxley Act. On July 30, 2002, President George W. Bush
signed into law the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"). The
Sarbanes-Oxley Act implements a broad range of corporate governance and
accounting measures for public companies designed to promote honesty and
transparency in corporate America and to better protect investors. The
Sarbanes-Oxley Act's principal legislation includes:
o the creation of an independent accounting oversight
board;
o auditor independence provisions which restrict non-audit
services that accountants may provide to their audit
clients;
o additional corporate governance and responsibility
measures, including the requirement that the chief
executive officer and chief financial officer certify
financial statements;
o the forfeiture of bonuses or other incentive-based
compensation and profits from the sale of an issuer's
securities by directors and senior officers in the
twelve month period following initial publication of any
financial statements that later require restatement;
o increased oversight of, and enhancement of certain
requirements relating to audit committees of public
companies and how they interact with the company's
independent auditors;
o requirement that audit committee members must be
independent and are absolutely barred from accepting
consulting, advisory or other compensatory fees from the
issuer;
o a requirement that companies disclose whether at least
one member of the committee is a "financial expert" (as
such term is defined by the Securities and Exchange
Commission) and if not, why not;
o expanded disclosure requirements for corporate insiders,
including accelerated reporting of stock transactions by
insiders and a prohibition on insider trading during
pension blackout periods;
o a prohibition on personal loans to directors and
officers, except certain loans made by insured financial
institutions;
o disclosure of a code of ethics and filing a Form 8-K for
a change or waiver of such code;
o mandatory disclosure by analysts of potential conflicts
of interest; and
o a range of enhanced penalties for fraud and other
violations.
Although we anticipate that we will incur additional expense in complying with
the provisions of the Sarbanes-Oxley Act and the resulting regulations,
management does not expect that such compliance will have a material impact on
our results of operations or financial condition.
USA Patriot Act. On October 26, 2001, President George W. Bush
signed the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001 (the "USA Patriot
Act"). The USA Patriot Act is intended to strengthen the ability of U. S. Law
Enforcement to combat terrorism on a variety of fronts. The potential impact of
the USA Patriot Act on financial institutions is significant and wide-ranging.
The USA Patriot Act contains sweeping anti-money laundering and financial
transparency laws and requires financial institutions to implement additional
policies and procedures with respect to, or additional measures designed to
address, any or all of the following matters, among others: money laundering,
suspicious activities and currency transaction reporting; and currency crimes.
8
In addition to the matters discussed above, the Corporation and the
Bank are subject to additional regulation of their activities, including a
variety of consumer protection regulations affecting their lending, deposit and
collection activities and regulations affecting secondary mortgage market
activities.
The earnings of financial institutions, including the Corporation
and the Bank, are also affected by general economic conditions and prevailing
interest rates, both domestic and foreign and by the monetary and fiscal
policies of the U.S. Government and its various agencies, particularly the
Federal Reserve.
Additional legislation and administrative actions affecting the
banking industry may be considered by the United States Congress, the Indiana
General Assembly and various regulatory agencies, including those referred to
above. It cannot be predicted with certainty whether such legislation of
administrative action will be enacted or the extent to which the banking
industry in general or the Corporation and the Bank in particular would be
affected thereby.
9
Item 2. Property
- -----------------
The Bank purchased the downtown office building which houses its
main office as well as the Corporation's main office at 107 North Pennsylvania
Street in December 1998. It was previously being leased from an affiliate of one
of the directors of the Corporation and the Bank.
The Bank opened its first neighborhood bank office in February 1995
at 84th and Ditch Road. The Bank also opened a neighborhood bank office at 82nd
and Bash Road on the northeast side of Indianapolis in December 1995. The Bank
owns the land and the premises for both of these offices. In March 1996, the
Bank opened an office in the Chamber of Commerce building at 320 N. Meridian
Street in the downtown Indianapolis area. The Bank leases the premises at this
banking office. In March 1998, the Bank opened an office at 4930 North
Pennsylvania Street and leases the premises at this banking office. In June
1999, the Bank opened an office in the AUL Office Complex located at One
American Square in the downtown Indianapolis area. The Bank leases the premises
at this banking center. In September 2000, the Bank opened an office at 650 East
Carmel Drive in Carmel. This office is located in Hamilton County which is north
of Indianapolis. The Bank leases the premises at this banking office. In July
1997, the Bank purchased a parcel of land in Greenwood for future business
development. In October 2001, the Bank opened an office at 1675 West Smith
Valley Road in Greenwood. The Bank leases the premises at this banking office.
The Bank has installed a remote ATM at the Indianapolis City Market,
Parkwood, and Meridian Mark II Office Complex. These remote ATMs provide
additional banking convenience for the customers of the Bank, and generate an
additional source of fee income for the Bank.
The Corporation's properties are in good physical condition and are
considered by the Corporation to be adequate to meet the banking needs of the
customers in the communities served.
Item 3. Legal Proceedings
- --------------------------
Neither the Corporation nor the Bank are involved in any pending
legal proceedings at this time, other than routine litigation incidental to its
business.
Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
None.
10
PART II
Item 5. Market Price for Registrant's Common Equity and
Related Stockholder Matters.
- --------------------------------------------------------
Shares of the common stock of the Corporation are not traded on
any national or regional exchange or in the over-the-counter market.
Accordingly, there is no established market for the common stock. These are
occasional trades as a result of private negotiations not involving a broker or
a dealer. The table below lists the high and low prices per share of which
management is aware of during 2003 and 2002. There may have been other trades at
other prices of which management is not aware. Management does not have
knowledge of the price paid in all transactions and has not verified the
accuracy of those prices that have been reported to it. Because of the lack of
an established market for the common shares of the Company, these prices would
not necessarily reflect the prices which the shares would trade in an active
market.
--------------------------------------------------------------
Price per Share
--------------------------------------------------------------
Quarter High Low
--------------------------------------------------------------
2003 2002 2003 2002
--------------------------------------------------------------
First Quarter $30.00 $25.50 $29.50 $25.50
--------------------------------------------------------------
Second Quarter $31.00 $27.75 $30.75 $27.00
--------------------------------------------------------------
Third Quarter $31.50 $28.00 $31.00 $28.00
--------------------------------------------------------------
Fourth Quarter $31.88 $29.00 $30.88 $28.50
--------------------------------------------------------------
The Corporation had 651 shareholders on record as of March 26, 2004.
The Corporation has not declared or paid any cash dividends on its
shares of common stock since its organization in 1993. The Corporation and the
Bank anticipate that earnings will be retained to finance the Bank's growth in
the immediate future. Future dividend payments by the Corporation, if any, will
be dependent upon dividends paid by the Bank, which are subject to regulatory
limitations, earnings, general economic conditions, financial condition, capital
requirements, and other factors as may be appropriate in determining dividend
policy.
11
Item 6. Selected Financial Data
- --------------------------------
The following table sets forth certain consolidated information
concerning the Corporation for the periods and dates indicated and should be
read in connection with, and is qualified in its entirety by, the detailed
information and consolidated financial statements and related notes set forth in
the Corporation's audited financial statements included elsewhere herein (in
000's), except per share data.
Year Ended December 31
-----------------------------------------------------------------
2003 2002 2001 2000 1999
-----------------------------------------------------------------
Consolidated Operating Data:
Interest income $ 34,560 $ 35,095 $ 38,801 $ 35,319 $ 26,247
Interest expense 11,950 14,061 20,953 19,786 14,355
Net interest income 22,610 21,034 17,848 15,533 11,892
Provision for loan losses 1,200 1,500 1,440 1,440 1,010
Net income after provision for loan losses 21,410 19,534 16,408 14,093 10,882
Securities losses net (37) -- -- -- --
Other operating income 7,951 7,475 5,923 4,278 3,363
Other operating expenses 20,984 19,452 16,821 14,002 11,198
Income before income taxes 8,377 7,557 5,510 4,369 3,047
Federal and state income taxes 3,213 3,000 2,140 1,719 1,217
Net income 5,164 4,557 3,370 2,650 1,830
Consolidated Balance Sheet Data (at end of period):
Total assets $ 812,599 $ 726,514 $ 670,697 $ 533,767 $ 429,501
Total investment securities
(including Stock in Federal Bank) 125,247 117,485 39,049 89,379 55,660
Total loans 597,063 528,911 452,060 361,602 311,478
Allowance for loan losses (8,030) (7,227) (5,987) (4,701) (3,393)
Deposits 637,537 544,343 506,125 410,434 345,008
Shareholders' equity 42,678 41,247 28,470 24,660 21,636
Weighted average shares outstanding 2,343 2,289 1,917 1,908 1,889
Per Share Data:
Basic net income (loss) per common share (1) $ 2.20 $ 1.99 $ 1.76 $ 1.39 $ 0.97
Cash dividends declared 0 0 0 0 0
Book value (2) 18.14 16.89 14.48 12.60 11.09
Other Statistics and Operating Data:
Return on average assets 0.7% 0.7% 0.5% 0.6% 0.5%
Return on average equity 12.1% 12.2% 12.7% 11.4% 8.9%
Net interest margin (3) 3.1% 3.2% 3.0% 3.5% 3.2%
Average loans to average deposits 95.7% 90.8% 90.8% 90.3% 83.4%
Allowance for loan losses to loans at end of period 1.3% 1.4% 1.3% 1.3% 1.1%
Allowance for loan losses to non-performing loans 164.8% 223.8% 717.0% 518.8% 881.5%
Non-performing loans to loans at end of period 0.8% 0.6% 0.2% 0.3% 0.1%
Net charge-offs to average loans 0.1% 0.1% 0.0% 0.0% 0.1%
Number of offices 8 8 8 7 6
Number of full and part-time employees 180 176 165 144 127
Number of Shareholders of Record 645 647 634 640 619
Capital Ratios:
Average shareholders' equity to average assets 5.6% 5.4% 4.3% 4.8% 5.1%
Equity to assets 5.3% 5.7% 4.2% 4.6% 5.0%
Total risk-based capital ratio (Bank only) 10.2% 10.1% 10.6% 11.1% 10.2%
(1) Based upon weighted average shares outstanding during the period.
(2) Based on Common Stock outstanding at the end of the period.
(3) Net interest income as a percentage of average interest-earning assets.
12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- ------------------------------------------------------------------------
The following discussion and analysis of the Corporation relates to the years
ended December 31, 2003, 2002 and 2001 and should be read in conjunction with
the Corporation's Consolidated Financial Statements and Notes thereto included
elsewhere herein.
The primary source of The National Bank of Indianapolis' revenue is
net interest income from loans and deposits, and fees from financial services
provided to customers. Overall economic factors including market interest rates,
business spending, and consumer confidence, as well as competitive conditions
within the marketplace tend to influence business volumes.
During 2003, interest rates reached record low levels resulting in
an extraordinary volume of mortgage loan originations and sales. As a result,
mortgage-related business contributed significantly to other operating income.
Results of Operations
Year Ended December 31, 2003 Compared to the Year Ended December 31, 2002 and
Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001
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 $5,164,200 for the year
ended December 31, 2003 compared to net income of $4,556,836 for the year ended
December 31, 2002 and net income of $3,370,043 for the year ended December 31,
2001. 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 and 2001, thereby offsetting more of the operating expenses.
The Bank experienced growth during the past three years. Total
assets increased $86,084,341 or 11.8% to $812,598,814 for the year ended
December 31, 2003 from $726,514,473 for the year ended December 31, 2002 and
total assets increased from $670,697,090 for the year ended December 31, 2001.
This growth is in part due to an increase in customers as a result of local bank
mergers/consolidations and the addition of experienced corporate and private
bankers to the staff.
Net Interest Income
- -------------------
The following table details the components of net interest income
for the years ended December 31, 2003, 2002, and 2001 (in 000's):
Year ended Year ended
December 31 $ % December 31 $ %
2003 2002 Change Change 2002 2001 Change Change
------------------------------------- -------------------------------------
Interest income:
Interest and fees on loans $31,010 $30,593 $ 417 1.4% $30,593 $30,799 $ (206) -0.7%
Interest on investment securities 3,020 3,683 (663) -18.0% 3,683 6,154 (2,471) -40.2%
Interest on federal funds sold 432 573 (141) -24.6% 573 1,045 (472) -45.2%
Interest on reverse repurchase agreements 98 245 (147) -60.0% 245 803 (558) -69.5%
------------------------------------- -------------------------------------
Total interest income 34,560 35,094 (534) -1.5% 35,094 38,801 (3,707) -9.6%
Interest expense:
Interest on deposits 7,668 9,145 (1,477) -16.2% 9,145 13,920 (4,775) -34.3%
Interest on repurchase agreements 381 752 (371) -49.3% 752 3,156 (2,404) -76.2%
Interest on FHLB advances 2,414 2,721 (307) -11.3% 2,721 2,434 287 11.8%
Interest on long term debt 1,487 1,444 43 3.0% 1,444 1,443 1 0.1%
------------------------------------- -------------------------------------
Total interest expense 11,950 14,062 (2,112) -15.0% 14,062 20,953 (6,891) -32.9%
------------------------------------- -------------------------------------
Net interest income $22,610 $21,032 $ 1,578 7.5% $21,032 $17,848 $ 3,184 17.8%
===================================== =====================================
13
The decrease in interest income is due to an overall lower interest
rate environment in 2003 and 2002 which was the result of significant interest
rate decreases by the Federal Reserve in 2001 as well as smaller decreases in
2002 and 2003. The following table shows the prime rate in effect as of each
year end:
Date Prime Rate
---- ----------
December 31, 2000 9.50%
December 31, 2001 4.75%
December 31, 2002 4.25%
December 31, 2003 4.00%
Net interest income increased for the year ended December 31, 2003
compared to the year ended December 31, 2002 and 2001. The overall increase
between 2003 and 2002 was 7.5% and between 2002 and 2001 it was 17.8%. The
overall increase was lower between 2003 and 2002 because of the overall lower
interest rate environment. Due to the lower interest rate environment, there is
a compression of the spread between the yield earned on loans and the yield paid
on deposits.
