Item 1. Business - -----------------
The Corporation. The National Bank of Indianapolis Corporation (the "Corporation") was formed on January 29, 1993, for the purpose of forming a banking institution in the Indianapolis, Indiana metropolitan area and holding all of the shares of common stock of such banking institution. The Corporation formed a national banking association entitled "The National Bank of Indianapolis" (the "Bank") as a wholly-owned subsidiary.
The Bank was officially chartered by the OCC on December 8, 1993 and opened for business to the public on December 21, 1993. The Bank's deposits are insured by the FDIC. The Bank currently conducts its business through its downtown headquarters located at 107 North Pennsylvania Street in Indianapolis, at neighborhood bank offices located at 84th Street and Ditch Road in northwestern Marion County and 82nd Street and Bash Road in northeastern Marion County, in the Chamber of Commerce Building and AUL Office Complex in downtown Indianapolis, at 49th Street and North Pennsylvania Street in northern Marion County, Carmel Drive in Hamilton County, and Smith Valley Road and S.R. 135 in Johnson County.
The Bank provides a full range of deposit, credit, and money management services to its targeted market, which is small to medium size businesses, affluent executive and professional individuals, and not-for-profit organizations. In February of 1994, the Bank received full trust powers.
Management has sought to position the Bank to capitalize on the customer disruption, dissatisfaction, and turn-over which it believes has resulted from the acquisition of the three largest commercial banks located in Indianapolis by out-of-state holding companies. On December 31, 2002, the Corporation had consolidated total assets of $727 million and total deposits of $544 million.
The key ingredients in the initial growth of the Bank have been an aggressive business plan, an experienced Board of Directors and management team and a seasoned group of bank employees. The basic strategy of the Bank continues to emphasize the delivery of highly personalized services to the target client base with an emphasis on quick response and financial expertise.
Business Plan Overview. The business plan of the Bank is based on being a strong, locally owned bank providing superior service to a small group of customers, which are primarily corporations with annual sales under $30 million, executives, professionals, and not-for-profit organizations. The Bank provides highly personalized banking services with an emphasis on knowledge of the particular financial needs and objectives of its clients and quick response to customer requests. Because the management of the Bank is located in Indianapolis, all credit and related decisions are made locally, thereby facilitating prompt response. The Bank emphasizes both highly personalized service at the customer's convenience and non-traditional delivery services that do not require customers to frequent the Bank. This personal contact has become a trademark of the Bank and a key means of differentiating the Bank from other financial service providers.
The Bank offers a broad range of deposit services typically available from most banks and savings associations, including checking accounts, NOW accounts, savings and other kinds of deposits of various types (ranging from daily money market accounts to longer term certificates of deposit). The Bank also offers a full range of credit services, including commercial loans (such as lines of credit, term loans, refinancings, etc.), personal lines of credit, direct installment consumer loans, credit card loans, residential mortgage loans, construction loans, and letters of credit. In addition, the Bank offers full trust services. The Bank also has formed arrangements with outside providers of tax and financial planning services to better accommodate its customers.
The Bank's growth in deposits is attributable in part to the efforts of its staff who provide personal banking services to the Bank's customers. In addition, the Bank has emphasized paying competitive interest rates on deposit products. Finally, the Bank has offered
savings and certificate of deposit products with competitive rates to larger depositors in an effort to minimize the operating costs of obtaining these deposits. Lending strategies focus primarily on commercial loans to small and medium size businesses as well as personal loans to executives and professionals.
In the residential mortgage lending area, the Bank offers regular, jumbo and CRA mortgage products. The Bank has developed a secondary market for its residential mortgage loans. Consumer lending is directed to executive and professional clients through residential mortgages, credit cards, and personal lines of credit to include home equity loans.
The Market. The Bank derives a substantial proportion of its business from the Indianapolis Metropolitan Statistical Area ("MSA), Indiana area. Indianapolis has been ranked by a number of national publications as a "top" Midwestern city.
Competition. The Bank's service area is highly competitive. There are numerous financial institutions operating in the Marion County marketplace. In addition to competition from commercial banks, significant competition also comes from savings and loans associations, credit unions, finance companies, insurance companies, mortgage companies, securities and brokerage firms, money market mutual funds, loan production offices, and other providers of financial services in the area. The Bank competes in this marketplace primarily on the basis of highly personalized service, responsive decision making, and competitive pricing.
Employees. The Bank has 176 employees, of which 167 are full-time employees. The Bank has employed persons with substantial experience in the Indianapolis banking market. The average banking experience level for all Bank employees is in excess of 12 years.
Lending Activity. The Bank's lending strategy emphasizes a high quality, well-diversified loan portfolio. The Bank's principal lending categories are commercial, residential mortgage, private banking/personal, and home equity. Commercial loans include loans for working capital, machinery and equipment purchases, premises and equipment acquisitions and other corporate needs. Residential mortgage lending includes loans on first mortgage residential properties. Private banking loans include secured and unsecured personal lines of credit as well as home equity loans.
Commercial loans typically entail a thorough analysis of the borrower, its industry, current and projected economic conditions and other factors. Credit analysis involves collateral, the type of loan, loan maturity, terms and conditions, and various loan to value ratios as they relate to loan policy. The Bank typically requires commercial borrowers to have annual financial statements prepared by independent accountants and may require such financial statements to be audited or reviewed by accountants. The Bank generally requires appraisals or evaluations in connection with loans secured by real estate. Such appraisals or evaluations are usually obtained prior to the time funds are advanced. The Bank also often requires personal guarantees from principals involved with closely-held corporate borrowers.
The Bank requires loan applications and personal financial statements from its personal borrowers on loans that the Bank originates. Loan officers complete a debt to income analysis that should meet established standards of lending policy.
The Bank maintains a comprehensive loan policy that establishes guidelines with respect to all categories of lending. In addition, loan policy sets forth lending authority for each loan officer. The Loan Committee of the Bank reviews all loans in excess of $250,000. Any loan in excess of a lending officer's lending authority, up to $1,500,000, must receive the approval of the Chief Executive Officer ("CEO"), Chief Lending Officer ("CLO"), or Senior Vice President - Corporate Banking ("SVP"). Loans in excess of $1,500,000 but less than $4,000,000 must be approved by the Loan Committee prior to the Bank making such loan. The Board of Directors Loan Policy Committee is not required to approve loans unless they are above $4,000,000 or are loans to directors or executive officers. All loans are assigned a numerical rating based on creditworthiness and are monitored for improvement or deterioration.
Loans are made primarily in the Bank's designated market area.
Bank Holding Company Regulation. The Corporation is registered as a bank holding company and is subject to the regulations of the Board of Governors of the Federal Reserve System ("Federal Reserve") under the Bank Holding Company Act of 1956, as amended ("BHCA"). Bank holding companies are required to file periodic reports with and are subject to periodic examination by the Federal Reserve. The Federal Reserve has the authority to issue cease-and-desist orders against a bank holding company and nonbank subsidiaries if it determines that activities of such entities represent an unsafe and unsound practice or a violation of law.
The Corporation is prohibited by the BHCA from acquiring direct or indirect control of more than 5% of the outstanding shares of any class of voting stock or substantially all of the assets of any bank or merging or consolidating with another bank holding company without prior approval of the Federal Reserve. In addition, the Corporation may not acquire direct or indirect control of a savings association without the prior approval of the Federal Reserve and the Office of Thrift Supervision. Additionally, the Corporation is prohibited by the BHCA from engaging in or from acquiring ownership or control of more than 5% of the outstanding shares of any class of voting stock of any company engaged in a nonbanking business unless such business is determined by the Federal Reserve to be so closely related to banking as to be a proper incident thereto. The BHCA does not place territorial restrictions on the activities of such nonbanking-related activities.
The Federal Reserve has issued regulations under the BHCA requiring a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. It is the policy of the Federal Reserve that, pursuant to this requirement, a bank holding company should stand ready to use its resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity. Additionally, under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), a bank holding company is required to guarantee the compliance of any insured depository institution subsidiary that may become "undercapitalized" (as defined in the statute) with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency, up to the lesser of (i) an amount equal to 5% of the institution's total assets at the time the institution became undercapitalized, or (ii) the amount that is necessary (or would have been necessary) to bring the institution into compliance with all applicable capital standards as of the time the institution fails to comply with such capital restoration plan. As a result of these policies, the Corporation may be required to commit resources to its subsidiary bank in circumstances where it might not otherwise do so.
Capital Adequacy Guidelines for Bank Holding Companies. The Federal Reserve, as the regulatory authority for bank holding companies, has adopted capital adequacy guidelines for bank holding companies. Bank holding companies with assets in excess of $150 million must comply with the Federal Reserve's risk-based capital guidelines which require a minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities such as standby letters of credit) of 8%. At least half of the total required capital must be "Tier 1 capital," consisting principally of common stockholders' equity, noncumulative perpetual preferred stock, a limited amount of cumulative perpetual preferred stock and minority interest in the equity accounts of consolidated subsidiaries, less certain goodwill items. The remainder ("Tier 2 capital") may consist of a limited amount of subordinated debt and intermediate-term preferred stock, certain hybrid capital instruments and other debt securities, cumulative perpetual preferred stock, and a limited amount of the general loan loss allowance. In addition to the risk-based capital guidelines, the Federal Reserve has adopted a Tier 1 (leverage) capital ratio under which the bank holding company must maintain a minimum level of Tier 1 capital to average total consolidated assets of 3% in the case of bank holding companies which have the highest regulatory examination ratings and are not contemplating significant growth or expansion. All other bank holding companies are expected to maintain a ratio of at least 1% to 2% above the stated minimum.
Certain regulatory capital ratios for the Corporation as of December 31, 2002 are shown below:
Tier 1 Capital to Risk-Weighted Assets 10.0%
Total Risk Based Capital to Risk-Weighted Assets 11.3%
Tier 1 Leverage Ratio 7.5%
Bank Regulation. The Bank is organized under the laws of the United States of America and is subject to the supervision of the OCC, whose examiners conduct periodic examinations of national banks. The deposits of the Bank are insured by the Bank Insurance Fund ("BIF") administered by the FDIC and are subject to the FDIC's rules and regulations respecting the insurance of deposits. See "--Deposit Insurance."
Both federal and state law extensively regulate various aspects of the banking business such as reserve requirements, truth-in-lending and truth-in-savings disclosure, equal credit opportunity, fair credit reporting, trading in securities and other aspects of banking operations. Current federal law also requires banks, among other things to make deposited funds available within specified time periods.
Under federal and Indiana law, the Bank may establish an additional banking location anywhere in Indiana. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 allows bank holding companies to acquire banks anywhere in the United States subject to certain state restrictions, and permits an insured bank to merge with an insured bank in another state without regard to whether such merger is prohibited by state law. Additionally, an out-of-state bank may acquire the branches of an insured bank in another state without acquiring the entire bank; provided, however, that the law of the state where the branch is located permits such an acquisition. Bank holding companies may merge existing bank subsidiaries located in different states into one bank.
With certain exceptions, a bank and a subsidiary may not extend credit, lease or sell property or furnish any services or fix or vary the consideration for the foregoing on the condition that (i) the customer must obtain or provide some additional credit, property or services from, or to, any of them, or (ii) the customer may not obtain some other credit, property or service from a competitor, except to the extent reasonable conditions are imposed to assure the soundness of credit extended.
An insured bank subsidiary may act as an agent for an affiliated bank or thrift in offering limited banking services (receive deposits, renew time deposits, close loans, service loans and receive payments on loan obligations) both within the same state and across state lines.
Dividend Limitations. Under Federal Reserve supervisory policy, a bank holding company generally should not maintain its existing rate of cash dividends on common shares unless (i) the organization's net income available to common shareholders over the past year has been sufficient to fully fund the dividends, and (ii) the prospective rate of earnings retention appears consistent with the organization's capital needs, asset quality, and overall financial condition. The FDIC also has authority under the Financial Institutions Supervisory Act to prohibit a bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice in light of the financial condition of the bank. The Corporation's Board of Directors has not yet declared any dividends and does not anticipate that it will do so in the immediate future. In addition, there can be no assurance as to when, if ever, the Corporation will declare and pay any cash dividends.
Under federal law, the Bank must comply with various restrictions applicable to its ability to pay dividends. In addition, the Bank is subject to certain restrictions imposed by the Federal Reserve on extensions of credit to the Corporation, on investments in the stock or other securities of the Corporation, and in taking such stock or securities as collateral for loans.
The most stringent capital requirement affecting the Bank, however, are those established by the prompt corrective action provisions of FDICIA, which are discussed below. At December 31, 2002, the Bank's total risk-based capital, Tier 1 risk-based capital and leverage capital exceeded the amounts required to be designated "well capitalized."
Lending Limits. Under federal law, the total loans and extension of credit by a national bank to a borrower outstanding at one time and not fully secured may not exceed 15% of such bank's capital and unimpaired surplus. An additional amount up to 10% of the bank's capital and unimpaired surplus may be loaned to the same borrower if such loan is fully secured by readily marketable collateral having a market value, as determined by reliable and continuously available price quotations, at least equal to the amount of such additional loans outstanding. If a loan is secured by United States obligations, such as treasury bills, bonds, or notes guaranteed by the federal government, it is not subject to the bank's legal lending limit.
Affiliates. The Bank is subject to Sections 22(h), 23A and 23B of the Federal Reserve Act, which restrict financial transactions between banks and affiliated companies limits credit transactions between a bank and its executive officers and its affiliates, prescribes terms and conditions for bank affiliate transactions deemed to be consistent with safe and sound banking practices, and restricts the types of collateral security permitted in connection with a bank's extension of credit to an affiliate.
Prompt Corrective Action. The FDIC has adopted regulations to implement "prompt corrective action" with respect to banks which do not meet minimum capital requirements. Among other things, the regulations define the relevant capital measures for the five capital categories. An institution is deemed to be "well capitalized" if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or greater, and is not subject to a regulatory order, agreement or directive to meet and maintain a specific capital level for any capital measure. An institution is deemed to be "adequately capitalized" if it has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater, and generally a leverage ratio 4% or greater. An institution is deemed to be "undercapitalized" if it has a total risk-based capital ratio of less than 8%, a Tier 1 risk-based capital ratio of less than 4%, or generally a leverage ratio of less than 4%. An institution is deemed to be "significantly undercapitalized" if it has a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 3%, or a leverage ratio of less than 3%. An institution is deemed to be "critically undercapitalized" if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2%.
