SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
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)
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 whether registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes [ ] No [X]
The number of shares of the registrant's Common Stock outstanding
November 12, 2004 was 2,352,046.
Table of Contents
The National Bank of Indianapolis Corporation
Report on Form 10-Q
for Quarter Ended
September 30, 2004
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - September 30, 2004
and December 31, 2003..............................................1
Consolidated Statements of Income - Three Months
ended September 30, 2004 and 2003..................................2
Consolidated Statements of Income - Nine Months
ended September 30, 2004 and 2003..................................3
Consolidated Statements of Cash Flows - Nine Months
ended September 30, 2004 and 2003..................................4
Consolidated Statements of Shareholders' Equity - Nine Months
ended September 30, 2004 and 2003..................................5
Notes to Consolidated Financial Statements......................6-13
Item 2. Management's Discussion and Analysis...........................14-25
Item 3. Quantitative and Qualitative Disclosures about Market Risk........25
Item 4. Controls and Procedures...........................................26
PART II OTHER INFORMATION
Item 1. Legal Proceedings.................................................27
Item 2. Changes in Securities, Use of Proceeds, and Issuer Purchases
Equity Securities..............................................27-28
Item 3. Defaults Upon Senior Securities...................................28
Item 4. Submission of Matters to a Vote of Security Holders...............28
Item 5. Other Information ................................................28
Item 6. Exhibits and Reports on Form 8-K..................................28
Signatures .................................................................29
Part I - Financial Information
Item 1. Financial Statements
The National Bank of Indianapolis Corporation
Consolidated Balance Sheets
September 30, December 31,
2004 2003
(Unaudited) (Note)
----------------------------------------
Assets
Cash and due from banks $ 39,306,795 $ 44,383,402
Reverse repurchase agreements 5,000,000 15,000,000
Federal funds sold 49,250,184 20,502,386
Investment securities
Available-for-sale securities 92,855,385 115,862,372
Held-to-maturity securities 56,133,441 5,826,468
----------------------------------------
Total investment securities 148,988,826 121,688,840
Loans 635,666,676 597,062,744
Less: Allowance for loan losses (7,483,697) (8,029,596)
----------------------------------------
Net loans 628,182,979 589,033,148
Premises and equipment 8,955,821 9,148,709
Accrued interest 3,451,001 3,503,401
Stock in federal banks 3,649,700 3,558,200
Other assets 7,308,295 5,780,728
----------------------------------------
Total assets $ 894,093,601 $ 812,598,814
========================================
Liabilities and shareholders' equity Deposits:
Noninterest-bearing demand deposits $ 153,996,403 $ 138,087,276
Money market and savings deposits 446,326,988 382,574,081
Time deposits over $100,000 51,943,626 48,219,664
Other time deposits 67,219,885 68,656,059
----------------------------------------
Total deposits 719,486,902 637,537,080
Security repurchase agreements 73,460,534 71,557,046
FHLB advances 32,000,000 42,000,000
Subordinated debt 5,000,000 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
Junior subordinated debentures owed to unconsolidated subsidiary trust 13,918,000 -
Other liabilities 4,702,317 3,326,284
----------------------------------------
Total liabilities 848,567,753 769,920,410
Shareholders' equity:
Common stock, no par value:
Authorized shares 2004 and 2003 -3,000,000 shares;
issued 2,624,054 in 2004 and 2,517,131 in 2003;
outstanding 2,356,669 in 2004 and 2,352,229 in 2003 20,896,007 22,858,900
Unearned compensation (626,671) (894,679)
Additional paid in capital 3,817,440 3,019,003
Retained earnings 21,729,123 17,684,102
Accumulated other comprehensive income (loss) (290,051) 11,078
----------------------------------------
Total shareholders' equity 45,525,848 42,678,404
----------------------------------------
Total liabilities and shareholders' equity $ 894,093,601 $ 812,598,814
========================================
Note: The balance sheet at December 31, 2003 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. See notes to consolidated financial statements.
1
The National Bank of Indianapolis Corporation
Consolidated Statements of Income
(Unaudited)
Three months ended
September 30,
2004 2003
------------------------------------
Interest income:
Interest and fees on loans $ 8,529,461 $ 7,699,013
Interest on investment securities 1,140,119 699,993
Interest on federal funds sold 209,613 102,040
Interest on reverse repurchase agreements 15,193 30,700
------------------------------------
Total interest income 9,894,386 8,531,746
Interest expense:
Interest on deposits 2,339,494 1,602,482
Interest on repurchase agreements 149,069 70,024
Interest on FHLB advances 415,279 611,273
Interest on long term debt 419,662 649,105
------------------------------------
Total interest expense 3,323,504 2,932,884
------------------------------------
Net interest income 6,570,882 5,598,862
Provision for loan losses 330,000 300,000
------------------------------------
Net interest income after provision for loan losses 6,240,882 5,298,862
Other operating income:
Trust fees and commissions 624,747 533,200
Building rental income 114,198 148,548
Service charges and fees on deposit accounts 518,956 607,592
Net gain on sale of mortgage loans 16,175 234,183
Interchange income 153,597 135,105
Other income 388,699 374,823
------------------------------------
Total operating income 1,816,372 2,033,451
Other operating expenses:
Salaries, wages and employee benefits 3,545,346 3,084,318
Occupancy expense 351,395 346,368
Furniture and equipment expense 193,951 217,076
Professional services 219,111 246,110
Data processing 362,759 352,907
Business development 230,599 207,581
Mortgage servicing rights impairment charges 1,153 15,300
Other expenses 768,407 721,187
------------------------------------
Total other operating expenses 5,672,721 5,190,847
------------------------------------
Net income before tax 2,384,533 2,141,466
Federal and state income tax 910,503 846,068
------------------------------------
Net income after tax $ 1,474,030 $ 1,295,398
====================================
Basic earnings per share $ 0.64 $ 0.55
====================================
Diluted earnings per share $ 0.61 $ 0.51
====================================
See notes to consolidated financial statements.
