Attached files
file | filename |
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EX-32.1 - EXHIBIT 32.1 - NATIONAL BANK OF INDIANAPOLIS CORP | c16671exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - NATIONAL BANK OF INDIANAPOLIS CORP | c16671exv31w1.htm |
EX-32.2 - EXHIBIT 32.2 - NATIONAL BANK OF INDIANAPOLIS CORP | c16671exv32w2.htm |
EX-31.2 - EXHIBIT 31.2 - NATIONAL BANK OF INDIANAPOLIS CORP | c16671exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 000-21671
THE NATIONAL BANK OF INDIANAPOLIS CORPORATION
(Exact name of registrant as specified in its charter)
Indiana | 35-1887991 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
107 North Pennsylvania Street | ||
Indianapolis, Indiana | 46204 | |
(Address of principal executive offices) | (Zip Code) |
(317) 261-9000
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or
such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
Common Stock | Outstanding at May 6, 2011 | |
Common Stock, no par value per share | 2,314,750 |
Table of Contents
The National Bank of Indianapolis Corporation
Report on Form 10-Q
for Quarter Ended
March 31, 2011
for Quarter Ended
March 31, 2011
1 | ||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
20 | ||||||||
32 | ||||||||
32 | ||||||||
34 | ||||||||
34 | ||||||||
34 | ||||||||
35 | ||||||||
35 | ||||||||
35 | ||||||||
35 | ||||||||
37 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
Table of Contents
Part I Financial Information
Item 1. | Financial Statements |
The National Bank of Indianapolis Corporation
Consolidated Balance Sheets
(Unaudited, Dollars in thousands except share data)
March 31, 2011 | December 31, 2010 | |||||||
Assets |
||||||||
Cash and cash equivalents |
||||||||
Cash and due from banks |
$ | 31,284 | $ | 24,143 | ||||
Interest bearing due from banks |
206,090 | 252,266 | ||||||
Reverse repurchase agreements |
1,000 | 1,000 | ||||||
Federal funds sold |
20,647 | 16,109 | ||||||
Total cash and cash equivalents |
259,021 | 293,518 | ||||||
Investment securities |
||||||||
Available-for-sale securities |
81,104 | 75,677 | ||||||
Held-to-maturity securities (Fair value of $154,767 at
March 31, 2011 and $117,302 at December 31, 2010) |
151,917 | 114,676 | ||||||
Total investment securities |
233,021 | 190,353 | ||||||
Loans held for sale |
415 | 1,424 | ||||||
Loans |
923,554 | 900,332 | ||||||
Less: Allowance for loan losses |
(16,042 | ) | (15,134 | ) | ||||
Net loans |
907,512 | 885,198 | ||||||
Bank owned life insurance |
12,025 | 11,938 | ||||||
Other real estate owned |
9,409 | 9,574 | ||||||
Premises and equipment |
24,705 | 24,852 | ||||||
Deferred tax asset |
8,604 | 8,540 | ||||||
Federal Reserve and FHLB stock at cost |
3,065 | 3,065 | ||||||
Other assets and accrued interest |
13,339 | 12,931 | ||||||
Total assets |
$ | 1,471,116 | $ | 1,441,393 | ||||
Liabilities and shareholders equity |
||||||||
Deposits: |
||||||||
Noninterest-bearing demand deposits |
$ | 220,067 | $ | 221,129 | ||||
Money market and savings deposits |
857,318 | 821,345 | ||||||
Time deposits over $100,000 |
100,983 | 108,840 | ||||||
Other time deposits |
84,986 | 87,526 | ||||||
Total deposits |
1,263,354 | 1,238,840 | ||||||
Repurchase agreements and other secured short term borrowings |
95,911 | 93,523 | ||||||
Short term debt |
2,625 | 2,688 | ||||||
Subordinated debt |
5,000 | 5,000 | ||||||
Junior subordinated debentures owed to unconsolidated subsidiary trust |
13,918 | 13,918 | ||||||
Other liabilities |
8,782 | 8,067 | ||||||
Total liabilities |
1,389,590 | 1,362,036 | ||||||
Shareholders equity: |
||||||||
Preferred stock, no par value authorized 5,000,000 shares |
$ | | $ | | ||||
Common stock, no par value authorized 15,000,000 shares
issued 2,867,441 shares at March 31, 2011 and 2,866,641
shares at December 31, 2010 |
35,294 | 35,269 | ||||||
Treasury stock, at cost; 549,691 shares at March 31, 2011
and 548,891 shares at December 31, 2010 |
(20,986 | ) | (20,953 | ) | ||||
Additional paid in capital |
13,475 | 12,866 | ||||||
Retained earnings |
53,470 | 51,853 | ||||||
Accumulated other comprehensive income |
273 | 322 | ||||||
Total shareholders equity |
81,526 | 79,357 | ||||||
Total liabilities and shareholders equity |
$ | 1,471,116 | $ | 1,441,393 | ||||
See notes to consolidated financial statements.
1
Table of Contents
The National Bank of Indianapolis Corporation
Consolidated Statements of Income
(Unaudited, Dollars in thousands except per share data)
Three months ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Interest income: |
||||||||
Interest and fees on loans |
$ | 10,571 | $ | 10,457 | ||||
Interest on investment securities taxable |
706 | 583 | ||||||
Interest on investment securities nontaxable |
524 | 488 | ||||||
Interest on federal funds sold |
11 | 1 | ||||||
Interest on due from banks |
132 | 86 | ||||||
Total interest income |
11,944 | 11,615 | ||||||
Interest expense: |
||||||||
Interest on deposits |
1,516 | 1,888 | ||||||
Interest on other short term borrowings |
72 | 71 | ||||||
Interest on short term debt |
31 | 47 | ||||||
Interest on long term debt |
388 | 388 | ||||||
Total interest expense |
2,007 | 2,394 | ||||||
Net interest income |
9,937 | 9,221 | ||||||
Provision for loan losses |
1,689 | 1,235 | ||||||
Net interest income after provision for loan losses |
8,248 | 7,986 | ||||||
Other operating income: |
||||||||
Wealth management fees |
1,380 | 1,204 | ||||||
Service charges and fees on deposit accounts |
747 | 769 | ||||||
Rental income |
42 | 69 | ||||||
Mortgage banking income |
219 | 212 | ||||||
Interchange income |
340 | 284 | ||||||
Other |
546 | 395 | ||||||
Total other operating income |
3,274 | 2,933 | ||||||
Other operating expenses: |
||||||||
Salaries, wages and employee benefits |
6,427 | 5,934 | ||||||
Occupancy |
644 | 641 | ||||||
Furniture and equipment |
299 | 329 | ||||||
Professional services |
513 | 589 | ||||||
Data processing |
793 | 725 | ||||||
Business development |
428 | 431 | ||||||
FDIC Insurance |
539 | 534 | ||||||
Non performing assets |
261 | 157 | ||||||
Other |
(461 | ) | 882 | |||||
Total other operating expenses |
9,443 | 10,222 | ||||||
Income before tax |
2,079 | 697 | ||||||
Federal and state income tax |
462 | 75 | ||||||
Net income |
$ | 1,617 | $ | 622 | ||||
Basic earnings per share |
$ | 0.70 | $ | 0.27 | ||||
Diluted earnings per share |
$ | 0.67 | $ | 0.26 | ||||
See notes to consolidated financial statements.
2
Table of Contents
The National Bank of Indianapolis Corporation
Consolidated Statements of Cash Flows
(Unaudited, Dollars in thousands)
Three months ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Operating Activities |
||||||||
Net Income |
$ | 1,617 | $ | 622 | ||||
Adjustments to reconcile net income to net cash provided (used) by operating activities: |
||||||||
Provision for loan losses |
1,689 | 1,235 | ||||||
Proceeds from sale of residential mortgage loans |
13,930 | 9,844 | ||||||
Origination of loans held for sale |
(12,506 | ) | (7,967 | ) | ||||
Depreciation and amortization |
383 | 381 | ||||||
Fair value adjustment on mortgage servicing rights |
33 | 88 | ||||||
Gain on sale of loans |
(136 | ) | (200 | ) | ||||
Net gain on sales and writedowns of other real estate and repossessions |
(105 | ) | (37 | ) | ||||
Net increase in deferred income taxes |
(32 | ) | (627 | ) | ||||
Net increase in bank owned life insurance |
(87 | ) | (98 | ) | ||||
Excess tax benefit from deferred stock compensation |
(3 | ) | (22 | ) | ||||
Net accretion of discounts and amortization of premiums on investments |
478 | 279 | ||||||
Compensation expense related to restricted stock and options |
608 | 411 | ||||||
Changes in assets and liabilities: |
||||||||
Accrued interest receivable |
(533 | ) | (237 | ) | ||||
Other assets |
92 | 217 | ||||||
Other liabilities |
718 | 1,623 | ||||||
Net cash provided by operating activities |
6,146 | 5,512 | ||||||
Investing Activities |
||||||||
Proceeds from maturities of investment securities held to maturity |
13,155 | 9,075 | ||||||
Proceeds from maturities of investment securities available for sale |
10,202 | | ||||||
Purchases of investment securities held to maturity |
(50,684 | ) | (1,004 | ) | ||||
Purchases of investment securities available for sale |
(15,900 | ) | | |||||
Net increase in loans |
(29,195 | ) | (7,353 | ) | ||||
Proceeds from sale of loans |
4,825 | | ||||||
Proceeds from sales of other real estate and repossessions |
358 | 1,884 | ||||||
Purchases of bank premises and equipment |
(236 | ) | (112 | ) | ||||
Net cash provided (used) by investing activities |
(67,475 | ) | 2,490 | |||||
Financing Activities |
||||||||
Net increase in deposits |
24,514 | 30,956 | ||||||
Net increase in short term borrowings |
2,388 | 11,238 | ||||||
Net change in revolving line of credit |
(63 | ) | (63 | ) | ||||
Income tax benefit from deferred stock compensation |
3 | 22 | ||||||
Proceeds from issuance of stock |
23 | 131 | ||||||
Repurchase of stock |
(33 | ) | (176 | ) | ||||
Net cash provided by financing activities |
26,832 | 42,108 | ||||||
Increase (decrease) in cash and cash equivalents |
(34,497 | ) | 50,110 | |||||
Cash and cash equivalents at beginning of year |
293,518 | 151,617 | ||||||
Cash and cash equivalents at end of year |
$ | 259,021 | $ | 201,727 | ||||
Supplemental cash flow information |
||||||||
Interest paid |
$ | 2,409 | $ | 2,943 | ||||
Supplemental non cash disclosure |
||||||||
Loan balances transferred to foreclosed real estate |
$ | 88 | $ | 112 |
See notes to consolidated financial statements.
3
Table of Contents
The National Bank of Indianapolis Corporation
Consolidated Statement of Shareholders Equity
(Unaudited, Dollars in thousands except share data)
Accumulated | ||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||
Common | Treasury | Paid In | Retained | Comprehensive | ||||||||||||||||||||
Stock | Stock | Capital | Earnings | Income | TOTAL | |||||||||||||||||||
Balance at January 1, 2010 |
$ | 34,440 | $ | (20,346 | ) | $ | 10,873 | $ | 48,067 | $ | (3 | ) | $ | 73,031 | ||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net income |
| | | 622 | | 622 | ||||||||||||||||||
Other comprehensive income |
||||||||||||||||||||||||
Net unrealized gain on investments, net of tax of $117 |
| | | | 179 | 179 | ||||||||||||||||||
Total comprehensive income |
801 | |||||||||||||||||||||||
Income tax benefit from deferred stock compensation |
| | 22 | | | 22 | ||||||||||||||||||
Issuance of stock 5,300 shares of common stock under stock-based compensation plans |
141 | | (10 | ) | | | 131 | |||||||||||||||||
Repurchase of stock 4,708 shares of common stock |
| (176 | ) | | | | (176 | ) | ||||||||||||||||
Stock based compensation earned |
| | 411 | | | 411 | ||||||||||||||||||
Balance at March 31, 2010 |
$ | 34,581 | $ | (20,522 | ) | $ | 11,296 | $ | 48,689 | $ | 176 | $ | 74,220 | |||||||||||
Balance at January 1, 2011 |
$ | 35,269 | $ | (20,953 | ) | $ | 12,866 | $ | 51,853 | $ | 322 | $ | 79,357 | |||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net income |
| | | 1,617 | | 1,617 | ||||||||||||||||||
Other comprehensive income |
||||||||||||||||||||||||
Net unrealized loss on investments, net of tax of $32 |
| | | | (49 | ) | (49 | ) | ||||||||||||||||
Total comprehensive income |
1,568 | |||||||||||||||||||||||
Income tax benefit from deferred stock compensation |
| | 3 | | | 3 | ||||||||||||||||||
Issuance of 800 shares of common stock under stock-based compensation plans |
25 | | (2 | ) | | | 23 | |||||||||||||||||
Repurchase of 800 shares of common stock |
| (33 | ) | | | | (33 | ) | ||||||||||||||||
Stock based compensation earned |
| | 608 | | | 608 | ||||||||||||||||||
Balance at March 31, 2011 |
$ | 35,294 | $ | (20,986 | ) | $ | 13,475 | $ | 53,470 | $ | 273 | $ | 81,526 | |||||||||||
See notes to consolidated financial statements.
