Attached files
file | filename |
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EX-32.1 - EXHIBIT 32.1 - NATIONAL BANK OF INDIANAPOLIS CORP | c07488exv32w1.htm |
EX-32.2 - EXHIBIT 32.2 - NATIONAL BANK OF INDIANAPOLIS CORP | c07488exv32w2.htm |
EX-31.1 - EXHIBIT 31.1 - NATIONAL BANK OF INDIANAPOLIS CORP | c07488exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - NATIONAL BANK OF INDIANAPOLIS CORP | c07488exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
OR
o | 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 | |
incorporation or organization) | Identification No.) | |
107 North Pennsylvania Street | ||
Indianapolis, Indiana | 46204 | |
(Address of principal executive offices) | (Zip Code) |
(317) 261-9000
(Registrants telephone number, including area code)
(Registrants 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or
such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
Common Stock | Outstanding at November 2, 2010 | |
Common Stock, no par value per share | 2,317,750 |
Table of Contents
The National Bank of Indianapolis Corporation
The National Bank of Indianapolis Corporation
Report on Form 10-Q
for Quarter Ended
September 30, 2010
for Quarter Ended
September 30, 2010
1 | ||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
16 | ||||||||
31 | ||||||||
32 | ||||||||
33 | ||||||||
33 | ||||||||
33 | ||||||||
34 | ||||||||
34 | ||||||||
34 | ||||||||
34 | ||||||||
36 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
Table of Contents
Part I Financial Information
Item 1. Financial Statements
The National Bank of Indianapolis Corporation
Consolidated Balance Sheets
(Unaudited, Dollars in thousands except share data)
September 30, 2010 | December 31, 2009 | |||||||
Assets |
||||||||
Cash and cash equivalents |
||||||||
Cash and due from banks |
$ | 182,905 | $ | 149,375 | ||||
Reverse repurchase agreements |
1,000 | 1,000 | ||||||
Federal funds sold |
15,137 | 1,242 | ||||||
Total cash and cash equivalents |
199,042 | 151,617 | ||||||
Investment securities |
||||||||
Available-for-sale securities |
84,519 | 67,296 | ||||||
Held-to-maturity securities (Fair value of $96,472 at
September 30, 2010 and $96,588 at December 31, 2009) |
91,871 | 94,922 | ||||||
Total investment securities |
176,390 | 162,218 | ||||||
Loans held for sale |
5,474 | 884 | ||||||
Loans |
905,409 | 863,838 | ||||||
Less: Allowance for loan losses |
(15,598 | ) | (13,716 | ) | ||||
Net loans |
889,811 | 850,122 | ||||||
Premises and equipment |
24,017 | 24,532 | ||||||
Deferred tax asset |
8,592 | 7,133 | ||||||
Accrued interest |
4,558 | 4,199 | ||||||
Federal Reserve and FHLB stock |
3,150 | 3,150 | ||||||
Other real estate owned |
9,980 | 8,432 | ||||||
Other assets |
21,250 | 21,343 | ||||||
Total assets |
$ | 1,342,264 | $ | 1,233,630 | ||||
Liabilities and shareholders equity |
||||||||
Deposits: |
||||||||
Noninterest-bearing demand deposits |
$ | 217,869 | $ | 192,705 | ||||
Money market and savings deposits |
742,888 | 650,353 | ||||||
Time deposits over $100,000 |
108,330 | 131,938 | ||||||
Other time deposits |
90,806 | 77,069 | ||||||
Total deposits |
1,159,893 | 1,052,065 | ||||||
Other short term borrowings |
74,840 | 81,314 | ||||||
Short term debt |
3,913 | 4,138 | ||||||
Subordinated debt |
5,000 | 5,000 | ||||||
Junior subordinated debentures owed to unconsolidated subsidiary trust |
13,918 | 13,918 | ||||||
Other liabilities |
7,440 | 4,164 | ||||||
Total liabilities |
1,265,004 | 1,160,599 | ||||||
Shareholders equity: |
||||||||
Preferred stock, no par value authorized 5,000,000 shares |
| | ||||||
Common stock, no par value authorized 15,000,000 shares
issued 2,863,941 shares at September 30, 2010 and
2,840,382 shares at December 31, 2009 |
35,190 | 34,440 | ||||||
Treasury stock, at cost; 545,573 shares at September 30,
2010 and 533,204 shares at December 31, 2009 |
(20,818 | ) | (20,346 | ) | ||||
Additional paid in capital |
12,196 | 10,873 | ||||||
Retained earnings |
50,281 | 48,067 | ||||||
Accumulated other comprehensive income (loss) |
411 | (3 | ) | |||||
Total shareholders equity |
77,260 | 73,031 | ||||||
Total liabilities and shareholders equity |
$ | 1,342,264 | $ | 1,233,630 | ||||
See notes to consolidated financial statements.
1
Table of Contents
The National Bank of Indianapolis Corporation
Consolidated Statements of Income
(Unaudited, Dollars in thousands except per share data)
Three months ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Interest income: |
||||||||
Interest and fees on loans |
$ | 10,739 | $ | 10,866 | ||||
Interest on investment securities taxable |
519 | 745 | ||||||
Interest on investment securities nontaxable |
534 | 513 | ||||||
Interest on federal funds sold |
10 | | ||||||
Interest on due from banks |
96 | 61 | ||||||
Total interest income |
11,898 | 12,185 | ||||||
Interest expense: |
||||||||
Interest on deposits |
1,745 | 2,300 | ||||||
Interest on other short term borrowings |
69 | 49 | ||||||
Interest on short term debt |
47 | 22 | ||||||
Interest on long term debt |
391 | 392 | ||||||
Total interest expense |
2,252 | 2,763 | ||||||
Net interest income |
9,646 | 9,422 | ||||||
Provision for loan losses |
1,875 | 3,955 | ||||||
Net interest income after provision for loan losses |
7,771 | 5,467 | ||||||
Other operating income: |
||||||||
Wealth management fees |
1,263 | 1,226 | ||||||
Service charges and fees on deposit accounts |
759 | 792 | ||||||
Rental income |
59 | 66 | ||||||
Mortgage banking income |
1,122 | 188 | ||||||
Interchange income |
330 | 268 | ||||||
Other |
675 | 451 | ||||||
Total other operating income |
4,208 | 2,991 | ||||||
Other operating expenses: |
||||||||
Salaries, wages and employee benefits |
5,249 | 5,102 | ||||||
Occupancy |
610 | 631 | ||||||
Furniture and equipment |
295 | 331 | ||||||
Professional services |
535 | 472 | ||||||
Data processing |
736 | 656 | ||||||
Business development |
438 | 448 | ||||||
FDIC Insurance |
505 | 411 | ||||||
Non performing assets |
964 | 135 | ||||||
Other |
1,805 | 942 | ||||||
Total other operating expenses |
11,137 | 9,128 | ||||||
Income (loss) before tax |
842 | (670 | ) | |||||
Federal and state income tax (benefit) |
86 | (462 | ) | |||||
Net income (loss) |
$ | 756 | $ | (208 | ) | |||
Basic earnings (loss) per share |
$ | 0.33 | $ | (0.09 | ) | |||
Diluted earnings (loss) per share |
$ | 0.32 | $ | (0.09 | ) | |||
See notes to consolidated financial statements.
2
Table of Contents
The National Bank of Indianapolis Corporation
Consolidated Statements of Income
(Unaudited, Dollars in thousands except per share data)
Nine months ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Interest income: |
||||||||
Interest and fees on loans |
$ | 31,725 | $ | 31,542 | ||||
Interest on investment securities taxable |
1,638 | 2,406 | ||||||
Interest on investment securities nontaxable |
1,549 | 1,557 | ||||||
Interest on federal funds sold |
15 | 3 | ||||||
Interest on due from banks |
272 | 137 | ||||||
Total interest income |
35,199 | 35,645 | ||||||
Interest expense: |
||||||||
Interest on deposits |
5,441 | 7,362 | ||||||
Interest on other short term borrowings |
213 | 134 | ||||||
Interest on short term debt |
141 | 64 | ||||||
Interest on long term debt |
1,167 | 1,194 | ||||||
Total interest expense |
6,962 | 8,754 | ||||||
Net interest income |
28,237 | 26,891 | ||||||
Provision for loan losses |
4,344 | 7,855 | ||||||
Net interest income after provision for loan losses |
23,893 | 19,036 | ||||||
Other operating income: |
||||||||
Wealth management fees |
3,934 | 3,647 | ||||||
Service charges and fees on deposit accounts |
2,277 | 2,316 | ||||||
Rental income |
204 | 251 | ||||||
Mortgage banking income |
1,602 | 1,137 | ||||||
Interchange income |
928 | 721 | ||||||
Net loss on sale of securities |
(5 | ) | | |||||
Other |
1,508 | 1,491 | ||||||
Total other operating income |
10,448 | 9,563 | ||||||
Other operating expenses: |
||||||||
Salaries, wages and employee benefits |
17,362 | 15,859 | ||||||
Occupancy |
1,898 | 1,863 | ||||||
Furniture and equipment |
954 | 1,031 | ||||||
Professional services |
1,678 | 1,404 | ||||||
Data processing |
2,263 | 2,055 | ||||||
Business development |
1,328 | 1,274 | ||||||
FDIC Insurance |
1,540 | 1,708 | ||||||
Non performing assets |
1,268 | 420 | ||||||
Other |
3,532 | 2,784 | ||||||
Total other operating expenses |
31,823 | 28,398 | ||||||
Income before tax |
2,518 | 201 | ||||||
Federal and state income tax (benefit) |
304 | (515 | ) | |||||
Net income |
$ | 2,214 | $ | 716 | ||||
Basic earnings per share |
$ | 0.96 | $ | 0.31 | ||||
Diluted earnings per share |
$ | 0.93 | $ | 0.31 | ||||
See notes to consolidated financial statements.
3
Table of Contents
The National Bank of Indianapolis Corporation
Consolidated Statements of Cash Flows
(Unaudited, Dollars in thousands)
Nine months ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Operating Activities |
||||||||
Net Income |
$ | 2,214 | $ | 716 | ||||
Adjustments to reconcile net income to net cash provided (used) by operating activities: |
||||||||
Provision for loan losses |
4,344 | 7,855 | ||||||
Proceeds from sale of loans |
50,286 | 57,752 | ||||||
Origination of loans held for sale |
(42,933 | ) | (56,783 | ) | ||||
Depreciation and amortization |
1,136 | 1,146 | ||||||
Fair value adjustment on mortgage servicing rights |
713 | 347 | ||||||
Loss on sales of investment securities available for sale |
5 | | ||||||
Gain on sale of loans |
(2,006 | ) | (1,230 | ) | ||||
Net loss on sales and writedowns of other real estate and
repossessions |
600 | 120 | ||||||
Net increase in deferred income taxes |
(1,730 | ) | (2,019 | ) | ||||
Net increase in bank owned life insurance |
(291 | ) | (308 | ) | ||||
Excess tax benefit from deferred stock compensation |
(56 | ) | (399 | ) | ||||
Board stock compensation |
120 | 100 | ||||||
Net accretion of discounts and amortization of premiums on
investments |
868 | 190 | ||||||
Compensation expense related to restricted stock and options |
1,361 | 1,128 | ||||||
Changes in assets and liabilities: |
||||||||
Accrued interest receivable |
(359 | ) | 441 | |||||
Other assets |
(329 | ) | (4,407 | ) | ||||
Other liabilities |
3,332 | 6,789 | ||||||
Net cash provided provided by operating activities |
17,275 | 11,438 | ||||||
Investing Activities |
||||||||
Proceeds from maturities of investment securities held to maturity |
18,328 | 15,855 | ||||||
Proceeds from maturities of investment securities available for sale |
29,775 | 51,000 | ||||||
Proceeds from sales of investment securities held to maturity |
477 | | ||||||
Purchases of investment securities held to maturity |
(16,082 | ) | (31,426 | ) | ||||
Purchases of investment securities available for sale |
(46,858 | ) | (57,986 | ) | ||||
Net (increase) decrease in loans |
(59,195 | ) | 13,953 | |||||
Proceeds from sales of other real estate and repossessions |
3,077 | 1,668 | ||||||
Purchases of bank premises and equipment |
(621 | ) | (1,829 | ) | ||||
Net cash used by investing activities |
(71,099 | ) | (8,765 | ) | ||||
Financing Activities |
||||||||
Net increase in deposits |
107,828 | 115,219 | ||||||
Net increase (decrease) in short term borrowings |
(6,474 | ) | 3,463 | |||||
Net change in revolving line of credit |
(225 | ) | | |||||
Income tax benefit from deferred stock compensation |
56 | 399 | ||||||
Proceeds from issuance of stock |
536 | 1,057 | ||||||
Repurchase of stock |
(472 | ) | (1,713 | ) | ||||
Net cash provided by financing activities |
101,249 | 118,425 | ||||||
Increase in cash and cash equivalents |
47,425 | 121,098 | ||||||
Cash and cash equivalents at beginning of year |
151,617 | 31,420 | ||||||
Cash and cash equivalents at end of year |
$ | 199,042 | $ | 152,518 | ||||
Interest paid |
$ | 7,755 | $ | 9,100 | ||||
Income taxes paid (refunded) |
$ | (382 | ) | $ | 78 | |||
See notes to consolidated financial statements.
