NATIONAL BANK OF INDIANAPOLIS CORP - FORM 10-Q

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - NATIONAL BANK OF INDIANAPOLIS CORP	c16671exv32w1.htm
EX-31.1 - EXHIBIT 31.1 - NATIONAL BANK OF INDIANAPOLIS CORP	c16671exv31w1.htm
EX-32.2 - EXHIBIT 32.2 - NATIONAL BANK OF INDIANAPOLIS CORP	c16671exv32w2.htm
EX-31.2 - EXHIBIT 31.2 - NATIONAL BANK OF INDIANAPOLIS CORP	c16671exv31w2.htm

UNITED STATES
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 March 31, 2011


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
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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 issuer’s classes of common stock, as of the latest practicable date.


Common Stock		Outstanding at May 6, 2011

Common Stock, no par value per share		2,314,750

Table of Contents

The National Bank of Indianapolis Corporation

Report on Form 10-Q
for Quarter Ended
March 31, 2011


PART I — FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (Unaudited)

Consolidated Balance Sheets — March 31, 2011 and December 31, 2010			1

Consolidated Statements of Income — Three Months ended March 31, 2011 and 2010			2

Consolidated Statements of Cash Flows — Three Months ended March 31, 2011 and 2010			3

Consolidated Statements of Shareholders’ Equity — Three Months ended March 31, 2011 and 2010			4

Notes to Consolidated Financial Statements			5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20

Item 3. Quantitative and Qualitative Disclosures about Market Risk			32

Item 4. Controls and Procedures			32

PART II — OTHER INFORMATION

Item 1. Legal Proceedings			34

Item 1A. Risk Factors			34

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			34

Item 3. Defaults Upon Senior Securities			35

Item 4. (Removed and Reserved)			35

Item 5. Other Information			35

Item 6. Exhibits			35

Signatures			37

Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

Part I — Financial Information


Item 1.		Financial Statements

The National Bank of Indianapolis Corporation

Consolidated Balance Sheets

(Unaudited, Dollars in thousands except share data)


	March 31, 2011			December 31, 2010
Assets
Cash and cash equivalents
Cash and due from banks	$	31,284		$	24,143
Interest bearing due from banks		206,090			252,266
Reverse repurchase agreements		1,000			1,000
Federal funds sold		20,647			16,109

Total cash and cash equivalents		259,021			293,518

Investment securities
Available-for-sale securities		81,104			75,677
Held-to-maturity securities (Fair value of $154,767 at March 31, 2011 and $117,302 at December 31, 2010)		151,917			114,676

Total investment securities		233,021			190,353

Loans held for sale		415			1,424
Loans		923,554			900,332
Less: Allowance for loan losses		(16,042	)		(15,134	)

Net loans		907,512			885,198
Bank owned life insurance		12,025			11,938
Other real estate owned		9,409			9,574
Premises and equipment		24,705			24,852
Deferred tax asset		8,604			8,540
Federal Reserve and FHLB stock at cost		3,065			3,065
Other assets and accrued interest		13,339			12,931

Total assets	$	1,471,116		$	1,441,393


Liabilities and shareholders’ equity
Deposits:
Noninterest-bearing demand deposits	$	220,067		$	221,129
Money market and savings deposits		857,318			821,345
Time deposits over $100,000		100,983			108,840
Other time deposits		84,986			87,526

Total deposits		1,263,354			1,238,840
Repurchase agreements and other secured short term borrowings		95,911			93,523
Short term debt		2,625			2,688
Subordinated debt		5,000			5,000
Junior subordinated debentures owed to unconsolidated subsidiary trust		13,918			13,918
Other liabilities		8,782			8,067

Total liabilities		1,389,590			1,362,036

Shareholders’ equity:
Preferred stock, no par value — authorized 5,000,000 shares	$	—		$	—
Common stock, no par value — authorized 15,000,000 shares issued 2,867,441 shares at March 31, 2011 and 2,866,641 shares at December 31, 2010		35,294			35,269
Treasury stock, at cost; 549,691 shares at March 31, 2011 and 548,891 shares at December 31, 2010		(20,986	)		(20,953	)
Additional paid in capital		13,475			12,866
Retained earnings		53,470			51,853
Accumulated other comprehensive income		273			322

Total shareholders’ equity		81,526			79,357

Total liabilities and shareholders’ equity	$	1,471,116		$	1,441,393

See notes to consolidated financial statements.

The National Bank of Indianapolis Corporation

Consolidated Statements of Income

(Unaudited, Dollars in thousands except per share data)


	Three months ended
	March 31,
	2011			2010
Interest income:
Interest and fees on loans	$	10,571		$	10,457
Interest on investment securities taxable		706			583
Interest on investment securities nontaxable		524			488
Interest on federal funds sold		11			1
Interest on due from banks		132			86

Total interest income		11,944			11,615

Interest expense:
Interest on deposits		1,516			1,888
Interest on other short term borrowings		72			71
Interest on short term debt		31			47
Interest on long term debt		388			388

Total interest expense		2,007			2,394

Net interest income		9,937			9,221

Provision for loan losses		1,689			1,235

Net interest income after provision for loan losses		8,248			7,986

Other operating income:
Wealth management fees		1,380			1,204
Service charges and fees on deposit accounts		747			769
Rental income		42			69
Mortgage banking income		219			212
Interchange income		340			284
Other		546			395

Total other operating income		3,274			2,933

Other operating expenses:
Salaries, wages and employee benefits		6,427			5,934
Occupancy		644			641
Furniture and equipment		299			329
Professional services		513			589
Data processing		793			725
Business development		428			431
FDIC Insurance		539			534
Non performing assets		261			157
Other		(461	)		882

Total other operating expenses		9,443			10,222

Income before tax		2,079			697
Federal and state income tax		462			75

Net income	$	1,617		$	622


Basic earnings per share	$	0.70		$	0.27


Diluted earnings per share	$	0.67		$	0.26

See notes to consolidated financial statements.

The National Bank of Indianapolis Corporation

Consolidated Statements of Cash Flows

(Unaudited, Dollars in thousands)


	Three months ended
	March 31,
	2011			2010

Operating Activities
Net Income	$	1,617		$	622
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Provision for loan losses		1,689			1,235
Proceeds from sale of residential mortgage loans		13,930			9,844
Origination of loans held for sale		(12,506	)		(7,967	)
Depreciation and amortization		383			381
Fair value adjustment on mortgage servicing rights		33			88
Gain on sale of loans		(136	)		(200	)
Net gain on sales and writedowns of other real estate and repossessions		(105	)		(37	)
Net increase in deferred income taxes		(32	)		(627	)
Net increase in bank owned life insurance		(87	)		(98	)
Excess tax benefit from deferred stock compensation		(3	)		(22	)
Net accretion of discounts and amortization of premiums on investments		478			279
Compensation expense related to restricted stock and options		608			411
Changes in assets and liabilities:
Accrued interest receivable		(533	)		(237	)
Other assets		92			217
Other liabilities		718			1,623

Net cash provided by operating activities		6,146			5,512

Investing Activities
Proceeds from maturities of investment securities held to maturity		13,155			9,075
Proceeds from maturities of investment securities available for sale		10,202			—
Purchases of investment securities held to maturity		(50,684	)		(1,004	)
Purchases of investment securities available for sale		(15,900	)		—
Net increase in loans		(29,195	)		(7,353	)
Proceeds from sale of loans		4,825			—
Proceeds from sales of other real estate and repossessions		358			1,884
Purchases of bank premises and equipment		(236	)		(112	)

Net cash provided (used) by investing activities		(67,475	)		2,490

Financing Activities
Net increase in deposits		24,514			30,956
Net increase in short term borrowings		2,388			11,238
Net change in revolving line of credit		(63	)		(63	)
Income tax benefit from deferred stock compensation		3			22
Proceeds from issuance of stock		23			131
Repurchase of stock		(33	)		(176	)

Net cash provided by financing activities		26,832			42,108


Increase (decrease) in cash and cash equivalents		(34,497	)		50,110

Cash and cash equivalents at beginning of year		293,518			151,617


Cash and cash equivalents at end of year	$	259,021		$	201,727


Supplemental cash flow information
Interest paid	$	2,409		$	2,943
Supplemental non cash disclosure
Loan balances transferred to foreclosed real estate	$	88		$	112

See notes to consolidated financial statements.