"Undercapitalized" banks are subject to growth limitations and are required to submit a capital restoration plan. A bank's compliance with such plan is required to be guaranteed by any company that controls the undercapitalized institution as described above. If an "undercapitalized" bank fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. "Significantly undercapitalized" banks are subject to one or more of a number of requirements and restrictions, including an order by the FDIC to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and case receipt of deposits from correspondent banks, and restrictions on compensation of executive officers. "Critically undercapitalized" institutions may not, beginning 60 days after becoming "critically undercapitalized", make any payment of principal or interest on certain subordinated debt or extend credit for a highly leveraged transaction or enter into any transaction outside the ordinary course of business. In addition, "critically undercapitalized" institutions are subject to appointment of a receiver or conservator.
Safety and Soundness Guidelines. The federal banking agencies have established guidelines which prescribe standards for depository institutions relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings, compensation fees and benefits, and management compensation. The agencies
may require an institution which fails to meet the standards set forth in the guidelines to submit a compliance plan. Failure to submit an acceptable plan or adhere to an accepted plan may be grounds for further enforcement action.
Deposit Insurance. The Bank's deposits are insured up to $100,000 per insured account by the BIF. As an institution whose deposits are insured by the BIF, the Bank is not currently required to pay deposit insurance premiums to BIF but was required to pay $22,119 for the Financing Corporation (FICO) assessment for the first quarter in 2003. The Bank's deposit insurance assessments may increase depending upon the risk category and subcategory, if any, to which the Bank is assigned by the FDIC. Any increase in insurance assessments could have an adverse effect on the Bank's earnings.
Bank Capital Requirements. The OCC has adopted risk-based capital ratio guidelines to which the Bank is subject. The guidelines establish a systematic analytical framework that makes regulatory capital requirements more sensitive to differences in risk profiles among banking organizations. Risk-based capital ratios are determined by allocating assets and specified off-balance sheet commitments to four risk weighted categories, with higher levels of capital being required for the categories perceived as representing greater risk.
These guidelines divide a bank's capital into two tiers. The first tier (Tier 1) includes common equity, certain non-cumulative perpetual preferred stock (excluding auction rate issues) and minority interests in equity accounts of consolidated subsidiaries, less goodwill and certain other intangible assets (except mortgage servicing rights and purchased credit card relationships, subject to certain limitations). Supplementary (Tier 2) capital includes, among other items, cumulative perpetual and long-term limited-life preferred stock, mandatory convertible securities, certain hybrid capital instruments, term subordinated debt and the allowance for loan and lease losses, subject to certain limitations, less required deductions. Banks are required to maintain a total risk-based capital ratio of 8%, of which 4% must be Tier 1 capital. The OCC may, however, set higher capital requirements when a bank's particular circumstances warrant. Banks experiencing or anticipating significant growth are expected to maintain capital ratios, including tangible capital positions, well above the minimum levels.
In addition, the OCC established guidelines prescribing a minimum Tier 1 leverage ratio (Tier 1 capital to adjusted total assets as specified in the guidelines). These guidelines provide for a minimum Tier 1 leverage ratio of 3% for banks that meet certain specified criteria, including that they have the highest regulatory rating and are not experiencing or anticipating significant growth. All other banks are required to maintain a Tier 1 leverage ratio of 3% plus an additional cushion of at least 100 to 200 basis points.
Certain regulatory capital ratios under the OCC's risk-based capital guidelines for the Bank at December 31, 2002 are shown below:
Tier 1 Capital to Risk-Weighted Assets.................... 8.9%
Total Risk-Based Capital to Risk-Weighted Assets.......... 10.1%
Tier 1 Leverage Ratio..................................... 6.6%
In 1996, the FDIC, along with the OCC and the Federal Reserve, issued a joint policy statement to provide guidance on sound practices for managing interest rate risk. The statement sets forth the factors the federal regulatory examiners will use to determine the adequacy of a bank's capital for interest rate risk. These qualitative factors include the adequacy and effectiveness of the bank's internal interest rate risk management process and the level of interest rate exposure. Other qualitative factors that will be considered include the size of the bank, the nature and complexity of its activities, the adequacy of its capital and earnings in relation to the bank's overall risk profile, and its earning exposure to interest rate movements. The interagency supervisory policy statement describes the responsibilities of a bank's board of directors in implementing a risk management process and the requirements of the bank's senior management in ensuring the effective management of interest rate risk. Further, the statement specifies the elements that a risk management process must contain.
The OCC, the Federal Reserve and the FDIC have issued final regulations further revising their risk-based capital standards to include a supervisory framework for measuring market risk. The effect of these regulations is that any bank holding company or bank which has significant exposure to market risk must measure such risk using its own internal model, subject to the requirements contained in the regulations, and must maintain adequate capital to support that exposure. These regulations apply to any bank holding company or bank whose trading activity equals 10% or more of its total assets, or whose trading activity equals $1 billion or more. Examiners may require a bank holding company or bank that does not meet the applicability criteria to comply with the capital requirements if necessary for safety and soundness purposes. These regulations contain supplemental rules to determine qualifying and excess capital, calculate risk-weighted assets, calculate market risk equivalent assets and calculate risk-based capital ratios adjusted for market risk.
Financial Modernization Legislation: The Gramm Leach Bliley Act. Effective as of March 11, 2000, the Gramm-Leach-Bliley Act:
(i) allows bank holding companies meeting management, capital and CRA standards to engage in a substantially broader range of non-banking activities then was previously permissible, including insurance underwriting and agency, and underwriting and making merchant banking investments in commercial and financial companies;
(ii) allows insurers and other financial services companies to acquire banks and thrifts;
(iii) removes various restrictions that previously applied to bank holding company ownership of securities firms and mutual fund advisory companies; and
(iv) establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities operations.
In order for a bank holding company to engage in the broader range of activities that are permitted by the Gramm-Leach-Bliley Act, (1) all of its depository institutions must be well capitalized and well managed and (2) it must file a declaration with the Federal Reserve Board that it elects to be a "financial holding company". In addition, to commence any new activity permitted by the Gramm-Leach-Bliley Act, each insured depository institution of the financial holding company must have received at least a "satisfactory" rating in its most recent examination under the Community Reinvestment Act.
The Gramm-Leach-Bliley Act also modified laws related to financial privacy. The new financial privacy provisions generally prohibit financial institutions, including the Bank, from disclosing nonpublic personal financial information to third parties unless customers have the opportunity to "opt out" of the disclosure.
The Company does not believe that the Gramm-Leach-Bliley Act will have any immediate, material impact on its operations. However, to the extent that the Gramm-Leach-Bliley Act permits commercial banks, securities firms and insurance companies to affiliate, the Act may have the effect of increasing the amount of competition that the Company faces from other companies offering financial products, many of which may have substantially more financial resources.
Additional Matters. ------------------
Sarbanes-Oxley Act. On July 30, 2002, President George W. Bush signed into law the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"). The Sarbanes-Oxley Act implements a broad range of corporate governance and accounting measures for public companies designed to promote honesty and transparency in corporate America and better protect investors from the type of corporate and accounting scandals that have occurred during the past year. The Sarbanes-Oxley Act's principal legislation includes:
o the creation of an independent accounting oversight board;
o auditor independence provisions which restrict non-audit services that accountants may provide to their audit clients;
o additional corporate governance and responsibility measures, including the requirement that the chief executive officer and chief financial officer certify financial statements;
o the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer's securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement;
o an increase the oversight of, and enhancement of certain requirements relating to audit committees of public companies and how they interact with the company's independent auditors;
o requirement that audit committee members must be independent and are absolutely barred from accepting consulting, advisory or other compensatory fees from the issuer;
o requirement that companies disclose whether at least one member of the committee is a "financial expert" (as such term will be defined by the Securities and Exchange Commission) and if not, why not;
o expanded disclosure requirements for corporate insiders, including accelerated reporting of stock transactions by insiders and a prohibition on insider trading during pension blackout periods;
o a prohibition on personal loans to directors and officers, except certain loans made by insured financial institutions;
o disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such code;
o mandatory disclosure by analysts of potential conflicts of interest; and
o a range of enhanced penalties for fraud and other violations.
Although we anticipate that we will incur additional expense in complying with the provisions of the Sarbanes-Oxley Act and the resulting regulations, management does not expect that such compliance will have a material impact on our results of operations or financial condition.
USA Patriot Act. On October 26, 2001, President George W. Bush signed the United and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the "USA Patriot Act"). The USA Patriot Act is intended to strengthen the ability of U. S. Law Enforcement to combat terrorism on a variety of fronts. The potential impact of the USA Patriot Act on financial institutions is significant and wide-ranging. The USA Patriot Act contains sweeping anti-money laundering and financial transparency laws and requires financial institutions to implement additional policies and procedures with respect to, or additional measures designed to address, any or all of the following matters, among others: money laundering, suspicious activities and currency transaction reporting; and currency crimes.
In addition to the matters discussed above, the Corporation and the Bank are subject to additional regulation of their activities, including a variety of consumer protection regulations affecting their lending, deposit and collection activities and regulations affecting secondary mortgage market activities.
The earnings of financial institutions, including the Corporation and the Bank, are also affected by general economic conditions and prevailing interest rates, both domestic and foreign and by the monetary and fiscal policies of the U.S. Government and its various agencies, particularly the Federal Reserve.
Additional legislation and administrative actions affecting the banking industry may be considered by the United States Congress, the Indiana General Assembly and various regulatory agencies, including those referred to above. It cannot be predicted with certainty whether such legislation of administrative action will be enacted or the extent to which the banking industry in general or the Corporation and the Bank in particular would be affected thereby.
Item 2.
Item 2. Property - -----------------
The Bank purchased the downtown office building which houses its main office as well as the Corporation's main office at 107 North Pennsylvania Street in December 1998. It was previously being leased from an affiliate of one of the directors of the Corporation and the Bank.
The Bank opened its first neighborhood bank office in February 1995 at 84th and Ditch Road. The Bank also opened a neighborhood bank office at 82nd and Bash Road on the northeast side of Indianapolis in December 1995. The Bank owns the land and the premises for both of these offices. In March 1996, the Bank opened an office in the Chamber of Commerce building at 320 N. Meridian Street in the downtown Indianapolis area. The Bank leases the premises at this banking office. In March 1998, the Bank opened an office at 4930 North Pennsylvania Street and leases the premises at this banking office. In June 1999, the Bank opened an office in the AUL Office Complex located at One American Square in the downtown Indianapolis area. The Bank leases the premises at this banking center. In September 2000, the Bank opened an office at 650 East Carmel Drive in Carmel. This office is located in Hamilton County which is north of Indianapolis. The Bank leases the premises at this banking office. In July 1997, the Bank purchased a parcel of land in Greenwood for future business development. In October 2001, the Bank opened an office at 1675 West Smith Valley Road in Greenwood. The Bank leases the premises at this banking office.
The Bank has installed a remote ATM at the Indianapolis City Market, University of Indianapolis, TGI Friday's at Keystone Crossing, and Meridian Mark II Office Complex. These remote ATMs provide additional banking convenience for the customers of the Bank, and generate an additional source of fee income for the Bank.
Item 3.
Item 3. Legal Proceedings - --------------------------
Neither the Corporation nor the Bank are involved in any pending legal proceedings at this time, other than routine litigation incidental to its business.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders. - -------------------------------------------------------------
None.
PART II
Item 5.
Item 5. Market Price for Registrant's Common Equity and Related Stockholder Matters. - ----------------------------------------------------------------------------
Shares of the common stock of the Corporation are not traded on any national or regional exchange or in the over-the-counter market. Accordingly, there is no established market for the common stock. These are occasional trades as a result of private negotiations not involving a broker or a dealer. The table below lists the high and low prices per share of which management is aware of during 2002 and 2001. There may have been other trades at other prices of which management is not aware. Management does not have knowledge of the price paid in all transactions and has not verified the accuracy of those prices that have been reported to it. Because of the lack of an established market for the common shares of the Company, these prices would not necessarily reflect the prices which the shares would trade in an active market.
Price per Share --------------- Quarter High Low ------- ---- --- 2002 2001 2002 2001 First Quarter $25.50 $24.50 $25.50 $23.00 Second Quarter $27.75 $25.00 $27.00 $24.50 Third Quarter $28.00 $25.50 $28.00 $25.50 Fourth Quarter $29.00 $25.50 $28.50 $25.50
The Corporation had 647 shareholders on record as of December 31, 2002.
The Corporation has not declared or paid any cash dividends on its shares of common stock since its organization in 1993. The Corporation and the Bank anticipate that earnings will be retained to finance the Bank's growth in the immediate future. Future dividend payments by the Corporation, if any, will be dependent upon dividends paid by the Bank, which are subject to regulatory limitations, earnings, general economic conditions, financial condition, capital requirements, and other factors as may be appropriate in determining dividend policy.
Item 6.
Item 6. Selected Financial Data - --------------------------------
The following table sets forth certain consolidated information concerning the Corporation for the periods and dates indicated and should be read in connection with, and is qualified in its entirety by, the detailed information and consolidated financial statements and related notes set forth in the Corporation's audited financial statements included elsewhere herein (in 000's), except per share data.
(1) Based upon weighted average shares outstanding during the period. (2) Based on Common Stock outstanding at the end of the period. (3) Net interest income as a percentage of average interest-earning assets.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - ------------------------------------------------------------------------
The following discussion and analysis of the Corporation relates to the years ended December 31, 2002, 2001 and 2000 and should be read in conjunction with the Corporation's Consolidated Financial Statements and Notes thereto included elsewhere herein.
Results of Operations
Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001 and Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000
The Corporation's results of operations depend primarily on the level of its net interest income, its non-interest income and its operating expenses. Net interest income depends on the volume of and rates associated with interest earning assets and interest bearing liabilities which results in the net interest spread. The Corporation had net income of $4,556,836 for the year ended December 31, 2002 compared to net income of $3,370,043 for the year ended December 31, 2001 and net income of $2,649,749 for the year ended December 31, 2000. This change is primarily due to the growth of the Bank allowing for more interest earning assets and net interest income compared to the same period during 2001 and 2000, thereby offsetting more of the operating expenses.