2
The National Bank of Indianapolis Corporation
Consolidated Statements of Income
(Unaudited)
Nine months ended
September 30,
2004 2003
------------------------------------
Interest income:
Interest and fees on loans $ 24,013,386 $ 23,164,086
Interest on investment securities 3,148,612 2,233,901
Interest on federal funds sold 480,649 327,926
Interest on reverse repurchase agreements 68,151 66,696
------------------------------------
Total interest income 27,710,798 25,792,609
Interest expense:
Interest on deposits 6,337,324 5,710,302
Interest on repurchase agreements 297,192 304,697
Interest on FHLB advances 1,359,556 1,863,996
Interest on long term debt 1,212,408 1,106,902
------------------------------------
Total interest expense 9,206,480 8,985,897
------------------------------------
Net interest income 18,504,318 16,806,712
Provision for loan losses 930,000 900,000
------------------------------------
Net interest income after provision for loan losses 17,574,318 15,906,712
Other operating income:
Trust fees and commissions 1,839,549 1,428,915
Building rental income 370,569 413,577
Service charges and fees on deposit accounts 1,646,582 1,845,696
Net gain on sale of mortgage loans 110,912 1,055,654
Interchange income 435,752 407,506
Securities losses net (83,739) -
Other 1,062,071 1,033,505
------------------------------------
Total operating income 5,381,696 6,184,853
Other operating expenses:
Salaries, wages and employee benefits 10,277,260 9,067,270
Occupancy expense 1,061,515 1,063,163
Furniture and equipment expense 618,155 652,704
Professional services 878,648 685,091
Data processing 1,082,229 1,021,033
Business development 768,400 680,914
Mortgage servicing rights impairment (recoveries) charges (157,499) 292,476
Other expenses 2,346,770 2,344,703
------------------------------------
Total other operating expenses 16,875,478 15,807,354
------------------------------------
Net income before tax 6,080,536 6,284,211
Federal and state income tax 2,035,515 2,486,527
------------------------------------
Net income after tax $ 4,045,021 $ 3,797,684
====================================
Basic earnings per share $ 1.76 $ 1.61
====================================
Diluted earnings per share $ 1.69 $ 1.51
====================================
See notes to consolidated financial statements.
3
The National Bank of Indianapolis Corporation
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended
September 30,
2004 2003
--------------------------------
Operating Activities
Net Income $ 4,045,021 $ 3,797,684
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses 930,000 900,000
Depreciation and amortization 962,467 824,670
Mortgage servicing rights impairment (recoveries) charges (157,499) 292,476
Loss on sales of investment securities available for sale 83,739 -
Gain on sale of loans (110,912) (1,055,654)
Gain on sale of fixed assets (2,000) -
Income tax benefit from exercise of warrants & options 798,437 120,556
Stock compensation 99,990 110,000
Net amortization of investments 221,599 799,324
Unearned compensation amortization 235,983 296,423
(Increase) decrease in:
Accrued interest receivable 52,400 626,844
Other assets (1,538,987) (624,179)
Increase (decrease) in:
Other liabilities 1,740,791 (1,301,341)
--------------------------------
Net cash provided by operating activities 7,361,029 4,786,803
--------------------------------
Investing Activities
Net change in federal funds sold (28,747,798) (26,063,594)
Net change in reverse repurchase agreements 10,000,000 (10,000,000)
Proceeds from maturities of investment securities held
to maturity 786,015 24,124,021
Proceeds from maturities of investment securities available
for sale 23,675,261 47,286,920
Proceeds from sales of investment securities available for sale 19,952,500 25,367,391
Purchases of investment securities held to maturity (51,372,750) (124,500)
Purchases of investment securities available for sale (20,995,321) (86,010,625)
Net increase in loans (65,578,071) (115,327,776)
Proceeds from sale of loans 25,609,152 63,200,887
Purchases of bank premises and equipment (589,076) (671,595)
--------------------------------
Net cash used by investing activities (87,260,088) (78,218,871)
--------------------------------
Financing Activities
Net increase in deposits 81,949,822 75,305,419
Net increase (decrease) in security repurchase agreements 1,903,488 (6,019,678)
Net change in FHLB borrowings (10,000,000) (6,000,000)
Proceeds from issuance of long-term debt 3,000,000 2,000,000
Proceeds from issuance of stock 1,343,274 458,746
Repurchase of stock (3,374,132) (1,008,203)
--------------------------------
Net cash provided by financing activities 74,822,452 64,736,284
--------------------------------
Decrease in cash and cash equivalents (5,076,607) (8,695,784)
Cash and cash equivalents at beginning of year 44,383,402 45,889,548
--------------------------------
Cash and cash equivalents at end of period $ 39,306,795 $ 37,193,764
================================
Interest paid $ 9,520,079 $ 9,494,678
================================
Income taxes paid $ 1,348,414 $ 3,314,931
================================
See notes to consolidated financial statements.
4
The National Bank of Indianapolis Corporation
Consolidated Statement of Shareholders' Equity
(Unaudited)
Accumulated
Additional and Other
Common Unearned Paid In Retained Comprehensive
Stock Compensation Capital Earnings Income TOTAL
-------------------------------------------------------------------------------------
Balance at December 31, 2002 $ 26,862,276 $ (1,218,746) $ 2,562,990 $ 12,519,902 $ 520,729 $ 41,247,151
Comprehensive income:
Net income 3,797,684 3,797,684
Other comprehensive income
Net unrealized loss on investments,
net of tax of $386,795 (589,714) (589,714)
---------------
Total comprehensive income 3,207,970
Income tax benefit from exercise of warrants
& options 120,556 120,556
Issuance of stock (30,306 shares) 640,771 (72,025) 568,746
Repurchase of stock (32,527 shares) (1,008,203) (1,008,203)
Compensation earned 296,423 296,423
-------------------------------------------------------------------------------------
Balance at September 30, 2003 $ 26,494,844 $ (994,348) $ 2,683,546 $ 16,317,586 $ (68,985) $ 44,432,643
=====================================================================================
Balance at December 31, 2003 $ 22,858,900 $ (894,679) $ 3,019,003 $ 17,684,102 $ 11,078 $ 42,678,404
Comprehensive income:
Net income 4,045,021 4,045,021
Other comprehensive income
Net unrealized loss on investments,
net of tax of $109,250 (155,486) (155,486)
Net unrealized loss on swap
net of tax $95,528 (145,643) (145,643)
---------------
Total comprehensive income 3,743,892
Income tax benefit from exercise of warrants
& options 798,437 798,437
Issuance of stock (106,923 shares) 1,411,239 32,025 1,443,264
Repurchase of stock (102,483 shares) (3,374,132) (3,374,132)
Compensation earned 235,983 235,983
-------------------------------------------------------------------------------------
Balance at September 30, 2004 $ 20,896,007 $ (626,671) $ 3,817,440 $ 21,729,123 $ (290,051) $ 45,525,848
=====================================================================================
See notes to consolidated financial statements.