4
Table of Contents
The National Bank of Indianapolis Corporation
Consolidated Statement of Shareholders Equity
(Unaudited, Dollars in thousands except share data)
Accumulated | ||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||
Common | Treasury | Paid In | Retained | Comprehensive | ||||||||||||||||||||
Stock | Stock | Capital | Earnings | Income | TOTAL | |||||||||||||||||||
Balance at December 31, 2008 |
$ | 33,136 | $ | (18,481 | ) | $ | 8,766 | $ | 47,955 | $ | 836 | $ | 72,212 | |||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net income |
| | | 716 | | 716 | ||||||||||||||||||
Other comprehensive income |
||||||||||||||||||||||||
Net unrealized loss
on investments, net
of tax of $482 |
| | | | (751 | ) | (751 | ) | ||||||||||||||||
Total comprehensive income |
(35 | ) | ||||||||||||||||||||||
Income tax benefit from deferred stock compensation |
| | 399 | | | 399 | ||||||||||||||||||
Issuance of stock 57,271 shares of common stock under
stock-based compensation plans |
1,162 | | (5 | ) | | | 1,157 | |||||||||||||||||
Repurchase of stock 45,184 shares of common stock |
| (1,713 | ) | | | | (1,713 | ) | ||||||||||||||||
Stock based compensation earned |
| | 1,128 | | | 1,128 | ||||||||||||||||||
Balance at September 30, 2009 |
$ | 34,298 | $ | (20,194 | ) | $ | 10,288 | $ | 48,671 | $ | 85 | $ | 73,148 | |||||||||||
Balance at December 31, 2009 |
$ | 34,440 | $ | (20,346 | ) | $ | 10,873 | $ | 48,067 | $ | (3 | ) | $ | 73,031 | ||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net income |
| | | 2,214 | | 2,214 | ||||||||||||||||||
Other comprehensive income |
||||||||||||||||||||||||
Net unrealized gain
on investments, net
of tax of $270 |
| | | | 414 | 414 | ||||||||||||||||||
Total comprehensive income |
2,628 | |||||||||||||||||||||||
Income tax benefit from deferred stock compensation |
| | 56 | | | 56 | ||||||||||||||||||
Issuance of 23,559 shares of common stock under
stock-based compensation plans |
750 | | (94 | ) | | | 656 | |||||||||||||||||
Repurchase of 12,369 shares of common stock |
| (472 | ) | | | | (472 | ) | ||||||||||||||||
Stock based compensation earned |
| | 1,361 | | | 1,361 | ||||||||||||||||||
Balance at September 30, 2010 |
$ | 35,190 | $ | (20,818 | ) | $ | 12,196 | $ | 50,281 | $ | 411 | $ | 77,260 | |||||||||||
See notes to consolidated financial statements.
5
Table of Contents
The National Bank of Indianapolis Corporation
Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)
($ in thousands, except share and per share data)
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). 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, 2010, are not necessarily indicative of the results that may be expected for
the year ended December 31, 2010. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Corporations Form 10-K for the year ended
December 31, 2009.
Note 2: Investment Securities
The following is a summary of available-for-sale and held-to-maturity securities:
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gain | Loss | Value | |||||||||||||
September 30, 2010 |
||||||||||||||||
Available-for-sale |
||||||||||||||||
U.S. Treasury securities |
$ | 12,200 | $ | | $ | | $ | 12,200 | ||||||||
U.S. Government agencies |
71,640 | 681 | 2 | 72,319 | ||||||||||||
Total available-for-sale |
$ | 83,840 | $ | 681 | $ | 2 | $ | 84,519 | ||||||||
Held-to-maturity |
||||||||||||||||
Municipal securities |
$ | 58,094 | $ | 3,614 | $ | | $ | 61,708 | ||||||||
Collateralized mortgage obligations, residential |
31,208 | 934 | | 32,142 | ||||||||||||
Mortgage backed securities, residential |
2,419 | 53 | | 2,472 | ||||||||||||
Other securities |
150 | | | 150 | ||||||||||||
Total Held-to-maturity |
$ | 91,871 | $ | 4,601 | $ | | $ | 96,472 | ||||||||
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gain | Loss | Value | |||||||||||||
December 31, 2009 |
||||||||||||||||
Available-for-sale |
||||||||||||||||
U.S. Treasury securities |
$ | 506 | $ | | $ | | $ | 506 | ||||||||
U.S. Government agencies |
66,795 | 97 | 102 | 66,790 | ||||||||||||
Total available-for-sale |
$ | 67,301 | $ | 97 | $ | 102 | $ | 67,296 | ||||||||
Held-to-maturity |
||||||||||||||||
Municipal securities |
$ | 54,913 | $ | 1,805 | $ | 47 | $ | 56,671 | ||||||||
Collateralized mortgage obligations, residential |
30,124 | 29 | 232 | 29,921 | ||||||||||||
Mortgage backed securities, residential |
9,735 | 111 | | 9,846 | ||||||||||||
Other securities |
150 | | | 150 | ||||||||||||
Total Held-to-maturity |
$ | 94,922 | $ | 1,945 | $ | 279 | $ | 96,588 | ||||||||
6
Table of Contents
Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)
($ in thousands, except share and per share data)
The fair value of debt securities and carrying amount, if different, at September 30, 2010, by
contractual maturity were as follows. Securities not due at a single maturity date, primarily
mortgage-backed securities, are shown separately. There was one sale of a held-to-maturity
municipal security with a net carrying amount of $483 thousand that was sold for a loss of $5
thousand during the nine month period ending September 30, 2010. Since the security had a
non-rated issuer, a credit review of the municipality was conducted. As a result of the review, it
was determined that the investment was no longer considered a pass asset and thus below investment
grade. Per investment policy, the Corporation is prohibited from holding any securities below
investment grade.
September 30, 2010 | ||||||||
Amortized | Fair | |||||||
Cost | Value | |||||||
Available-for-sale |
||||||||
Due in one year or less |
$ | 12,200 | $ | 12,200 | ||||
Due from one to five years |
71,640 | 72,319 | ||||||
Total |
$ | 83,840 | $ | 84,519 | ||||
Held-to-maturity |
||||||||
Due in one year or less |
$ | 6,843 | $ | 6,888 | ||||
Due from one to five years |
5,580 | 5,978 | ||||||
Due from five to ten years |
37,536 | 40,330 | ||||||
Due after ten years |
8,285 | 8,662 | ||||||
CMO/Mortgage-backed, residential |
33,627 | 34,614 | ||||||
Total |
$ | 91,871 | $ | 96,472 | ||||
Investment securities with a carrying value of approximately $88 million and $83 million were
pledged as collateral for Wealth Management accounts and securities sold under agreements to
repurchase at September 30, 2010, and December 31, 2009, respectively.
Securities with unrealized losses at September 30, 2010, and December 31, 2009, aggregated by
investment category and length of time that individual securities have been in a continuous
unrealized loss position, are as follows:
Less Than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Loss | Value | Loss | Value | Loss | |||||||||||||||||||
September 30, 2010 |
||||||||||||||||||||||||
Available-for-sale |
||||||||||||||||||||||||
U.S. Government agencies |
$ | 16,090 | $ | 2 | $ | | $ | | $ | 16,090 | $ | 2 | ||||||||||||
Total available-for-sale |
$ | 16,090 | $ | 2 | $ | | $ | | $ | 16,090 | $ | 2 | ||||||||||||
Held-to-maturity |
||||||||||||||||||||||||
None |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
December 31, 2009 |
||||||||||||||||||||||||
Available-for-sale |
||||||||||||||||||||||||
U.S. Government agencies |
$ | 36,515 | $ | 102 | $ | | $ | | $ | 36,515 | $ | 102 | ||||||||||||
Total available-for-sale |
$ | 36,515 | $ | 102 | $ | | $ | | $ | 36,515 | $ | 102 | ||||||||||||
Held-to-maturity |
||||||||||||||||||||||||
Collateralized mortgage
obligations,
residential |
$ | 24,851 | $ | 232 | $ | | $ | | $ | 24,851 | $ | 232 | ||||||||||||
Municipal securities |
1,796 | 10 | 1,424 | 37 | 3,220 | 47 | ||||||||||||||||||
Total Held-to-maturity |
$ | 26,647 | $ | 242 | $ | 1,424 | $ | 37 | $ | 28,071 | $ | 279 | ||||||||||||
7
Table of Contents
Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)
($ in thousands, except share and per share data)
In determining other-than-temporary-impairment (OTTI) for debt securities, management
considers many factors, including: (1) the length of time and the extent to which the fair value
has been less than cost, (2) the financial condition and near-term prospects of the issuer,
(3) whether the market decline was affected by macroeconomic conditions, and (4) whether the
Company has the intent to sell the debt security or more likely than not will be required to sell
the debt security before its anticipated recovery. The assessment of whether an
other-than-temporary-impairment exists involves a high degree of subjectivity and judgment and is
based on the information available to management at a point in time.
When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity
intends to sell the security or it is more likely than not it will be required to sell the security
before recovery of its amortized cost basis, less any current-period credit loss. If an entity
intends to sell or it is more likely than not it will be required to sell the security before
recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall be
recognized in earnings equal to the entire difference between the investments amortized cost basis
and its fair value at the balance sheet date. If an entity does not intend to sell the security
and it is not more likely than not that the entity will be required to sell the security before
recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into
the amount representing the credit loss and the amount related to all other factors. The amount of
the total OTTI related to the credit loss is determined based on the present value of cash flows
expected to be collected and is recognized in earnings. The amount of the total OTTI related to
other factors is recognized in other comprehensive income, net of applicable taxes. The previous
amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of
the investment.
As of September 30, 2010, the Corporation held 5 investments of which the amortized cost was
greater than fair value.
The unrealized losses for investments classified as available-for-sale is attributable to changes
in interest rates and individually is 0.01% or less of its respective amortized costs. The largest
unrealized loss relates to one security issued by the Federal Home Loan Bank. Given this
investment is backed by the U.S. Government, there is no credit risk.
Note 3: Loans
Loans, including net unamortized deferred fees and costs, consist of the following:
September 30, 2010 | December 31, 2009 | |||||||
Residential loans secured by real estate |
$ | 268,617 | $ | 253,838 | ||||
Commercial loans secured by real estate |
284,738 | 232,841 | ||||||
Construction loans |
48,289 | 75,615 | ||||||
Other commercial and industrial loans |
272,397 | 273,117 | ||||||
Consumer loans |
31,368 | 28,427 | ||||||
Total loans |
905,409 | 863,838 | ||||||
Less allowance for loan losses |
(15,598 | ) | (13,716 | ) | ||||
Total loans, net |
$ | 889,811 | $ | 850,122 | ||||
The Corporation periodically sells residential mortgage loans it originates based on the overall
loan demand of the Corporation and outstanding balances of the residential mortgage portfolio.
There were no loans pledged as collateral for FHLB advances as of September 30, 2010, and December
31, 2009.
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Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)
($ in thousands, except share and per share data)
Activity in the allowance for loan losses was as follows:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Beginning balance |
$ | 15,523 | $ | 14,077 | $ | 13,716 | $ | 12,847 | ||||||||
Loan charge offs |
(1,849 | ) | (1,171 | ) | (2,566 | ) | (3,903 | ) | ||||||||
Recoveries |
49 | 25 | 104 | 87 | ||||||||||||
Provision for loan losses |
1,875 | 3,955 | 4,344 | 7,855 | ||||||||||||
Ending balance |
$ | 15,598 | $ | 16,886 | $ | 15,598 | $ | 16,886 | ||||||||
Note 4: Real Estate Owned
Activity in real estate owned was as follows:
Nine months ended | Twelve months ended | |||||||
September 30, 2010 | December 31, 2009 | |||||||
Balance at beginning of period |
$ | 8,432 | $ | 3,418 | ||||
Additions |
5,225 | 7,614 | ||||||
Write downs |
(731 | ) | (905 | ) | ||||
Sales |
(2,946 | ) | (1,695 | ) | ||||
Balance at end of period |
$ | 9,980 | $ | 8,432 | ||||
Expenses related to real estate owned include:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net gain on sales |
$ | (10 | ) | $ | (3 | ) | $ | (131 | ) | $ | (37 | ) | ||||
Write downs |
685 | 49 | 731 | 157 | ||||||||||||
Operating expenses,
net of rental
income |
(22 | ) | 71 | 273 | 273 | |||||||||||
$ | 653 | $ | 117 | $ | 873 | $ | 393 | |||||||||
Note 5: Mortgage Banking Activities
The unpaid principal balances of mortgage loans serviced for others were $171.4 million and $154.3
million at September 30, 2010, and December 31, 2009, respectively.