14
The following table details average balances, interest income /
expense and average rates / yields for the Bank's earning assets and interest
bearing liabilities for the years ended December 31, 2003, 2002 and 2001 (in
000's):
2003 2002 2001
Interest Average Interest Average Interest Average
Average Income/ Rate/ Average Income/ Rate/ Average Income/ Rate/
Balance Expense Yield Balance Expense Yield Balance Expense Yield
------------------------------- ------------------------------- -------------------------------
Assets:
Federal Funds $ 39,961 $ 432 1.08% $ 34,992 $ 573 1.64% $ 27,630 $ 1,045 3.78%
Reverse Repurchase Agreements 10,986 98 0.89% 15,548 245 1.58% 28,178 803 2.85%
Investments 115,597 3,020 2.61% 130,832 3,683 2.82% 130,763 6,154 4.71%
Loans (gross) 562,587 31,010 5.51% 483,562 30,593 6.33% 403,365 30,799 7.64%
------------------------------- ------------------------------- -------------------------------
Total earning assets $ 729,131 $ 34,560 4.74% $ 664,934 $ 35,094 5.28% $ 589,936 $ 38,801 6.58%
Non-earning assets 37,076 44,413 42,174
----------- ----------- -----------
Total assets $ 766,207 $ 709,347 $ 632,110
=========== =========== ===========
Liabilities:
Interest bearing DDA $ 69,194 $ 576 0.83% $ 57,430 $ 574 1.00% $ 48,646 $ 696 1.43%
Savings 275,108 3,764 1.37% 248,487 4,162 1.67% 193,111 6,694 3.47%
CD's under $100,000 54,146 1,752 3.24% 57,954 2,496 4.31% 62,361 3,625 5.81%
CD's over $100,000 40,430 1,186 2.93% 36,840 1,421 3.86% 40,177 2,326 5.79%
Individual Retirement Accounts 11,848 390 3.29% 10,885 492 4.52% 9,827 579 5.89%
Repurchase Agreements 71,352 381 0.53% 70,121 752 1.07% 92,603 3,156 3.41%
FHLB Advances/Other 46,052 2,414 5.24% 48,926 2,721 5.56% 41,393 2,434 5.88%
Subordinated Debt 1,145 43 3.76% - - - - - -
Long Term Debt 13,500 1,444 10.70% 13,500 1,444 10.70% 13,500 1,443 10.69%
------------------------------- ------------------------------- -------------------------------
Total Interest Bearing Liabilities $ 582,775 $ 11,950 2.05% $ 544,143 $ 14,062 2.58% $ 501,618 $ 20,953 4.18%
Non-Interest Bearing Liabilities 136,846 116,295 88,130
Other Liabilities 3,841 3,726 3,967
----------- ----------- -----------
Total Liabilities $ 723,462 $ 664,164 $ 593,715
Equity 42,745 45,183 38,395
----------- ----------- -----------
Total Liabilities & Equity $ 766,207 $ 709,347 $ 632,110
=========== =========== ===========
Recap:
Interest Income $ 34,560 4.74% $ 35,094 5.28% $ 38,801 6.58%
Interest Expense 11,950 2.05% 14,062 2.58% 20,953 4.18%
-------------------- -------------------- --------------------
Net Interest Income/Spread $ 22,610 2.69% $ 21,032 2.69% $ 17,848 2.40%
==================== ==================== ====================
Contribution of Non-Interest
Bearing Funds 0.41% 0.47% 0.63%
Net Interest Margin 3.10% 3.16% 3.03%
========= ========= =========
Average balances computed using daily actual balances.
15
The following table sets forth an analysis of volume and rate
changes in interest income and interest expense of the Corporation's average
earning assets and average interest-bearing liabilities. The table distinguishes
between the changes related to average outstanding balances of assets and
liabilities (changes in volume holding the initial average interest rate
constant) and the changes related to average interest rates (changes in average
rate holding the initial average outstanding balance constant). The change in
interest due to both volume and rate has been allocated to volume and rate
changes in proportion to the relationship of the absolute dollar amounts of the
change in each.
Net Interest Income Changes Due to Volume and Rates (in 000's):
Year Ended December 31
2003 Changes from 2002 2002 Changes from 2001 2001 Changes from 2000
Net Due to Due to Net Due to Due to Net Due to Due to
Change Rate Volume Change Rate Volume Change Rate Volume
Interest earning assets:
Federal funds sold $ (141) $ (195) $ 54 $ (472) $ (593) $ 121 $ (311) $ (541) $ 230
Reverse repurchase agreements (147) (106) (41) (558) (359) (199) 803 -- 803
Investment securities (663) (265) (398) (2,471) (2,473) 2 436 (1,465) 1,901
Loans 417 (3,939) 4,356 (206) (5,280) 5,074 2,554 (2,953) 5,507
----------------------------- ----------------------------- -----------------------------
TOTAL $ (534) $(4,505) $ 3,971 $(3,707) $(8,704) $ 4,997 $ 3,482 $(4,959) $ 8,441
Interest bearing liabilities:
Demand deposits $ 2 $ (96) $ 98 $ (122) $ (210) $ 88 $ (53) $ (188) $ 135
Savings deposits (398) (762) 364 (2,532) (3,460) 928 (1,030) (2,516) 1,486
CDs under $100,000 (744) (621) (123) (1,129) (939) (190) 105 (51) 156
CDs over $100,000 (235) (340) 105 (905) (776) (129) 114 (71) 185
Individual retirement accounts (102) (134) 32 (87) (135) 48 61 (10) 71
Repurchase agreements (371) (378) 7 (2,404) (2,163) (241) 152 (1,180) 1,332
FHLB Advances (307) (156) (151) 287 (132) 419 1,291 (43) 1,334
Subordinated debt 43 -- 43 -- -- -- -- -- --
Long term debt -- -- -- 1 1 -- 527 124 403
----------------------------- ----------------------------- -----------------------------
TOTAL $(2,112) $(2,487) $ 375 $(6,891) $(7,813) $ 922 $ 1,167 $(3,936) $ 5,103
----------------------------- ----------------------------- -----------------------------
Net change in Net Interest Income $ 1,578 $(2,018) $ 3,596 $ 3,184 $ (891) $ 4,075 $ 2,315 $(1,023) $ 3,338
============================= ============================= =============================
NOTE: Due to Rate Increase was calculated by taking the change in the rate
times the prior year average balance.
Due to Volume Increase was calculated by taking the change in
average balance times the prior year rate.
16
Average total loans for the year ended December 31, 2003 increased
compared to the years ended December 31, 2002 and 2001. The increase in the
average total loans was offset by the decrease in interest rates. The loan
portfolio produces the highest yield of all earning assets. The increased loan
growth is the result of new clients and the addition of experienced corporate
bankers to the staff.
Investment portfolio income decreased for the year ended December
31, 2003 compared to the years ended December 31, 2002 and 2001. The decrease is
due to a lower interest rate environment in 2003 and 2002 compared to 2001 as
well as a decrease in volume in 2003 as compared to previous years. The weighted
average rate of the investment portfolio was 2.61% for the year ended December
31, 2003 compared to 2.82% and 4.71% for the years ended December 31, 2002 and
2001, respectively.
Interest on federal funds sold decreased for the year ended December
31, 2003 compared to the years ended December 31, 2002 and 2001. The decrease is
due to lower interest rates in 2003 compared to previous years. The weighted
average rate was 1.08% for the year ended December 31, 2003 compared to a
weighted average rate of 1.64% and 3.78% for the years ended December 31, 2002
and 2001, respectively. The average balance for federal funds sold increased for
the year ended December 31, 2003 compared to the years ended December 31, 2002
and 2001.
Interest on reverse repurchase agreements decreased for the year
ended December 31, 2003 compared to the years ended December 31, 2002 and 2001.
The decrease is the result of a decrease in the average balance of reverse
repurchase agreements for the year ended December 31, 2003 compared to the years
ended December 31, 2002 and 2001. The decrease is also due to lower interest
rates in 2003 as compared to previous years. The weighted average rate was
approximately 0.89% for the year ended December 31, 2003 compared to a weighted
average rate of 1.58% and 2.85% for the years ended December 31, 2002 and 2001,
respectively.
Total interest expense decreased for the year ended December 31,
2003 compared to the years ended December 31, 2002 and 2001. This decrease is
due to low interest rates in 2003.
Total interest bearing liabilities for the year ended December 31,
2003 increased compared to the years ended December 31, 2002 and 2001. The
average cost of interest bearing liabilities for the year ended December 31,
2003 was approximately 2.1% as compared of 2.6% for the year ended December 31,
2002 and 4.2% for the year ended December 31, 2001. This rate decrease is due to
an overall interest rate decrease in the market and due to the run off of higher
priced deposits being replaced by lower priced deposits.
17
Provision for Loan Losses
The amount charged to the provision for loan losses by the Bank is
based on management's evaluation as to the amounts required to maintain an
allowance adequate to provide for potential losses inherent in the loan
portfolio. The level of this allowance is dependent upon the total amount of
past due and non-performing loans, general economic conditions and management's
assessment of potential losses based upon internal credit evaluations of loan
portfolios and particular loans. Most sectors of the economy are showing signs
of improvement over last year. It has been our experience that improved economic
strength generally will translate into better credit quality in the banking
industry. Management believes that the quality of our loan portfolio continues
to remain excellent and our reserves for loan losses are adequate. Loans are
principally to borrowers in central Indiana.
Twelve months ended
December 31,
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
Beginning of Period $7,227,000 $5,986,965 $4,700,672 $3,392,587 $2,626,279
Provision for loan losses 1,200,000 1,500,000 1,440,000 1,440,000 1,010,000
Losses charged to the reserve
Commercial 506,413 207,716 102,315 139,294 225,000
Real Estate 1,297 21,800 18,772 30,168 27,452
Installment 2,185 2,052 10,766 16,052 --
Credit Cards 26,922 53,661 46,468 12,351 --
---------- ---------- ---------- ---------- ----------
536,816 285,229 178,321 197,865 252,452
Recoveries
Commercial 121,918 17,024 23,868 65,281 3,760
Real Estate 16,438 -- -- -- 5,000
Installment 105 266 463 266 --
Credit Cards 950 7,974 283 403 --
------------------------------------ ---------- ----------
139,412 25,264 24,614 65,950 8,760
---------- ---------- ---------- ---------- ----------
End of Period $8,029,596 $7,227,000 $5,986,965 $4,700,672 $3,392,587
========== ========== ========== ========== ==========
Allowance as a % of Loans 1.34% 1.37% 1.32% 1.30% 1.09%
18
Other Operating Income
- ----------------------
The following table details the components of other operating income
for the years ended December 31, 2003, 2002, and 2001 (in 000's):
Year ended Year ended
December 31 $ % December 31 $ %
2003 2002 Change Change 2002 2001 Change Change
-------------------------------------- ---------------------------------------
Trust fees and commissions $ 1,987 $ 2,323 (336) -14.5% $ 2,323 $ 2,052 $ 271 13.2%
Service charges and fees on deposit accounts 2,410 2,227 183 8.2% 2,227 1,650 577 35.0%
Building rental income 548 480 68 14.2% 480 474 6 1.3%
Net gain on sale of mortgage loans 1,056 706 350 49.6% 706 435 271 62.3%
Interchange income 542 526 16 3.0% 526 467 59 12.6%
Other 1,408 1,214 194 16.0% 1,214 844 370 43.8%
-------------------------------------------------------------------------------
Total operating income $ 7,951 $ 7,476 $ 475 6.4% $ 7,476 $ 5,922 $ 1,554 26.2%
===============================================================================
Other operating income increased for the year ended December 31,
2003 compared to the years ended December 31, 2002 and 2001. There are several
components contributing to the overall increase.
Trust fees and commissions decreased for the year ended December 31,
2003 compared to the year ended December 31, 2002. The decrease is attributable
to the overall decline in the stock and treasury markets and a change in
accounting estimate related to the accrual of fees during 2003. Trust fees and
commissions increased for the year ended December 31, 2002 compared to the year
ended December 31, 2001. The increase is attributable to a general increase in
the average trust fee charged which was offset by an overall decline in the
stock and treasury markets.
Service charges and fees on deposit accounts increased for the year
ended December 31, 2003 compared to the years ended December 31, 2002 and 2001.
This increase is attributable to the increase in average demand deposit accounts
for the year ended December 31, 2003 compared to the years ended December 31,
2002 and 2001.
Building rental income increased for the year ended December 31,
2003 compared to the years ended December 31, 2002 and 2001. This is due to new
tenants in the building in 2003 compared to the same period in the previous
years.
Net gain on sale of mortgage loans increased for the year ended
December 31, 2003 compared to the years ended December 31, 2002 and 2001. This
is due to the ability to sell a bulk of mortgages that were generated during
2003 and 2002 as a result of lower interest rates. The Mortgage Division
originated in excess of $100 million in mortgage loans during the year, while
selling over $70 million to the secondary market.
19
Other Operating Expenses
The following table details the components of other operating
expenses for the years ended December 31, 2003, 2002, and 2001 (in 000's):
Year ended Year ended
December 31 $ % December 31 $ %
2003 2002 Change Change 2002 2001 Change Change
------------------------------------------------------------------------------
Salaries, wages and employee benefits $12,122 $11,278 $ 844 7.5% $11,278 $ 9,385 $ 1,893 20.2%
Occupancy expense 1,409 1,450 (41) -2.8% 1,450 1,418 32 2.3%
Furniture and equipment expense 891 896 (5) -0.6% 896 876 20 2.3%
Professional services 886 744 142 19.1% 744 851 (107) -12.6%
Data processing 1,362 1,289 73 5.7% 1,289 1,186 103 8.7%
Business development 838 735 103 14.0% 735 662 73 11.0%
Valuation of allowance for
mortgage servicing rights 345 261 84 32.2% 261 -- 261 --
Other expenses 3,131 2,799 332 11.9% 2,799 2,443 356 14.6%
------------------------------------------------------------------------------
Total other operating expenses $20,984 $19,452 $ 1,532 7.9% $19,452 $16,821 $ 2,631 15.6%
==============================================================================
Other operating expenses increased for the year ended December 31,
2003 compared to the years ended December 31, 2002 and 2001. Salaries, wages and
employee benefits increased for the year ended December 31, 2003 compared to the
years ended December 31, 2002 and 2001. This increase is primarily due to the
increase in the number of employees to 173 full time equivalents at December 31,
2003 from 167 full time equivalents at December 31, 2002 and from 153 full time
equivalents at December 31, 2001.
Occupancy expense decreased slightly for the year ended December 31,
2003 compared to the year ended December 31, 2002 due to lower building
maintenance and repair expense. Occupancy expense increased slightly for the
year ended December 31, 2002 compared to the year ended December 31, 2001 due to
the opening of a new banking office in Greenwood in October 2001.
Furniture and equipment expense decreased slightly for the year
ended December 31, 2003 compared to the year ended December 31, 2002 primarily
due to decreases in expenses related to fully depreciated assets at the older
banking centers and main office. Furniture and equipment expense increased
slightly for the year ended December 31, 2002 compared to the year ended
December 31, 2001 due to the additional expense associated with opening of a new
banking office offset by decreases in expenses related to fully depreciated
assets at the older banking centers and main office.
Professional services expense increased for the year ended December
31, 2003 compared to the year ended December 31, 2002 primarily due to
additional expense incurred for legal fees related to troubled loans and
accounting fees related to new regulations mandated by the Sarbanes-Oxley Act of
2002. Professional services expense decreased for the year ended December 31,
2002 compared to the year ended December 31, 2001 due to lower courier service
costs.