4
Table of Contents
The National Bank of Indianapolis Corporation
Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)
Note 1: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of The
National Bank of Indianapolis Corporation (Corporation) and its wholly-owned subsidiary, The
National Bank of Indianapolis (Bank). All intercompany transactions between the Corporation and
its subsidiary have been properly eliminated. The consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the United States for
interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the three month period
ended March 31, 2011, are not necessarily indicative of the results that may be expected for the
year ended December 31, 2011. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Corporations Form 10-K for the year ended
December 31, 2010.
Note 2: Investment Securities
The following is a summary of available-for-sale and held-to-maturity securities:
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gain | (Loss) | Value | |||||||||||||
March 31, 2011 |
||||||||||||||||
Available-for-sale |
||||||||||||||||
U.S. Treasury securities |
$ | 14,403 | $ | 1 | $ | | $ | 14,404 | ||||||||
U.S. Government agencies |
66,249 | 451 | | 66,700 | ||||||||||||
Total available-for-sale |
$ | 80,652 | $ | 452 | $ | | $ | 81,104 | ||||||||
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrecognized | Unrecognized | Fair | |||||||||||||
Cost | Gain | (Loss) | Value | |||||||||||||
Held-to-maturity |
||||||||||||||||
Municipal securities |
$ | 60,650 | $ | 2,800 | $ | (31 | ) | $ | 63,419 | |||||||
Collateralized mortgage obligations, residential |
89,801 | 451 | (406 | ) | 89,846 | |||||||||||
Mortgage backed securities, residential |
1,316 | 36 | | 1,352 | ||||||||||||
Other securities |
150 | | | 150 | ||||||||||||
Total Held-to-maturity |
$ | 151,917 | $ | 3,287 | $ | (437 | ) | $ | 154,767 | |||||||
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gain | (Loss) | Value | |||||||||||||
December 31, 2010 |
||||||||||||||||
Available-for-sale |
||||||||||||||||
U.S. Treasury securities |
$ | 8,700 | $ | | $ | | $ | 8,700 | ||||||||
U.S. Government agencies |
66,444 | 535 | (2 | ) | 66,977 | |||||||||||
Total available-for-sale |
$ | 75,144 | $ | 535 | $ | (2 | ) | $ | 75,677 | |||||||
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrecognized | Unrecognized | Fair | |||||||||||||
Cost | Gain | (Loss) | Value | |||||||||||||
Held-to-maturity |
||||||||||||||||
Municipal securities |
$ | 55,429 | $ | 2,121 | $ | (115 | ) | $ | 57,435 | |||||||
Collateralized mortgage obligations, residential |
57,569 | 714 | (139 | ) | 58,144 | |||||||||||
Mortgage backed securities, residential |
1,528 | 45 | | 1,573 | ||||||||||||
Other securities |
150 | | | 150 | ||||||||||||
Total Held-to-maturity |
$ | 114,676 | $ | 2,880 | $ | (254 | ) | $ | 117,302 | |||||||
5
Table of Contents
Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)
There were no sales of securities during the three month period ending March 31, 2011 and 2010.
The fair value of debt securities and carrying amount, if different, at March 31, 2011, by
contractual maturity were as follows. Securities not due at a single maturity date, primarily
mortgage-backed securities, are shown separately.
March 31, 2011 | ||||||||
Amortized | Fair | |||||||
Cost | Value | |||||||
Available-for-sale |
||||||||
Due in one year or less |
$ | 44,758 | $ | 44,832 | ||||
Due from one to five years |
35,894 | 36,272 | ||||||
Total |
$ | 80,652 | $ | 81,104 | ||||
Held-to-maturity |
||||||||
Due in one year or less |
$ | 50 | $ | 50 | ||||
Due from one to five years |
5,891 | 6,290 | ||||||
Due from five to ten years |
38,902 | 41,044 | ||||||
Due after ten years |
15,957 | 16,185 | ||||||
CMO/Mortgage-backed, residential |
91,117 | 91,198 | ||||||
Total |
$ | 151,917 | $ | 154,767 | ||||
Investment securities with a carrying value of approximately $112 million and $103 million were
pledged as collateral for Wealth Management accounts, U.S. Department of Justice for bankruptcy
accounts on deposit, and securities sold under agreements to repurchase at March 31, 2011, and
December 31, 2010, respectively.
Securities with unrealized losses at March 31, 2011, and December 31, 2010, aggregated by
investment category and length of time that individual securities have been in a continuous
unrealized loss position, are as follows:
Less Than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | (Loss) | Value | (Loss) | Value | (Loss) | |||||||||||||||||||
March 31, 2011 |
||||||||||||||||||||||||
Available-for-sale |
||||||||||||||||||||||||
None |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
Held-to-maturity |
||||||||||||||||||||||||
Collateralized mortgage
obligations,
residential |
$ | 58,684 | $ | (406 | ) | $ | | $ | | $ | 58,684 | $ | (406 | ) | ||||||||||
Municipal securities |
3,928 | (31 | ) | | | 3,928 | (31 | ) | ||||||||||||||||
Total Held-to-maturity |
$ | 62,612 | $ | (437 | ) | $ | | $ | | $ | 62,612 | $ | (437 | ) | ||||||||||
December 31, 2010 |
||||||||||||||||||||||||
Available-for-sale |
||||||||||||||||||||||||
U.S. Government agencies |
$ | 16,070 | $ | (2 | ) | $ | | $ | | $ | 16,070 | $ | (2 | ) | ||||||||||
Total available-for-sale |
$ | 16,070 | $ | (2 | ) | $ | | $ | | $ | 16,070 | $ | (2 | ) | ||||||||||
Held-to-maturity |
||||||||||||||||||||||||
Collateralized mortgage
obligations,
residential |
$ | 12,744 | $ | (139 | ) | $ | | $ | | $ | 12,744 | $ | (139 | ) | ||||||||||
Municipal securities |
8,358 | (115 | ) | | | 8,358 | (115 | ) | ||||||||||||||||
Total Held-to-maturity |
$ | 21,102 | $ | (254 | ) | $ | | $ | | $ | 21,102 | $ | (254 | ) | ||||||||||
In determining other-than-temporary-impairment (OTTI) for debt securities, management considers
many factors, including: (1) the length of time and the extent to which the fair value has been
less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the
market decline was affected by macroeconomic conditions, and (4) whether the Corporation has the
intent to sell the debt security or more likely than not will be required to sell the debt security
before its anticipated recovery. The assessment of whether an other-than-temporary
decline exists involves a high degree of subjectivity and judgment and is based on the information
available to management at a point in time.
6
Table of Contents
Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)
When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity
intends to sell the security or it is more likely than not it will be required to sell the security
before recovery of its amortized cost basis, less any current-period credit loss. If an entity
intends to sell or it is more likely than not it will be required to sell the security before
recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall be
recognized in earnings equal to the entire difference between the investments amortized cost basis
and its fair value at the balance sheet date. If an entity does not intend to sell the security
and it is not more likely than not that the entity will be required to sell the security before
recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into
the amount representing the credit loss and the amount related to all other factors. The amount of
the total OTTI related to the credit loss is determined based on the present value of cash flows
expected to be collected and is recognized in earnings. The amount of the total OTTI related to
other factors is recognized in other comprehensive income, net of applicable taxes. The previous
amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of
the investment.
As of March 31, 2011, the Corporation held 26 investments of which the amortized cost was greater
than fair value. The Corporation has no securities in which OTTI has been recorded.
There were no unrealized losses for investments classified as available-for-sale.
The unrealized losses for investments classified as held-to-maturity are attributable to changes in
interest rates and/or economic environment and individually were 2.33% or less of their respective
amortized costs. The unrealized losses relate primarily to residential collateralized mortgage
obligations and securities issued by various municipalities. The residential collateralized
mortgage obligations were purchased in January 2011 and October 2010. There has been an increase
in long-term interest rates from the time of the investment purchase and March 31, 2011, which
affects the fair value of residential collateralized mortgage obligations. All residential
collateralized mortgage obligations are backed by the U.S. Government and its agencies and
represent minimal credit risk at this time. The unrealized losses on securities issued by various
municipalities were mainly purchased during the first quarter of 2011. The largest unrealized loss
relates to one municipal that was purchased February 2011. The credit rating of the individual
municipalities is assessed monthly. As of March 31, 2011, all but four of the municipal debt
securities were rated BBB or better (as a result of insurance of the underlying rating on the
bond). The four municipal debt securities have no underlying rating. Credit reviews of the
municipalities have been conducted. As a result, we have determined that all of our non-rated debt
securities would be rated a pass asset and thus classified as an investment grade security. All
interest payments are current for all municipal securities and management expects all to be
collected in accordance with contractual terms.
Note 3: Loans
Loans, including unamortized deferred costs net of fees, consist of the following:
March 31, 2011 | December 31, 2010 | |||||||
Residential loans secured by real estate |
$ | 257,764 | $ | 258,483 | ||||
Commercial loans secured by real estate |
298,237 | 289,286 | ||||||
Construction loans |
43,397 | 44,639 | ||||||
Other commercial and industrial loans |
301,915 | 287,706 | ||||||
Consumer loans |
22,018 | 20,172 | ||||||
Total loans |
923,331 | 900,286 | ||||||
Net deferred loan costs |
223 | 46 | ||||||
Allowance for loan losses |
(16,042 | ) | (15,134 | ) | ||||
Total loans, net |
$ | 907,512 | $ | 885,198 | ||||
7
Table of Contents
Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)
The Corporation periodically sells residential mortgage loans it originates based on the overall
loan demand of the
Corporation and outstanding balances of the residential mortgage portfolio.
As of March 31, 2011, and December 31, 2010, there was $86.0 million and $85.9 million, of 1-4
family residential mortgage loans, respectively, pledged as collateral for FHLB advances.
There was an aggregate of $289.2 million and $297.6 million of commercial loans, commercial real
estate, and construction loans pledged as collateral at the Federal Reserve Bank Discount Window at
March 31, 2011, and December 31, 2010, respectively.
The following table presents the recorded investment in financing receivables by portfolio segment
and the related activity in the allowance for loan losses for the period ending March 31, 2011:
Commercial | Residential | Consumer | Unallocated | Total | ||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||
Beginning balance |
$ | 11,715 | $ | 2,400 | $ | 200 | $ | 819 | $ | 15,134 | ||||||||||
Loan charge offs |
(811 | ) | (122 | ) | (7 | ) | | (940 | ) | |||||||||||
Recoveries |
149 | 8 | 2 | | 159 | |||||||||||||||
Provision |
2,215 | 128 | 148 | (802 | ) | 1,689 | ||||||||||||||
Ending balance |
$ | 13,268 | $ | 2,414 | $ | 343 | $ | 17 | $ | 16,042 | ||||||||||
Ending balance: individually
evaluated for impairment |
$ | 1,774 | $ | 724 | $ | | $ | | $ | 2,498 | ||||||||||
Ending balance: collectively
evaluated for impairment |
$ | 11,494 | $ | 1,690 | $ | 343 | $ | 17 | $ | 13,544 | ||||||||||
Commercial | Residential | Consumer | Unallocated | Total | ||||||||||||||||
Loans: |
||||||||||||||||||||
Loans individually evaluated for impairment |
$ | 9,928 | $ | 4,340 | $ | 106 | N/A | $ | 14,374 | |||||||||||
Loans collectively evaluated for impairment |
633,319 | 253,926 | 21,935 | N/A | 909,180 | |||||||||||||||
Accrued interest receivable |
1,923 | 1,278 | 54 | N/A | 3,255 | |||||||||||||||
Total recorded investment |
$ | 645,170 | $ | 259,544 | $ | 22,095 | N/A | $ | 926,809 | |||||||||||
The following table presents the recorded investment in the allowance for loan losses and the
recorded investment in loans by portfolio segment and based on impairment method at December 31,
2010:
Commercial | Residential | Consumer | Unallocated | Total | ||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||
Ending allowance balance attributable to loans: |
||||||||||||||||||||
Individually evaluated for impairment |
$ | 781 | $ | 801 | $ | 5 | $ | | $ | 1,587 | ||||||||||
Collectively evaluated for impairment |
10,934 | 1,599 | 195 | 819 | 13,547 | |||||||||||||||
Total ending allowance balance |
$ | 11,715 | $ | 2,400 | $ | 200 | $ | 819 | $ | 15,134 | ||||||||||
Loans: |
||||||||||||||||||||
Loans individually evaluated for impairment |
$ | 6,894 | $ | 4,165 | $ | 111 | N/A | $ | 11,170 | |||||||||||
Loans collectively evaluated for impairment |
614,277 | 254,798 | 20,087 | N/A | 889,162 | |||||||||||||||
Accrued interest receivable |
1,884 | 1,188 | 43 | N/A | 3,115 | |||||||||||||||
Total recorded investment |
$ | 623,055 | $ | 260,151 | $ | 20,241 | N/A | $ | 903,447 | |||||||||||
8
Table of Contents
Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)
Activity in the allowance for loan losses was as follows for the three month period ending March
31, 2010:
Beginning balance |
$ | 13,716 | ||
Loan charge offs |
(208 | ) | ||
Recoveries |
16 | |||
Provision for loan losses |
1,235 | |||
Ending balance |
$ | 14,759 | ||
Loans are considered to be impaired when it is determined that the obligor will not pay all
contractual principal and interest when due. The following table presents loans individually
evaluated for impairment by class of loans at March 31, 2011:
Unpaid | Allowance for | |||||||||||
Principal | Recorded | Loan Losses | ||||||||||
Balance | Investment | Allocated | ||||||||||
With no related allowance recorded: |
||||||||||||
Commercial |
||||||||||||
Commercial & industrial |
$ | 3,981 | $ | 2,814 | $ | | ||||||
Commercial real estate |
2,436 | 2,244 | | |||||||||
Construction |
1,490 | 961 | | |||||||||
Residential |
||||||||||||
1-4 family |
1,039 | 681 | | |||||||||
Home equity |
1,696 | 1,531 | | |||||||||
Consumer |
||||||||||||
Personal |
106 | 106 | | |||||||||
Installment |
| | | |||||||||
Overdraft |
| | | |||||||||
Credit cards |
| | | |||||||||
With an allowance recorded: |
||||||||||||
Commercial |
||||||||||||
Commercial & industrial |
991 | 991 | 706 | |||||||||
Commercial real estate |
353 | 353 | 101 | |||||||||
Construction |
2,565 | 2,565 | 967 | |||||||||
Residential |
||||||||||||
1-4 family |
188 | 186 | 47 | |||||||||
Home equity |
1,942 | 1,942 | 677 | |||||||||
Consumer |
||||||||||||
Personal |
| | | |||||||||
Installment |
| | | |||||||||
Overdraft |
| | | |||||||||
Credit cards |
| | | |||||||||
Total |
$ | 16,787 | $ | 14,374 | $ | 2,498 | ||||||
9
Table of Contents
Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)
The following table presents loans individually evaluated for impairment by class of loans at
December 31, 2010:
Unpaid | Allowance for | |||||||||||
Principal | Recorded | Loan Losses | ||||||||||
Balance | Investment | Allocated | ||||||||||
With no related allowance recorded: |
||||||||||||
Commercial |
||||||||||||
Commercial & industrial |
$ | 3,467 | $ | 2,524 | $ | | ||||||
Commercial real estate |
2,150 | 2,076 | | |||||||||
Construction |
1,490 | 1,251 | | |||||||||
Residential |
||||||||||||
1-4 family |
1,080 | 710 | | |||||||||
Home equity |
729 | 630 | | |||||||||
Consumer |
||||||||||||
Personal |
106 | 106 | | |||||||||
Installment |
| | | |||||||||
Overdraft |
| | | |||||||||
Credit cards |
| | | |||||||||
With an allowance recorded: |
||||||||||||
Commercial |
||||||||||||
Commercial & industrial |
1,043 | 1,043 | 781 | |||||||||
Commercial real estate |
| | | |||||||||
Construction |
| | | |||||||||
Residential |
||||||||||||
1-4 family |
56 | 56 | 20 | |||||||||
Home equity |
2,769 | 2,769 | 781 | |||||||||
Consumer |
||||||||||||
Personal |
| | | |||||||||
Installment |
| | | |||||||||
Overdraft |
| | | |||||||||
Credit cards |
5 | 5 | 5 | |||||||||
Total |
$ | 12,895 | $ | 11,170 | $ | 1,587 | ||||||
The following table presents the average balance of individually impaired loans by class for the
period ending March 31, 2011:
Commercial |
||||
Commercial & industrial |
$ | 3,868 | ||
Commercial real estate |
2,346 | |||
Construction |
2,009 | |||
Residential |
||||
1-4 family |
826 | |||
Home equity |
3,492 | |||
Consumer |
||||
Personal |
106 | |||
Installment |
| |||
Overdraft |
| |||
Credit cards |
3 | |||
Total |
$ | 12,650 | ||
The average balance of individually impaired loans for the year ending March 31, 2010, was $15.2
million.