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 January 1, 2010	$	34,440	$	(20,346	)	$	10,873		$	48,067	$	(3	)	$	73,031

Comprehensive income:
Net income		—		—			—			622		—			622
Other comprehensive income
Net unrealized gain on investments, net of tax of $117		—		—			—			—		179			179

Total comprehensive income															801

Income tax benefit from deferred stock compensation		—		—			22			—		—			22
Issuance of stock 5,300 shares of common stock under stock-based compensation plans		141		—			(10	)		—		—			131
Repurchase of stock 4,708 shares of common stock		—		(176	)		—			—		—			(176	)
Stock based compensation earned		—		—			411			—		—			411

Balance at March 31, 2010	$	34,581	$	(20,522	)	$	11,296		$	48,689	$	176		$	74,220


Balance at January 1, 2011	$	35,269	$	(20,953	)	$	12,866		$	51,853	$	322		$	79,357

Comprehensive income:
Net income		—		—			—			1,617		—			1,617
Other comprehensive income
Net unrealized loss on investments, net of tax of $32		—		—			—			—		(49	)		(49	)

Total comprehensive income															1,568

Income tax benefit from deferred stock compensation		—		—			3			—		—			3
Issuance of 800 shares of common stock under stock-based compensation plans		25		—			(2	)		—		—			23
Repurchase of 800 shares of common stock		—		(33	)		—			—		—			(33	)
Stock based compensation earned		—		—			608			—		—			608

Balance at March 31, 2011	$	35,294	$	(20,986	)	$	13,475		$	53,470	$	273		$	81,526

See notes to consolidated financial statements.

The National Bank of Indianapolis Corporation

Notes to Consolidated Financial Statements

($ 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 three month period ended March 31, 2011, are not necessarily indicative of the results that may be expected for the year ended December 31, 2011. For further information, refer to the consolidated financial statements and footnotes thereto included in the Corporation’s Form 10-K for the year ended December 31, 2010.

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
March 31, 2011
Available-for-sale
U.S. Treasury securities	$	14,403	$	1	$	—	$	14,404
U.S. Government agencies		66,249		451		—		66,700

Total available-for-sale	$	80,652	$	452	$	—	$	81,104


			Gross		Gross			Estimated
	Amortized		Unrecognized		Unrecognized			Fair
	Cost		Gain		(Loss)			Value
Held-to-maturity
Municipal securities	$	60,650	$	2,800	$	(31	)	$	63,419
Collateralized mortgage obligations, residential		89,801		451		(406	)		89,846
Mortgage backed securities, residential		1,316		36		—			1,352
Other securities		150		—		—			150

Total Held-to-maturity	$	151,917	$	3,287	$	(437	)	$	154,767


			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gain		(Loss)			Value
December 31, 2010
Available-for-sale
U.S. Treasury securities	$	8,700	$	—	$	—		$	8,700
U.S. Government agencies		66,444		535		(2	)		66,977

Total available-for-sale	$	75,144	$	535	$	(2	)	$	75,677


			Gross		Gross			Estimated
	Amortized		Unrecognized		Unrecognized			Fair
	Cost		Gain		(Loss)			Value
Held-to-maturity
Municipal securities	$	55,429	$	2,121	$	(115	)	$	57,435
Collateralized mortgage obligations, residential		57,569		714		(139	)		58,144
Mortgage backed securities, residential		1,528		45		—			1,573
Other securities		150		—		—			150

Total Held-to-maturity	$	114,676	$	2,880	$	(254	)	$	117,302

Notes to Consolidated Financial Statements

($ in thousands, except share and per share data)

There were no sales of securities during the three month period ending March 31, 2011 and 2010.

The fair value of debt securities and carrying amount, if different, at March 31, 2011, by contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.


	March 31, 2011
	Amortized		Fair
	Cost		Value
Available-for-sale
Due in one year or less	$	44,758	$	44,832
Due from one to five years		35,894		36,272

Total	$	80,652	$	81,104


Held-to-maturity
Due in one year or less	$	50	$	50
Due from one to five years		5,891		6,290
Due from five to ten years		38,902		41,044
Due after ten years		15,957		16,185
CMO/Mortgage-backed, residential		91,117		91,198

Total	$	151,917	$	154,767

Investment securities with a carrying value of approximately $112 million and $103 million were pledged as collateral for Wealth Management accounts, U.S. Department of Justice for bankruptcy accounts on deposit, and securities sold under agreements to repurchase at March 31, 2011, and December 31, 2010, respectively.

Securities with unrealized losses at March 31, 2011, and December 31, 2010, 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)
March 31, 2011
Available-for-sale
None	$	—	$	—		$	—	$	—	$	—	$	—

Held-to-maturity
Collateralized mortgage obligations, residential	$	58,684	$	(406	)	$	—	$	—	$	58,684	$	(406	)
Municipal securities		3,928		(31	)		—		—		3,928		(31	)

Total Held-to-maturity	$	62,612	$	(437	)	$	—	$	—	$	62,612	$	(437	)


December 31, 2010
Available-for-sale
U.S. Government agencies	$	16,070	$	(2	)	$	—	$	—	$	16,070	$	(2	)

Total available-for-sale	$	16,070	$	(2	)	$	—	$	—	$	16,070	$	(2	)


Held-to-maturity
Collateralized mortgage obligations, residential	$	12,744	$	(139	)	$	—	$	—	$	12,744	$	(139	)
Municipal securities		8,358		(115	)		—		—		8,358		(115	)

Total Held-to-maturity	$	21,102	$	(254	)	$	—	$	—	$	21,102	$	(254	)

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 Corporation 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 decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

Notes to Consolidated Financial Statements

($ in thousands, except share and per share data)

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 investment’s 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 March 31, 2011, the Corporation held 26 investments of which the amortized cost was greater than fair value. The Corporation has no securities in which OTTI has been recorded.

There were no unrealized losses for investments classified as available-for-sale.

The unrealized losses for investments classified as held-to-maturity are attributable to changes in interest rates and/or economic environment and individually were 2.33% or less of their respective amortized costs. The unrealized losses relate primarily to residential collateralized mortgage obligations and securities issued by various municipalities. The residential collateralized mortgage obligations were purchased in January 2011 and October 2010. There has been an increase in long-term interest rates from the time of the investment purchase and March 31, 2011, which affects the fair value of residential collateralized mortgage obligations. All residential collateralized mortgage obligations are backed by the U.S. Government and its agencies and represent minimal credit risk at this time. The unrealized losses on securities issued by various municipalities were mainly purchased during the first quarter of 2011. The largest unrealized loss relates to one municipal that was purchased February 2011. The credit rating of the individual municipalities is assessed monthly. As of March 31, 2011, all but four of the municipal debt securities were rated BBB or better (as a result of insurance of the underlying rating on the bond). The four municipal debt securities have no underlying rating. Credit reviews of the municipalities have been conducted. As a result, we have determined that all of our non-rated debt securities would be rated a “pass” asset and thus classified as an investment grade security. All interest payments are current for all municipal securities and management expects all to be collected in accordance with contractual terms.

Note 3: Loans

Loans, including unamortized deferred costs net of fees, consist of the following:


	March 31, 2011			December 31, 2010
Residential loans secured by real estate	$	257,764		$	258,483
Commercial loans secured by real estate		298,237			289,286
Construction loans		43,397			44,639
Other commercial and industrial loans		301,915			287,706
Consumer loans		22,018			20,172

Total loans		923,331			900,286
Net deferred loan costs		223			46
Allowance for loan losses		(16,042	)		(15,134	)

Total loans, net	$	907,512		$	885,198

Notes to Consolidated Financial Statements

($ in thousands, except share and per share data)

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.