The Bank experienced exceptional growth during the past three years. Total assets increased $55,817,383 or 8.3% to $726,514,473 for the year ended December 31, 2002 from $670,697,090 for the year ended December 31, 2001 and total assets increased from $533,766,826 for the year ended December 31, 2000. This growth is in part due to an increase in customers as a result of a local merger of People's Bank with Fifth/Third in 1999 - 2000 and the addition of experienced lenders to the staff.
Net Interest Income - -------------------
Net interest income increased $3,185,177 or 17.8% to $21,033,723 for the year ended December 31, 2002, from $17,848,546 for the year ended December 31, 2001 and from $15,532,985 for the year ended December 31, 2000. Total interest income decreased $3,706,106 or 9.6% to $35,095,300 for the year ended December 31, 2002 from $38,801,406 for the year ended December 31, 2001 and from $35,318,668 for the year ended December 31, 2000. The decrease in interest income is due to significant interest rate decreases by the Federal Reserve in 2001. Prime rate decreased 475 basis points during 2001. Prime rate was 4.25% at December 31, 2002 compared to 4.75% at December 31, 2001 and 9.50% at December 31, 2000. Average total loans for the year ended December 31, 2002 was approximately $484,000,000 compared to approximately $403,000,000 for the year ended December 31, 2001 and approximately $331,000,000 for the year ended December 31, 2000. The increase in the average total loans was offset by the decrease in the interest rate. The loan portfolio produces the highest yield of all earning assets. The increased loan growth is the result of new clients and the addition of experienced lenders to the staff. Investment portfolio income decreased $2,471,187 or 40.2% to $3,683,093 for the year ended December 31, 2002, as compared to $6,154,280 for the year ended December 31, 2001, as compared to $5,718,341 for the year ended December 31, 2000. Interest on investment securities decreased due to a lower interest rate environment in 2002 compared to previous years. The weighted average rate of the investment portfolio was 2.82% for the year ended December 31, 2002 compared to 4.71% and 6.33% for the years ended December 31, 2001 and 2000, respectively. The average investment securities portfolio was approximately $131,000,000 for the years ended December 31, 2002 and December 31, 2001 compared to an average balance of approximately $90,000,000 for the year ended December 31, 2000. Interest on federal funds sold decreased $472,357 or 45.2% to $573,328 for the year ended December 31, 2002 from $1,045,685 for the year ended December 31, 2001 and from $1,355,758 for the year ended December 31, 2000. The decrease is due lower interest rates in 2002 compared to previous years. The weighted average rate was 1.64% for the year ended December 31, 2002 compared to a weighted average rate of 3.78% and 6.29% for the years
ended December 31, 2001 and 2000, respectively. The average balance for federal funds sold was approximately $35,000,000 for the year ended December 31, 2002 compared to approximately $28,000,000 for the year ended December 31, 2001 and approximately $22,000,000 for the year ended December 31, 2000. Interest on reverse repurchase agreements decreased $557,320 or 69.4% to $245,442 for the year ended December 31, 2002 from $802,762 for the year ended December 31, 2001 and $0 for the year ended December 31, 2000. The decrease is the result of a decrease in the average of reverse repurchase agreements of approximately $12,000,000 to $16,000,000 for the year ended December 31, 2002 from $28,000,000 for the year ended December 31, 2001 and $0 for the year ended December 31, 2000. The decrease is also due to lower interest rates in 2002 as compared to 2001. The weighted average rate was approximately 1.58% for the year ended December 31, 2002 compared to a weighted average rate of 2.85% for the year ended December 31, 2001.
Total interest expense decreased $6,891,283 or 32.9% to $14,061,577 for the year ended December 31, 2002, from $20,952,860 for the year ended December 31, 2001 and from $19,785,683 for the year ended December 31, 2000. This decrease is due to significant decreases in interest rates in 2001 and additional decreases in 2002. During 2001, prime rate decreased 475 basis points and decreased an additional 50 basis points during 2002. Total interest bearing liabilities averaged approximately $548,000,000 for the year ended December 31, 2002 as compared to approximately $503,000,000 for the year ended December 31, 2001 and approximately $378,000,000 for the year ended December 31, 2000. The average cost of interest bearing liabilities for the year ended December 31, 2002 was approximately 2.6% as compared of 4.2% for the year ended December 31, 2001 and 5.2% for the year ended December 31, 2000. This rate decrease is due to an overall rate decrease in the market and due to the run off of higher priced deposits being replaced by lower priced deposits.
The following table details average balances, interest income/expense and average rates/yields for the Bank's earning assets and interest bearing liabilities for the years ended December 31, 2002, 2001 and 2000 (in 000's):
Average balances computed using daily actual balances.
The following table sets forth an analysis of volume and rate changes in interest income and interest expense of the Corporation's average earning assets and average interest-bearing liabilities. The table distinguishes between the changes related to average outstanding balances of assets and liabilities (changes in volume holding the initial average interest rate constant) and the changes related to average interest rates (changes in average rate holding the initial average outstanding balance constant). The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
Net Interest Income Changes Due to Volume and Rates (in 000's):
NOTE: Due to Rate Increase was calculated by taking the change in the rate times the prior year average balance.
Due to Volume Increase was calculated by taking the change in average balance times the prior year rate.
Provision for Loan Losses - -------------------------
The amount charged to the provision for loan losses by the Bank is based on management's evaluation as to the amounts required to maintain an allowance adequate to provide for potential losses inherent in the loan portfolio. The level of this allowance is dependent upon the total amount of past due and non-performing loans, general economic conditions and management's assessment of potential losses based upon internal credit evaluations of loan portfolios and particular loans. Loans are principally to borrowers in central Indiana.
Other Operating Income - ----------------------
Other operating income for the year ended December 31, 2002, increased $1,552,889 or 26.2% to $7,475,462 from $5,922,573 for the year ended December 31, 2001 and from $4,277,930 for the year ended December 31, 2000. The increase in other operating income is primarily due to an increase in service charges and fees on deposit accounts of $576,724 or 35.0% to $2,226,686 for the year ended December 31, 2002 from $1,649,962 for the year ended December 31, 2001 and from $902,147 for the year ended December 31, 2000. This increase is attributable to the increase in average demand deposit accounts of approximately $95,000,000 to approximately $427,000,000 for the year ended December 31, 2002 from approximately $332,000,000 for the year ended December 31, 2001 and an increase of approximately $71,000,000 from approximately $261,000,000 for the year ended December 31, 2000. The increase in other operating income is also attributable to an increase in trust fees of $271,168 or 13.2% to $2,323,032 for the year ended December 31, 2002 from $2,051,864 for the year ended December 31, 2001 and from $1,670,431 for the year ended December 31, 2000. The increase in trust
income is attributable to a general increase in the average trust fee charged. Also, contributing to the increase in other operating income is the net gain on the sale of mortgage loans of $705,611 for the year ended December 31, 2002 compared to a net gain on the sale of mortgage loans of $435,058 for the year ended December 31, 2001. This compares to a net loss on the sale of mortgage loans of $1,008 for the year ended December 31, 2000. This is due to the ability to sell a bulk of mortgages that were generated during 2002 and 2001 as a result of lower interest rates.
In December 1998, the Bank purchased the downtown office building at 107 North Pennsylvania Street which houses its main office as well as the Corporation's main office. For the year ended December 31, 2002, building rental income increased to $480,375 from $474,298 for the year ended December 31, 2001 and decreased from $683,984 for the year ended December 31, 2000. The decrease in 2001 over 2000 was due to the Bank occupying more space in the building in 2000 than in 2001. The slight increase in 2002 over 2001 was due to new tenants in the building.
Other Operating Expenses - ------------------------
Other operating expenses for the year ended December 31, 2002 increased $2,631,550 or 15.6% to $19,452,070 from $16,820,520 for the year ended December 31, 2001 and increased $2,818,812 or 20.1% for the year ended December 31, 2001 from $14,001,708 for the year ended December 31, 2000. Salaries, wages and employee benefits increased $1,892,892 or 20.2% to $11,278,361 for the year ended December 31, 2002 from $9,385,469 for the year ended December 31, 2001 and increased $1,441,822 or 18.2% from the year ended December 31, 2001 from $7,943,647 for the year ended December 31, 2000. This increase is primarily due to the increase in the number of employees to 167 full time equivalents at December 31, 2002 from 153 full time equivalents at December 31, 2001 and from 138 full time equivalents at December 31, 2000. Occupancy expense increased $31,842 for the year ended December 31, 2002 over the same period the previous year and it increased $204,336 for the year ended December 31, 2001 over the same period the previous year primarily due to the additional expense related to the operations of the building at 107 North Pennsylvania Street and the opening of new banking offices in Carmel in September 2000 and in Greenwood in October 2001. Furniture and equipment expense increased $19,881 for the year ended December 31, 2002 over the same period the previous year and it increased $127,264 for the year ended December 31, 2001 over the same period the previous year primarily due to the additional expense associated with opening of the new banking offices offset by decreases in expenses related to fully depreciated assets at the older banking centers and main office. Professional services expense decreased $107,623 or 12.6% to $743,508 for the year ended December 31, 2002 from $851,131 for the year ended December 31, 2001 and increased $130,165 or 18.1% for the year ended December 31, 2001 from $720,966 for the year ended December 31, 2000. The decrease in 2002 was due to lower courier service costs. The increase in 2001 and 2000 was due to consulting fees incurred for the development and implementation of Private Portrait, the Bank's internet banking web site. Also contributing to the increase was accounting fees and the courier service. Data processing expenses increased $103,416 for the year ended December 31, 2002 over the same period the previous year and also increased $264,318 for the year ended December 31, 2001 over the same period the previous year primarily due to increased service bureau fees relating to increased transaction activity by the Bank and trust department. Business Development increased $73,510 for the year ended December 31, 2002 over the same period the previous year and increased $162,019 for the year ended December 31, 2001 over the same period the previous year. The increase is due to customer entertaining and public relations.
Tax (Benefit)/Expense - ---------------------
The Corporation applies a federal income tax rate of 34% and a state tax rate of 8.5% in the computation of tax expense. The provision for income taxes consisted of the following:
2002 2001 2000 --------------------------------------- Current tax expense $3,636,852 $2,646,904 $2,262,449 Deferred tax benefit (636,573) (506,348) (542,991) --------------------------------------- $3,000,279 $2,140,556 $1,719,458 =======================================
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets are recognized for the estimated tax effects attributable to deductible temporary differences and operating loss carryforwards, net of any valuation allowances for amounts which may not be realized by the Corporation.
The components of the Corporation's net deferred tax assets in the consolidated balance sheet as of December 31 are as follows:
2002 2001 ------------------------- Deferred tax assets: Allowance for loan losses $2,862,615 $2,371,437 Other 590,068 436,561 ------------------------- Total deferred tax assets 3,452,683 2,807,998
Deferred tax liability: Mortgage servicing rights (308,995) (293,952) Other (333,296) (40,197) ------------------------- Total deferred tax liabilities (642,291) (334,149)
------------------------- Net deferred tax assets $2,810,392 $2,473,849 =========================
Effects of Inflation
Inflation can have a significant effect on the operating results of all industries. This is especially true in industries with a high proportion of fixed assets and inventory. However, management believes that these factors are not as critical in the banking industry. Inflation does, however, have an impact on the growth of total assets and the need to maintain a proper level of equity capital.
Interest rates are significantly affected by inflation, but it is difficult to assess the impact since neither the timing nor the magnitude of the changes in the various inflation indices coincides with changes in interest rates. There is, of course, an impact on longer-term earning assets; however, this effect continues to diminish as investment maturities are shortened and interest-earning assets and interest-bearing liabilities shift from fixed rate, long-term to rate-sensitive, short-term.
Liquidity and Interest Rate Sensitivity
The Corporation must maintain an adequate liquidity position in order to respond to the short-term demand for funds caused by withdrawals from deposit accounts, extensions of credit and for the payment of operating expenses. Maintaining this position of adequate liquidity is accomplished through the management of a combination of liquid assets; those which can be converted into cash and access to additional sources of funds. Primary liquid assets of the Corporation are cash and due from banks, federal funds sold, investments held as available for sale and maturing loans. Federal funds sold represent the Corporation's primary source of immediate liquidity and were maintained at a level adequate to meet immediate needs. Federal funds sold averaged approximately $35,000,000, $28,000,000 and $22,000,000 for the twelve months ended December 31, 2002, 2001 and 2000 respectively. Reverse repurchase agreements may serve as a source of liquidity, but are primarily used as collateral for customer balances in overnight repurchase agreements. The average balance was approximately $16,000,000 and $28,000,000 and $0 for the twelve months ended December 31, 2002, 2001 and 2000 respectively. 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 actively manages its interest rate sensitive assets and liabilities to reduce the impact of interest rate fluctuations. At December 31, 2002, the Corporation's rate sensitive liabilities exceeded rate sensitive assets due within one year by $2,113,011. At December 31, 2001, the Corporation's rate sensitive liabilities exceeded rate sensitive assets due within one year by $22,540,294.
The purpose of the Bank's Investment Committee is to manage and balance interest rate risk, to provide a readily available source of liquidity to cover deposit runoff and loan growth, and to provide a portfolio of safe, secure assets of high quality that generate a supplemental source of income in concert with the overall asset/liability policies and strategies of the Bank.
The Bank holds securities of the U.S. Government and its agencies along with asset-backed securities, collateralized mortgage obligations, municipals, and Federal Home Loan Bank and Federal Reserve Bank stock. In order to properly manage market risk, credit risk and interest rate risk, the Bank has guidelines it must follow when purchasing investments for the portfolio and adherence to these policy guidelines are reported monthly to the board of directors.
A portion of the Bank's investment securities consist of asset-backed securities (in previous years) and collateralized mortgage obligations. The Bank limits the level of these securities that can be held in the portfolio to a specified percentage of total average assets. Also, asset-backed securities collateralized by receivables other than mortgages will not have a stated final maturity greater than seven years. In addition, only credit card receivables or mortgage-related securities rated "AA" or better by Standard & Poor's or an equivalent rating by another rating agency, will be purchased.
All mortgage-related securities must pass the FFIEC stress test. This stress test determines if price volatility under a 200 basis point interest rate shock for each security exceeds a benchmark 30 year mortgage-backed security. If the security fails the test, it is considered high risk and the Bank will not purchase it. All mortgage-related securities purchased and included in the investment portfolio will be subject to the FFIEC test as of December 31 each year to determine if they have become high risk holdings. If a mortgage-related security becomes high risk, it will be evaluated by the Bank's Investment Committee to determine if the security should be liquidated. At December 31, 2002 and 2001 the Bank held one high risk mortgage-related security.