Custodial escrow balances maintained in connection with serviced loans were $1.1 million and $1.2
million at September 30, 2010, and December 31, 2009, respectively.
The following table includes activity for mortgage servicing rights:
Nine months ended | Twelve months ended | |||||||
September 30, 2010 | December 31, 2009 | |||||||
Balance at beginning of period |
$ | 1,459 | $ | 1,070 | ||||
Plus additions |
396 | 723 | ||||||
Fair value adjustments |
(713 | ) | (334 | ) | ||||
Balance at end of period |
$ | 1,142 | $ | 1,459 | ||||
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Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)
($ in thousands, except share and per share data)
Mortgage servicing rights are carried at fair value at September 30, 2010, and December 31,
2009. Fair value at September 30, 2010, was determined using discount rates ranging from 10.7% to
16.0%, prepayment speeds ranging from 7.40% to 24.44%, depending on the stratification of the
specific right, and a weighted average default rate of 0.50%. Fair value at December 31, 2009, was
determined using discount rates ranging from 11.0% to 17.0%, prepayment speeds ranging from 8.68%
to 28.92%, depending on the stratification of the specific right, and a weighted average default
rate of 0.41%.
Note 6: Subordinated Term Loan Agreement/Revolving Line of Credit
On June 29, 2007, the Bank entered into a Subordinated Debenture Purchase Agreement with U.S. Bank
in the amount of $5.0 million, which will mature on June 28, 2017. Under the terms of the
Subordinated Debenture Purchase Agreement, the Bank pays 3-month LIBOR plus 1.20% which equated to
1.76% at September 30, 2010. Interest payments are due quarterly.
On June 29, 2007, the Corporation entered into a $5.0 million revolving loan agreement with U.S.
Bank, which matured on June 27, 2009, and was renewed and matured on August 31, 2009. The
revolving loan agreement was used to provide additional liquidity support to the Corporation, if
needed. On September 5, 2008, and December 11, 2008, the Corporation drew $1.3 million and $2.9
million, respectively, on the revolving loan agreement with U.S. Bank.
On August 31, 2009, U.S. Bank renewed the revolving loan agreement which matured on August 31,
2010. As part of the renewal of the revolving loan agreement, U.S. Bank reduced the revolving loan
amount from $5.0 million to $2.0 million and $3.0 million was moved to a separate one-year term
facility with principal payments of $62.5 thousand and interest payments due quarterly. The
revolving loan agreement and one-year term facility were renewed and will now mature on August 31,
2011. Under the terms of the one-year term facility, the Corporation pays prime plus 1.25% which
equated to 4.50% at September 30, 2010.
Under the terms of the revolving loan agreement, the Corporation paid prime minus 1.25% which
equated to 2.00% through August 31, 2009, and interest payments were due quarterly. Beginning
September 1, 2009, the Corporation pays prime plus 1.25% which equated to 4.50% at September 30,
2010. In addition, beginning October 1, 2009, U.S. Bank assessed a 0.25% fee on the unused portion
of the revolving line of credit.
The revolving loan agreement contains various financial and non-financial covenants. As of
September 30, 2010, the Corporation was in compliance with all covenants.
Note 7: Trust Preferred Securities
In September 2000, the Corporation established the Trust, a Connecticut statutory business trust,
which subsequently issued $13.5 million of company obligated mandatorily redeemable capital
securities and $418 thousand of common securities. The proceeds from the issuance of both the
capital and common securities were used by the Trust to purchase from the Corporation $13.9 million
fixed rate junior subordinated debentures. The capital securities and debentures 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 a thousand dollars, 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 and the
debentures 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. The indenture, dated September 7, 2000, requires
compliance with certain non-financial covenants.
The Corporation does not have the power to direct the activities of the trust, therefore, the trust
is not consolidated in the Corporations financial statements. The junior subordinated debt
obligation issued to the Trust of $13.9 million is reflected in the Corporations consolidated
balance sheets at September 30, 2010, and December 31, 2009. The junior subordinated debentures
owed to the Trust and held by the Corporation qualify as Tier 1 capital for the Corporation under
Federal Reserve Board guidelines.
Interest payments made on the junior subordinated debentures are reported as a component of
interest expense on long-term debt.
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Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)
($ in thousands, except share and per share data)
Note 8: Stock Based Compensation
During the first quarter of 2010, four officers of the Corporation exercised options to purchase
5,300 common shares in aggregate. The weighted average exercise price was $24.68 and the weighted
average fair market value of the stock was $37.44.
During the second quarter of 2010, two directors and one officer of the Corporation exercised
options to purchase 5,600 common shares in aggregate. The weighted average exercise price was
$24.00 and the weighted average fair market value of the stock was $38.86.
During the third quarter of 2010, one officer of the Corporation exercised options to purchase
1,600 common shares in aggregate. The weighted aerage exercise price was $27.75 and the weighted
average fair market value of the stock was $39.36.
Due to the exercise of these options and the vesting of restricted stock for the nine months ended
September 30, 2010, the Corporation will receive a deduction for tax purposes for the difference
between the fair value of the stock at the date of grant and the date of exercise. The Corporation
recorded an income tax benefit of $56 thousand as additional paid in capital for the nine months
ended September 30, 2010, as per guidance issued by the Financial Accounting Standards Board (FASB)
on stock compensation.
Note 9: 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, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Basic average shares outstanding |
2,318,032 | 2,305,849 | 2,312,148 | 2,299,892 | ||||||||||||
Net income (loss) |
$ | 756 | $ | (208 | ) | $ | 2,214 | $ | 716 | |||||||
Basic net income (loss) per common share |
$ | 0.33 | $ | (0.09 | ) | $ | 0.96 | $ | 0.31 | |||||||
Diluted |
||||||||||||||||
Average shares outstanding |
2,318,032 | 2,305,849 | 2,312,148 | 2,299,892 | ||||||||||||
Nonvested restricted stock |
50,050 | 25,707 | 43,193 | 12,208 | ||||||||||||
Net effect of the assumed
exercise of stock options |
18,664 | 24,813 | 20,017 | 29,947 | ||||||||||||
Diluted average shares |
2,386,746 | 2,356,369 | 2,375,358 | 2,342,047 | ||||||||||||
Net income (loss) |
$ | 756 | $ | (208 | ) | $ | 2,214 | $ | 716 | |||||||
Diluted net income (loss) per common share |
$ | 0.32 | $ | (0.09 | ) | $ | 0.93 | $ | 0.31 | |||||||
For the three month period ending September 30, 2010, options to purchase 183,800 shares and
108,300 restricted shares were outstanding but not included in the computation of diluted earnings
per share because they were antidilutive.
For the nine month period ending September 30, 2010, options to purchase 183,800 shares and 108,300
restricted shares were outstanding but not included in the computation of diluted earnings per
share because they were antidilutive.
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Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)
($ in thousands, except share and per share data)
For the three month period ending September 30, 2009, options to purchase 192,200 shares and 4,325
restricted shares were outstanding but not included in the computation of diluted earnings per
share because they were antidilutive.
For the nine month period ending September 30, 2009, options to purchase 192,200 shares and 70,850
restricted shares were outstanding but not included in the computation of diluted earnings per
share because they were antidilutive.
Note 10: Comprehensive Income
Comprehensive income consists of net income and other comprehensive income. Other comprehensive
income includes unrealized gains and losses on securities available-for-sale. Following is a
summary of other comprehensive income (loss):
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income (loss) |
$ | 756 | $ | (208 | ) | $ | 2,214 | $ | 716 | |||||||
Other comprehensive income (loss) |
||||||||||||||||
Change in securities available for sale: |
||||||||||||||||
Net unrealized gains (loss) during the period |
41 | (327 | ) | 684 | (1,233 | ) | ||||||||||
Tax effect |
(15 | ) | 127 | (270 | ) | 482 | ||||||||||
Total other comprehensive income (loss) |
26 | (200 | ) | 414 | (751 | ) | ||||||||||
Comprehensive income (loss) |
$ | 782 | $ | (408 | ) | $ | 2,628 | $ | (35 | ) | ||||||
Note 11: Commitments and Contingencies
Some financial instruments, such as loan commitments, credit lines, letters of credit, and
overdraft protection are issued to meet customer financing needs. These are agreements to provide
credit or to support the credit of others, as long as conditions established in the contract are
met, and usually have expiration dates. Commitments may expire without being used. Off-balance
sheet risk to credit loss exists up to the face amount of these instruments, although material
losses are not anticipated.
The contractual amount of financial instruments with off-balance sheet risk was as follows:
September 30, 2010 | December 31, 2009 | |||||||
Unused commercial credit lines |
$ | 199,697 | $ | 198,815 | ||||
Unused revolving home equity and credit card lines |
104,366 | 99,629 | ||||||
Standby letters of credit |
7,227 | 24,338 | ||||||
Demand deposit account lines of credit |
2,545 | 2,499 | ||||||
$ | 313,835 | $ | 325,281 | |||||
The majority of commitments to fund loans are variable rate. The demand deposit account lines of
credit are a fixed rate at 18% with no maturity.
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 managements credit assessment of the customer.
Neither the Corporation or any of its subsidiaries are involved in any pending material legal
proceedings at this time, other than routine litigation incidental to the business.
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Note 12: Fair Value
Fair value is the exchange price that would be received for an asset or paid to transfer a
liability (exit price) in the principal or most advantageous market for the asset or liability in
an orderly transaction between market participants on the measurement date. There are three levels
of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active
markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as
quoted prices for similar assets or liabilities; quoted prices in markets that are
not active; or other inputs that are observable or can be corroborated by
observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entitys own
assumptions about the assumptions that market participants would use in pricing an
asset or liability.
The Corporation used the following methods and significant assumptions to estimate the fair value
of each type of asset or liability carried at fair value:
The fair value of available-for-sale securities are determined by obtaining quoted prices on
nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a
mathematical technique widely used in the industry to value debt securities without relying
exclusively on quoted prices for the specific securities but rather by relying on securities
relationship to other benchmark quoted securities (Level 2 inputs).
The fair value of mortgage servicing rights is based on a valuation model that calculates the
present value of estimated net servicing income. The valuation model incorporates assumptions that
market participants would use in estimating future net servicing income. The Corporation is able
to compare the valuation model inputs and results to widely available published industry data for
reasonableness.
The fair value of other real estate owned and impaired loans with specific allocations of the
allowance for loan losses is generally based on recent real estate appraisals. These appraisals
may utilize a single valuation approach or a combination of approaches including comparable sales
and the income approach. Adjustments are routinely made in the appraisal process by the appraisers
to adjust for differences between the comparable sales and income data available. Such adjustments
are usually significant and typically result in a Level 3 classification of the inputs for
determining fair value.
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Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below:
Fair Value Measurements Using: | ||||||||||||||||
Quoted Prices | ||||||||||||||||
in Active Markets | Significant | Significant | ||||||||||||||
for Identical | Other | Unobservable | ||||||||||||||
Assets | Observable Inputs | Inputs | ||||||||||||||
September 30, 2010 | Carrying Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Assets: |
||||||||||||||||
U.S. Treasury securities |
$ | 12,200 | $ | | $ | 12,200 | $ | | ||||||||
U.S. Government agencies |
72,319 | | 72,319 | | ||||||||||||
Mortgage servicing
rights |
1,142 | | 1,142 | | ||||||||||||
December 31, 2009 |
||||||||||||||||
Assets: |
||||||||||||||||
U.S. Treasury securities |
$ | 506 | $ | | $ | 506 | $ | | ||||||||
U.S. Government agencies |
66,790 | | 66,790 | | ||||||||||||
Mortgage servicing
rights |
1,459 | | 1,459 | |
A detailed breakdown of the fair value for the available-for-sale investment securities is provided
in the Investment Securities note.
Assets and Liabilities Measured on a Non-Recurring Basis
Assets and liabilities measured at fair value on a non-recurring basis are summarized below:
Fair Value Measurements Using: | ||||||||||||||||
Quoted Prices | ||||||||||||||||
in Active Markets | Significant | Significant | ||||||||||||||
for Identical | Other | Unobservable | ||||||||||||||
Assets | Observable Inputs | Inputs | ||||||||||||||
September 30, 2010 | Carrying Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Assets: |
||||||||||||||||
Impaired loans |
$ | 1,869 | $ | | $ | | $ | 1,869 | ||||||||
Other real estate |
1,597 | | | 1,597 | ||||||||||||
December 31, 2009 |
||||||||||||||||
Assets: |
||||||||||||||||
Impaired loans |
$ | 6,120 | $ | | $ | | $ | 6,120 | ||||||||
Other real estate |
2,017 | | | 2,017 |
Impaired loans, which are measured for impairment using the fair value of the collateral for
collateral dependent loans, had a carrying amount of $3.7 million, with a valuation allowance of
$1.8 million, at September 30, 2010. This resulted in an additional provision for loan losses of
$374 thousand and $1.6 million for the three month and nine month periods ending September 30,
2010, respectively.