As of March 31, 2011, and December 31, 2010, there was $86.0 million and $85.9 million, of 1-4 family residential mortgage loans, respectively, pledged as collateral for FHLB advances.

There was an aggregate of $289.2 million and $297.6 million of commercial loans, commercial real estate, and construction loans pledged as collateral at the Federal Reserve Bank Discount Window at March 31, 2011, and December 31, 2010, respectively.

The following table presents the recorded investment in financing receivables by portfolio segment and the related activity in the allowance for loan losses for the period ending March 31, 2011:


	Commercial			Residential			Consumer			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	11,715		$	2,400		$	200		$	819		$	15,134
Loan charge offs		(811	)		(122	)		(7	)		—			(940	)
Recoveries		149			8			2			—			159
Provision		2,215			128			148			(802	)		1,689

Ending balance	$	13,268		$	2,414		$	343		$	17		$	16,042


Ending balance: individually evaluated for impairment	$	1,774		$	724		$	—		$	—		$	2,498


Ending balance: collectively evaluated for impairment	$	11,494		$	1,690		$	343		$	17		$	13,544


	Commercial		Residential		Consumer		Unallocated		Total
Loans:
Loans individually evaluated for impairment	$	9,928	$	4,340	$	106		N/A	$	14,374
Loans collectively evaluated for impairment		633,319		253,926		21,935		N/A		909,180
Accrued interest receivable		1,923		1,278		54		N/A		3,255

Total recorded investment	$	645,170	$	259,544	$	22,095		N/A	$	926,809

The following table presents the recorded investment in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method at December 31, 2010:


	Commercial		Residential		Consumer		Unallocated		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	781	$	801	$	5	$	—	$	1,587
Collectively evaluated for impairment		10,934		1,599		195		819		13,547

Total ending allowance balance	$	11,715	$	2,400	$	200	$	819	$	15,134


Loans:
Loans individually evaluated for impairment	$	6,894	$	4,165	$	111		N/A	$	11,170
Loans collectively evaluated for impairment		614,277		254,798		20,087		N/A		889,162
Accrued interest receivable		1,884		1,188		43		N/A		3,115

Total recorded investment	$	623,055	$	260,151	$	20,241		N/A	$	903,447

Notes to Consolidated Financial Statements

($ in thousands, except share and per share data)

Activity in the allowance for loan losses was as follows for the three month period ending March 31, 2010:


Beginning balance	$	13,716
Loan charge offs		(208	)
Recoveries		16
Provision for loan losses		1,235

Ending balance	$	14,759

Loans are considered to be impaired when it is determined that the obligor will not pay all contractual principal and interest when due. The following table presents loans individually evaluated for impairment by class of loans at March 31, 2011:


	Unpaid				Allowance for
	Principal		Recorded		Loan Losses
	Balance		Investment		Allocated
With no related allowance recorded:
Commercial
Commercial & industrial	$	3,981	$	2,814	$	—
Commercial real estate		2,436		2,244		—
Construction		1,490		961		—
Residential
1-4 family		1,039		681		—
Home equity		1,696		1,531		—
Consumer
Personal		106		106		—
Installment		—		—		—
Overdraft		—		—		—
Credit cards		—		—		—
With an allowance recorded:
Commercial
Commercial & industrial		991		991		706
Commercial real estate		353		353		101
Construction		2,565		2,565		967
Residential
1-4 family		188		186		47
Home equity		1,942		1,942		677
Consumer
Personal		—		—		—
Installment		—		—		—
Overdraft		—		—		—
Credit cards		—		—		—

Total	$	16,787	$	14,374	$	2,498

Notes to Consolidated Financial Statements

($ in thousands, except share and per share data)

The following table presents loans individually evaluated for impairment by class of loans at December 31, 2010:


	Unpaid				Allowance for
	Principal		Recorded		Loan Losses
	Balance		Investment		Allocated
With no related allowance recorded:
Commercial
Commercial & industrial	$	3,467	$	2,524	$	—
Commercial real estate		2,150		2,076		—
Construction		1,490		1,251		—
Residential
1-4 family		1,080		710		—
Home equity		729		630		—
Consumer
Personal		106		106		—
Installment		—		—		—
Overdraft		—		—		—
Credit cards		—		—		—
With an allowance recorded:
Commercial
Commercial & industrial		1,043		1,043		781
Commercial real estate		—		—		—
Construction		—		—		—
Residential
1-4 family		56		56		20
Home equity		2,769		2,769		781
Consumer
Personal		—		—		—
Installment		—		—		—
Overdraft		—		—		—
Credit cards		5		5		5

Total	$	12,895	$	11,170	$	1,587

The following table presents the average balance of individually impaired loans by class for the period ending March 31, 2011:


Commercial
Commercial & industrial	$	3,868
Commercial real estate		2,346
Construction		2,009
Residential
1-4 family		826
Home equity		3,492
Consumer
Personal		106
Installment		—
Overdraft		—
Credit cards		3

Total	$	12,650

The average balance of individually impaired loans for the year ending March 31, 2010, was $15.2 million.

There was no interest income recorded on a cash or accrual basis for any class of impaired loans for the three month period ending March 31, 2011, and 2010.

Notes to Consolidated Financial Statements

($ in thousands, except share and per share data)

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans at March 31, 2011, and December 31, 2010:


					Loans Past Due
	Nonaccrual				Over 90 Days Still Accruing
	March 31, 2011		December 31, 2010		March 31, 2011		December 31, 2010
Commercial
Commercial & industrial	$	3,805	$	3,567	$	—	$	—
Commercial real estate		2,597		2,076		—		—
Construction		3,526		1,251		—		—
Residential
1-4 family		799		766		—		—
Home equity		3,473		3,399		—		—
Consumer
Personal		106		106		—		—
Installment		—		—		—		—
Overdraft		—		—		—		—
Credit cards		—		—		—		5

Total	$	14,306	$	11,165	$	—	$	5

The following table presents the aging of the recorded investment in past due loans, including nonaccrual loans, by class of loans at March 31, 2011:


	30 – 89		Greater than
	Days		90 Days		Total
	Past Due		Past Due		Past Due
Commercial
Commercial & industrial	$	1,474	$	1,204	$	2,678
Commercial real estate		653		1,536		2,189
Construction		95		960		1,055
Residential
1-4 family		1,783		287		2,070
Home equity		26		1,346		1,372
Consumer
Personal		—		106		106
Installment		9		—		9
Overdraft		—		—		—
Credit cards		39		—		39

Total	$	4,079	$	5,439	$	9,518

Notes to Consolidated Financial Statements

($ in thousands, except share and per share data)

The following table presents the aging of the recorded investment in past due loans, including nonaccrual loans, by class of loans at December 31, 2010:


	30 – 89		Greater than
	Days		90 Days		Total
	Past Due		Past Due		Past Due
Commercial
Commercial & industrial	$	667	$	1,501	$	2,168
Commercial real estate		1,644		1,815		3,459
Construction		205		1,251		1,456
Residential
1-4 family		1,785		289		2,074
Home equity		1,024		430		1,454
Consumer
Personal		850		106		956
Installment		14		—		14
Overdraft		—		—		—
Credit cards		39		5		44

Total	$	6,228	$	5,397	$	11,625

Troubled Debt Restructurings:

The Corporation has allocated $878 thousand and $0 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2011, and December 31, 2010, respectively. The Corporation has not committed to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings as of March 31, 2011, and December 31, 2010.