The Bank's investment portfolio also consists of bank-qualified municipal securities. Municipal securities purchased are limited to the first three (3) grades of the rating agencies. The grade is reviewed each December 31 to verify that the grade has not deteriorated below
the first three (3) grades. The Bank may purchase non-rated general obligation municipals, but the credit strength of the municipality must be evaluated by the Bank's Credit Department. Generally, municipal securities from each issuer will be limited to $1 million, never to exceed 10% of the Bank's tier 1 capital and will not have a stated final maturity date of greater than ten (10) years.
The average yield on the Bank's investment portfolio is as follows as of December 31,
2002 2001 2000 ---- ---- ---- U.S. Treasuries 2.47% 5.41% 5.92% U.S. Government agencies 2.85% 5.37% 6.24% Collateralized mortgage obligations 3.31% 5.35% 6.63% Asset-backed securities - - 6.11% Municipals 7.32% 7.32% 7.10% Other securities 2.14% 3.72% 6.42%
With the exception of securities of the U.S. Government and U.S. Government agencies and corporations, the Corporation had no other securities with a book or market value greater than 10% of shareholders' equity as of December 31, 2002, 2001 and 2000.
The following is a summary of available-for-sale securities and held-to-maturity securities:
As part of managing liquidity, the Corporation monitors its loan to deposit ratio on a daily basis. At December 31, 2002 the ratio was 97.2 percent and as of December 31, 2001 the ratio was 89.3 percent which is within the Corporation's acceptable range.
The following table shows the composition of the Bank's loan portfolio as of the dates indicated (in 000's):
The following table shows the composition of the commercial loan category by industry type as of the dates indicated (in $000's):
The following table shows the composition of the Bank's deposit portfolio as of the dates indicated (in 000's):
The Corporation experienced an increase in cash and cash equivalents, its primary source of liquidity, of $11,045,188 during 2002. During 2001, it experienced a decrease of $21,792,118. The primary financing activity for 2002 was deposit growth which provided net cash of $38,217,157 and security repurchase agreements which provided net cash of $5,922,142. The primary financing activity for 2001 was deposit growth which provided net cash of $95,691,810 and security repurchase agreements which provided net cash of $10,890,378. Lending used $77,110,879 during 2002 and $90,612,302 during 2001. 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 following table illustrates the projected maturities and the repricing mechanisms of the major asset/liabilities categories of the Corporation as of December 31, 2002, based on certain assumptions. Prepayment rate assumptions have been made for the residential loans secured by real estate portfolio. Maturity and repricing dates for investments have been projected by applying the assumptions set forth below to contractual maturity and repricing dates.
Critical Accounting Policy
The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses related to loans that are identified as impaired is based on discounted cash flows using the loan's initial effective interest rate, or the fair value of the collateral for certain collateral dependent loans. The Corporation collectively evaluates consumer loans and loans secured by real estate for impairment as homogeneous loan groups.
The allowance for loan losses is maintained at a level believed adequate by management to absorb inherent losses in the loan portfolio. The determination of the allowance is based on factors which, in management's judgment, deserve recognition under existing economic conditions in estimating possible loan losses. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. The allowance is increased by provisions for loan losses charged against income and reduced by net charge-offs.
The allowance for loan losses is allocated to each loan category based on the Bank's peer median charge off percentages by loan category added to actual reserves maintained for non-performing or specifically identified loans needing a reserve. Any remaining allowance is then allocated back to each loan category based on that category's percentage of the total loan portfolio. Although the loan loss reserve is allocated by loan category, the entire allowance is available to cover any loan loss that may occur.
The following table shows the dollar amount of the allowance for loan losses using management's estimate by loan category (in $000's):
Loan Loss Reserve Allocation
December 31, ------------ 2002 2001 2000 1999 1998 ---- ---- ---- ---- ----
Commercial $5,173 $4,792 $3,246 $1,452 $1,209 Construction 82 21 49 142 59 Commercial Mortgage 437 104 297 342 250 Residential Mortgage 906 499 779 1,088 975 Installment 156 72 43 22 18 Credit Card 61 55 70 15 13 Other 412 444 217 132 102 Year 2000 -- -- -- 200 -- ------------------------------------------- $7,227 $5,987 $4,701 $3,393 $2,626 ===========================================
Management considers the present allowance to be appropriate and adequate to cover losses inherent in the loan portfolio based on the current economic environment. However, future economic changes cannot be predicted. Deterioration in economic conditions could result in an increase in the risk characteristics of the loan portfolio and an increase in the provision for loan losses.
The following table presents a summary of non-performing assets as of December 31, ($000):
The following table summarizes the Corporation's non-performing loans.
Capital Resources
The Corporation's only source of capital since commencing operations has been from issuance of common stock, results of operations, issuance of long term debt to a non-affiliated third party, and the issuance of company obligated mandatorily redeemable preferred capital securities.
The Corporation maintains a Revolving Credit Agreement with Harris Trust and Savings Bank in the amount of $5,000,000, of which none has been drawn, that will mature September 28, 2003.
In September 2000, the Trust, which is wholly owned by the Corporation, issued $13,500,000 of company obligated mandatorily redeemable capital securities. The proceeds from the issuance of the capital securities and the proceeds from the issuance of the common securities of $418,000 were used by the Trust to purchase from the Corporation $13,918,000 Fixed Rate Junior Subordinated Debentures. The capital securities mature September 7, 2030, and have a fixed interest rate of 10.60%. The net proceeds received by the Corporation from the sale of capital securities were used for general corporate purposes.
The Bank has incurred indebtedness pursuant to FHLB advances as follows:
Amount Rate Maturity ------ ---- --------
$ 6,000,000 5.66% 09/04/2003
5,000,000 5.39% 02/26/2004
5,000,000 5.15% 04/23/2004
5,000,000 5.14% 08/01/2005
3,000,000 5.39% 10/03/2005
5,000,000 5.43% 03/16/2006
5,000,000 5.32% 05/08/2006
8,000,000 4.19% 07/24/2007
3,000,000 5.57% 08/13/2007
3,000,000 5.55% 10/02/2008 -------------
$48,000,000
The Bank may add indebtedness of this nature in the future if determined to be in the best interest of the Bank.
Capital for the Bank is above well-capitalized regulatory requirements at December 31, 2002. Pertinent capital ratios for the Bank as of December 31, 2002 are as follows:
Well Adequately Actual Capitalized Capitalized ------ ----------- ----------- Tier 1 risk-based capital ratio 8.9% 6.0% 4.0%
Total risk-based capital ratio 10.1% 10.0% 8.0%
Leverage ratio 6.6% 5.0% 4.0%
Dividends from the Bank to the Corporation may not exceed the undivided profits of the Bank (included in consolidated retained earnings) without prior approval of a federal regulatory agency. In addition, Federal banking laws limit the amount of loans the Bank may make to the Corporation, subject to certain collateral requirements. No loans were made during 2002 by the Bank to the Corporation, but a dividend of $650,000 was declared and made during 2002. No dividends were declared, or loans made, during 2001 by the Bank to the Corporation.
Forward-Looking Statements
The sections that follow, Quantitative and Qualitative Disclosures about Market Risk, contain certain forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995). These forward-looking statements involve significant risks and uncertainties including changes in general economic and financial market conditions, the Corporation's ability to execute its business plans. Although the Corporation believes the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk - --------------------------------------------------------------------
Market risk is the risk of loss due to adverse changes in market prices and rates. The Corporation's market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. Management actively monitors and manages its interest rate exposure.
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. The Corporation also performs a 200 basis point upward and downward interest rate shock and makes sure that there is not an adverse impact on its annual net interest income.
The following table shows the impact of a 200 basis point upward shock on the Corporation's Gap Report as of December 31, 2002 (in $000's):
Current Cost/Revenue Under 1 Year Over 1 Year Total ------------ ----------- -----
Assets $19,952 $14,899 $34,851
Liabilities / Equity 6,802 3,965 10,767 ------- ------- -------
Net Interest Income $13,150 $10,934 $24,084
Shock Calculation Cost/Revenue Under 1 Year Over 1 Year Total ------------ ----------- -----
Assets $26,710 $14,966 $41,676
Liabilities / Equity 12,261 3,965 16,226 ------- ------- -------
Net Interest Income $14,449 $11,001 $25,450
Summary:
Net interest income - current $24,084
Net interest income - shocked 25,450 -------
Change $ $ 1,366
Change % 5.37%
The following table shows the impact of a 200 basis point downward shock on the Corporation's Gap Report as of December 31, 2002 (in $000's):
Current Cost/Revenue Under 1 Year Over 1 Year Total ------------ ----------- -----
Assets $ 19,952 $ 14,899 $ 34,851
Liabilities / Equity 6,802 3,965 10,767 -------- -------- --------
Net Interest Income $ 13,150 $ 10,934 $ 24,084
Shock Calculation Cost/Revenue Under 1 Year Over 1 Year Total ------------ ----------- -----
Assets $ 16,887 $ 13,642 $ 30,529
Liabilities / Equity 4,268 3,965 8,233 -------- -------- --------
Net Interest Income $ 12,619 $ 9,677 $ 22,296
Summary:
Net interest income - current $ 24,084
Net interest income - shocked 22,296 --------
Change $ $ (1,788)
Change % -8.02%
Item 7B. Report of Management on Internal Control - --------------------------------------------------
The National Bank of Indianapolis Corporation is responsible for the preparation, integrity, and fair presentation of the financial statements included in this report. The consolidated financial statements and notes included in the audited financial statements have been prepared in conformity with accounting principles generally accepted in the United States and necessarily include some amounts that are based on management's best estimates and judgments.
We, as management of The National Bank of Indianapolis Corporation, are responsible for establishing and maintaining effective internal controls over financial reporting that are designed to produce reliable financial statements in conformity with accounting principles generally accepted in the United States. The system of internal control over financial reporting as it relates to the financial statements contains self-monitoring mechanisms, and compliance is tested and evaluated through a program of internal audits. Actions are taken to correct potential deficiencies as they are identified. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that controls can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in condition, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.
The Audit Committee, consisting entirely of outside directors, meets regularly with management, internal auditors and independent auditors, and reviews audit plans and results, as well as management's action taken in discharging responsibilities for accounting, financial reporting, and internal controls. Ernst & Young LLP, independent auditors, and the internal auditors have direct and confidential access to the Audit Committee at all times to discuss the results of their examinations.
Management assessed the Corporation's system of internal control over financial reporting as of December 31, 2002, in relation to criteria for effective internal control over financial reporting as described in "Internal Control - Integrated Framework," issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of December 31, 2002, its system of internal control over financial reporting met those criteria.
Item 8.
Item 8. Financial Statements and Supplementary Data - ----------------------------------------------------
Report of Independent Auditors
Board of Directors The National Bank of Indianapolis Corporation
We have audited the accompanying consolidated balance sheets of The National Bank of Indianapolis Corporation and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The National Bank of Indianapolis Corporation and subsidiaries at December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Indianapolis, Indiana January 24, 2003
The National Bank of Indianapolis Corporation Consolidated Balance Sheets
See accompanying notes.
The National Bank of Indianapolis Corporation Consolidated Statements of Income
See accompanying notes.
The National Bank of Indianapolis Corporation Consolidated Statements of Shareholders' Equity
See accompanying notes.
The National Bank of Indianapolis Corporation Consolidated Statements of Cash Flows
See accompanying notes.
1. Organization and Accounting Policies
Organization
The National Bank of Indianapolis Corporation (the Corporation) was incorporated in the State of Indiana on January 29, 1993. The Corporation subsequently formed a de novo national bank, The National Bank of Indianapolis (the Bank), and a statutory trust, NBIN Statutory Trust I (the Trust). The Bank is a wholly owned subsidiary and commenced operations in December, 1993. The Trust was formed in September, 2000 as part of the issuance of capital securities. The Corporation and the Bank engage in a wide range of commercial, personal banking, and trust activities primarily in Central Indiana.
The consolidated financial statements include the accounts of the Corporation, the Bank, and the Trust with intercompany balances and transactions eliminated.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and interest-bearing deposits. Interest-bearing deposits are available on demand.
Investment Securities
Investments in debt securities are classified as held-to-maturity or available-for-sale. Management determines the appropriate classification of the securities at the time of purchase.
Debt securities are classified as held-to-maturity when the Corporation has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost.
Debt securities not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of shareholders' equity.
1. Organization and Accounting Policies (continued)
Investment Securities (continued)
The amortized cost of debt securities classified as held-to-maturity or available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security. Such amortization is included in interest income from investments and is computed using a method which approximates the level-yield method. Interest and dividends are included in interest income from investments. Realized gains and losses, and declines in value judged to be other-than-temporary are included in other income. The cost of securities sold is based on the specific identification method.
Loans
Interest income on commercial, mortgage and certain installment loans is accrued on the principal amount of such loans outstanding. Loans are placed on non-accrual status when significant doubt exists as to the collectibility of principal or interest.
Allowance for Loan Losses
The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses related to loans that are identified as impaired is based on discounted cash flows using the loan's initial effective interest rate, or the fair value of the collateral for certain collateral dependent loans. The Corporation collectively evaluates consumer loans and loans secured by real estate for impairment as homogeneous loan groups.
The allowance for loan losses is maintained at a level believed adequate by management to absorb inherent losses in the loan portfolio. The determination of the allowance is based on factors which, in management's judgment, deserve recognition under existing economic conditions in estimating possible loan losses. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. The allowance is increased by provisions for loan losses charged against income and reduced by net charge-offs.
1. Organization and Accounting Policies (continued)
Mortgage Servicing Rights
Mortgage servicing rights are recognized as separate assets when rights are acquired through sale of financial assets. Capitalized servicing rights are reported in other assets and are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Mortgage servicing rights are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation computed by the straight-line method over their useful lives or, for leasehold improvements, the remaining lease term.
Comprehensive Income
Comprehensive income is defined as net income plus other comprehensive income, which, under existing accounting standards includes unrealized gains and losses on certain investments in debt and equity securities. Comprehensive income is reported by the Corporation in the consolidated statements of shareholders' equity.