There was no interest income recorded on a cash or accrual basis for any class of impaired loans
for the three month period ending March 31, 2011, and 2010.
10
Table of Contents
Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)
The following table presents the recorded investment in nonaccrual and loans past due over 90 days
still on accrual by class of loans at March 31, 2011, and December 31, 2010:
Loans Past Due | ||||||||||||||||
Nonaccrual | Over 90 Days Still Accruing | |||||||||||||||
March 31, 2011 | December 31, 2010 | March 31, 2011 | December 31, 2010 | |||||||||||||
Commercial |
||||||||||||||||
Commercial & industrial |
$ | 3,805 | $ | 3,567 | $ | | $ | | ||||||||
Commercial real estate |
2,597 | 2,076 | | | ||||||||||||
Construction |
3,526 | 1,251 | | | ||||||||||||
Residential |
||||||||||||||||
1-4 family |
799 | 766 | | | ||||||||||||
Home equity |
3,473 | 3,399 | | | ||||||||||||
Consumer |
||||||||||||||||
Personal |
106 | 106 | | | ||||||||||||
Installment |
| | | | ||||||||||||
Overdraft |
| | | | ||||||||||||
Credit cards |
| | | 5 | ||||||||||||
Total |
$ | 14,306 | $ | 11,165 | $ | | $ | 5 | ||||||||
The following table presents the aging of the recorded investment in past due loans, including
nonaccrual loans, by class of loans at March 31, 2011:
30 89 | Greater than | |||||||||||
Days | 90 Days | Total | ||||||||||
Past Due | Past Due | Past Due | ||||||||||
Commercial |
||||||||||||
Commercial & industrial |
$ | 1,474 | $ | 1,204 | $ | 2,678 | ||||||
Commercial real estate |
653 | 1,536 | 2,189 | |||||||||
Construction |
95 | 960 | 1,055 | |||||||||
Residential |
||||||||||||
1-4 family |
1,783 | 287 | 2,070 | |||||||||
Home equity |
26 | 1,346 | 1,372 | |||||||||
Consumer |
||||||||||||
Personal |
| 106 | 106 | |||||||||
Installment |
9 | | 9 | |||||||||
Overdraft |
| | | |||||||||
Credit cards |
39 | | 39 | |||||||||
Total |
$ | 4,079 | $ | 5,439 | $ | 9,518 | ||||||
11
Table of Contents
Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)
The following table presents the aging of the recorded investment in past due loans, including
nonaccrual loans, by class of loans at December 31, 2010:
30 89 | Greater than | |||||||||||
Days | 90 Days | Total | ||||||||||
Past Due | Past Due | Past Due | ||||||||||
Commercial |
||||||||||||
Commercial & industrial |
$ | 667 | $ | 1,501 | $ | 2,168 | ||||||
Commercial real estate |
1,644 | 1,815 | 3,459 | |||||||||
Construction |
205 | 1,251 | 1,456 | |||||||||
Residential |
||||||||||||
1-4 family |
1,785 | 289 | 2,074 | |||||||||
Home equity |
1,024 | 430 | 1,454 | |||||||||
Consumer |
||||||||||||
Personal |
850 | 106 | 956 | |||||||||
Installment |
14 | | 14 | |||||||||
Overdraft |
| | | |||||||||
Credit cards |
39 | 5 | 44 | |||||||||
Total |
$ | 6,228 | $ | 5,397 | $ | 11,625 | ||||||
Troubled Debt Restructurings:
The Corporation has allocated $878 thousand and $0 of specific reserves to customers whose loan
terms have been modified in troubled debt restructurings as of March 31, 2011, and December 31,
2010, respectively. The Corporation has not committed to lend additional amounts to customers with
outstanding loans that are classified as troubled debt restructurings as of March 31, 2011, and
December 31, 2010.
Credit Quality Indicators:
The Corporation categorizes loans into risk categories based on relevant information about the
ability of borrowers to service their debt such as: current financial information, historical
payment experience, credit documentation, public information, and current economic trends, among
other factors. The Corporation analyzes certain loans individually by classifying the loans as to
credit risk. This analysis includes non-homogeneous loans, such as commercial, commercial real
estate, and loans for personal or consumer purpose as warranted. This analysis is performed on a
monthly basis. The Corporation uses the following definitions for risk ratings:
Special Mention. Loans classified as special mention have a potential weakness that
deserves managements close attention. If left uncorrected, these potential weaknesses may
result in deterioration of the repayment prospects for the loan or of the Corporations
credit position at some future date.
Substandard. Loans classified as substandard are inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so
classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the
debt. They are characterized by the distinct possibility that the institution will sustain
some loss if the deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified
as substandard, with the added characteristic that the weaknesses make collection or
liquidation in full, on the basis of currently existing facts, conditions, and values,
highly questionable and improbable.
12
Table of Contents
Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)
Loans not meeting the criteria above that are analyzed individually as part of the above described
process are considered to be pass rated loans. Based on the most recent analysis performed, the
risk rating of the loans by class of loans is as follows:
Not | Special | |||||||||||||||||||
March 31, 2011 | Rated | Pass | Mention | Substandard | Doubtful | |||||||||||||||
Commercial |
||||||||||||||||||||
Commercial & industrial |
$ | | $ | 280,280 | $ | 6,454 | $ | 15,340 | $ | | ||||||||||
Commercial real estate |
| 260,859 | 15,809 | 21,155 | | |||||||||||||||
Construction |
| 32,015 | 844 | 10,491 | | |||||||||||||||
Total |
$ | | $ | 573,154 | $ | 23,107 | $ | 46,986 | $ | | ||||||||||
Not | Special | |||||||||||||||||||
December 31, 2010 | Rated | Pass | Mention | Substandard | Doubtful | |||||||||||||||
Commercial |
||||||||||||||||||||
Commercial & industrial |
$ | | $ | 265,528 | $ | 7,893 | $ | 14,122 | $ | | ||||||||||
Commercial real estate |
| 256,866 | 24,745 | 7,402 | | |||||||||||||||
Construction |
| 31,458 | 6,499 | 6,658 | | |||||||||||||||
Total |
$ | | $ | 553,852 | $ | 39,137 | $ | 28,182 | $ | | ||||||||||
The Corporation considers the performance of the loan portfolio and its impact on the allowance for
loan losses. For residential and consumer loan classes, the Corporation also evaluates credit
quality based on the aging status of the loan, which are previously presented, and by payment
activity. The following table presents the recorded investment in residential and consumer loans
based on payment activity.
Consumer | Residential | |||||||||||||||||||||||
March 31, 2011 | Personal | Installment | Overdraft | Credit cards | 1-4 family | Home equity | ||||||||||||||||||
Performing |
$ | 16,098 | $ | 880 | $ | 540 | $ | 4,417 | $ | 110,014 | $ | 143,911 | ||||||||||||
Nonperforming |
106 | | | | 867 | 3,473 | ||||||||||||||||||
Total |
$ | 16,204 | $ | 880 | $ | 540 | $ | 4,417 | $ | 110,881 | $ | 147,384 | ||||||||||||
Consumer | Residential | |||||||||||||||||||||||
December 31, 2010 | Personal | Installment | Overdraft | Credit cards | 1-4 family | Home equity | ||||||||||||||||||
Performing |
$ | 14,158 | $ | 885 | $ | 620 | $ | 4,424 | $ | 109,360 | $ | 145,438 | ||||||||||||
Nonperforming |
106 | | | 5 | 766 | 3,399 | ||||||||||||||||||
Total |
$ | 14,264 | $ | 885 | $ | 620 | $ | 4,429 | $ | 110,126 | $ | 148,837 | ||||||||||||
Note 4: Real Estate Owned
Activity in real estate owned was as follows:
Three months ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Balance at beginning of period |
$ | 9,574 | $ | 8,432 | ||||
Additions |
88 | 112 | ||||||
Write downs |
(202 | ) | (19 | ) | ||||
Sales |
(51 | ) | (1,828 | ) | ||||
Balance at end of period |
$ | 9,409 | $ | 6,697 | ||||
13
Table of Contents
Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)
Expenses related to real estate owned include:
Three months ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Net gain on sales |
$ | (307 | ) | $ | (56 | ) | ||
Write downs |
202 | 19 | ||||||
Operating expenses, net of rental income |
172 | 136 | ||||||
$ | 67 | $ | 99 | |||||
Note 5: Mortgage Banking Activities
The unpaid principal balances of mortgage loans serviced for others were $190.4 million and $183.2
million at March 31, 2011, and December 31, 2010, respectively.
Custodial escrow balances maintained in connection with serviced loans were $1.5 million and $725
thousand at March 31, 2011, and December 31, 2010, respectively.
The following table includes activity for mortgage servicing rights:
Three months ended | Twelve months ended | |||||||
March 31, 2011 | December 31, 2010 | |||||||
Balance at beginning of period |
$ | 1,624 | $ | 1,459 | ||||
Plus additions |
160 | 692 | ||||||
Fair value adjustments |
(33 | ) | (527 | ) | ||||
Balance at end of period |
$ | 1,751 | $ | 1,624 | ||||
Mortgage servicing rights are carried at fair value at March 31, 2011, and December 31, 2010. Fair
value at March 31, 2011, was determined using discount rates ranging from 10.6% to 15.0%,
prepayment speeds ranging from 3.83% to 24.12%, depending on the stratification of the specific
right, and a weighted average default rate of 0.40%. Fair value at December 31, 2010, was
determined using discount rates ranging from 10.6% to 16.0%, prepayment speeds ranging from 6.39%
to 23.08%, depending on the stratification of the specific right, and a weighted average default
rate of 0.39%.
Note 6: Stock Based Compensation
During the first quarter of 2011, one officer of the Corporation exercised options to purchase 800
common shares in the aggregate. The weighted average exercise price was $27.75 and the weighted
average fair market value of the stock was $41.49.
Due to the exercise of these options for the three months ended March 31, 2011, the Corporation
will receive a deduction for tax purposes for the difference between the fair value of the stock at
the date of grant and the date of exercise. The Corporation recorded an income tax benefit of $3
thousand as additional paid in capital for the three months ended March 31, 2011, as per guidance
issued by the Financial Accounting Standards Board (FASB) on stock compensation.