Credit Quality Indicators:

The Corporation categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Corporation analyzes certain loans individually by classifying the loans as to credit risk. This analysis includes non-homogeneous loans, such as commercial, commercial real estate, and loans for personal or consumer purpose as warranted. This analysis is performed on a monthly basis. The Corporation uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Corporation’s credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Notes to Consolidated Financial Statements

($ in thousands, except share and per share data)

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Based on the most recent analysis performed, the risk rating of the loans by class of loans is as follows:


	Not				Special
March 31, 2011	Rated		Pass		Mention		Substandard		Doubtful
Commercial
Commercial & industrial	$	—	$	280,280	$	6,454	$	15,340	$	—
Commercial real estate		—		260,859		15,809		21,155		—
Construction		—		32,015		844		10,491		—

Total	$	—	$	573,154	$	23,107	$	46,986	$	—


	Not				Special
December 31, 2010	Rated		Pass		Mention		Substandard		Doubtful
Commercial
Commercial & industrial	$	—	$	265,528	$	7,893	$	14,122	$	—
Commercial real estate		—		256,866		24,745		7,402		—
Construction		—		31,458		6,499		6,658		—

Total	$	—	$	553,852	$	39,137	$	28,182	$	—

The Corporation considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, the Corporation also evaluates credit quality based on the aging status of the loan, which are previously presented, and by payment activity. The following table presents the recorded investment in residential and consumer loans based on payment activity.


	Consumer								Residential
March 31, 2011	Personal		Installment		Overdraft		Credit cards		1-4 family		Home equity

Performing	$	16,098	$	880	$	540	$	4,417	$	110,014	$	143,911
Nonperforming		106		—		—		—		867		3,473

Total	$	16,204	$	880	$	540	$	4,417	$	110,881	$	147,384


	Consumer								Residential
December 31, 2010	Personal		Installment		Overdraft		Credit cards		1-4 family		Home equity

Performing	$	14,158	$	885	$	620	$	4,424	$	109,360	$	145,438
Nonperforming		106		—		—		5		766		3,399

Total	$	14,264	$	885	$	620	$	4,429	$	110,126	$	148,837

Note 4: Real Estate Owned

Activity in real estate owned was as follows:


	Three months ended
	March 31,
	2011			2010
Balance at beginning of period	$	9,574		$	8,432
Additions		88			112
Write downs		(202	)		(19	)
Sales		(51	)		(1,828	)

Balance at end of period	$	9,409		$	6,697

Notes to Consolidated Financial Statements

($ in thousands, except share and per share data)

Expenses related to real estate owned include:


	Three months ended
	March 31,
	2011			2010
Net gain on sales	$	(307	)	$	(56	)
Write downs		202			19
Operating expenses, net of rental income		172			136

	$	67		$	99

Note 5: Mortgage Banking Activities

The unpaid principal balances of mortgage loans serviced for others were $190.4 million and $183.2 million at March 31, 2011, and December 31, 2010, respectively.

Custodial escrow balances maintained in connection with serviced loans were $1.5 million and $725 thousand at March 31, 2011, and December 31, 2010, respectively.

The following table includes activity for mortgage servicing rights:


	Three months ended			Twelve months ended
	March 31, 2011			December 31, 2010
Balance at beginning of period	$	1,624		$	1,459
Plus additions		160			692
Fair value adjustments		(33	)		(527	)

Balance at end of period	$	1,751		$	1,624

Mortgage servicing rights are carried at fair value at March 31, 2011, and December 31, 2010. Fair value at March 31, 2011, was determined using discount rates ranging from 10.6% to 15.0%, prepayment speeds ranging from 3.83% to 24.12%, depending on the stratification of the specific right, and a weighted average default rate of 0.40%. Fair value at December 31, 2010, was determined using discount rates ranging from 10.6% to 16.0%, prepayment speeds ranging from 6.39% to 23.08%, depending on the stratification of the specific right, and a weighted average default rate of 0.39%.

Note 6: Stock Based Compensation

During the first quarter of 2011, one officer of the Corporation exercised options to purchase 800 common shares in the aggregate. The weighted average exercise price was $27.75 and the weighted average fair market value of the stock was $41.49.

Due to the exercise of these options for the three months ended March 31, 2011, 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 $3 thousand as additional paid in capital for the three months ended March 31, 2011, as per guidance issued by the Financial Accounting Standards Board (FASB) on stock compensation.

Notes to Consolidated Financial Statements

($ in thousands, except share and per share data)

Note 7: Earnings per Share

The following table sets forth the computation of basic and diluted earnings per share:


	Three months ended
	March 31,
	2011		2010

Basic average shares outstanding		2,317,751		2,307,356


Net income	$	1,617	$	622


Basic net income per common share	$	0.70	$	0.27


Diluted
Average shares outstanding		2,317,751		2,307,356
Nonvested restricted stock		82,967		35,189
Net effect of the assumed exercise of stock options		21,742		20,007

Diluted average shares		2,422,460		2,362,552


Net income	$	1,617	$	622


Diluted net income per common share	$	0.67	$	0.26

For the three month period ending March 31, 2011 and 2010, options to purchase 183,800 and 189,400 shares, respectively, were outstanding but not included in the computation of diluted earnings per share because they were antidilutive.

There were no antidilutive restricted shares for the three month period ending March 31, 2011. For the three month period ending March 31, 2010, 4,325 restricted shares were outstanding but not included in the computation of diluted earnings per share because they were antidilutive.

Note 8: 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
	March 31,
	2011			2010
Net income	$	1,617		$	622
Other comprehensive income (loss)
Change in securities available for sale:
Net unrealized gains (loss) during the period		(81	)		296
Tax effect		32			(117	)

Total other comprehensive income (loss)		(49	)		179

Comprehensive income	$	1,568		$	801

Note 9: 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.

Notes to Consolidated Financial Statements

($ in thousands, except share and per share data)

The contractual amount of financial instruments with off-balance sheet risk was as follows:


	March 31, 2011		December 31, 2010
Unused commercial credit lines	$	209,053	$	222,387
Unused revolving home equity and credit card lines		112,555		107,712
Standby letters of credit		7,908		7,712
Demand deposit account lines of credit		2,608		2,596

	$	332,124	$	340,407

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 management’s credit assessment of the customer.

As of March 31, 2011, the Corporation had committed to fund $2.1 million in commercial and residential mortgages.

Other than routine litigation incidental to business and based on the information presently available, the Corporation believes that the total amounts, if any, that will ultimately be paid arising from these claims and legal actions are reflected in the consolidated results of operations and financial position.

Note 10: 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 entity’s 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.

Notes to Consolidated Financial Statements

($ in thousands, except share and per share data)

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 Other		Significant
			for Identical Assets		Observable Inputs		Unobservable Inputs
	Carrying Value		(Level 1)		(Level 2)		(Level 3)
March 31, 2011
Assets:
Available-for-sale securities:
U.S. Treasury securities	$	14,404	$	—	$	14,404	$	—
U.S. Government agencies		66,700		—		66,700		—
Mortgage servicing rights		1,751		—		1,751		—

December 31, 2010
Assets:
Available-for-sale securities:
U.S. Treasury securities	$	8,700	$	—	$	8,700	$	—
U.S. Government agencies		66,977		—		66,977		—
Mortgage servicing rights		1,624		—		1,624		—

There were no significant transfers between Level 1 and Level 2 during the three month period ending March 31, 2011.