Data processing expenses increased for the year ended December 31,
2003 compared to the years ended December 31, 2002 and 2001 primarily due to
increased service bureau fees relating to increased transaction activity by the
Bank and trust department.
Business development expenses increased for the year ended December
31, 2003 compared to the years ended December 31, 2002 and 2001 due to increased
customer entertaining and public relations expense.
20
During the third quarter of 2002, a valuation reserve of $88,000 was
established for the mortgage servicing rights ("MSRs") asset. There were many
refinances and the Corporation had increased mortgage sales due to the overall
lower interest rates in 2002 and 2003. In a low rate environment, mortgage loan
refinancings generally increase, causing actual and expected loan prepayments to
increase, which drives down the estimated carrying value of existing MSRs. For
the year ended December 31, 2003, there was additional expense recorded against
the valuation reserve.
Tax (Benefit)/Expense
- ---------------------
The Corporation applies a federal income tax rate of 34% and a state
tax rate of 8.5% in the computation of tax expense. The provision for income
taxes consisted of the following:
2003 2002 2001
-----------------------------------------
Current tax expense $3,592,053 $3,636,852 $2,646,904
Deferred tax benefit (379,263) (636,573) (506,348)
-----------------------------------------
$3,212,790 $3,000,279 $2,140,556
=========================================
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Deferred tax
assets are recognized for the estimated tax effects attributable to deductible
temporary differences and operating loss carryforwards, net of any valuation
allowances for amounts which may not be realized by the Corporation.
The components of the Corporation's net deferred tax assets in the
consolidated balance sheet as of December 31 are as follows:
2003 2002
--------------------------
Deferred tax assets:
Allowance for loan losses $ 3,180,523 $ 2,862,615
Other 706,760 598,320
--------------------------
Total deferred tax assets 3,887,283 3,460,935
Deferred tax liability:
Mortgage servicing rights (356,080) (308,995)
Other (7,266) (341,548)
--------------------------
Total deferred tax liabilities (363,346) (650,543)
--------------------------
Net deferred tax assets $ 3,523,937 $ 2,810,392
==========================
21
Effects of Inflation
Inflation can have a significant effect on the operating results of
all industries. This is especially true in industries with a high proportion of
fixed assets and inventory. However, management believes that these factors are
not as critical in the banking industry. Inflation does, however, have an impact
on the growth of total assets and the need to maintain a proper level of equity
capital.
Interest rates are significantly affected by inflation, but it is
difficult to assess the impact since neither the timing nor the magnitude of the
changes in the various inflation indices coincides with changes in interest
rates. There is, of course, an impact on longer-term earning assets; however,
this effect continues to diminish as investment maturities are shortened and
interest-earning assets and interest-bearing liabilities shift from fixed rate,
long-term to rate-sensitive, short-term.
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 an adequate liquidity position is accomplished through the
management of the liquid assets - those which can be converted into cash - and
access to additional sources of funds. The Corporation must monitor its
liquidity ratios as established in the Asset/Liability ("ALCO") Committee
Policy. In addition, the Corporation has established a contingency funding plan
to address liquidity needs in the event of depressed economic conditions. The
liquidity position is continually monitored and reviewed by ALCO.
The Corporation has many sources of funds available, they include:
overnight federal funds sold, investments available for sale, maturity of
investments held for sale, deposits, Federal Home Loan Bank ("FHLB") advances,
and issuance of debt. Funding sources did not change significantly during 2003.
Deposits are the most significant funding source and loans are the most
significant use of funds for the years ended December 31, 2003, 2002, and 2001.
The Corporation maintains a $5,000,000 revolving credit agreement with Harris
Trust and Savings Bank to provide additional liquidity support to the Bank, if
needed. There were no borrowings under this agreement at December 31, 2003 or
2002.
Primary liquid assets of the Corporation are cash and due from
banks, federal funds sold, investments held as available for sale, and maturing
loans. Federal funds sold represent the Corporation's primary source of
immediate liquidity and were maintained at a level adequate to meet immediate
needs. Federal funds sold averaged approximately $40,000,000, $35,000,000 and
$28,000,000 for the twelve months ended December 31, 2003, 2002 and 2001
respectively. 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 avoid matching short-term deposits with
long-term loans and investments. Other assets and liabilities are also monitored
to provide the proper balance between liquidity, safety, and profitability. This
monitoring process must be continuous due to the constant flow of cash which is
inherent in a financial institution.
The Corporation'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.
22
The Corporation actively manages its interest rate sensitive assets
and liabilities to reduce the impact of interest rate fluctuations. At December
31, 2003, the Corporation's rate sensitive assets exceeded rate sensitive
liabilities due within one year by $6,250,723. At December 31, 2002, the
Corporation's rate sensitive liabilities exceeded rate sensitive assets due
within one year by $2,113,011.
The purpose of the Bank's Investment Committee is to manage and
balance interest rate risk, to provide a readily available source of liquidity
to cover deposit runoff and loan growth, and to provide a portfolio of safe,
secure assets of high quality that generate a supplemental source of income in
concert with the overall asset/liability policies and strategies of the Bank.
The Bank holds securities of the U.S. Government and its agencies
along with asset-backed securities, collateralized mortgage obligations,
municipals, and Federal Home Loan Bank and Federal Reserve Bank stock. In order
to properly manage market risk, credit risk and interest rate risk, the Bank has
guidelines it must follow when purchasing investments for the portfolio and
adherence to these policy guidelines are reported monthly to the board of
directors.
A portion of the Bank's investment securities consist of
asset-backed securities (in previous years) and collateralized mortgage
obligations. The Bank limits the level of these securities that can be held in
the portfolio to a specified percentage of total average assets. Also,
asset-backed securities collateralized by receivables other than mortgages will
not have a stated final maturity greater than seven years. In addition, only
credit card receivables or mortgage-related securities rated "AA" or better by
Standard & Poor's or an equivalent rating by another rating agency, will be
purchased.
All mortgage-related securities must pass the FFIEC stress test.
This stress test determines if price volatility under a 200 basis point interest
rate shock for each security exceeds a benchmark 30 year mortgage-backed
security. If the security fails the test, it is considered high risk and the
Bank will not purchase it. All mortgage-related securities purchased and
included in the investment portfolio will be subject to the FFIEC test as of
December 31 each year to determine if they have become high risk holdings. If a
mortgage-related security becomes high risk, it will be evaluated by the Bank's
Investment Committee to determine if the security should be liquidated. At
December 31, 2003, the Bank did not hold any high risk mortgage-related
securities and at December 31, 2002, the Bank held one high risk
mortgage-related security.
The Bank's investment portfolio also consists of bank-qualified
municipal securities. Municipal securities purchased are limited to the first
three (3) grades of the rating agencies. The grade is reviewed each December 31
to verify that the grade has not deteriorated below the first three (3) grades.
The Bank may purchase non-rated general obligation municipals, but the credit
strength of the municipality must be evaluated by the Bank's Credit Department.
Generally, municipal securities from each issuer will be limited to $1 million,
never to exceed 10% of the Bank's tier 1 capital and will not have a stated
final maturity date of greater than ten (10) years.
23
The average yield on the Bank's investment portfolio is as follows
as of December 31,
2003 2002 2001
---- ---- ----
U.S. Treasuries 1.99% 2.47% 5.41%
U.S. Government agencies 2.72% 2.85% 5.37%
Collateralized mortgage obligations 1.87% 3.31% 5.35%
Municipals 7.32% 7.32% 7.32%
Other securities 1.91% 2.14% 3.72%
With the exception of securities of the U.S. Government and U.S. Government
agencies and corporations, the Corporation had no other securities with a book
or market value greater than 10% of shareholders' equity as of December 31,
2003, 2002 and 2001.
24
The following is a summary of available-for-sale securities and
held-to-maturity securities:
Available-for-Sale Securities
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
---------------------------------------------------------
December 31, 2003
U.S. Treasury securities $ 21,840,685 $ 5,646 $ 954 $ 21,845,377
U.S. Government agencies 93,904,140 829,297 815,799 93,917,638
Collateralized mortgage obligations 99,203 154 -- 99,357
---------------------------------------------------------
$115,844,028 $ 835,097 $ 816,753 $115,862,372
=========================================================
December 31, 2002
U.S. Treasury securities $ 2,100,309 $ 13,230 $ 275 $ 2,113,264
U.S. Government agencies 79,930,066 845,676 -- 80,775,742
Collateralized mortgage obligations 1,097,683 3,646 -- 1,101,329
---------------------------------------------------------
$ 83,128,058 $ 862,552 $ 275 $ 83,990,335
=========================================================
December 31, 2001
U.S. Treasury securities $ 2,113,700 $ 12,385 $ -- $ 2,126,085
U.S. Government agencies 23,262,121 88,863 -- 23,350,984
Collateralized mortgage obligations 1,775,838 3,578 11 1,779,405
---------------------------------------------------------
$ 27,151,659 $ 104,826 $ 11 $ 27,256,474
=========================================================
Held-to-Maturity Securities
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
---------------------------------------------------------
December 31, 2003
Municipals $ 5,576,468 $ 531,499 $ -- $ 6,107,967
Other securities 250,000 7,082 -- 257,082
---------------------------------------------------------
$ 5,826,468 $ 538,581 $ -- $ 6,365,049
=========================================================
December 31, 2002
Collateralized mortgage obligations $ 24,333,493 $ 339,440 $ 12,644 $ 24,660,289
Municipals 5,534,243 552,233 -- 6,086,476
Other securities 225,000 10,391 -- 235,391
---------------------------------------------------------
$ 30,092,736 $ 902,064 $ 12,644 $ 30,982,156
=========================================================
December 31, 2001
Collateralized mortgage obligations $ 2,696,147 $ 6,816 $ 21,832 $ 2,681,131
Municipals 5,494,504 184,573 -- 5,679,077
Other securities 200,000 1,925 1,028 200,897
---------------------------------------------------------
$ 8,390,651 $ 193,314 $ 22,860 $ 8,561,105
=========================================================
25
As part of managing liquidity, the Corporation monitors its loan to
deposit ratio on a daily basis. At December 31, 2003 the ratio was 93.7 percent
and as of December 31, 2002 the ratio was 97.2 percent which is within the
Corporation's acceptable range.
The following table shows the composition of the Bank's loan
portfolio as of the dates indicated (in 000's):
December 31,
------------
2003 2002 2001 2,000 1999
---- ---- ---- ----- ----
% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
-------------------- -------------------- -------------------- -------------------- --------------------
TYPES OF LOANS
Commercial $ 221,846 37.2% $ 182,994 34.6% $ 150,101 33.2% $ 166,881 34.2% $ 135,897 43.6%
Construction 35,305 5.9% 21,107 4.0% 17,027 3.8% 8,733 2.4% 14,472 4.6%
Commercial Mortgage 120,135 20.1% 113,399 21.4% 82,256 18.2% 53,095 14.7% 34,726 11.1%
Residential Mortgage 183,095 30.7% 163,034 30.8% 151,874 33.6% 116,064 37.8% 109,787 35.3%
Installment 25,183 4.2% 35,934 6.8% 37,493 8.3% 2,320 6.9% 2,084 0.7%
Credit Card 2,360 0.4% 2,056 0.4% 1,811 0.4% 1,709 0.5% 1,556 0.5%
Other 9,139 1.5% 10,387 2.0% 11,498 2.5% 12,800 3.5% 12,956 4.2%
-------------------- -------------------- -------------------- -------------------- --------------------
Total - Gross $ 597,063 100.0% $ 528,911 100.0% $ 452,060 100.0% $ 361,602 100.0% $ 311,478 100.0%
========= ========= ========= ========= =========
Allowance (8,030) (7,227) (5,987) (4,701) (3,393)
----------- ----------- ----------- ----------- -----------
Total - Net $ 589,033 $ 521,684 $ 446,073 $ 356,901 $ 308,085
=========== =========== =========== =========== ===========
The following table shows the composition of the commercial loan
category by industry type as of the dates indicated (in $000's):
December 31,
------------
2003 2002 2001
---- ---- ----
Type Amount % Amount % Amount %
- ---- ------ - ------ - ------ -
Agriculture, Foresty & Fishing $ 1,297 0.6% $ - 0.0% $ - 0.0%
Mining 1,939 0.9% 794 0.4% 2,291 1.5%
Utilities - 0.0% - 0.0% - 0.0%
Construction 17,480 7.9% 13,814 7.5% 9,127 6.1%
Manufacturing 18,996 8.6% 12,139 6.6% 10,964 7.4%
Wholesale Trade 26,778 12.1% 21,649 11.8% 19,535 13.1%
Retail Trade 6,387 2.9% 11,372 6.2% 7,561 5.0%
Transportation 5,423 2.4% 4,544 2.5% 2,425 1.6%
Information 1,348 0.6% 1,464 0.8% 2,878 1.9%
Finance & Insurance 6,066 2.7% 5,275 2.9% 6,808 4.5%
Real Estate and Rental & Leasing 38,430 17.3% 29,602 16.2% 22,645 15.1%
Professional, Scientific & Technical Services 33,808 15.2% 22,788 12.5% 11,475 7.6%
Management of Companies & Enterprises - 0.0% - 0.0% - 0.0%
Administrative and Support, Waste Management &
Remediation Services 1,180 0.5% 1,254 0.7% 1,333 0.9%
Educational Services 2,760 1.2% 1,966 1.1% 1,893 1.3%
Health Care & Social Assistance 19,912 9.0% 15,932 8.7% 12,338 8.2%
Arts, Entertainment & Recreation 1,628 0.7% 2,835 1.5% 2,394 1.6%
Accommodation & Food Services 10,752 4.8% 10,385 5.7% 7,869 5.2%
Other Services 27,662 12.5% 27,183 14.9% 28,565 19.0%
----------------------- ------------------------ -----------------------
$ 221,846 100.0% $ 182,994 100.0% $ 150,101 100.0%
======================= ======================== =======================
26
The following table shows the composition of the Bank's deposit
portfolio as of the dates indicated (in 000's):
December 31
-----------
2003 2002 2001
---- ---- ----
% of % of % of
Amount Total Amount Total Amount Total
--------------------- --------------------- ---------------------
TYPES OF DEPOSITS
Demand $ 138,087 26.52% $ 137,576 31.04% $ 94,874 23.82%
MMDA/Savings 382,574 73.48% 305,605 68.96% 303,375 76.18%
--------------------- --------------------- ---------------------
Total Demand Deposits 520,661 100.00% 443,181 100.00% 398,249 100.00%
========== ========== ==========
CDs < $100,000 57,329 49.05% 53,872 53.25% 61,724 57.22%
CDs > $100,000 47,051 40.26% 35,988 35.57% 35,755 33.14%
Individual Retirement Accounts 12,496 10.69% 11,302 11.17% 10,397 9.64%
--------------------- --------------------- ---------------------
Total Certificates of Deposit 116,876 100.00% 101,162 100.00% 107,876 100.00%
========== ========== ==========
----------- ----------- -----------
Total Deposits $ 637,537 $ 544,343 $ 506,125
=========== =========== ===========
27
The following table illustrates the projected maturities and the
repricing mechanisms of the major asset/liabilities categories of the
Corporation as of December 31, 2003, based on certain assumptions. Prepayment
rate assumptions have been made for the residential loans secured by real estate
portfolio. Maturity and repricing dates for investments have been projected by
applying the assumptions set forth below to contractual maturity and repricing
dates.
