U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
X Annual report under section 13 or 15(d) of the Securities Exchange Act
of 1934 [Fee Required] for the fiscal year ended 12/31/98 Transition
report under section 13 or 15(d) of the Securities Exchange Act of 1934
[No Fee Required] for the transition period from ______________ to
_______________
COMMISSION FILE NUMBER 000-21671
The National Bank of Indianapolis Corporation
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
Indiana 35-1887991
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
107 North Pennsylvania Street, Suite 700, Indianapolis, IN 46204
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (317) 261-9000
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None
Securities to be registered under Section 12(g) of the Act:
Common Stock
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy of
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenue's for its most recent fiscal year $23,092,822
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State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. (See definition of affiliate in Rule 12b-2 of the Exchange Act).
$25,737,540
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NOTE.--If determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by non-affiliates on the basis of reasonable
assumptions, if the assumptions are stated.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS) State the number of shares
outstanding of each of the issuer's classes of common equity, as of the latest
practicable date. 1,908,279 at 2/28/99
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DOCUMENTS INCORPORATED BY REFERENCE. If the following documents are incorporated
by reference, briefly describe them and identify the part of the Form 10-KSB
(e.g., Part I, Part II, etc.) Into which the document is incorporated: (1) any
annual report to security holders; (2) any proxy or information statement;
and(3) any prospectus filed pursuant to Rule 424(b) or (c) the Securities Act of
1933 ("Securities Act".) The listed documents should be clearly described for
identification purposes (e.g., annual report to security holders for fiscal year
ended December 24, 1990). None
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TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): YES NO X
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FORM 10-KSB CROSS REFERENCE INDEX
Item Disclosure Required Page
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PART I
Item 1. Description of Business 3
Item 2. Description of Property 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 10
Item 6. Management's Discussion and Analysis or Plan of Operations 11
Item 7. Financial Statements 27
Item 8. Changes In and Disagreements With Accountants on Accounting 46
and Financial Disclosure
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons, 46
Compliance With Section 16(a) of Exchange Act
Item 10. Executive Compensation 49
Item 11. Security Ownership and Certain Beneficial Owners and Management 56
Item 12. Certain Relationship and Related Transactions 58
Item 13. Exhibits and Reports on Form 8-K 59
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
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The Corporation. The National Bank of Indianapolis Corporation (the
"Corporation") was formed on January 29, 1993, for the purpose of forming a
banking institution in the Indianapolis, Indiana metropolitan area and holding
all of the shares of common stock of such banking institution. The Corporation
formed a national banking association entitled "The National Bank of
Indianapolis" (the "Bank") as a wholly-owned subsidiary.
The Bank was officially chartered by the Office of the Comptroller of
the Currency ("OCC") on December 8, 1993 and opened for business to the public
on December 21, 1993. The Bank's deposits are insured by the Federal Deposit
Insurance Corporation ("FDIC"). The Bank currently conducts its business through
its downtown headquarters located at 107 North Pennsylvania Street in
Indianapolis, at neighborhood bank offices located at 84th Street and Ditch Road
in northwestern Marion County and 82nd Street and Bash Road in northeastern
Marion County, in the Chamber of Commerce Building in downtown Indianapolis, and
at 4930 North Pennsylvania Street in northern Marion County.
The Bank provides a full range of deposit, credit, and money management
services to its targeted market, which is small to medium size businesses,
affluent executive and professional individuals, and not-for-profit
organizations. In February of 1994, the Bank received full trust powers and
offers full trust services.
Management has sought to position the Bank to capitalize on the
customer disruption, dissatisfaction, and turnover which it believes has
resulted from the acquisition of the three largest commercial banks located in
Indianapolis by out-of-state holding companies. As such, The National Bank of
Indianapolis enjoys a unique position as the only locally-owned and operated
national bank in Marion County. On December 31, 1998, the Corporation had
consolidated total assets of $359 million and total deposits of $298 million.
The key ingredients in the initial growth of the Bank have been an
aggressive business plan, an experienced Board of Directors and management team,
a seasoned group of bank employees, and a very attractive local economy. The
basic strategy of the Bank continues to emphasize the delivery of highly
personalized services to the target client base with an emphasis on quick
response and financial expertise.
Business Plan Overview. The business plan of the Bank is based on being
a strong, locally owned bank providing superior service to a small group of
customers, which are primarily corporations with annual sales under $30 million,
executives, professionals, and not-for-profit organizations. The Bank provides
highly personalized banking services with an emphasis on knowledge of the
particular financial needs and objectives of its clients and quick response to
customer requests. Because the management of the Bank is located in
Indianapolis, all credit and related decisions are made locally, thereby
facilitating prompt response. The Bank emphasizes both highly personalized
service at the customer's convenience and non-traditional delivery services that
do not require customers to frequent the Bank. This personal contact has become
a trademark of the Bank and a key means of differentiating the Bank from other
financial service providers.
The Bank offers a broad range of deposit services typically available
from most banks and savings associations, including checking accounts, NOW
accounts, savings and other kinds of deposits of various types (ranging from
daily money market accounts to longer term certificates of deposit). The Bank
also offers a full range of credit services, including commercial loans (such as
lines of credit, term loans, refinancings, etc.), personal lines of credit,
direct installment consumer loans, credit card loans, residential mortgage
loans, construction loans, and letters of credit. In addition, the Bank offers
full trust services. The Bank also has formed arrangements with outside
providers of tax, and financial planning services to better accommodate its
customers.
The Bank's growth in deposits is attributable in part to the efforts of
its staff who provide personal banking services to the Bank's customers. In
addition, the Bank has emphasized paying competitive interest rates on deposit
products. Finally, the Bank has offered savings and certificate of deposit
products with competitive rates to larger depositors in an effort to minimize
the operating costs of obtaining these deposits. Lending strategies focus
primarily on commercial loans to small and medium size businesses as well as
personal loans to executives and professionals.
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In the residential mortgage lending area, the Bank offers regular,
jumbo and CRA mortgage products. The Bank has developed a secondary market for
its residential mortgage loans. Consumer lending is directed to executive and
professional clients through residential mortgages, credit cards, and personal
lines of credit to include home equity loans.
The Market. The Bank plans to derive a substantial proportion of its
business from the Indianapolis/Marion County, Indiana area. Indianapolis has
been ranked by a number of national publications as a "top" Midwestern city. In
addition, Indianapolis is the most centrally located city in the United States
to the top 100 markets. As such, the city is a major distribution center where
more highways converge than any other city in the entire United States. The city
is home to such large employers as Eli Lilly and Company, Clarian Health
Partners, Simon Debartolo, USA Group, Conseco, St. Vincent Hospital, Anthem, and
Marsh Supermarkets.
Marion County is the largest county in the Indianapolis Metropolitan
Statistical Area ("MSA"), and comprises 65% of the Indianapolis MSA population.
According to the 1990 census, Marion County had a total population of 797,159.
This represents an increase of almost 32,000 people or 4.2% over the 1980
census. The population of Marion County is projected to grow by another 42,071
to 839,230, or approximately 5.3%, by the year 2000.
Competition. The Bank's service area is highly competitive. There are
currently approximately 60 financial institutions operating in the Marion County
marketplace. In addition to competition from commercial banks, significant
competition also comes from savings and loans associations, credit unions,
finance companies, insurance companies, mortgage companies, securities and
brokerage firms, money market mutual funds, loan production offices, and other
providers of financial services in the area. The Bank competes in this
marketplace primarily on the basis of highly personalized service, responsive
decision making, and competitive pricing.
Employees. The Bank has 96 employees, of which 84 are full-time
employees. The Bank has employed persons with substantial experience in the
Indianapolis banking market. The average experience level for all Bank employees
is in excess of 12 years.
Lending Activity. The Bank's lending strategy emphasizes the
development of a high quality, well-diversified loan portfolio. The Bank's
principal lending categories are commercial, residential mortgage, private
banking/personal, and home equity. Commercial loans include loans for working
capital, machinery and equipment purchases, premises and equipment acquisitions
and other corporate needs. Residential mortgage lending includes loans on first
mortgage residential properties. Private banking loans include secured and
unsecured personal lines of credit as well as home equity loans.
Commercial loans typically entail a thorough analysis of the borrower,
its industry, current and projected economic conditions and other factors.
Credit analysis involves collateral, the type of loan, loan maturity, terms and
conditions, and various loan to value ratios as they relate to loan policy. The
Bank typically requires commercial borrowers to have annual financial statements
prepared by independent accountants and often requires such financial statements
to be audited or reviewed by accountants. The Bank requires appraisals or
evaluations in connection with loans secured by real estate. Such appraisals or
evaluations are usually obtained prior to the time funds are advanced. The Bank
also often requires personal guarantees from principals involved with
closely-held corporate borrowers.
The Bank requires loan applications and personal financial statements
from its personal borrowers on loans that the Bank originates. Loan officers
complete a debt to income analysis that should meet established standards of
lending policy.
The Bank maintains a comprehensive loan policy that establishes
guidelines with respect to all categories of lending. In addition, loan policy
sets forth lending authority for each loan officer. The Loan Committee of the
Bank reviews all loans made under $200,000. Any loan in excess of $200,000 must
receive the approval of the Loan Committee prior to the Bank making such loan.
The Board of Directors Loan Policy Committee does not generally approve loans
unless they are above $1,800,000 or are loans to directors or executive
officers. All loans are assigned a numerical rating based on creditworthiness
and are monitored for improvement or deterioration.
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Loans are made primarily in the Bank's designated market area.
Bank Holding Company Regulation. The Corporation is registered as a
bank holding company and is subject to the regulations of the Board of Governors
of the Federal Reserve System ("Federal Reserve") under the Bank Holding Company
Act of 1956, as amended ("BHCA"). Bank holding companies are required to file
periodic reports with and are subject to periodic examination by the Federal
Reserve. The Federal Reserve has the authority to issue cease-and-desist orders
against a bank holding company and nonbank subsidiaries if it determines that
activities of such entities represent an unsafe and unsound practice or a
violation of law.
The Corporation is prohibited by the BHCA from acquiring direct or
indirect control of more than 5% of the outstanding shares of any class of
voting stock or substantially all of the assets of any bank or merging or
consolidating with another bank holding company without prior approval of the
Federal Reserve. In addition, the Corporation may not acquire direct or indirect
control of a savings association without the prior approval of the Federal
Reserve and the Office of Thrift Supervision. Additionally, the Corporation is
prohibited by the BHCA from engaging in or from acquiring ownership or control
of more than 5% of the outstanding shares of any class of voting stock of any
company engaged in a nonbanking business unless such business is determined by
the Federal Reserve to be so closely related to banking as to be a proper
incident thereto. The BHCA does not place territorial restrictions on the
activities of such nonbanking-related activities.
The Federal Reserve has issued regulations under the BHCA requiring a
bank holding company to serve as a source of financial and managerial strength
to its subsidiary banks. It is the policy of the Federal Reserve that, pursuant
to this requirement, a bank holding company should stand ready to use its
resources to provide adequate capital funds to its subsidiary banks during
periods of financial stress or adversity. Additionally, under the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), a bank holding
company is required to guarantee the compliance of any insured depository
institution subsidiary that may become "undercapitalized" (as defined in the
statute) with the terms of any capital restoration plan filed by such subsidiary
with its appropriate federal banking agency, up to the lesser of (i) an amount
equal to 5% of the institution's total assets at the time the institution became
undercapitalized, or (ii) the amount that is necessary (or would have been
necessary) to bring the institution into compliance with all applicable capital
standards as of the time the institution fails to comply with such capital
restoration plan. As a result of these policies, the Corporation may be required
to commit resources to its subsidiary bank in circumstances where it might not
otherwise do so.
Capital Adequacy Guidelines for Bank Holding Companies. The Federal
Reserve, as the regulatory authority for bank holding companies, has adopted
capital adequacy guidelines for bank holding companies. Bank holding companies
with assets in excess of $150 million must comply with the Federal Reserve's
risk-based capital guidelines which require a minimum ratio of total capital to
risk-weighted assets (including certain off-balance sheet activities such as
standby letters of credit) of 8%. At least half of the total required capital
must be "Tier 1 capital," consisting principally of common stockholders' equity,
noncumulative perpetual preferred stock, a limited amount of cumulative
perpetual preferred stock and minority interest in the equity accounts of
consolidated subsidiaries, less certain goodwill items. The remainder ("Tier 2
capital") may consist of a limited amount of subordinated debt and
intermediate-term preferred stock, certain hybrid capital instruments and other
debt securities, cumulative perpetual preferred stock, and a limited amount of
the general loan loss allowance. In addition to the risk-based capital
guidelines, the Federal Reserve has adopted a Tier 1 (leverage) capital ratio
under which the bank holding company must maintain a minimum level of Tier 1
capital to average total consolidated assets of 3% in the case of bank holding
companies which have the highest regulatory examination ratings and are not
contemplating significant growth or expansion. All other bank holding companies
are expected to maintain a ratio of at least 1% to 2% above the stated minimum.
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Certain regulatory capital ratios for the Corporation as of December
31, 1998 are shown below
Tier 1 Capital to Risk-Weighted Assets 8.3%
Total Risk Based Capital to Risk-Weighted Assets 9.5%
Tier 1 Leverage Ratio 5.5%
Bank Regulation. The Bank is organized under the laws of the United
States of America and is subject to the supervision of the Office of the
Comptroller of the Currency ("OCC"), whose examiners conduct periodic
examinations of national banks. The deposits of the Bank are insured by the
Bank Insurance Fund ("BIF") administered by the FDIC and are subject to the
FDIC's rules and regulations respecting the insurance of deposits. See
"--Deposit Insurance."
Both federal and state law extensively regulate various aspects of the
banking business such as reserve requirements, truth-in-lending and
truth-in-savings disclosure, equal credit opportunity, fair credit reporting,
trading in securities and other aspects of banking operations. Current federal
law also requires banks, among other things to make deposited funds available
within specified time periods.
Under federal and Indiana law, the Bank may establish an additional
banking location anywhere in Indiana. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 allows bank holding companies to acquire banks
anywhere in the United States subject to certain state restrictions, and permits
an insured bank to merge with an insured bank in another state without regard to
whether such merger is prohibited by state law. Additionally, an out-of-state
bank may acquire the branches of an insured bank in another state without
acquiring the entire bank; provided, however, that the law of the state where
the branch is located permits such an acquisition. Bank holding companies may
merge existing bank subsidiaries located in different states into one bank.
With certain exceptions, a bank and a subsidiary may not extend credit,
lease or sell property or furnish any services or fix or vary the consideration
for the foregoing on the condition that (i) the customer must obtain or provide
some additional credit, property or services from, or to, any of them, or (ii)
the customer may not obtain some other credit, property or service from a
competitor, except to the extent reasonable conditions are imposed to assure the
soundness of credit extended.
An insured bank subsidiary may act as an agent for an affiliated bank
or thrift in offering limited banking services (receive deposits, renew time
deposits, close loans, service loans and receive payments on loan obligations)
both within the same state and across state lines.
Dividend Limitations. Under Federal Reserve supervisory policy, a bank
holding company generally should not maintain its existing rate of cash
dividends on common shares unless (i) the organization's net income available to
common shareholders over the past year has been sufficient to fully fund the
dividends, and (ii) the prospective rate of earnings retention appears
consistent with the organization's capital needs, asset quality, and overall
financial condition. The FDIC also has authority under the Financial
Institutions Supervisory Act to prohibit a bank from paying dividends if, in its
opinion, the payment of dividends would constitute an unsafe or unsound practice
in light of the financial condition of the bank. The Corporation's Board of
Directors has not yet declared any dividends and does not anticipate that it
will do so in the immediate future. In addition, there can be no assurance as to
when, if ever, the Corporation will declare and pay any cash dividends.
Under federal law, the Bank must comply with various restrictions
applicable to its ability to pay dividends. In addition, the Bank is subject to
certain restrictions imposed by the Federal Reserve on extensions of credit to
the Corporation, on investments in the stock or other securities of the
Corporation, and in taking such stock or securities as collateral for loans.
The most stringent capital requirement affecting the Bank, however, are
those established by the prompt corrective action provisions of FDICIA, which
are discussed below. At December 31, 1998, the Bank's total risk-based capital,
Tier 1 risk-based capital and leverage capital exceeded the amounts required to
be designated "adequately capitalized."