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 Other		Significant
			for Identical Assets		Observable Inputs		Unobservable Inputs
	Carrying Value		(Level 1)		(Level 2)		(Level 3)
March 31, 2011
Assets:
Impaired loans
Commercial	$	2,134	$	—	$	—	$	2,134
Residential		1,404		—		—		1,404
Consumer		—		—		—		—
Other real estate
Commercial		4,342		—		—		4,342
Residential		134		—		—		134
Consumer		—		—		—		—

December 31, 2010
Assets:
Impaired loans
Commercial	$	262	$	—	$	—	$	262
Residential		2,024		—		—		2,024
Consumer		—		—		—		—
Other real estate
Commercial		4,826		—		—		4,826
Residential		97		—		—		97
Consumer		—		—		—		—

Notes to Consolidated Financial Statements

($ in thousands, except share and per share data)

The following represent impairment charges recognized during the period:

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $6.0 million, with a valuation allowance of $2.5 million, at March 31, 2011. This resulted in an additional provision for loan losses of $925 thousand for the three month period ending March 31, 2011. At December 31, 2010, impaired loans had a carrying amount of $3.9 million, with a valuation allowance of $1.6 million. This resulted in an additional provision for loan losses of $1.4 million for the year ending December 31, 2010.

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 $4.5 million at March 31, 2011. At December 31, 2010, 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 $4.9 million. There was a charge to earnings through non performing asset expense of $202 thousand and $1.1 million for the three month period ending March 31, 2011, and the year ending December 31, 2010, respectively, for the write down of other real estate.

The estimated fair value of the Corporation’s financial instruments is as follows:


	March 31, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Assets
Cash and due from banks	$	237,374	$	237,374	$	276,409	$	276,409
Federal funds sold		20,647		20,647		16,109		16,109
Reverse repurchase agreements		1,000		1,000		1,000		1,000
Investment securities available-for-sale		81,104		81,104		75,677		75,677
Investment securities held-to-maturity		151,917		154,767		114,676		117,302
Loans held for sale		415		415		1,424		1,424
Net loans		907,512		916,310		885,198		893,665
Federal Reserve and FHLB stock		3,065		N/A		3,065		N/A
Accrued interest receivable		4,749		4,749		4,216		4,216

Liabilities
Deposits		1,263,354		1,262,747		1,238,840		1,238,175
Repurchase agreements and other secured short-term borrowings		95,911		95,960		93,523		93,554
Short-term debt		2,625		2,625		2,688		2,688
Subordinated debt		5,000		5,000		5,000		5,000
Junior subordinated debt		13,918		10,280		13,918		10,245
Accrued interest payable		1,001		1,001		1,498		1,498

The following methods and assumptions, not previously presented, 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, or other secured short-term borrowings or for 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 adjusted for allowance for loan losses. It was not practicable to determine the fair value of Federal Reserve and 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.

Notes to Consolidated Financial Statements

($ in thousands, except share and per share data)

Note 11: Adoption of New Accounting Standards

In January 2011, the FASB deferred the effective date of Disclosures about Troubled Debt Restructurings (“TDRs”). This delay was intended to allow the Board time to complete deliberations on what constitutes a TDR. The effective date of the new disclosures regarding TDRs for public entities and the guidelines for determining what constitutes a troubled debt restructuring will be effective upon issuance. The adoption of this standard is not expected to have a material effect on the Corporation’s results of operations or financial position.

In April 2011, the FASB issued updated guidance for determining whether a restructuring is a troubled debt restructuring. In determining whether a restructuring of a financing receivable is a troubled debt restructuring, the creditor must separately conclude that both the restructuring of the debt constitutes a concession and the debtor is experiencing financial difficulties.

When evaluating whether a concession has been made, the creditor must determine if the debtor has access to funds at a market rate for debt with similar risk characteristics as the restructured debt. If not, the restructuring would be considered to be a below-market rate, which may indicate that the creditor has been granted a concession. Further, a temporary or permanent increase in the contractual interest as a result of a restructuring does not preclude the restructuring from being considered a concession since the new contractual interest rate on the restructured debt could still be below the market interest rate for new debt with similar risk characteristics.

Once it has been determined that a debtor has been given a concession, the creditor must then determine if the debtor is experiencing financial difficulties. The update provides guidance on a creditor’s evaluation of whether a debtor is experiencing financial difficulties by requiring the creditor to consider whether it is probable that the debtor would be in payment default on any of its debt in the foreseeable future without a modification.

In addition, the update clarifies that the creditor is precluded from using the effective interest rate test in the debtor’s guidance on restricting of payable when evaluating whether a restructuring constitutes a troubled debt restructuring.

The updated guidance is effective for public entities beginning with the first interim or annual period on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired and for those receivables, the entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. Early adoption is permitted. Management continues to evaluate the impact of the adoption of this update, but does not anticipate it to have a significant impact on the Corporation’s financial statements.


Item 2.		Management’s 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 Bank’s twelve banking offices in Marion, Johnson, and Hamilton County, Indiana.

The primary source of the Bank’s 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 $1.6 million or $0.67 per diluted share for the three month period ending March 31, 2011, as compared to $622 thousand or $0.26 per diluted share for the three month period ending March 31, 2010.

The risks and challenges that management believes will be important for the remainder of 2011 are price competition for loans and deposits by competitors, marketplace credit effects, continued spread compression, a 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. market 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.

Forward-Looking Information

This section contains forward-looking statements. Forward-looking statements give current expectations or forecasts of future events and are not guarantees of future performance. The forward-looking statements are based on management’s expectations and are subject to a number of risks and uncertainties. Although management believes the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements. Risks and uncertainties that could cause actual results to differ materially include, without limitation, the Corporation’s ability to execute its business plans; changes in general economic and financial market conditions; changes in interest rates; changes in competitive conditions; continuing consolidation in the financial services industry; new litigation or changes in existing litigation; losses, customer bankruptcy, claims and assessments; changes in banking regulations or other regulatory or legislative requirements that impact the Corporation’s business; and changes in accounting policies and procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies. Additional information concerning factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements is available in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010.

Critical Accounting Policies

The Corporation’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and follow general practices within the industries in which it operates. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets are based either on quoted market prices or are provided by other third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal cash flow modeling techniques.

Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the valuation of the mortgage servicing asset, the valuation of investment securities, foreclosed assets, 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.

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.

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 investment’s 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.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs. Interest income on commercial, mortgage, and consumer loans is accrued on the principal amount of such loans outstanding and is recognized when earned. Loan origination fees and certain direct origination costs are deferred and recognized in interest income using the level-yield method without anticipating prepayments. The recorded investment in loans includes accrued interest receivable.

All loan classes, except overdraft protection lines of credit and credit cards, are typically placed on non-accrual when they become 90 days past due, unless the loan is well secured and in the process of collection, or it is determined that the obligor will not pay all contractual principal and interest due. Unless there is a significant reason to the contrary, overdraft protection lines of credit and credit cards are charged off when deemed uncollectible, but generally no later than when they become 150 days past due. Any accrued interest is charged against interest income. Interest continues to legally accrue on these non-accrual loans, but no income is recognized for financial statement purposes. Both principal and interest payments received on non-accrual loans are applied to the outstanding principal balance, until the remaining balance is considered collectible, at which time interest income may be recognized when received.

Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

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 for each loan portfolio segment by 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 management’s 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. All loan classes are considered to be impaired when it is determined that the obligor will not pay all contractual principal and interest due or they become 90 days past due, unless the loan is both well secured and in the process of collection. For loans determined to be impaired, the loan’s 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 loss experience supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: changes in lending policies and procedures; effects of changes in risk selection and underwriting standards; national and local economic trends and conditions; trends in nature, volume, and growth rate of loans; experience, ability, and depth of lending management and other relevant staff; levels of and trends in past due and classified loans; collateral valuations in the market for collateral dependent loans; effects of changes in credit concentrations; and competition, legal, and regulatory factors. These loans are segregated by loan class and/or risk grade with an estimated loss ratio applied against each loan class and/or risk grade.

Loans for which the terms have been modified resulting in concessions and for which the borrower is experiencing financial difficulties are considered troubled debt restructuring and are classified as impaired. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Corporation determines the amount of the reserve in accordance with the accounting policy for the allowance for loan losses.