0 - 180 181 - 365 1 - 2 2 - 3 3 -5 5 +
days days years years years years
---- ---- ----- ----- ----- -----
Interest Earning Assets:
Fed Funds/ Overnight Time $ 32,302,386
Reverse repurchase agreements 15,000,000
Investments 33,301,945 675,000 61,550,000 10,525,000 10,600,000 8,595,095
Loans
Commercial & Industrial
Fixed 22,166,681 8,274,981 10,663,953 6,892,599 4,097,367 3,395,826
Variable 162,290,944
Commercial Loans Secured by
Real Estate
Fixed 11,150,951 10,428,946 20,816,673 15,671,131 16,475,245 7,154,552
Variable 38,437,607
Residential Loans Secured by
Real Estate
Fixed 10,798,103 10,688,439 12,564,731 5,763,128 6,471,911 2,920,942
Variable 135,181,849 5,097,479 6,255,078 5,710,853 10,403,932 5,736,414
Other
Fixed 567,328 486,556 811,691 512,985 845,513 669
Variable 23,923,642 9,141,637 6,264 6,523 12,721 --
------------------------------------------------------------------------------
Total Interest Earning Assets $485,121,436 $ 44,793,038 $112,668,390 $ 45,082,219 $ 48,906,689 $ 27,803,498
------------------------------------------------------------------------------
Non-Interest Earning Assets
------------------------------------------------------------------------------
Total Assets $485,121,436 $ 44,793,038 $112,668,390 $ 45,082,219 $ 48,906,689 $ 27,803,498
==============================================================================
Interest Bearing Liabilities:
Demand Deposits $ 38,942
Interest Bearing Demand 79,380,134
Savings Deposits 9,543,088
Money Market Accounts 293,650,859
Certificate of Deposits 22,411,501 14,127,416 16,056,390 3,770,618 8,517,577 3,772,907
Jumbo CDs 19,528,864 10,969,339 9,586,519 1,569,994 4,381,010 2,183,938
Repurchase Agreements 71,557,046
FHLB Advances 10,000,000 8,000,000 10,000,000 14,000,000
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
------------------------------------------------------------------------------
Total Interest Bearing Liabilities $498,566,996 $ 25,096,755 $ 33,642,909 $ 15,340,612 $ 26,898,587 $ 28,999,933
==============================================================================
Non-Interest Bearing Liabilities
Equity
------------------------------------------------------------------------------
Total Liabilities & Shareholders' Equity $498,566,996 $ 25,096,755 $ 33,642,909 $ 15,340,612 $ 26,898,587 $ 28,999,933
==============================================================================
Interest Sensitivy Gap per Period $(13,445,560) $ 19,696,283 $ 79,025,481 $ 29,741,607 $ 22,008,102 $ (1,196,435)
Cumulative Interest Sensitivity Gap $(13,445,560) $ 6,250,723 $ 85,276,204 $115,017,811 $137,025,913 $135,829,478
Interest Sensitivity Gap as a Percentage
of Earning Assets -1.75% 2.56% 10.27% 3.86% 2.86% -0.16%
Cumulative Sensitivity Gap as a
Percentage of Earning Assets -1.75% 0.81% 11.08% 14.94% 17.80% 17.65%
Non-interest
Earning Total
------- -----
Interest Earning Assets:
Fed Funds/ Overnight Time $ 32,302,386
Reverse repurchase agreements 15,000,000
Investments 125,247,040
Loans
Commercial & Industrial
Fixed 4,063,260 59,554,667
Variable 162,290,944
Commercial Loans Secured by
Real Estate
Fixed -- 81,697,498
Variable 38,437,607
Residential Loans Secured by
Real Estate
Fixed 80,005 49,287,259
Variable 727,796 169,113,401
Other
Fixed 365,839 3,590,581
Variable -- 33,090,787
----------------------------
Total Interest Earning Assets $ 5,236,900 $ 769,612,170
----------------------------
Non-Interest Earning Assets 42,986,644 42,986,644
----------------------------
Total Assets $ 48,223,544 $ 812,598,814
============================
Interest Bearing Liabilities:
Demand Deposits $ 138,048,334 $ 138,087,276
Interest Bearing Demand 79,380,134
Savings Deposits 9,543,088
Money Market Accounts 293,650,859
Certificate of Deposits 68,656,059
Jumbo CDs 48,219,664
Repurchase Agreements 71,557,046
FHLB Advances 42,000,000
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
----------------------------
Total Interest Bearing Liabilities $ 138,048,334 $ 766,594,126
Non-Interest Bearing Liabilities 3,326,284 3,326,284
Equity 42,678,404 42,678,404
----------------------------
Total Liabilities & Shareholders' Equity $ 184,053,022 $ 812,598,814
============================
Interest Sensitivy Gap per Period $(135,829,478)
Cumulative Interest Sensitivity Gap $ 0
Interest Sensitivity Gap as a Percentage
of Earning Assets -17.65%
Cumulative Sensitivity Gap as a
Percentage of Earning Assets 0.00%
Of the $19,528,864 Jumbo CDs maturing in 0 - 180 days, $11,193,166
will mature in three months or less.
28
Contractual Obligations
The following table presents, as of December 31, 2003, significant
fixed and determinable contractual obligations to third parties by payment date.
Further discussion of the nature of each obligation is included in the
referenced note to the consolidated financial statements.
Contractual Obligations
- ---------------------------------------------------------------------------------------------------------
Payments Due In
----------------------------------------------------------------
One to
Note One Year Three Three to Over
(In Thousands) Reference or Less Years Five Years Five Years Total
- ---------------------------------------------------------------------------------------------------------
Deposits without a stated maturity(a) 8 $ 520,661 $ 520,661
Consumer certificates of deposits (a) 8 67,037 30,984 12,899 5,956 116,876
FHLB Advances(a) 9 10,000 18,000 14,000 -- 42,000
Security repurchase agreements(a) 9 71,557 -- -- -- 71,557
Long-term debt (a) 9 -- -- -- 15,500 15,500
Operating leases 6 257 376 272 98 1,002
- ---------------------------------------------------------------------------------------------------------
(a) Excludes Interest
The Corporation's operating lease obligations represent short and
long-term lease and rental payments for banking center offices.
Critical Accounting Policy
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 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.
29
Mortgage Servicing Assets
- -------------------------
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.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses is established through provisions for
loan losses charged against income. Loans deemed to be uncollectible are charged
against the allowance for loan losses, and subsequent recoveries, if any, are
credited to the allowance. The allowance for loan losses related to loans that
are identified as impaired is based on discounted cash flows using the loan's
initial effective interest rate, or the fair value of the collateral for certain
collateral dependent loans. The Corporation collectively evaluates consumer
loans and loans secured by real estate for impairment as homogeneous loan
groups.
30
The allowance for loan losses is maintained at a level believed
adequate by management to absorb inherent losses in the loan portfolio. The
determination of the allowance is based on factors which, in management's
judgment, deserve recognition under existing economic conditions in estimating
possible loan losses. This evaluation is inherently subjective as it requires
material estimates including the amounts and timing of future cash flows
expected to be received on impaired loans that may be susceptible to significant
change. The allowance is increased by provisions for loan losses charged against
income and reduced by net charge-offs.
The allowance for loan losses is allocated to each loan category
based on the Bank's peer median charge off percentages by loan category added to
actual reserves maintained for non-performing or specifically identified loans
needing a reserve. Any remaining allowance is then allocated back to each loan
category based on that category's percentage of the total loan portfolio.
Although the loan loss reserve is allocated by loan category, the entire
allowance is available to cover any loan loss that may occur.
The following table shows the dollar amount of the allowance for
loan losses using management's estimate by loan category (in $000's):
December 31,
------------
2003 2002 2001 2,000 1999
---- ---- ---- ----- ----
Commercial $6,519 $5,173 $4,792 $3,246 $1,452
Construction 77 82 21 49 142
Commercial Mortgage 261 437 104 297 342
Residential Mortgage 639 906 499 779 1,088
Installment 71 156 72 43 22
Credit Card 63 61 55 70 15
Other 400 412 444 217 332
--------------------------------------
$8,030 $7,227 $5,987 $4,701 $3,393
======================================
Management considers the present allowance to be appropriate and
adequate to cover losses inherent in the loan portfolio based on the current
economic environment. However, future economic changes cannot be predicted.
Deterioration in economic conditions could result in an increase in the risk
characteristics of the loan portfolio and an increase in the provision for loan
losses.
31
The following table presents a summary of non-performing assets as
of December 31, (in 000's):
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
------------------ ------------------ ----------------- ------------------ ------------------
Non-Accrual Loans
- -----------------
Commercial $ 4,063 83.4% $ 1,605 49.7% $ 335 40.1% $ 595 65.7% $ 272 70.6%
Construction - 0.0% - 0.0% - 0.0% - 0.0% - 0.0%
Commercial Mortgage - 0.0% - 0.0% 184 22.0% - 0.0% - 0.0%
Residential Mortgage 808 16.6% 1,624 50.3% 303 36.3% 288 31.8% 86 22.3%
Installment - 0.0% - 0.0% 13 1.6% 23 2.5% 27 7.0%
Credit Card - 0.0% - 0.0% - 0.0% - 0.0% - 0.0%
Other - 0.0% - 0.0% - 0.0% - 0.0% - 0.0%
------------------ ------------------ ----------------- ------------------ ------------------
Total $ 4,871 100.0% $ 3,229 100.0% $ 835 100.0% $ 906 100.0% $ 385 100.0%
================== ================== ================= ================== ==================
Loans 90 Days Past Due -
Still Accruing $ 1 $ 9 $ 5 $ - $ -
Restructured due to
troubled conditions
of the borrower $ - $ 2,902 $ - $ - $ -
32
The following table presents a summary of non-performing loans as of
December 31:
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Loan Type
Commercial
# of loans 28 11 7 11 2
Interest income recognized $ 112,102 $ 111,591 $ 9,534 $ 55,432 $ 43,771
Additional interest income if loan had been accruing $ 168,426 $ 54,952 $ 25,191 $ 65,435 $ 1,897
Installment
# of loans -- -- 1 3 1
Interest income recognized $ -- $ -- $ -- $ 1,760 $ 1,615
Additional interest income if loan had been accruing $ -- $ -- $ 1,545 $ 2,176 $ 1,921
Residential mortgage loans
# of loans 13 12 6 5 1
Interest income recognized $ 42,539 $ 18,650 $ 1,925 $ 7,095 $ 4,563
Additional interest income if loan had been accruing $ 22,527 $ 34,598 $ 24,785 $ 16,454 $ 1,483
Credit cards
# of loans -- -- -- 4 --
Interest income recognized $ -- $ -- $ -- $ 167 $ --
Additional interest income if loan had been accruing $ -- $ -- $ -- $ 1,821 $ --
Restructured loans -- $2,901,600 $ -- $ -- $ --
33
Capital Resources
The Corporation's only source of capital since commencing operations
has been from issuance of common stock, results of operations, issuance of long
term debt to a non-affiliated third party, and the issuance of company obligated
mandatorily redeemable preferred capital securities.
The Corporation maintains a Revolving Credit Agreement with Harris
Trust and Savings Bank in the amount of $5,000,000, of which none has been
drawn, that will mature September 28, 2004.
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 permitted to be repaid 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 3.17% at
December 31, 2003. 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 page 36.
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, or
upon earlier redemption as provided by the Indenture. The Corporation has the
right to redeem the capital securities, in whole or in part, but in all cases in
a principal amount with integral multiples of $1,000, on any March 7 or
September 7 on or after September 7, 2010 at a premium, declining ratably to par
on September 7, 2020. The capital securities have a fixed interest rate of
10.60%, and are guaranteed by the Bank. The net proceeds received by the
Corporation from the sale of capital securities were used for general corporate
purposes.
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
34
During 2003 the maximum amount outstanding at any month-end during the year was
$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.
Security repurchase agreements are short-term borrowings that
generally mature within one to three days from the transaction date. At December
31, 2003 and 2002 the weighted average interest rate on these borrowings was
0.53% and 1.08%, respectively. During 2003 the maximum amount outstanding at any
month-end during the year was $82,490,510.
35
Capital for the Bank is above well-capitalized regulatory
requirements at December 31, 2003. Pertinent capital ratios for the Bank as of
December 31, 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 6.4% 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 2003 or
2002 by the Bank to the Corporation. A dividend of $1,650,000 was declared and
made during 2003 and a dividend of $650,000 was declared and made during 2002 by
the Bank to the Corporation.
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.
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 December 31, 2003, the remaining authority under Program One was
approximately $3,927,100.
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 2004 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 December 31, 2003, the remaining authority under Program Two was
approximately $4,147,913.
36
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This discussion contains certain forward-looking statements that are subject to
risks and uncertainties and includes information about possible or assumed
future results of operations. Many possible events or factors could affect our
future financial results and performance. This could cause results or
performance to differ materially from those expressed in our forward-looking
statements. Words such as "expects," "anticipates," "believes," "estimates,"
variations of such words and other similar expressions are intended to identify
such forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions which are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in, or implied by, such
forward-looking statements. Readers should not rely solely on the
forward-looking statements and should consider all uncertainties and risks
discussed throughout this discussion. These statements are representative only
on the date hereof.
The possible events or factors include the following: our loan growth is
dependent on economic conditions, as well as various discretionary factors, such
as decisions to sell or purchase certain loans or loan portfolios;
participations of loans; retention of residential mortgage loans; and the
management of borrower, industry, product and geographic concentrations and the
mix of the loan portfolio. The rate of charge-offs and provision expense can be
affected by local, regional and international economic and market conditions,
concentrations of borrowers, industries, products and geographic locations, the
mix of the loan portfolio and management's judgments regarding the
collectibility of loans. Liquidity requirements may change as a result of
fluctuations in assets and liabilities and off-balance sheet exposures, which
will impact our capital and debt financing needs and the mix of funding sources.