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Lending Limits. Under federal law, the total loans and extension of
credit by a national bank to a borrower outstanding at one time and not fully
secured may not exceed 15% of such bank's capital and unimpaired surplus. An
additional amount up to 10% of the bank's capital and unimpaired surplus may be
loaned to the same borrower if such loan is fully secured by readily marketable
collateral having a market value, as determined by reliable and continuously
available price quotations, at least equal to the amount of such additional
loans outstanding.
Affiliates. The Bank is subject to Sections 22(h), 23A and 23B of the
Federal Reserve Act, which restrict financial transactions between banks and
affiliated companies limits credit transactions between a bank and its executive
officers and its affiliates, prescribes terms and conditions for bank affiliate
transactions deemed to be consistent with safe and sound banking practices, and
restricts the types of collateral security permitted in connection with a bank's
extension of credit to an affiliate.
FDICIA. FDICIA requires, among other things, federal bank regulatory
authorities to take "prompt corrective action" with respect to banks which do
not meet minimum capital requirements. For these purposes, FDICIA establishes
five capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized.
The FDIC has adopted regulations to implement the prompt corrective
action provisions of FDICIA. Among other things, the regulations define the
relevant capital measures for the five capital categories. An institution is
deemed to be "well capitalized" if it has a total risk-based capital ratio of
10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a
leverage ratio of 5% or greater, and is not subject to a regulatory order,
agreement or directive to meet and maintain a specific capital level for any
capital measure. An institution is deemed to be "adequately capitalized" if it
has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based
capital ratio of 4% or greater, and generally a leverage ratio 4% or greater. An
institution is deemed to be "undercapitalized" if it has a total risk-based
capital ratio of less than 8%, a Tier 1 risk-based capital ratio of less than
4%, or generally a leverage ratio of less than 4%. An institution is deemed to
be "significantly undercapitalized" if it has a total risk-based capital ratio
of less than 6%, a Tier 1 risk-based capital ratio of less than 3%, or a
leverage ratio of less than 3%. An institution is deemed to be "critically
undercapitalized" if it has a ratio of tangible equity (as defined in the
regulations) to total assets that is equal to or less than 2%.
"Undercapitalized" banks are subject to growth limitations and are
required to submit a capital restoration plan. A bank's compliance with such
plan is required to be guaranteed by any company that controls the
undercapitalized institution as described above. If an "undercapitalized" bank
fails to submit an acceptable plan, it is treated as if it is significantly
undercapitalized. "Significantly undercapitalized" banks are subject to one or
more of a number of requirements and restrictions, including an order by the
FDIC to sell sufficient voting stock to become adequately capitalized,
requirements to reduce total assets and case receipt of deposits from
correspondent banks, and restrictions on compensation of executive officers.
"Critically undercapitalized" institutions may not, beginning 60 days after
becoming "critically undercapitalized", make any payment of principal or
interest on certain subordinated debt or extend credit for a highly leveraged
transaction or enter into any transaction outside the ordinary course of
business. In addition, "critically undercapitalized" institutions are subject to
appointment of a receiver or conservator.
The federal banking agencies have established guidelines which
prescribe standards for depository institutions relating to internal controls,
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, asset quality, earnings,
compensation fees and benefits, and management compensation. The agencies may
require an institution which fails to meet the standards set forth in the
guidelines to submit a compliance plan. Failure to submit an acceptable plan or
adhere to an accepted plan may be grounds for further enforcement action.
Deposit Insurance. The Bank's deposits are insured up to $100,000 per
insured account by the BIF. As an institution whose deposits are insured by the
BIF, the Bank is not currently required to pay deposit insurance premiums to BIF
but, was required to pay $8,400 for the Financing Corporation ("FICO")
assessment for the first quarter in 1999. The Bank's deposit insurance
assessments may increase depending upon the risk category and subcategory, if
any, to which the Bank is assigned by the FDIC. Any increase in insurance
assessments could have an adverse effect on the Bank's earnings.
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Bank Capital Requirements. The OCC has adopted risk-based capital ratio
guidelines to which the Bank is subject. The guidelines establish a systematic
analytical framework that makes regulatory capital requirements more sensitive
to differences in risk profiles among banking organizations. Risk-based capital
ratios are determined by allocating assets and specified off-balance sheet
commitments to four risk weighted categories, with higher levels of capital
being required for the categories perceived as representing greater risk.
These guidelines divide a bank's capital into two tiers. The first tier
(Tier 1) includes common equity, certain non-cumulative perpetual preferred
stock (excluding auction rate issues) and minority interests in equity accounts
of consolidated subsidiaries, less goodwill and certain other intangible assets
(except mortgage servicing rights and purchased credit card relationships,
subject to certain limitations). Supplementary (Tier 2) capital includes, among
other items, cumulative perpetual and long-term limited-life preferred stock,
mandatory convertible securities, certain hybrid capital instruments, term
subordinated debt and the allowance for loan and lease losses, subject to
certain limitations, less required deductions. Banks are required to maintain a
total risk-based capital ratio of 8%, of which 4% must be Tier 1 capital. The
OCC may, however, set higher capital requirements when a bank's particular
circumstances warrant. Banks experiencing or anticipating significant growth are
expected to maintain capital ratios, including tangible capital positions, well
above the minimum levels.
In addition, the OCC established guidelines prescribing a minimum Tier
1 leverage ratio (Tier 1 capital to adjusted total assets as specified in the
guidelines). These guidelines provide for a minimum Tier 1 leverage ratio of 3%
for banks that meet certain specified criteria, including that they have the
highest regulatory rating and are not experiencing or anticipating significant
growth. All other banks are required to maintain a Tier 1 leverage ratio of 3%
plus an additional cushion of at least 100 to 200 basis points.
Certain regulatory capital ratios under the OCC's risk-based capital
guidelines for the Bank at December 31, 1998 are shown below:
Tier 1 Capital to Risk-Weighted Assets.......................8.2%
Total Risk-Based Capital to Risk-Weighted Assets.............9.3%
Tier 1 Leverage Ratio........................................5.4%
In 1996, the FDIC, along with the OCC and the Federal Reserve, issued a
joint policy statement to provide guidance on sound practices for managing
interest rate risk. The statement sets forth the factors the federal regulatory
examiners will use to determine the adequacy of a bank's capital for interest
rate risk. These qualitative factors include the adequacy and effectiveness of
the bank's internal interest rate risk management process and the level of
interest rate exposure. Other qualitative factors that will be considered
include the size of the bank, the nature and complexity of its activities, the
adequacy of its capital and earnings in relation to the bank's overall risk
profile, and its earning exposure to interest rate movements. The interagency
supervisory policy statement describes the responsibilities of a bank's board of
directors in implementing a risk management process and the requirements of the
bank's senior management in ensuring the effective management of interest rate
risk. Further, the statement specifies the elements that a risk management
process must contain.
The OCC, the Federal Reserve and the FDIC have issued final regulations
further revising their risk-based capital standards to include a supervisory
framework for measuring market risk. The effect of these regulations is that any
bank holding company or bank which has significant exposure to market risk must
measure such risk using its own internal model, subject to the requirements
contained in the regulations, and must maintain adequate capital to support that
exposure. These regulations apply to any bank holding company or bank whose
trading activity equals 10% or more of its total assets, or whose trading
activity equals $1 billion or more. Examiners may require a bank holding company
or bank that does not meet the applicability criteria to comply with the capital
requirements if necessary for safety and soundness purposes. These regulations
contain supplemental rules to determine qualifying and excess capital, calculate
risk-weighted assets, calculate market risk equivalent assets and calculate
risk-based capital ratios adjusted for market risk.
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Additional Matters. In addition to the matters discussed above, the
Corporation and the Bank are subject to additional regulation of their
activities, including a variety of consumer protection regulations affecting
their lending, deposit and collection activities and regulations affecting
secondary mortgage market activities.
The earnings of financial institutions, including the Corporation and
the Bank, are also affected by general economic conditions and prevailing
interest rates, both domestic and foreign and by the monetary and fiscal
policies of the U.S. Government and its various agencies, particularly the
Federal Reserve.
Additional legislation and administrative actions affecting the banking
industry may be considered by the United States Congress, the Indiana General
Assembly and various regulatory agencies, including those referred to above. It
cannot be predicted with certainty whether such legislation of administrative
action will be enacted or the extent to which the banking industry in general or
the Corporation and the Bank in particular would be affected thereby.
ITEM 2. DESCRIPTION OF PROPERTY
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The Bank purchased the downtown office building which houses its main
office as well as the Corporation's main office at 107 North Pennsylvania Street
in December 1998. It was previously being leased from an affiliate of one of the
directors of the Corporation and the Bank.
The Bank opened its first neighborhood bank office in February 1995 at
84th and Ditch Road. The Bank also opened a neighborhood bank office at 82nd and
Bash Road on the northeast side of Indianapolis in December 1995. The Bank owns
the land and the premises for both of these offices. In March 1996, the Bank
opened an office in the Chamber of Commerce building at 320 N. Meridian Street
in the downtown Indianapolis area. The Bank leases the premises at this banking
office. In March 1998, the Bank opened an office at 4930 North Pennsylvania
Street and leases the premises at this banking office. In July 1997, the Bank
purchased a parcel of land in Greenwood for future business development.
The Bank has installed a remote ATM at the Indianapolis City Market,
University of Indianapolis, TGI Friday's at Keystone Crossing, and Meridian Mark
II Office Complex. These remote ATMs provide additional banking convenience for
the customers of the Bank, and generate an additional source of fee income for
the Bank.
ITEM 3. LEGAL PROCEEDINGS
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Neither the Corporation nor the Bank are involved in any pending legal
proceedings at this time, other than routine litigation incidental to its
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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None.
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PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS.
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There is no established public trading market for the common stock. The
Corporation is aware of periodic trades of the shares. These transactions are
privately negotiated between the buyers and sellers.
The Corporation sold 400,000 shares in a private placement in 1995-1996
at a price of $12.50 per share. However, because there is not an established
public trading market for any shares, the offering price of $12.50 may not
reflect the price which would be paid for the shares on an active market and
should not necessarily be relied upon when determining the value of a
shareholder's investment.
At December 31, 1998, there were approximately 579 holders of record of
the common stock.
The Corporation has not declared or paid any cash dividends on its
shares of common stock since its organization in 1993. The Corporation and the
Bank anticipate that earnings will be retained to finance the Bank's growth.
Future dividend payments by the Corporation, if any, will be largely dependent
upon dividends paid by the Bank, which are subject to regulatory limitations.
10
<PAGE>
ITEM 6. MANAGEMENT DISCUSSION AND ANALYSIS.
- --------------------------------------------
The following table sets forth certain consolidated information concerning the
Company for the periods and dates indicated and should be read in connection
with, and is qualified in its entirety by, the detailed information and
consolidated financial statements and related notes set forth in the
Corporation's audited financial statements included elsewhere herein (in 000's).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996 1995 1994
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED OPERATING DATA:
Interest income $ 21,052 $ 15,597 $ 10,969 $ 6,252 $ 2,043
Interest expense 12,367 9,005 6,234 3,425 811
---------- ----------- ---------- ---------- ----------
Net interest income 8,685 6,592 4,735 2,827 1,232
Provision for loan losses 680 624 420 600 360
---------- ----------- ---------- ---------- ----------
Net income after provision for loan losses 8,005 5,968 4,315 2,227 872
Securities gains (losses) net 0 0 23 (2) 0
Other income 2,041 1,297 901 445 151
Non-interest expense 8,168 6,091 5,161 3,537 2,313
---------- ----------- ---------- ---------- ----------
Income (loss) before income taxes 1,878 1,174 78 (867) (1,290)
Applicable income taxes 198 0 0 0 0
---------- ----------- ---------- ---------- ----------
Net income (loss) $ 1,680 $ 1,174 $ 78 $ (867) $ (1,290)
========== =========== ========== ========== ==========
CONSOLIDATED BALANCE SHEET DATA (AT END OF PERIOD):
Total assets $ 358,600 $ 243,067 $ 201,118 $ 120,531 $ 58,386
Total investment securities 79,707 54,313 38,988 26,370 14,459
Total loans 227,848 157,905 122,832 70,538 32,427
Allowance for loan losses 2,626 1,963 1,356 985 385
Deposits 297,914 203,234 170,148 98,309 46,630
Shareholders' equity 19,355 17,394 15,999 15,705 11,433
Weighted average shares outstanding 1,868 1,831 1,820 1,498 1,403
PER SHARE DATA:
Basic net income (loss) per common share (1) $ 0.90 $ 0.64 $ 0.04 $ (0.58) $ (0.92)
Cash dividends declared 0 0 0 0 0
Book value (2) $ 10.14 $ 9.18 $ 8.78 $ 8.75 $ 8.08
OTHER STATISTICS AND OPERATING DATA:
Return on average assets 0.6% 0.5% 0.1% (1.0)% (3.3)%
Return on average equity 9.3% 7.7% 0.5% (7.7)% (10.8)%
Net interest margin (3) 3.0% 3.1% 3.1% 3.4% 3.6%
Average loans to average deposits 74.6% 74.7% 69.7% 66.1% 77.9%
Allowance for loan losses to loans at end of period 1.2% 1.2% 1.1% 1.4% 1.2%
Allowance for loan losses to non-performing loans N/A 1846.7% 1639.8% N/A N/A
Non-performing loans to loans at end of period 0.0% 0.1% 0.1% N/A N/A
Net charge-offs to average loans 0.0% 0.0% 0.1% N/A N/A
Number of offices 5 4 4 3 1
Number of full and part-time employees 96 77 58 47 28
Number of Shareholders of Record 579 567 549 542 436
CAPITAL RATIOS:
Average shareholders' equity to average assets 5.9% 7.0% 9.2% 12.8% 30.8%
Equity to Assets 5.4% 7.2% 8.0% 13.0% 19.7%
Total risk-based capital ratio (Bank Only) 9.3% 11.4% 12.7% 18.1% 31.6%
</TABLE>
(1) Based upon weighted average shares outstanding during the period.
(2) Based on Common Stock outstanding at the end of the period.
(3) Net interest income as a percentage of average interest-earning assets.
11
<PAGE>
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE CORPORATION RELATES TO THE YEARS
ENDED DECEMBER 31, 1998 AND 1997 AND SHOULD BE READ IN CONJUNCTION WITH THE
CORPORATION'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED
ELSEWHERE HEREIN.
RESULTS OF OPERATIONS
Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997
The Corporation's results of operations depend primarily on the level of its net
interest income, its non-interest income and its operating expenses. Net
interest income depends on the volume of and rates associated with interest
earning assets and interest bearing liabilities which results in the net
interest spread. The Corporation had net income of $1,680,346 for the year ended
December 31, 1998 compared to net income of $1,174,128 for the year ended
December 31, 1997. This change is primarily due to the growth of the Bank
allowing for more interest earning assets and net interest income compared to
the same period during 1997, thereby offsetting more of the operating expenses.
The Bank experienced exceptional growth during 1998. Total assets increased
$115,533,393 or 47.5% from $243,066,708 for the year ended December 31, 1997 to
$358,600,101 for the year ended December 31, 1998. This growth is in part due to
the local merger of Bank One with NBD and the entrance of Union Planters to the
Indianapolis market.
Net Interest Income
Net interest income increased $2,092,937 or 31.7% to $8,685,236 for the year
ended December 31, 1998, from $6,592,299 for the year ended December 31, 1997.
Total interest income increased $5,454,459 for the year ended December 31, 1998
to $21,051,778 from $15,597,319 for the year ended December 31, 1997. This
increase is primarily a result of average total loans for the year ended
December 31, 1998 being approximately $190,000,000 compared to average total
loans of approximately $139,000,000 for the year ended December 31, 1997. The
loan portfolio produces the highest yield of all earning assets. Investment
portfolio income increased $1,032,110 or 31.7% to $4,284,039 for the year ended
December 31, 1998, as compared to $3,251,929 for the year ended December 31,
1997. This increase is primarily a result of the increase in the average
investment securities portfolio from approximately $54,000,000 for the year
ended December 31, 1997, to approximately $74,000,000 for the year ended
December 31, 1998. Interest on federal funds sold increased due to an increase
in average federal funds sold of approximately $11,000,000 for the year ended
December 31, 1998 over the same period the previous year.
Total interest expense increased $3,361,522 or 37.3% to $12,366,542 for the year
ended December 31, 1998, from $9,005,020 for the year ended December 31, 1997.