Earnings Per Share
Basic earnings per share is computed by dividing net income applicable to common shareholders by the weighted average numbers of shares of common shares outstanding for the period. Diluted earnings per share is computed by dividing an adjusted net income by the sum of the weighted average number of shares and the potentially dilutive shares that could be issued through stock award programs or convertible securities.
Fair Values of Financial Instruments
The fair values of financial instruments are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment concerning several factors, especially in the absence of broad markets for particular items.
1. Organization and Accounting Policies (continued)
Stock Based Compensation
Effective January 1, 2001, the Corporation compensates directors with cash and stock. To employees, and to directors through December 31, 2000, the Corporation grants stock options for a fixed number of shares with an exercise price which approximates the fair value of shares at the date of grant. As discussed further in Note 9.,expense for director and employee compensation under stock option plans is based on Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," (APB 25), with expense reported only if options are granted below market price at grant date. Pro forma disclosures of net income and earnings per share are provided as if the fair value method of Financial Accounting Standard Board (FASB) Statement No. 123 "Accounting for Stock Based Compensation", as amended by FASB Statement No. 148, were used for stock-based compensation.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over their vesting periods. The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of Statement No. 123 to stock-based compensation.
1. Organization and Accounting Policies (continued)
Reclassifications
Certain amounts in the 2001 and 2000 financial statements have been reclassified to conform with the 2002 presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
2. Restrictions on Cash and Due From Bank Accounts
The Corporation is required to maintain average reserve balances with the Federal Reserve Bank or as cash on hand or on deposit with a correspondent bank. The required amount of reserve was approximately $25,000 at December 31, 2002 and 2001.
3. Investment Securities
The following is a summary of available-for-sale securities and held-to-maturity securities:
3. Investment Securities (continued)
Investment securities with a carrying value of approximately $71,000,000 and $2,100,000 at December 31, 2002 and 2001, respectively were pledged as collateral for bankruptcy accounts to the U.S. Department of Justice, Treasury Tax and Loan, and securities sold under agreements to repurchase.
3. Investment Securities (continued)
The amortized cost and estimated fair value of debt and marketable equity securities at December 31, 2002, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
Estimated Amortized Fair Cost Value -------------------------- Available-for-Sale Due in one year or less $46,938,336 $47,223,221 Due after one year through five years 35,092,039 35,665,785 Collateralized mortgage obligations 1,097,683 1,101,329 -------------------------- $83,128,058 $83,990,335 ========================== Held-to-Maturity Due after one year through five years $ 150,000 $ 156,605 Due after five years through ten years 5,609,243 6,165,262 Collateralized mortgage obligations 24,333,493 24,660,289 -------------------------- $30,092,736 $30,982,156 ==========================
4. Loans and Allowance for Loan Losses
Loans consist of the following at December 31:
2002 2001 ---------------------------- Residential loans secured by real estate $184,141,018 $168,900,807 Commercial loans secured by real estate 113,398,604 82,255,861 Other commercial and industrial loans 182,993,990 150,101,133 Loans to individuals for household, family, and other consumer expenditures 48,377,605 50,802,502 ---------------------------- Total loans $528,911,217 $452,060,303 ============================
Activity in the allowance for loan losses was as follows:
2002 2001 2000 ----------------------------------------
Beginning balance $5,986,965 $4,700,672 $3,392,587 Loans charged off (net) (259,965) (153,707) (131,915) Provision for loan losses 1,500,000 1,440,000 1,440,000 ---------------------------------------- Ending balance $7,227,000 $5,986,965 $4,700,672 ========================================
4. Loans and Allowance for Loan Losses (continued)
At December 31, 2002 twenty-three loans with a combined balance of $3,229,000 were considered to be impaired. At December 31, 2001 thirteen loans with a combined balance of $835,000 were considered to be impaired. The average combined balance of impaired loans during 2002 and 2001 was $1,864,000 and $973,000, respectively.
Loans are principally to borrowers in the Central Indiana area.
5. Premises and Equipment
Premises and equipment consist of the following at December 31:
2002 2001 ----------------------------
Land and improvements $ 2,270,444 $2,270,444 Building and improvements 5,027,631 4,242,697 Construction in progress 244,564 489,649 Leasehold improvements 1,611,134 1,562,388 Furniture and equipment 5,993,658 5,535,165 ---------------------------- 15,147,431 14,100,343 Less accumulated depreciation and amortization (5,899,141) (4,843,107) ---------------------------- Net premises and equipment $9,248,290 $9,257,236 ============================
Certain Corporation facilities and equipment are leased under various operating leases. Rental expense under these leases was $245,629, $240,913, and $175,435 for 2002, 2001, and 2000, respectively.
Future minimum rental commitments under noncancelable leases are:
2003 $ 242,373 2004 224,224 2005 212,744 2006 157,469 2007 136,003 Thereafter 231,347 ---------------- $1,204,160 ================
6. Loan Servicing
Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage loans serviced for others was $80,021,212 and $69,216,879 at December 31, 2002 and 2001, respectively.
The balance of capitalized servicing rights, net of valuation allowances, included in other assets at December 31, 2002 and 2001, was $780,093 and $742,115, respectively. The valuation allowance related to these rights were $261,174 and $0, respectively.
7. Deposits
At December 31, 2002 the stated maturities of time deposits are as follows:
Greater Less than Than $100,000 $100,000 -------------------------------
Mature in three months or less $16,033,990 $13,132,946 Mature after three months through six months 8,444,470 5,985,896 Mature after six months through twelve months 10,710,978 5,257,148 Mature in 2002 13,894,220 7,422,085 Mature in 2003 6,952,406 1,980,136 Thereafter 8,314,226 3,032,954 ------------------------------- $64,350,290 $36,811,165 ===============================
8. Other Borrowings
Security repurchase agreements are short-term borrowings that generally mature within one to three days from the transaction date. At December 31, 2002 and 2001 the weighted average interest rate on these borrowings was 1.08% and 3.43%, respectively.
All of the FHLB advances have a fixed interest rate and require monthly interest payments. The principal balances for each of the advances is due at maturity. The advances are collateralized by a pledge covering certain of the Corporation's mortgage loans.
8. Other Borrowings (continued)
A schedule of the FHLB advances as of December 31, 2002 is as follows:
Amount Rate Maturity ----------------------------------------------- $6,000,000 5.66% 09/04/2003 5,000,000 5.39% 02/26/2004 5,000,000 5.15% 04/23/2004 5,000,000 5.14% 08/01/2005 3,000,000 5.39% 10/03/2005 5,000,000 5.43% 03/16/2006 5,000,000 5.32% 05/08/2006 8,000,000 4.19% 07/24/2007 3,000,000 5.57% 08/13/2007 3,000,000 5.55% 10/02/2008 --------------- $ 48,000,000 ===============
The Corporation has a $5,000,000 Revolving Credit Agreement with Harris Trust and Savings Bank maturing September 28, 2003. At December 31, 2002 and 2001, $0 was outstanding, respectively. Several interest rate options, including an adjusted LIBOR rate, are available to the Corporation on any amounts drawn on the line. Interest payments are due quarterly. The Corporation also pays a commitment fee of .25% per annum on the average daily unused portion of the line of credit. The line is collateralized by the issued and outstanding stock of the Bank. In addition, this agreement requires the maintenance of certain ratios and compliance with various other restrictive covenants.
In September of 2000, the Trust, which is wholly owned by the Corporation, issued $13,500,000 of company obligated mandatorily redeemable capital securities. The proceeds from the issuance of the capital securities and from the issuance of related common securities of $418,000 were used by the Trust to purchase from the Corporation $13,918,000 Fixed Rate Junior Subordinated Debentures. The capital securities mature September 6, 2030, have a fixed interest rate of 10.60%, and are guaranteed by the Bank. The net proceeds received by the Corporation from the sale of the capital securities were used for general corporate purposes. The indenture, dated September 7, 2000, requires compliance with certain non-financial covenants.
9. Stock Option and Award and Employee Benefit Programs
The Board of Directors of the Corporation adopted stock option plans for directors and key employees at the initial formation of the Bank in 1993. The Board of Directors authorized 130,000 shares in 1993, 90,000 shares in 1996, 150,000 shares in 1999, and an additional 120,000 during 2002 to be reserved for issuance under the Corporation's stock option plan. All of the options in these plans remain exercisable for a period of 10 years from the date of issuance, subject to the terms and conditions of the plans.
Shares subject to outstanding options are summarized as follows:
As of December 31, 2002 total shares which may be purchased under the plans is 391,557 with option prices ranging from $10.00 to $27.75. The weighted-average remaining contractual life of those options is six years.
9. Stock Option and Award and Employee Benefit Programs (continued)
The Board of Directors also approved a restricted stock plan in 1993. Shares reserved by the Corporation for the restricted stock plan include 50,000 shares in 1993, 20,000 shares in 1996, 40,000 in 1999 and an additional 55,000 shares in 2002. Under this plan, shares were issued in the proceeding years as detailed in the following table. The Corporation recorded each stock issuance in shareholders' equity with an offsetting contra-equity account, unearned compensation, equal to the fair market value of the shares at the grant date. The unearned compensation is amortized over the vesting period.
In consideration of their efforts in organizing the Corporation and the Bank, two officers/directors of the Corporation were issued warrants on October 18, 1993 to purchase an additional 345,500 common shares. The warrants became exercisable, subject to certain regulatory conditions and restrictions, on October 18, 1994 and will remain exercisable for a period of ten years thereafter at a purchase price of $10 per share. During 1995, the Corporation issued warrants to purchase an additional 76,875 common shares at a purchase price of $12.50 to one officer/director. The 1995 warrants expire on July 20, 2005.
During 2002, certain officers/directors of the Corporation exercised their warrants/options to purchase 422,175 shares of common shares. The exercise price ranged from $10.00 to $22.50 with a weighted average exercise price of $10.66 and the weighted average fair market value of the stock was $26.05.
9. Stock Option and Award and Employee Benefit Programs (continued)
The Corporation has elected to follow APB 25 and related Interpretations in accounting for its director and employee stock options, restricted stock and warrants. Under APB 25, because the exercise price of the Corporation's director and employee stock options and warrants equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
See Note. 1 for the pro forma information regarding net income and earnings per share as required by FASB Statement No. 123, which also requires that the information be determined as if the Corporation has accounted for its stock options, restricted stock and warrants granted under the fair value method of that Statement. The fair value for the options and warrants was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted- average assumptions: a dividend yield of 0%; volatility factor of the expected market price of the Corporation's common stock of .001; and an expected life of the options of 10 years. The risk-free interest rate was estimated to be 5.2% to 5.66%, 5.33%, and 6.26% to 6.53% for 2002, 2001, and 2000, respectively. The fair value for the restricted stock is estimated to equal the fair value of unrestricted stock and be restricted for a weighted average of five years.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Corporation's director and employee stock options, restricted stock and warrants have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its director and employee stock options.
The Corporation has a trusteed 401(k) retirement savings plan covering substantially all employees and encouraging employee contributions. Employer contributions include Board of Director discretionary contributions and the matching of a portion of employee contributions. The Corporation expensed approximately $167,000, $146,000, and $98,000 for employer contributions to the plan during 2002, 2001, and 2000, respectively.
10. Dividend and Loan Limitation and Regulatory Capital Ratios
Dividends from the Bank to the Corporation may not exceed the undivided profits of the Bank (included in consolidated retained earnings) without prior approval of a federal regulatory agency. In addition, Federal banking laws limit the amount of loans the Bank may make to the Corporation, subject to certain collateral requirements. No loans were made during 2002 or 2001 by the Bank to the Corporation. The Bank declared $650,000 and $0 dividends to the Corporation during 2002 and 2001, respectively.
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory-and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of total qualifying capital to total adjusted asset (as defined). Management believes, as of December 31, 2002 and 2001, that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 2002, the most recent notification from the Comptroller of the Currency categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and leveraged capital ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the institution's category.
10. Dividend and Loan Limitation and Regulatory Capital Ratios (continued)
The Bank's actual capital amounts and ratios are also presented in the following table.
11. Related Parties
Certain directors and principal shareholders of the Corporation, including their families and companies in which they are principal owners, are loan customers of and have other transactions with the Corporation or its subsidiary in the ordinary course of business. The aggregate dollar amount of these loans was approximately $8,770,311 and $7,251,832 on December 31, 2002 and 2001, respectively. All of the loans made were on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with unrelated parties. The amounts do not include loans made in the ordinary course of business to companies in which officers or directors of the Corporation are either officers or directors, but are not principal owners, of such companies. During 2002, new loans to these parties amounted to $2,201,228 and repayments amounted to $682,749.
12. Income Taxes
The Corporation applies a federal income tax rate of 34% and a state tax rate of 8.5% in the computation of tax expense or benefit. The provision for income taxes consisted of the following:
2002 2001 2000 -------------------------------------------- Current tax expense $3,636,852 $2,646,904 $2,262,449 Deferred tax benefit (636,573) (506,348) (542,991) -------------------------------------------- $3,000,279 $2,140,556 $1,719,458 ============================================
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets are recognized for the estimated tax effects attributable to deductible temporary differences and operating loss carryforwards, net of any valuation allowances for amounts which may not be realized by the Corporation.
The components of the Corporation's net deferred tax assets in the consolidated balance sheet as of December 31 are as follows:
2002 2001 --------------------------- Deferred tax assets: Allowance for loan losses $ 2,862,615 $ 2,371,437 Other 590,068 436,561 --------------------------- Total deferred tax assets 3,452,683 2,807,998 Deferred tax liability: Mortgage servicing rights (308,995) (293,952) Other (333,296) (40,197) --------------------------- Total deferred tax liabilities (642,291) (334,149) --------------------------- Net deferred tax assets $ 2,810,392 $ 2,473,849 ===========================
13. Commitments and Contingencies
A summary of the contractual amount of commitments to extend credit is as follows:
2002 2001 ---------------------------- Commercial credit lines $104,949,477 $ 88,237,003 Revolving home equity and credit card lines 63,441,970 61,865,125 Standby letters of credit 11,116,928 12,703,423 Other loans 2,379,428 2,041,660 ---------------------------- $181,887,803 $164,847,211 ============================
Commitments to extend credit are agreements to lend. Since many of the commitments to extend credit may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash-flow requirements.
Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party.
The credit risk associated with loan commitments and standby letters of credit is essentially the same as that involved in extending loans to customers and is subject to normal credit policies. Collateral may be obtained based on management's credit assessment of the customer.