The following portfolio segments have been identified: commercial, residential, and consumer. Commercial credits and personal lines of credit are subject to the assignment of individual risk grades in accordance with the Corporation’s Loan Risk Rating Guidelines. These loans are individually graded as Pass, Special Mention, Substandard or Doubtful, with the “Pass” rating further subdivided into risk gradients. Residential loans (including home equity lines of credit) and consumer loans (excluding aforementioned personal lines of credit) are not generally individually graded; rather, these loans are treated as homogenous pools within each category. When included in these pools, these loans are assigned a “Pass” Risk Rating. These loans may be or may become individually graded based on a pledge of liquid collateral, delinquency status, identified changes in the borrower’s repayment capacity, or as a result of legal action.

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. All impaired loan classes 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 losses inherent in the loan portfolio.

Foreclosed Assets

Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. Any excess recorded investment over the fair value of the property received is charged to the allowance for loan losses. The fair value of foreclosed assets is subject to fluctuations in appraised values which are affected by the local and national economy. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through non performing assets expense.

When the Corporation owns and operates these assets, it is exposed to risks inherent in the ownership of real estate. In addition to declines in the value of the property, there are expenditures associated with the ownership of real estate which are expensed after the Corporation acquires the property. These expenditures primarily include real estate taxes, insurance, and maintenance costs. These expenses may adversely affect the income since they may exceed the amount of rental income collected.

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.

Results of Operations

Net Interest Income

The Corporation’s results of operations depend primarily on the level of its net interest income, its non-interest income and its operating expenses. Net interest income depends on the volume of and rates associated with interest earning assets and interest bearing liabilities which results in the net interest spread. The Corporation had net interest income fully taxable equivalent (“FTE”) of $10.4 million for the three month period ending March 31, 2011, as compared to net interest income FTE of $9.5 million for the three month period ending March 31, 2010. The increase in net interest income FTE is due to an increase in total earning assets of $196.8 million for the three month period ending March 31, 2011, as compared to the three month period ending March 31, 2010. Additionally, total interest bearing liabilities increased $165.6 million for the three month period ending March 31, 2011, as compared to the three month period ending March 31, 2010. The net interest income spread FTE decreased 0.18% to 2.93% for the three month period ending March 31, 2011, from 3.11% for the three month period ending March 31, 2010. The contribution of non-interest bearing funds decreased 0.04% to 0.11% from 0.15% for the three month period ending March 31, 2011 and 2010, respectively, resulting in an overall decrease to the net interest margin FTE to 3.04% from 3.26% for the three month period ending March 31, 2011 and 2010, respectively.

The following table details average balances, interest income/expense average rates/yields for the Corporation’s earning assets and interest bearing liabilities at the dates indicated.


	Three months ended
	March 31,
	2011							2010
			Interest		Average					Interest		Average
	Average		Income/		Rate/			Average		Income/		Rate/
	Balance		Expense		Yield			Balance		Expense		Yield
Assets:
Interest bearing due from banks	$	213,117	$	132		0.25	%	$	138,641	$	86		0.25	%
Reverse repurchase agreements		1,000		—		0.01	%		1,000		—		0.01	%
Federal funds		17,971		11		0.24	%		1,328		1		0.30	%
Non taxable investment securities — FTE		56,629		811		5.73	%		53,241		753		5.66	%
Taxable investment securities		167,012		706		1.69	%		108,190		583		2.16	%
Loans (gross) — FTE		910,101		10,718		4.71	%		866,657		10,497		4.84	%

Total earning assets	$	1,365,830	$	12,378		3.63	%	$	1,169,057	$	11,920		4.08	%
Non-earning assets		90,460							90,568

Total assets	$	1,456,290						$	1,259,625


Liabilities:
Interest bearing DDA	$	210,208	$	88		0.17	%	$	196,554	$	137		0.28	%
Savings		634,681		732		0.46	%		477,445		717		0.60	%
CD’s under $100		70,787		240		1.36	%		61,869		311		2.01	%
CD’s over $100		97,382		360		1.48	%		126,357		599		1.90	%
Individual retirement accounts		22,119		96		1.74	%		22,373		124		2.22	%
Repurchase agreements and other secured short term borrowings		98,161		72		0.29	%		81,727		71		0.35	%
Short-term debt		2,686		31		4.62	%		4,138		47		4.54	%
Subordinated debt		5,000		19		1.52	%		5,000		19		1.52	%
Long term debt		13,918		369		10.60	%		13,918		369		10.60	%

Total interest bearing liabilities	$	1,154,942	$	2,007		0.70	%	$	989,381	$	2,394		0.97	%
Non-interest bearing liabilities		213,958							191,922
Other liabilities		6,693							4,377

Total liabilities	$	1,375,593						$	1,185,680
Equity		80,697							73,945

Total liabilities & equity	$	1,456,290						$	1,259,625


Recap:
Interest income — FTE			$	12,378		3.63	%			$	11,920		4.08	%
Interest expense				2,007		0.70	%			$	2,394		0.97	%

Net interest income/spread — FTE			$	10,371		2.93	%			$	9,526		3.11	%


Contribution of non-interest bearing funds						0.11	%						0.15	%

Net interest margin — FTE						3.04	%						3.26	%

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 costs net of loan fees, of $185 thousand and $158 thousand, for the three month period ending March 31, 2011 and 2010, respectively.

•

Net interest income on a fully taxable equivalent basis, the most significant component of the Corporation’s 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 on a fully taxable equivalent 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 $147 thousand and $40 thousand for the three month period ending March 31, 2011 and 2010, respectively. The appropriate tax equivalent adjustments to interest income on municipal securities was $287 thousand and $265 thousand for the three month period ending March 31, 2011 and 2010, 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 Corporation’s results of operations. This adjustment is considered helpful in the comparison of one financial institution’s 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 management’s 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 management’s 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 $1.7 million and $1.2 million, for the three month period ending March 31, 2011 and 2010, respectively. The increase in the provision for loan losses for the three month period ending March 31, 2011, compared to the three month period ending March 31, 2010, is due to an increase in charge offs relating to specific commercial loans. The change in the unallocated reserve of $802 thousand from $819 thousand at December 31, 2010, to $17 thousand at March 31, 2011, was due to the reallocation of the allowance held for commercial loans as a result of the specific identification of weakened commercial loans.

Based on management’s 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 details the components of loan loss reserve:


	Three months ended
	March 31,
	2011			2010
Beginning of Period	$	15,134		$	13,716
Provision for loan losses		1,689			1,235
Chargeoffs
Commercial		811			89
Residential		122			66
Consumer		7			53

		940			208
Recoveries
Commercial		149			8
Residential		8			7
Consumer		2			1

		159			16

End of Period	$	16,042		$	14,759

Allowance as a % of Loans		1.74	%		1.70	%

Loans are considered to be impaired when it is determined that the obligor will not pay all contractual principal and interest when due.

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 $9.5 million or 1.03% of total loans at March 31, 2011, compared to $9.3 million or 1.07% of total loans at March 31, 2010.

There were no loans greater than 90 days past due and still accruing interest at March 31, 2011. Loans greater than 90 days past due and still accruing interest at March 31, 2010, totaled approximately $25 thousand. The total amount of nonaccrual loans was $14.3 million at March 31, 2011, compared to $15.1 million at March 31, 2010. 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 Corporation’s credit monitoring procedures.

Other Operating Income

The following table details the components of other operating income:


	Three months ended
	March 31,				$			%
	2011		2010		Change			Change
Wealth management fees	$	1,380	$	1,204	$	176			14.6	%
Service charges and fees on deposit accounts		747		769		(22	)		-2.9	%
Rental income		42		69		(27	)		-39.1	%
Mortgage banking income		219		212		7			3.3	%
Interchange income		340		284		56			19.7	%
Other		546		395		151			38.2	%

Total other operating income	$	3,274	$	2,933	$	341			11.6	%

Total other operating income for the three month period ending March 31, 2011, increased as compared to the three month period ending March 31, 2010.