5
The National Bank of Indianapolis
Corporation
Notes to Consolidated Financial Statements
September 30, 2004
Note 1: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include
the accounts of The National Bank of Indianapolis Corporation ("Corporation")
and its wholly-owned subsidiary The National Bank of Indianapolis ("Bank"). The
presentation of the 2003 financial statements also includes the accounts of the
NBIN Statutory Trust I. All intercompany transactions between the Corporation
and its subsidiary have been properly eliminated. The consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the nine month period ended September 30, 2004
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2004. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Corporation's Form
10-K for the year ended December 31, 2003.
Note 2: Trust Preferred Securities
In September 2000, NBIN Statutory Trust I ("the Trust"), a Connecticut statutory
business trust owned by the Corporation, issued $13,500,000 of company obligated
mandatorily redeemable capital securities. The proceeds from the issuance of the
capital securities and the proceeds from the issuance of the common securities
of $418,000 were used by the Trust to purchase from the Corporation $13,918,000
Fixed Rate Junior Subordinated Debentures. The 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 subordinated
debentures are the sole assets of the Trust and the Corporation owns all of the
common securities of the Trust. The net proceeds received by the Corporation
from the sale of capital securities were used for general corporate purposes.
In January of 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
interpretation of Accounting Research Bulletin No. 51" (FIN 46, or 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 FIN 46, entities are generally consolidated by an enterprise when it
has a controlling interest through ownership of a majority voting interest in
the entity.
6
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. However, in certain circumstances, the Interpretation initially
allowed the parent to continue consolidating the trust.
In December 2003 a revised interpretation was issued which 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 FIN 46 to the Trust, which allowed the Corporation to
continue consolidating the Trust. However, the Corporation was required to adopt
the provisions of the revised interpretation and to deconsolidate the Trust no
later than March 31, 2004.
In the first quarter of 2004, as a result of applying the provisions of FIN 46,
the Corporation was required to deconsolidate the Trust from its financial
statements. The deconsolidation of the net assets and results of operations of
the Trust had virtually no impact on the Corporation's financial statements or
liquidity position since the Corporation continues to be obligated to repay the
debentures held by the Trust and guarantees repayment of the capital securities
issued by the Trust. The debt obligation related to the Trust increased from
$13,500,000 to $13,918,000 upon deconsolidation with the difference representing
the Corporation's common equity ownership interest in the Trust.
The junior subordinated debentures owed to the Trust and held by the Corporation
qualify as Tier 1 capital for the Corporation under Federal Reserve Board
guidelines. As a result of the issuance of FIN 46, the Federal Reserve Board
completed an evaluation and determined that the deconsolidation of the Trust
will not affect the qualifications of the capital securities as Tier 1 capital.
Consolidated debt related to the Trust holding solely debentures of the
Corporation:
September 30, December 31,
2004 2003
----------------------------
10.60% junior subordinated debentures owed to NBIN
Statutory Trust I due September 7, 2030 $13,918,000 $ -
- --------------------------------------------------------------------------------
10.60% capital securities of NBIN Statutory Trust I
due September 7, 2030 $ - $13,500,000
- --------------------------------------------------------------------------------
$13,918,000 $13,500,000
================================================================================
Interest payments made on the capital securities or the junior subordinated
debentures are reported as a component of interest expense on long-term debt.
7
Note 3: Investment Securities
The securities available for sale are summarized as follows:
Available-for-Sale Securities
---------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
---------------------------------------------------------------------
September 30, 2004
U.S. Treasury securities $ 2,023,824 $ -- $ 4,334 $ 2,019,490
U.S. Government agencies 91,000,000 315,849 550,758 90,765,091
Collateralized mortgage obligations 70,686 118 -- 70,804
---------------------------------------------------------------------
$ 93,094,510 $ 315,967 $ 555,092 $ 92,855,385
=====================================================================
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
=====================================================================
Held-to-Maturity Securities
---------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
---------------------------------------------------------------------
September 30, 2003
Municipals $ 5,432,922 $ 525,723 $ -- $ 5,958,645
Commercial Mortgage backed 50,475,519 -- 650,826 49,824,693
Other securities 225,000 5,197 -- 230,197
---------------------------------------------------------------------
$ 56,133,441 $ 530,920 $ 650,826 $ 56,013,535
=====================================================================
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
=====================================================================
The Bank does not believe any individual unrealized loss as of September 30,
2004 represents an other-than-temporary impairment.
8
Note 4: Loans
Major classifications of loans are as follows:
September 30, 2004 December 31, 2003
------------------ -----------------
% of % of
Amount Total Amount Total
--------------------------------- ------------------------------
TYPES OF LOANS
Commercial $ 231,788,516 36.5% $ 221,845,612 37.2%
Construction 29,196,226 4.6% 30,522,549 5.1%
Commercial Mortgage 122,068,995 19.2% 120,135,105 20.1%
Residential Mortgage 205,975,436 32.4% 187,878,110 31.5%
Installment 36,889,840 5.7% 25,183,365 4.2%
Credit Card 2,433,541 0.4% 2,359,403 0.4%
Other 7,314,122 1.2% 9,138,600 1.5%
--------------------------------- ------------------------------
Total - Gross $ 635,666,676 100.0% $ 597,062,744 100.0%
============== ===============
Allowance (7,483,697) (8,029,596)
------------------- ---------------
Total - Net $ 628,182,979 $ 589,033,148
=================== ===============
Note 5: Subordinated Term Loan Agreement
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 first advance was made in the amount of $2,000,000 on June 6, 2003.