Decisions to purchase, hold or sell securities are also dependent on liquidity
requirements and market volatility, as well as on- and off-balance sheet
positions. Factors that may impact interest rate risk include local, regional
and international economic conditions, levels, mix, maturities, yields or rates
of assets and liabilities, and the wholesale and retail funding sources of the
Bank. We are also exposed to the potential of losses arising from adverse
changes in market rates and prices which can adversely impact the value of
financial products, including securities, loans, deposits, debt and derivative
financial instruments, such as futures, forwards, swaps, options and other
financial instruments with similar characteristics.
In addition, the banking industry in general is subject to various monetary and
fiscal policies and regulations, which include those determined by the Federal
Reserve Board, the Office of the Comptroller of the Currency ("OCC"), the
Federal Deposit Insurance Corporation ("FDIC"), state regulators and the Office
of Thrift Supervision, whose policies and regulations could affect our results.
Other factors that may cause actual results to differ from the forward-looking
statements include the following: competition with other local, regional and
international banks, thrifts, credit unions and other non-bank financial
institutions, such as investment banking firms, investment advisory firms,
brokerage firms, investment companies and insurance companies, as well as other
entities which offer financial services, located both within and outside the
United States and through alternative delivery channels such as the World Wide
Web; interest rate, market and monetary fluctuations; inflation; market
volatility; general economic conditions and economic conditions in the
geographic regions and industries in which we operate; introduction and
acceptance of new banking-related products, services and enhancements; fee
pricing strategies, mergers and acquisitions and our ability to manage these and
other risks.
37
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------
Market risk is the risk of loss due to adverse changes in market
prices and rates. The Corporation's market risk arises primarily from interest
rate risk inherent in its lending and deposit taking activities. Management
actively monitors and manages its interest rate exposure and makes monthly
reports to the Asset/Liability ("ALCO") Committee. The ALCO Committee is
responsible for reviewing the interest rate sensitivity position and
establishing policies to monitor and limit exposure to interest rate risk. The
guidelines established by ALCO are reviewed by the ALCO/Investment Committee of
the Corporation's Board of Directors.
The Corporation's profitability is affected by fluctuations in
interest rates. A sudden and substantial increase in interest rates may
adversely impact the Corporation's earnings to the extent that the interest
rates earned by assets and paid on liabilities do not change at the same speed,
to the same extent, or on the same basis. The Corporation monitors the impact of
changes in interest rates on its net interest income. The Corporation attempts
to maintain a relatively neutral gap between earning assets and liabilities at
various time intervals to minimize the effects of interest rate risk.
One of the primary goals of asset/liability management is to
maximize net interest income and the net value of future cash flows within
authorized risk limits. Net interest income is affected by changes in the
absolute level of interest rates. Net interest income is also subject to changes
in the shape of the yield curve. In general, a flattening of the yield curve
would result in a decline in earnings due to the compression of earning asset
yields and funding rates, while a steepening would result in increased earnings
as investment margins widen. Earnings are also affected by changes in spread
relationships between certain rate indices, such as prime rate.
Interest rate risk is monitored through earnings simulation
modeling. The earnings simulation model projects changes in net interest income
caused by the effect of changes in interest rates. The model requires management
to make assumptions about how the balance sheet is likely to behave through time
in different interest rate environments. Loan and deposit balances remain static
and maturities reprice at the current market rate. The investment portfolio
maturities and prepayments are assumed to be reinvested in similar instruments.
Mortgage loan prepayment assumptions are developed from industry median
estimates of prepayment speeds. Non-maturity deposit pricing is modeled on
historical patterns. The Corporation performs a 200 basis point upward and
downward interest rate shock and makes sure that there is not an adverse impact
on its annual net interest income and that it is within the established policy
limits. The earnings simulation model as of December 31, 2003 projects an
approximate decrease of 6.3% in net interest income in a 200 basis point
downward interest rate shock and an approximate increase of 7.2% in net interest
income in a 200 basis point upward interest rate shock. These changes are well
within the policy limits established by the ALCO policy.
At December 31, 2003, the interest rate risk position of the
Corporation was asset sensitive, meaning net income should increase as rates
rise and decrease as rates fall. During 2003, the Corporation maintained an
asset sensitive interest rate risk position due to management's expectation that
rates would rise.
See further discussion on interest rate sensitivity on page 22.
38
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
Report of Independent Auditors
Board of Directors
The National Bank of Indianapolis Corporation
We have audited the accompanying consolidated balance sheets of The National
Bank of Indianapolis Corporation and subsidiaries as of December 31, 2003 and
2002, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
2003. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The National Bank
of Indianapolis Corporation and subsidiaries at December 31, 2003 and 2002, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Indianapolis, Indiana
January 24, 2004
39
The National Bank of Indianapolis Corporation
Consolidated Balance Sheets
December 31
2003 2002
-----------------------------
Assets
Cash and due from banks $ 44,383,402 $ 45,889,548
Reverse repurchase agreements 15,000,000 5,000,000
Federal funds sold 20,502,386 18,177,463
Available-for-sale securities 115,862,372 83,990,335
Held-to-maturity securities 5,826,468 30,092,736
-----------------------------
Total investment securities 121,688,840 114,083,071
Loans 597,062,744 528,911,217
Less: Allowance for loan losses (8,029,596) (7,227,000)
-----------------------------
Net loans 589,033,148 521,684,217
Premises and equipment 9,148,709 9,248,290
Accrued interest receivable 3,503,401 3,974,258
Stock in federal banks 3,558,200 3,401,500
Other assets 5,780,728 5,056,126
-----------------------------
Total assets $ 812,598,814 $ 726,514,473
=============================
Liabilities and shareholders' equity Deposits:
Noninterest-bearing demand deposits $ 138,087,276 $ 137,575,932
Money market and saving deposits 382,574,081 305,605,133
Time deposits over $100,000 48,219,664 36,811,165
Other time deposits 68,656,059 64,350,290
-----------------------------
Total deposits 637,537,080 544,342,520
Security repurchase agreements 71,557,046 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 3,326,284 5,151,028
-----------------------------
Total liabilities 769,920,410 685,267,322
Shareholders' equity:
Common stock, no par value:
Authorized shares; 2003 and 2002-3,000,000 shares;
issued 2,517,131 in 2003 and 2,447,224 in 2002;
outstanding 2,352,229 in 2003 and 2,442,324 in 2002 22,858,900 26,862,276
Unearned compensation (894,679) (1,218,746)
Additional paid in capital 3,019,003 2,562,990
Retained earnings 17,684,102 12,519,902
Accumulated other comprehensive income 11,078 520,729
-----------------------------
Total shareholders' equity 42,678,404 41,247,151
-----------------------------
Total liabilities and shareholders' equity $ 812,598,814 $ 726,514,473
=============================
See accompanying notes.
40
The National Bank of Indianapolis Corporation
Consolidated Statements of Income
Years ended December 31
2003 2002 2001
-----------------------------------------
Interest income:
Interest and fees on loans $ 31,010,185 $ 30,593,437 $ 30,798,679
Interest on investment securities 3,020,337 3,683,093 6,154,280
Interest on federal funds sold 432,019 573,328 1,045,685
Interest on reverse repurchase agreements 97,600 245,442 802,762
-----------------------------------------
Total interest income 34,560,141 35,095,300 38,801,406
Interest expense:
Interest on deposits 7,668,254 9,144,476 13,919,427
Interest on repurchase agreements 381,077 752,464 3,156,276
Interest on FHLB advances 2,413,952 2,720,963 2,434,022
Interest on long-term debt 1,486,637 1,443,674 1,443,135
-----------------------------------------
Total interest expense 11,949,920 14,061,577 20,952,860
-----------------------------------------
Net interest income 22,610,221 21,033,723 17,848,546
Provision for loan losses 1,200,000 1,500,000 1,440,000
-----------------------------------------
Net interest income after provision for loan losses 21,410,221 19,533,723 16,408,546
Other operating income:
Trust fees and commissions 1,987,400 2,323,032 2,051,864
Service charges and fees on deposit accounts 2,409,577 2,226,686 1,649,962
Building rental income 548,060 480,375 474,298
Net gain on sale of mortgage loans 1,056,418 705,611 435,058
Interchange income 542,221 526,067 467,278
Securities gain (losses) net (36,891) 497 --
Other income 1,444,290 1,213,194 844,113
-----------------------------------------
Total other operating income 7,951,075 7,475,462 5,922,573
Other operating expenses:
Salaries, wages, and employee benefits 12,122,238 11,278,361 9,385,469
Occupancy expense 1,409,226 1,450,186 1,418,344
Furniture and equipment expense 891,328 895,505 875,624
Professional services 885,595 743,508 851,131
Data processing 1,362,202 1,288,961 1,185,545
Business development 838,132 735,212 661,702
Valuation of allowance for mortgage servicing rights 345,102 261,174 --
Other expenses 3,130,483 2,799,163 2,442,705
-----------------------------------------
Total other operating expenses 20,984,306 19,452,070 16,820,520
-----------------------------------------
Net income before tax 8,376,990 7,557,115 5,510,599
Federal and state income tax 3,212,790 3,000,279 2,140,556
-----------------------------------------
Net income after tax $ 5,164,200 $ 4,556,836 $ 3,370,043
=========================================
Basic earnings per share $ 2.20 $ 1.99 $ 1.76
=========================================
Diluted earnings per share $ 2.08 $ 1.88 $ 1.55
=========================================
See accompanying notes.
41
The National Bank of Indianapolis Corporation
Consolidated Statements of Shareholders' Equity
Accumulated
Additional Other
Common Unearned Paid in Retained Comprehensive
Stock Compensation Capital Earnings Income (Loss) Total
-------------------------------------------------------------------------------------
Balance at December 31, 2000 $ 20,665,160 $ (598,711) $ -- $ 4,593,023 $ 334 $ 24,659,806
Comprehensive income:
Net income -- -- -- 3,370,043 -- 3,370,043
Other comprehensive income
Net unrealized gain on
investments, net of tax
of $41,298 -- -- -- -- 62,964 62,964
------------
Total comprehensive income 3,433,007
Issuance of stock (10,782 shares) 262,818 (47,422) -- -- -- 215,396
Repurchase of stock (1,800 shares) (44,550) -- -- -- -- (44,550)
Compensation earned -- 206,343 -- -- -- 206,343
-------------------------------------------------------------------------------------
Balance at December 31, 2001 20,883,428 (439,790) -- 7,963,066 63,298 28,470,002
Comprehensive income:
Net income -- -- -- 4,556,836 -- 4,556,836
Other comprehensive income
Net unrealized gain on
investments, net of tax
of $300,031 -- -- -- -- 457,431 457,431
------------
Total comprehensive income 5,014,267
Income tax benefit from exercise of
warrants & options -- -- 2,562,990 -- -- 2,562,990
Issuance of stock (477,479 shares) 6,009,648 (1,061,450) -- -- -- 4,948,198
Repurchase of stock (1,100 shares) (30,800) -- -- -- -- (30,800)
Compensation earned -- 282,494 -- -- -- 282,494
-------------------------------------------------------------------------------------
Balance at December 31, 2002 26,862,276 (1,218,746) 2,562,990 12,519,902 520,729 41,247,151
Comprehensive income:
Net income -- -- -- 5,164,200 -- 5,164,200
Other comprehensive income
Net unrealized loss on
investments, net of tax
of $334,282 -- -- -- -- (509,651) (509,651)
------------
Total comprehensive income 4,654,549
Income tax benefit from exercise of
warrants & options -- -- 456,013 -- -- 456,013
Issuance of stock (69,907 shares) 1,051,171 (72,025) -- -- -- 979,146
Repurchase of stock (160,002 shares) (5,054,547) -- -- -- -- (5,054,547)
Compensation earned -- 396,092 -- -- -- 396,092
-------------------------------------------------------------------------------------
Balance at December 31, 2003 $ 22,858,900 $ (894,679) $ 3,019,003 $ 17,684,102 $ 11,078 $ 42,678,404
=====================================================================================
See accompanying notes.
42
The National Bank of Indianapolis Corporation
Consolidated Statements of Cash Flows
Years ended December 31
2003 2002 2001
---------------------------------------------
Operating activities
Net income $ 5,164,200 $ 4,556,836 $ 3,370,043
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 1,200,000 1,500,000 1,440,000
Depreciation and amortization 1,099,026 1,056,034 1,070,855
Valuation of allowance for mortgage servicing rights 345,102 261,174 --
Income tax benefit from exercise of warrants & options 456,013 2,562,990 --
Stock compensation 110,000 109,918 110,000
Net accretion of investments 841,086 1,151,094 (1,652,102)
Unearned compensation amortization 396,092 282,494 206,343
(Increase) decrease in:
Accrued interest receivable 470,857 (1,147,427) 616,672
Other assets (735,424) (1,224,833) (802,469)
Increase (decrease) in:
Other liabilities (1,824,744) 900,935 537,880
---------------------------------------------
Net cash provided by operating activities 7,522,208 10,009,215 4,897,222
Investing activities
Net change in federal funds sold (2,324,923) (3,923,259) 1,279,249
Net change in reverse repurchase agreements (10,000,000) 115,000,000 (120,000,000)
Proceeds from maturities of investment
securities held to maturity 24,124,021 1,797,727 3,954,061
Proceeds from maturities of investment
securities available for sale 48,297,884 62,376,100 175,020,797
Proceeds from sales of investment securities available for sale 25,367,391 9,998,502 --
Purchases of investment securities held to maturity (181,700) (23,796,563) (3,363,863)
Purchases of investment securities available for sale (107,055,082) (129,205,346) (123,524,709)
Net increase in loans (68,548,931) (77,110,879) (90,612,302)
Purchases of premises and equipment (999,445) (1,047,088) (2,085,607)
---------------------------------------------
Net cash used by investing activities (91,320,785) (45,910,806) (159,332,374)
Financing activities
Net increase in deposits 93,194,560 38,217,157 95,691,810
Net change in security repurchase agreements (2,716,728) 5,922,142 10,890,378
Net change in FHLB advances (6,000,000) (2,000,000) 26,000,000
Proceeds from issuance of long-term debt 2,000,000 -- --
Repurchase of stock (5,054,547) (30,800) (44,550)
Proceeds from issuance of stock 869,146 4,838,280 105,396
---------------------------------------------
Net cash provided by financing activities 82,292,431 46,946,779 132,643,034
---------------------------------------------
Increase (decrease) in cash and cash equivalents (1,506,146) 11,045,188 (21,792,118)
Cash and cash equivalents at beginning of year 45,889,548 34,844,360 56,636,478
---------------------------------------------
Cash and cash equivalents at end of year $ 44,383,402 $ 45,889,548 $ 34,844,360
=============================================
Interest paid $ 12,149,305 $ 14,144,085 $ 21,217,998
=============================================
Income taxes paid $ 4,268,861 $ 405,325 $ 2,700,277
=============================================
See accompanying notes.