The Corporation has committed to invest $500,000 in the CSC Tax Credit Fund for the purpose of obtaining future tax credits. The investment funds will be used for the construction of low-income housing. The investment is non-interest bearing, and receipt of future tax credits are subject to the investee's fulfillment of requirements as set forth by the Indiana Housing Finance Authority. The Corporation expects to receive the investment principal in approximately 10-15 years. However, the receipt of the principal in the future is not guaranteed.
14. Fair Value of Financial Instruments
FASB Statement No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Statement No. 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation.
The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments:
Cash and short-term investments: The carrying amounts reported in the balance sheet for cash and short-term investments approximate those assets' fair values due to the short maturity of those assets.
Investment securities (including collateral mortgage obligations and stock in federal banks): Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
Loans receivable: For variable-rate loans that re-price frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for all other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued interest approximates its fair value.
Deposits: The fair values disclosed for demand deposits, including interest-bearing and non-interest bearing accounts, passbook savings, and certain types of money market accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
14. Fair Value of Financial Instruments (continued)
Security Repurchase Agreements: The carrying amounts of borrowings under repurchase agreements approximate their fair values due to variable interest rates.
FHLB Advances: The fair value of FHLB advances are based upon discounted cash flows using rates for similar advances with the same maturities.
Capital securities: The fair value of the preferred capital securities are based upon discounted cash flows using rates for similar securities with the same maturities.
Off-balances-sheet instruments: Due to variable interest rates, the fair value of commitments to extend credit approximate the carrying value.
The estimated fair values of the Corporation's financial instruments at December 31 are as follows:
15. Earnings Per Share
Basic net income per common share is computed by dividing net income applicable to common stock by the weighted average number of shares of common stock outstanding during the period. Diluted net income per common share is computed by dividing net income applicable to common stock by the weighted average number of shares, non-vested stock and dilutive common stock equivalents outstanding during the period. Common stock equivalents consist of common stock issuable under the assumed exercise of warrants and stock options granted under the Corporation's stock plans, using the treasury stock method. A computation of earnings per share follows:
2002 2001 2000 --------------------------------------
Basic average shares outstanding 2,288,715 1,916,658 1,908,476 ======================================
Net income $4,556,836 $3,370,043 $2,649,749 ======================================
Basic net income per common share $ 1.99 $ 1.76 $ 1.39 ======================================
Diluted Average shares outstanding 2,288,715 1,916,658 1,908,476 Nonvested restricted stock 48,300 27,600 28,920 Common stock equivalents Net effect of the assumed exercise of stock options 77,518 80,040 69,164 Net effect of the assumed exercise of warrants 14,581 149,521 138,227 -------------------------------------- Diluted average shares 2,429,114 2,173,819 2,144,787 ======================================
Net income $4,556,836 $3,370,043 $2,649,749 ======================================
Diluted net income per common share $ 1.88 $ 1.55 $ 1.24 ======================================
16. Parent Company Financial Statements
The condensed financial statements of the Corporation, prepared on a parent company unconsolidated basis, are presented as follows:
Balance Sheet
December 31 2002 2001 -------------------------- Assets Cash $ 7,313,809 $ 642,034 Investment in subsidiaries 48,517,856 41,958,395 Other assets 395,564 389,000 -------------------------- Total assets $56,227,229 $42,989,429 ==========================
Liabilities and shareholders' equity Other liabilities $ 1,062,078 $ 601,427 Subordinated debt 13,918,000 13,918,000 -------------------------- Total liabilities 14,980,078 14,519,427
Shareholders' equity 41,247,151 28,470,002 -------------------------- Total liabilities and shareholders' equity $56,227,229 $42,989,429 ==========================
16. Parent Financial Statements (continued)
Statements of Cash Flows
17. Quarterly Results of Operations (Unaudited)
The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 2002 and 2001:
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. - --------------------------------------------------------------------
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------
The following sets forth information as to each director and executive officer of the Corporation and the Bank as of December 31, 2002, including their ages, present principal occupations, other business experience during the last five years and directorships in other publicly held companies. Each individual's service with the Corporation and the Bank began at the formation of the Corporation in 1993, unless otherwise noted. In addition, all current directors of the Corporation are also current directors of the Bank. Certain family relationships exist among the directors of the Corporation. Michael S. Maurer and Morris L. Maurer are cousins. There are no arrangements or understandings between any of the directors pursuant to which any of them have been selected for their respective positions.
KATHRYN G. BETLEY - Age 60, Term Expires 2003. Ms. Betley, a director, has been chairman of the board, secretary and co-owner of Romancing the Seasons, a retail store located in Indianapolis, from 1989 through the present. Ms. Betley is an active community volunteer in the Indianapolis area and is involved with and serves on the boards of many civic organizations.
JAMES M. CORNELIUS - Age 59, Term Expires 2004. James M. Cornelius serves as non-executive Chairman of the Board of Guidant Corporation, a leading cardiac and vascular medical device company (New York Stock Exchange: GDT), whose global headquarters are located in Indianapolis, Indiana. He was elected Chairman of the Board of Directors, and its senior executive, in September 1994 when the Company was formed. Mr. Cornelius relinquished his executive responsibilities in 2001, upon retirement after 33 years of combined service to Guidant and Eli Lilly and Company.
From 1994 to 2001, Guidant sales had tripled to $2.5 billion, the number of employees had grown from 5,000 to 10,000 and the Company's stock market capitalization had increased from $1 billion to over $18 billion. Fortune Magazine ranked Guidant 35th in their year 2001 list of "America's Most Admired Companies" and has included Guidant in their annual listing of the "100 Best Companies to Work for in America" on three occasions.
While at Eli Lilly and Company, Mr. Cornelius was a member of the Board of Directors, its Executive Committee, and Chief Financial Officer from 1983 until joining Guidant. He was instrumental in the successful IPO and subsequent split-off of Guidant as an independent company from Lilly. In 1978 he was named the initial director of acquistions for Lilly's Medical Device and Diagnostics Division (MDD), the predecessor group to Guidant. He served as president and CEO of IVAC Corporation in San Diego, CA from 1980-82, previously part of Lilly's MDD division.
In addition to Guidant, he serves on the public company Boards of The Chubb Corporation, and Hughes Electronics. He was elected as the first independent Director of the Israeli medical device start-up Given Imaging, now listed on NASDAQ. He is also a member of the Board of Directors of American United Mutual Insurance Holding Company and a founding Board member of The National Bank of Indianapolis.
He was previously a member of the Board of Directors of Lilly Industries, DowElanco, Indiana National Bank, Indiana Bell
Telephone Company, and CompuServe. He has been active as a Board member of several Indianapolis civic organziations and has served United Way of Central Indiana in multiple leadership positions. He is currently Treasurer of the Board of Governors of the Indianapolis Museum of Art, a member of the Board of Trustees at DePauw University, and is President of the Cornelius Family Foundation.
DAVID R. FRICK - Age 58, Term Expires 2003. Mr. Frick, a director, is the executive vice president and chief legal and administrative officer of Anthem Insurance Companies, Inc. (a health care management and health insurance company). He served as managing partner of Baker & Daniels, one of Indiana's largest law firms, from 1987 through 1992. Mr. Frick was engaged in the private practice of law from 1969 to 1976, when he became Corporation Counsel and Deputy Mayor of the City of Indianapolis. Mr. Frick returned to the private practice of law in 1982 in Indianapolis. Mr. Frick is a member of the Board of Managers of Anthem Prescription Management LLC, President and Director of Anthem Blue Cross and Blue Shield Foundations, Inc. Mr. Frick is also a director of Anthem Benefit Administrators, Inc., Anthem East, Inc., Anthem Financial, Inc., Anthem Health Plans of Connecticut, Inc., Anthem Health Plans of Maine, Inc., Anthem Health Plans of New Hampshire, Inc., Anthem Life Insurance Company, Anthem Midwest, Inc., Anthem West, Inc., Associated Group, Inc., The Anthem Companies, Inc., AdminaStar Federal, Inc., AllMed Financial Corp., HMO Colorado, Inc,. Health Care Ventures, Inc., Health Initiatives, Inc., Lease Partners, Inc., Matthew Thornton Health Plan, Inc., Matthew Thornton Insurance, Inc., Northeast Consolidated Services, Inc., Occupational Healthcare Management Services, Inc., Raffensperger, Hughes & Co., Inc., Rocky Mountain Administrative Services Company, Inc., Rocky Mountain Health Care Corporation, Rocky Mountain Hospital and Medical Service, Inc.
ANDRE B. LACY - Age 63, Term Expires 2005. Mr. Lacy, a director, began his career in 1961 with the predecessor of Lacy Diversified Industries, Inc. as an analyst. Mr. Lacy held various positions with the company before becoming chairman and chief executive officer of LDI, Ltd. (Limited Partnership) and its subsidiaries. Its various entities include: Lacy Distributions, Inc.; Major Video Concepts; Tucker-Rocky Distributing; Answer Products, Inc.; and FinishMaster, Inc.
Mr. Lacy was a director of Merchants National Bank & Trust Company and Merchants National Corporation/National City Corporation from 1979 through 1992. He also served as chairman of the Finance Committee and as a member of the Executive Committee. Mr. Lacy is currently a director of IPALCO Enterprises, Inc., Patterson Dental Co., Indianapolis Chamber of Commerce, Indiana Chamber of Commerce, Economic Club of Indianapolis, Inc., Corporate Community Council, Herff Jones, National Association of Wholesalers-Distributors; and FinishMaster, Inc. He is also the Chairman of Community Leaders Allies for Superior Schools, a Trustee of Hudson Institute, serves on the Board of Governors of United Way of Central Indiana and is on the Board of Trustees of Rose-Hulman Institute of Technology.
G. BENJAMIN LANTZ, JR. - Age 66, Term Expires 2004. Dr. Lantz, a director, was president of the University of Indianapolis from 1988 through May 1998. He is currently retired and now serves as an independent consultant. He served approximately 18 years in the administration of various colleges before he became vice president, administration and development at NESCO, Inc., a privately held manufacturing, real estate and engineering company located in Mayfield Heights, Ohio. Dr. Lantz's responsibilities included supervision of legal counsel and corporate recruitment. Dr. Lantz was also involved in acquisitions and divestitures and locating, analyzing and negotiating and conducting due diligence activities for the purchase of companies. Dr. Lantz also monitored corporate activities for four companies. He is a director of Administar Federal Inc.
WILLIAM J. LOVEDAY - Age 59, Term Expires 2004. Mr. Loveday, a director, is currently the president and chief executive officer of Clarian Health Partners, Inc. Mr. Loveday has served in that capacity since 1988. Mr. Loveday is also a director of Indianapolis
Life Insurance Company, Indiana Health Industry Forum, Healthcare Research Development Institute, Inc., IUPUI Board of Advisors, and Indiana Health and Hospital Association. From 1983 to 1988, Mr. Loveday was executive vice president and chief operating officer of Memorial Medical Center of Long Beach, California.
MICHAEL S. MAURER - Age 60, Term Expires 2004. Mr. Maurer, the chairman of the board of the Corporation and the Bank, was self-employed as an attorney from 1969 through 1988. In 1987 Mr. Maurer became chief executive officer and fifty percent owner of MYSTAR Corp., a broadcasting company which owns Indianapolis radio stations WTPI-FM, WZPL-FM and WMyS-AM. In 1990 Mr. Maurer became chief executive officer and fifty percent owner of IBJ Corp., a publishing company which owns The Indianapolis Business Journal, The Court and Commercial Record, Indiana Lawyer, and Senior Beacon. From April 1991 through December 1992, Mr. Maurer served as a director and member of the Executive Committee of Merchants National Bank/National City Bank, Indianapolis, Indiana. Mr. Maurer is currently chairman of the board of MyStar Communications and IBJ Corporation. He is also a director of Jewish Community Relations Council, Indianapolis Chamber of Commerce, Central Indiana Corporate Partnership, Inc., Greater Indianapolis Progress Committee and is a member of Indiana Square, LLC.
MORRIS L. MAURER - Age 51, Term Expires 2005. Mr. Maurer is the president, chief executive officer and a director of the Corporation and the Bank. He was employed by Indiana National Bank/INB Financial Corporation from 1975 through 1992. In Mr. Maurer's capacity as senior vice president, he was responsible for corporate-wide strategic planning, venture capital, chairman of corporate and lead bank ALCO committees, mergers and acquisitions, and economic research. As chief financial officer, Mr. Maurer was responsible for general accounting, controller, investment, funds desk, security sales and brokerage functions. In addition, Mr. Maurer was a member of the executive management committee, and chairman of the state-wide bank integration committee. Mr. Maurer is a director of Historic Landmarks Foundation of Indiana, serves as the Treasurer of Indianapolis Civic Theatre and is a Trustee of Indianapolis Museum of Art.
PHILIP B. ROBY - Age 59, Term Expires 2003. Mr. Roby is the executive vice president, chief operating officer and a director of the Corporation and the Bank and is also the chief lending officer of the Bank. He began his career at Indiana National Bank in 1965 in its Management Training Program. During the years between 1967 to 1973, Mr. Roby worked as a Commercial Lending Officer and Correspondent Banking Officer at Indiana National Bank. In 1973, he was named manager of the Commercial Credit Department with responsibility for the Commercial Credit Training Program in Commercial Loan Analysis. In 1975, he became president of two real estate subsidiaries of the parent holding company, Indiana National Financial Corporation.
From 1978 to 1990, he held the position of senior vice president and division head of the Metropolitan Division. Mr. Roby served as a member of the Commercial Loan Committee during this period. In 1990, Mr. Roby became president of INB Banking Company, Northeast, an affiliate bank of INB Financial Corporation, located in Fort Wayne, Indiana. Subsequent to the INB merger with NBD Bancorp, he was elected executive vice president and senior commercial lending officer for the Northeast Region of the merged bank and was also named one of the eight members of the Senior Indiana Loan Committee of NBD Indiana, Inc.
Mr. Roby currently serves as chairman of Noble Foundation, YMCA of Greater Indianapolis, and Lynx Capital Corporation. In addition, Mr. Roby is a board member of Marion County Commission on Youth, Greater Indianapolis Progress Committee, Indiana Organ Procurement Organization, Inc., and Urban Economic Development Initiative.