Other real estate that has been written down to fair value less costs to sell subsequent to being
transferred to other real estate, had a carrying amount of $1.6 million at September 30, 2010.
There was a charge to earnings through non performing asset expense of $685 thousand and $731
thousand for the three month and nine month periods ending September 30, 2010, respectively.
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The estimated fair value of the Corporations financial instruments is as follows:
September 30, 2010 | December 31, 2009 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
Assets |
||||||||||||||||
Cash and due from banks |
$ | 182,905 | $ | 182,905 | $ | 149,375 | $ | 149,375 | ||||||||
Federal funds sold |
15,137 | 15,137 | 1,242 | 1,242 | ||||||||||||
Reverse repurchase agreements |
1,000 | 1,000 | 1,000 | 1,000 | ||||||||||||
Investment securities available-for-sale |
84,519 | 84,519 | 67,296 | 67,296 | ||||||||||||
Investment securities held-to-maturity |
91,871 | 96,472 | 94,922 | 96,588 | ||||||||||||
Loans held for sale |
5,474 | 5,614 | 884 | 879 | ||||||||||||
Net loans |
889,811 | 901,062 | 850,122 | 849,998 | ||||||||||||
Federal Reserve and FHLB stock |
3,150 | N/A | 3,150 | N/A | ||||||||||||
Accrued interest receivable |
4,558 | 4,558 | 4,199 | 4,199 | ||||||||||||
Liabilities |
||||||||||||||||
Deposits |
1,159,893 | 1,161,039 | 1,052,065 | 1,053,849 | ||||||||||||
Repurchase agreements and other
secured short-term borrowings |
74,840 | 74,885 | 81,314 | 81,415 | ||||||||||||
Short-term debt |
3,913 | 3,913 | 4,138 | 4,138 | ||||||||||||
Subordinated debt |
5,000 | 5,000 | 5,000 | 5,000 | ||||||||||||
Junior subordinated debt |
13,918 | 10,209 | 13,918 | 10,102 | ||||||||||||
Accrued interest payable |
1,365 | 1,365 | 2,158 | 2,158 |
The following methods and assumptions were used by the Corporation in estimating its fair value
disclosures for financial instruments not recorded at fair value: Carrying amount is the estimated
fair value for cash and short-term investments, interest bearing deposits, accrued interest
receivable and payable, demand deposits, borrowings under repurchase agreements, short-term debt,
variable rate loans or deposits that reprice frequently and fully. For fixed rate loans, deposits,
other secured short-term borrowings, variable rate loans or deposits with infrequent pricing or
repricing limits, fair value is based on discounted cash flows using current market rates applied
to the estimated life and credit risk. It was not practicable to determine the fair value of
Federal Reserve or FHLB stock due to restrictions placed on its transferability. The fair value of
the subordinated debt and junior subordinated debentures are based upon discounted cash flows using
rates for similar securities with the same maturities. The fair value of off-balance-sheet items is
not considered material.
Note 13: Adoption of New Accounting Standards
In April 2010, the FASB amended previous guidance on receivables specifically relating to loans and
debt securities acquired with deteriorated credit quality and the effect of a loan modification
when the loan is part of a pool that is accounted for as a single asset. Loans that are accounted
for within a pool under this guidance do not result in the removal of the loans from the pool even
if the modification of the loans would otherwise be considered a troubled debt restructuring. The
Corporation will be required to consider whether the pool of assets in which the loans are included
is impaired if the expected cash flows for the pool changes. The amendments to this guidance do
not affect the accounting for loans under the scope of loan and debt securities acquired with
deteriorated credit quality that is accounted for on individual loans. Loans that are accounted
for individually will continue to be subject to the troubled debt restructuring accounting
provision within the troubled debt restructurings by Creditors within the receivables guidance.
The amended guidance is effective in the first interim or annual period ending July 15, 2010. The
amendments are to be applied prospectively and early application is permitted. The adoption of
this standard is did not have a material effect on the Corporations results of operations or
financial position.
In April 2010, the FASB amended previous guidance relating to stock compensation. This amended
guidance clarifies that an employee share-based payment award with an exercise price denominated in
the currency of a market in which a substantial portion of the entitys equity securities trade
should not be considered to contain a condition that is not a market, performance, or service
condition and therefore should not classify the award as a liability if the share-based payment
qualifies as an equity. This guidance is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2010. The adoption of this
standard is not expected to have a material effect on the Corporations results of operations or
financial position.
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Table of Contents
In July 2010, the FASB updated previous guidance on disclosures relating to credit quality of
financing receivables and the allowance for credit losses. The updated guidance enhances and
provides greater transparency to help financial statement users to assess an entitys credit risk
exposure and its allowance for credit losses. The updated guidance requires an entity to disclose
credit quality indicators, past due information, and modifications of its financing receivables.
The update guidance is effective for fiscal years, and interim periods ending on or after December
15, 2010. The adoption of this standard is not expected to have a material effect on the
Corporations results of operations or financial position.
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Corporation Overview
The National Bank of Indianapolis Corporation (the Corporation) is a one-bank holding company
formed in 1993 which owns all of the outstanding stock of The National Bank of Indianapolis (the
Bank). The Bank, a national banking association, was formed in 1993 and is headquartered in
Indianapolis, Indiana. The primary business activity of the Corporation is providing financial
services through the Banks twelve banking offices in Marion, Johnson, and Hamilton County,
Indiana.
The primary source of the Corporations 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.
The Corporation recorded net income of $756 thousand or $0.32 per diluted share for the three month
period ending September 30, 2010, as compared to a net loss of $208 thousand or ($0.09) per diluted
share for the three month period ending September 30, 2009.
The Corporation recorded net income of $2.2 million or $0.93 per diluted share for the nine month
period ending September 30, 2010, as compared to $716 thousand or $0.31 per diluted share for the
nine month period ending September 30, 2009. Net income increased for the three and nine month
periods ending September 30, 2010, as compared to the three and nine month periods ending September
30, 2009, primarily due to a decrease in the provision for loan losses and an increase in mortgage
banking income. The increase is partially offset by an increase in salary and non-performing
assets expense for the nine month period ending September 30, 2010, as compared to the nine month
period ending September 30, 2009.
The risks and challenges that management believes will be important for the remainder of 2010 are
price competition for loans and deposits by competitors, marketplace credit effects, continued
spread compression, slow recovery of the local economy that could adversely impact the ability of
borrowers to repay outstanding loans or the value of the collateral securing these loans, and the
lingering effects from the financial crisis in the U.S. and foreign markets.
The Corporation has determined that it has one reportable segment, banking services. The Bank
provides a full range of deposit, credit, and money management services to its target markets,
which are small to medium size businesses, affluent executive and professional individuals, and
not-for-profit organizations in the Indianapolis Metropolitan Statistical Area of Indiana.
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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 managements 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 Corporations 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 Corporations business;
and changes in accounting policies and procedures as may be required by the Financial Accounting
Standards Board or other regulatory agencies. Additional information concerning factors that could
cause actual results to differ materially from those expressed or implied in the forward-looking
statements is available in the Corporations Annual Report on Form 10-K for the year ended December
31, 2009.
Critical Accounting Policies
The Corporations 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
valuation of the mortgage servicing asset, the valuation of investment securities, and the
determination of the allowance for loan losses 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.
Mortgage Servicing Assets
Mortgage servicing rights are recognized separately when they are acquired through sales of loans.
Capitalized mortgage servicing rights are reported in other assets. When mortgage loans are sold,
servicing rights are initially recorded at fair value with the income statement effect recorded in
gains on sales of loans. Fair value is based on a valuation model that calculates the present
value of estimated future net servicing income. The valuation model incorporates assumptions that
market participants would use in estimating future net servicing income, such as the cost to
service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income,
prepayment speeds and default rates and losses. The Corporation obtains fair value estimates from
an independent third party and compares significant valuation model inputs to published industry
data in order to validate the model assumptions and results.
Under the fair value measurement method, the Corporation measures servicing rights at fair value at
each reporting date and reports changes in fair value of servicing assets in earnings in the period
in which the changes occur, and these changes are included in mortgage banking income on the income
statement. The fair values of servicing rights are subject to significant fluctuations as a result
of changes in estimated and actual prepayment speeds and default rates and losses.
Investment Securities Valuation
When the Corporation classifies debt securities as held-to-maturity, it 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 component of other comprehensive income. Interest income includes
amortization of purchase premium or discount. Premiums and discounts on securities are amortized
on the level-yield method without anticipating prepayments, except for mortgage backed securities where
prepayments are anticipated. Gains and losses on sales are recorded on the trade date and
determined using the specific identification method.
17
Table of Contents
The Corporation obtains fair values from a third party on a monthly basis in order to adjust the
available-for-sale securities to fair value. Equity securities that do not have readily
determinable fair values are carried at cost. When other-than-temporary-impairment (OTTI) occurs,
the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the
security or it is more likely than not it will be required to sell the security before recovery of
its amortized cost basis, less any current-period credit loss. If an entity intends to sell or it
is more likely than not it will be required to sell the security before recovery of its amortized
cost basis, less any current-period credit loss, the OTTI shall be recognized in earnings equal to
the entire difference between the investments amortized cost basis and its fair value at the
balance sheet date. If an entity does not intend to sell the security and it is not more likely
than not that the entity will be required to sell the security before recovery of its amortized
cost basis less any current-period loss, the OTTI shall be separated into the amount representing
the credit loss and the amount related to all other factors. The amount of the total OTTI related
to the credit loss is determined based on the present value of cash flows expected to be collected
and is recognized in earnings. The amount of the total OTTI related to other factors is recognized
in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the
OTTI recognized in earnings becomes the new amortized cost basis of the investment. In determining
whether a market value decline is other-than-temporary, management considers the reason for the
decline, the extent of the decline and the duration of the decline. Management evaluates securities
for OTTI at least on a quarterly basis, and more frequently when economic or market conditions
warrant such an evaluation.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred credit 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 for loan losses.
Management estimates the allowance balance required using past loan loss experience, the nature and
volume of the portfolio, information about specific borrower situations and estimated collateral
values, economic conditions, and other factors. Allocations of the allowance may be made for
specific loans, but the entire allowance is available for any loan that, in managements judgment,
should be charged off.
Within the allowance, there are specific and general loss components. The specific loss component
is assessed for non-homogeneous loans that management believes to be impaired. Loans are
considered to be impaired when it is determined that the obligor will not pay all contractual
principal and interest due. For loans determined to be impaired, the loans carrying value is
compared to its fair value using one of the following fair value measurement techniques: present
value of expected future cash flows, observable market price, or fair value of the associated
collateral less costs to sell. An allowance is established when the fair value is lower than the
carrying value of that loan. The general component covers non-impaired loans and is based on a
three-year historical average loss experience adjusted for current factors. These loans are
segregated by major product type and/or risk grade with an estimated loss ratio applied against
each product type and/or risk grade. The loss ratio is generally based upon historic loss
experience for each loan type as adjusted for certain environmental factors management believes to
be relevant.
It is the policy of the Corporation to promptly charge off any loan, or portion thereof, which is
deemed to be uncollectible. This includes, but is not limited to, any loan rated Loss by the
regulatory authorities. Impaired commercial credits are considered on a case-by-case basis. An
assessment of the adequacy of the allowance is performed on a quarterly basis. Management believes
the allowance for loan losses is maintained at a level that is adequate to absorb probable incurred
losses inherent in the loan portfolio.
18
Table of Contents
Results of Operations
Net Interest Income
The Corporations 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 fully taxable equivalent (FTE) of $29.5
million for the nine month period ending September 30, 2010, as compared to net interest income FTE
of $27.8 million for the nine month period ending September 30, 2009. The increase in net interest
income FTE is due to an increase in total earning assets FTE of $100.7 million for the nine month
period ending September 30, 2010, as compared to the nine month period ending September 30, 2009.
Additionally, total interest bearing liabilities increased $91.3 million for the nine month period
ending September 30, 2010, as compared to the nine month period ending September 30, 2009. The net
interest income spread FTE decreased 0.03% to 3.12% for the nine month period ending September 30,
2010, from 3.15% for the nine month period ending September 30, 2009. The contribution of
non-interest bearing funds decreased 0.06% to 0.15% from 0.21% for the nine month period ending
September 30, 2010 and 2009, respectively, resulting in an overall decrease to the net interest
margin FTE to 3.27% from 3.36% for the nine month period ending September 30, 2010 and 2009,
respectively.