This increase is due to an increase in interest bearing deposits and advances
from FHLB. Total interest bearing liabilities averaged approximately
$249,000,000 for the year ended December 31, 1998 as compared to approximately
$174,000,000 for the year ended December 31, 1997. The average cost of interest
bearing liabilities at December 31, 1998, was approximately 5.0% as compared to
average cost of interest bearing liabilities of approximately 5.1% at December
31, 1997. The rate decrease was due to the run off of higher priced deposits
being replaced by lower priced deposits.
12
<PAGE>
The following table details average balances, interest income/expense and
average rates/yields for the Bank's earning assets and interest bearing
liabilities for the years ended December 31, 1998 and 1997 (in 000's):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Interest Average Interest Average Interest Average
Average Income/ Rate/ Average Income/ Rate/ Average Income/ Rate/
Balance Expense Yield Balance Expense Yield Balance Expense Yield
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Federal Funds $ 28,681 $ 1,543 5.38% $ 17,340 $ 953 5.50% $ 21,952 $ 1,166 5.31%
Investments 74,025 4,284 5.79 54,117 3,252 6.01 36,394 2,191 6.02
Loans (gross) 189,582 15,225 8.03 138,984 11,392 8.20 94,556 7,612 8.05
--------------------------------------------------------------------------------------------------
Total earning assets $ 292,288 $ 21,052 7.20% $ 210,441 $ 15,597 7.41% $ 152,902 $ 10,969 7.17%
Non-earning assets 14,194 9,734 7,607
----------- --------- ---------
Total assets $ 306,482 $ 220,175 $ 160,509
=========
Liabilities:
Interest bearing DDA $ 19,760 $ 438 2.21% $ 13,824 $ 323 2.34% $ 11,311 $ 261 2.31%
Savings 96,114 4,457 4.64 65,640 3,077 4.69 52,033 2,409 4.63
CD's under $100,000 58,410 3,406 5.83 44,513 2,629 5.91 27,611 1,656 6.00
CD's over $100,000 35,847 2,082 5.81 30,269 1,784 5.89 21,718 1,271 5.85
Individual Retirement Accounts 6,367 368 5.79 5,020 303 6.04 2,917 186 6.38
Repurchase Agreements 26,625 1,281 4.81 15,324 759 4.95 8,950 431 4.81
FHLB Advances 5,452 323 5.93 2,000 130 6.50 301 20 6.51
--------------------------------------------------------------------------------------------------
Total Interest
-bearing Liabilities $ 248,575 $ 12,355 4.97% $ 176,590 $ 9,005 5.10% $ 124,841 $ 6,234 4.99%
Non-Interest-bearing
Liabilities 37,635 26,872 20,027
Other Liabilities 2,244 1,369 947
----------- --------- ---------
Total Liabilities $ 288,454 $ 204,831 $ 145,815
Equity 18,028 15,344 14,694
---------
Total Liabilities & Equity $ 306,482 $ 220,175 $ 160,509
=========== ========= =========
Recap:
Interest Income $ 21,052 7.20% $ 15,597 7.41% $ 10,969 7.17%
Interest Expense 12,355 4.97 9,005 5.10 6,234 4.99
--------- -------- --------- ------- ---------- ---------
Net Interest
Income/ Spread $ 8,697 2.23 $ 6,592 2.31 $ 4,735 2.18
========= ========= ==========
Contribution of Non-
Interest-bearing funds 0.74 0.82 0.92
----------- --------- ---------
Net Interest Margin 2.98% 3.13% 3.10%
=========== ========= =========
</TABLE>
Average balances computed using daily actual balances.
13
<PAGE>
The following table sets forth an analysis of volume and rate changes in
interest income and interest expense of the Company's average earning assets and
average interest-bearing liabilities. The table distinguishes between the
changes related to average outstanding balances of assets and liabilities
(changes in volume holding the initial average interest rate constant) and the
changes related to average interest rates (changes in average rate holding the
initial average outstanding balance constant). The change in interest due to
both volume and rate has been allocated to volume and rate changes in proportion
to the relationship of the absolute dollar amounts of the change in each.
Net Interest Income Changes Due to Volume and Rates (in 000's):
<TABLE>
<CAPTION>
Year Ended December 31
1998 Changes from 1997 1997 Changes from 1996 1996 Changes from 1995
Due to Due to Due to Due to Due to Due to
Net Change Rate Volume Net Change Rate Volume Net Change Rate Volume
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Federal funds sold $ 590 $ (20) $ 610 $ (213) $ 41 $ (254) $ 236 $ (96) $ 332
Investment Securities 1,032 (120) 1,152 1,061 (4) 1,065 1,013 (99) 1,112
Loans 3,833 (231) 4,064 3,780 138 3,642 3,468 (245) 3,713
---------------------------------------------------------------------------------------------
Total $ 5,455 $ (371) $ 5,826 $ 4,628 $ 175 $ 4,453 $ 4,717 $ (440) $ 5,157
Interest bearing liabilities:
Demand deposits $ 115 $ (17) $ 132 $ 62 $ 3 $ 59 $ 73 $ (48) $ 121
Savings deposits 1,380 (33) 1,413 668 30 638 948 (148) 1,096
Certificates of deposit
under $100,000 777 (33) 810 973 (25) 998 737 (56) 793
Certificates of deposit
over $100,000 298 (26) 324 513 9 504 662 (23) 685
Individual Retirement Accounts 65 (13) 78 117 (10) 127 79 1 78
Repurchase agreements 522 (21) 543 328 13 315 290 (15) 305
FHLB Advances 193 (11) 204 110 0 110 20 0 20
---------------------------------------------------------------------------------------------
Total $ 3,350 $ (154) $ 3,504 $ 2,771 $ 20 $ 2,751 $ 2,809 $ (289) $ 3,098
---------------------------------------------------------------------------------------------
Net change in Net Interest Income $ 2,105 $ (217) $ 2,322 $ 1,857 $ 155 $ 1,702 $ 1,908 $ (151) $ 2,059
=============================================================================================
</TABLE>
NOTE: Due to Rate Increase was calculated by taking the change in the rate
times prior year average balance.
Due to Volume Increase was calculated by taking the change in average
balance times the prior year rate.
14
<PAGE>
Provision for Loan Losses
- -------------------------
The amount charged to the provision for loan losses by the Bank is based on
management's evaluation as to the amounts required to maintain an allowance
adequate to provide for potential losses inherent in the loan portfolio. The
level of this allowance is dependent upon the total amount of past due and
non-performing loans, general economic conditions and management's assessment of
potential losses based upon internal credit evaluations of loan portfolios and
particular loans. Loans are entirely to borrowers in central Indiana.
During the year ended December 31, 1998, $680,000 was charged to the provision
for loan losses compared to $624,000 for the year ended December 31, 1997. At
December 31, 1998, the allowance was $2,626,279 or 1.2% of total loans. This
compares to an allowance of $1,963,040 or 1.2% as of December 31, 1997. A total
of $16,761 was charged-off for the year ended December 31, 1998 compared to a
total of $16,760 for the year ended December 31, 1997.
Other Operating Income
- ----------------------
Other operating income for the year ended December 31, 1998, increased $743,848
or 57.3% to $2,041,044 from $1,297,196 for the year ended December 31, 1997. The
increase is primarily due to an increase in trust fees of $232,332 or 32.7% from
$710,543 for the year ended December 31, 1997 to $942,875 for the year ended
December 31, 1998. The increase in trust income is attributable to the increase
in total assets under trust administration of approximately $108,800,000 from
approximately $280,800,000 at December 31, 1997 to approximately $389,600,000 at
December 31, 1998. Also contributing to the increase in other operating income
was the increase in the gain on the sale of mortgages of $118,638 or 140.0% from
$84,716 for the year ended December 31, 1997 compared to $203,354 for the year
ended December 31, 1998.
Other Operating Expenses
- ------------------------
Other operating expenses for the year ended December 31, 1998 increased
$2,077,067 or 34.1% to $8,168,434 from $6,091,367 for the year ended December
31, 1997. Salaries, wages and employee benefits increased $1,199,219 or 35.2% to
$4,602,132 for the year ended December 31, 1998 from $3,402,913 for the year
ended December 31, 1997. This increase is primarily due to the increase in the
number of employees from 71 full time equivalents at December 31, 1997 to 89
full time equivalents at December 31, 1998. Net occupancy expense increased
$142,638 for the year ended December 31, 1998 over the same period the previous
year primarily due to the additional expense related to the purchase of the
building at 107 North Pennsylvania Street and the opening of the new branch at
4930 North Pennsylvania Street in March 1998. Furniture and equipment expense
increased $98,599 for the year ended December 31, 1998 over the same period the
previous year primarily due the opening of the new branch located at 4930 North
Pennsylvania Street. Professional services expense increased $93,327 or 27.3%
from $341,883 for the year ended December 31, 1997 to $435,210 for the year
ended December 31, 1998. Data processing expenses increased $91,092 for the year
ended December 31, 1998 over the same period the previous year primarily due to
increased service bureau fees relating to increased transaction activity by the
Bank and trust department.
Tax (Benefit)/Expense
- ---------------------
The Corporation applies a federal income tax rate of 34% and a state tax rate of
8.5% in the computation of tax expense or benefit. For the year ended December
31, 1998, the provision for income taxes consisted of current tax expense of
$1,068,011, a deferred tax benefit of $316,944 and a benefit of $553,567 from
the reduction of the valuation allowance for deferred tax assets.
The Corporation has total deferred tax assets of $1,295,488 as of December 31,
1998. The deferred tax assets represent primarily a temporary difference for the
recognition of the allowance for loan losses.
15
<PAGE>
EFFECTS OF INFLATION
Inflation can have a significant effect on the operating results of all
industries. This is especially true in industries with a high proportion of
fixed assets and inventory. However, management believes that these factors are
not as critical in the banking industry. Inflation does, however, have an impact
on the growth of total assets and the need to maintain a proper level of equity
capital.
Interest rates are significantly affected by inflation, but it is difficult to
assess the impact since neither the timing nor the magnitude of the changes in
the various inflation indices coincides with changes in interest rates. There
is, of course, an impact on longer-term earning assets; however, this effect
continues to diminish as investment maturities are shortened and
interest-earning assets and interest-bearing liabilities shift from fixed rate,
long-term to rate-sensitive, short-term.
LIQUIDITY AND INTEREST RATE SENSITIVITY
The Corporation must maintain an adequate liquidity position in order to respond
to the short-term demand for funds caused by withdrawals from deposit accounts,
extensions of credit and for the payment of operating expenses. Maintaining this
position of adequate liquidity is accomplished through the management of a
combination of liquid assets; those which can be converted into cash and access
to additional sources of funds. Primary liquid assets of the Corporation are
cash and due from banks, federal funds sold, investments held as "available for
sale" and maturing loans. Federal funds sold represent the Corporations primary
source of immediate liquidity and were maintained at a level adequate to meet
immediate needs. Federal funds averaged approximately $29,000,000 and
$17,000,000 for the twelve months ended December 31, 1998 and 1997,
respectively. Maturities in the Corporation's loan and investment portfolios are
monitored regularly to avoid matching short-term deposits with long-term loans
and investments. Other assets and liabilities are also monitored to provide the
proper balance between liquidity, safety, and profitability. This monitoring
process must be continuous due to the constant flow of cash which is inherent in
a financial institution.
The Corporation actively manages its interest rate sensitive assets and
liabilities to reduce the impact of interest rate fluctuations. At December 31,
1998, the Corporation's rate sensitive liabilities exceeded rate sensitive
assets due within one year by $32,581,749.
The purpose of the Bank's Investment Committee is to manage and balance interest
rate risk, to provide a readily available source of liquidity to cover deposit
runoff and loan growth, and to provide a portfolio of safe, secure assets of
high quality that generate a supplemental source of income in concert with the
overall asset/liability policies and strategies of the Bank.
The Bank holds securities of the U.S. Government and its agencies along with
asset-backed securities and Federal Home Loan Bank and Federal Reserve Bank
stock. In order to properly manage market risk, credit risk and interest rate
risk, the Bank has guidelines it must follow when purchasing investments for the
portfolio and adherence to these policy guidelines are reported monthly to the
board of directors.
A significant portion of the Bank's investment securities consist of
asset-backed securities and collateralized mortgage obligations. The Bank limits
the level of these securities that can be held in the portfolio to a specified
percentage of total average assets. Also, asset-backed securities collateralized
by receivables other than mortgages will not have a stated final maturity
greater than seven years. In addition, only credit card receivables or
mortgage-related securities rated "AA" or better by Standard & Poor's, or an
equivalent rating by another rating agency, will be purchased.
All mortgage-related securities must pass the FFIEC "stress" test. This stress
test determines if price volatility under a 200 basis point interest rate shock
for each security exceeds a benchmark 30 year mortgage-backed security. If the
security fails the test, it is considered high risk and the Bank will not
purchase it. All mortgage-related securities purchased and included in the
investment portfolio will be subject to the FFIEC test as of December 31 each
year to determine if they have become high risk holdings. If a mortgage-related
security becomes high risk, it will be evaluated by the Bank's Investment
Committee to determine if the security should be liquidated. At December 31,
1998, the Bank held one high risk mortgage-related security.
16
<PAGE>
As of December 31, 1998, the average yield on the Bank's investment portfolio is
as follows:
U.S. Treasuries 5.70%
U.S. Government agencies 5.43%
Collateralized mortgage obligations 6.65%
Asset-backed securities 5.63%
Other securities 5.60%
With the exception of securities of the U.S. Government and U.S. Government
agencies and corporations, the Corporation had no other securities with a book
or market value greater than 10% of shareholders' equity as of December 31,
1998.
The following is a summary of available-for-sale securities and held-to-maturity
securities:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
----------------------------------------------------------------------
Gross Gross Estimated
AMORTIZED Unrealized Unrealized Fair
COST Gain Loss Value
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1998
U.S. Treasury securities $ 6,496,513 $ 9,775 $ (6,428) $ 6,499,860
U.S. Government agencies 42,175,157 678 (22,534) 42,153,301
Collateralized mortgage obligations 15,984,303 13,252 (73,043) 15,924,512
Asset-backed securities 2,850,000 1,000 - 2,851,000
----------------------------------------------------------------------
$ 67,505,973 $ 24,705 $ (102,005) $ 67,428,673
======================================================================
DECEMBER 31, 1997
U.S. Treasury securities $ 3,470,956 $ 23,424 $ - $ 3,494,380
U.S. Government agencies 28,120,198 4,369 (25,832) 28,098,734
Collateralized mortgage obligations 6,404,920 2,833 (8,133) 6,399,620
Asset-backed securities 2,850,000 3,787 - 2,853,788
----------------------------------------------------------------------
$ 40,846,074 $ 34,413 $ (33,965) $ 40,846,522
======================================================================
DECEMBER 31, 1996
U.S. Treasury securities $ 4,423,366 $ 55,919 $ - $ 4,479,285
U.S. Government agencies 14,643,182 21,493 (4,507) 14,660,168
Collateralized mortgage obligations 6,969,805 17,167 - 6,986,972
Asset-backed securities 2,850,000 5,376 - 2,855,376
----------------------------------------------------------------------
$ 28,886,353 $ 99,955 $ (4,507) $ 28,981,801
======================================================================
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
HELD-TO-MATURITY SECURITIES
----------------------------------------------------------------------
Gross Gross Estimated
AMORTIZED Unrealized Unrealized Fair
COST Gain Loss Value
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1998
Collateralized mortgage obligations $ 10,839,214 $ 75,600 $ (333) $ 10,914,481
Other securities 125,000 4,488 - 129,488
----------------------------------------------------------------------
$ 10,964,214 $ 80,088 $ (333) $ 11,043,969
======================================================================
DECEMBER 31, 1997
Collateralized mortgage obligations $ 12,198,686 $ 155,089 $ (1,287) $ 12,352,488
Other securities 100,000 3,834 - 103,834
----------------------------------------------------------------------
$ 12,298,686 $ 158,923 $ (1,287) $ 12,456,322
======================================================================
DECEMBER 31, 1996
Collateralized mortgage obligations $ 9,042,711 $ 68,185 $ (809) $ 9,110,087
Other securities 75,000 1,583 - 76,583
----------------------------------------------------------------------
$ 9,117,711 $ 69,768 $ (809) $ 9,186,670
======================================================================
</TABLE>
As part of managing liquidity, the Corporation monitors its loan to deposit
ratio on a daily basis. At December 31, 1998 the ratio was 76.5 percent which is
within the Corporation's acceptable range.