43
The National Bank of Indianapolis Corporation
Notes to Consolidated Financial Statements
December 31, 2003
1. Organization and Accounting Policies
Organization
The National Bank of Indianapolis Corporation (the Corporation) was incorporated
in the State of Indiana on January 29, 1993. The Corporation subsequently formed
a de novo national bank, The National Bank of Indianapolis (the Bank), and a
statutory trust, NBIN Statutory Trust I (the Trust). The Bank is a wholly owned
subsidiary and commenced operations in December, 1993. The Trust was formed in
September, 2000 as part of the issuance of trust preferred capital securities.
The Corporation and the Bank engage in a wide range of commercial, personal
banking, and trust activities primarily in Central Indiana.
The consolidated financial statements include the accounts of the Corporation,
the Bank, and the Trust with intercompany balances and transactions eliminated.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and interest-bearing deposits.
Interest-bearing deposits are available on demand.
Investment Securities
Investments in debt securities are classified as held-to-maturity or
available-for-sale. Management determines the appropriate classification of the
securities at the time of purchase.
Debt securities are classified as held-to-maturity when the Corporation has the
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost.
Debt securities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are stated at fair value, with
the unrealized gains and losses, net of tax, reported as a separate component of
shareholders' equity.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization is included in interest income
from investments and is computed using a method which approximates the
level-yield method. Interest and dividends are included in interest income from
investments. Realized gains and losses, and declines in value judged to be
other-than-temporary are included in other income. The cost of securities sold
is based on the specific identification method.
44
The National Bank of Indianapolis Corporation
Notes to Consolidated Financial Statements (continued)
1. Organization and Accounting Policies (continued)
Loans
Interest income on commercial, mortgage and certain installment loans are
accrued on the principal amount of such loans outstanding. Loans are placed on
nonaccrual status when significant doubt exists as to the collectibility of
principal or interest.
Allowance for Loan Losses
The allowance for loan losses is established through provisions for loan losses
charged against income. Loans deemed to be uncollectible are charged against the
allowance for loan losses, and subsequent recoveries, if any, are credited to
the allowance. The allowance for loan losses related to loans that are
identified as impaired is based on discounted cash flows using the loan's
initial effective interest rate, or the fair value of the collateral for certain
collateral dependent loans. The Corporation collectively evaluates consumer
loans and loans secured by real estate for impairment as homogeneous loan
groups.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb inherent losses in the loan portfolio. The determination of
the allowance is based on factors which, in management's judgment, deserve
recognition under existing economic conditions in estimating possible loan
losses. This evaluation is inherently subjective as it requires material
estimates including the amounts and timing of future cash flows expected to be
received on impaired loans that may be susceptible to significant change. The
allowance is increased by provisions for loan losses charged against income and
reduced by net charge-offs.
Mortgage Servicing Rights
Mortgage servicing rights are recognized as separate assets when rights are
acquired through sale of financial assets. Capitalized servicing rights are
reported in other assets and are amortized into other operating expenses in
proportion to, and over the period of, the estimated future net servicing income
of the underlying financial assets. Mortgage servicing rights are evaluated for
impairment based upon the fair value of the rights as compared to amortized
cost. Impairment is determined by stratifying rights by predominant
characteristics, such as interest rates and terms. Fair value is determined
using prices for similar assets with similar characteristics, when available, or
based upon discounted cash flows using market-based assumptions. Impairment is
recognized through a valuation allowance for an individual stratum, to the
extent that fair value is less than the cost of the rights for each stratum.
45
The National Bank of Indianapolis Corporation
Notes to Consolidated Financial Statements (continued)
1. Organization and Accounting Policies (continued)
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation computed
by the straight-line method over their useful lives or, for leasehold
improvements, the remaining lease term.
Comprehensive Income
Comprehensive income is defined as net income plus other comprehensive income,
which, under existing accounting standards includes unrealized gains and losses
on certain investments in debt securities. Comprehensive income is reported by
the Corporation in the consolidated statements of shareholders' equity.
Earnings Per Share
Basic earnings per share is computed by dividing net income applicable to common
shareholders by the weighted average numbers of shares of common shares
outstanding for the period. Diluted earnings per share is computed by dividing
an adjusted net income by the sum of the weighted average number of shares and
the potentially dilutive shares that could be issued through stock award
programs or convertible securities.
Fair Values of Financial Instruments
The fair values of financial instruments are estimated using relevant market
information and other assumptions. Fair value estimates involve uncertainties
and matters of significant judgment concerning several factors, especially in
the absence of broad markets for particular items.
Stock Based Compensation
The Corporation has granted stock options to certain employees and directors.
The stock options are for a fixed number of shares with an exercise price which
approximates the fair value of shares at the date of grant. As discussed further
in Note 10, expense for director and employee compensation under stock option
plans is based on Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," (APB 25), with expense reported only if options are
granted below market price at grant date. Pro forma disclosures of net income
and earnings per share are provided as if the fair value method of Financial
Accounting Standard Board (FASB) Statement No. 123 "Accounting for Stock Based
Compensation", as amended by FASB Statement No. 148, were used for stock-based
compensation.
46
The National Bank of Indianapolis Corporation
Notes to Consolidated Financial Statements (continued)
1. Organization and Accounting Policies (continued)
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.
2003 2002 2001
------------------------------------
Net income, as reported $5,164,200 $4,556,836 $3,370,043
Add: stock-based compensation expense,
net of related taxes 239,200 170,598 124,610
Less: total stock-based compensation
expense determined under
fair-value-based method, net of taxes (459,052) (529,881) (253,831)
------------------------------------
Pro forma net income $4,944,348 $4,197,553 $3,240,822
====================================
Earnings per share:
Basic, as reported $ 2.20 $ 1.99 $ 1.76
Basic, pro forma $ 2.11 $ 1.83 $ 1.69
Diluted, as reported $ 2.08 $ 1.88 $ 1.55
Diluted, pro forma $ 1.99 $ 1.73 $ 1.49
Reclassifications
Certain amounts in the 2002 and 2001 financial statements have been reclassified
to conform with the 2003 presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
47
The National Bank of Indianapolis Corporation
Notes to Consolidated Financial Statements (continued)
2. Accounting Pronouncements
In January of 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51" (the Interpretation). The Interpretation requires the consolidation of
entities in which an enterprise absorbs a majority of the entity's expected
losses, receives a majority of the entity's expected residual returns, or both,
as a result of ownership, contractual or other financial interests in the
entity. Prior to the adoption of the Interpretation, entities are generally
consolidated by an enterprise when it has a controlling interest through
ownership of a majority voting interest in the entity.
Under the provisions of the Interpretation, except in certain circumstances,
trust preferred capital securities by design are considered variable interest
entities with no variable interest holder being considered the primary
beneficiary, thus requiring the reporting enterprise to deconsolidate the trust
upon adoption of the Interpretation. However, in certain circumstances, the
Interpretation could have allowed the parent to continue consolidating the
trust.
However, a revised interpretation was issued in December of 2003 which has
effectively removed the ability for a reporting enterprise to continue
consolidating the trust. Therefore, a reporting enterprise must deconsolidate
its trust as soon as practicable, but no later than March 31, 2004. The
Corporation had previously applied the provision of the Interpretation to the
Trust, which allowed the Corporation to continue consolidating the Trust.
However, the Corporation is required to adopt the provisions of the revised
interpretation and to deconsolidate the Trust no later than March 31, 2004.
Statement of Financial Accounting Standards No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity" was
issued in May of 2003 and is effective for financial instruments entered into or
modified after May 31, 2003. This statement establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability. The
Corporation currently classifies its corporation-obligated mandatorily
redeemable capital securities as a liability. Therefore, this pronouncement has
no impact on the Corporation's financial statements.
3. Restrictions on Cash and Due From Bank Accounts
The Corporation is required to maintain average reserve balances with the
Federal Reserve Bank or as cash on hand or on deposit with a correspondent bank.
The required amount of reserve was approximately $25,000 at December 31, 2003
and 2002.
48
The National Bank of Indianapolis Corporation
Notes to Consolidated Financial Statements (continued)
4. Investment Securities
The following is a summary of available-for-sale securities:
------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
------------------------------------------------------------
December 31, 2003
U.S. Treasury securities $ 21,840,685 $ 5,646 $ 954 $ 21,845,377
U.S. Government agencies 93,904,140 829,297 815,799 93,917,638
Collateralized mortgage obligations 99,203 154 -- 99,357
------------------------------------------------------------
$115,844,028 $ 835,097 $ 816,753 $115,862,372
============================================================
December 31, 2002
U.S. Treasury securities $ 2,100,309 $ 13,230 $ 275 $ 2,113,264
U.S. Government agencies 79,930,066 845,676 -- 80,775,742
Collateralized mortgage obligations 1,097,683 3,646 -- 1,101,329
------------------------------------------------------------
$ 83,128,058 $ 862,552 $ 275 $ 83,990,335
============================================================
The following table presents the amortized cost, fair value, and
weighted-average yield of available-for-sale securities at December 31, 2003 by
maturity:
-----------------------------------------------------------------------------
Weighted-
Average
Within 1 Year 1 to 5 Years 5 to 10 Years Total Yield
-----------------------------------------------------------------------------
U.S. Treasury and
U.S. Government agency debentures $ 33,703,921 $ 72,040,904 $ 10,000,000 $115,744,825 2.31%
Collateralized mortgage obligations -- 99,203 99,203 1.46%
---------------------------------------------------------------
Amortized costs $ 33,703,921 $ 72,140,107 $ 10,000,000 $115,844,028
---------------------------------------------------------------
Fair value $ 33,832,165 $ 71,884,907 $ 10,145,300 $115,862,372
---------------------------------------------------------------
Weighted-average yield 1.81% 2.41% 3.25% 2.31%
---------------------------------------------------------------
49
The Corporation held four investment securities as of December 31, 2003 of which
the amortized cost was greater than market value. All of these investment
securities were purchased during 2003. Management does not believe any
individual unrealized loss as of December 31, 2003 represents an
other-than-temporary impairment. The unrealized losses relate primarily to
securities issued by FHLB and FHLMC. These unrealized losses are primarily
attributable to changes in interest rates and individually were 3% or less of
their respective amortized cost basis. The Corporation has both the intent and
ability to hold these securities for a time necessary to recover the amortized
cost.
Investment securities with a carrying value of approximately $73,000,000 and
$71,000,000 at December 31, 2003 and 2002, respectively were pledged as
collateral for bankruptcy accounts to the U.S. Department of Justice, Treasury
Tax and Loan, and securities sold under agreements to repurchase.
50
The National Bank of Indianapolis Corporation
Notes to Consolidated Financial Statements (continued)
4. Investment Securities (continued)
The following is a summary of held-to-maturity securities:
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
--------------------------------------------------------
December 31, 2003
Municipals $ 5,576,468 $ 531,499 $ -- $ 6,107,967
Other securities 250,000 7,082 -- 257,082
--------------------------------------------------------
$ 5,826,468 $ 538,581 $ -- $ 6,365,049
========================================================
December 31, 2002
Collateralized mortgage obligations $24,333,493 $ 339,440 $ 12,644 $24,660,289
Municipals 5,534,243 552,233 -- 6,086,476
Other securities 225,000 10,391 -- 235,391
--------------------------------------------------------
$30,092,736 $ 902,064 $ 12,644 $30,982,156
========================================================
The amortized cost and estimated fair value of debt securities at December 31,
2003, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because the issuers of the securities may have the
right to prepay obligations without prepayment penalties.
----------------------------------------------------------------------
Weighted-
Average
Within 1 Year 1 to 5 Years 5 to 10 Years Total Yield
----------------------------------------------------------------------
Corporate $ 25,000 $ 175,000 $ 50,000 $ 250,000 5.75%
Municipals -- -- $5,576,468 $5,576,468 4.93%
--------------------------------------------------------------------
Amortized cost $ 25,000 $ 175,000 $5,626,468 $5,826,468
--------------------------------------------------------------------
Fair value $ 25,637 $ 178,813 $6,160,599 $6,365,049
--------------------------------------------------------------------
Weighted-average yield 8.10% 5.76% 4.93% 4.97%
--------------------------------------------------------------------
51
The National Bank of Indianapolis Corporation
Notes to Consolidated Financial Statements (continued)
5. Loans and Allowance for Loan Losses
Loans consist of the following at December 31:
2003 2002
--------------------------
Residential loans secured by real estate $218,400,660 $184,141,018
Commercial loans secured by real estate 120,135,105 113,398,604
Other commercial and industrial loans 221,845,611 182,993,990
Loans to individuals for household, family,
and other consumer expenditures 36,681,368 48,377,605
--------------------------
Total loans $597,062,744 $528,911,217
==========================
Activity in the allowance for loan losses was as follows:
2003 2002 2001
---------------------------------------
Beginning balance $ 7,227,000 $ 5,986,965 $ 4,700,672
Loans charged off (net) (397,404) (259,965) (153,707)
Provision for loan losses 1,200,000 1,500,000 1,440,000
---------------------------------------
Ending balance $ 8,029,596 $ 7,227,000 $ 5,986,965
=======================================
At December 31, 2003 forty-one loans with a combined balance of $4,871,000 were
considered to be impaired. At December 31, 2002 twenty-three loans with a
combined balance of $3,229,000 were considered to be impaired. The average
combined balance of impaired loans during 2003 and 2002 was $4,180,000 and
$1,864,000, respectively. For loans classified as impaired at December 31, 2003,
the contractual interest due and actual interest recognized on those loans
during 2003 was $345,594 and $154,641, respectively.
Loans are principally to borrowers in the Central Indiana area.
52
The National Bank of Indianapolis Corporation
Notes to Consolidated Financial Statements (continued)
6. Premises and Equipment
Premises and equipment consist of the following at December 31:
2003 2002
---------------------------
Land and improvements $ 2,270,444 $ 2,270,444
Building and improvements 5,358,751 5,027,631
Construction in progress 70,444 244,564
Leasehold improvements 1,614,621 1,611,134
Furniture and equipment 6,832,616 5,993,658
---------------------------
16,146,876 15,147,431
Less accumulated depreciation and
amortization (6,998,167) (5,899,141)
---------------------------
Net premises and equipment $ 9,148,709 $ 9,248,290
===========================
Certain Corporation facilities and equipment are leased under various operating
leases. Rental expense under these leases was $247,822, $245,629, and $240,913
for 2003, 2002, and 2001, respectively.
Future minimum rental commitments under noncancelable leases are:
2004 $ 256,505
2005 215,426
2006 160,234
2007 138,721
2008 133,154
Thereafter 98,418
------------
$1,002,458
============
7. Loan Servicing
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of mortgage loans
serviced for others was $82,210,074 and $80,021,212 at December 31, 2003 and
2002, respectively.