TODD H. STUART - Age 37, Term Expires 2005. Mr. Stuart, a director, has been employed by Stuart's Household Furniture Moving & Storage, Inc., a household and commercial moving, packing and warehousing business since 1983. As vice president of the company, Mr. Stuart's responsibilities include sales, daily operations and supervision of more than 40 employees. Mr. Stuart is a director of Brightpoint, Inc. and is on the Board of Governors of the Indianapolis Museum of Art.
DEBRA L. ROSS - Age 41. Ms. Ross is the chief financial officer of the Corporation and the Bank. She was employed as a staff accountant at KPMG-Peat Marwick from 1987 to 1989. From 1989 to 1993 she was employed by Summit Bank as assistant vice president and assistant controller, where she was responsible for developing and administering accounting policies and procedures, regulatory reporting, financial analysis, budgeting, and directing and supervising the activities of the accounting and cash management departments.
Executive Officers of the Corporation - -------------------------------------
The executive officers of the Corporation, all of whom serve for a one year term, consist of Michael S. Maurer, chairman of the board; Morris L. Maurer, president and chief executive officer; Philip B. Roby, executive vice president, chief operating officer and chief lending officer; and Debra L. Ross, chief financial officer.
ITEM 11.
ITEM 11. Executive Compensation - --------------------------------
Compensation of Directors - -------------------------
To assist in attaining profitability, prior to 2001 Directors of the Corporation and the Bank were compensated for their services as directors solely by the grant of stock options. In June 1996 the Board of Directors adopted a resolution providing that Directors be compensated with stock options each year having a net present value of approximately $17,500 to $20,000 until such time as the Directors are compensated with cash compensation. After analyzing the form and amount of compensation paid to similarly situated companies, the Directors determined that beginning in 2001, Directors would be compensated in the form of cash and grants of stock. For 2002, Messrs. Cornelius, Frick, Lacy, Lantz, Loveday and Stuart and Ms. Betley each were awarded 360 shares of stock and were paid $833 per board meeting attended and $500 per committee meeting attended. Michael S. Maurer, who is the Chairman of the Corporation but is not an employee of the Corporation, received no cash compensation since the organization of the Corporation until 2002. In recognition of this, Mr. Maurer was awarded options in 2002 by the Board of Directors to purchase 29,000 shares, with an exercise price equal $27.50 per share, which was the fair market value at the date of grant. Mr. Maurer also received an additional $80,000 fee payment in 2002 for his service as Chairman in 2001. Beginning in 2002, the Board of Directors determined to pay Mr. Maurer an annual director fee composed of a cash payment equal to $40,000 in January and a grant of shares of the Corporation equal to $40,000 in July, which number of shares equaled 1,441 shares for 2002. Mr. Maurer receives no other fees in his capacity as a director. Morris L. Maurer and Philip B. Roby were not separately compensated for their services as directors of the Corporation or the Bank.
Compensation Committee Report - -----------------------------
Decisions on compensation of the Corporation?s executives are made by the Compensation Committee of the Board, which also serves as the Compensation Committee of the Bank. Each member of the Compensation Committee is a non-employee director. All decisions of the Compensation Committee relating to the compensation of the Corporation and the Bank's executive officers are reviewed by the full Board.
Compensation Policies Toward Executive Officers
The Compensation Committee?s executive compensation policies are designed to provide competitive levels of compensation to the executive officers and to reward officers for individual performance and for performance of the Corporation as a whole. Although there are established goals and standards relating to performance of the Corporation, these goals and standards have not been established solely for utilization in setting compensation of individual employees. The Compensation Committee does, however, consider the Corporation and the Bank's performance compared to the Annual Plan and compared to certain established non-financial goals in setting compensation levels
Base Salary
Each executive officer is reviewed individually by the Compensation Committee, which review includes an analysis of the performance of the Corporation and the Bank. In addition, the review includes, among other things, an analysis of the individual'?s performance during the past fiscal year, focusing primarily upon the following aspects of the individual?'s job or characteristics of the individual exhibited during the most recent fiscal year: quality and quantity of work; supervisory skills; dependability; initiative; attendance; overall skill level; and overall value to the Corporation.
Bonus Amounts
During 2002, the Board of Directors approved an incentive bonus plan ("Incentive Bonus Plan") for all employees of the Bank applicable only in 2002. Under the terms of the Incentive Bonus Plan, all employees were entitled to receive a bonus of up to 15% of their salary, depending upon the amount, if any, by which the Bank exceeded its profit plan. An additional bonus in the aggregate amount of $55,000 was awarded to Morris L. Maurer and Philip B. Roby for exceptional individual performance in areas considered critical to the success of the Bank. This bonus was based upon a review of compensation levels in other financial institutions similar in size to the Corporation and the Bank, and a comparison of the Corporation's performance compared to the 2002 goals for growth in assets, loans, "wealth management" assets under management, net income, and after consideration of non-financial performance, including the results of regulatory examinations.
Other Compensation Plans
At various times in the past, the Corporation has adopted certain broad-based employee benefit plans for all employees. Senior executives are permitted to participate in these plans on the same terms as non-executive employees who meet applicable eligibility criteria, subject to any legal limitations on the amount that may be contributed or the benefits that may be payable under the plans. These plans include such customary employee benefit plans as medical insurance, life insurance, and a 401(k) plan.
Mr. Maurer's 2002 Compensation
Regulations of the Securities and Exchange Commission require that the Compensation Committee disclose the Committee's basis for compensation reported for any individual who served as the Chief Executive Officer during the last fiscal year. Morris L. Maurer's
salary was determined in the same manner as discussed above for other senior executives.
Members of the Compensation Committee:
William J. Loveday (Chairperson)
Michael S. Maurer
Andre B. Lacy
Todd H. Stuart
Compensation Committee Insider Participation - --------------------------------------------
During the past fiscal year, none of the executive officers who received compensation from the Corporation or the Bank served on the Compensation Committee, except for Michael S. Maurer. Mr. Maurer did not participate in any discussion with respect to his compensation from the Corporation or the Bank, and was not present in the room during the discussion by the Compensation Committee of his compensation.
Summary Compensation Table - --------------------------
The following table sets forth for the fiscal year ending December 31, 2002 the cash compensation paid by the Corporation or the Bank, as well as certain other compensation paid or awarded during those years, to the chief executive officer and any other executive officer whose total annual salary and bonus equaled or exceeded $100,000.
(1) While executive officers enjoy certain perquisites, such perquisites are less than 5% of such officer's salary and bonus and are not required to be reported. (2) Amounts include amounts awarded under the Incentive Bonus Plan and additional amounts deemed appropriate by the Board of Directors in recognition of performance critical to the success of the Bank.
(3) The 2002 award reported in the table represents awards under the 1993 Restricted Stock Plan of the Corporation. One hundred percent of these shares of restricted stock awarded in 2002 will vest on June 20, 2007. The amounts in the table represent an assumed value of $27.75 per share for 2002, which is the value determined by the Board of Directors, without giving effect to the diminution in value attributable to the restrictions on such stock. Dividends, if declared by the Corporation, would be paid on the restricted shares at the same time and rate as dividends paid to shareholders of unrestricted shares. At December 31, 2002, the total number and value (based on a value of $29.50 per share) of shares of restricted stock held by the named executive officers were as follows: Mr. Maurer (37,000 shares; $1,091,500); Mr. Roby (27,000 shares; $796,500); and Ms. Ross (4,000 shares; $118,000). The assumed value of $29.50 at December 31, 2002 is the value determined by the Board of Directors for purposes of the Corporation's 401(k) Savings Plan to be the "fair market value" of a share of the Corporation's Common Stock at December 31, 2002, without giving effect to the diminution in value attributable to the restrictions on such stock. Because there is not an established trading market for the Common Stock, the assumed price of $29.50 may not reflect the actual price which would be paid for a share of the Common Stock in an active or established trading market and should not necessarily be relied upon when determining the value of a shareholder's investment. (4) These amounts represent amounts contributed by the Corporation under the Corporation's 401(k) plan.
Employee Benefit Plans - ----------------------
Stock Plans
The Corporation has adopted a stock option program for directors of the Corporation and the Bank, and a separate stock option program for officers and key employees of the Corporation and the Bank. The Corporation has also adopted a restricted stock plan for officers and employees of the Corporation and the Bank. Under the option programs, options for an aggregate of 490,000 shares may be granted. A total of 165,000 shares have been reserved for issuance under the restricted stock plan. The Board of Directors of the Corporation believes these programs provide an important incentive to those who will be instrumental to the success of the Corporation and of the Bank. A more detailed description of each of the programs is set forth below.
1993 Employees' Stock Option Plan. This plan provides for the grant of "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code and the grant of nonqualified stock options (the "Plan"). The Plan provides for the award of stock options to elected officers and key employees of the Corporation and its subsidiaries, including the Bank, which currently is the Corporation's only subsidiary. The exercise price for all options granted under the Plan will not be less than the greater of $10.00 or the fair market value of the Shares on the date of grant. The Plan will expire on May 31, 2008.
Options may be granted under the Plan only to officers and other key employees who are in positions to make significant contributions to the success of the Corporation. The Compensation Committee, consisting of outside directors of the Corporation who are ineligible under the Plan to receive options themselves, administers the Plan.
Options are exercisable in whole or in part upon such terms and conditions as may be determined by the Compensation Committee, but in no event will any incentive stock options be exercisable later than ten years after date of grant.
A total of 340,000 shares has been reserved for issuance under the Employee Stock Option Plan. As of March 25, 2003, there were 38,243 shares available for issuance under the Plan.
Options Grants in Last Fiscal Year
The following table provides details regarding stock options granted to Morris L. Maurer, Philip B. Roby, and Debra L. Ross in 2002. In addition, in accordance with the rules of the Securities and Exchange Commission, there are shown the hypothetical gains or "options spreads" that would exist for respective options. These gains are based on assumed rates of annual compound stock price appreciation of five percent (5%) and ten percent (10%) from the date the options were granted over the full option term. Gains are reported net of the option exercise price, but before any effect of taxes. In assessing these values, it should be kept in mind that no matter what value is placed on a stock option on the date of grant, its ultimate value will be dependent on the market value of the Corporation's stock at a future date, and that value would depend on the efforts of such executive to foster the future success of the Corporation for the benefit of all shareholders. The amounts reflected in the table may not necessarily be achieved.
Aggregate Fiscal Year-end Option Values Table
The following table shows the number of shares covered by both exercisable and non-exercisable stock options by Messrs. M.L. Maurer and Roby and Ms. Ross as of December 31, 2002. Also reported are the values for the "in-the-money" options, which represent the positive spread between the exercise price of any such existing stock options and the year-end assumed price of the Common Stock. For purposes of the following table, the year-end price of the stock was assumed to be $29.50, which is the value determined by the Board of Directors for purposes of the Corporation's 401(k) Savings Plan to be the "fair market value" of a share of the Corporation's Common Stock at December 31, 2002. Because there is not an established trading market for the Common Stock, the assumed price of $29.50 may not reflect the actual price which would be paid for shares of the Common Stock in an active or established trading market and should not necessarily be relied upon when determining the value of a shareholder's investment.
Number of Shares Underlying Value of Unexercised Unexercised Options in-the-Money Options at Fiscal Year End at Fiscal Year End (#) ($) - -------------------------------------------------------------------------------- Name Exercisable Unexercisable Exercisable Unexercisable - -------------------------------------------------------------------------------- Morris L. Maurer 42,500 14,500 $761,250 $69,125 Philip B. Roby 31,000 11,500 $550,500 $42,000 Debra L. Ross 1,200 4,800 $12,600 $15,400 - --------------------------------------------------------------------------------
1993 Directors' Stock Option Plan. In 1993, the Board of Directors of the Corporation adopted a nonqualified stock option plan (the "Directors' Plan") which provides for the grant of nonqualified stock options to those individuals who are not officers or employees of the Corporation or the Bank and who serve as directors (the "Outside Directors") of the Corporation or any of its subsidiaries, including the Bank. The Plan will expire on May 31, 2003.
The Directors' Plan provides for the grant of nonqualified stock options to acquire shares of the Corporation at a price equal to the greater of $10.00 or the fair market value of the shares on the date of grant. A total of 150,000 shares has been reserved for issuance under the Directors' Plan. As of March 25, 2003 there were 14,000 shares available for issuance under the Directors' Plan.
The options under this program are exercisable for ten years from the date of grant. In addition, the options will immediately become null and void, without any action required by the Corporation or the Bank, the FDIC, the OCC, or the Federal Reserve if the Federal Reserve, the FDIC, or the OCC issues a directive or final order to the Corporation or the Bank requiring a contribution of capital. Individuals become eligible to receive grants of options under the Directors' Plan upon their election to a qualifying board of directors but do not receive additional options because they are a member of more than one such board.
1993 Restricted Stock Plan. On June 1, 1993, the Board of Directors of the Corporation adopted a Restricted Stock Plan (the "Restricted Stock Plan"), which provides for the grant of shares to officers and key employees of the Corporation and the Bank.
The Restricted Stock Plan provides for the outright grant of shares, subject to the vesting schedule set forth in the agreement between the recipient and the Administrative Committee of the Restricted Stock Plan, to officers and employees of the Corporation and the Bank. Grants under the Restricted Stock Plan may be made only to officers and other employees who are in position to make significant
contributions to the success of the Corporation. The Compensation Committee, consisting of outside directors of the Corporation who are ineligible under the Plan to receive grants of restricted stock, administers the Restricted Stock Plan. Such committee has the authority to determine the number of grants to issue and to whom such grants are made, what price, if any, will be required to purchase shares of stock issued under the Restricted Stock Plan and the vesting schedule of the restricted stock.
The Restricted Stock Plan provides for the issuance of up to 165,000 Shares. The plan expires on May 31, 2008. As of March 25, 2003, there were 16,700 shares available for issuance under the Restricted Stock Plan.
401(k) Savings Plan
The Corporation sponsors The National Bank of Indianapolis Corporation 401(k) Savings Plan ("401(k) Plan") for the benefit of substantially all of the employees of the Corporation and its subsidiaries. All employees of the Corporation and its subsidiaries become participants in the 401(k) Plan after completing one year of service for the Corporation or its subsidiaries and attaining age 21.