18
<PAGE>
The following table shows the composition of the Bank's loan portfolio as of the
dates indicated (in 000's):
<TABLE>
<CAPTION>
December 31,
1998 1997 1996 1995 1994
% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TYPES OF LOANS
Commercial $ 102,427 45.0 % $ 78,855 49.9 % $ 55,678 45.3 % $ 34,881 49.4 % $ 19,155 59.1 %
Construction 5,347 2.3 2,174 1.4 1,784 1.5 2,375 3.4 0 0.0
Commercial Mortgage 21,990 9.7 3,624 2.3 3,017 2.5 3,403 4.8 400 1.2
Residential Mortgage 86,095 37.8 62,666 39.7 56,455 46.0 28,403 40.3 11,966 36.9
Installment 1,607 0.7 1,326 0.8 836 0.7 679 1.0 382 1.2
Credit Card 1,179 0.5 860 0.5 793 0.6 541 0.8 355 1.1
Other 9,202 4.0 8,400 5.4 4,269 3.4 256 0.3 169 0.5
----------------------------------------------------------------------------------------------------------------
Total-Gross 227,847 100.0 % 157,905 100.0 % 122,832 100.0 % 70,538 100.0 % 32,427 100.0 %
======= ======= ======= ======= ========
Allowance (2,626) (1,963) (1,356) (985) (385)
----------- ----------- ----------- ---------- ----------
Total-Net $ 225,221 $ 155,942 $ 121,476 $ 69,553 $ 32,042
=========== =========== =========== ========== ==========
</TABLE>
19
<PAGE>
The following table shows the composition of the commercial loan category by
industry type at December 31, 1998 (in $000's):
Type Amount Percentage
- ---- ------ ----------
Agri/Forestry $ 128 0.1 %
Construction 330 0.3
Manufacturing 4,528 4.4
Transportation, Communication & Utilities 134 0.1
Wholesale Trade 4,393 4.3
Retail Trade 5,028 4.9
Finance, Insurance & Real Estate 27,239 26.6
Services 60,510 59.1
Public Administration 137 0.1
----------- ------------
$ 102,427 100.0 %
=========== ============
The allowance for loan losses is allocated to each loan category based on the
Bank's peer median charge off percentages by loan category added to actual
reserves maintained for non-performing or specifically identified loans needing
a reserve. Any remaining allowance is considered unallocated. The following
table shows the dollar amount of the allowance for loan losses using
management's estimate by loan category:
Loan Loss Reserve Allocation ($000):
December 31,
1998 1997 1996 1995 1994
-----------------------------------------------
Commercial $ 51 $ 181 $ 57 $ 73 $ 103
Construction 0 0 0 0 0
Commercial Mortgage 0 0 0 0 0
Residential Mortgage 2 0 0 0 0
Installment 0 4 2 1 1
Credit Card 0 5 4 4 0
Other 0 22 8 1 0
Unallocated 2,573 1,751 1,285 906 231
-----------------------------------------------
$ 2,626 $ 1,963 $ 1,356 $ 985 $ 335
===============================================
Management considers the present allowance to be appropriate and adequate to
cover losses inherent in the loan portfolio based on the current economic
environment. However, future economic changes cannot be predicted. Deterioration
in economic conditions could result in an increase in the risk characteristics
of the loan portfolio and an increase in the provision for loan losses.
20
<PAGE>
The following table presents a summary of non-performing assets ($000):
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
Amount % of Total Amount % of Total Amount % of Total Amount % of Total Amount % of Total
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-Accrual Loans
Commercial $ 0 0.0 % $ 57 63.3 % $ 84 100.0 % $ 0 0.0 % $ 0 0.0 %
Construction 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0
Commercial Mortgage 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0
Residential Mortgage 0 0.0 33 36.7 0 0.0 0 0.0 0 0.0
Installment 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0
Credit Card 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0
Other 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0
$ 0 0.0 % $ 90 100.0 % $ 84 0.0 % $ 0 0.0 % $ 0 0.0 %
=========================================================================================================
Loans 90 Days Past Due -
Still Accruing $ 0 $ 0 $ 418 $ 0 $ 0
</TABLE>
During 1998, the Corporation had one non-accrual commercial loan and recognized
no interest income on the loan. The loan was charged off in February 1998. If
the loan had been accruing, $2,041 in interest income would have been
recognized. Also, the Corporation had one non-accrual residential mortgage loan
and recognized no interest income on the loan. The loan was charged off in June
1998. If the loan had been accruing, $1,327 in interest income would have been
recognized.
During 1997, the Corporation had one non-accrual commercial loan and recognized
no interest income on the loan. If the loan had been accruing, $10,195 in
interest income would have been recognized. Also, the Corporation had one
non-accrual residential mortgage loan. A total of $943 was included in interest
income and if the loan had been accruing, an additional $806 would have been
recorded.
During 1996, the Corporation had one non-accrual commercial loan and recognized
$6,905 in interest income and would have recorded an additional $1,875 in
interest if the loan had been accruing. The Corporation generally stops accruing
interest on loans when payments of principal and/or interest is past due 90 days
or more. There were student loans in the amount of $418,000 that were past due
90 days or more and still accruing interest at December 31, 1996. This is due to
the fact that the loans are guaranteed by the government and loss of principal
and/or interest is remote.
The Corporation had no restructured loans due to troubled conditions of the
borrower in any of the years presented in the above table.
21
<PAGE>
The following table shows the composition of the Bank's deposit portfolio as of
the dates indicated (in 000's):
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
% of % of % of
Amount Total Amount Total Amount Total
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TYPES OF DEPOSITS
Demand Deposits $ 54,670 28.86% $ 33,601 28.90% $ 30,402 29.69%
MMDA/Savings 134,458 71.00 82,222 70.73 71,798 70.12
Individual Retirement Accounts 262 0.14 430 0.37 191 0.19
--------------------------------------------------------------
Total Demand Deposits 189,417 100.00% 116,253 100.00% 102,391 100.00%
Certificates of Deposit
Under $100,000 62,309 57.43 48,932 56.26 38,082 56.20
Over $100,000 39,657 36.55 32,769 37.67 25,716 37.95
Individual Retirement Accounts 6,531 6.02 5,280 6.07 3,959 5.85
--------------------------------------------------------------
Total Certificates of Deposit 108,497 100.00% 86,981 100.00% 67,757 100.00%
-------- -------- --------
Total Deposits $297,914 $203,234 $170,148
======== ======== ========
</TABLE>
The Corporation experienced an increase in cash and cash equivalents, its
primary source of liquidity, of $15,101,820 during 1998. The primary financing
activity for 1998 was deposit growth which provided net cash of $94,680,122.
Lending used $69,959,495 and increasing federal funds sold used $725,000. The
Corporation's management believes its liquidity sources are adequate to meet its
operating needs and does not know of any trends, events or uncertainties that
may result in a significant adverse effect on the Corporation's liquidity
position.
22
<PAGE>
The following table illustrates the projected maturities and the repricing
mechanisms of the major asset/liabilities categories of the Corporation as of
December 31, 1998, based on certain assumptions. No prepayment rate assumptions
have been made for the loan portfolio. Maturity and repricing dates for
investments have been projected by applying the assumptions set forth below to
contractual maturity and repricing dates.
<TABLE>
<CAPTION>
0-180 DAYS 181-365 1-2 YEARS 2-3 YEARS 3-5 YEARS 5+ YEARS NON-INTEREST TOTAL
DAYS EARNING/BEARING
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
- -----------------------------------------------------------------------------------------------------------------------------------
Fed Funds/Overnight Time 26,150,000 26,150,000
Investments 61,239,526 6,966,751 1,806,895 3,036,908 4,087,665 2,569,742 79,707,487
- -----------------------------------------------------------------------------------------------------------------------------------
Loans:
- -----------------------------------------------------------------------------------------------------------------------------------
Commercial & Industrial:
Fixed 5,302,004 4,137,025 7,256,268 4,950,224 4,672,549 1,389,933 0 27,708,003
Variable 36,857,608 36,857,608
- -----------------------------------------------------------------------------------------------------------------------------------
Loans Secured by Real Estate:
Fixed 3,521,163 2,686,644 5,351,063 5,181,863 8,326,300 17,770,586 0 42,837,619
Variable 32,523,901 2,836,538 3,168,532 6,187,523 17,607,120 21,570,569 83,894,183
- -----------------------------------------------------------------------------------------------------------------------------------
Other:
Fixed 690,292 568,869 932,339 866,974 1,390,637 8,490 206,628 4,714,229
Variable 23,054,553 8,781,547 31,836,100
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets 189,339,047 25,977,374 18,565,097 20,223,492 36,084,271 43,309,320 206,628 333,705,229
- -----------------------------------------------------------------------------------------------------------------------------------
Non-Interest Earning Assets 24,894,872 24,894,872
- -----------------------------------------------------------------------------------------------------------------------------------
Total Assets 358,600,101
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
0-180 Days 181-365 1-2 Years 2-3 Years 3-5 Years
Days
- ----------------------------------------------------------------------------------------------------
<S> <>C <C> <C> <C> <C>
Interest-Bearing Liabilities:
- ----------------------------------------------------------------------------------------------------
Demand Deposits 88,690
- ----------------------------------------------------------------------------------------------------
Interest-Bearing Demand 25,919,567
- ----------------------------------------------------------------------------------------------------
Savings Deposits
- ----------------------------------------------------------------------------------------------------
Money Market Accounts 106,832,118
- ----------------------------------------------------------------------------------------------------
Certificate of Deposits 27,954,718 25,761,214 9,644,138 2,166,915 1,429,664
- ----------------------------------------------------------------------------------------------------
Jumbo CD's 24,068,883 11,714,774 2,860,868 1,047,696 525,690
- ----------------------------------------------------------------------------------------------------
Repurchase Agreements 25,558,206
- ----------------------------------------------------------------------------------------------------
FHLB Advances 14,000,000
- ----------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 210,422,182 37,475,988 12,505,006 3,214,611 15,955,354
- ----------------------------------------------------------------------------------------------------
Non-Interest Bearing Liabilities
- ----------------------------------------------------------------------------------------------------
Shareholder's Equity
- ----------------------------------------------------------------------------------------------------
Total Liabilities and Shareholder's
Equity
- ----------------------------------------------------------------------------------------------------
Interest Sensitivity Gap per Period (21,083,135) (11,498,614) 6,060,091 17,008,881 20,128,917
====================================================================================================
Cumulative Interest Sensitivity (21,083,135) (32,581,749) (26,521,658) (9,512,777) 10,616,140
Gap
====================================================================================================
Interest Sensitivity Gap as a -6.32% -3.45% 1.82% 5.10% 6.03%
Percentage of Earning assets
====================================================================================================
Cumulative Sensitivity Gap as a
Percentage of Earning Assets -6.32% -9.76% -7.95% -2.85% 3.18%
====================================================================================================
5+ Years Non-Interest Total
Earning/Bearing
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-Bearing Liabilities:
- ---------------------------------------------------------------------------
Demand Deposits 54,581,318 54,670,008
- ---------------------------------------------------------------------------
Interest-Bearing Demand 25,919,567
- ---------------------------------------------------------------------------
Savings Deposits 1,732,668 1,732,668
- ---------------------------------------------------------------------------
Money Market Accounts 106,832,118
- ---------------------------------------------------------------------------
Certificate of Deposits 1,184,840 68,141,489
- ---------------------------------------------------------------------------
Jumbo CD's 400,000 40,617,911
- ---------------------------------------------------------------------------
Repurchase Agreements 25,558,206
- ---------------------------------------------------------------------------
FHLB Advances 14,000,000
- ---------------------------------------------------------------------------
Total Interest-Bearing Liabilities 1,584,840 56,313,986 337,471,967
- ---------------------------------------------------------------------------
Non-Interest Bearing Liabilities 1,772,702 1,772,702
- ---------------------------------------------------------------------------
Shareholder's Equity 19,355,432 19,355,432
- ---------------------------------------------------------------------------
Total Liabilities and Shareholder's
Equity 358,600,101
- ---------------------------------------------------------------------------
Interest Sensitivity Gap per Period 41,724,480 (52,340,620)
===========================================================================
Cumulative Interest Sensitivity 52,340,620 (0)
Gap
===========================================================================
Interest Sensitivity Gap as a 12.50% -15.68%
Percentage of Earning assets
===========================================================================
Cumulative Sensitivity Gap as a
Percentage of Earning Assets 15.68% 0.00%
===========================================================================
</TABLE>
24
<PAGE>
CAPITAL RESOURCES
The Corporation's only source of capital since commencing operations has been
from issuance of common stock and results of operations. It has not issued long
term debt nor does it have any long term debt facility arrangements. The Bank
has incurred indebtedness pursuant to FHLB advances as follows:
Amount Rate Maturity
------ ---- --------
$ 2,000,000 6.40% 08/01/2001
6,000,000 5.66% 09/04/2003
3,000,000 5.39% 10/03/2005
3,000,000 5.55% 10/02/2005
------------
$14,000,000
The Bank may add indebtedness of this nature in the future if determined to be
in the best interest of the Bank. In late 1995, the Corporation increased its
common stock by approximately $5,000,000 with the sale of 400,000 shares.
Capital for the Corporation is above regulatory requirements at December 31,
1998. Pertinent capital ratios for the Corporation as of December 31, 1998 are
as follows:
Minimum
Actual Requirements
------ -------------
Tier 1 risk-based capital ratio 8.3% 4.0%
Total risk-based capital ratio 9.5% 8.0%
Leverage ratio 5.5% 4.0%
Dividends from the Bank to the Corporation may not exceed the undivided profits
of the Bank (included in consolidated retained earnings) without prior approval
of a federal regulatory agency. In addition, Federal banking laws limit the
amount of loans the Bank may make to the Corporation, subject to certain
collateral requirements. No dividends were declared, or loans made, during 1998
or 1997 by the Bank to the Corporation.
FORWARD-LOOKING STATEMENTS
The sections that follow, Market Risk and Other, contain certain forward-looking
statements (as defined in the Private Securities Litigation Reform Act of 1995).
These forward-looking statements involve significant risks and uncertainties
including changes in general economic and financial market conditions, the
Corporation's ability to execute its business plans, including its plan to
address the Year 2000 issue, and the ability of third parties to effectively
address their Year 2000 issues. Although the Corporation believes the
expectations reflected in such forward-looking statements are reasonable, actual
results may differ materially.
MARKET RISK
Market risk is the risk of loss due to adverse changes in market prices and
rates. The Corporation's market risk arises primarily from interest rate risk
inherent in its lending and deposit taking activities. Management actively
monitors and manages its interest rate exposure.
The Corporation's profitability is affected by fluctuations in interest rates. A
sudden and substantial increase in interest rates may adversely impact the
Corporation's earnings to the extent that the interest rates earned by assets
and paid on liabilities do not change at the same speed, to the same extent, or
on the same basis. The Corporation monitors the impact of changes in interest
rates on its net interest income. The Corporation attempts to maintain a
relatively neutral gap between earning assets a d liabilities at various time
intervals to minimize the effects of interest rate risk. The Corporation also
performs a 200 basis point upward interest rate shock and makes sure that there
is not an adverse impact on its annual net interest income.
25
<PAGE>
The following table shows the impact of a 200 basis upward shock on the
Corporation's Gap Report as of December 31, 1998 (in $000's):
<TABLE>
<CAPTION>
Current Cost/Revenue
Under 1 Year Over 1 Year Total
------------ ----------- -----
<S> <C> <C> <C>
Assets $14,211 $8,796 $23,007
Liabilities / Equity 11,112 1,949 13,061
--------- ------ -------
Net Interest Income $ 3,099 $6,847 $ 9,946
Shock Calculation Cost/Revenue
Under 1 Year Over 1 Year Total
------------ ----------- -----
Assets $17,196 $8,796 $25,992
Liabilities / Equity 14,475 1,949 16,424
------- ------ -------
Net Interest Income $ 2,721 $6,847 $ 9,568
Summary:
Net interest income - current $9,946
Net interest income - shocked 9,568
------
Change $ $ 378
Change % -3.95%
</TABLE>
OTHER
YEAR 2000
Many computer programs do not properly recognize a year that begins with "20"
instead of "19". If not corrected, many computer applications could fail or
create erroneous results. In the unlikely event that all phases of the Year 2000
program are not completed, the Bank could be materially adversely affected as a
result of not being able to process transactions related to its core business
activities. In addition, noncompliance by third parties (including loan
customers) and disruptions to the economy in general resulting from Year 2000
issues could also have a negative impact of undeterminable magnitude on The
National Bank of Indianapolis.