14
Table of Contents
Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)
Note 7: Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share:
Three months ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Basic average shares outstanding |
2,317,751 | 2,307,356 | ||||||
Net income |
$ | 1,617 | $ | 622 | ||||
Basic net income per common share |
$ | 0.70 | $ | 0.27 | ||||
Diluted |
||||||||
Average shares outstanding |
2,317,751 | 2,307,356 | ||||||
Nonvested restricted stock |
82,967 | 35,189 | ||||||
Net effect of the assumed exercise of stock options |
21,742 | 20,007 | ||||||
Diluted average shares |
2,422,460 | 2,362,552 | ||||||
Net income |
$ | 1,617 | $ | 622 | ||||
Diluted net income per common share |
$ | 0.67 | $ | 0.26 | ||||
For the three month period ending March 31, 2011 and 2010, options to purchase 183,800 and 189,400
shares, respectively, were outstanding but not included in the computation of diluted earnings per
share because they were antidilutive.
There were no antidilutive restricted shares for the three month period ending March 31, 2011. For
the three month period ending March 31, 2010, 4,325 restricted shares were outstanding but not
included in the computation of diluted earnings per share because they were antidilutive.
Note 8: Comprehensive Income
Comprehensive income consists of net income and other comprehensive income. Other comprehensive
income includes unrealized gains and losses on securities available-for-sale. Following is a
summary of other comprehensive income (loss):
Three months ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Net income |
$ | 1,617 | $ | 622 | ||||
Other comprehensive income (loss) |
||||||||
Change in securities available for sale: |
||||||||
Net unrealized gains (loss) during the period |
(81 | ) | 296 | |||||
Tax effect |
32 | (117 | ) | |||||
Total other comprehensive income (loss) |
(49 | ) | 179 | |||||
Comprehensive income |
$ | 1,568 | $ | 801 | ||||
Note 9: Commitments and Contingencies
Some financial instruments, such as loan commitments, credit lines, letters of credit, and
overdraft protection are issued to meet customer financing needs. These are agreements to provide
credit or to support the credit of others, as long as conditions established in the contract are
met, and usually have expiration dates. Commitments may expire without being used. Off-balance
sheet risk to credit loss exists up to the face amount of these instruments, although material
losses are not anticipated.
15
Table of Contents
Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)
The contractual amount of financial instruments with off-balance sheet risk was as follows:
March 31, 2011 | December 31, 2010 | |||||||
Unused commercial credit lines |
$ | 209,053 | $ | 222,387 | ||||
Unused revolving home equity and credit card lines |
112,555 | 107,712 | ||||||
Standby letters of credit |
7,908 | 7,712 | ||||||
Demand deposit account lines of credit |
2,608 | 2,596 | ||||||
$ | 332,124 | $ | 340,407 | |||||
The majority of commitments to fund loans are variable rate. The demand deposit account lines of
credit are a fixed rate at 18% with no maturity.
The credit risk associated with loan commitments and standby letters of credit is essentially the
same as that involved in extending loans to customers and is subject to normal credit policies.
Collateral may be obtained based on managements credit assessment of the customer.
As of March 31, 2011, the Corporation had committed to fund $2.1 million in commercial and
residential mortgages.
Other than routine litigation incidental to business and based on the information presently
available, the Corporation believes that the total amounts, if any, that will ultimately be paid
arising from these claims and legal actions are reflected in the consolidated results of operations
and financial position.
Note 10: Fair Value
Fair value is the exchange price that would be received for an asset or paid to transfer a
liability (exit price) in the principal or most advantageous market for the asset or liability in
an orderly transaction between market participants on the measurement date. There are three levels
of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active
markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as
quoted prices for similar assets or liabilities; quoted prices in markets that are
not active; or other inputs that are observable or can be corroborated by
observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entitys own
assumptions about the assumptions that market participants would use in pricing an
asset or liability.
The Corporation used the following methods and significant assumptions to estimate the fair value
of each type of asset or liability carried at fair value:
The fair value of available-for-sale securities are determined by obtaining quoted prices on
nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a
mathematical technique widely used in the industry to value debt securities without relying
exclusively on quoted prices for the specific securities but rather by relying on securities
relationship to other benchmark quoted securities (Level 2 inputs).
The fair value of mortgage servicing rights is based on a valuation model that calculates the
present value of estimated net servicing income. The valuation model incorporates assumptions that
market participants would use in estimating future net servicing income. The Corporation is able
to compare the valuation model inputs and results to widely available published industry data for
reasonableness.
The fair value of other real estate owned and impaired loans with specific allocations of the
allowance for loan losses is generally based on recent real estate appraisals. These appraisals
may utilize a single valuation approach or
a combination of approaches including comparable sales and the income approach. Adjustments are
routinely made in the appraisal process by the appraisers to adjust for differences between the
comparable sales and income data available. Such adjustments are usually significant and typically
result in a Level 3 classification of the inputs for determining fair value.
16
Table of Contents
Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)
Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below:
Fair Value Measurements Using: | ||||||||||||||||
Quoted Prices | ||||||||||||||||
in Active Markets | Significant Other | Significant | ||||||||||||||
for Identical Assets | Observable Inputs | Unobservable Inputs | ||||||||||||||
Carrying Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
March 31, 2011 |
||||||||||||||||
Assets: |
||||||||||||||||
Available-for-sale securities: |
||||||||||||||||
U.S. Treasury securities |
$ | 14,404 | $ | | $ | 14,404 | $ | | ||||||||
U.S. Government agencies |
66,700 | | 66,700 | | ||||||||||||
Mortgage servicing rights |
1,751 | | 1,751 | | ||||||||||||
December 31, 2010 |
||||||||||||||||
Assets: |
||||||||||||||||
Available-for-sale securities: |
||||||||||||||||
U.S. Treasury securities |
$ | 8,700 | $ | | $ | 8,700 | $ | | ||||||||
U.S. Government agencies |
66,977 | | 66,977 | | ||||||||||||
Mortgage servicing rights |
1,624 | | 1,624 | |
There were no significant transfers between Level 1 and Level 2 during the three month period
ending March 31, 2011.
Assets and Liabilities Measured on a Non-Recurring Basis
Assets and liabilities measured at fair value on a non-recurring basis are summarized below:
Fair Value Measurements Using: | ||||||||||||||||
Quoted Prices | ||||||||||||||||
in Active Markets | Significant Other | Significant | ||||||||||||||
for Identical Assets | Observable Inputs | Unobservable Inputs | ||||||||||||||
Carrying Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
March 31, 2011 |
||||||||||||||||
Assets: |
||||||||||||||||
Impaired loans |
||||||||||||||||
Commercial |
$ | 2,134 | $ | | $ | | $ | 2,134 | ||||||||
Residential |
1,404 | | | 1,404 | ||||||||||||
Consumer |
| | | | ||||||||||||
Other real estate |
||||||||||||||||
Commercial |
4,342 | | | 4,342 | ||||||||||||
Residential |
134 | | | 134 | ||||||||||||
Consumer |
| | | | ||||||||||||
December 31, 2010 |
||||||||||||||||
Assets: |
||||||||||||||||
Impaired loans |
||||||||||||||||
Commercial |
$ | 262 | $ | | $ | | $ | 262 | ||||||||
Residential |
2,024 | | | 2,024 | ||||||||||||
Consumer |
| | | | ||||||||||||
Other real estate |
||||||||||||||||
Commercial |
4,826 | | | 4,826 | ||||||||||||
Residential |
97 | | | 97 | ||||||||||||
Consumer |
| | | |
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Table of Contents
Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)
The following represent impairment charges recognized during the period:
Impaired loans, which are measured for impairment using the fair value of the collateral for
collateral dependent loans, had a carrying amount of $6.0 million, with a valuation allowance of
$2.5 million, at March 31, 2011. This resulted in an additional provision for loan losses of $925
thousand for the three month period ending March 31, 2011. At December 31, 2010, impaired loans
had a carrying amount of $3.9 million, with a valuation allowance of $1.6 million. This resulted
in an additional provision for loan losses of $1.4 million for the year ending December 31, 2010.
Other real estate that has been written down to fair value less costs to sell subsequent to being
transferred to other real estate had a carrying amount of $4.5 million at March 31, 2011. At
December 31, 2010, other real estate that has been written down to fair value less costs to sell
subsequent to being transferred to other real estate had a carrying amount of $4.9 million. There
was a charge to earnings through non performing asset expense of $202 thousand and $1.1 million for
the three month period ending March 31, 2011, and the year ending December 31, 2010, respectively,
for the write down of other real estate.
The estimated fair value of the Corporations financial instruments is as follows:
March 31, 2011 | December 31, 2010 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
Assets |
||||||||||||||||
Cash and due from banks |
$ | 237,374 | $ | 237,374 | $ | 276,409 | $ | 276,409 | ||||||||
Federal funds sold |
20,647 | 20,647 | 16,109 | 16,109 | ||||||||||||
Reverse repurchase agreements |
1,000 | 1,000 | 1,000 | 1,000 | ||||||||||||
Investment securities available-for-sale |
81,104 | 81,104 | 75,677 | 75,677 | ||||||||||||
Investment securities held-to-maturity |
151,917 | 154,767 | 114,676 | 117,302 | ||||||||||||
Loans held for sale |
415 | 415 | 1,424 | 1,424 | ||||||||||||
Net loans |
907,512 | 916,310 | 885,198 | 893,665 | ||||||||||||
Federal Reserve and FHLB stock |
3,065 | N/A | 3,065 | N/A | ||||||||||||
Accrued interest receivable |
4,749 | 4,749 | 4,216 | 4,216 | ||||||||||||
Liabilities |
||||||||||||||||
Deposits |
1,263,354 | 1,262,747 | 1,238,840 | 1,238,175 | ||||||||||||
Repurchase agreements and other
secured short-term borrowings |
95,911 | 95,960 | 93,523 | 93,554 | ||||||||||||
Short-term debt |
2,625 | 2,625 | 2,688 | 2,688 | ||||||||||||
Subordinated debt |
5,000 | 5,000 | 5,000 | 5,000 | ||||||||||||
Junior subordinated debt |
13,918 | 10,280 | 13,918 | 10,245 | ||||||||||||
Accrued interest payable |
1,001 | 1,001 | 1,498 | 1,498 |
The following methods and assumptions, not previously presented, were used by the Corporation in
estimating its fair value disclosures for financial instruments not recorded at fair value.
Carrying amount is the estimated fair value for cash and short-term investments, interest bearing
deposits, accrued interest receivable and payable, demand deposits, borrowings under repurchase
agreements, short-term debt, variable rate loans or deposits that reprice frequently and fully.
For fixed rate loans, deposits, or other secured short-term borrowings or for variable rate loans
or deposits with infrequent pricing or repricing limits, fair value is based on discounted cash
flows using current market rates applied to the estimated life and adjusted for allowance for loan
losses. It was not practicable to determine the fair value of Federal Reserve and FHLB stock due
to restrictions placed on its transferability. The fair value of the subordinated debt and junior
subordinated debentures are based upon discounted cash flows using rates for similar securities
with the same maturities. The fair value of off-balance-sheet items is not considered material.
18
Table of Contents
Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)
Note 11: Adoption of New Accounting Standards
In January 2011, the FASB deferred the effective date of Disclosures about Troubled Debt
Restructurings (TDRs). This delay was intended to allow the Board time to complete deliberations
on what constitutes a TDR. The effective date of the new disclosures regarding TDRs for public
entities and the guidelines for determining what constitutes a troubled debt restructuring will be
effective upon issuance. The adoption of this standard is not expected to have a material effect
on the Corporations results of operations or financial position.
In April 2011, the FASB issued updated guidance for determining whether a restructuring is a
troubled debt restructuring. In determining whether a restructuring of a financing receivable is a
troubled debt restructuring, the creditor must separately conclude that both the restructuring of
the debt constitutes a concession and the debtor is experiencing financial difficulties.
When evaluating whether a concession has been made, the creditor must determine if the debtor has
access to funds at a market rate for debt with similar risk characteristics as the restructured
debt. If not, the restructuring would be considered to be a below-market rate, which may indicate
that the creditor has been granted a concession. Further, a temporary or permanent increase in
the contractual interest as a result of a restructuring does not preclude the restructuring from
being considered a concession since the new contractual interest rate on the restructured debt
could still be below the market interest rate for new debt with similar risk characteristics.
Once it has been determined that a debtor has been given a concession, the creditor must then
determine if the debtor is experiencing financial difficulties. The update provides guidance on a
creditors evaluation of whether a debtor is experiencing financial difficulties by requiring the
creditor to consider whether it is probable that the debtor would be in payment default on any of
its debt in the foreseeable future without a modification.
In addition, the update clarifies that the creditor is precluded from using the effective interest
rate test in the debtors guidance on restricting of payable when evaluating whether a
restructuring constitutes a troubled debt restructuring.
The updated guidance is effective for public entities beginning with the first interim or annual
period on or after June 15, 2011, and should be applied retrospectively to the beginning of the
annual period of adoption. As a result of applying these amendments, an entity may identify
receivables that are newly considered impaired and for those receivables, the entity should apply
the amendments prospectively for the first interim or annual period beginning on or after June 15,
2011. Early adoption is permitted. Management continues to evaluate the impact of the adoption of
this update, but does not anticipate it to have a significant impact on the Corporations financial
statements.
19
Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Corporation Overview
The National Bank of Indianapolis Corporation (the Corporation) is a one-bank holding company
formed in 1993 which owns all of the outstanding stock of The National Bank of Indianapolis (the
Bank). The Bank, a national banking association, was formed in 1993 and is headquartered in
Indianapolis, Indiana. The primary business activity of the Corporation is providing financial
services through the Banks twelve banking offices in Marion, Johnson, and Hamilton County,
Indiana.