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Table of Contents
The following table details average balances, interest income/expense average rates/yields for the
Corporations earning assets and interest bearing liabilities at the dates indicated.
Nine months ended | ||||||||||||||||||||||||
September 30, | ||||||||||||||||||||||||
2010 | 2009 | |||||||||||||||||||||||
Interest | Average | Interest | Average | |||||||||||||||||||||
Average | Income/ | Rate/ | Average | Income/ | Rate/ | |||||||||||||||||||
Balance | Expense | Yield | Balance | Expense | Yield | |||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Interest bearing due from banks |
$ | 144,176 | $ | 272 | 0.25 | % | $ | 72,611 | $ | 137 | 0.25 | % | ||||||||||||
Reverse repurchase agreements |
1,000 | | 0.01 | % | 1,000 | | 0.01 | % | ||||||||||||||||
Federal funds |
7,979 | 15 | 0.25 | % | 3,050 | 3 | 0.13 | % | ||||||||||||||||
Non taxable investment
securities FTE |
56,371 | 2,393 | 5.66 | % | 56,352 | 2,367 | 5.60 | % | ||||||||||||||||
Taxable investments securities |
111,203 | 1,638 | 1.96 | % | 81,008 | 2,406 | 3.96 | % | ||||||||||||||||
Loans (gross) FTE |
882,258 | 32,120 | 4.85 | % | 888,237 | 31,659 | 4.75 | % | ||||||||||||||||
Total earning assets |
$ | 1,202,987 | $ | 36,438 | 4.04 | % | $ | 1,102,258 | $ | 36,572 | 4.42 | % | ||||||||||||
Non-earning assets |
89,409 | 83,444 | ||||||||||||||||||||||
Total assets |
$ | 1,292,396 | $ | 1,185,702 | ||||||||||||||||||||
Liabilities: |
||||||||||||||||||||||||
Interest bearing DDA |
$ | 202,066 | $ | 380 | 0.25 | % | $ | 152,103 | $ | 468 | 0.41 | % | ||||||||||||
Savings |
500,133 | 2,207 | 0.59 | % | 468,835 | 2,712 | 0.77 | % | ||||||||||||||||
CDs under $100 |
64,628 | 886 | 1.83 | % | 63,759 | 1,308 | 2.74 | % | ||||||||||||||||
CDs over $100 |
119,464 | 1,608 | 1.79 | % | 129,878 | 2,455 | 2.52 | % | ||||||||||||||||
Individual retirement accounts |
22,765 | 360 | 2.11 | % | 19,418 | 419 | 2.88 | % | ||||||||||||||||
Repurchase agreements and other
secured short term borrowings |
81,660 | 213 | 0.35 | % | 65,307 | 134 | 0.27 | % | ||||||||||||||||
Short-term debt |
4,074 | 141 | 4.61 | % | 4,200 | 64 | 2.03 | % | ||||||||||||||||
Subordinated debt |
5,000 | 61 | 1.63 | % | 5,000 | 88 | 2.35 | % | ||||||||||||||||
Long term debt |
13,918 | 1,106 | 10.60 | % | 13,918 | 1,106 | 10.60 | % | ||||||||||||||||
Total interest bearing liabilities |
$ | 1,013,708 | $ | 6,962 | 0.92 | % | $ | 922,418 | $ | 8,754 | 1.27 | % | ||||||||||||
Non-interest bearing liabilities |
197,497 | 182,092 | ||||||||||||||||||||||
Other liabilities |
5,768 | 8,002 | ||||||||||||||||||||||
Total liabilities |
$ | 1,216,973 | $ | 1,112,512 | ||||||||||||||||||||
Equity |
75,423 | 73,190 | ||||||||||||||||||||||
Total liabilities & equity |
$ | 1,292,396 | $ | 1,185,702 | ||||||||||||||||||||
Recap: |
||||||||||||||||||||||||
Interest income FTE |
$ | 36,438 | 4.04 | % | $ | 36,572 | 4.42 | % | ||||||||||||||||
Interest expense |
6,962 | 0.92 | % | $ | 8,754 | 1.27 | % | |||||||||||||||||
Net interest income/spread FTE |
$ | 29,476 | 3.12 | % | $ | 27,818 | 3.15 | % | ||||||||||||||||
Contribution of non-interest
bearing funds |
0.15 | % | 0.21 | % | ||||||||||||||||||||
Net interest margin FTE |
3.27 | % | 3.36 | % | ||||||||||||||||||||
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Notes to the average balance and interest rate tables:
| Average balances are computed using daily actual balances. |
| The average loan balance includes loans held for sale, non-accrual loans and the
interest recognized prior to becoming non-accrual is reflected in the interest income for
loans. |
| Interest income on loans includes loan fees net of loan costs, of $(512) thousand and
$(482) thousand, for the nine month period ending September 30, 2010 and 2009,
respectively. |
| Net interest income on a fully taxable equivalent basis, the most significant component
of the Corporations earnings, is total interest income on a fully taxable equivalent basis
less total interest expense. The level of net interest income on a fully taxable
equivalent basis is determined by the mix and volume of interest earning assets, interest
bearing deposits and borrowed funds, and changes in interest rates. |
| Net interest spread is the difference between the fully taxable equivalent rate earned
on interest earning assets less the rate expensed on interest bearing liabilities. |
| Net interest margin represents net interest income on a fully taxable equivalent basis
as a percentage of average interest earning assets. Net interest margin is affected by
both the interest rate spread and the level of non-interest bearing sources of funds,
primarily consisting of demand deposits and shareholders equity. |
| Interest income on a fully taxable equivalent basis includes the additional amount of
interest income that would have been earned on tax exempt loans and if investments in
certain tax-exempt interest earning assets had been made in assets subject to federal taxes
yielding the same after-tax income. Interest income on tax exempt loans and municipal
securities has been calculated on a fully taxable equivalent basis using a federal and
state income tax blended rate of 40%. The appropriate tax equivalent adjustments to
interest income on loans was $395 thousand and $117 thousand for the nine month period
ending September 30, 2010 and 2009, respectively. The appropriate tax equivalent
adjustments to interest income on municipal securities was $844 thousand and $810 thousand
for the nine month period ending September 30, 2010 and 2009, respectively. |
| Management believes the disclosure of the fully taxable equivalent net interest income
information improves the clarity of financial analysis, and is particularly useful to
investors in understanding and evaluating the changes and trends in the Corporations
results of operations. This adjustment is considered helpful in the comparison of one
financial institutions net interest income to that of another institution, as each will
have a different proportion of tax-exempt interest from their earning asset portfolios. |
Provision for Loan Losses
The amount charged to the provision for loan losses by the Bank is based on managements evaluation
as to the amounts required to maintain an allowance adequate to provide for probable incurred
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 managements
assessment of probable incurred 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 $1.9 million and $4.0 million, for the three month period ending
September 30, 2010 and 2009, respectively. The provision for loan losses was $4.3 million for the
nine month period ending September 30, 2010, compared to a provision for loan losses of $7.9
million for the nine month period ending September 30, 2009. The decrease in the provision for
loan losses for the three and nine month period ending September 30, 2010, compared to the three
and nine month period ending September 30, 2009, is due to an overall improvement in loan quality.
Contributing to the decrease for the nine month period ending September 30, 2010, compared to the
nine month period ending September 30, 2009, is a decrease in chargeoffs relating to commercial
loans. Partially offsetting the decrease in the provision for loan losses for the three and nine
month period ending September 30, 2010, compared to the three and nine month period ending
September 30, 2009, is an increase in chargeoffs relating to commercial real estate.
The allowance for loan losses is a valuation allowance for probable incurred credit 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 for loan losses.
21
Table of Contents
Management estimates the allowance balance required using past loan loss experience, the nature and
volume of the portfolio, information about specific borrower situations and estimated collateral
values, economic conditions, and other factors. Allocations of the allowance may be made for
specific loans, but the entire allowance is available for any loan that, in managements judgment,
should be charged off.
Within the allowance, there are specific and general loss components. The specific loss component
is assessed for non-homogeneous loans that management believes to be impaired. Loans are
considered to be impaired when it is determined that the obligor will not pay all contractual
principal and interest due. For loans determined to be impaired, the loans carrying value is
compared to its fair value using one of the following fair value measurement techniques: present
value of expected future cash flows, observable market price, or fair value of the associated
collateral less costs to sell. An allowance is established when the fair value is lower than the
carrying value of that
loan. The general component covers non-impaired loans and is based on a three-year historical
average loss experience adjusted for current factors. These loans are segregated by major product
type and/or risk grade with an estimated loss ratio applied against each product type and/or risk
grade. The loss ratio is generally based upon historic loss experience for each loan type as
adjusted for certain environmental factors management believes to be relevant.
Based on managements risk assessment and evaluation of the probable incurred losses of the loan
portfolio, management believes that the current allowance for loan losses is adequate to provide
for probable incurred losses in the loan portfolio.
The following table sets forth activity in the allowance for loan losses:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Beginning of Period |
$ | 15,523 | $ | 14,077 | $ | 13,716 | $ | 12,847 | ||||||||
Provision for loan losses |
1,875 | 3,955 | 4,344 | 7,855 | ||||||||||||
Chargeoffs |
||||||||||||||||
Commercial |
435 | 683 | 860 | 2,499 | ||||||||||||
Commercial Real Estate |
1,290 | | 1,363 | | ||||||||||||
Residential Mortgage |
123 | 476 | 248 | 665 | ||||||||||||
Consumer |
| 5 | 34 | 15 | ||||||||||||
Credit Cards |
1 | 7 | 61 | 70 | ||||||||||||
Construction |
| | | 654 | ||||||||||||
1,849 | 1,171 | 2,566 | 3,903 | |||||||||||||
Recoveries |
||||||||||||||||
Commercial |
37 | 22 | 75 | 40 | ||||||||||||
Commercial Real Estate |
2 | | 2 | | ||||||||||||
Residential Mortgage |
6 | 3 | 19 | 15 | ||||||||||||
Consumer |
2 | | 4 | | ||||||||||||
Credit Cards |
2 | | 4 | 32 | ||||||||||||
49 | 25 | 104 | 87 | |||||||||||||
End of Period |
$ | 15,598 | $ | 16,886 | $ | 15,598 | $ | 16,886 | ||||||||
Allowance as a % of Loans |
1.71 | % | 1.95 | % | 1.71 | % | 1.95 | % |
Loans are considered to be impaired when it is determined that the obligor will not pay all
contractual principal and interest when due.
22
Table of Contents
The table below provides information on impaired loans:
September 30, 2010 | December 31, 2009 | September 30, 2009 | ||||||||||
Balance of impaired loans |
$ | 10,708 | $ | 15,106 | $ | 18,500 | ||||||
Related allowance on impaired loans |
1,796 | 1,724 | 6,093 | |||||||||
Impaired loans with related allowance |
3,665 | 7,844 | 13,954 | |||||||||
Impaired loans without an allowance |
7,043 | 7,262 | 4,546 | |||||||||
Average balance of impaired loans (year to
date) |
14,853 | 11,961 | 11,054 | |||||||||
Accrued interest recorded during impairment |
2 | | 1 | |||||||||
Cash basis interest income recognized |
| | |
A loan is considered delinquent when a payment has not been made more than 30 days past its
contractual due date. Loans past due over 30 days, including past due nonaccrual loans, totaled
$10.7 million or 1.18% of total loans at September 30, 2010, compared to $12.0 million or 1.36% of
total loans at September 30, 2009.
Loans greater than 90 days past due and still accruing interest at September 30, 2010 and 2009,
totaled approximately $38 thousand and $15 thousand, respectively. The total amount of nonaccrual
loans was $10.7 million at September 30, 2010, compared to $13.3 million at September 30, 2009.
Not all nonaccrual loans are 90 days past due.
It is the policy of the Corporation to review each prospective credit in order to determine the
appropriateness and, when required, the adequacy of security or collateral necessary when making a
loan. The type of collateral when required will vary from liquid assets to real estate. The
Corporation seeks to assure access to collateral in the event of default through adherence to state
lending laws and the Corporations credit monitoring procedures.
Other Operating Income
The following table details the components of other operating income:
Three months ended | ||||||||||||||||
September 30, | $ | % | ||||||||||||||
2010 | 2009 | Change | Change | |||||||||||||
Wealth management fees |
$ | 1,263 | $ | 1,226 | $ | 37 | 3.0 | % | ||||||||
Service charges and fees on deposit accounts |
759 | 792 | (33 | ) | -4.2 | % | ||||||||||
Rental income |
59 | 66 | (7 | ) | -10.6 | % | ||||||||||
Mortgage banking income |
1,122 | 188 | 934 | 496.8 | % | |||||||||||
Interchange income |
330 | 268 | 62 | 23.1 | % | |||||||||||
Other |
675 | 451 | 224 | 49.7 | % | |||||||||||
Total other operating income |
$ | 4,208 | $ | 2,991 | $ | 1,217 | 40.7 | % | ||||||||
Total other operating income for the three month period ending September 30, 2010, increased as
compared to the three month period ending September 30, 2009.