The second advance was made in the amount of $3,000,000 on May 3, 2004. The
final maturity date of the loan is June 6, 2010. The outstanding principal
balance is due at maturity, but prepayment of the principal balance is permitted
prior to maturity with prior consent from the Federal Reserve.
Under the terms of the agreement, 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 3.70 %. Interest payments are due at the expiration of the fixed term
option. During the second quarter of 2004, the Bank made a $1,000,000 dividend
to the Corporation from the loan proceeds to accommodate the stock repurchase
program as discussed on page 24 and in Item 2 (c) on page 27.
9
Note 6: Derivative Instruments and Hedging Activities
During the second quarter of 2004, the Corporation entered into an interest rate
swap to reduce the volatility of variable interest payments received on a
portion of its overnight federal funds sold. This interest rate swap qualified
as and is being accounted for as a cash flow hedge pursuant to Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities", (SFAS133). SFAS 133 requires changes in the fair value
of cash flow hedges to be reported as a component of Other Comprehensive Income,
net of deferred taxes.
September 30, 2004 December 31, 2003
Net Ineffective Net Ineffective
Notional Derivative Hedge Gains Notional Derivative Hedge Gains
Amount Liability (Losses) Amount Liability (Losses)
- ----------------------------------------------------------------------------------- -----------------------------------------
Cash Flow Hedge
Overnight Federal Funds Sold
Receive fixed interest rate swap $20,000,000 $241,171 $ -- $ -- $ -- $ --
Note 7: Exercise of Options
During the first quarter of 2004, one director and one officer of the
Corporation exercised options to purchase 5,500 common shares in aggregate. The
weighted average exercise price was $10.00 and the weighted average fair market
value of the stock was $33.00.
During the second quarter of 2004, two directors and six officers of the
Corporation exercised options to purchase 50,800 common shares in aggregate. The
weighted average exercise price was $12.28 per share and the weighted average
fair market value of the stock was $32.88.
During the third quarter of 2004, one director and four officers of the
Corporation exercised options to purchase 42,931 common shares in aggregate. The
weighted average exercise price was $10.77 per share and the weighted average
fair market value of the stock was $33.05
Due to the exercise of these options for the nine months ended September 30,
2004, the Corporation will receive a deduction for tax purposes for the
difference between the fair value of the stock at the date of exercise and the
exercise price. In accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock-Based Compensation," (APB 25) the Corporation has recorded
the income tax benefit of $832,644 as additional paid in capital for the nine
months period ended September 30, 2004.
10
Note 8: Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
Three months ended Nine months ended
September 30, September 30,
2004 2003 2004 2003
------------ ------------- ------------- -------------
Basic average shares outstanding 2,308,456 2,360,371 2,301,812 2,363,426
============ ============= ============= =============
Net income $1,474,030 $ 1,295,398 $ 4,045,021 $ 3,797,684
============ ============= ============= =============
Basic net income per common share $ 0.64 $ 0.55 $ 1.76 $ 1.61
============ ============= ============= =============
Diluted
Average shares outstanding 2,308,456 2,360,371 2,301,812 2,363,426
Nonvested restricted stock 29,160 49,620 29,160 49,620
Common stock equivalents
Net effect of the assumed exercise of stock options 59,911 89,906 59,911 89,906
Net effect of the assumed exercise of warrants - 15,562 - 15,562
------------ ------------- ------------- -------------
Diluted average shares 2,397,527 2,515,459 2,390,883 2,518,514
============ ============= ============= =============
Net income $1,474,030 $ 1,295,398 $ 4,045,021 $ 3,797,684
============ ============= ============= =============
Diluted net income per common share $ 0.61 $ 0.51 $ 1.69 $ 1.51
============ ============= ============= =============
Note 9: Comprehensive Income
The following table sets forth the computation of comprehensive income:
Three months ended Nine months ended
September 30, September 30,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Net income $ 1,474,030 $ 1,295,398 $ 4,045,021 $ 3,797,684
Unrealized gains (losses) on securities, net of tax 436,973 (433,999) (155,486) (589,714)
Unrealized gains (losses) on swap, net of tax 108,222 - (145,643) -
-------------- -------------- -------------- --------------
Comprehensive income $ 2,019,225 $ 861,399 $ 3,743,892 $ 3,207,970
============== ============== ============== ==============
11
Note 10: Stock Based Compensation
The Corporation follows APB 25 in accounting for its stock option plans. Under
APB 25, compensation expense is generally not recognized if the exercise price
of the option equals the fair value of the stock on the date of grant. The
following table illustrates the effect on net income and earnings per share if
the Corporation had applied the fair value recognition provisions of Statement
No. 123 to stock-based compensation. For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over their vesting
periods.
Three months ended Nine months ended
September 30, September 30,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Net income, as reported $ 1,474,030 $ 1,295,398 $ 4,045,021 $ 3,797,684
Add: stock-based compensation expense, net of 38,282 59,963 142,510 179,010
related taxes
Less: total stock-based compensation expense (74,168) (115,140) (286,913) (232,953)
determined under fair-value based method, net
of taxes
-------------- -------------- -------------- --------------
Pro forma net income $ 1,438,144 $ 1,240,221 $ 3,900,618 $ 3,743,741
============== ============== ============== ==============
Earnings per share:
Basic, as reported $ 0.64 $ 0.55 $ 1.76 $ 1.61
Basic, pro forma $ 0.62 $ 0.53 $ 1.69 $ 1.58
Diluted, as reported $ 0.61 $ 0.51 $ 1.69 $ 1.51
Diluted, pro forma $ 0.60 $ 0.49 $ 1.63 $ 1.49
12
Note 11: Recent Accounting Pronouncements
In March 2004, The Emerging Issues Task Force ("EITF"), a standard setting body
working under the auspices of the FASB, issued EITF No. 03-1, "The Meaning of
Other than Temporary Impairments and its Application to Certain Investments". In
the revised guidance the EITF reached a Consensus regarding the model to be used
in determining whether an investment is other-than-temporarily impaired, and the
required disclosures about unrealized losses on available-for-sale debt and
equity securities. The impact of EITF 03-1 will apply to the evaluation of
other-than-temporary impairment in reporting periods beginning after June 15,
2004.