Management has completed an assessment of all its computer systems and software
and other operating equipment used in the daily operation of the Bank that could
be affected by the Year 2000. Management has established a plan to thoroughly
address the issues related to the Year 2000.
Management divided all computer systems and software and operating equipment
into two separate categories - Mission Critical and all other. Mission Critical
refers to computer systems and software and operating equipment that is the most
critical to the daily operation of the Bank. Assessment, remediation, and
testing of all mission critical computer systems and software and operating
equipment will be substantially completed by the end of March 1999. Assessment
and remediation of all non-mission critical computer systems and software and
operating equipment has been substantially completed with testing to be
completed by the end of June 1999.
Management is also working with significant loan customers to monitor the
progress of their Year 2000 efforts.
Management believes that it has an effective plan in place to resolve the Year
2000 issue in a timely manner. Regular status reports are made by Management to
the Bank's Board of Directors relating to Year 2000. The Corporation currently
has contingency plans in place in the event it does not complete all phases of
the Year 2000 program.
Since the Bank's main computer and software services are provided by outside
third-party vendors, the cost to make computer systems and software and
operating equipment Year 2000 compliant is estimated to be immaterial.
26
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
- -----------------------------
Report of Independent Auditors
Board of Directors
The National Bank of Indianapolis Corporation
We have audited the accompanying consolidated balance sheets of The National
Bank of Indianapolis Corporation as of December 31, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity and cash flows
for the years then ended. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The National Bank
of Indianapolis Corporation at December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
/S/ Ernst & Young LLP
Indianapolis, IN
January 29, 1999
27
<PAGE>
The National Bank of Indianapolis Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1998 1997
----------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 26,547,970 $ 11,446,150
Federal funds sold 16,150,000 15,425,000
Available-for-sale securities 67,428,673 40,846,522
Held-to-maturity securities 10,964,214 12,298,686
----------------------------------------
Total investment securities 78,392,887 53,145,208
Loans 227,847,742 157,905,008
Less: Allowance for loan losses (2,626,279) (1,963,040)
----------------------------------------
Net loans 225,221,463 155,941,968
Premises and equipment 7,124,929 3,707,907
Accrued interest 1,774,536 1,685,761
Stock in federal banks 1,314,600 1,168,000
Other assets 2,073,716 546,714
----------------------------------------
Total assets $ 358,600,101 $ 243,066,708
========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits $ 54,670,008 $ 33,601,383
Money market and saving deposits 134,746,677 82,651,421
Time deposits over $100,000 40,617,911 33,384,744
Other time deposits 67,879,165 53,596,091
----------------------------------------
Total deposits 297,913,761 203,233,639
Security repurchase agreements 25,558,206 19,341,555
FHLB advances 14,000,000 2,000,000
Other liabilities 1,772,702 1,097,267
----------------------------------------
Total liabilities 339,244,669 225,672,461
Shareholders' equity:
Common stock, no par value:
Authorized shares - 1998 and 1997 - 3,000,000
Issued and outstanding shares; 1998 - 1,908,279;
1997-1,901,433 19,747,320 19,661,133
Unearned compensation (460,394) (699,942)
Retained earnings (deficit) 112,954 (1,567,392)
Accumulated other comprehensive income (44,448) 448
----------------------------------------
Total shareholders' equity 19,355,432 17,394,247
----------------------------------------
Total liabilities and shareholders' equity $ 358,600,101 $ 243,066,708
========================================
</TABLE>
See accompanying notes.
28
<PAGE>
The National Bank of Indianapolis
Corporation
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1998 1997
--------------------------------------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 15,224,821 $ 11,392,221
Interest on investment securities 4,284,039 3,251,929
Interest on federal funds sold 1,542,918 953,169
--------------------------------------------
Total interest income 21,051,778 15,597,319
Interest expense:
Interest on deposits 10,751,116 8,116,427
Interest on repurchase agreements 1,281,340 758,815
Interest on FHLB advances 323,215 129,778
Other 10,871 -
--------------------------------------------
Total interest expense 12,366,542 9,005,020
--------------------------------------------
Net interest income 8,685,236 6,592,299
Provision for loan losses 680,000 624,000
--------------------------------------------
Net interest income after provision for loan losses 8,005,236 5,968,299
Other operating income:
Trust fees and commissions 942,875 710,543
Service charges and fees on deposit accounts 318,593 239,040
Net gain on sale of mortgage loans 203,354 84,716
Other income 576,222 262,897
--------------------------------------------
Total other operating income 2,041,044 1,297,196
Other operating expenses:
Salaries, wages and employee benefits 4,602,132 3,402,913
Net occupancy expense 651,269 508,631
Furniture and equipment expense 537,216 438,617
Professional services 435,210 341,883
Data processing 460,172 369,080
Other expenses 1,482,435 1,030,243
--------------------------------------------
Total other operating expenses 8,168,434 6,091,367
--------------------------------------------
Net income before tax 1,877,846 1,174,128
Federal and state income tax 197,500 -
--------------------------------------------
Net income after tax $ 1,680,346 $ 1,174,128
============================================
Basic earnings per share $0.90 $0.64
============================================
Diluted earnings per share $0.84 $0.61
============================================
</TABLE>
See accompanying notes.
29
<PAGE>
The National Bank of Indianapolis
Corporation
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
ACCUMULATED
RETAINED AND OTHER
COMMON UNEARNED EARNINGS COMPREHENSIVE
STOCK COMPENSATION (DEFICIT) INCOME TOTAL
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $18,645,376 $ $(2,741,520) $ 95,448 $ 15,999,304
Comprehensive income:
Net income - - 1,174,128 - 1,174,128
Other comprehensive income
Net unrealized loss on
investments - - - (95,000) (95,000)
------------
Total comprehensive income - - - - 1,079,128
Issuance of stock (79,658 shares) 1,015,757 (849,465) - - 166,292
Compensation earned - 149,523 - - 149,523
----------------------------------------------------------------------------
Balance at December 31, 1997 19,661,133 (699,942) (1,567,392) 448 17,394,247
Comprehensive income:
Net income - - 1,680,346 - 1,680,346
Other comprehensive income
Net unrealized loss on
investments, net of tax
of $32,852 - - - (44,896) (44,896)
------------
Total comprehensive income - - - - 1,635,450
Issuance of stock (6,846 shares) 86,187 (14,000) - - 72,187
Compensation earned - 253,548 - - 253,548
----------------------------------------------------------------------------
Balance at December 31, 1998 $19,747,320 $(460,394) $ 112,954 $ (44,448) $ 19,355,432
============================================================================
</TABLE>
See accompanying notes
30
<PAGE>
The National Bank of Indianapolis
Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31
1998 1997
---------------------------------------
<S> <C> <C>
Operating activities
Net income $ 1,680,346 $ 1,174,128
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 680,000 624,000
Depreciation and amortization 608,624 513,197
Net accretion of investments (714,539) (436,467)
Increase (decrease) in:
Interest receivable (88,775) (488,251)
Other assets (1,494,150) (117,241)
Increase (decrease) in:
Other liabilities 675,435 109,603
---------------------------------------
Net cash provided by operating activities 1,346,941 1,378,969
INVESTING ACTIVITIES
Net change in federal funds sold (725,000) 5,250,000
Proceeds from maturities of investment securities held to
maturity 2,369,193 5,130,350
Proceeds from maturities of investment securities
available for sale 84,204,222 50,497,348
Purchases of investment securities held to maturity (1,117,056) (8,571,759)
Purchases of investment securities available for sale (110,213,847) (62,040,168)
Net increase in loans (69,959,495) (35,090,195)
Purchases of premises and equipment (4,025,646) (644,987)
---------------------------------------
Net cash used by investing activities (99,467,629) (45,469,411)
FINANCING ACTIVITIES
Net increase in deposits 94,680,122 33,085,577
Increase in security repurchase agreements 6,216,651 7,358,206
Increase in FHLB borrowings 12,000,000 -
Proceeds from issuance of stock 325,735 315,815
---------------------------------------
Net cash provided by financing activities 113,222,508 40,759,598
---------------------------------------
Increase (decrease) in cash and cash equivalents 15,101,820 (3,330,844)
Cash and cash equivalents at beginning of year 11,446,150 14,776,994
---------------------------------------
Cash and cash equivalents at end of year $ 26,547,970 $ 11,446,150
=======================================
Interest paid $ 12,221,455 $ 8,932,800
=======================================
Income taxes paid $ 1,304,090 $ 72,147
=======================================
</TABLE>
See accompanying notes.
31
<PAGE>
The National Bank of Indianapolis
Corporation
Notes to Consolidated Financial Statements
December 31, 1998
1. ORGANIZATION AND ACCOUNTING POLICIES
ORGANIZATION
The National Bank of Indianapolis Corporation (the Corporation) was incorporated
in the State of Indiana on January 29, 1993. The Corporation subsequently formed
a de novo national bank, The National Bank of Indianapolis (the Bank). The Bank
is a wholly owned subsidiary and commenced operations in December, 1993. The
Corporation and the Bank engage in a wide range of commercial, personal banking
and trust activities primarily in Central Indiana.
The consolidated financial statements include the accounts of the Corporation
and the Bank with intercompany balances and transactions eliminated.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and interest-bearing deposits.
Interest-bearing deposits are available on demand.
INVESTMENT SECURITIES
Investments in debt securities are classified as held-to-maturity or
available-for-sale. Management determines the appropriate classification of the
securities at the time of purchase and reevaluates such designation as of each
balance sheet date.
Debt securities are classified as held-to-maturity when the Corporation has the
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost.
Debt securities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are stated at fair value, with
the unrealized gains and losses, net of tax, reported as a separate component of
shareholders' equity.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization is included in interest income
from investments and is computed using a method which approximates the
level-yield method. Interest and dividends are included in interest income from
investments. Realized gains and losses, and declines in value judged to be
other-than-temporary are included in net securities gains (losses). The cost of
securities sold is based on the specific identification method.
32
<PAGE>
LOANS
Interest income on commercial, mortgage and certain installment loans is accrued
on the principal amount of such loans outstanding. Loans are placed on
nonaccrual status when significant doubt exists as to the collectibility of
principal or interest.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through provisions for loan losses
charged against income. Loans deemed to be uncollectible are charged against the
allowance for loan losses, and subsequent recoveries, if any, are credited to
the allowance. The allowance for loan losses related to loans that are
identified as impaired is based on discounted cash flows using the loan's
initial effective interest rate, or the fair value of the collateral for certain
collateral dependent loans. The Corporation collectively evaluates consumer
loans and loans secured by real estate for impairment as homogeneous loan
groups.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses in the loan portfolio. The determination
of the allowance is based on factors which, in management's judgment, deserve
recognition under existing economic conditions in estimating possible loan
losses. This evaluation is inherently subjective as it requires material
estimates including the amounts and timing of future cash flows expected to be
received on impaired loans that may be susceptible to significant change. The
allowance is increased by provisions for loan losses charged against income and
reduced by net charge-offs.
MORTGAGE SERVICING RIGHTS
Mortgage servicing rights are carried at their relative fair value and
separately from the loan asset. They are expensed in correlation to estimated
net servicing revenues. The capitalized mortgage servicing rights are assessed
for impairment based on the fair value of those rights.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation computed
by the straight-line method over their useful lives or, for leasehold
improvements, the remaining lease term.
STOCK BASED COMPENSATION
The Corporation grants stock options for a fixed number of shares to directors
and employees with an exercise price which approximates the fair value of shares
at the date of grant. Expense for director and employee compensation under stock
option plans is based on Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," (APB 25), with expense reported only if options
are granted below market price at grant date. Pro forma disclosures of net
income and earnings per share are provided as if the fair value method of
Financial Accounting Standard No. 123 were used for stock-based compensation.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of financial instruments are estimated using relevant market
information and other assumptions. Fair value estimates involve uncertainties
and matters of significant judgment concerning several factors, especially in
the absence of broad markets for particular items.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants, and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share.
33
<PAGE>
RECLASSIFICATIONS
Certain amounts in the 1997 financial statements have been reclassified to
conform with the 1998 presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
RECENT ACCOUNTING AND REPORTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" which
established standards for the reporting and display of comprehensive income and
its components in a full set of comparative general-purpose financial
statements. The statement became effective for the Corporation in 1998.
Comprehensive income is defined in this statement as net income plus other
comprehensive income, which, under existing accounting standards includes
foreign currency items, minimum pension liability adjustments and unrealized
gains and losses on certain investments in debt and equity securities.
Comprehensive income is reported by the Corporation in the consolidated
statements of shareholders' equity.
2. RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
The Corporation is required to maintain average reserve balances with the
Federal Reserve Bank or as cash on hand or on deposit with a correspondent bank.
The required amount of reserve was approximately $25,000 and $1,081,000 at
December 31, 1998 and 1997, respectively.
3. INVESTMENT SECURITIES
The following is a summary of available-for-sale securities and held-to-maturity
securities:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
----------------------------------------------------------------------
Gross Gross Estimated
AMORTIZED Unrealized Unrealized Fair
COST Gain Loss Value
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1998
U.S. Treasury securities $ 6,496,513 $ 9,775 $ (6,428) $ 6,499,860
U.S. Government agencies 42,175,157 678 (22,534) 42,153,301
Collateralized mortgage obligations 15,984,303 13,252 (73,043) 15,924,512
Asset-backed securities 2,850,000 1,000 - 2,851,000
----------------------------------------------------------------------
$67,505,973 $24,705 $(102,005) $67,428,673
======================================================================
December 31, 1997
U.S. Treasury securities $ 3,470,956 $23,424 $ - $ 3,494,380
U.S. Government agencies 28,120,198 4,369 (25,832) 28,098,734
Collateralized mortgage obligations 6,404,920 2,833 (8,133) 6,399,620
Asset-backed securities 2,850,000 3,787 - 2,853,788
======================================================================
$40,846,074 $34,413 $(33,965) $40,846,522
======================================================================
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
HELD-TO-MATURITY SECURITIES
----------------------------------------------------------------------
Gross Gross Estimated
AMORTIZED Unrealized Unrealized Fair
COST Gain Loss Value
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1998
Collateralized mortgage obligations $10,839,214 $75,600 $(333) $10,914,481
Other securities 125,000 4,488 - 129,488
----------------------------------------------------------------------
$10,964,214 $80,088 $(333) $11,043,969
======================================================================
December 31, 1997
Collateralized mortgage obligations $12,198,686 $155,089 $(1,287) $12,352,488
Other securities 100,000 3,834 - 103,834
----------------------------------------------------------------------
$12,298,686 $158,923 $(1,287) $12,456,322
======================================================================
</TABLE>
There were no sales of investment securities in 1998 or 1997.
Investment securities with a carrying value of approximately $32,100,000 and
$22,110,000 at December 31, 1998 and 1997, respectively were pledged as
collateral for bankruptcy accounts to the U.S. Department of Justice, Treasury
Tax and Loan, and securities sold under agreements to repurchase.
The amortized cost and estimated fair value of debt and marketable equity
securities at December 31, 1998, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because the issuers
of the securities may have the right to prepay obligations without prepayment
penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
-----------------------------------
<S> <C> <C>
Available-for-Sale
Due in one year or less $49,426,117 $49,411,375
Due after one year through five years 18,079,856 18,017,298
-----------------------------------
$67,505,973 $67,428,673
===================================
Held-to-Maturity
Due after five years through ten years $ 125,000 $ 129,488
Collateralized mortgage obligations 10,839,214 10,914,481
-----------------------------------
$10,964,214 $11,043,969
===================================
</TABLE>
4. Loans and Loan Commitments
Loans consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------
<S> <C> <C>
Loans secured by real estate $126,731,804 $ 80,823,913
Commercial and industrial loans 64,559,573 58,248,447
Loans to individuals for household, family, and other
consumer expenditures 36,556,365 18,832,648
-----------------------------------
Total loans $227,847,742 $157,905,008
===================================
</TABLE>
In the normal course of business, the Corporation has outstanding letters of
credit and loan commitments to meet the financing needs of its customers. At
December 31, 1998 and 1997, unused loan commitments totaled approximately
$79,746,309 and $70,926,833, respectively. Since some of these commitments are
expected to expire without being drawn upon, the outstanding amounts do not
necessarily represent future cash requirements.