Wealth management fees increased for the three month period ending September 30, 2010, as compared
to the three month period ending September 30, 2009. The increase in wealth management fees is
attributable to an increase in the stock market. The increase is partially offset by a decrease in
estate fees and Dreyfus money market funds.
Service charges and fees on deposit accounts decreased for the three month period ending September
30, 2010, as compared to the three month period ending September 30, 2009. The decrease is
primarily attributable to a decrease in service charges collected for DDA business and non-profit
accounts and overdraft and NSF fees.
23
Table of Contents
Rental income decreased for the three month period ending September 30, 2010, as compared to the
three month period ending September 30, 2009. This was due to the bank occupying more space at the
4930 North Pennsylvania Street and 107 North Pennsylvania Street locations thus reducing the space
available for tenants.
Mortgage banking income increased for the three month period ending September 30, 2010, as compared
to the three month period ending September 30, 2009. The increase for the three month period
ending September 30, 2010, as compared to the three month period ending September 30, 2009, is due
to an increase in the net gain on the sale of mortgage loans. A net gain on the sale of mortgage
loans of $1.3 million was recorded for the three month period ending September 30, 2010, as
compared to a net gain on the sale of mortgage loans of $303 thousand for the three month period
ending September 30, 2009. The increase in the net gain on sale of mortgage loans is due to an
increase in the volume of loans originated and commitments of residential mortgages available for
sale period over period. For the three month period ending September 30, 2010, origination of
loans held for sale was $25.0 million and loan commitments of residential mortgages available for
sale were $25.8 million. For the three month period ending September 30, 2009, origination of
loans held for sale was $17.6 millon and loan commitments of residential mortgages available for
sale were $4.7 million. Also, contributing to the increase was the opportunity to sell residential
mortgages that were previously originated at lower interest rates due to a drop in interest rates
period over period.
Offsetting this increase was a write down of the fair value of mortgage servicing rights (MSRs)
of $275 thousand for the three month period ending September 30, 2010, as compared to a write down
of $206 thousand for the three month period ending September 30, 2009.
When mortgage loans are sold and the MSRs are retained, the MSRs are recorded as an asset on the
balance sheet. The value of the MSRs is sensitive to changes in interest rates. In a declining
interest rate environment, mortgage loan refinancings generally increase, causing actual and
expected loan prepayments to increase, which decreases the value of existing MSRs. Conversely, as
interest rates rise, mortgage loan refinancings generally decline, causing actual and expected loan
prepayments to decrease, which increases the value of the MSRs.
Interchange income increased for the three month period ending September 30, 2010, as compared to
the three month period ending September 30, 2009. The increase is attributable to higher
transaction volumes for debit cards and credit cards during the three month period ending September
30, 2010, as compared to the three month period ending September 30, 2009.
Other income increased for the three month period ending September 30, 2010, as compared to the
three month period ending September 30, 2009. The increase is primarily due to an increase in
other real estate rental income, prepayment penalties collected, certain loan fees, and
Mastercard/Visa merchant fees. The increase is partially offset by a decrease in letter of credit
fees, Dreyfus money market funds sweep fees, and late fee income.
Nine months ended | ||||||||||||||||
September 30, | $ | % | ||||||||||||||
2010 | 2009 | Change | Change | |||||||||||||
Wealth management fees |
$ | 3,934 | $ | 3,647 | $ | 287 | 7.9 | % | ||||||||
Service charges and fees on deposit accounts |
2,277 | 2,316 | (39 | ) | -1.7 | % | ||||||||||
Rental income |
204 | 251 | (47 | ) | -18.7 | % | ||||||||||
Mortgage banking income |
1,602 | 1,137 | 465 | 40.9 | % | |||||||||||
Interchange income |
928 | 721 | 207 | 28.7 | % | |||||||||||
Net loss on sale of securities |
(5 | ) | | (5 | ) | 100.0 | % | |||||||||
Other |
1,508 | 1,491 | 17 | 1.1 | % | |||||||||||
Total other operating income |
$ | 10,448 | $ | 9,563 | $ | 885 | 9.3 | % | ||||||||
Total other operating income for the nine month period ending September 30, 2010, increased as
compared to the nine month period ending September 30, 2009.
24
Table of Contents
Wealth management fees increased for the nine month period ending September 30, 2010, as compared
to the nine month period ending September 30, 2009. The increase in wealth management fees is
attributable to an increase in the stock market and tax preparation fees. The increase is
partially offset by a decrease in estate fees and Dreyfus money market funds.
Service charges and fees on deposit accounts decreased for the nine month period ending September
30, 2010, as compared to the nine month period ending September 30, 2009. The decrease is
primarily attributable to a decrease
in service charges collected for non-profit accounts and overdraft and NSF fees. The decrease is
partially offset by an increase in service charges collected for DDA business accounts and wire
transfer fees for the nine month period ending September 30, 2010, as compared to the nine month
period ending September 30, 2009.
Rental income decreased for the nine month period ending September 30, 2010, as compared to the
nine month period ending September 30, 2009. This was due to the bank occupying more space at the
4930 North Pennsylvania Street and 107 North Pennsylvania Street locations thus reducing the space
available for tenants.
Mortgage banking income increased for the nine month period ending September 30, 2010, as compared
to the nine month period ending September 30, 2009. The increase for the nine month period ending
September 30, 2010, as compared to the nine month period ending September 30, 2009, is due to an
increase in the net gain on the sale of mortgage loans. A net gain on the sale of mortgage loans
of $2.0 million was recorded for the nine month period ending September 30, 2010, as compared to a
net gain on the sale of mortgage loans of $1.2 million for the nine month period ending September
30, 2009. The increase in the net gain on sale of mortgage loans is due to an increase in the
volume of loans originated and commitments of residential mortgages available for sale period over
period. For the nine period ending September 30, 2010, origination of loans held for sale was
$42.9 million and loan commitments of residential mortgages available for sale were $25.8 million.
For the nine month period ending September 30, 2009, origination of loans held for sale was $56.8
million and loan commitments of residential mortgages available for sale were $4.7 million. Also,
contributing to the increase was the opportunity to sell residential mortgages that were previously
originated at lower interest rates due to a drop in interest rates period over period.
Offsetting this increase was a write down of the fair value of MSRs of $713 thousand for the nine
month period ending September 30, 2010, as compared to a write down of $347 thousand for the nine
month period ending September 30, 2009.
When mortgage loans are sold and the MSRs are retained, the MSRs are recorded as an asset on the
balance sheet. The value of the MSRs is sensitive to changes in interest rates. In a declining
interest rate environment, mortgage loan refinancings generally increase, causing actual and
expected loan prepayments to increase, which decreases the value of existing MSRs. Conversely, as
interest rates rise, mortgage loan refinancings generally decline, causing actual and expected loan
prepayments to decrease, which increases the value of the MSRs.
Interchange income increased for the nine month period ending September 30, 2010, as compared to
the nine month period ending September 30, 2009. The increase is attributable to higher
transaction volumes for debit cards and credit cards during the nine month period ending September
30, 2010, as compared to the nine month period ending September 30, 2009. Additionally, there was
a decrease in cash back rewards expense for the nine months ended September 30, 2010, as compared
to the nine months ended September 30, 2009.
Net loss on sale of securities increased for the nine month period ending September 30, 2010, as
compared the nine month period ending September 30, 2009. There was one sale of a held-to-maturity
municipal security during the nine month period ending September 30, 2010. Since the security had
a non-rated issuer, a credit review of the municipality was conducted. As a result of the review,
it was determined that the investment was no longer considered a pass asset and thus below
investment grade. Per investment policy, the Corporation is prohibited from holding any securities
below investment grade.
Other income increased for the nine month period ending September 30, 2010, as compared to the nine
month period ending September 30, 2009. The increase is primarily due to an increase in other real
estate rental income, prepayment penalties collected, certain loan fees, and Mastercard/Visa
merchant fees. The increase is partially offset by a decrease in bank owned life insurance
income, letter of credit fees, Dreyfus money market funds sweep fees, late fee income, and income
collected for a swap fee.
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Other Operating Expenses
The following table details the components of other operating expense:
Three months ended | ||||||||||||||||
September 30, | $ | % | ||||||||||||||
2010 | 2009 | Change | Change | |||||||||||||
Salaries, wages and employee benefits |
$ | 5,249 | $ | 5,102 | $ | 147 | 2.9 | % | ||||||||
Occupancy |
610 | 631 | (21 | ) | -3.3 | % | ||||||||||
Furniture and equipment |
295 | 331 | (36 | ) | -10.9 | % | ||||||||||
Professional services |
535 | 472 | 63 | 13.3 | % | |||||||||||
Data processing |
736 | 656 | 80 | 12.2 | % | |||||||||||
Business development |
438 | 448 | (10 | ) | -2.2 | % | ||||||||||
FDIC Insurance |
505 | 411 | 94 | 22.9 | % | |||||||||||
Non performing assets |
964 | 135 | 829 | 614.1 | % | |||||||||||
Other |
1,805 | 942 | 863 | 91.6 | % | |||||||||||
Total other operating expenses |
$ | 11,137 | $ | 9,128 | $ | 2,009 | 22.0 | % | ||||||||
Total other operating expenses for the three month period ending September 30, 2010, increased as
compared to the three month period ending September 30, 2009.
Salaries, wages, and employee benefits increased for the three month period ending September 30,
2010, as compared to the three month period ending September 30, 2009. The increase is the result
of increased salary expense, employer FICA expense, group medical and dental benefits, deferred
compensation, and contract labor. Salary expense, employer FICA expense, and group medical and
dental benefits increased due to an increase in full-time equivalent employees of 15 from 253 at
September 30, 2009, compared to 268 at September 30, 2010. Deferred compensation increased due to
the issuance of restricted stock during the second quarter of 2009. The increase is partially
offset by a decrease in expense relating to the performance bonus, direct loan origination costs,
training expense, and employee relations.
Occupancy expense decreased for the three month period ending September 30, 2010, as compared to
the three month period ending September 30, 2009. The decrease is due to a decrease in real estate
taxes, cleaning supplies, and leasehold improvements depreciation expense. The decrease is
partially offset by an increase in building and improvements depreciation expense due to the
opening of the banking center located at 11701 Olio Road in December 2009 and utilities expense.
Furniture and equipment expense decreased for the three month period ending September 30, 2010, as
compared to the three month period ending September 30, 2009. This decrease is due to a decrease
in depreciation for furniture, fixture, and equipment due to older assets being fully depreciated,
furniture, fixture, and equipment repair expense, and furniture, fixture, and equipment purchased
and expensed for $500.
Professional services expense increased for the three month period ending September 30, 2010, as
compared to the three month period ending September 30, 2009. The increase is due to an increase
in consulting fees, extended audit services, advertising agency fees, and attorney fees. The
increase is partially offset by a decrease in courier service.
Data processing expenses increased for the three month period ending September 30, 2010, as
compared to the three month period ending September 30, 2009. The increase is due to an increase
in bill payment services, ATM/debit cards, credit cards, transaction processing fees and mutual
fund expense for Wealth Management accounts, computer software, and software maintenance. The
increase is partially offset by a decrease in service bureau fees of the Bank.
Business development expenses decreased for the three month period ending September 30, 2010, as
compared to the three period ending September 30, 2009. The decrease is due to a decrease in
direct mail campaign and customer entertainment. The decrease is partially offset by an increase
in public relations.
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FDIC insurance expense increased for the three month period ending September 30, 2010, as compared
to the three month period ending September 30, 2009. The increase is due to an overall increase in
the FDIC assessment.
Nonperforming assets expenses increased for the three month period ending September 30, 2010, as
compared to the three month period ending September 30, 2009. This increase is due to an increase
in the write down of the carrying value of other real estate owned and classified loan expense.
Also contributing to the increase is an increase in real estate taxes, lawn maintenance, and
appraisal fees related to other real estate owned by the Corporation.
Other expenses increased for the three month period ending September 30, 2010, as compared to the
three period ending September 30, 2009. The increase is due to the Corporation recording a reserve
as a result of a wire transfer inadvertently sent to the wrong beneficiary. The Corporation is
attempting to collect the misappropriated funds. Also contributing to the increase was an increase
in debit and credit card losses, office supplies, and board fees. The increase is partially offset
by a decrease in armored transportation, loan appraisals, and check losses.