The balance of capitalized servicing rights, net of valuation allowances,
included in other assets at December 31, 2003 and 2002, was $898,965 and
$780,093, respectively. At December 31, 2003 and 2002 the valuation allowance
related to these rights was $606,276 and $261,174, respectively.
53
The National Bank of Indianapolis Corporation
Notes to Consolidated Financial Statements (continued)
8. Deposits
At December 31, 2003 the stated maturities of time deposits are as follows:
Greater
Less than Than
$100,000 $100,000
------------------------
Mature in three months or less $12,657,020 $11,193,167
Mature after three months through six months 9,754,481 8,335,698
Mature after six months through twelve months 14,127,415 10,969,339
Mature in 2005 16,056,391 9,586,519
Mature in 2006 3,770,617 1,569,994
Thereafter 12,290,135 6,564,947
------------------------
$68,656,059 $48,219,664
========================
9. Other Borrowings
Security repurchase agreements are short-term borrowings that generally mature
within one to three days from the transaction date. At December 31, 2003 and
2002 the weighted average interest rate on these borrowings was 0.53% and 1.08%,
respectively.
All of the FHLB advances have a fixed interest rate and require monthly interest
payments. The principal balances for each of the advances is due at maturity.
The advances are collateralized by a pledge covering certain of the
Corporation's mortgage loans.
A schedule of the FHLB advances as of December 31, 2003 is 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
=============
54
The National Bank of Indianapolis Corporation
Notes to Consolidated Financial Statements (continued)
9. Other Borrowings (continued)
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. At
December 31, 2003 and 2002, $0 was outstanding. The Corporation pays a
commitment fee of .25% per annum on the average daily unused portion of the line
of credit.
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 permitted to be repaid 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 3.17% at December 31, 2003. Interest payments are due at the
expiration of the fixed term option.
In September of 2000, the Trust, which is wholly owned by the Corporation,
issued $13,500,000 of company obligated mandatorily redeemable capital
securities. The proceeds from the issuance of the capital securities and from
the issuance of related common securities of $418,000 were used by the Trust to
purchase from the Corporation $13,918,000 Fixed Rate Junior Subordinated
Debentures. The capital securities mature September 7, 2030, or upon earlier
redemption as provided by the indenture. The Corporation has the right to redeem
the capital securities, in whole or in part, but in all cases in a principal
amount with integral multiples of $1,000, on any March 7 or September 7 on or
after September 7, 2010 at a premium, declining ratably to par on September 7,
2020. The capital securities have a fixed interest rate of 10.60%, and are
guaranteed by the Bank. The net proceeds received by the Corporation from the
sale of the capital securities were used for general corporate purposes. The
indenture, dated September 7, 2000, requires compliance with certain
non-financial covenants.
10. Stock Option and Award and Employee Benefit Programs
The Board of Directors and the shareholders of the Corporation adopted stock
option plans for directors and key employees at the initial formation of the
Bank in 1993. The Board of Directors authorized 130,000 shares in 1993, 90,000
shares in 1996, 150,000 shares in 1999, and an additional 120,000 during 2002 to
be reserved for issuance under the Corporation's stock option plan. All of the
options in these plans remain exercisable for a period of 10 years from the date
of issuance, subject to the terms and conditions of the plans.
55
The National Bank of Indianapolis Corporation
Notes to Consolidated Financial Statements (continued)
10. Stock Option and Award and Employee Benefit Programs (continued)
Shares subject to outstanding options are summarized as follows:
December 31
--------------------------------------------------------------------------
2003 2002 2001
--------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------------------------------------------------------------------------
Options outstanding at
beginning of year 391,557 $ 18.75 315,500 $ 14.75 316,500 $ 14.65
New options
granted 5,800 29.98 115,057 27.58 4,000 23.00
Options exercised (17,662) 13.79 (37,800) 12.25 -- --
Options forfeited -- -- (1,200) 19.00 (5,000) 15.33
------- ------- -------
Options outstanding at end
of year 379,695 $ 19.15 391,557 $ 18.75 315,500 $ 14.75
======= ======= =======
Exercisable at year end 266,881 $ 16.25 260,300 $ 15.72 241,800 $ 13.47
As of December 31, 2003, 2002, 2001 the weighted-average fair value of the
options granted for each year was $10.43, $11.06, and $9.32, respectively.
As of December 31, 2003 total shares which may be purchased under the plans is
379,695 with option prices ranging from $10.00 to $31.25. The weighted-average
remaining contractual life of those options is six years.
The Board of Directors also approved a restricted stock plan in 1993. Shares
reserved by the Corporation for the restricted stock plan include 50,000 shares
in 1993, 20,000 shares in 1996, 40,000 in 1999 and an additional 55,000 shares
in 2002. Under this plan, shares were issued in the proceeding years as detailed
in the following table. The Corporation recorded each stock issuance in
shareholders' equity with an offsetting contra-equity account, unearned
compensation, equal to the fair market value of the shares at the grant date.
The unearned compensation is amortized over the vesting period.
56
The National Bank of Indianapolis Corporation
Notes to Consolidated Financial Statements (continued)
10. Stock Option and Award and Employee Benefit Programs (continued)
Fiscal Number of
Year Shares Shares Unearned Vesting Date Fully
Ended Issued Forfeited Compensation Schedule Vested
- ------------------------------------------------------------------------------------------
1997 19,500 700 $242,332 20% per year January 1, 2002
1998 1,000 - 14,000 20% per year January 1, 2003
1999 36,000 2,000 646,000 5 yr. cliff June 30, 2004
2000 5,000 - 100,000 5 yr. cliff March 16, 2005
2001 3,000 - 69,000 5 yr. cliff January 26, 2006
2002 1,500 - 37,500 5 yr. cliff June 11, 2006
2002 6,500 - 178,750 4 yr. Cliff August 31, 2006
2002 30,800 500 845,200 5 yr. Cliff June 20, 2007
2003 1700 - 50,150 5 yr. Cliff January 8, 2008
2003 700 - 21,875 5 yr. Cliff July 17, 2008
In consideration of their efforts in organizing the Corporation and the Bank,
two officers/directors of the Corporation were issued warrants on October 18,
1993 to purchase an additional 345,500 common shares at a purchase price of $10
per share. During 1995, the Corporation issued warrants to purchase an
additional 76,875 common shares at a purchase price of $12.50 to one
officer/director. As of December 31, 2003, all warrants have been exercised.
During 2003, certain officers/directors of the Corporation exercised their
warrants/options to purchase 55,662 shares of common stock. The exercise price
ranged from $10.00 to $27.50 with a weighted average exercise price of $11.20
and a weighted average fair market value of the stock was $31.40.
During 2002, certain officers/directors of the Corporation exercised their
warrants/options to purchase 422,175 shares of common shares. The exercise price
ranged from $10.00 to $22.50 with a weighted average exercise price of $10.66
and the weighted average fair market value of the stock was $26.05.
Due to the exercise of the options, the Corporation received a deduction for tax
purposes for the difference between the fair value of the stock at the date of
the exercise and the exercise price. In accordance with APB 25 the Corporation
has recorded an income tax benefit of $456,013 and $2,562,990 as additional paid
in capital during 2003 and 2002, respectively.
57
The National Bank of Indianapolis Corporation
Notes to Consolidated Financial Statements (continued)
10. Stock Option and Award and Employee Benefit Programs (continued)
The Corporation has elected to follow APB 25 and related Interpretations in
accounting for its director and employee stock options, restricted stock and
warrants. Under APB 25, because the exercise price of the Corporation's director
and employee stock options and warrants equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
The pro forma information regarding net income and earnings per share as
required by FASB Statement No. 123, which also requires that the information be
determined as if the Corporation has accounted for its stock options, restricted
stock and warrants granted under the fair value method of that Statement is
included in Note 1. The fair value for the options and warrants was estimated at
the date of grant using a Black-Scholes option pricing model with the following
weighted- average assumptions: a dividend yield of 0%; volatility factor of the
expected market price of the Corporation's common stock of .001; and an expected
life of the options of 10 years. The risk-free interest rate was estimated to be
4.3% to 4.4%, 5.2% to 5.66%, and 5.33% for 2003, 2002, and 2001, respectively.
The fair value for the restricted stock is estimated to equal the fair value of
unrestricted stock and to be restricted for a weighted average of five years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Corporation's director and employee stock options, restricted stock and
warrants have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
director and employee stock options.
The Corporation has a trusteed 401(k) retirement savings plan covering
substantially all employees and encouraging employee contributions. Employer
contributions include Board of Director discretionary contributions and the
matching of a portion of employee contributions. The Corporation expensed
approximately $211,000, $167,000, and $146,000 for employer contributions to the
plan during 2003, 2002, and 2001, respectively.
58
The National Bank of Indianapolis Corporation
Notes to Consolidated Financial Statements (continued)
11. Dividend and Loan Limitation and Regulatory Capital Ratios
Dividends from the Bank to the Corporation may not exceed the undivided profits
of the Bank (included in consolidated retained earnings) without prior approval
of a federal regulatory agency. In addition, Federal banking laws limit the
amount of loans the Bank may make to the Corporation, subject to certain
collateral requirements. No loans were made during 2003 or 2002 by the Bank to
the Corporation. The Bank declared $1,650,000 and $650,000 dividends to the
Corporation during 2003 and 2002, respectively.
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory-and possibly additional discretionary-actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain amounts and ratios (set forth in the table below)
of total and Tier 1 capital (as defined in the regulations) to risk-weighted
assets (as defined), and of total qualifying capital to total adjusted asset (as
defined). Management believes, as of December 31, 2003 and 2002, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 2003, the most recent notification from the Comptroller of
the Currency categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Bank must maintain minimum total risk-based, Tier 1 risk-based, and
leveraged capital ratios as set forth in the following table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
59
The National Bank of Indianapolis Corporation
Notes to Consolidated Financial Statements (continued)
11. Dividend and Loan Limitation and Regulatory Capital Ratios (continued)
The Bank's actual capital amounts and ratios are also presented in the following
table.
To be well
capitalized under prompt
For capital corrective action
Actual adequacy purposes provisions
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------------
As of December 31, 2003
Tier 1 Risk-Based Capital $52,254,914 8.6% $24,309,136 4.0% $36,463,703 6.0%
Total Risk-Based Capital 61,856,864 10.2% 48,618,271 8.0% 60,772,839 10.0%
Leveraged Capital 52,254,914 6.4% 32,699,306 4.0% 40,874,133 5.0%
As of December 31, 2002
Tier 1 Risk-Based Capital $47,501,118 8.9% $21,477,933 4.0% $32,216,900 6.0%
Total Risk-Based Capital 54,219,332 10.1% 42,955,867 8.0% 53,694,834 10.0%
Leveraged Capital 47,501,118 6.6% 28,755,905 4.0% 35,944,882 5.0%
12. Related Parties
Certain directors and principal shareholders of the Corporation, including their
families and companies in which they are principal owners, are loan customers of
and have other transactions with the Corporation or its subsidiary in the
ordinary course of business. The aggregate dollar amount of these loans was
approximately $8,847,920 and $8,770,311 on December 31, 2003 and 2002,
respectively. All of the loans made were on substantially the same terms,
including interest rate and collateral, as those prevailing at the time for
comparable transactions with unrelated parties. The amounts do not include loans
made in the ordinary course of business to companies in which officers or
directors of the Corporation are either officers or directors, but are not
principal owners, of such companies. During 2003, new loans to these parties
amounted to $112,800 and repayments amounted to $35,191.
60
The National Bank of Indianapolis Corporation
Notes to Consolidated Financial Statements (continued)
13. Income Taxes
The Corporation applies a federal income tax rate of 34% and a state tax rate of
8.5% in the computation of tax expense or benefit. The provision for income
taxes consisted of the following:
2003 2002 2001
----------------------------------------
Current tax expense $3,592,053 $3,636,852 $2,646,904
Deferred tax benefit (379,263) (636,573) (506,348)
----------------------------------------
$3,212,790 $3,000,279 $2,140,556
========================================
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Deferred tax assets are
recognized for the estimated tax effects attributable to deductible temporary
differences and operating loss carryforwards, net of any valuation allowances
for amounts which may not be realized by the Corporation.
The components of the Corporation's net deferred tax assets in the consolidated
balance sheet as of December 31 are as follows:
2003 2002
--------------------------
Deferred tax assets:
Allowance for loan losses $ 3,180,523 $ 2,862,615
Other 706,760 598,320
--------------------------
Total deferred tax assets 3,887,283 3,460,935
Deferred tax liability:
Mortgage servicing rights (356,080) (308,995)
Other (7,266) (341,548)
--------------------------
Total deferred tax liabilities (363,346) (650,543)
--------------------------
Net deferred tax assets $ 3,523,937 $ 2,810,392
==========================
61
The National Bank of Indianapolis Corporation
Notes to Consolidated Financial Statements (continued)
14. Commitments and Contingencies
A summary of the contractual amount of commitments to extend credit is as
follows:
2003 2002
---------------------------
Commercial credit lines $150,011,250 $104,949,477
Revolving home equity and credit card lines 76,386,307 63,441,970
Standby letters of credit 12,053,320 11,116,928
Other loans 2,655,819 2,379,428
---------------------------
$241,106,696 $181,887,803
===========================
Commitments to extend credit are agreements to lend. Since many of the
commitments to extend credit may expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash-flow requirements.
Standby letters of credit are conditional commitments issued to guarantee the
performance of a customer to a third party. Standby letters of credit generally
are contingent upon the failure of the customer to perform according to the
terms of the underlying contract with the third party.
The credit risk associated with loan commitments and standby letters of credit
is essentially the same as that involved in extending loans to customers and is
subject to normal credit policies. Collateral may be obtained based on
management's credit assessment of the customer.
The Corporation has committed to invest $500,000 in the CSC Tax Credit Fund for
the purpose of obtaining future tax credits. The investment funds will be used
for the construction of low-income housing. The investment is non-interest
bearing, and receipt of future tax credits are subject to the investee's
fulfillment of requirements as set forth by the Indiana Housing Finance
Authority. The Corporation expects to receive the investment principal in
approximately 10-15 years. However, the receipt of the principal in the future
is not guaranteed.
62
The National Bank of Indianapolis Corporation
Notes to Consolidated Financial Statements (continued)
15. Fair Value of Financial Instruments
FASB Statement No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. Statement No. 107 excludes certain financial
instruments and all non-financial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Corporation.
The following methods and assumptions were used by the Corporation in estimating
its fair value disclosures for financial instruments:
Cash and short-term investments: The carrying amounts reported in the
balance sheet for cash and short-term investments approximate those
assets' fair values due to the short maturity of those assets.
Investment securities (including collateral mortgage obligations and stock
in federal banks): Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans receivable: For variable-rate loans that re-price frequently and
with no significant change in credit risk, fair values are based on
carrying values. The fair values for all other loans are estimated using
discounted cash flow analyses, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit
quality. The carrying amount of accrued interest approximates its fair
value.