In September 2004, The Financial Accounting Standards Board ("FASB") announced
that the effective date for applying Paragraph 16 will be delayed pending
further discussion. Paragraph 16 of the Consensus relates to debt securities
that cannot be contractually prepaid or otherwise settled for an amount less
than the investor's cost. The effective date for the recognition and measurement
portion of the Consensus remains June 15, 2004. Management continues to evaluate
the impact of adopting EITF 03-1 and it is not expected to have a material
impact on the Corporation's financial condition, results of operations, or cash
flow.
In October 2004, the FASB issued Statement 123R, Share-Based Payment, which
would require all companies to measure compensation cost for all share-based
payments at fair value, Statement 123R would be effective for public companies
for interim or annual periods beginning after June 15, 2005. Management is
currently evaluating the effect of this guidance on the Corporation's financial
condition, results of operations, and cash flow.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Corporation Overview:
The primary source of The National Bank of Indianapolis Corporation's revenue is
net interest income from loans and deposits and fees from financial services
provided to customers. Business volumes tend to be influenced by overall
economic factors including market interest rates, business spending, and
consumer confidence, as well as competitive conditions within the marketplace.
The Corporation monitors the impact of changes in interest rates on its net
interest income. 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. At September 30, 2004 the interest rate risk position of
the Corporation was asset sensitive. Maintaining an asset sensitive interest
rate risk position means that net income should increase as rates rise and
decrease as rates fall.
Due to record low interest rates in 2003, there was an increase in refinancing
activity and mortgage loan sales by the Corporation. There has been a
significant decrease in mortgage loan refinancing during 2004 resulting in less
sales by the Corporation causing a decrease in other income.
Net income is affected by the provision for loan losses. Management performs an
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.
The risks and challenges that management believes will be important for the
remainder of 2004 are price competition for loans and deposits by new market
entrants and lower mortgage loan volume leading to lower gains on sales of
mortgage loans.
Forward Looking Information
This section contains forward looking statements. Forward looking statements
give current expectations or forecasts of future events and are not guarantees
of future performance. The forward looking statements are based on management's
expectations and are subject to a number of risks and uncertainties. Although
management believes the expectations reflected in such forward looking
statements are reasonable, actual results may differ materially from those
expressed or implied in such statements. Risks and uncertainties that could
cause actual results to differ materially include, without limitation, the
Corporation's ability to execute its business plans; changes in general economic
and financial market conditions; changes in interest rates; changes in
competitive conditions; continuing consolidation in the financial services
industry; new litigation or changes in existing litigation; losses, customer
bankruptcy, claims and assessments; changes in banking regulations or other
regulatory or legislative requirements that impact the Corporation's business;
and changes in accounting policies and procedures as may be required by the
Financial Accounting Standards Board or other regulatory agencies. Additional
information concerning factors that could cause actual results to differ
14
materially from those expressed or implied in the forward-looking statements is
available in the Corporation's Annual Report on Form 10-K for the year ended
December 31, 2003.
Critical Accounting Policies
The Corporation's consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States and follow
general practices within the industries in which it operates. Application of
these principles requires management to make estimates, assumptions, and
judgments that affect the amounts reported in the financial statements and
accompanying notes. These estimates, assumptions, and judgments are based on
information available as of the date of the financial statements; accordingly,
as this information changes, the financial statements could reflect different
estimates, assumptions, and judgments. Certain policies 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.
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 probable 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 for loan losses is allocated to each loan category based on
management's estimate of expected losses, which is determined by, among other
things, the Bank's historical loss experience and peer median charge off
percentages by loan category added to actual reserves maintained for
15
non-performing or specifically identified loans needing a reserve. Although the
loan loss reserve is allocated by loan category, the entire allowance is
available to cover any loan loss that may occur.
Mortgage Servicing Assets
Mortgage service assets are recorded in connection with the Bank's sales of
mortgage loans and are classified in other 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.
Off Balance Sheet Arrangements
During the first quarter of 2004, the Corporation adopted FIN 46, which governs
when certain variable interests should be consolidated in the financial
statements of the Corporation. As a result, the Corporation deconsolidated the
Trust which removed $13,500,000 of Mandatorily Redeemable Capital Securities
issued by the Trust while adding $13,918,000 of junior subordinated debentures
to the consolidated balance sheet. See Note 2 Trust Preferred Securities in the
Notes to the Consolidated Financial Statements under Item 1 of this report for
further information.
Derivative Instruments and Hedging Activities
During the second quarter of 2004, the Corporation entered into an interest rate
swap to protect the risk of adverse interest rate movements on the value of
future cash flows related to its investment in overnight Federal Funds sold.
Pursuant to SFAS 133, cash flow hedges are accounted for by recording the fair
value of the derivative instrument on the balance sheet as either an asset or
liability, with a corresponding offset recorded in other comprehensive income
within shareholders' equity, net of tax.
Under the cash flow hedge accounting method, derivative gains and losses not
effective in hedging the change in expected cash flows of the hedged item are
recognized immediately in the income statement. At the hedge's inception and
quarterly thereafter, a formal assessment is performed to determine whether
changes in cash flows of the derivative instrument have been highly effective in
offsetting changes in the cash flows of the hedged item and whether they are
expected to be highly effective in the future. If it is determined a derivative
instrument has not been or will not continue to be highly effective as a hedge,
hedge accounting is discontinued. See Note 6 Derivative Instruments and Hedging
Activities in the Notes to the Consolidated Financial Statements under Item 1 of
this report for further information.
16
Results of Operations
Net Interest Income
- -------------------
This section should be reviewed in conjunction with the daily average earning
assets balances and interest bearing liabilities and funding tables found on
page 21.
Nine months ended September 30, 2004 compared to the nine months ended September
30, 2003:
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 interest income of $18,504,318, for the
nine months ended September 30, 2004 compared to net interest income of
$16,806,712, for the nine months ended September 30, 2003. This growth in net
interest income was the result of earning asset growth and lower funding costs.