Nine months ended | ||||||||||||||||
September 30, | $ | % | ||||||||||||||
2010 | 2009 | Change | Change | |||||||||||||
Salaries, wages and employee benefits |
$ | 17,362 | $ | 15,859 | $ | 1,503 | 9.5 | % | ||||||||
Occupancy |
1,898 | 1,863 | 35 | 1.9 | % | |||||||||||
Furniture and equipment |
954 | 1,031 | (77 | ) | -7.5 | % | ||||||||||
Professional services |
1,678 | 1,404 | 274 | 19.5 | % | |||||||||||
Data processing |
2,263 | 2,055 | 208 | 10.1 | % | |||||||||||
Business development |
1,328 | 1,274 | 54 | 4.2 | % | |||||||||||
FDIC Insurance |
1,540 | 1,708 | (168 | ) | -9.8 | % | ||||||||||
Non performing assets |
1,268 | 420 | 848 | 201.9 | % | |||||||||||
Other |
3,532 | 2,784 | 748 | 26.9 | % | |||||||||||
Total other operating expenses |
$ | 31,823 | $ | 28,398 | $ | 3,425 | 12.1 | % | ||||||||
Total other operating expenses for the nine month period ending September 30, 2010, increased as
compared to the nine month period ending September 30, 2009.
Salaries, wages, and employee benefits increased for the nine month period ending September 30,
2010, as compared to the nine month period ending September 30, 2009. The increase is the result
of increased salary expense, employer FICA expense, group medical and dental benefits, performance
bonus, deferred compensation, and security guard. Salary expense, employer FICA expense, and group
medical and dental benefits increased due to an increase in full-time equivalent employees of 15
from 253 at September 30, 2009, compared to 268 at September 30, 2010. Deferred compensation
increased due to the issuance of restricted stock during the second quarter of 2009. The increase
is partially offset by a decrease in contract labor, training expense, and direct loan origination
costs.
Occupancy expense increased for the nine month period ending September 30, 2010, as compared to the
nine month period ending September 30, 2009. The increase is due to an increase in building and
improvements depreciation expense due to the opening of the banking center located at 11701 Olio
Road in December 2009, building and property repairs and maintenance, management fees, utilities,
and rent expense at the disaster location. The increase is partially offset by a decrease in real
estate taxes, building operating costs, and leasehold improvements depreciation expense.
Furniture and equipment expense decreased for the nine month period ending September 30, 2010, as
compared to the nine month period ending September 30, 2009. This decrease is due to a decrease in
depreciation for furniture, fixture, and equipment due to older assets being fully depreciated and
furniture, fixture, and equipment repair expense.
Professional services expense increased for the nine month period ending September 30, 2010, as
compared to the nine month period ending September 30, 2009. The increase is due to an increase in
consulting fees, advertising agency fees, design services, extended audit services, accounting
fees, and attorney fees. The increase is partially offset by a decrease in courier service.
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Table of Contents
Data processing expenses increased for the nine month period ending September 30, 2010, as compared
to the nine month period ending September 30, 2009. The increase is due to an increase in bill payment
services, ATM/debit cards, fiduciary income tax preparation for Wealth Management accounts,
transaction processing fees and mutual fund expense for Wealth Management accounts, computer
software, software maintenance, and increased service bureau fees related to increased activity by
the Bank.
Business development expenses increased for the nine month period ending September 30, 2010, as
compared to the nine period ending September 30, 2009. The increase is due to an increase in
public relations, direct mail campaign, market research, and sales and product literature. The
increase is partially offset by a decrease in customer entertainment and grand opening expense.
FDIC insurance expense decreased for the nine month period ending September 30, 2010, as compared
to the nine month period ending September 30, 2009. The decrease is due to a special assessment of
$557 thousand that was expensed during the second quarter of 2009. The decrease is partially
offset by an overall increase in the FDIC assessment.
Nonperforming assets expenses increased for the nine month period ending September 30, 2010, as
compared to the nine month period ending September 30, 2009. This increase is due to an increase
in the write down of the carrying value of other real estate owned and classified loan expense.
Also contributing to the increase is an increase in real estate taxes, lawn maintenance, and
appraisal fees related to other real estate owned by the Corporation. The increase is partially
offset by gains on the sale of other real estate.
Other expenses increased for the nine month period ending September 30, 2010, as compared to the
nine period ending September 30, 2009. The increase is due to the Corporation recording a reserve
as a result of a wire transfer inadvertently sent to the wrong beneficiary. The Corporation is
attempting to collect the misappropriated funds. Also contributing to the increase was an increase
in stationery and printing, telephone service, ATM surcharges refunded, conferences and
conventions, personal property taxes, board fees, Comptroller of the Currency assessment, and debit
card losses. The increase is partially offset by a decrease in armored transportation, loan
collection expense, loan appraisals, correspondent bank charges, postage expense, check losses,
and employment
agency fees. During the nine month period ending September 30, 2009, the Corporation recorded a
loss of $40 thousand as the result of the Heartland Payment Systems credit card software compromise
and a charge of $50 thousand related to certain deposit accounts.
Federal and State Income Tax
The statutory rate reconciliation is as follows:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Income (loss) before federal and state income
tax |
$ | 842 | $ | (670 | ) | $ | 2,518 | $ | 201 | |||||||
Tax expense (benefit) at federal statutory rate |
286 | (227 | ) | 856 | 69 | |||||||||||
Increase (decrease) in taxes resulting from: |
||||||||||||||||
State income tax |
26 | (61 | ) | 80 | (55 | ) | ||||||||||
Tax exempt interest |
(266 | ) | (185 | ) | (661 | ) | (531 | ) | ||||||||
Other |
40 | 11 | 29 | 2 | ||||||||||||
Total income tax (benefit) |
$ | 86 | $ | (462 | ) | $ | 304 | $ | (515 | ) | ||||||
28
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Financial Condition
Total assets increased $108.0 million from $1.234 billion at December 31, 2009, to $1.342 billion
at September 30, 2010. The increase is the result of an increase of $47.4 million in cash and cash
equivalents from $151.6 million at December 31, 2009, to $199.0 million at September 30, 2010, and
an increase of $46.2 million in loans from $864.7 million at December 31, 2009, to $910.9 million
at September 30, 2010. Contributing to the increase in cash and cash equivalents is an increase of
$108.0 million in deposits from $1.052 billion at December 31, 2009, to $1.160 billion at September
30, 2010. The increase in deposits is due to new deposit relationships, funds coming from
Dreyfus sweep accounts, and funds flowing back into the Bank that left last year during the overall
financial crisis in the U.S.
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 Committee (ALCO) 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: cash and due from Federal
Reserve, 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. Deposits were
the most significant funding source and loans were the most significant use of funds during the
nine month period ending September 30, 2010. During the nine month period ending September 30,
2009, deposits were the most significant funding source and purchases of investment securities
available for sale were the most significant use of funds.
On June 29, 2007, the Corporation entered into a $5.0 million revolving loan agreement with U.S.
Bank, which matured on June 27, 2009, and was renewed and matured on August 31, 2009. The
revolving loan agreement was used to provide additional liquidity support to the Corporation, if
needed. On September 5, 2008, and December 11, 2008, the Corporation drew $1.3 million and $2.9
million, respectively, on the revolving loan agreement with U.S. Bank.
On August 31, 2009, U.S. Bank renewed the revolving loan agreement which matured on August 31,
2010. As part of the renewal of the revolving loan agreement, U.S. Bank reduced the revolving loan
amount from $5.0 million to $2.0 million and $3.0 million was moved to a separate one-year term
facility with principal payments of $62.5 thousand and interest payments due quarterly. The
revolving loan agreement and one-year term facility were renewed and will now mature on August 31,
2011. Under the terms of the one-year term facility, the Corporation pays prime plus 1.25% which
equated to 4.50% at September 30, 2010.
Under the terms of the revolving loan agreement, the Corporation paid prime minus 1.25% which
equated to 2.00% through August 31, 2009, and interest payments were due quarterly. Beginning
September 1, 2009, the Corporation pays prime plus 1.25% which equated to 4.50% at September 30,
2010. In addition, beginning October 1, 2009, U.S. Bank assessed a 0.25% fee on the unused portion
of the revolving line of credit.
The revolving loan agreement contains various financial and non-financial covenants. As of
September 30, 2010, the Corporation was in compliance with all covenants.
Primary liquid assets of the Corporation are cash and due from banks, federal funds sold,
investments held as available for sale, and maturing loans. Due from the Federal Reserve
represented the Corporations primary source of immediate liquidity and averaged $144 million for
the nine month period ending September 30, 2010. During the nine month period ending September 30,
2009, Due from the Federal Reserve was the Corporations primary source of immediate liquidity and
averaged $73 million for the nine month period ending September 30, 2009. The increase in balances
period over period is due to deposit growth greater than loan growth. The Corporation believes
these balances are maintained at a level adequate to meet immediate needs. 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 Corporations loan and investment
portfolios are monitored regularly to avoid matching short-term deposits with long-term
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.
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Table of Contents
The Corporations 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 Corporations liquidity position.
The Corporation actively manages its interest rate sensitive assets and liabilities to reduce the
impact of interest rate fluctuations. At September 30, 2010, the Corporations rate sensitive
liabilities exceeded rate sensitive assets due within one year by $86.3 million.
As part of managing liquidity, the Corporation monitors its loan to deposit ratio on a monthly
basis. At September 30, 2010, the ratio was 78.5%. This is well within the board approved policy.
The Corporation experienced an increase in cash and cash equivalents, another primary source of
liquidity, of $47.4 million during the nine month period ending September 30, 2010. The increase
is primarily due to a net increase in deposits. Deposit growth provided net cash of $108.0 million
and proceeds from the maturity of investment securities provided cash of $48.1 million. Lending
activities used cash of $59.2 million and purchases of investment securities used cash of $62.9
million.
The purpose of the Banks Investment Committee is to manage and balance interest rate risk of the
investment portfolio, 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.
Capital Resources
The Corporation has a $2.0 million revolving line of credit and a $3.0 million one-year term loan
with U.S. Bank. See Liquidity and Interest Rate Sensitivity section of this report for further
discussion.
On June 29, 2007, the Bank entered into a Subordinated Debenture Purchase Agreement with U.S. Bank
in the amount of $5.0 million, which will mature on June 28, 2017. Under the terms of the
Subordinated Debenture Purchase Agreement, the Bank pays 3-month LIBOR plus 1.20% which equated to
1.76% at September 30, 2010. Interest payments are due quarterly.
In September 2000, the Trust, which is wholly owned by the Corporation, issued $13.5 million 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 thousand
were used by the Trust to purchase from the Corporation $13.9 million 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
a thousand dollars 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 and the debentures 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.
There were no FHLB advances outstanding as of September 30, 2010, or 2009.
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,
2010. Pertinent capital ratios for the Bank as of September 30, 2010, are as follows:
Well | Adequately | |||||||||||
Actual | Capitalized | Capitalized | ||||||||||
Tier 1 risk-based capital ratio |
9.1 | % | 6.0 | % | 4.0 | % | ||||||
Total risk-based capital ratio |
10.9 | % | 10.0 | % | 8.0 | % | ||||||
Leverage ratio |
6.6 | % | 5.0 | % | 4.0 | % |
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Dividends from the Bank to the Corporation may not exceed the net undivided profits of the Bank
(included in consolidated retained earnings) for the current calendar year and the two previous
calendar years without prior approval from the Office of the Comptroller of the Currency. 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 by the Bank to the Corporation
during the nine month period ending September 30, 2010 or 2009. The Bank declared and
made a $1.1 million and $1.0 million dividend to the Corporation during the nine month period
ending September 30, 2010 and 2009, respectively.
On November 20, 2008, the Board of Directors adopted a new three-year stock repurchase program for
directors and employees. Under the new stock repurchase program, the Corporation may repurchase
shares in individually negotiated transactions from time to time as such shares become available
and spend up to $8 million to repurchase such shares over the three-year term. Subject to the $8
million limitation, the Corporation intends to purchase shares recently acquired by the selling
shareholder pursuant to the exercise of stock options or the vesting of restricted stock, and limit
its acquisition of shares which were not recently acquired by the selling shareholder pursuant to
the exercise of stock options or the vesting of shares of restricted stock to no more than 10,000
shares per year. Under the new repurchase plan, the Corporation purchased 12,369 shares during the
nine month period ending September 30, 2010, and $5.4 million is still available under the new
repurchase plan as of September 30, 2010. The stock repurchase program does not require the
Corporation to acquire any specific number of shares and may be modified, suspended, extended or
terminated by the Corporation at any time without prior notice. The repurchase program will
terminate on December 31, 2011, unless earlier suspended or discontinued by the Corporation.
Recent Accounting Pronouncements and Developments
Note 13 to the Consolidated Financial Statements under Item 1 discusses new accounting policies
adopted by the Corporation during the third quarter of 2010 and the expected impact of the adoption
of the new accounting policies.
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
Corporations 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 ALCO. ALCO 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 Corporations
Board of Directors.