The primary source of the Banks revenue is net interest income from loans and deposits and fees
from financial services provided to customers. Overall economic factors, including market interest
rates, business spending, and consumer confidence, as well as competitive conditions within the
marketplace, tend to influence business volumes.
The Corporation recorded net income of $1.6 million or $0.67 per diluted share for the three month
period ending March 31, 2011, as compared to $622 thousand or $0.26 per diluted share for the three
month period ending March 31, 2010.
The risks and challenges that management believes will be important for the remainder of 2011 are
price competition for loans and deposits by competitors, marketplace credit effects, continued
spread compression, a slow recovery of the local economy that could adversely impact the ability of
borrowers to repay outstanding loans or the value of the collateral securing these loans, and the
lingering effects from the financial crisis in the U.S. market and foreign markets.
The Corporation has determined that it has one reportable segment, banking services. The Bank
provides a full range of deposit, credit, and money management services to its target markets,
which are small to medium size businesses, affluent executive and professional individuals, and
not-for-profit organizations in the Indianapolis Metropolitan Statistical Area of Indiana.
Forward-Looking Information
This section contains forward-looking statements. Forward-looking statements give current
expectations or forecasts of future events and are not guarantees of future performance. The
forward-looking statements are based on managements expectations and are subject to a number of
risks and uncertainties. Although management believes the expectations reflected in such
forward-looking statements are reasonable, actual results may differ materially from those
expressed or implied in such statements. Risks and uncertainties that could cause actual results
to differ materially include, without limitation, the Corporations ability to execute its business
plans; changes in general economic and financial market conditions; changes in interest rates;
changes in competitive conditions; continuing consolidation in the financial services industry; new
litigation or changes in existing litigation; losses, customer bankruptcy, claims and assessments;
changes in banking regulations or other regulatory or legislative requirements that impact the
Corporations business; and changes in accounting policies and procedures as may be required by the
Financial Accounting Standards Board or other regulatory agencies. Additional information
concerning factors that could cause actual results to differ materially from those expressed or
implied in the forward-looking statements is available in the Corporations Annual Report on Form
10-K for the year ended December 31, 2010.
Critical Accounting Policies
The Corporations consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States and follow general practices within the
industries in which it operates. Application of these principles requires management to make
estimates, assumptions, and judgments that affect the amounts reported in the financial statements
and accompanying notes. These estimates, assumptions, and judgments are based on information
available as of the date of the financial statements; accordingly, as this information changes, the
financial statements could reflect different estimates, assumptions, and judgments. Certain
policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and
as such have a greater possibility of producing results that could be materially different than
originally reported. Estimates, assumptions, and judgments
are necessary when assets and liabilities are required to be recorded at fair value, when a decline
in the value of an asset not carried on the financial statements at fair value warrants an
impairment write-down or valuation reserve to be established, or when an asset or liability needs
to be recorded contingent upon a future event. Carrying assets and liabilities at fair value
inherently results in more financial statement volatility. The fair values and the information
used to record valuation adjustments for certain assets are based either on quoted market prices or
are provided by other third-party sources, when available. When third-party information is not
available, valuation adjustments are estimated in good faith by management primarily through the
use of internal cash flow modeling techniques.
20
Table of Contents
Based on the valuation techniques used and the sensitivity of financial statement amounts to the
methods, assumptions, and estimates underlying those amounts, management has identified the
valuation of the mortgage servicing asset, the valuation of investment securities, foreclosed
assets, and the determination of the allowance for loan losses to be the accounting areas that
require the most subjective or complex judgments, and as such could be most subject to revision as
new information becomes available.
Investment Securities Valuation
When the Corporation classifies debt securities as held-to-maturity, it has the positive intent and
ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized
cost. Debt securities not classified as held-to-maturity are classified as available-for-sale.
Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net
of tax, reported as a component of other comprehensive income. Interest income includes
amortization of purchase premium or discount. Premiums and discounts on securities are amortized
on the level-yield method without anticipating prepayments, except for mortgage backed securities
where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and
determined using the specific identification method.
The Corporation obtains fair values from a third party on a monthly basis in order to adjust the
available-for-sale securities to fair value. Equity securities that do not have readily
determinable fair values are carried at cost. When other-than-temporary-impairment (OTTI)
occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell
the security or it is more likely than not it will be required to sell the security before recovery
of its amortized cost basis, less any current-period credit loss. If an entity intends to sell or
it is more likely than not it will be required to sell the security before recovery of its
amortized cost basis, less any current-period credit loss, the OTTI shall be recognized in earnings
equal to the entire difference between the investments amortized cost basis and its fair value at
the balance sheet date. If an entity does not intend to sell the security and it is not more
likely than not that the entity will be required to sell the security before recovery of its
amortized cost basis less any current-period loss, the OTTI shall be separated into the amount
representing the credit loss and the amount related to all other factors. The amount of the total
OTTI related to the credit loss is determined based on the present value of cash flows expected to
be collected and is recognized in earnings. The amount of the total OTTI related to other factors
is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost
basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.
In determining whether a market value decline is other-than-temporary, management considers the
reason for the decline, the extent of the decline and the duration of the decline. Management
evaluates securities for OTTI at least on a quarterly basis, and more frequently when economic or
market conditions warrant such an evaluation.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until
maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and
costs. Interest income on commercial, mortgage, and consumer loans is accrued on the principal
amount of such loans outstanding and is recognized when earned. Loan origination fees and certain
direct origination costs are deferred and recognized in interest income using the level-yield
method without anticipating prepayments. The recorded investment in loans includes accrued
interest receivable.
All loan classes, except overdraft protection lines of credit and credit cards, are typically
placed on non-accrual when they become 90 days past due, unless the loan is well secured and in the
process of collection, or it is determined that the obligor will not pay all contractual principal
and interest due. Unless there is a significant reason to the contrary, overdraft protection lines
of credit and credit cards are charged off when deemed
uncollectible, but generally no later than when they become 150 days past due. Any accrued
interest is charged against interest income. Interest continues to legally accrue on these
non-accrual loans, but no income is recognized for financial statement purposes. Both principal
and interest payments received on non-accrual loans are applied to the outstanding principal
balance, until the remaining balance is considered collectible, at which time interest income may
be recognized when received.
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Table of Contents
Loan Commitments and Related Financial Instruments: Financial instruments include
off-balance sheet credit instruments, such as commitments to make loans and commercial letters of
credit, issued to meet customer financing needs. The face amount for these items represents the
exposure to loss, before considering customer collateral or ability to repay. Such financial
instruments are recorded when they are funded.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses. The
allowance for loan losses is established through provisions for loan losses charged against income.
Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent
recoveries, if any, are credited to the allowance for loan losses.
Management estimates the allowance balance required for each loan portfolio segment by using past
loan loss experience, the nature and volume of the portfolio, information about specific borrower
situations and estimated collateral values, economic conditions, and other factors. Allocations of
the allowance may be made for specific loans, but the entire allowance is available for any loan
that, in managements judgment, should be charged off.
Within the allowance, there are specific and general loss components. The specific loss component
is assessed for non-homogeneous loans that management believes to be impaired. All loan classes
are considered to be impaired when it is determined that the obligor will not pay all contractual
principal and interest due or they become 90 days past due, unless the loan is both well secured
and in the process of collection. For loans determined to be impaired, the loans carrying value
is compared to its fair value using one of the following fair value measurement techniques:
present value of expected future cash flows, observable market price, or fair value of the
associated collateral less costs to sell. An allowance is established when the fair value is lower
than the carrying value of that loan. The general component covers non-impaired loans and is based
on a three-year historical loss experience supplemented with other economic factors based on the
risks present for each portfolio segment. These economic factors include consideration of the
following: changes in lending policies and procedures; effects of changes in risk selection and
underwriting standards; national and local economic trends and conditions; trends in nature,
volume, and growth rate of loans; experience, ability, and depth of lending management and other
relevant staff; levels of and trends in past due and classified loans; collateral valuations in the
market for collateral dependent loans; effects of changes in credit concentrations; and
competition, legal, and regulatory factors. These loans are segregated by loan class and/or risk
grade with an estimated loss ratio applied against each loan class and/or risk grade.
Loans for which the terms have been modified resulting in concessions and for which the borrower is
experiencing financial difficulties are considered troubled debt restructuring and are classified
as impaired. Troubled debt restructurings are separately identified for impairment disclosures and
are measured at the present value of estimated future cash flows using the loans effective rate at
inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the
loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that
subsequently default, the Corporation determines the amount of the reserve in accordance with the
accounting policy for the allowance for loan losses.
The following portfolio segments have been identified: commercial, residential, and consumer.
Commercial credits and personal lines of credit are subject to the assignment of individual risk
grades in accordance with the Corporations Loan Risk Rating Guidelines. These loans are
individually graded as Pass, Special Mention, Substandard or Doubtful, with the Pass rating
further subdivided into risk gradients. Residential loans (including home equity lines of credit)
and consumer loans (excluding aforementioned personal lines of credit) are not generally
individually graded; rather, these loans are treated as homogenous pools within each category.
When included in these pools, these loans are assigned a Pass Risk Rating. These loans may be or
may become individually graded based on a pledge of liquid collateral, delinquency status,
identified changes in the borrowers repayment capacity, or as a result of legal action.
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It is the policy of the Corporation to promptly charge off any loan, or portion thereof, which is
deemed to be uncollectible. This includes, but is not limited to, any loan rated Loss by the
regulatory authorities. All impaired loan classes are considered on a case-by-case basis.
An assessment of the adequacy of the allowance is performed on a quarterly basis. Management
believes the allowance for loan losses is maintained at a level that is adequate to absorb probable
losses inherent in the loan portfolio.
Foreclosed Assets
Assets acquired through or instead of loan foreclosure are initially recorded at fair value less
costs to sell when acquired, establishing a new cost basis. Any excess recorded investment over
the fair value of the property received is charged to the allowance for loan losses. The fair
value of foreclosed assets is subject to fluctuations in appraised values which are affected by the
local and national economy. If fair value declines subsequent to foreclosure, a valuation allowance
is recorded through non performing assets expense.
When the Corporation owns and operates these assets, it is exposed to risks inherent in the
ownership of real estate. In addition to declines in the value of the property, there are
expenditures associated with the ownership of real estate which are expensed after the Corporation
acquires the property. These expenditures primarily include real estate taxes, insurance, and
maintenance costs. These expenses may adversely affect the income since they may exceed the amount
of rental income collected.
Mortgage Servicing Assets
Mortgage servicing rights are recognized separately when they are acquired through sales of loans.
Capitalized mortgage servicing rights are reported in other assets. When mortgage loans are sold,
servicing rights are initially recorded at fair value with the income statement effect recorded in
gains on sales of loans. Fair value is based on a valuation model that calculates the present
value of estimated future net servicing income. The valuation model incorporates assumptions that
market participants would use in estimating future net servicing income, such as the cost to
service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income,
prepayment speeds and default rates and losses. The Corporation obtains fair value estimates from
an independent third party and compares significant valuation model inputs to published industry
data in order to validate the model assumptions and results.
Under the fair value measurement method, the Corporation measures servicing rights at fair value at
each reporting date and reports changes in fair value of servicing assets in earnings in the period
in which the changes occur, and these changes are included in mortgage banking income on the income
statement. The fair values of servicing rights are subject to significant fluctuations as a result
of changes in estimated and actual prepayment speeds and default rates and losses.
Results of Operations
Net Interest Income
The Corporations results of operations depend primarily on the level of its net interest income,
its non-interest income and its operating expenses. Net interest income depends on the volume of
and rates associated with interest earning assets and interest bearing liabilities which results in
the net interest spread. The Corporation had net interest income fully taxable equivalent (FTE)
of $10.4 million for the three month period ending March 31, 2011, as compared to net interest
income FTE of $9.5 million for the three month period ending March 31, 2010. The increase in net
interest income FTE is due to an increase in total earning assets of $196.8 million for the three
month period ending March 31, 2011, as compared to the three month period ending March 31, 2010.
Additionally, total interest bearing liabilities increased $165.6 million for the three month
period ending March 31, 2011, as compared to the three month period ending March 31, 2010. The net
interest income spread FTE decreased 0.18% to 2.93% for the three month period ending March 31,
2011, from 3.11% for the three month period ending March 31, 2010. The contribution of
non-interest bearing funds decreased 0.04% to 0.11% from 0.15% for the three month period ending
March 31, 2011 and 2010, respectively, resulting in an overall decrease to the net interest margin
FTE to 3.04% from 3.26% for the three month period ending March 31, 2011 and 2010, respectively.
23
Table of Contents
The following table details average balances, interest income/expense average rates/yields for the
Corporations earning assets and interest bearing liabilities at the dates indicated.