35
<PAGE>
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------
<S> <C> <C>
Beginning balance $1,963,040 $1,355,800
Loans charged off (net) (16,761) (16,760)
Provision for loan losses 680,000 624,000
-----------------------------------
Ending balance $2,626,279 $1,963,040
===================================
</TABLE>
No loans were determined to be impaired at December 31, 1998. At December 31,
1997 two loans with a combined balance of $74,000 were considered to be
impaired. The average balance of impaired loans during 1998 and 1997 was
immaterial.
Loans are entirely to borrowers in the Central Indiana area.
5. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------
<S> <C> <C>
Land and improvements $2,270,444 $ 1,789,444
Building and improvements 3,315,464 660,639
Construction in progress 53,945 62,758
Leasehold improvements 847,931 674,324
Furniture and equipment 2,824,693 2,099,665
-----------------------------------
9,312,477 5,286,830
Less accumulated depreciation and amortization (2,187,548) (1,578,923)
-----------------------------------
Net premises and equipment $7,124,929 $ 3,707,907
===================================
</TABLE>
The Corporation purchased the downtown office building which houses the main
office and was previously being leased from a third party on December 2, 1998
for $3,100,000.
Certain Corporation facilities and equipment are leased under various operating
leases. Rental expense under these leases was $309,255 and $246,996 for 1998 and
1997, respectively.
Future minimum rental commitments under noncancelable leases are:
1999 $ 92,834
2000 108,834
2001 108,452
2002 88,202
2003 84,088
Thereafter 337,415
----------------
$819,825
================
6. LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
mortgage loans serviced for others was $37,146,000 and $15,575,000 at December
31, 1998 and 1997, respectively.
36
<PAGE>
7. DEPOSITS
At December 31, 1998 the stated maturities of time deposits are as follows:
<TABLE>
<CAPTION>
Greater
Less than than
$100,000 $100,000
-----------------------------------
<S> <C> <C>
Mature in three months or less $ 8,827,911 $15,256,517
Mature after three months through six months 18,515,466 8,812,366
Mature after six months through twelve months 25,883,570 11,714,774
Mature in 2000 9,870,799 2,860,868
Mature in 2001 2,166,914 1,047,696
Thereafter 2,614,505 925,690
-----------------------------------
$67,879,165 $40,617,911
===================================
</TABLE>
8. OTHER BORROWINGS
Security repurchase agreements are short-term borrowings that generally mature
within one to three days from the transaction date. At December 31, 1998 and
1997 the weighted average interest rate on these borrowings was 4.83% and 5.05%,
respectively.
All of the FHLB advances have a fixed interest rate and require monthly interest
payments. The principal balances for each of the advances is due at maturity.
The advances are secured by a pledge covering certain of the Corporation's
mortgage loans and investment securities. A schedule of the FHLB advances is as
follows:
Amount Rate Maturity
- --------------------------------------------------------
$ 2,000,000 6.40% 8/1/2001
6,000,000 5.66% 9/4/2003
3,000,000 5.39% 10/3/2005
3,000,000 5.55% 10/2/2008
----------------
$ 14,000,000
================
9. STOCK OPTION AND EMPLOYEE BENEFIT PROGRAMS
The Board of Directors of the Corporation adopted stock option plans for
directors and key employees at the initial formation of the Bank in 1993. The
Board of Directors authorized 130,000 shares in 1993 and an additional 90,000
shares during 1996 to be reserved for issuance under the Corporation's stock
option plan. All of the options in these plans remain exercisable for a period
of 10 years from the date of issuance, subject to the terms and conditions of
the plans.
37
<PAGE>
9. STOCK OPTION AND EMPLOYEE BENEFIT PROGRAMS (CONTINUED)
Shares subject to outstanding options are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
-------------------------------------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
OPTIONS Price Options Price
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding at beginning
of year 175,400 $11.01 131,500 $10.29
New options granted 17,000 $14.82 47,500 $12.93
Options exercised (2,400) $10.00 (1,800) $10.00
Options forfeited - - (1,800) $10.00
Options outstanding at end of
year 190,000 $11.36 175,400 $11.01
============ ===========
Exercisable at year end 163,000 $11.09 128,600 $10.70
Weighted-average fair value of
options granted during the year
$ 5.74 $ 5.64
</TABLE>
As of December 31, 1998, total shares which may be purchased under the plans is
190,000 with option prices ranging from $10.00 to $15.00. The weighted-average
remaining contractual life of those options is 6.7 years.
The Board of Directors also approved a restricted stock plan in 1993. Shares
reserved by the Corporation for the restricted stock plan include 50,000 shares
in 1993 and an additional 20,000 shares during 1996. In 1994, the Corporation
issued 48,000 shares under this plan to employees subject to the terms and
conditions of the restricted plan. These restricted shares were originally
issued with a requirement that they would not vest unless a defined net income
level was achieved, and to the extent the restricted shares issued were not
vested by 2001, they would expire. During 1997, the restriction on these shares
was modified, eliminating the defined net income threshold and specifying a
vesting schedule of 50% as of July 1, 1998, and 25% as of July 1, 1999 and 2000.
As a result of the 1997 modification, the Corporation recorded the stock
issuance in shareholders' equity with an offsetting contra-equity account,
unearned compensation, equal to the fair market value of the shares at the date
of the modification of $611,000. The unearned compensation is being amortized
over the vesting period and the amortization is included in salaries and wages
expense.
In 1997 the Corporation issued 19,000 shares pursuant to the 1993 restricted
stock plan. These shares vest 20% per year beginning with the first vesting date
of January 1, 1998 and will be fully vested on January 1, 2002. The Corporation
recorded the stock issuance in shareholders' equity with an offsetting
contra-equity account, unearned compensation, in the amount of $238,465. The
unearned compensation is being amortized over the vesting period.
In consideration of their efforts in organizing the Corporation and the Bank,
two officers/directors of the Corporation were issued warrants on October 18,
1993 to purchase an additional 345,500 common shares. The warrants became
exercisable, subject to certain regulatory conditions and restrictions, on
October 18, 1994 and will remain exercisable for a period of ten years
thereafter at a purchase price of $10 per share. During 1995, the Corporation
issued warrants to purchase an additional 76,875 common shares at a purchase
price of $12.50 to one officer/director. The 1995 warrants expire on July 20,
2005.
38
<PAGE>
The Corporation has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its director and employee stock options,
restricted stock and warrants, because, as discussed below, the alternative fair
value accounting provided for under FASB Statement No. 123, "Accounting for
Stock-Based Compensation," requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because the
exercise price of the Corporation's director and employee stock options and
warrants equals the market price of the underlying stock on the date of grant,
no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
Statement 123, which also requires that the information be determined as if the
Corporation has accounted for its stock options, restricted stock and warrants
granted under the fair value method of that Statement. The fair value for the
options and warrants was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions: risk-free
interest rates of 6.56% and 5.89%; a dividend yield of 0%; volatility factor of
the expected market price of the Corporation's common stock of .001; and an
expected life of the options of 10 years. The fair value for the restricted
stock issued in 1994 was estimated to equal the fair value of unrestricted stock
and be restricted for a weighted average of six years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Corporation's director and employee stock options, restricted stock and
warrants have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
director and employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over their vesting periods. Also, for purposes of pro
forma disclosure, the estimated fair value of restricted stock issued in 1994 is
amortized to expense through June 30, 1998, when compensation was recorded for
these shares as a result of modifications of the restrictions. The Corporation's
pro forma information follows:
1998 1997
-----------------------------------
Pro forma net income $1,561,978 $1,047,828
Pro forma earnings per share:
Basic $ .84 $ .57
Diluted $ .78 $ .55
Effective January 1, 1994, the Corporation adopted a trusteed 401(k) retirement
savings plan covering substantially all employees and encouraging employee
contributions. Employer contributions include Board of Director discretionary
contributions and the matching of a portion of employee contributions. The
Corporation expensed approximately $55,000 and $39,000 for employer
contributions to the plan during 1998 and 1997, respectively.
10. DIVIDEND AND LOAN LIMITATION AND REGULATORY CAPITAL RATIOS
Dividends from the Bank to the Corporation may not exceed the undivided profits
of the Bank (included in consolidated retained earnings) without prior approval
of a federal regulatory agency. In addition, Federal banking laws limit the
amount of loans the Bank may make to the Corporation, subject to certain
collateral requirements. No dividends were declared, or loans made, during 1998
or 1997 by the Bank to the Corporation.
39
<PAGE>
The Federal Reserve Board has established standards for measuring capital
adequacy based on "risk-weighting" assets according to potential credit risk and
classifying capital into two tiers. At December 31, 1998, the Corporation's Tier
1 capital, consisting of shareholders' equity, was $19,399,880. Tier 2 capital,
which consists of the allowance for loan losses, amounted to $2,626,279. Total
qualifying capital, combining Tier 1 and Tier 2 capital, therefore, amounted to
$22,026,159 and risk-weighted assets (including off-balance sheet exposures)
totaled $232,998,683 against which Tier 1 and Tier 1 plus Tier 2 capital are
compared to determine risk-based capital ratios. The capital adequacy standards
also require a minimum leverage ratio which represents the ratio of total
qualifying capital to total adjusted assets.
As shown in the following table, the Corporation's regulatory capital ratios are
above minimum levels as of December 31, 1998 and 1997.
Minimum
ACTUAL Requirements
-----------------------------------
As of December 31, 1998
Tier 1 risk-based capital ratio 8.3% 4.0%
Total risk-based capital ratio 9.5 8.0
Leverage ratio 5.5 4.0
AS OF DECEMBER 31, 1997
Tier 1 risk-based capital ratio 10.8% 4.0%
Total risk-based capital ratio 12.1 8.0
Leverage ratio 7.3 4.0
11. RELATED PARTIES
Certain directors and principal shareholders of the Corporation, including their
families and companies in which they are principal owners, were loan customers
of and had other transactions with the Corporation or its subsidiary in the
ordinary course of business during 1998. The aggregate dollar amount of these
loans was approximately $4,917,128 and $2,590,841 on December 31, 1998 and 1997,
respectively. All of the loans made were on substantially the same terms,
including interest rate and collateral, as those prevailing at the time for
comparable transactions with unrelated parties. The amounts do not include loans
made in the ordinary course of business to companies in which officers or
directors of the Corporation are either officers or directors, but are not
principal owners, of such companies.
During 1998, new loans to these parties amounted to $2,496,977 and repayments
amounted to $170,689.
12. INCOME TAXES
The Corporation applies a federal income tax rate of 34% and a state tax rate of
8.5% in the computation of tax expense or benefit. The provision for income
taxes consisted of the following:
1998 1997
---------------------------
Current tax expense $1,068,011 $ 808,000
Net operating loss carryforward benefit - (409,000)
Deferred tax benefit (316,944) (295,000)
Reduce valuation allowance for deferred
tax assets (553,567) (104,000)
---------------------------
$ 197,500 $ -
===========================
40
<PAGE>
12. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Deferred tax assets are
recognized for the estimated tax effects attributable to deductible temporary
differences and operating loss carryforwards, net of any valuation allowances
for amounts which may not be realized by the Corporation
The components of the Corporation's net deferred tax assets in the consolidated
statement of condition as of December 31 are as follows:
1998 1997
---------------------------
Deferred tax assets:
Allowance for loan losses $1,040,269 $ 785,200
Other 255,219 162,725
---------------------------
Total deferred tax assets 1,295,488 947,925
Valuation allowance for deferred tax assets - (553,567)
---------------------------
Net deferred tax assets $1,295,488 $ 394,358
===========================
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Corporation.
The following methods and assumptions were used by the Corporation in estimating
its fair value disclosures for financial instruments:
Cash and short-term investments: The carrying amounts reported in the
balance sheet for cash and short-term investments approximate those assets'
fair values.
Investment securities (including collateral mortgage obligations): Fair
values for investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based
on quoted market prices of comparable instruments.
Loans receivable: For variable-rate loans that reprice frequently and with
no significant change in credit risk, fair values are based on carrying
values. The fair values for all other loans are estimated using discounted
cash flow analyses, using interest rates currently being offered for loans
with similar terms to borrowers of similar credit quality. The carrying
amount of accrued interest approximates its fair value.
Deposit liabilities: The fair values disclosed for demand deposits,
including interest-bearing and noninterest-bearing accounts, passbook
savings, and certain types of money market accounts are, by definition,
equal to the amount payable on demand at the reporting date (i.e., their
carrying amounts). Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest
rates currently being offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits.
41
<PAGE>
Short-term borrowings: The carrying amounts of borrowings under repurchase
agreements, and other short-term borrowings approximate their fair values.
Off-balances-sheet instruments: Fair values of the Corporation's
off-balance-sheet instruments (loan commitments) are based on quoted fees
currently charged to enter into similar agreements, taking into account the
counterparties' credit standing.
The estimated fair values of the Corporation's financial instruments at December
31 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------------------------------
CARRYING Fair Carrying Fair
AMOUNT Value Amount Value
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 26,547,970 $ 26,547,970 $ 11,446,150 $ 11,446,150
Federal funds sold 16,150,000 16,150,000 15,425,000 15,425,000
Investment securities available-for-
sale 67,428,673 67,428,673 40,846,522 40,846,522
Investment securities held-to-
maturity 12,278,814 12,358,569 13,466,686 13,624,322
Net loans 225,221,463 227,338,847 155,941,968 157,017,483
LIABILITIES
Deposits 297,913,761 299,408,327 203,233,639 203,384,691
Short-term borrowings 25,558,206 25,558,206 19,341,555 19,341,555
FHLB advances 14,000,000 14,000,000 2,000,000 2,000,000
OFF-BALANCE-SHEET INSTRUMENTS
Loan commitments - 147,726 - 316,042
Standby and commercial letters of
credit - 50,431 - 44,582
</TABLE>
42
<PAGE>
14. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------
<S> <C> <C>
Net income $1,680,346 $1,174,128
===================================
Weighted average shares for basic earnings per share 1,867,710 1,830,600
Effect of dilutive securities:
Employee stock options 27,710 15,077
Restricted Stock 23,520 39,300
Warrants 76,905 46,589
-----------------------------------
128,135 100,966
-----------------------------------
Shares for diluted earnings per share - weighted
average shares and assumed conversions 1,995,845 1,931,566
===================================
Basic earnings per share $0.90 $0.64
===================================
Diluted earnings per share $0.84 $0.61
===================================
</TABLE>
15. PARENT COMPANY FINANCIAL STATEMENTS
The condensed financial statements of the Corporation, prepared on a parent
company unconsolidated basis, are presented as follows:
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
-----------------------------------
<S> <C> <C>
Assets
Cash $ 472,073 $ 246,264
Investment in The National Bank of Indianapolis 18,969,359 17,171,214
-----------------------------------
Total assets $19,441,432 $17,417,478
===================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 86,000 $ 23,231
-----------------------------------
Total liabilities 86,000 23,231
Shareholders' equity 19,355,432 17,394,247
-----------------------------------
Total liabilities and shareholders' equity $19,441,432 $17,417,478
===================================
</TABLE>
43
<PAGE>
15. PARENT COMPANY FINANCIAL STATEMENTS (CONT'D)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1998 1997
-----------------------------------
<S> <C> <C>
Interest income $ 9,299 $ 51,905
Expenses:
Unearned compensation amortization 253,493 149,523
Other expenses 25,212 28,837
-----------------------------------
Total expenses 278,705 178,360
-----------------------------------
Net loss before tax benefit and equity in undistributed
net loss of The National Bank of Indianapolis (269,406) (126,455)
-----------------------------------
Tax benefit 106,712 -
-----------------------------------
Net loss before equity in undistributed net income of The National
Bank of Indianapolis (162,694) (126,455)
Equity in undistributed net income of The National Bank of
Indianapolis 1,843,040 1,300,583
-----------------------------------
Net income $1,680,346 $1,174,128
===================================
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31
1998 1997
-----------------------------------
<S> <C> <C>
Operating activities
Net income $1,680,346 $ 1,174,128
Adjustments to reconcile net income to net cash provided by operating
activities:
Undistributed income of The National Bank of Indianapolis (1,843,040) (1,300,583)
Unearned compensation amortization 253,493 149,523
Increase in liabilities 62,823 423
-----------------------------------
Net cash provided by operating activities 153,622 23,491
INVESTING ACTIVITIES
Capital contribution to The National Bank of Indianapolis - (1,000,000)
-----------------------------------
Net cash used by investing activities - (1,000,000)
FINANCING ACTIVITIES
Proceeds from issuance of stock 72,187 166,292
-----------------------------------
Net cash provided by financing activities 72,187 166,292
-----------------------------------
Increase (decrease) in cash and cash equivalents 225,809 (810,217)
Cash and cash equivalents at beginning of year 246,264 1,056,481
-----------------------------------
Cash and cash equivalents at end of year $ 472,073 $ 246,264
===================================
</TABLE>
16. YEAR 2000 (UNAUDITED)
44
<PAGE>
The Corporation has established a plan to thoroughly address the issues related
to the Year 2000. Management of the Corporation has finished an assessment of
systems, programs, computers, and equipment used in the daily operation of the
Bank. In most cases, key systems and equipment are already Year 2000 compliant.