The Corporations profitability is affected by fluctuations in interest rates. A sudden and
substantial increase in interest rates may adversely impact the Corporations 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, 2010, the interest rate risk position of the Corporation was liability sensitive,
meaning net income should decrease as rates rise and increase as rates fall. The Corporation
performs a 200 basis point upward and downward interest rate shock to determine whether there would
be an adverse impact on its annual net income and that it is within the established policy limits.
A downward interest rate shock scenario was not performed due to the low level of current interest
rates. The earnings simulation model as of September 30, 2010, projects an approximate decrease of
28.0% in net income in a 200 basis point upward interest rate shock. The Corporation was in
violation of its policy limits established by the ALCO policy at September 30, 2010. Management
believes there is a 0.00% probability that interest rates would rise 200 basis points immediately.
Management performs additional interest rate scenarios that have higher probabilities of
occurrence. In these rate scenarios, the change to net income is within established limits.
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Table of Contents
See
Liquidity and Interest Rate Sensitivity section of this
report for further discussion.
There have been no material changes in the quantitative analysis used by the Corporation since
filing the Corporations Annual Report on Form 10-K for the year ended December 31, 2009, (the
2009 Form 10-K); for further discussion of the quantitative analysis used by the Corporation
refer to page 55 of the 2009 Form 10-K filed with the U.S. Securities and Exchange Commission on
March 12, 2010.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Corporations management is responsible for establishing and maintaining effective disclosure
controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange
Act of 1934. As of September 30, 2010, an evaluation was performed under the supervision and with
the participation of management, including the principal executive officer and principal financial
officer, of the effectiveness of the design and operation of the Corporations disclosure controls
and procedures. Based on that evaluation, the principal executive officer and principal financial
officer concluded that the Corporations disclosure controls and procedures as of September 30,
2010, were effective in ensuring information required to be disclosed in this Quarterly Report on
Form 10-Q was recorded, processed, summarized, and reported on a timely basis.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting that occurred during the
quarter ended September 30, 2010, that have materially affected, or are reasonably likely to
materially affect, the Corporations internal control over financial reporting.
Limitations on the Effectiveness of Controls
The Corporations management, including its principal executive officer and principal financial
officer, does not expect that the Corporations 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.
32
Table of Contents
Part
II Other Information.
Item 1. Legal Proceedings
Neither the Corporation nor its subsidiaries are involved in any pending material
legal proceedings at this time, other than routine litigation incidental to their
business.
Item 1A. Risk Factors
The Recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act may
have a material impact on our operations.
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the Dodd-Frank Reform Act) into law. This new law
broadly affects the financial services industry by establishing a framework for
systemic risk oversight, creating a resolution authority, mandating higher capital
and liquidity requirements, requiring banks to pay increased fees to regulatory
agencies and containing numerous other provisions aimed at strengthening the sound
operation of the financial services sector. The full impact of the Dodd-Frank Act on
our business and operations may not be known for years until regulations
implementing the statute are written and adopted. The Dodd-Frank Act may have a
material impact on our operations, particularly through increased compliance costs.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) | On September 20, 2010, the Corporation sold a total of 1,600
shares of common stock for proceeds of $44,400 to one officer of the
Corporation pursuant to the exercise of stock options by the officer pursuant
to an exemption from registration under Sections 3(a)(11) and 4(2) of the
Securities Act of 1933, as amended. |
||
(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
Securities Exchange Act of 1934 during the third quarter of 2010. |
Maximum | ||||||||||||||||
Number (or | ||||||||||||||||
Approximate | ||||||||||||||||
Total | Dollar Value) | |||||||||||||||
Number of | of Shares that | |||||||||||||||
Shares | May Yet Be | |||||||||||||||
Purchased as | Purchased | |||||||||||||||
Part of | Under the | |||||||||||||||
Total | Price Paid | Plans of | (Dollars in | |||||||||||||
Period | Number of | per Share | Programs** | thousands) | ||||||||||||
July 1 -
July 31, 2010 |
800 | $ | 35.84 | 800 | $ | 5,496 | ||||||||||
August 1 -
August 31, 2010 |
| $ | | | $ | 5,496 | ||||||||||
September 1 -
September 30, 2010 |
1,600 | $ | 39.36 | 1,600 | $ | 5,433 | ||||||||||
Total |
2,400 | * | 2,400 | |||||||||||||
* | The weighted average price per share for the period July 2010 through September 2010 was $38.19. |
|
** | All shares repurchased by the Corporation during 2010 were completed pursuant to the new repurchase program. |
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Table of Contents
On November 20, 2008, the Board of Directors adopted a new three-year stock
repurchase program for directors and employees. Under the new stock
repurchase program, the Corporation may repurchase shares in individually
negotiated transactions from time to time as such shares become available
and spend up to $8 million to repurchase such shares over the three-year
term. Subject to the $8 million limitation, the Corporation intends to
purchase shares recently acquired by the selling shareholder pursuant to the
exercise of stock options or the vesting of restricted stock and limit its
acquisition of shares which were not recently acquired by the selling
shareholder pursuant to the exercise of stock options or the vesting of
shares of restricted stock to no more than 10,000 shares per year. Under
the new repurchase plan, the Corporation purchased 12,369 shares during the
nine month period ending September 30, 2010, and $5.4 million is still
available under the new repurchase plan as of September 30, 2010. The stock
repurchase program does not require the Corporation to acquire any specific
number of shares and may be modified, suspended, extended or terminated by
the Corporation at any time without prior notice. The repurchase program
will terminate on December 31, 2011, unless earlier suspended or
discontinued by the Corporation.
Item 3. Defaults on Senior Securities
Not applicable.
Item 4. (Removed and Reserved)
Item 5. Other Information
Not applicable.
Item 6. Exhibits
3.01 | Articles of Incorporation of the Corporation, filed as Exhibit
3(i) to the Corporations 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. |
|||
3.02 | Bylaws of the Corporation, filed as Exhibit 3(ii) to the
Corporations Form 8-K filed July 30, 2009, are incorporated by reference. |
|||
10.01* | 1993 Key Employees Stock Option Plan of the Corporation, as amended, filed
as Exhibit 10(a) to the Form 10-K for the fiscal year ended December 31, 2004,
is incorporated by reference. |
|||
10.02* | 1993 Directors Stock Option Plan of the Corporation, as amended, filed as
Exhibit 10(b) to the Corporations Form 10-Q as of June 30, 2001, is
incorporated by reference. |
|||
10.03* | 1993 Restricted Stock Plan of the Corporation, as amended, filed as Exhibit
10(c) to the Form 10-K for the fiscal year ended December 31, 2004, is
incorporated by reference. |
|||
10.04* | Form of agreement under the 1993 Key Employees Stock Option Plan, filed as
Exhibit 10(d) to the Form 10-K for the fiscal year ended December 31, 2004, is
incorporated by reference. |
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Table of Contents
10.05* | Form of agreement under the 1993 Restricted Stock Plan, filed as Exhibit
10(e) to the Form 10-K for the fiscal year ended December 31, 2004, is
incorporated by reference. |
|||
10.06* | Schedule of Directors Compensation Arrangements, filed as part of the
Corporations Form 8-K dated March 17, 2010, is incorporated by reference. |
|||
10.07* | Schedule of Named Executive Officers Compensation Arrangements, filed as
Exhibit 10.07 to the Corporations Form 8-K dated May 18, 2006, is incorporated
by reference, as amended by the Corporations Form 8-K filed March 17, 2010. |
|||
10.08* | The National Bank of Indianapolis Corporation Amended and Restated 2005
Equity Incentive Plan, filed as Exhibit 10.01 to the Corporations Form 8-K
dated June 23, 2010, is incorporated by reference. |
|||
10.09* | Form of Restricted Stock Award Agreement for The National Bank of
Indianapolis Corporation 2005 Equity Incentive Plan, filed as Exhibit 10.02 to
the Corporations Form 8-K dated June 22, 2005, is incorporated by reference. |
|||
10.10* | Form of Stock Option Award Agreement for The National Bank of Indianapolis
Corporation 2005 Equity Incentive Plan, filed as Exhibit 10.03 to the
Corporations Form 8-K dated June 22, 2005, is incorporated by reference. |
|||
10.11* | Employment Agreement dated December 15, 2005, between Morris L. Maurer and
the Corporation, filed as Exhibit 10.06 to the Corporations Form 8-K dated
December 21, 2005, and as amended by Exhibit 10.06 to the Corporations Form
8-K dated November 26, 2008, is incorporated by reference. |
|||
10.13* | The National Bank of Indianapolis Corporation Executives Deferred
Compensation Plan, filed as Exhibit 10.08 to the Corporations Form 8-K dated
December 21, 2005, and as amended by Exhibit 10.08 to the Corporations Form
8-K dated November 26, 2008, is incorporated by reference. |
|||
10.14* | The National Bank of Indianapolis Corporation 401(k) Savings Plan (as amended
and restated generally effective January 1, 2006), filed as Exhibit 10.14 to
the Corporations Form 10-K dated December 31, 2005, is incorporated by
reference. |
|||
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. |
* | Management contract or compensatory plan or arrangement. |
35
Table of Contents
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 2, 2010 | ||||
THE NATIONAL BANK OF INDIANAPOLIS CORPORATION |
||||
/s/ Debra L. Ross | ||||
Debra L. Ross | ||||
Chief Financial Officer (Principal Financial Officer) |
36
Table of Contents
EXHIBIT INDEX
3.01 | Articles of Incorporation of the Corporation, filed as Exhibit
3(i) to the Corporations 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. |
|||
3.02 | Bylaws of the Corporation, filed as Exhibit 3(ii) to the
Corporations Form 8-K filed July 30, 2009, are incorporated by reference. |
|||
10.01* | 1993 Key Employees Stock Option Plan of the Corporation, as amended, filed
as Exhibit 10(a) to the Form 10-K for the fiscal year ended December 31, 2004,
is incorporated by reference. |
|||
10.02* | 1993 Directors Stock Option Plan of the Corporation, as amended, filed as
Exhibit 10(b) to the Corporations Form 10-Q as of June 30, 2001, is
incorporated by reference. |
|||
10.03* | 1993 Restricted Stock Plan of the Corporation, as amended, filed as Exhibit
10(c) to the Form 10-K for the fiscal year ended December 31, 2004, is
incorporated by reference. |
|||
10.04* | Form of agreement under the 1993 Key Employees Stock Option Plan, filed as
Exhibit 10(d) to the Form 10-K for the fiscal year ended December 31, 2004, is
incorporated by reference. |
|||
10.05* | Form of agreement under the 1993 Restricted Stock Plan, filed as Exhibit
10(e) to the Form 10-K for the fiscal year ended December 31, 2004, is
incorporated by reference. |
|||
10.06* | Schedule of Directors Compensation Arrangements, filed as part of the
Corporations Form 8-K dated March 17, 2010, is incorporated by reference. |
|||
10.07* | Schedule of Named Executive Officers Compensation Arrangements, filed as
Exhibit 10.07 to the Corporations Form 8-K dated May 18, 2006, is incorporated
by reference, as amended by the Corporations Form 8-K filed March 17, 2010. |
|||
10.08* | The National Bank of Indianapolis Corporation Amended and Restated 2005
Equity Incentive Plan, filed as Exhibit 10.01 to the Corporations Form 8-K
dated June 23, 2010, is incorporated by reference. |
|||
10.09* | Form of Restricted Stock Award Agreement for The National Bank of
Indianapolis Corporation 2005 Equity Incentive Plan, filed as Exhibit 10.02 to
the Corporations Form 8-K dated June 22, 2005, is incorporated by reference. |
|||
10.10* | Form of Stock Option Award Agreement for The National Bank of Indianapolis
Corporation 2005 Equity Incentive Plan, filed as Exhibit 10.03 to the
Corporations Form 8-K dated June 22, 2005, is incorporated by reference. |
|||
10.11* | Employment Agreement dated December 15, 2005, between Morris L. Maurer and
the Corporation, filed as Exhibit 10.06 to the Corporations Form 8-K dated
December 21, 2005, and as amended by Exhibit 10.06 to the Corporations Form
8-K dated November 26, 2008, is incorporated by reference. |
37
Table of Contents
10.13* | The National Bank of Indianapolis Corporation Executives Deferred
Compensation Plan, filed as Exhibit 10.08 to the Corporations Form 8-K dated
December 21, 2005, and as amended by Exhibit 10.08 to the Corporations Form
8-K dated November 26, 2008, is incorporated by reference. |
|||
10.14* | The National Bank of Indianapolis Corporation 401(k) Savings Plan (as amended
and restated generally effective January 1, 2006), filed as Exhibit 10.14 to
the Corporations Form 10-K dated December 31, 2005, is incorporated by
reference. |
|||
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. |
* | Management contract or compensatory plan or arrangement. |
38