Three months ended | ||||||||||||||||||||||||
March 31, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Interest | Average | Interest | Average | |||||||||||||||||||||
Average | Income/ | Rate/ | Average | Income/ | Rate/ | |||||||||||||||||||
Balance | Expense | Yield | Balance | Expense | Yield | |||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Interest bearing due from banks |
$ | 213,117 | $ | 132 | 0.25 | % | $ | 138,641 | $ | 86 | 0.25 | % | ||||||||||||
Reverse repurchase agreements |
1,000 | | 0.01 | % | 1,000 | | 0.01 | % | ||||||||||||||||
Federal funds |
17,971 | 11 | 0.24 | % | 1,328 | 1 | 0.30 | % | ||||||||||||||||
Non taxable investment securities FTE |
56,629 | 811 | 5.73 | % | 53,241 | 753 | 5.66 | % | ||||||||||||||||
Taxable investment securities |
167,012 | 706 | 1.69 | % | 108,190 | 583 | 2.16 | % | ||||||||||||||||
Loans (gross) FTE |
910,101 | 10,718 | 4.71 | % | 866,657 | 10,497 | 4.84 | % | ||||||||||||||||
Total earning assets |
$ | 1,365,830 | $ | 12,378 | 3.63 | % | $ | 1,169,057 | $ | 11,920 | 4.08 | % | ||||||||||||
Non-earning assets |
90,460 | 90,568 | ||||||||||||||||||||||
Total assets |
$ | 1,456,290 | $ | 1,259,625 | ||||||||||||||||||||
Liabilities: |
||||||||||||||||||||||||
Interest bearing DDA |
$ | 210,208 | $ | 88 | 0.17 | % | $ | 196,554 | $ | 137 | 0.28 | % | ||||||||||||
Savings |
634,681 | 732 | 0.46 | % | 477,445 | 717 | 0.60 | % | ||||||||||||||||
CDs under $100 |
70,787 | 240 | 1.36 | % | 61,869 | 311 | 2.01 | % | ||||||||||||||||
CDs over $100 |
97,382 | 360 | 1.48 | % | 126,357 | 599 | 1.90 | % | ||||||||||||||||
Individual retirement accounts |
22,119 | 96 | 1.74 | % | 22,373 | 124 | 2.22 | % | ||||||||||||||||
Repurchase agreements and other secured
short term borrowings |
98,161 | 72 | 0.29 | % | 81,727 | 71 | 0.35 | % | ||||||||||||||||
Short-term debt |
2,686 | 31 | 4.62 | % | 4,138 | 47 | 4.54 | % | ||||||||||||||||
Subordinated debt |
5,000 | 19 | 1.52 | % | 5,000 | 19 | 1.52 | % | ||||||||||||||||
Long term debt |
13,918 | 369 | 10.60 | % | 13,918 | 369 | 10.60 | % | ||||||||||||||||
Total interest bearing liabilities |
$ | 1,154,942 | $ | 2,007 | 0.70 | % | $ | 989,381 | $ | 2,394 | 0.97 | % | ||||||||||||
Non-interest bearing liabilities |
213,958 | 191,922 | ||||||||||||||||||||||
Other liabilities |
6,693 | 4,377 | ||||||||||||||||||||||
Total liabilities |
$ | 1,375,593 | $ | 1,185,680 | ||||||||||||||||||||
Equity |
80,697 | 73,945 | ||||||||||||||||||||||
Total liabilities & equity |
$ | 1,456,290 | $ | 1,259,625 | ||||||||||||||||||||
Recap: |
||||||||||||||||||||||||
Interest income FTE |
$ | 12,378 | 3.63 | % | $ | 11,920 | 4.08 | % | ||||||||||||||||
Interest expense |
2,007 | 0.70 | % | $ | 2,394 | 0.97 | % | |||||||||||||||||
Net interest income/spread FTE |
$ | 10,371 | 2.93 | % | $ | 9,526 | 3.11 | % | ||||||||||||||||
Contribution of non-interest bearing funds |
0.11 | % | 0.15 | % | ||||||||||||||||||||
Net interest margin FTE |
3.04 | % | 3.26 | % | ||||||||||||||||||||
Notes to the average balance and interest rate tables:
| Average balances are computed using daily actual balances. |
| The average loan balance includes loans held for sale, non-accrual loans and the
interest recognized prior to becoming non-accrual is reflected in the interest income for
loans. |
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| Interest income on loans includes loan costs net of loan fees, of $185 thousand and $158
thousand, for the three month period ending March 31, 2011 and 2010, respectively. |
| Net interest income on a fully taxable equivalent basis, the most significant component
of the Corporations earnings, is total interest income on a fully taxable equivalent basis
less total interest expense. The level of net interest income on a fully taxable
equivalent basis is determined by the mix and volume of interest earning assets, interest
bearing deposits and borrowed funds, and changes in interest rates. |
| Net interest spread on a fully taxable equivalent is the difference between the fully
taxable equivalent rate earned on interest earning assets less the rate expensed on
interest bearing liabilities. |
| Net interest margin represents net interest income on a fully taxable equivalent basis
as a percentage of average interest earning assets. Net interest margin is affected by
both the interest rate spread and the level of non-interest bearing sources of funds,
primarily consisting of demand deposits and shareholders equity. |
| Interest income on a fully taxable equivalent basis includes the additional amount of
interest income that would have been earned on tax exempt loans and if investments in
certain tax-exempt interest earning assets had been made in assets subject to federal taxes
yielding the same after-tax income. Interest income on tax exempt loans and municipal
securities has been calculated on a fully taxable equivalent basis using a federal and
state income tax blended rate of 40%. The appropriate tax equivalent adjustments to
interest income on loans was $147 thousand and $40 thousand for the three month period
ending March 31, 2011 and 2010, respectively. The appropriate tax equivalent adjustments
to interest income on municipal securities was $287 thousand and $265 thousand for the
three month period ending March 31, 2011 and 2010, respectively. |
| Management believes the disclosure of the fully taxable equivalent net interest income
information improves the clarity of financial analysis, and is particularly useful to
investors in understanding and evaluating the changes and trends in the Corporations
results of operations. This adjustment is considered helpful in the comparison of one
financial institutions net interest income to that of another institution, as each will
have a different proportion of tax-exempt interest from their earning asset portfolios. |
Provision for Loan Losses
The amount charged to the provision for loan losses by the Bank is based on managements evaluation
as to the amounts required to maintain an allowance adequate to provide for probable incurred
losses inherent in the loan portfolio. The level of this allowance is dependent upon the total
amount of past due and non-performing loans, general economic conditions and managements
assessment of probable incurred losses based upon internal credit evaluations of loan portfolios
and particular loans. Loans are principally to borrowers in central Indiana.
The provision for loan losses was $1.7 million and $1.2 million, for the three month period ending
March 31, 2011 and 2010, respectively. The increase in the provision for loan losses for the three
month period ending March 31, 2011, compared to the three month period ending March 31, 2010, is
due to an increase in charge offs relating to specific commercial loans. The change in the
unallocated reserve of $802 thousand from $819 thousand at December 31, 2010, to $17 thousand at
March 31, 2011, was due to the reallocation of the allowance held for commercial loans as a result
of the specific identification of weakened commercial loans.
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Based on managements risk assessment and evaluation of the probable incurred losses of the loan
portfolio, management believes that the current allowance for loan losses is adequate to provide
for probable incurred losses in the loan portfolio.
The following table details the components of loan loss reserve:
Three months ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Beginning of Period |
$ | 15,134 | $ | 13,716 | ||||
Provision for loan losses |
1,689 | 1,235 | ||||||
Chargeoffs |
||||||||
Commercial |
811 | 89 | ||||||
Residential |
122 | 66 | ||||||
Consumer |
7 | 53 | ||||||
940 | 208 | |||||||
Recoveries |
||||||||
Commercial |
149 | 8 | ||||||
Residential |
8 | 7 | ||||||
Consumer |
2 | 1 | ||||||
159 | 16 | |||||||
End of Period |
$ | 16,042 | $ | 14,759 | ||||
Allowance as a % of Loans |
1.74 | % | 1.70 | % |
Loans are considered to be impaired when it is determined that the obligor will not pay all
contractual principal and interest when due.
A loan is considered delinquent when a payment has not been made more than 30 days past its
contractual due date. Loans past due over 30 days, including past due nonaccrual loans, totaled
$9.5 million or 1.03% of total loans at March 31, 2011, compared to $9.3 million or 1.07% of total
loans at March 31, 2010.
There were no loans greater than 90 days past due and still accruing interest at March 31, 2011.
Loans greater than 90 days past due and still accruing interest at March 31, 2010, totaled
approximately $25 thousand. The total amount of nonaccrual loans was $14.3 million at March 31,
2011, compared to $15.1 million at March 31, 2010. Not all nonaccrual loans are 90 days past due.
It is the policy of the Corporation to review each prospective credit in order to determine the
appropriateness and, when required, the adequacy of security or collateral necessary when making a
loan. The type of collateral when required will vary from liquid assets to real estate. The
Corporation seeks to assure access to collateral in the event of default through adherence to state
lending laws and the Corporations credit monitoring procedures.
Other Operating Income
The following table details the components of other operating income:
Three months ended | ||||||||||||||||
March 31, | $ | % | ||||||||||||||
2011 | 2010 | Change | Change | |||||||||||||
Wealth management fees |
$ | 1,380 | $ | 1,204 | $ | 176 | 14.6 | % | ||||||||
Service charges and fees on deposit accounts |
747 | 769 | (22 | ) | -2.9 | % | ||||||||||
Rental income |
42 | 69 | (27 | ) | -39.1 | % | ||||||||||
Mortgage banking income |
219 | 212 | 7 | 3.3 | % | |||||||||||
Interchange income |
340 | 284 | 56 | 19.7 | % | |||||||||||
Other |
546 | 395 | 151 | 38.2 | % | |||||||||||
Total other operating income |
$ | 3,274 | $ | 2,933 | $ | 341 | 11.6 | % | ||||||||
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Total other operating income for the three month period ending March 31, 2011, increased as
compared to the three month period ending March 31, 2010.
Wealth management fees increased for the three month period ending March 31, 2011, as compared to
the three month period ending March 31, 2010. The increase in wealth management fees is
attributable to an overall increase in the stock market and estate fees.
Service charges and fees on deposit accounts decreased for the three month period ending March 31,
2011, as compared to the three month period ending March 31, 2010. The decrease is primarily
attributable to a decrease in service charges collected for DDA business accounts and overdraft and
NSF fees. The decrease is partially offset by an increase in service charges collected for
non-profit accounts and wire transfer fees.
Rental income decreased for the three month period ending March 31, 2011, as compared to the three
month period ending March 31, 2010. The decrease was primarily due to the refund of the tenants
operating costs as a result of the annual true up and the Bank occupying more space at the 4930
North Pennsylvania Street location thus reducing the space available for tenants.
Mortgage banking income increased for the three month period ending March 31, 2011, as compared to
the three month period ending March 31, 2010. The increase for the three month period ending March
31, 2011, as compared to the three month period ending March 31, 2010, is due to a decrease in the
write down of the fair value of mortgage servicing rights (MSRs) of $33 thousand for the three
month period ending March 31, 2011, as compared to a write down of $88 thousand for the three month
period ending March 31, 2010. Offsetting this increase was a decrease in the net gain on the sale
of mortgage loans. A net gain on the sale of mortgage loans of $136 thousand was recorded for the
three month period ending March 31, 2011, as compared to a net gain on the sale of mortgage loans
of $200 thousand for the three month period ending March 31, 2010.
When mortgage loans are sold and the MSRs are retained, the MSRs are recorded as an asset on the
balance sheet. The value of the MSRs is sensitive to changes in interest rates. In a declining
interest rate environment, mortgage loan refinancings generally increase, causing actual and
expected loan prepayments to increase, which decreases the value of existing MSRs. Conversely, as
interest rates rise, mortgage loan refinancings generally decline, causing actual and expected loan
prepayments to decrease, which increases the value of the MSRs.
Interchange income increased for the three month period ending March 31, 2011, as compared to the
three month period ending March 31, 2010. The increase is attributable to higher transaction
volumes for debit cards and credit cards during the three month period ending March 31, 2011, as
compared to the three month period ending March 31, 2010. The increase is partially offset by an
increase in cash back rewards expense for the three month period ending March 31, 2011, as compared
to the three month period ending March 31, 2010.
Other income increased for the three month period ending March 31, 2011, as compared to the three
month period ending March 31, 2010. The increase is primarily due to an increase in other real
estate rental income and prepayment penalties collected. The increase is partially offset by a
decrease in letter of credit fees, application fees, bank owned life insurance income, Dreyfus
money market funds sweep fees, and late fee income.
27
Table of Contents
Other Operating Expenses
The following table details the components of other operating expense:
Three months ended | ||||||||||||||||
March 31, | $ | % | ||||||||||||||
2011 | 2010 | Change | Change | |||||||||||||
Salaries, wages and employee benefits |
$ | 6,427 | $ | 5,934 | $ | 493 | 8.3 | % | ||||||||
Occupancy |
644 | 641 | 3 | 0.5 | % | |||||||||||
Furniture and equipment |
299 | 329 | (30 | ) | -9.1 | % | ||||||||||
Professional services |
513 | 589 | (76 | ) | -12.9 | % | ||||||||||
Data processing |
793 | 725 | 68 | 9.4 | % | |||||||||||
Business development |
428 | 431 | (3 | ) | -0.7 | % | ||||||||||
FDIC Insurance |
539 | 534 | 5 | 0.9 | % | |||||||||||
Non performing assets |
261 | 157 | 104 | 66.2 | % | |||||||||||
Other |
(461 | ) | 882 | (1,343 | ) | -152.3 | % | |||||||||
Total other operating expenses |
$ | 9,443 | $ | 10,222 | $ | (779 | ) | -7.6 | % | |||||||
Total other operating expenses for the three month period ending March 31, 2011, decreased as
compared to the three month period ending March 31, 2010.
Salaries, wages, and employee benefits increased for the three month period ending March 31, 2011,
as compared to the three month period ending March 31, 2010. The increase is the result of
increased salary expense, employer FICA expense, federal and state unemployment tax expense,
contract labor, group medical benefits, 401K expense, and deferred compensation. The increase is
partially offset by a decrease in direct loan origination costs.