Some systems and equipment have been identified as needing remediation and work
is well under way by the appropriate third-party vendors. In most cases, all
necessary remediation is expected to be completed by March 31, 1999 with testing
to follow. In addition, regular status reports are made by management to the
Bank's Board of Directors.
45
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
- ------------------------------------------------------------------------
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
- ----------------------------------------------------------------------
The following sets forth information as to each director and each
executive officer of the Corporation and the Bank as of December 31, 1998,
including their ages, present principal occupations, other business experience
during the last five years and directorships in other publicly held companies.
Each individual's service with the Corporation and the Bank began at the
formation of the Corporation in 1993, unless otherwise noted. In addition, all
current directors of the Corporation are also current directors of the Bank.
Certain family relationships exist among the directors of the Corporation.
Michael S. Maurer and Morris L. Maurer are cousins. There are no arrangements or
understandings between any of the directors pursuant to which any of them have
been selected for their respective positions.
MICHAEL S. MAURER - Age 56, Term Expires 2001. Mr. Maurer, the
chairman of the board of the Corporation and the Bank, was self-employed as an
attorney from 1969 through 1988. In 1987 Mr. Maurer became chief executive
officer and fifty percent owner of MYSTAR Corp., a broadcasting company which
owns Indianapolis radio stations WTPI, WZPL-FM and WMyS-AM. In 1990 Mr. Maurer
became chief executive officer and fifty percent owner of IBJ Corp., a
publishing company which owns The Indianapolis Business Journal, The Court and
Commercial Record, and the Indiana Lawyer. From April 1991 through December
1992, Mr. Maurer served as a director and member of the Executive Committee of
Merchants National Bank/National City Bank, Indianapolis, Indiana. Mr. Maurer
is currently a director of IPALCO Enterprises, Inc. and Indianapolis Power and
Light Company.
MORRIS L. MAURER - Age 47, Term Expires 1999. Mr. Maurer is the
president, chief executive officer and a director of the Corporation and the
Bank. He was employed by Indiana National Bank/INB Financial Corporation from
1975 through 1992. In Mr. Maurer's capacity as senior vice president, he was
responsible for corporate-wide strategic planning, venture capital, chairman of
corporate and lead bank ALCO committees, mergers and acquisitions, and economic
research. As chief financial officer, Mr. Maurer was responsible for general
accounting, controller, investment, funds desk, security sales and brokerage
functions. In addition, Mr. Maurer was a member of the executive management
committee, and chairman of the state-wide bank integration committee.
PHILIP B. ROBY - Age 55, Term Expires 2000. Mr. Roby is the executive
vice president, chief operating officer and a director of the Corporation and
the Bank and is also the chief lending officer of the Bank. He began his career
at Indiana National Bank in 1965 in its Management Training Program. During the
years between 1967 to 1973, Mr. Roby worked as a Commercial Lending Officer and
Correspondent Banking Officer at Indiana National Bank. In 1973, he was named
manager of the Commercial Credit Department with responsibility for the
Commercial Credit Training Program in Commercial Loan Analysis. In 1975, he
became president of two real estate subsidiaries of the parent holding company,
Indiana National Financial Corporation.
From 1978 to 1990, he held the position of senior vice president and
division head of the Metropolitan Division. Mr. Roby served as a member of the
Commercial Loan Committee during this period. In 1990, Mr. Roby became president
of INB Banking Company, Northeast, an affiliate bank of INB Financial
Corporation, located in Fort Wayne, Indiana. Subsequent to the INB merger with
NBD Bancorp, he was elected executive vice president and senior commercial
lending officer for the Northeast Region of the merged bank and was also named
one of the eight members of the Senior Indiana Loan Committee of NBD Indiana,
Inc.
46
<PAGE>
JAMES M. CORNELIUS - Age 55, Term Expires 2001. Mr. Cornelius, a
director, is chairman of the board of directors of Guidant Corporation, a global
medical device company traded on the New York and Pacific Stock Exchanges. He
was elected to this position in September 1994 and joined Guidant full time
following his retirement from Eli Lilly and Company in October 1995. He served
as vice president of finance and chief financial officer at Lilly from January
1983 until his retirement and served on its Board and Executive Committee from
December 1986. Mr. Cornelius serves on the Board of Directors for American
United Life Insurance Company and Lilly Industries, Inc. He served as a director
of Indiana National Bank from 1982 through 1992.
TODD H. STUART - Age 33, Term Expires 1999. Mr. Stuart, a director,
has been employed by Stuart's Household Furniture Moving & Storage, Inc., a
household and commercial moving, packing and warehousing business since 1983. As
vice president of the company, Mr. Stuart's responsibilities include sales,
daily operations and supervision of more than 40 employees. Mr. Stuart is also
a director of Bankers Life Holding Corporation, Chicago, Illinois.
G. BENJAMIN LANTZ - Age 62, Term Expires 2001. Dr. Lantz, a director,
was employed as president of the University of Indianapolis from 1988 through
May 1998. He served approximately 18 years in the administration of various
colleges before he became vice president, administration and development at
NESCO, Inc., a privately held manufacturing, real estate and engineering company
located in Mayfield Heights, Ohio. Dr. Lantz's responsibilities included
supervision of legal counsel and corporate recruitment. Dr. Lantz was also
involved in acquisitions and divestitures and locating, analyzing and
negotiating and conducting due diligence activities for the purchase of
companies. Dr. Lantz also monitored corporate activities for four companies.
ANDRE B. LACY - Age 59, Term Expires 1999. Mr. Lacy, a director,
began his career in 1961 with the predecessor of Lacy Diversified Industries,
Inc. as an analyst. Mr. Lacy held various positions with the company before
becoming chairman and chief executive officer of LDI, Ltd. (Limited Partnership)
and its subsidiaries. Its various entities include: Lacy Diversified
Industries; Jessup Door Company; Major Video Concepts; Tucker-Rocky
Distributing; and Answer Products, Inc.
Mr. Lacy was a director of Merchants National Bank & Trust Company and
Merchants National Corporation/National City Corporation from 1979 through 1992.
He also served as chairman of the Finance Committee and as a member of the
Executive Committee. Mr. Lacy is currently a director of Albemarle Corporation,
Richmond, Virginia; IPALCO Enterprises, Indianapolis; Tredegar Industries,
Richmond, Virginia; and Patterson Dental Company, St. Paul, Minnesota.
DAVID R. FRICK - Age 54, Term Expires 2000. Mr. Frick, a director, is
the executive vice president and chief administrative officer of Anthem, Inc.
(an insurance and financial services company). He served as managing partner
of Baker & Daniels, one of Indiana's largest law firms, from 1987 through 1992.
Mr. Frick was engaged in the private practice of law from 1969 to 1976, when he
became Corporation Counsel and Deputy Mayor of the City of Indianapolis. Mr.
Frick returned to the private practice of law in 1982 in Indianapolis. Mr.
Frick is also a director of Broadcasting Management, Inc., Accordia
Mid-Atlantic, All-Med, Inc., and Anthem Companies, Inc.
KATHRYN G. BETLEY - Age 56, Term Expires 2000. Ms. Betley, a director,
has been chairman of the board, secretary and co-owner of Romancing the
Seasons, a retail store located in Indianapolis, from 1989 through the present.
Ms. Betley is an extremely active community volunteer in the Indianapolis area
and is involved with and serves on the boards of many civic organizations.
WILLIAM J. LOVEDAY - Age 55, Term Expires 2001. Mr. Loveday, a
director, is currently the president and chief executive officer of Clarian
Health Partners, Inc. Mr. Loveday has served in that capacity from 1988 through
the present. Mr. Loveday is also a director of Indianapolis Life Insurance
Company. From 1983 to 1988, Mr. Loveday was executive vice president and chief
operating officer of Memorial Medical Center of Long Beach, California.
47
<PAGE>
DEBRA L. ROSS - Age 37. Ms. Ross is the chief financial officer of the
Corporation and Bank. She was employed as a staff accountant at KPMG-Peat
Marwick from 1987 to 1989. From 1989 to 1993, Ms. Ross was employed by Summit
Bank as assistant vice president and assistant controller, where she was
responsible for developing and administering accounting policies and procedures,
regulatory reporting, financial analysis, budgeting and directing and
supervising the activities of the accounting and cash management departments.
48
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
- ---------------------------------
Compensation Committee
- ----------------------
Decisions on compensation of the Corporation's executives are made by the
Compensation Committee of the Board, which also serves as the Compensation
Committee of the Bank. Each member of the Compensation Committee is a
non-employee director. All decisions of the Compensation Committee relating to
the compensation of the Corporation and the Bank's executive officers are
reviewed by the full Board.
Compensation of Directors
- -------------------------
Directors of neither the Corporation nor the Bank have ever received fees for
serving in such capacities. In June 1996 the Board of Directors adopted a
resolution providing that Directors be compensated with stock options each year
having a net present value between approximately $17,500 to $20,000 until such
time as the Directors are compensated with cash compensation. In 1998, Messrs.
Cornelius, Frick, Lacy, Lantz, Loveday and Stuart and Ms. Betley were each
granted options for 2,000 shares, exercisable at $15.00 per share, during a ten
year period.
Compensation Policies Toward Executive Officers
- -----------------------------------------------
The Compensation Committee's executive compensation policies are designed to
provide competitive levels of compensation to the executive officers and to
reward officers for individual performance and for performance of the
Corporation as a whole. Although there are established goals and standards
relating to performance of the Corporation, these goals and standards have not
been established solely for utilization in setting compensation of individual
employees. The Compensation Committee does, however, consider the Corporation
and the Bank's performance compared to the Annual Plan and compared to certain
established non-financial goals in setting compensation levels.
Base Salary
- -----------
Each executive officer is reviewed individually by the Compensation Committee,
which review includes an analysis of the performance of the Corporation and the
Bank. In addition, the review includes, among other things, an analysis of the
individual's performance during the past fiscal year, focusing primarily upon
the following aspects of the individual's job or characteristics of the
individual exhibited during the most recent fiscal year: quality and quantity of
work; supervisory skills; dependability; initiative; attendance; overall skill
level; and overall value to the Corporation.
Bonus Amounts
- -------------
During 1998, the Board of Directors approved a bonus plan ("Bonus Plan") for all
employees of the Bank applicable only to 1998. Under the terms of the Bonus
Plan, all employees were entitled to receive a bonus of up to 10% of their
salary depending upon the amount, if any, by which the Bank exceeded its budget.
Mr. Maurer received a bonus of $20,952 and Mr. Roby a bonus of $18,864 payable
in 1999.
49
<PAGE>
Other Compensation Plans
- ------------------------
At various times in the past, the Corporation has adopted certain broad-based
employee benefit plans for all employees. Senior executives are permitted to
participate in these plans on the same terms as non-executive employees who meet
applicable eligibility criteria, subject to any legal limitations on the amount
that may be contributed or the benefits that may be payable under the plans.
These plans include such customary employee benefit plans as medical insurance,
life insurance, and a 401(k) plan.
50
<PAGE>
Summary Compensation Table
- --------------------------
The following table sets forth for the fiscal year ending December 31, 1998 the
cash compensation paid by the Corporation or the Bank, as well as certain other
compensation paid or awarded during those years, to the chief executive officer
and any other executive officer whose total annual salary and bonus equaled or
exceeded $100,000. Michael S. Maurer receives no salary from either the
Corporation or the Bank; however, Mr. Maurer did receive warrants to purchase
76,875 shares at $12.50 per share during 1995. See "Employee Benefit Plans
- --Warrants."
<TABLE>
<CAPTION>
ANNUAL COMPENSATION (1) LONG TERM COMPENSATION
- ---------------------------------------------------------------------------------------------------------------------------
SECURITIES
RESTRICTED STOCK UNDERLYING ALL OTHER
NAME AND SALARY ($) BONUS AWARDS ($) OPTIONS/SARS COMPENSATION
PRINCIPAL POSITION YEAR (2) ($) (3) (#) (4)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Morris L. Maurer, 1998 $167,019 $20,952 $0 -0- $3,520
President and Chief 1997 $139,731 $9,797 $28,000 -0- $3,195
Executive Officer 1996 $125,272 $5,525 $0 -0- $3,300
- ---------------------------------------------------------------------------------------------------------------------------
Philip B. Roby, 1998 $146,144 $18,864 $0 -0- $3,409
Executive Vice 1997 $125,750 $8,817 $56,000 -0- $2,876
President and Chief 1996 $113,243 $4,986 $0 -0- $2,921
Lending Officer
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) While executive officers enjoy certain perquisites, such perquisites
are less than 5% of such officer's salary and bonus and are not
required to be reported.
(2) Effective July 1, 1998 the salary of Morris L. Maurer was increased
from $150,000 to $165,000 and the salary of Philip B. Roby was
increased from $130,000 to $145,000. Effective July 1, 1997 the salary
of Morris L. Maurer was increased from $126,000 to $150,000 and the
salary of Philip B. Roby was increased from $115,000 to $130,000.
Effective July 1, 1996, the salary of Morris L. Maurer was increased
from $120,000 to $126,000 and the salary of Philip B. Roby was
increased from $110,000 to $115,000.
(3) The 1997 award reported in the table represents awards under the 1993
Restricted Stock Plan of the Corporation. Twenty percent of these
shares of restricted stock awarded in 1997 vest on January 1, 1998,
with an additional 20% vesting on January 1 of each subsequent year
until the shares are fully vested on January 1, 2002. The amounts in
the table represent a value of $14.00 per share for 1997. This amount
represents the value determined by the Board of Directors for purposes
of the Corporation's 401(k) Savings Plan to be the "fair market value"
of a share of the Corporation's common stock at December 31, 1997,
without giving effect to the restrictions on such stock. Because there
is not an established trading market for the Common Stock, the assumed
price of $14.00 may not reflect the actual price which would be paid
for shares of the Common Stock in an active or established trading
market and should not necessarily be relied upon when determining the
value of a shareholder's investment. Dividends, if declared by the
Corporation, would be paid on the restricted shares at the same time
and rate as dividends paid to shareholders of unrestricted shares. At
December 31, 1998, the total number and value (based on a value of
$17.50 per share) of shares of restricted stock held by Messrs. Maurer
and Roby were as follows: Mr. Maurer (27,000 shares; $472,500); and Mr.
Roby (19,000 shares; $332,500). Because there
51
<PAGE>
is not an established trading market for the Common Stock, the assumed
price of $17.50 may not reflect the actual price which would be paid
for shares of the Common Stock in an active or established trading
market and should not necessarily be relied upon when determining the
value of a shareholder's investment.
4) These amounts represent Corporation contributions under the
Corporation's 401(k) savings plan.
Employee Benefit Plans
- ----------------------
Warrants
- --------
In consideration of their efforts in organizing the Corporation and the Bank and
for services to be rendered after the Bank began operations, Michael S. Maurer
and Morris L. Maurer were issued warrants to purchase 307,500 and 38,000 shares,
respectively, in connection with the formation of the Corporation and the Bank
in 1993. Such warrants are exercisable and will remain exercisable until 2003 at
a purchase price of $10.00 per share. The warrants will immediately become null
and void, without any action required by the Corporation or the Bank, the FDIC,
OCC, or the Board of Governors of the Federal Reserve System ("Federal Reserve")
if either the Federal Reserve, the FDIC, or the OCC issues a directive or final
order to the Corporation or the Bank requiring a contribution of capital.
In addition, in 1995 Michael S. Maurer received warrants for 76,875 shares,
exercisable at a price of $12.50 per share, exercisable until 2005. Such
warrants were granted to Mr. Maurer in recognition of the fact that he had not
received any cash compensation from either the Bank or the Corporation since its
inception, and that the initial directors of the Corporation and the Bank who
are still directors had received at that time options individually for 6,500
shares since the Corporation and the Bank were organized.