While interest rates have increased during 2004 from 2003, asset yields continue
to be low and spreads on deposits remain narrow, a reflection of the ongoing
effect of low market interest rates, which led to a lower net interest margin
for the nine month period ended September 30, 2004 compared to the nine month
period ended September 30, 2003.
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 probable losses inherent in the loan portfolio. The
level of this allowance is dependent upon the total amount of past due and
non-performing loans, general economic conditions and management's assessment of
potential losses based upon internal credit evaluations of loan portfolios and
particular loans. Loans are principally to borrowers in central Indiana.
The provision for loan losses was $930,000 for the nine months ended September
30, 2004 compared to a $900,000 provision for loan losses for the nine months
ended September 30, 2003. Based on management's risk assessment and evaluation
of the potential losses of the loan portfolio, management believes that the
current allowance for loan losses is adequate to provide for potential losses in
the loan portfolio.
17
The following table sets forth the roll forward of the allowance for loan
losses:
Nine months ended
September 30,
2004 2003
---------- ----------
Beginning of Period $8,029,596 $7,227,000
Provision for loan losses 930,000 900,000
Losses charged to the reserve
Commercial 1,117,913 360,000
Real Estate 273,966 1,296
Consumer 93,689 2,185
Credit Cards 33,236 14,904
---------- ----------
1,518,804 378,385
Recoveries
Commercial 11,898 81,321
Real Estate 26,836 16,438
Consumer 2,121 62
Credit Cards 2,050 950
---------- ----------
42,905 98,771
---------- ----------
End of Period $7,483,697 $7,847,386
========== ==========
Allowance as a % of Loans 1.18% 1.35%
Loans past due over 30 days totaled $ 4,238,181, or .67% of total loans at
September 30, 2004 compared to $7,411,653 or 1.28% of total loans at September
30, 2003.
18
Other Operating Income
- ----------------------
The following table details the components of other operating income:
Nine months ended
September 30, $ %
2004 2003 Change Change
------------------------------------------------------------
Trust fees and commissions $ 1,839,549 $ 1,428,915 $ 410,634 28.7%
Service charges and fees on deposit accounts 1,646,582 1,845,696 (199,114) -10.8%
Building rental income 370,569 413,577 (43,008) -10.4%
Net gain on sale of mortgage loans 110,912 1,055,654 (944,742) -89.5%
Interchange income 435,752 407,506 28,246 6.9%
Net loss on securities (83,739) - (83,739)
Other 1,062,071 1,033,505 28,566 2.8%
------------------------------------------------------------
Total operating income $ 5,381,696 $ 6,184,853 $ (803,157) -13.0%
------------------------------------------------------------
Other operating income for the nine months ended September 30, 2004 decreased as
compared to the nine months ended September 30, 2003.
Trust fees and commissions increased for the nine months ended September 30,
2004 as compared to the nine months ended September 30, 2003. The net increase
in trust income is attributable to the overall price appreciation in the stock
and treasury markets and an increase in assets under management. Trust fees and
commissions for the nine months ended September 30, 2003 was lower due to a
change in accounting estimate related to the accrual of fees.
Service charges and fees on deposit accounts decreased for the nine months ended
September 30, 2004 as compared to the nine months ended September 30, 2003 and
is attributable to lower overdraft and NSF fees assessed. Also, contributing to
the decrease was an increase in the earnings credit rate paid on business demand
deposits which decreases the service charges assessed.
Rental income from the other tenants in the Corporation's main office building
decreased for the nine months ended September 30, 2004 as compared to the nine
months ended September 30, 2003 due to fewer tenants in the building in 2004
compared to the same period the previous year and the Corporation occupying more
space in the building.
Due to the sale of bulk mortgages that were generated during 2003 as a result of
lower interest rates, the net gain on the sale of mortgages decreased for the
nine months ended September 30, 2004 as compared to the nine months ended
September 30, 2003.
During the first quarter of 2004, a net loss on the sale of two available for
sale securities was recorded. The securities were replaced with higher yielding
investments to place the portfolio in a better position during a period of
rising interest rates.
19
Other Operating Expenses
- ------------------------
The following table details the components of other operating expense:
Nine months ended
September 30, $ %
2004 2003 Change Change
----------------------------------------------------------
Salaries, wages and employee benefits $ 10,277,260 $ 9,067,270 $ 1,209,990 13.3%
Occupancy expense 1,061,515 1,063,163 (1,648) -0.2%
Furniture and equipment expense 618,155 652,704 (34,549) -5.3%
Professional services 878,648 685,091 193,557 28.3%
Data processing 1,082,229 1,021,033 61,196 6.0%
Business development 768,400 680,914 87,486 12.8%
Valuation of allowance for mortgage servicing rights (157,499) 292,476 (449,975) -153.9%
Other expenses 2,346,770 2,344,703 2,067 0.1%
----------------------------------------------------------
Total other operating expenses $ 16,875,478 $ 15,807,354 $ 1,068,124 6.8%
----------------------------------------------------------
Other operating expenses for the nine months ended September 30, 2004 increased
as compared to the nine months ended September 30, 2003.
Salaries, wages and employee benefits increased due to annual merit increases of
employees, increased FICA expense related to the cliff vesting of restricted
stock for officers of the Bank, increase in bonus accrual, employee relations,
and training expense.
Professional services expense increased due to increased accounting fees related
to the implementation of the Sarbanes-Oxley Act of 2002, legal fees, advertising
agency fees, and consulting fees.
Data processing expenses increased primarily due to increased service bureau
fees relating to increased transaction activity by the Bank and trust
department.
Business development expenses increased due to increased advertising, customer
entertainment and customer relations costs.
Due to the overall lower interest rates in 2002 and 2003, there were many
mortgage loan refinances and the Corporation had increased mortgage sales. As of
December 2003, a valuation reserve of $606,276 was recognized for mortgage
servicing rights. The valuation reserve for mortgage servicing rights decreased
as of September 30, 2004 as compared to September 30, 2003. The Corporation
recorded a partial recovery of previous period impairments of the mortgage
servicing rights due to higher interest rates which caused a significant slow
down in mortgage refinances and prepayments of existing mortgages.