Occupancy expense increased for the three month period ending March 31, 2011, as compared to the
three month period ending March 31, 2010. The increase is due to an increase in real estate taxes,
building and improvements depreciation expense, and utilities expense. The increase is partially
offset by a decrease in building and property repair expense, land and leasehold improvements
depreciation expense, snow removal, management fees, building cleaning and supplies, and building
maintenance
Furniture and equipment expense decreased for the three month period ending March 31, 2011, as
compared to the three month period ending March 31, 2010. This decrease is due to a decrease in
furniture, fixture, and equipment purchased for less than $500 and expensed and maintenance
contracts.
Professional services expense decreased for the three month period ending March 31, 2011, as
compared to the three month period ending March 31, 2010. The decrease is due to a decrease in
consulting fees, advertising agency fees, attorney fees, design services, accounting fees, and
courier service. The decrease is partially offset by an increase in extended audit services.
Data processing expenses increased for the three month period ending March 31, 2011, as compared to
the three month period ending March 31, 2010. The increase is due to an increase in bill payment
services, ATM/debit cards, credit cards, transaction processing fees and mutual fund expense for
Wealth Management accounts, remote deposit capture fees, computer software, and software
maintenance. The increase is partially offset by a decrease in service bureau fees of the Bank.
Business development expenses decreased for the three month period ending March 31, 2011, as
compared to the three period ending March 31, 2010. The decrease is due to a decrease in direct
mail campaign, grand opening expense, and customer entertainment. The decrease is partially offset
by an increase in customer relations, market research, and public relations.
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Table of Contents
FDIC insurance expense increased for the three month period ending March 31, 2011, as compared to
the three month period ending March 31, 2010. The increase is due to an increase in the FDIC
assessment because of higher deposits period over period.
Nonperforming assets expenses increased for the three month period ending March 31, 2011, as
compared to the three month period ending March 31, 2010. This increase is due to the write down
of the carrying value of other real estate owned period over period. Also contributing to the
increase is an increase in real estate taxes, lawn maintenance, and appraisal fees related to other
real estate owned by the Corporation. The increase is partially offset by gains on the sale of
other real estate and a decrease in classified loan expense.
Other expenses decreased for the three month period ending March 31, 2011, as compared to the three
period ending March 31, 2010. The decrease is due to a reversal of a $1.0 million accrual
established by the Corporation in 2008 relating to a certain deposit account. In addition, the
Corporation recovered $395 thousand related to a wire transfer inadvertently sent to the wrong
beneficiary in 2010.
Federal and State Income Tax
The statutory rate reconciliation is as follows:
Three months ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Income before federal and state income tax |
$ | 2,079 | $ | 697 | ||||
Tax expense at federal statutory rate |
707 | 237 | ||||||
Increase (decrease) in taxes resulting from: |
||||||||
State income tax |
58 | 25 | ||||||
Tax exempt interest |
(278 | ) | (178 | ) | ||||
Other |
(25 | ) | (9 | ) | ||||
Total income tax |
$ | 462 | $ | 75 | ||||
Financial Condition
Total assets increased $30.0 million from $1.441 billion at December 31, 2010, to $1.471 billion at
March 31, 2011. The increase is the result of an increase of $42.6 million in investment
securities and an increase of $23.3 million in loans which were offset by a decrease in cash and
cash equivalents of $34.5 million. Deposits increased $24.0 million from $1.239 billion at
December 31, 2010, to $1.263 billion at March 31, 2011, due to new deposit relationships. The
increase in deposits and decrease in cash and cash equivalents funded the increase in loans as well
as the purchase of investments securities.
Liquidity and Interest Rate Sensitivity
The Corporation must maintain an adequate liquidity position in order to respond to the short-term
demand for funds caused by withdrawals from deposit accounts, extensions of credit and for the
payment of operating expenses. Maintaining an adequate liquidity position is accomplished through
the management of the liquid assets those which can be converted into cash and access to
additional sources of funds. The Corporation must monitor its liquidity ratios as established by
the Asset Liability Committee (ALCO). In addition, the Corporation has established a contingency
funding plan to address liquidity needs in the event of depressed economic or market conditions,
unexpected events, and/or situations beyond the Corporations control. The liquidity position is
continually monitored and reviewed by ALCO.
The Corporation has many sources of funds available, they include: cash and due from Federal
Reserve, overnight federal funds sold, investments available for sale, maturity of investments held
for sale, deposits, Federal Home Loan Bank (FHLB) advances, and issuance of debt. Deposits were
the most significant funding source and
purchases of investment securities held to maturity and available for sale were the most
significant use of funds during the three month period ending March 31, 2011. Deposits were the
most significant funding source and loans were the most significant use of funds during the three
month period ending March 31, 2010.
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The Corporation has entered into a $2.0 million revolving line of credit with U.S. Bank which
matures on August 31, 2011. Under the terms of the revolving line of credit, the Corporation pays
prime plus 1.25% which equated to 4.50% at March 31, 2011. In addition, the Corporation pays a
0.25% fee on the unused portion of the revolving line of credit. As of March 31, 2011, the
outstanding balance of the revolving line of credit was $0.
The Corporation also has a $3.0 million one-year term facility with U.S. Bank which matures on
August 31, 2011. Under the terms of the one-year term facility, the Corporation pays prime plus
1.25% which equated to 4.50% at March 31, 2011. In addition to quarterly interest payments, the
Corporation makes quarterly principal payments of $62.5 thousand. As of March 31, 2011, the
outstanding balance of the term facility was $2.6 million.
All of the U.S. Bank agreements contain various financial and non-financial covenants. As of March
31, 2011, the Corporation was in compliance with all covenants.
Primary liquid assets of the Corporation are cash and due from banks, federal funds sold,
investments held as available for sale, and maturing loans. Interest bearing due from banks
represented the Corporations primary source of immediate liquidity and averaged $213.1 million and
$138.6 million for the three month period ending March 31, 2011, and March 31, 2010, respectively.
The Corporation believes these balances are maintained at a level adequate to meet immediate needs.
Reverse repurchase agreements may serve as a source of liquidity, but are primarily used as
collateral for customer balances in overnight repurchase agreements. Maturities in the
Corporations 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 Corporations management believes its liquidity sources are adequate to meet its operating
needs and does not know of any trends, events or uncertainties that may result in a significant
adverse effect on the Corporations liquidity position.
The Corporation actively manages its interest rate sensitive assets and liabilities to reduce the
impact of interest rate fluctuations. At March 31, 2011, the Corporations rate sensitive
liabilities exceeded rate sensitive assets due within one year by $130.3 million.
As part of managing liquidity, the Corporation monitors its loan to deposit ratio on a monthly
basis. At March 31, 2011, the ratio was 73.1%. This is well within the board approved policy.
The Corporation experienced a decrease in cash and cash equivalents, another primary source of
liquidity, of $34.5 million during the three month period ending March 31, 2011. Deposit growth
provided net cash of $24.5 million and proceeds from the maturity of investment securities provided
cash of $23.4 million. Lending activities used cash of $29.2 million and purchases of investment
securities used cash of $66.6 million.
The purpose of the Banks Investment Committee is to manage and balance interest rate risk of the
investment portfolio, to provide a readily available source of liquidity to cover deposit runoff
and loan growth, and to provide a portfolio of safe, secure assets of high quality that generate a
supplemental source of income in concert with the overall asset/liability policies and strategies
of the Bank.
Capital Resources
The Corporation has a $2.0 million revolving line of credit and a $3.0 million one-year term loan
with U.S. Bank. See Liquidity and Interest Rate Sensitivity section of this report for further
discussion.
On June 29, 2007, the Bank entered into a Subordinated Debenture Purchase Agreement with U.S. Bank
in the amount of $5.0 million, which will mature on June 28, 2017. Under the terms of the
Subordinated Debenture
Purchase Agreement, the Bank pays 3-month London Interbank Offered Rate (LIBOR) plus 1.20% which
equated to 1.51% at March 31, 2011. Interest payments are due quarterly.
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In September 2000, the Trust, which is wholly owned by the Corporation, issued $13.5 million of
company obligated mandatorily redeemable capital securities. The proceeds from the issuance of the
capital securities and the proceeds from the issuance of the common securities of $418 thousand
were used by the Trust to purchase from the Corporation $13.9 million fixed rate junior
subordinated debentures. The capital securities mature September 7, 2030, or upon earlier
redemption as provided by the Indenture. The Corporation has the right to redeem the capital
securities, in whole or in part, but in all cases in a principal amount with integral multiples of
a thousand dollars on any March 7 or September 7 on or after September 7, 2010, at a premium of
105.3%, declining ratably to par on September 7, 2020. The capital securities and the debentures
have a fixed interest rate of 10.60% and are guaranteed by the Bank. The net proceeds received by
the Corporation from the sale of capital securities were used for general corporate purposes.
There were no FHLB advances outstanding as of March 31, 2011, or 2010.
The Bank may add indebtedness of this nature in the future if determined to be in the best interest
of the Bank.
Capital for the Bank is at or above the well capitalized regulatory requirements at March 31, 2011.
Pertinent capital ratios for the Bank as of March 31, 2011, are as follows:
Well | Adequately | |||||||||||
Actual | Capitalized | Capitalized | ||||||||||
Tier 1 risk-based capital ratio |
9.3 | % | 6.0 | % | 4.0 | % | ||||||
Total risk-based capital ratio |
11.1 | % | 10.0 | % | 8.0 | % | ||||||
Leverage ratio |
6.3 | % | 5.0 | % | 4.0 | % |
Dividends from the Bank to the Corporation may not exceed the net undivided profits of the Bank
(included in consolidated retained earnings) for the current calendar year and the two previous
calendar years without prior approval from the Office of the Comptroller of the Currency. In
addition, Federal banking laws limit the amount of loans the Bank may make to the Corporation,
subject to certain collateral requirements. No loans were made by the Bank to the Corporation
during the three month period ending March 31, 2011 or 2010. A dividend of $356 thousand and $383
thousand was declared and paid by the Bank to the Corporation during the three month period ending
March 31, 2011 and 2010, respectively.
On November 20, 2008, the Board of Directors adopted a new three-year stock repurchase program for
directors and employees. Under the new stock repurchase program, the Corporation may repurchase
shares in individually negotiated transactions from time to time as such shares become available
and spend up to $8 million to repurchase such shares over the three-year term. Subject to the $8
million limitation, the Corporation intends to purchase shares recently acquired by the selling
shareholder pursuant to the exercise of stock options or the vesting of restricted stock, and limit
its acquisition of shares which were not recently acquired by the selling shareholder pursuant to
the exercise of stock options or the vesting of shares of restricted stock to no more than 10,000
shares per year.
On February 18, 2011, the Corporation amended its stock repurchase program. Under the amended
repurchase program, the Corporation may repurchase up to 15,000 shares from outside shareholders in
addition to the previously approved employee and director repurchase plan. The Corporation
anticipates that it will fund purchases under the repurchase program from available working
capital.
Under the amended repurchase plan, the Corporation purchased 800 shares during the three month
period ending March 31, 2011, and $5.3 million is still available under the new repurchase plan as
of March 31, 2011. The stock repurchase program does not require the Corporation to acquire any
specific number of shares and may be modified, suspended, extended or terminated by the Corporation
at any time without prior notice. The repurchase program will terminate on December 31, 2011,
unless earlier suspended or discontinued by the Corporation.
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Table of Contents
Recent Accounting Pronouncements and Developments
Note 11 to the Consolidated Financial Statements under Item 1 discusses new accounting policies
adopted by the Corporation during the first quarter of 2011 and the expected impact of the adoption
of the new accounting policies.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
Market risk is the risk of loss due to adverse changes in market prices and rates. The
Corporations market risk arises primarily from interest rate risk inherent in its lending and
deposit taking activities. Management actively monitors and manages its interest rate exposure and
makes monthly reports to ALCO. ALCO is responsible for reviewing the interest rate sensitivity
position and establishing policies to monitor and limit exposure to interest rate risk. The
guidelines established by ALCO are reviewed by the ALCO/Investment Committee of the Corporations
Board of Directors.
The Corporations profitability is affected by fluctuations in interest rates. A sudden and
substantial increase in interest rates may adversely impact the Corporations earnings to the
extent that the interest rates earned by assets and paid on liabilities do not change at the same
speed, to the same extent, or on the same basis. The Corporation monitors the impact of changes in
interest rates on its net interest income. The Corporation attempts to maintain a relatively
neutral gap between earning assets and liabilities at various time intervals to minimize the
effects of interest rate risk.
One of the primary goals of asset/liability management is to maximize net interest income and the
net value of future cash flows within authorized risk limits. Net interest income is affected by
changes in the absolute level of interest rates. Net interest income is also subject to changes in
the shape of the yield curve. In general, a flattening of the yield curve would result in a
decline in earnings due to the compression of earning asset yields and funding rates, while a
steepening would result in increased earnings as investment margins widen. Earnings are also
affected by changes in spread relationships between certain rate indices, such as prime rate.
At March 31, 2011, the interest rate risk position of the Corporation was liability sensitive,
meaning net income should decrease as rates rise and increase as rates fall. The Corporation
performs a 200 basis point upward and downward interest rate shock to determine whether there would
be an adverse impact on its annual net income and that it is within the established policy limits.
A downward interest rate shock scenario was not performed due to the low level of current interest
rates. The earnings simulation model as of March 31, 2011, projects an approximate decrease of
24.7% in net income in a 200 basis point upward interest rate shock. The Corporation was in
violation of its policy limits established by the ALCO policy at March 31, 2011. Management
believes there is a 0.00% probability that interest rates would rise 200 basis points immediately.