Deposits: The fair values disclosed for demand deposits, including
interest-bearing and non-interest bearing accounts, passbook savings, and
certain types of money market accounts are, by definition, equal to the
amount payable on demand at the reporting date (i.e., their carrying
amounts). Fair values for fixed-rate certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits.
63
The National Bank of Indianapolis Corporation
Notes to Consolidated Financial Statements (continued)
15. Fair Value of Financial Instruments (continued)
Security repurchase agreements: The carrying amounts of borrowings under
repurchase agreements approximate their fair values due to variable interest
rates.
FHLB advances: The fair value of FHLB advances are based upon discounted
cash flows using rates for similar advances with the same maturities.
Subordinated debt: The carrying amounts of borrowings under subordinated
debt approximate their fair values due to variable interest rates.
Capital securities: The fair value of the preferred capital securities are
based upon discounted cash flows using rates for similar securities with the
same maturities.
Off-balances-sheet instruments: Due to variable interest rates, the fair
value of commitments to extend credit approximate the carrying value.
64
The National Bank of Indianapolis Corporation
Notes to Consolidated Financial Statements (continued)
15. Fair Value of Financial Instruments (continued)
The estimated fair values of the Corporation's financial instruments at December
31 are as follows:
2003 2002
---------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------------------------------------
Assets
Cash and due from banks $ 44,383,402 $ 44,383,402 $ 45,889,548 $ 45,889,548
Federal funds sold 20,502,386 20,502,386 18,177,463 18,177,463
Reverse repurchase agreements
15,000,000 15,000,000 5,000,000 5,000,000
Investment securities available-for-sale
115,862,372 115,862,372 83,990,335 83,990,335
Investment securities held-to-maturity
5,826,468 6,365,049 30,092,736 30,982,156
Net loans 589,033,148 598,495,968 521,684,217 525,006,358
Stock in federal banks 3,558,200 3,558,200 3,401,500 3,401,500
Liabilities
Deposits 637,537,080 643,909,939 544,342,520 546,351,117
Security repurchase agreements
71,557,046 71,557,046 74,273,774 74,273,774
FHLB advances 42,000,000 43,781,955 48,000,000 50,671,440
Subordinated debt 2,000,000 2,000,000 -- --
Capital securities 13,500,000 15,290,047 13,500,000 14,866,537
Off-Balance-Sheet Instruments
Commitments to extend credit -- -- -- --
65
The National Bank of Indianapolis Corporation
Notes to Consolidated Financial Statements (continued)
16. Earnings Per Share
Basic net income per common share is computed by dividing net income applicable
to common stock by the weighted average number of shares of common stock
outstanding during the period. Diluted net income per common share is computed
by dividing net income applicable to common stock by the weighted average number
of shares, nonvested stock and dilutive common stock equivalents outstanding
during the period. Common stock equivalents consist of common stock issuable
under the assumed exercise of warrants and stock options granted under the
Corporation's stock plans, using the treasury stock method. A computation of
earnings per share follows:
2003 2002 2001
------------------------------------
Basic average shares outstanding 2,343,460 2,288,715 1,916,658
====================================
Net income $5,164,200 $4,556,836 $3,370,043
====================================
Basic net income per common share $ 2.20 $ 1.99 $ 1.76
====================================
Diluted
Average shares outstanding 2,343,460 2,288,715 1,916,658
Nonvested restricted stock 49,620 48,300 27,600
Common stock equivalents
Net effect of the assumed exercise
of stock options 89,919 77,518 80,040
Net effect of the assumed
exercise of warrants -- 14,581 149,521
------------------------------------
Diluted average shares 2,482,999 2,429,114 2,173,819
====================================
Net income $5,164,200 $4,556,836 $3,370,043
====================================
Diluted net income per common share $ 2.08 $ 1.88 $ 1.55
====================================
66
The National Bank of Indianapolis Corporation
Notes to Consolidated Financial Statements (continued)
17. Parent Company Financial Statements
The condensed financial statements of the Corporation, prepared on a parent
company unconsolidated basis, are presented as follows:
Balance Sheet
December 31
2003 2002
------------------------
Assets
Cash $ 3,584,877 $ 7,313,809
Investment in subsidiaries 52,920,721 48,517,856
Other assets 732,942 395,564
------------------------
Total assets $57,238,540 $56,227,229
========================
Liabilities and shareholders' equity
Other liabilities $ 642,136 $ 1,062,078
Subordinated debt 13,918,000 13,918,000
------------------------
Total liabilities 14,560,136 14,980,078
Shareholders' equity 42,678,404 41,247,151
------------------------
Total liabilities and shareholders' equity $57,238,540 $56,227,229
========================
Statements of Income
Years ended December 31
2003 2002 2001
---------------------------------------
Interest income $ 76,863 $ 65,119 $ 58,222
Interest expense 1,590,506 1,443,674 1,443,135
Other operating expenses:
Unearned compensation amortization 396,092 282,494 206,343
Other expenses 305,923 316,483 285,162
---------------------------------------
Total other operating expenses 702,015 598,977 491,505
---------------------------------------
Net loss before tax benefit and equity in
undistributed net income of subsidiaries (2,215,658) (1,977,532) (1,876,418)
Tax benefit 817,343 782,338 756,260
---------------------------------------
Net loss before equity in undistributed
net income of subsidiaries (1,398,315) (1,195,194) (1,120,158)
Equity in undistributed net income of subsidiaries 6,562,515 5,752,030 4,490,201
---------------------------------------
Net income $ 5,164,200 $ 4,556,836 $ 3,370,043
=======================================
67
The National Bank of Indianapolis Corporation
Notes to Consolidated Financial Statements (continued)
17. Parent Financial Statements (continued)
Statements of Cash Flows
Years ended December 31
2003 2002 2001
---------------------------------------
Operating activities
Net income $ 5,164,200 $ 4,556,836 $ 3,370,043
Adjustments to reconcile net income to net cash provided by
operating activities:
Undistributed net income of subsidiaries (6,562,516) (5,752,030) (4,490,201)
Income tax benefit from exercise of options & warrants 456,013 2,562,990 --
Stock compensation 110,000 109,918 110,000
Unearned compensation amortization 396,092 282,494 206,343
Decrease in other assets (337,378) (6,564) 49,019
Increase (decrease) in other liabilities (419,942) 460,651 106,341
---------------------------------------
Net cash provided by (used by) operating activities (1,193,531) 2,214,295 (648,455)
Investing activities
Capital contribution to The National Bank of Indianapolis -- (1,000,000) (1,000,000)
Dividends from The National Bank of Indianapolis 1,650,000 650,000 --
---------------------------------------
Net cash (used by) investing activities 1,650,000 (350,000) (1,000,000)
Financing activities
Proceeds from issuance of stock 869,146 4,838,280 105,396
Repurchase of stock (5,054,547) (30,800) (44,550)
---------------------------------------
Net cash provided by (used by) financing activities (4,185,401) 4,807,480 60,846
---------------------------------------
Increase (decrease) in cash and cash equivalents (3,728,932) 6,671,775 (1,587,609)
Cash and cash equivalents at beginning of year 7,313,809 642,034 2,229,643
---------------------------------------
Cash and cash equivalents at end of year $ 3,584,877 $ 7,313,809 $ 642,034
=======================================
68
The National Bank of Indianapolis Corporation
Notes to Consolidated Financial Statements (continued)
18. Quarterly Results of Operations (Unaudited)
The following is a summary of the unaudited quarterly results of operations for
the years ended December 31, 2003 and 2002:
March 31 June 30 September 30 December 31
-------------------------------------------------
2003
Interest income $8,570,656 $8,690,207 $8,531,746 $8,767,532
Interest expense 2,989,800 3,063,213 2,932,884 2,964,023
-------------------------------------------------
Net interest income 5,580,856 5,626,994 5,598,862 5,803,509
Provision for loan losses 300,000 300,000 300,000 300,000
Other operating income 2,100,042 2,051,360 2,033,451 1,766,222
Other operating expense 5,238,174 5,378,333 5,190,847 5,176,952
-------------------------------------------------
Net income before tax 2,142,724 2,000,021 2,141,466 2,092,779
Federal and state income tax 845,898 794,561 846,068 726,263
-------------------------------------------------
Net income after tax $1,296,826 $1,205,460 $1,295,398 $1,366,516
=================================================
Basic earnings per share $ 0.55 $ 0.51 $ 0.55 $ 0.59
Diluted earnings per share $ 0.52 $ 0.48 $ 0.51 $ 0.57
2002
Interest income $8,432,837 $8,761,125 $9,030,932 $8,870,406
Interest expense 3,825,423 3,633,413 3,432,602 3,170,139
-------------------------------------------------
Net interest income 4,607,414 5,127,712 5,598,330 5,700,267
Provision for loan losses 450,000 450,000 300,000 300,000
Other operating income 1,666,772 1,977,197 1,872,262 1,959,231
Other operating expense 4,559,236 4,543,060 5,055,581 5,294,193
-------------------------------------------------
Net income before tax 1,264,950 2,111,849 2,115,011 2,065,305
Federal and state income tax 509,484 837,032 838,048 815,715
-------------------------------------------------
Net income after tax $ 755,466 $1,274,817 $1,276,963 $1,249,590
=================================================
Basic earnings per share $ 0.36 $ 0.54 $ 0.54 $ 0.55
Diluted earnings per share $ 0.34 $ 0.51 $ 0.51 $ 0.52
69
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
- ------------------------------------------------------------------------
None.
Item 9A. 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 under Rules 13(a)-15(e) or Rules 15d-15(e) under the
Securities Exchange Act of 1934, as amended), based on their
evaluation of these controls and procedures as of the period covered
by this Form 10-K, are effective.
(b) Changes in Internal Controls. There have been no significant changes
in the Corporation's internal controls or in other factors that
could significantly affect these controls subsequent to the date of
the evaluation thereof, including any corrective actions with regard
to significant deficiencies and material weaknesses.
(c) Limitations on the Effectiveness of Controls. The Corporation's
management, including its principal executive officer and principal
financial officer, does not expect that the Corporation's disclosure
controls and procedures and other internal controls will prevent all
error and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the
design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of
fraud, if any, within the company have been detected. These inherent
limitations include the realities that judgments in decision-making
can be faulty, and that breakdowns can occur because of simple error
or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people,
or by management override of the control.
The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and there
can only be reasonable assurance that any design will succeed in
achieving its stated goals under all potential future conditions;
over time, control may become inadequate because of changes in
conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud
may occur and not be detected.
(d) CEO and CFO Certifications. Appearing immediately following the
Signatures section of this report there are Certifications of the
Corporation's principal executive officer and principal financial
officer. The Certifications are required in accord with Section 302
of the Sarbanes-Oxley Act of 2002 (the "Section 302
Certifications"). This Item of this report which you are currently
reading is the information concerning the Evaluation referred to in
the Section 302 Certifications and this information should be read
in conjunction with the Section 302 Certifications for a more
complete understanding of the topics presented.
70
PART III
Items 10. 11, 12, 13 and 14
- ----------------------------
In accordance with the provisions of General Instruction G to Form
10-K, the information required for the required disclosures under Items 10, 11,
12, 13 and 14 are not set forth herein because the Corporation intends to file
with the Securities and Exchange Commission a definitive Proxy Statement
pursuant to Regulation 14A not later than 120 days following the end of its 2003
fiscal year, which Proxy Statement will contain such information. The
information required by Items 10, 11, 12, 13 and 14 is incorporated herein by
reference to such Proxy Statement.
71
Part IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on From 8-K
- --------------------------------------------------------------------------
(a) (1) The following consolidated financial statements are included in Item 8:
Page Number in
10-K
Independent Auditors' Report on Consolidated Financial Statements 39
Consolidated Balance Sheets December 31, 2002 and 2001 40
Consolidated Statements of Income 41
For the years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Shareholders' Equity 42
For the years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows 43
For the years ended December 31, 2002, 2001, and 2000
Notes to consolidated Financial Statements 44
(2) See response to Item 15 (a)(1). All other financial statement schedules
have been omitted because they are not applicable, or the required
information is shown in the consolidated financial statements or notes
thereto.
(3) List of Exhibits
72
Exhibit Number Description
- -------------- -----------
3(i) Articles of Incorporation of the Corporation, filed as
Exhibit 3(i) to the Corporation's Form 10-QSB as of
September 30, 1995 are incorporated by reference and
Articles of Amendment filed as Exhibit 3(i) to the Form
10-K for the fiscal year ended December 31, 2001
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
21 Subsidiaries of the Corporation
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
* Management Contract or Compensatory plan
(b) The registrant furnished the following Current Reports on From 8-K
during the quarter ended December 31, 2003.
Date Item Reported
November 3, 2003 Letter to Shareholders of the Registrant,
dated November 3, 2003
(c) See the list of exhibits in Item 15 (a) (3).
(d) No other financial statement schedules are required to be submitted.
73
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
(Registrant) The National Bank of Indianapolis Corporation
------------------------------------------------------------------
By (Signature and Title) /S/ Morris L. Maurer March 26,2004
------------------------------------------------------
Morris L. Maurer, President Date
(Principal Executive Officer)
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title) /S/ Morris L. Maurer March 26, 2004
-------------------------------------------------------
Morris L. Maurer, President Date
(Principal Executive Officer)
By (Signature and Title) /S/ Philip B. Roby March 26, 2004
-------------------------------------------------------
Philip B. Roby, Executive Vice President Date
By (Signature and Title) /S/ Debra L. Ross March 26, 2004
-------------------------------------------------------
Debra L. Ross, Senior Vice President Date
(Principal Financial and Accounting
Officer)
By (Signature and Title) /S/ Michael S. Maurer March 26, 2004
-------------------------------------------------------
Michael S. Maurer, Chairman of the Board Date
By (Signature and Title) /S/ Kathryn G. Betley March 26, 2004
-------------------------------------------------------
Kathryn G. Betley, Director Date
By (Signature and Title) /S/ James M. Cornelius March 26, 2004
-------------------------------------------------------
James M. Cornelius, Director Date
By (Signature and Title) /S/ David R. Frick March 26, 2004
-------------------------------------------------------
David R. Frick, Director Date
By (Signature and Title) /S/ Andre B. Lacy March 26, 2004
-------------------------------------------------------
Andre B. Lacy, Director Date
By (Signature and Title) /S/ William J. Loveday March 26, 2004
-------------------------------------------------------
William J. Loveday, Director Date
By (Signature and Title) /S/ G. Benjamin Lantz March 26, 2004
-------------------------------------------------------
G. Benjamin Lantz, Director Date
By (Signature and Title) /S/ Todd H. Stuart March 26, 2004
-------------------------------------------------------
Todd H. Stuart, Director Date
74