Each participant may enter into a salary redirection agreement with the Corporation or the Bank whereby the Corporation or the Bank redirects to the participant's account in the 401(k) Plan an amount, on a pre-tax basis, equal to not less than one percent (1%) or more than (50%) of the participant's compensation, as defined in the 401(k) Plan. If a participant makes salary redirection contributions to the 401(k) Plan, the Corporation will make a matching contribution in the amount necessary to match 50% of the participant's salary redirection contribution up to 6% of the participant's compensation, as defined in the 401(k) Plan. The Board of Directors of the Corporation may, in its discretion, make an additional matching contribution to the 401(k) Plan in such amount as the Board may determine. In addition, the Corporation may fund all or any part of its matching contributions with shares of its stock. The Corporation also may, in its discretion, make a profit sharing contribution to the 401(k) Plan.
An employee who has an interest in a qualified retirement plan with a former employee may transfer the eligible portion of that benefit into a rollover account in the 401(k) Plan. The participant may request that the trustee invest up to 50% of the fair market value of the participant's rollover contribution (valued as of the effective date of the contribution to the 401(k) Plan) in whole and fractional shares of the Common Stock to the Corporation.
Benefits under the 401(k) Plan are distributable to participants or their beneficiaries in a single lump sum payment.
Certain Other Transactions - --------------------------
The Corporation's officers and directors, as well as firms and companies with which they are associated, have had and will have banking transactions with the Bank. It is the policy of the Bank that any credit extended to such persons, firms and companies will be extended only in the ordinary course of business and on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and will not involve more than the normal risk of collectability or present other unfavorable features.
FIVE YEAR TOTAL SHAREHOLDER RETURN
The following indexed graph indicates the Corporation's total return to its shareholders on its common stock for the past five years, assuming dividend reinvestment, as compared to total return for the Russell 2000 Index and the Peer Group Index (which is a line-of-business index prepared by an independent third party consisting of stock of banks with assets between $500 million and $1 billion). The comparison of total return on investment for each of the periods assumes that $100 was invested on January 1, 1998, in each of the Corporation, the Russell 2000 Index, and the Peer Group Index. Shares of the common stock of the Corporation are not traded on any national or regional exchange or in the over-the-counter market and there is not established market for the common stock. For purposes of the following graph, the year-end price of the stock was assumed to be the value determined by the Board of Directors for purposes of the Corporation's 401(k) Savings Plan to be the "fair market value" of a share of the Corporation's Common Stock at December 31. Because there is not an established trading market for the Common Stock, these assumed prices may not reflect the actual price which would be paid for shares of the Common Stock in an active or established trading market and should not necessarily be relied upon when determining the value of a shareholder's investment.
[PERFORMANCE CHART APPEARS HERE]
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters - ----------------------------------------------------------------------------
The following table sets forth as of March 25, 2003 the total number of shares of Common Stock of the Corporation beneficially owned by each director and executive officer of the Corporation and by all directors and executive officers as a group. The number of shares shown as being beneficially owned by each director and executive officer are those over which he or she has sole voting or investment power, unless otherwise noted.
- -------------------------------------------------------------------------------- Name of Beneficial Owner Number of Shares Percent of Class - -------------------------------------------------------------------------------- Kathryn G. Betley 13,635 (1) 0.6% James M. Cornelius 32,260 (2) 1.3% David R. Frick 24,010 1.0% Andre B. Lacy 45,760 (3) 1.9% G. Benjamin Lantz, Jr. 24,310 (3) 1.0% William J. Loveday 12,160 (1) 0.5% Michael S. Maurer 688,291 (4) 27.8% Morris L. Maurer 166,910 (5) 6.6% Philip B. Roby 71,997 (6) 2.9% Todd H. Stuart 17,885 (7) 0.7% Debra L. Ross 6,174 (8) 0.3% Directors and executive officers as a group (consisting of 11 individuals) 1,103,392 41.5% - --------------------------------------------------------------------------------
(1) Includes 11,000 shares which such individual has the right to acquire pursuant to the exercise of options. See "Employee Benefit Plans -- 1993 Directors' Stock Option Plan."
(2) Includes 6,000 shares which such individual has the right to acquire pursuant to the exercise of options. See "Employee Benefit Plans -- 1993 Directors' Stock Option Plan."
(3) Includes 17,000 shares which such individual has the right to acquire pursuant to the exercise of options. See "Employee Benefit Plans--1993 Directors' Stock Option Plan."
(4) Includes 29,000 shares which such individual has the right to acquire pursuant to the exercise of options. See "Employee Benefit Plans--1993 Directors' Stock Option Plan"
(5) Includes 38,000 shares held jointly with the spouse of Mr. Maurer, 42,500 shares which Mr. Maurer has the right to acquire pursuant to the exercise of stock options, 38,000 shares which Mr. Maurer has the right to acquire pursuant to stock warrants, 37,000 shares of restricted stock, and 1,910 shares in the 401(k) Plan allocated to the account of Mr. Maurer. See "Employee Benefit Plans -- 1993 Employee Stock Option Plan," and "--1993 Restricted Stock Plan," and " -- Warrants." Mr. Maurer received the warrants in 1993 in consideration of his efforts in organizing the Corporation and the Bank and for services to be rendered after the Bank began operations. The warrants are exercisable and will remain exercisable until 2003 at a purchase price of $10.00 per share, and will immediately become null and void, without any action required by the Corporation or the Bank, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the
Currency, or the Board of Governors of the Federal Reserve System if any of these regulatory agencies issues a directive or final order to the Corporation or the Bank requiring a contribution of capital.
(6) Includes 9,900 shares held jointly with the spouse of Mr. Roby, 31,000 shares which Mr. Roby has the right to acquire pursuant to the exercise of stock options, 27,000 shares of restricted stock, and 1,597 shares in the 401(k) Plan allocated to the account of Mr. Roby. See "Employee Benefit Plans -- 1993 Employee Stock Option Plan" and "--1993 Restricted Stock Plan."
(7) Includes 14,000 shares which such individual has the right to acquire pursuant to the exercise of options. See "Employee Benefit Plans--1993 Directors' Stock Option Plan."
(8) Includes 1,200 shares which Ms. Ross has the right to acquire pursuant to the exercise of stock options, 4,000 shares of restricted stock, and 974 shares in the 401(k) Plan allocated to the account of Ms. Ross. See "Employee Benefit Plans -- 1993 Employee Stock Option Plan" and "--1993 Restricted Stock Plan."
PRINCIPAL SHAREHOLDERS
The following table contains information concerning individuals or entities who, to the knowledge of the Corporation, beneficially owned on March 25, 2003, more than 5% of the Common Stock of the Corporation:
- ------------------------------------------------------------------------- Name and Address of Beneficial Owner Shares Beneficially Owned Percent of Class
Michael S. Maurer 688,291 (1) 27.8% Morris L. Maurer 166,910 (2) 6.6% Eugene and Marilyn Glick 125,000 5.1% - -------------------------------------------------------------------------
(1) Includes 29,000 shares which Mr. Maurer has the right to acquire pursuant to the exercise of stock options. See "Employee Benefit Plans--1993 Directors' Stock Option Plan."
(2) Includes 38,000 shares held jointly with the spouse of Mr. Maurer, 42,500 shares which Mr. Maurer has the right to acquire pursuant to the exercise of stock options and 38,000 shares which Mr. Maurer has the right to acquire pursuant to stock warrants, 37,000 shares of restricted stock, and 1,910 shares in the 401(k) Plan allocated to the account of Mr. Maurer. See "Employee Benefit Plans -- 1993 Employees' Stock Option Plan, and -- Warrants."
DISCLOSURE OF EQUITY COMPENSATION PLAN INFORMATION
AS OF DECEMBER 31, 2002
The following table provides information on all existing Stock Option Plans and Restricted Stock Plans as of December 31, 2002.
(1) Includes all outstanding Stock Option Plans and Restricted Stock Plans of the Corporation.
(2) Includes securities to be issued upon the exercise of options under the Stock Option Plans, and does not include any shares of outstanding restricted stock.
(3) Includes 18,400 shares subject to issuance under the Restricted Stock Plan and 56,443 shares subject to issuance under the Stock Option Plans.
(4) Not reflected in the above are shares which may be issued in connection with the payment of directors' fees. In 2002, each non-employee Director of the Corporation, other than the Chairman of the Board, received as payment, in part, of director fees grants of 360 shares of the common stock of the Corporation (for an aggregate number of 2,520 shares). In addition, the above does not include shares which may be granted to the Chairman of the Board as payment, in part, of his director fee (which were 1,441 shares in 2002). For a discussion of these fees, see the portion of this report entitled "Director Compensation" under Item 11 -- Executive Compensation.
(5) Represents shares subject to issuance upon the exercise of a ten-year warrant granted to Mr. Maurer in 1993 in connection with his efforts in organizing the Corporation in 1993.
Item 13.
Item 13. Certain Relationships and Related Transactions. - ---------------------------------------------------------
The Corporation's officers and directors, as well as firms and companies with which they are associated, have banking transactions with the Bank. It is the policy of the Bank that any credit extended to such persons, firms and companies will be extended only in the ordinary course of business and on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and will not involve more than the normal risk of collectability or present other unfavorable features.
Item 14.
Item 14. Controls and Procedures. ---------------------------------
(a) Evaluation of Disclosure Controls and Procedures. The Corporation's principal executive officer and principal financial officer have concluded that the Corporation's disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934, as amended), based on their evaluation of these controls and procedures as of a date within ninety (90) days prior to the filing date of this Form 10-K, are effective.
(b) Changes in Internal Controls. There have been no significant changes in the Corporation's internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation thereof, including any corrective actions with regard to significant deficiencies and material weaknesses.
(c) Limitations on the Effectiveness of Controls. The Corporation's management, including its principal executive officer and principal financial officer, does not expect that the Corporation's disclosure controls and procedures and other internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
(d) CEO and CFO Certifications. Appearing immediately following the Signatures section of this report there are Certifications of the Corporation's principal executive officer and principal financial officer. The Certifications are required in accord with Section 302 of the Sarbanes-Oxley Act of 2002 (the "Section 302 Certifications"). This Item of this report which you are currently reading is the information concerning the Evaluation referred to in the Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.
Part IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules, and Reports on From 8-K - --------------------------------------------------------------------------
(a) (1) The following consolidated financial statements are included in Item 8:
Page Number in 10-K
Independent Auditors' Report on Consolidated Financial Statements 36
Consolidated Balance Sheets December 31, 2002 and 2001 37
Consolidated Statements of Income 38 For the years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Shareholders' Equity 39 For the years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows 40 For the years ended December 31, 2002, 2001, and 2000
Notes to consolidated Financial Statements 41
(2) See response to Item 15 (a)(1). All other financial statement schedules have been omitted because they are not applicable, or the required information is shown in the consolidated financial statements or notes thereto.
(3) List of Exhibits
Exhibit Number Description - -------------- -----------
3a) 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
3b) Bylaws of the Corporation, filed as Exhibit 3(ii) to the Corporation's Form 10-Q as of September 30, 1996 are incorporated by reference
10a) 1993 Key Employees' Stock Option Plan of the Corporation, as amended, filed as Exhibit 10(a) to the Corporation's Form 10-Q as of June 30, 2002 are incorporated by reference
10b) 1993 Directors' Stock Option Plan of the Corporation, as amended, filed as Exhibit 10(b) to the Corporation's Form 10-Q as of June 30, 2001 are incorporated by reference
10c) 1993 Restricted Stock Plan of the Corporation, as amended, filed as Exhibit 10(c) to the Corporation's Form 10-Q as of June 30, 2002 are incorporated by reference
21 Subsidiaries of the Corporation
99.1 Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350
99.2 Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350
(b) No reports on Form 8-K were filed during the last quarter of the fiscal year.
(c) See the list of exhibits in Item 15 (a) (3).
(d) No other financial statement schedules are required to be submitted.
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) The National Bank of Indianapolis Corporation ------------------------------------------------------------------ By (Signature and Title) /S/ Morris L. Maurer March 28, 2003 ----------------------------- -------------- Morris L. Maurer, President & Date Principal Executive Officer
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By (Signature and Title) /S/ Morris L. Maurer March 28, 2003 ------------------------------------------------------- Morris L. Maurer, President & Date Principal Executive Officer
By (Signature and Title) /S/ Philip B. Roby March 28, 2003 ------------------------------------------------------- Philip B. Roby, Executive Vice President Date
By (Signature and Title) /S/ Debra L. Ross March 28, 2003 ------------------------------------------------------- Debra L. Ross, Principal Financial Date and Accounting Officer
By (Signature and Title) /S/ Michael S. Maurer March 28, 2003 ------------------------------------------------------- Michael S. Maurer, Chairman of the Board Date
By (Signature and Title) /S/ Kathryn G. Betley March 28, 2003 ------------------------------------------------------- Kathryn G. Betley, Director Date
By (Signature and Title) /S/ James M. Cornelius March 28, 2003 ------------------------------------------------------- James M. Cornelius, Director Date
By (Signature and Title) /S/ David R. Frick March 28, 2003 ------------------------------------------------------- David R. Frick, Director Date
By (Signature and Title) /S/ Andre B. Lacy March 28, 2003 ------------------------------------------------------- Andre B. Lacy, Director Date
By (Signature and Title) /S/ William J. Loveday March 28, 2003 ------------------------------------------------------- William J. Loveday, Director Date
By (Signature and Title) /S/ G. Benjamin Lantz March 28, 2003 ------------------------------------------------------- G. Benjamin Lantz, Director Date
By (Signature and Title) /S/ Todd H. Stuart March 28, 2003 ------------------------------------------------------- Todd H. Stuart, Director Date
CERTIFICATIONS
I, Morris L. Maurer, certify that:
1. I have reviewed this annual report on Form 10-K of The National Bank of Indianapolis Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 28, 2003 /s/ Morris L. Maurer ----------------------------------- Morris L. Maurer, President and Chief Executive Officer
CERTIFICATIONS
I, Debra L. Ross, certify that:
1. I have reviewed this annual report on Form 10-K of The National Bank of Indianapolis Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 28, 2003 /s/ Debra L. Ross -------------------------------------- Debra L. Ross, Chief Financial Officer
Exhibit Index - -------------
3(i) Articles of Incorporation of The National Bank of Indianapolis Corporation and Articles of Amendment
3(ii) By-laws of The National Bank of Indianapolis Corporation
10(a) 1993 Key Employees' Stock Option Plan
10(b) 1993 Directors' Stock Option Plan
10(c) 1993 Restricted Stock Plan
21 Subsidiaries of The National Bank of Indianapolis Corporation