Management performs additional interest rate scenarios that have higher probabilities of
occurrence. In these rate scenarios, the change to net income is within established limits.
See Liquidity and Interest Rate Sensitivity section of this report for further discussion.
There have been no material changes in the quantitative analysis used by the Corporation since
filing the Corporations Annual Report on Form 10-K for the year ended December 31, 2010, (the
2010 Form 10-K); for further discussion of the quantitative analysis used by the Corporation
refer to page 48 of the 2010 Form 10-K filed with the U.S. Securities and Exchange Commission on
March 11, 2011.
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
The Corporations management is responsible for establishing and maintaining effective disclosure
controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange
Act of 1934. As of March 31, 2011, an evaluation was performed under the supervision and with the
participation of management, including the principal executive officer and principal financial
officer, of the effectiveness of the design and operation of the Corporations disclosure controls
and procedures. Based on that evaluation, the principal executive officer and principal financial
officer concluded that the Corporations disclosure controls and procedures as of March 31, 2011,
were effective in ensuring information required to be disclosed in this Quarterly Report on Form
10-Q was recorded, processed, summarized, and reported on a timely basis.
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Table of Contents
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting that occurred during the
quarter ended March 31, 2011, that have materially affected, or are reasonably likely to materially
affect, the Corporations internal control over financial reporting.
Limitations on the Effectiveness of Controls
The Corporations management, including its principal executive officer and principal financial
officer, does not expect that the Corporations disclosure controls and procedures and other
internal controls will prevent all error and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of
the control system are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if any, within the
Corporation have been detected. These inherent limitations include the realities that judgments in
decision making can be faulty and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some persons, by collusion of
two or more people, or by management override of the control.
The design of any system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can only be reasonable assurance that any design will
succeed in achieving its stated goals under all potential future conditions; over time, control may
become inadequate because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in a cost effective control
system, misstatements due to error or fraud may occur and not be detected.
33
Table of Contents
Part II Other Information.
Item 1. | Legal Proceedings |
Neither the Corporation nor its subsidiaries are involved in any pending material
legal proceedings at this time, other than routine litigation incidental to their
business.
Item 1A. | Risk Factors |
There have been no material changes to the risk factors disclosed in the
Corporations Form 10-K for the year ended December 31, 2010, as filed with the SEC
on March 11, 2011.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
(a) | On January 7, 2011, the Corporation sold a total of 800 shares
of common stock for proceeds of $22,200 to one officer of the Corporation
pursuant to the exercise of stock options by the officer pursuant to an
exemption from registration under Sections 3(a)(11) and 4(2) of the Securities
Act of 1933, as amended. |
(b) | Not applicable. |
(c) | The following table sets forth the issuer repurchases of equity
securities that are registered by the Corporation pursuant to Section 12 of the
Securities Exchange Act of 1934 during the first quarter of 2011. |
Maximum | ||||||||||||||||
Number (or | ||||||||||||||||
Approximate | ||||||||||||||||
Total | Dollar Value) | |||||||||||||||
Number of | of Shares that | |||||||||||||||
Shares | May Yet Be | |||||||||||||||
Purchased as | Purchased | |||||||||||||||
Part of | Under the | |||||||||||||||
Total | Publicly | Plans or | ||||||||||||||
Number of | Average | Announced | Programs | |||||||||||||
Shares | Price Paid | Plans or | (Dollars in | |||||||||||||
Period | Purchased | per Share | Programs** | thousands) | ||||||||||||
January 1
January 31, 2011 |
800 | $ | 41.49 | 800 | $ | 5,265 | ||||||||||
February 1
February 28, 2011 |
| $ | | | $ | 5,265 | ||||||||||
March 1
March 31, 2011 |
| $ | | | $ | 5,265 | ||||||||||
Total |
800 | * | 800 | |||||||||||||
* | The weighted average price per share for the period January 2011 through March 2011 was
$41.49. |
|
** | All shares repurchased by the Corporation during 2011 were completed pursuant to the repurchase
program. |
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On November 20, 2008, the Board of Directors adopted a new three-year
stock repurchase program for directors and employees. Under the new stock
repurchase program, the Corporation may repurchase shares in individually
negotiated transactions from time to time as such shares become available
and spend up to $8 million to repurchase such shares over the three-year
term. Subject to the $8 million limitation, the Corporation intends to
purchase shares recently acquired by the selling shareholder pursuant to the
exercise of stock options or the vesting of restricted stock and limit its
acquisition of shares which were not recently acquired by the selling
shareholder pursuant to the exercise of stock options or the vesting of shares of restricted stock to no more than 10,000 shares per year.
On February 18, 2011, the Corporation amended its stock repurchase program.
Under the amended repurchase program, the Corporation may repurchase up to
15,000 shares from outside shareholders in addition to the previously
approved employee and director repurchase plan. The Corporation anticipates
that it will fund purchases under the repurchase program from available
working capital.
Under the amended repurchase plan, the Corporation purchased 800 shares
during the three month period ending March 31, 2011, and $5.3 million is
still available under the new repurchase plan as of March 31, 2011. The
stock repurchase program does not require the Corporation to acquire any
specific number of shares and may be modified, suspended, extended or
terminated by the Corporation at any time without prior notice. The
repurchase program will terminate on December 31, 2011, unless earlier
suspended or discontinued by the Corporation.
Item 3. | Defaults on Senior Securities |
Not applicable.
Item 4. | (Removed and Reserved) |
Item 5. | Other Information |
Not applicable.
Item 6. | Exhibits |
3.01 | Articles of Incorporation of the Corporation, filed as Exhibit
3(i) to the Corporations Form 10-QSB as of September 30, 1995, are
incorporated by reference and Articles of Amendment filed as Exhibit 3(i) to
the Form 10-K for the fiscal year ended December 31, 2001. |
|||
3.02 | Bylaws of the Corporation, filed as Exhibit 3(ii) to the
Corporations Form 8-K filed July 30, 2009, are incorporated by reference. |
|||
10.01 | * | 1993 Key Employees Stock Option Plan of the Corporation, as amended, filed
as Exhibit 10(a) to the Form 10-K for the fiscal year ended December 31, 2004,
is incorporated by reference. |
||
10.02 | * | 1993 Directors Stock Option Plan of the Corporation, as amended, filed as
Exhibit 10(b) to the Corporations Form 10-Q as of June 30, 2001, is
incorporated by reference. |
||
10.03 | * | 1993 Restricted Stock Plan of the Corporation, as amended, filed as Exhibit
10(c) to the Form 10-K for the fiscal year ended December 31, 2004, is
incorporated by reference. |
||
10.04 | * | Form of agreement under the 1993 Key Employees Stock Option Plan, filed as
Exhibit 10(d) to the Form 10-K for the fiscal year ended December 31, 2004, is
incorporated by reference. |
35
Table of Contents
10.05 | * | Form of agreement under the 1993 Restricted Stock Plan, filed as Exhibit
10(e) to the Form 10-K for the fiscal year ended December 31, 2004, is
incorporated by reference. |
||
10.06 | * | Schedule of Directors Compensation Arrangements, filed as part of the
Corporations Form 8-K dated March 17, 2010, is incorporated by reference. |
||
10.07 | * | Schedule of Named Executive Officers Compensation Arrangements, filed as
Exhibit 10.07 to the Corporations Form 8-K dated May 18, 2006, is incorporated
by reference, as amended by the Corporations Form 8-K filed January 6, 2011. |
||
10.08 | * | The National Bank of Indianapolis Corporation Amended and Restated 2005
Equity Incentive Plan, filed as Exhibit 10.01 to the Corporations Form 8-K
dated June 23, 2010, is incorporated by reference. |
||
10.09 | * | Form of Restricted Stock Award Agreement for The National Bank of
Indianapolis Corporation 2005 Equity Incentive Plan, filed as Exhibit 10.02 to
the Corporations Form 8-K dated June 22, 2005, is incorporated by reference. |
||
10.10 | * | Form of Stock Option Award Agreement for The National Bank of Indianapolis
Corporation 2005 Equity Incentive Plan, filed as Exhibit 10.03 to the
Corporations Form 8-K dated June 22, 2005, is incorporated by reference. |
||
10.11 | * | Employment Agreement dated December 15, 2005, between Morris L. Maurer and
the Corporation, filed as Exhibit 10.06 to the Corporations Form 8-K dated
December 21, 2005, and as amended by Exhibit 10.06 to the Corporations Form
8-K dated November 26, 2008, is incorporated by reference. |
||
10.13 | * | The National Bank of Indianapolis Corporation Executives Deferred
Compensation Plan, filed as Exhibit 10.08 to the Corporations Form 8-K dated
December 21, 2005, and as amended by Exhibit 10.08 to the Corporations Form
8-K dated November 26, 2008, is incorporated by reference. |
||
10.14 | * | The National Bank of Indianapolis Corporation 401(k) Savings Plan (as amended
and restated generally effective January 1, 2006), filed as Exhibit 10.14 to
the Corporations Form 10-K dated December 31, 2005, is incorporated by
reference. |
||
31.1 | Certificate of Chief Executive Officer pursuant to Rule
13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. |
|||
31.2 | Certificate of Chief Financial Officer pursuant to Rule
13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. |
|||
32.1 | Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350. |
|||
32.2 | Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350. |
* | Management contract or compensatory plan or arrangement. |
36
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 6, 2011 THE NATIONAL BANK OF INDIANAPOLIS CORPORATION |
||||
/s/ Debra L. Ross | ||||
Debra L. Ross | ||||
Chief Financial Officer (Principal Financial Officer) |
37
Table of Contents
EXHIBIT INDEX
3.01 | Articles of Incorporation of the Corporation, filed as Exhibit
3(i) to the Corporations Form 10-QSB as of September 30, 1995, are
incorporated by reference and Articles of Amendment filed as Exhibit 3(i) to
the Form 10-K for the fiscal year ended December 31, 2001. |
|||
3.02 | Bylaws of the Corporation, filed as Exhibit 3(ii) to the
Corporations Form 8-K filed July 30, 2009, are incorporated by reference. |
|||
10.01 | * | 1993 Key Employees Stock Option Plan of the Corporation, as amended, filed
as Exhibit 10(a) to the Form 10-K for the fiscal year ended December 31, 2004,
is incorporated by reference. |
||
10.02 | * | 1993 Directors Stock Option Plan of the Corporation, as amended, filed as
Exhibit 10(b) to the Corporations Form 10-Q as of June 30, 2001, is
incorporated by reference. |
||
10.03 | * | 1993 Restricted Stock Plan of the Corporation, as amended, filed as Exhibit
10(c) to the Form 10-K for the fiscal year ended December 31, 2004, is
incorporated by reference. |
||
10.04 | * | Form of agreement under the 1993 Key Employees Stock Option Plan, filed as
Exhibit 10(d) to the Form 10-K for the fiscal year ended December 31, 2004, is
incorporated by reference. |
||
10.05 | * | Form of agreement under the 1993 Restricted Stock Plan, filed as Exhibit
10(e) to the Form 10-K for the fiscal year ended December 31, 2004, is
incorporated by reference. |
||
10.06 | * | Schedule of Directors Compensation Arrangements, filed as part of the
Corporations Form 8-K dated March 17, 2010, is incorporated by reference. |
||
10.07 | * | Schedule of Named Executive Officers Compensation Arrangements, filed as
Exhibit 10.07 to the Corporations Form 8-K dated May 18, 2006, is incorporated
by reference, as amended by the Corporations Form 8-K filed January 6, 2011. |
||
10.08 | * | The National Bank of Indianapolis Corporation Amended and Restated 2005
Equity Incentive Plan, filed as Exhibit 10.01 to the Corporations Form 8-K
dated June 23, 2010, is incorporated by reference. |
||
10.09 | * | Form of Restricted Stock Award Agreement for The National Bank of
Indianapolis Corporation 2005 Equity Incentive Plan, filed as Exhibit 10.02 to
the Corporations Form 8-K dated June 22, 2005, is incorporated by reference. |
||
10.10 | * | Form of Stock Option Award Agreement for The National Bank of Indianapolis
Corporation 2005 Equity Incentive Plan, filed as Exhibit 10.03 to the
Corporations Form 8-K dated June 22, 2005, is incorporated by reference. |
||
10.11 | * | Employment Agreement dated December 15, 2005, between Morris L. Maurer and
the Corporation, filed as Exhibit 10.06 to the Corporations Form 8-K dated
December 21, 2005, and as amended by Exhibit 10.06 to the Corporations Form
8-K dated November 26, 2008, is incorporated by reference. |
38
Table of Contents
10.13 | * | The National Bank of Indianapolis Corporation Executives Deferred
Compensation Plan, filed as Exhibit 10.08 to the Corporations Form 8-K dated
December 21, 2005, and as amended by Exhibit 10.08 to the Corporations Form
8-K dated November 26, 2008, is incorporated by reference. |
||
10.14 | * | The National Bank of Indianapolis Corporation 401(k) Savings Plan (as amended
and restated generally effective January 1, 2006), filed as Exhibit 10.14 to
the Corporations Form 10-K dated December 31, 2005, is incorporated by
reference. |
||
31.1 | Certificate of Chief Executive Officer pursuant to Rule
13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. |
|||
31.2 | Certificate of Chief Financial Officer pursuant to Rule
13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. |
|||
32.1 | Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350. |
|||
32.2 | Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350. |
* | Management contract or compensatory plan or arrangement. |
39