Wealth management fees increased for the three month period ending March 31, 2011, as compared to the three month period ending March 31, 2010. The increase in wealth management fees is attributable to an overall increase in the stock market and estate fees.

Service charges and fees on deposit accounts decreased for the three month period ending March 31, 2011, as compared to the three month period ending March 31, 2010. The decrease is primarily attributable to a decrease in service charges collected for DDA business accounts and overdraft and NSF fees. The decrease is partially offset by an increase in service charges collected for non-profit accounts and wire transfer fees.

Rental income decreased for the three month period ending March 31, 2011, as compared to the three month period ending March 31, 2010. The decrease was primarily due to the refund of the tenant’s operating costs as a result of the annual true up and the Bank occupying more space at the 4930 North Pennsylvania Street location thus reducing the space available for tenants.

Mortgage banking income increased for the three month period ending March 31, 2011, as compared to the three month period ending March 31, 2010. The increase for the three month period ending March 31, 2011, as compared to the three month period ending March 31, 2010, is due to a decrease in the write down of the fair value of mortgage servicing rights (“MSRs”) of $33 thousand for the three month period ending March 31, 2011, as compared to a write down of $88 thousand for the three month period ending March 31, 2010. Offsetting this increase was a decrease in the net gain on the sale of mortgage loans. A net gain on the sale of mortgage loans of $136 thousand was recorded for the three month period ending March 31, 2011, as compared to a net gain on the sale of mortgage loans of $200 thousand for the three month period ending March 31, 2010.

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 March 31, 2011, as compared to the three month period ending March 31, 2010. The increase is attributable to higher transaction volumes for debit cards and credit cards during the three month period ending March 31, 2011, as compared to the three month period ending March 31, 2010. The increase is partially offset by an increase in cash back rewards expense for the three month period ending March 31, 2011, as compared to the three month period ending March 31, 2010.

Other income increased for the three month period ending March 31, 2011, as compared to the three month period ending March 31, 2010. The increase is primarily due to an increase in other real estate rental income and prepayment penalties collected. The increase is partially offset by a decrease in letter of credit fees, application fees, bank owned life insurance income, Dreyfus money market funds sweep fees, and late fee income.

Other Operating Expenses

The following table details the components of other operating expense:


	Three months ended
	March 31,					$			%
	2011			2010		Change			Change
Salaries, wages and employee benefits	$	6,427		$	5,934	$	493			8.3	%
Occupancy		644			641		3			0.5	%
Furniture and equipment		299			329		(30	)		-9.1	%
Professional services		513			589		(76	)		-12.9	%
Data processing		793			725		68			9.4	%
Business development		428			431		(3	)		-0.7	%
FDIC Insurance		539			534		5			0.9	%
Non performing assets		261			157		104			66.2	%
Other		(461	)		882		(1,343	)		-152.3	%

Total other operating expenses	$	9,443		$	10,222	$	(779	)		-7.6	%

Total other operating expenses for the three month period ending March 31, 2011, decreased as compared to the three month period ending March 31, 2010.

Salaries, wages, and employee benefits increased for the three month period ending March 31, 2011, as compared to the three month period ending March 31, 2010. The increase is the result of increased salary expense, employer FICA expense, federal and state unemployment tax expense, contract labor, group medical benefits, 401K expense, and deferred compensation. The increase is partially offset by a decrease in direct loan origination costs.

Occupancy expense increased for the three month period ending March 31, 2011, as compared to the three month period ending March 31, 2010. The increase is due to an increase in real estate taxes, building and improvements depreciation expense, and utilities expense. The increase is partially offset by a decrease in building and property repair expense, land and leasehold improvements depreciation expense, snow removal, management fees, building cleaning and supplies, and building maintenance

Furniture and equipment expense decreased for the three month period ending March 31, 2011, as compared to the three month period ending March 31, 2010. This decrease is due to a decrease in furniture, fixture, and equipment purchased for less than $500 and expensed and maintenance contracts.

Professional services expense decreased for the three month period ending March 31, 2011, as compared to the three month period ending March 31, 2010. The decrease is due to a decrease in consulting fees, advertising agency fees, attorney fees, design services, accounting fees, and courier service. The decrease is partially offset by an increase in extended audit services.

Data processing expenses increased for the three month period ending March 31, 2011, as compared to the three month period ending March 31, 2010. 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, remote deposit capture fees, 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 March 31, 2011, as compared to the three period ending March 31, 2010. The decrease is due to a decrease in direct mail campaign, grand opening expense, and customer entertainment. The decrease is partially offset by an increase in customer relations, market research, and public relations.

FDIC insurance expense increased for the three month period ending March 31, 2011, as compared to the three month period ending March 31, 2010. The increase is due to an increase in the FDIC assessment because of higher deposits period over period.

Nonperforming assets expenses increased for the three month period ending March 31, 2011, as compared to the three month period ending March 31, 2010. This increase is due to the write down of the carrying value of other real estate owned period over period. 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 and a decrease in classified loan expense.

Other expenses decreased for the three month period ending March 31, 2011, as compared to the three period ending March 31, 2010. The decrease is due to a reversal of a $1.0 million accrual established by the Corporation in 2008 relating to a certain deposit account. In addition, the Corporation recovered $395 thousand related to a wire transfer inadvertently sent to the wrong beneficiary in 2010.

Federal and State Income Tax

The statutory rate reconciliation is as follows:


	Three months ended
	March 31,
	2011			2010

Income before federal and state income tax	$	2,079		$	697


Tax expense at federal statutory rate		707			237

Increase (decrease) in taxes resulting from:
State income tax		58			25
Tax exempt interest		(278	)		(178	)
Other		(25	)		(9	)

Total income tax	$	462		$	75

Financial Condition

Total assets increased $30.0 million from $1.441 billion at December 31, 2010, to $1.471 billion at March 31, 2011. The increase is the result of an increase of $42.6 million in investment securities and an increase of $23.3 million in loans which were offset by a decrease in cash and cash equivalents of $34.5 million. Deposits increased $24.0 million from $1.239 billion at December 31, 2010, to $1.263 billion at March 31, 2011, due to new deposit relationships. The increase in deposits and decrease in cash and cash equivalents funded the increase in loans as well as the purchase of investments securities.

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 by the Asset Liability Committee (“ALCO”). In addition, the Corporation has established a contingency funding plan to address liquidity needs in the event of depressed economic or market conditions, unexpected events, and/or situations beyond the Corporation’s control. 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 purchases of investment securities held to maturity and available for sale were the most significant use of funds during the three month period ending March 31, 2011. Deposits were the most significant funding source and loans were the most significant use of funds during the three month period ending March 31, 2010.

The Corporation has entered into a $2.0 million revolving line of credit with U.S. Bank which matures on August 31, 2011. Under the terms of the revolving line of credit, the Corporation pays prime plus 1.25% which equated to 4.50% at March 31, 2011. In addition, the Corporation pays a 0.25% fee on the unused portion of the revolving line of credit. As of March 31, 2011, the outstanding balance of the revolving line of credit was $0.

The Corporation also has a $3.0 million one-year term facility with U.S. Bank which matures 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 March 31, 2011. In addition to quarterly interest payments, the Corporation makes quarterly principal payments of $62.5 thousand. As of March 31, 2011, the outstanding balance of the term facility was $2.6 million.

All of the U.S. Bank agreements contain various financial and non-financial covenants. As of March 31, 2011, 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. Interest bearing due from banks represented the Corporation’s primary source of immediate liquidity and averaged $213.1 million and $138.6 million for the three month period ending March 31, 2011, and March 31, 2010, respectively. 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 Corporation’s loan and investment portfolios are monitored regularly to avoid matching short-term deposits with long-term loans and investments. Other assets and liabilities are also monitored to provide the proper balance between liquidity, safety, and profitability. This monitoring process must be continuous due to the constant flow of cash which is inherent in a financial institution.