Stock Plans
- -----------
The Corporation has adopted a stock option program for directors of the
Corporation and the Bank, and a separate stock option program for officers and
key employees of the Corporation and the Bank. The Corporation has also adopted
a restricted stock plan for officers and employees of the Corporation and the
Bank. Under the option programs, options for an aggregate of 220,000 shares may
be granted. A total of 70,000 shares have been reserved for issuance under the
restricted stock plan. The Board of Directors of the Corporation believes these
programs provide an important incentive to those who will be instrumental to the
success of the Corporation and of the Bank.
A more detailed description of each of the programs is set forth below.
1993 Employees' Stock Option Plan. This plan provides for the grant of
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code and the grant of nonqualified stock options (the "Plan"). The Plan
provides for the award of stock options to elected officers and key employees of
the Corporation and its subsidiaries, including the Bank, which currently is the
Corporation's only subsidiary. The exercise price for all options granted under
the Plan will not be less than the greater of $10.00 or the fair market value of
the Shares on the date of grant. The Plan will expire on May 31, 2003.
Options may be granted under the Plan only to officers and other key employees
who are in positions to make significant contributions to the success of the
Corporation. The Compensation Committee, consisting of outside directors of the
Corporation who are ineligible under the Plan to receive options themselves,
administers the Plan.
Options are exercisable in whole or in part upon such terms and conditions as
may be determined by the Compensation Committee, but in no event will any
incentive stock options be exercisable later than ten years after the date of
grant.
52
<PAGE>
A total of 120,000 shares has been reserved for issuance under the Employee
Stock Option Plan, of which 1,800 shares have been forfeited and 4,200 shares
have been exercised. Options for 84,000 shares were granted under the Plan in
1994. Morris L. Maurer received options for 35,000 shares and Philip B. Roby
received options for 25,000 shares, representing 41.7% and 29.8% of the total
options granted under the Plan in 1994. No options were granted under the Plan
in 1995. All of the options which were granted in 1994 are exercisable at $10.00
per share. Twenty percent of the options which were granted in 1994 vested on
December 31, 1994, an additional 20% vested on December 31, 1995, with an
additional 20% vesting every December 31 with the final shares having vested on
December 31, 1998. Options for 30,000 shares were granted under the Plan in 1997
and are exercisable at $12.89 per share. Twenty percent of the options will vest
on January 1, 1998 with an additional 20% to vest each January 1 thereafter
until the options will be fully vested on January 1, 2002. Options for 3,000
shares were granted under the Plan in 1998 and are exercisable at $14.00 per
share. Twenty percent of the options will vest on January 1, 1999 with an
additional 20% to vest each January 1 thereafter until the options will be fully
vested on January 1, 2003.
The following table shows the number of shares covered by both exercisable and
non-exercisable stock options by Messrs. M. L. Maurer and P. B. Roby as of
December 31, 1998. Also reported are the values for the "in-the-money" options,
which represent the positive spread between the exercise price of any such
existing stock options and the year-end assumed price of the Common Stock. For
purposes of the following table, the year-end price of the stock was assumed to
be $17.50 which is the value determined by the Board of Directors for purposes
of the Corporation's 401(k) Savings Plan to be the "fair market value" of a
share of the Corporation's common stock at December 31, 1998. Because there is
not an established trading market for the Common Stock, the assumed price of
$17.50 may not reflect the actual price which would be paid for shares of the
Common Stock in an active or established trading market and should not
necessarily be relied upon when determining the value of a shareholder's
investment.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR END AT FISCAL YEAR END
(#) ($)
- -------------------------------------------------------------------------------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Morris L. Maurer 35,000 0 $262,500 $0
- -------------------------------------------------------------------------------------------------------------
Philip B. Roby 25,000 0 $187,500 $0
- -------------------------------------------------------------------------------------------------------------
</TABLE>
53
<PAGE>
1993 Directors' Stock Option Plan. As previously stated, Directors have not
received any fees for their services as a director. However in 1993, the Board
of Directors of the Corporation adopted a nonqualified stock option plan (the
"Directors' Plan") which provides for the grant of nonqualified stock options to
those individuals who are not officers or employees of the Corporation or the
Bank and who serve as directors (the "Outside Directors") of the Corporation or
any of its subsidiaries, including the Bank. The Chairman of the Board of
Directors of the Corporation, Michael S. Maurer, is not eligible to receive
grants of options under the Directors' Plan. The Plan will expire on May 31,
2003.
The Directors' Plan provides for the grant of nonqualified stock options to
acquire shares of the Corporation at a price equal to the greater of $10.00 or
the fair market value of the shares on the date of grant. A total of 100,000
shares have been reserved for issuance under the Directors' Plan. There are
currently 35,000 shares available for issuance under the Directors' Plan.
The options under this program are exercisable for ten years from the date of
grant. In addition, the options will immediately become null and void, without
any action required by the Corporation or the Bank, the FDIC, the OCC, or the
Federal Reserve if either the Federal Reserve, the FDIC, or the OCC issues a
directive or final order to the Corporation or the Bank requiring a contribution
of capital. Messrs. Cornelius, Frick, Lacy, Lantz, and Stuart have each received
options to acquire a total of 13,000 shares. Ms. Betley and Mr. Loveday were not
appointed as directors until October 1995. They have each received options to
acquire a total of 7,000 shares. All of these individuals received options for
2,500 shares in 1997 at an exercise price of $13.00 per share and 2,000 shares
in 1998 at an exercise price of $15.00 per share. Individuals become eligible to
receive grants of options under the Directors' Plan upon their election to a
qualifying board of directors, but do not receive additional options because
they are a member of more than one such board.
1993 Restricted Stock Plan. On June 1, 1993, the Board of Directors of the
Corporation adopted a Restricted Stock Plan (the "Restricted Stock Plan"), which
provides for the grant of shares to officers and key employees of the
Corporation and the Bank.
The Restricted Stock Plan provides for the outright grant of shares, subject to
the vesting schedule set forth in the agreement between the recipient and the
Administrative Committee of the Restricted Stock Plan, to officers and employees
of the Corporation and the Bank. Grants under the Restricted Stock Plan may be
made only to officers and other employees who are in a position to make
significant contributions to the success of the Corporation. The Compensation
Committee, consisting of outside directors of the Corporation who are ineligible
under the Plan to receive grants of restricted stock, administers the Restricted
Stock Plan. Such committee has the authority to determine the number of grants
to issue and to whom such grants are made, what price, if any, will be required
to purchase shares of stock issued under the Restricted Stock Plan and the
vesting schedule of the restricted stock.
The Restricted Stock Plan provides for the issuance of up to 70,000 Shares. The
plan expires on May 31, 2006. Grants for 68,000 shares have been made under the
Restricted Stock Plan with 1,500 shares being forfeited.
401(k) Savings Plan
- -------------------
The Corporation sponsors The National Bank of Indianapolis Corporation 401(k)
Savings Plan ("401(k) Plan") for the benefit of substantially all of the
employees of the Corporation and its subsidiaries. All employees of the
Corporation and its subsidiaries become participants in the 401(k) Plan after
completing one year of service for the Corporation or its subsidiaries and
attaining age 21.
Each participant may enter into a salary redirection agreement with the
Corporation or the Bank whereby the Corporation or the Bank redirects to the
participant's account in the 401(k) Plan an amount, on a pre-tax basis, equal to
not less than one percent (1%) or more than (10%) of the participant's
compensation, as defined in the 401(k) Plan. If a participant makes salary
redirection contributions to the 401(k) Plan, the Corporation will make a
matching contribution in the amount necessary to match 60% of the participant's
salary redirection contribution up to two percent (2%) of the participant's
compensation, as defined in the 401(k) Plan. The Board of Directors of the
54
<PAGE>
Corporation may, in its discretion, make an additional matching contribution to
the 401(k) Plan in such amount as the Board may determine. In addition, the
Corporation may fund all or any part of its matching contributions with shares
of its stock. The Corporation also may, in its discretion, make a profit sharing
contribution to the 401(k) Plan.
An employee who has an interest in a qualified retirement plan with a former
employee may transfer the eligible portion of that benefit into a rollover
account in the 401(k) Plan. The participant may request that the trustee invest
up to 50% of the fair market value of the participant's rollover contribution
(valued as of the effective date of the contribution to the 401(k) Plan) in
whole and fractional shares of the common stock of the Corporation.
Benefits under the 401(k) Plan are distributable to participants or their
beneficiaries in a single lump sum payment.
55
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------------------------------------------------------------------------
The following table contains information concerning individuals or entities who,
to the knowledge of the Corporation, beneficially owned on December 31, 1998,
more than 5% of the common stock of the Corporation:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
NAME OF BENEFICIAL OWNER SHARES BENEFICIALLY OWNED PERCENT OF CLASS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Michael S. Maurer 656,250(1) 28.6%
- --------------------------------------------------------------------------------------------------------
Morris L. and Janis Maurer 148,689(2) 7.5%
- --------------------------------------------------------------------------------------------------------
Eugene and Marilyn Glick 125,000 6.6%
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 384,375 shares which Mr. Maurer may acquire pursuant to stock
warrants. See "Employee Benefit Plans -- Warrants."
(2) Includes 35,000 shares which Mr. Maurer has the right to acquire
pursuant to the exercise of stock options and 38,000 shares which Mr.
Maurer has the right to acquire pursuant to stock warrants, 27,000
shares of restricted stock, and 1,189 shares in the 401(k) Plan
allocated to the account of Mr. Maurer. See "Employee Profit Plans --
1993 Employees' Stock Option Plan and Warrants."
56
<PAGE>
The following table sets forth as of December 31, 1998 the total number of
shares of common stock of the Corporation beneficially owned by each director
and executive officer of the Corporation and by all directors and executive
officers as a group. The number of shares shown as being beneficially owned by
each director and executive officer are those over which he or she has sole or
shared voting or investment power.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF CLASS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Kathryn G. Betley 8,875 (1) 0.5%
- -------------------------------------------------------------------------------------------------------------------
James M. Cornelius 25,500 (2) 1.3%
- -------------------------------------------------------------------------------------------------------------------
David R. Frick 19,250 (2) 1.0%
- -------------------------------------------------------------------------------------------------------------------
Andre B. Lacy 41,000 (2) 2.1%
- -------------------------------------------------------------------------------------------------------------------
G. Benjamin Lantz, Jr. 16,750 (2) 0.9%
- -------------------------------------------------------------------------------------------------------------------
William J. Loveday 7,400 (1) 0.4%
- -------------------------------------------------------------------------------------------------------------------
Michael S. Maurer 656,250 (3) 28.6%
- -------------------------------------------------------------------------------------------------------------------
Morris L. Maurer 148,689 (4) 7.5%
- -------------------------------------------------------------------------------------------------------------------
Philip B. Roby 57,598 (5) 3.0%
- -------------------------------------------------------------------------------------------------------------------
Todd H. Stuart 16,125 (2) 0.8%
- -------------------------------------------------------------------------------------------------------------------
Directors and executive officers as a group (consisting of 11 individuals) 1,002,486 (6) 40.5%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 7,000 shares which such individual has the right to acquire
pursuant to the exercise of options. See "Employee Benefit Plans --
1993 Directors' Stock Option Plan."
(2) Includes 13,000 shares which such individual has the right to acquire
pursuant to the exercise of options. See "Employee Benefit Plans --
1993 Directors' Stock Option Plan."
(3) Includes 384,375 shares which Mr. Maurer may acquire pursuant to stock
warrants. See "Employee Benefit Plans -- Warrants."
(4) Includes 35,000 shares which Mr. Maurer has the right to acquire
pursuant to the exercise of stock options, 38,000 shares which Mr.
Maurer has the right to acquire pursuant to stock warrants, 27,000
shares of restricted stock, and 1,189 shares in the 401(k) Plan
allocated to the account of Mr. Maurer. See "Employee Profit Plans --
1993 Employees' Stock Option Plan."
(5) Includes 25,000 shares which Mr. Roby has the right to acquire pursuant
to the exercise of stock options, 19,000 shares of restricted stock,
and 1,098 shares in the 401(k) Plan allocated to the account of Mr.
Roby. See "Employee Profit Plans -- 1993 Employees' Stock Option Plan."
(6) Includes 3,000 shares which Ms. Ross has the right to acquire pursuant
to the exercise of stock options, 1,500 shares of restricted stock, and
548 shares in the 401(k) Plan allocated to the account of Ms. Ross. See
"Employee Profit Plans -- 1993 Employees' Stock Option Plan."
57
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- ---------------------------------------------------------
The offices of the Corporation and the Bank at 107 North Pennsylvania
Street, Indianapolis, Indiana were leased from a company in which Andre B. Lacy,
a director of the Corporation and a director of the Bank, has an ownership
interest. In December 1998, the Bank purchased the building. The Corporation has
received a report from an independent property consultant that the terms and
conditions of the leases and purchase price fall within a reasonable range of
market terms and do not involve more than normal risk or present unfavorable
features to the Corporation.
It is anticipated that the Corporation's officers and directors, as
well as firms and companies with which they are associated, will have banking
transactions with the Bank. It is the policy of the Bank that any credit
extended to such persons, firms and companies will be extended only in the
ordinary course of business and on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other persons, and will not involve more than the normal risk
of collectability or present other unfavorable features.
58
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
(a) List of exhibits
Exhibit Number Description
- --------------------------
3a) Articles of Incorporation of the Corporation, filed as Exhibit
3(i) to the Corporation's Form 10-SB are incorporated by
reference
3b) Bylaws of the Corporation, filed as Exhibit 3(ii) to the
Corporation's Form 10-SB are incorporated by reference
10a) 1993 Key Employees' Stock Option Plan of the Corporation,
filed as Exhibit 10(i) to the Corporation's Form 10-SB are
incorporated by reference
10b) 1993 Directors' Stock Option Plan of the Corporation, filed as
Exhibit 10(ii) to the Corporation's Form 10-SB are
incorporated by reference
10c) 1993 Restricted Stock Plan of the Corporation, filed as
Exhibit 10(iii) to the Corporation's Form 10-SB are
incorporated by reference
21 Subsidiaries of the Corporation
27 Financial Data Schedule
b) No reports on Form 8-K were filed during the last quarter of the fiscal
year.
59
<PAGE>
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
(Registrant) The National Bank of Indianapolis Corporation
By (Signature and Title) /S/ Morris L. Maurer March 29, 1999
--------------------------------- --------------
Morris L. Maurer, President & Date
Principal Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title) /S/ Morris L. Maurer March 29, 1999
--------------------------------- --------------
Morris L. Maurer, President & Date
Principal Executive Officer
By (Signature and Title) /S/ Philip B. Roby March 29, 1999
--------------------------------- --------------
Philip B. Roby, Executive Date
Vice President
By (Signature and Title) /S/ Debra L. Ross March 29, 1999
--------------------------------- --------------
Debra L. Ross, Principal Date
Financial and Accounting Officer
By (Signature and Title) /S/ Michael S. Maurer March 29, 1999
--------------------------------- --------------
Michael S. Maurer, Chairman Date
of the Board
By (Signature and Title) /S/ Kathryn G. Betley March 29, 1999
--------------------------------- --------------
Kathryn G. Betley, Director Date
By (Signature and Title) /S/ James M. Cornelius March 29, 1999
--------------------------------- --------------
James M. Cornelius, Director Date
By (Signature and Title) /S/ David R. Frick March 29, 1999
--------------------------------- --------------
David R. Frick, Director Date
By (Signature and Title) /S/ Andre B. Lacy March 29, 1999
--------------------------------- --------------
Andre B. Lacy, Director Date
By (Signature and Title) /S/ William J. Loveday March 29, 1999
--------------------------------- --------------
William J. Loveday, Director Date
By (Signature and Title) /S/ G. Benjamin Lantz March 29, 1999
--------------------------------- --------------
G. Benjamin Lantz, Director Date
By (Signature and Title) /S/ Todd H. Stuart March 29, 1999
--------------------------------- --------------
Todd H. Stuart, Director Date
60
<PAGE>
EXHIBIT INDEX
- -------------
3(I) Articles of Incorporation of The National Bank of Indianapolis
Corporation
3(ii) By-laws of The National Bank of Indianapolis Corporation
10(I) 1993 Key Employees' Stock Option Plan
10(ii) 1993 Directors' Stock Option Plan
10(iii) 1993 Restricted Stock Plan
21 Subsidiaries of The National Bank of Indianapolis Corporation
27 Financial Data Schedules
61
EXHIBIT 21
- ----------
Subsidiaries of The National Bank of Indianapolis Corporation
- -------------------------------------------------------------
1. The National Bank of Indianapolis
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