20
AVERAGE EARNING ASSETS
The following table is a summary of the daily average of earning assets:
Nine months ended
September 30, $ %
2004 2003 Change Change
---------------------------------------------------------------
Loans
Commercial $ 322,800,000 $ 285,500,000 $ 37,300,000 13.1%
Real Estate - Commercial 119,700,000 121,000,000 (1,300,000) -1.1%
Real Estate - Residential 148,900,000 133,700,000 15,200,000 11.4%
Other 12,400,000 14,400,000 (2,000,000) -13.9%
---------------------------------------------------------------
Total loans 603,800,000 554,600,000 49,200,000 8.9%
Investments 156,800,000 114,800,000 42,000,000 36.6%
Federal Funds Sold 42,000,000 38,900,000 3,100,000 8.0%
Reverse Repurchase Agreements 10,600,000 9,600,000 1,000,000 10.4%
---------------------------------------------------------------
Total Earning Assets $ 813,200,000 $ 717,900,000 $ 95,300,000 13.3%
===============================================================
AVERAGE INTEREST BEARING LIABILITIES AND FUNDING
The following table is a summary of the daily average of interest bearing
liabilities and funding:
Nine months ended
September 30, $ %
2004 2003 Change Change
-------------------------------------------------------------
Noninterest bearing deposits $ 147,900,000 $ 136,400,000 $ 11,500,000 8.4%
Interest bearing deposits 534,800,000 445,600,000 89,200,000 20.0%
-------------------------------------------------------------
Total core deposits 682,700,000 582,000,000 100,700,000 17.3%
Security repurchase agreements 72,500,000 70,600,000 1,900,000 2.7%
FHLB advances 35,000,000 47,400,000 (12,400,000) -26.2%
Subordinated debt 3,700,000 900,000 2,800,000 311.1%
Long-term debt 13,900,000 13,500,000 400,000 3.0%
Shareholders' equity 53,900,000 49,900,000 4,000,000 8.0%
-------------------------------------------------------------
Total funding $ 861,700,000 $ 764,300,000 $ 97,400,000 12.7%
=============================================================
Total interest bearing liabilities $ 659,900,000 $ 578,000,000 $ 81,900,000 14.2%
Total interest expense/
total interest bearing liabilities 1.9% 2.1%
21
Liquidity and Interest Rate Sensitivity
The Corporation must maintain an adequate liquidity position in order to respond
to the short-term demand for funds caused by withdrawals from deposit accounts,
extensions of credit and for the payment of operating expenses. Maintaining this
position of adequate liquidity is accomplished through the management of a
combination of liquid assets - those which can be converted into cash - and
access to additional sources of funds. 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 the first nine months
of 2004. Deposits are the most significant funding source and loans are the most
significant use of funds for the nine months ended September 30, 2004 and 2003.
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 September 30, 2004 or
2003.
Primary liquid assets of the Corporation are cash and due from banks, federal
funds sold, investments held as available for sale, and maturing loans. Federal
funds sold represented the Corporation's primary source of immediate liquidity
and were maintained at a level adequate to meet immediate needs. Federal funds
sold averaged approximately $42,000,000 for the nine months ended September 30,
2004, an increase of approximately $3,100,000 from $38,900,000 for the nine
months ended September 30, 2003. Reverse repurchase agreements may serve as a
source of liquidity, but are primarily used as collateral for customer balances
in overnight repurchase agreements. Maturities in the Corporation's loan and
investment portfolios are monitored regularly to manage the maturity dates of
deposits to coincide with long-term loans and investments. Other assets and
liabilities are also monitored to provide the proper balance between liquidity,
safety, and profitability. This monitoring process must be continuous due to the
constant flow of cash which is inherent in a financial institution.
The Corporation'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.
The Corporation actively manages its interest rate sensitive assets and
liabilities to reduce the impact of interest rate fluctuations. At September 30,
2004, the Corporation's rate sensitive assets exceeded rate sensitive
liabilities due within one year by $24,570,000.
As part of managing liquidity, the Corporation monitors its loan to deposit
ratio on a daily basis. At September 30, 2004 the ratio was 88.3 percent.
The Corporation experienced an decrease in cash and cash equivalents, another
primary source of liquidity, of $5,076,607 during the first nine months of 2004.
The primary financing activity of deposit growth provided net cash of
$81,949,822. Lending used $65,578,071, investments used $27,870,556 and
increasing federal funds sold used $28,747,798 and decreasing reverse repurchase
agreements provided $10,000,000.
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
22
high quality that generate a supplemental source of income in concert with the
overall asset/liability policies and strategies of the Bank.
Capital Resources
The Corporation's only sources of capital since commencing operations have been
from issuance of common stock, results of operations, issuance of long-term debt
to a non-affiliated third party, and the issuance of company obligated
mandatorily redeemable preferred capital securities.
The Corporation maintains a Revolving Credit Agreement with Harris Trust and
Savings Bank in the amount of $5,000,000 that will mature September 28, 2005. As
of September 30, 2004, there were no amounts outstanding under this Revolving
Credit Agreement.
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 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 first advance was made in the amount of $2,000,000 on June 6, 2003.
The second advance was made in the amount of $3,000,000 on May 3, 2004. The
final maturity date of the loan is June 6, 2010. The outstanding principal
balance is due at maturity, but prepayment of the principal balance is permitted
prior to maturity with prior consent from the Federal Reserve.
Under the terms of the agreement, 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 3.70%. Interest payments are due at the expiration of the fixed term
option. During June 2004, the Bank made a $1,000,000 dividend to the Corporation
from the loan proceeds to accommodate the stock repurchase program as discussed
on page 24 and in Item 2 (c) on page 27.
23
The Bank has incurred indebtedness pursuant to FHLB advances as follows:
Amount Rate Maturity
------ ---- --------
$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
-------------
$32,000,000
=============
The Bank may add indebtedness of this nature in the future if determined to be
in the best interest of the Bank.