The Corporation’s management believes its liquidity sources are adequate to meet its operating needs and does not know of any trends, events or uncertainties that may result in a significant adverse effect on the Corporation’s liquidity position.

The Corporation actively manages its interest rate sensitive assets and liabilities to reduce the impact of interest rate fluctuations. At March 31, 2011, the Corporation’s rate sensitive liabilities exceeded rate sensitive assets due within one year by $130.3 million.

As part of managing liquidity, the Corporation monitors its loan to deposit ratio on a monthly basis. At March 31, 2011, the ratio was 73.1%. This is well within the board approved policy.

The Corporation experienced a decrease in cash and cash equivalents, another primary source of liquidity, of $34.5 million during the three month period ending March 31, 2011. Deposit growth provided net cash of $24.5 million and proceeds from the maturity of investment securities provided cash of $23.4 million. Lending activities used cash of $29.2 million and purchases of investment securities used cash of $66.6 million.

The purpose of the Bank’s 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 London Interbank Offered Rate (LIBOR) plus 1.20% which equated to 1.51% at March 31, 2011. 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 of 105.3%, 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 March 31, 2011, or 2010.

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 March 31, 2011. Pertinent capital ratios for the Bank as of March 31, 2011, are as follows:


				Well			Adequately
	Actual			Capitalized			Capitalized
Tier 1 risk-based capital ratio		9.3	%		6.0	%		4.0	%
Total risk-based capital ratio		11.1	%		10.0	%		8.0	%
Leverage ratio		6.3	%		5.0	%		4.0	%

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 three month period ending March 31, 2011 or 2010. A dividend of $356 thousand and $383 thousand was declared and paid by the Bank to the Corporation during the three month period ending March 31, 2011 and 2010, 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.

On February 18, 2011, the Corporation amended its stock repurchase program. Under the amended repurchase program, the Corporation may repurchase up to 15,000 shares from outside shareholders in addition to the previously approved employee and director repurchase plan. The Corporation anticipates that it will fund purchases under the repurchase program from available working capital.

Under the amended repurchase plan, the Corporation purchased 800 shares during the three month period ending March 31, 2011, and $5.3 million is still available under the new repurchase plan as of March 31, 2011. 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 11 to the Consolidated Financial Statements under Item 1 discusses new accounting policies adopted by the Corporation during the first quarter of 2011 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 Corporation’s market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. Management actively monitors and manages its interest rate exposure and makes monthly reports to 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 Corporation’s Board of Directors.

The Corporation’s profitability is affected by fluctuations in interest rates. A sudden and substantial increase in interest rates may adversely impact the Corporation’s earnings to the extent that the interest rates earned by assets and paid on liabilities do not change at the same speed, to the same extent, or on the same basis. The Corporation monitors the impact of changes in interest rates on its net interest income. The Corporation attempts to maintain a relatively neutral gap between earning assets and liabilities at various time intervals to minimize the effects of interest rate risk.

One of the primary goals of asset/liability management is to maximize net interest income and the net value of future cash flows within authorized risk limits. Net interest income is affected by changes in the absolute level of interest rates. Net interest income is also subject to changes in the shape of the yield curve. In general, a flattening of the yield curve would result in a decline in earnings due to the compression of earning asset yields and funding rates, while a steepening would result in increased earnings as investment margins widen. Earnings are also affected by changes in spread relationships between certain rate indices, such as prime rate.

At March 31, 2011, 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 March 31, 2011, projects an approximate decrease of 24.7% 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 March 31, 2011. 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.

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 Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010, (the “2010 Form 10-K”); for further discussion of the quantitative analysis used by the Corporation refer to page 48 of the 2010 Form 10-K filed with the U.S. Securities and Exchange Commission on March 11, 2011.


Item 4.		Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Corporation’s 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 March 31, 2011, 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 Corporation’s disclosure controls and procedures. Based on that evaluation, the principal executive officer and principal financial officer concluded that the Corporation’s disclosure controls and procedures as of March 31, 2011, 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 March 31, 2011, that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

Limitations on the Effectiveness of Controls

The Corporation’s management, including its principal executive officer and principal financial officer, does not expect that the Corporation’s disclosure controls and procedures and other internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Corporation have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can only be reasonable assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected.

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

There have been no material changes to the risk factors disclosed in the Corporation’s Form 10-K for the year ended December 31, 2010, as filed with the SEC on March 11, 2011.


Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds

(a)

On January 7, 2011, the Corporation sold a total of 800 shares of common stock for proceeds of $22,200 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 first quarter of 2011.

Maximum

Number (or

Approximate

Total

Dollar Value)

Number of

of Shares that

May Yet Be

Purchased as

Purchased

Part of

Under the

Total

Publicly

Plans or

Number of

Average

Announced

Programs

Price Paid

Plans or

(Dollars in

Period

Purchased

per Share

Programs**

thousands)

January 1 – January 31, 2011

800

41.49

800

5,265

February 1 – February 28, 2011

—

5,265

March 1 – March 31, 2011

—

5,265

Total

800


*		The weighted average price per share for the period January 2011 through March 2011 was $41.49.

**		All shares repurchased by the Corporation during 2011 were completed pursuant to the repurchase program.

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.


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 Corporation’s Form 10-QSB as of September 30, 1995, are incorporated by reference and Articles of Amendment filed as Exhibit 3(i) to the Form 10-K for the fiscal year ended December 31, 2001.

3.02		Bylaws of the Corporation, filed as Exhibit 3(ii) to the Corporation’s 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 Corporation’s 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 Corporation’s 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 Corporation’s Form 8-K dated May 18, 2006, is incorporated by reference, as amended by the Corporation’s Form 8-K filed January 6, 2011.

10.08	*	The National Bank of Indianapolis Corporation Amended and Restated 2005 Equity Incentive Plan, filed as Exhibit 10.01 to the Corporation’s 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 Corporation’s 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 Corporation’s 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 Corporation’s Form 8-K dated December 21, 2005, and as amended by Exhibit 10.06 to the Corporation’s Form 8-K dated November 26, 2008, is incorporated by reference.

10.13	*	The National Bank of Indianapolis Corporation Executive’s Deferred Compensation Plan, filed as Exhibit 10.08 to the Corporation’s Form 8-K dated December 21, 2005, and as amended by Exhibit 10.08 to the Corporation’s 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 Corporation’s 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.

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: May 6, 2011 THE NATIONAL BANK OF INDIANAPOLIS CORPORATION
	/s/ Debra L. Ross
	Debra L. Ross
	Chief Financial Officer (Principal Financial Officer)

EXHIBIT INDEX


3.01		Articles of Incorporation of the Corporation, filed as Exhibit 3(i) to the Corporation’s Form 10-QSB as of September 30, 1995, are incorporated by reference and Articles of Amendment filed as Exhibit 3(i) to the Form 10-K for the fiscal year ended December 31, 2001.

3.02		Bylaws of the Corporation, filed as Exhibit 3(ii) to the Corporation’s 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 Corporation’s 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 Corporation’s 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 Corporation’s Form 8-K dated May 18, 2006, is incorporated by reference, as amended by the Corporation’s Form 8-K filed January 6, 2011.

10.08	*	The National Bank of Indianapolis Corporation Amended and Restated 2005 Equity Incentive Plan, filed as Exhibit 10.01 to the Corporation’s 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 Corporation’s 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 Corporation’s 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 Corporation’s Form 8-K dated December 21, 2005, and as amended by Exhibit 10.06 to the Corporation’s Form 8-K dated November 26, 2008, is incorporated by reference.


10.13	*	The National Bank of Indianapolis Corporation Executive’s Deferred Compensation Plan, filed as Exhibit 10.08 to the Corporation’s Form 8-K dated December 21, 2005, and as amended by Exhibit 10.08 to the Corporation’s 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 Corporation’s 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.

NATIONAL BANK OF INDIANAPOLIS CORP - FORM 10-Q - May 6, 2011

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