Capital for the Bank is at or above the well-capitalized regulatory requirements
at September 30, 2004. Pertinent capital ratios for the Bank as of September 30,
2004 are as follows:
Well Adequately
Actual Capitalized Capitalized
------ ----------- -----------
Tier 1 risk-based capital ratio 8.52% 6.0% 4.0%
Total risk-based capital ratio 10.41% 10.0% 8.0%
Leverage ratio 6.43% 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. The Bank declared and made a $1,000,000 dividend to the
Corporation during the nine month period ended September 30, 2004 and a dividend
of $1,650,000 was declared and made during the nine month period ended September
30, 2003. No loans from the Bank to the Corporation were made during the nine
month period ended September 30, 2004 or 2003.
In January 2003, the Board of Directors of the Corporation authorized a stock
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.
In January 2003, the Board of the Corporation authorized a separate stock
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.
24
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.
Item 3. 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.
At September 30, 2004 the interest rate risk position of the Corporation was
asset sensitive. Maintaining an asset sensitive interest rate risk position
means that net income should increase as rates rise and decrease as rates fall.
See further discussion liquidity and interest rate sensitivity on pages 22 - 23
of this report.
There have been no material changes in the quantitative analysis used by the
Corporation since filing the 2003 Form 10-K, for further discussion of the
quantitative analysis used by the Corporation refer to page 38 of the 2003 Form
10-K filed on March 26, 2004.
25
Item 4. Controls and Procedures
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
13a-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
end of the period covered by this Form 10-Q, are effective.
Changes in Internal Controls. There have been no significant changes in internal
control over financial reporting that occurred during the quarter ended
September 30, 2004, that have materially affected, or are reasonably likely to
materially affect, the registrant's internal control over financial reporting.
Limitations on the Effectiveness of Controls. The Corporation's management,
including its principal executive officer and principal financial officer, does
not expect that the Corporation's disclosure controls and procedures and other
internal controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Corporation have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control.
The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can only be
reasonable assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, control 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.
CEO and CFO Certifications. Appearing as an exhibit to this report there are
Certifications of the Corporation's principal executive officer and principal
financial officer. The Certifications are required in accord with Section 302 of
the Sarbanes-Oxley Act of 2002 (the "Section 302 Certifications"). This Item of
this report which you are currently reading is the information concerning the
evaluation referred to in the Section 302 Certifications and this information
should be read in conjunction with the Section 302 Certifications for a more
complete understanding of the topics presented.
26
Part II - Other Information.
Item 1. Legal Proceedings
Neither The National Bank of Indianapolis Corporation nor its
subsidiaries are involved in any pending legal proceedings at this
time, other than routine litigation incidental to its business.
Item 2. Unregistered Sales of Equity and Use of Proceeds
(a) On July 14, 2004 the Corporation sold a total of 35,000 shares of
common stock for an aggregate amount of $350,000 to one officer
of the Corporation pursuant to the exercise of stock options by
the officer.
On July 22, 2004 the Corporation sold a total of 2,500 shares of
common stock for an aggregate amount of $32,500 to one director
of the Corporation pursuant to the exercise of stock options by
the officer.
On August 11, 2004 the Corporation sold a total of 3,000 shares
of common stock for an aggregate amount of $30,000 to one officer
of the Corporation pursuant to the exercise of stock options by
the officer.
On September 3, 2004 the Corporation sold a total of 431 shares
of common stock for an aggregate amount of $11,853 to one officer
of the Corporation pursuant to the exercise of stock options by
the officer.
On September 22, 2004 the Corporation sold a total of 2,000
shares of common stock for an aggregate amount of $38,000 to one
officer of the Corporation pursuant to the exercise of stock
options by the officer.
All of these shares were sold in private placements pursuant to
Section 4(2) of the Securities Act of 1933.
(b) Not applicable.
(c) The following table sets forth the issuer repurchases of equity
securities that are registered by the Corporation pursuant to
Section 12 of the 1934 Act during the second quarter of 2004:
27
ISSUER PURCHASES OF EQUITY SECURITIES
- ------------------------------------------------------------------------------------------------
Maximum Number
Total Number of (or Approximate
Shares Purchased Dollar Value) of
as Part of Shares that May
Total Number Publicly Yet Be Purchased
of Shares Average Price Announced Plans Under the Plans
Period Purchased Paid per Share or Programs or Programs
- ------------------------------------------------------------------------------------------------
07/01/04 -
07/30/04 27,399 $32.97 250,130 $5,078,881
- ------------------------------------------------------------------------------------------------
08/01/04 -
08/31/04 9,027 $33.17 259,157 $4,779,455
- ------------------------------------------------------------------------------------------------
09/01/04 -
09/30/04 2,326 $33.75 261,483 $4,700,953
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Total 38,752 - * 770,770 -**
- ------------------------------------------------------------------------------------------------
* Weighted average price per share for the period July 2004 to
September 2004 was $33.06
** As of September 30, 2004 $4,700,953 is still available for
Program One and Program Two
In January 2003 the Board of Directors of the Corporation
authorized a repurchase program entitled "Program One" and
"Program Two". Program One 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 their
stock. Program One was initially disclosed in the September 30,
2003 Form 10-Q. Program Two 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. On June 3, 2003, a
letter was sent to all shareholders announcing the Board's
authorization of Program Two. Neither plan was terminated during
the first nine months of 2004.
Item 3. Defaults Upon Senior Securities - Not applicable
Item 4. Submission of Matters to a Vote of Security Holders -
Not applicable
Item 5. Other Information - Not applicable
Item 6. Exhibits.
31.1 Certificate of Chief Executive Officer pursuant to Rule
13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of
1934, as amended
31.2 Certificate of Chief Financial Officer pursuant to Rule
13a-14(a)/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
Date Item Reported
---- -------------
August 9, 2004 Letter to Shareholders of the Registrant, dated
August 9, 2004
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 12, 2004
THE NATIONAL BANK OF INDIANAPOLIS CORPORATION
/s/ Debra L. Ross
---------------------------------------------
Debra L. Ross
Chief Financial Officer
(Principal Financial Officer)
29
EXHIBIT INDEX
31.1 Chief Executive Officer Certification pursuant to
Rule 13a-14(a)/Rule 15d-14(a)
31.2 Chief Financial Officer Certification pursuant to
Rule 13a-14(a)/Rule 15d-14(a)
32.1 Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350
32.2 Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350