UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-21671

THE NATIONAL BANK OF INDIANAPOLIS CORPORATION

(Exact name of registrant as specified in its charter)

Indiana	35-1887991
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
107 North Pennsylvania Street Indianapolis, Indiana	46204
(Address of principal executive offices)	(Zip Code)

(317) 261-9000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨  (do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock	Outstanding at August 3, 2012
Common Stock, no par value per share	2,361,010

Table of Contents

The National Bank of Indianapolis Corporation

Report on Form 10-Q

for Quarter Ended

June 30, 2012

PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets – June 30, 2012 and December 31, 2011	1
Consolidated Statements of Income and Comprehensive Income – Three Months ended June 30, 2012 and 2011	2
Six Months ended June 30, 2012 and 2011	4
Consolidated Statements of Cash Flows – Six Months ended June 30, 2012 and 2011	6
Consolidated Statements of Shareholders’ Equity – Six Months ended June 30, 2012 and 2011	7
Notes to Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3. Quantitative and Qualitative Disclosures about Market Risk	40
Item 4. Controls and Procedures	41
PART II - OTHER INFORMATION
Item 1. Legal Proceedings	42
Item 1A. Risk Factors	42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3. Defaults Upon Senior Securities	44
Item 4. Mine Safety Disclosures	44
Item 5. Other Information	44
Item 6. Exhibits	45
Signatures	47

Part I—Financial Information

Item 1. Financial Statements

The National Bank of Indianapolis Corporation

Consolidated Balance Sheets

(Unaudited, Dollars in thousands except share data)

	June 30, 2012			December 31, 2011
Assets
Cash and cash equivalents
Cash and due from banks	$	24,538		$	33,134
Interest bearing due from banks		206,377			159,290
Reverse repurchase agreements		1,000			1,000
Federal funds sold		9,368			2,911
Total cash and cash equivalents		241,283			196,335
Investment securities
Available-for-sale securities		146,630			140,484
Held-to-maturity securities (Fair value of $135,200 at June 30, 2012 and $115,003 at December 31, 2011)		134,045			113,799
Total investment securities		280,675			254,283
Loans held for sale		5,680			—
Loans		953,232			953,612
Less: Allowance for loan losses		(12,614	)		(14,242	)
Net loans		940,618			939,370
Bank owned life insurance		20,494			12,278
Other real estate owned		5,157			7,575
Premises and equipment		27,388			26,432
Deferred tax asset		6,241			6,642
Federal Reserve and FHLB stock at cost		2,990			2,990
Accrued interest		4,477			4,403
Other assets		11,108			9,288
Total assets	$	1,546,111		$	1,459,596
Liabilities and shareholders’ equity
Deposits:
Noninterest-bearing demand deposits	$	310,749		$	258,874
Money market and savings deposits		867,499			817,081
Time deposits		161,296			166,864
Total deposits		1,339,544			1,242,819
Repurchase agreements and other secured short term borrowings		84,922			95,585
Short term debt		2,313			2,438
Subordinated debt		5,000			5,000
Junior subordinated debentures owed to unconsolidated subsidiary trust		13,918			13,918
Other liabilities		6,247			9,717
Total liabilities		1,451,944			1,369,477
Shareholders’ equity:
Preferred stock, no par value - authorized 5,000,000 shares	$	—		$	—
Common stock, no par value - authorized 15,000,000 shares issued 2,955,072 shares at June 30, 2012 and 2,920,458 shares at December 31, 2011		38,244			37,028
Treasury stock, at cost; 624,616 shares at June 30, 2012 and 590,074 shares at December 31, 2011		(24,438	)		(22,771	)
Additional paid in capital		16,070			15,089
Retained earnings		60,888			57,209
Accumulated other comprehensive income		3,403			3,564
Total shareholders’ equity		94,167			90,119
Total liabilities and shareholders’ equity	$	1,546,111		$	1,459,596

See notes to consolidated financial statements.

1

The National Bank of Indianapolis Corporation

Consolidated Statements of Income and Comprehensive Income

(Unaudited, Dollars in thousands except per share data)

	Three months ended
	June 30,
	2012		2011
Interest income:
Interest and fees on loans	$	10,474	$	10,692
Interest on investment securities taxable		759		661
Interest on investment securities nontaxable		576		591
Interest on federal funds sold		6		7
Interest on due from banks		109		115
Total interest income		11,924		12,066
Interest expense:
Interest on deposits		968		1,422
Interest on other short term borrowings		29		62
Interest on short term debt		28		32
Interest on long term debt		390		388
Total interest expense		1,415		1,904
Net interest income		10,509		10,162
Provision for loan losses		296		989
Net interest income after provision for loan losses		10,213		9,173
Other operating income:
Wealth management fees		1,750		1,704
Service charges and fees on deposit accounts		793		745
Rental income		189		265
Mortgage banking income		1,054		(2	)
Interchange income		383		369
Other		449		385
Total other operating income		4,618		3,466
Other operating expenses:
Salaries, wages and employee benefits		6,661		6,776
Occupancy		736		732
Furniture and equipment		292		283
Professional services		515		534
Data processing		916		878
Business development		495		464
FDIC Insurance		332		244
Non performing assets		401		571
Other		1,938		977
Total other operating expenses		12,286		11,459
Income before tax		2,545		1,180
Federal and state income tax		607		142
Net income	$	1,938	$	1,038
Basic earnings per share	$	0.83	$	0.45
Diluted earnings per share	$	0.78	$	0.43

2

The National Bank of Indianapolis Corporation

Consolidated Statements of Income and Comprehensive Income (Continued)

(Unaudited, Dollars in thousands except per share data)

	Three months ended
	June 30,
	2012			2011
Net income	$	1,938		$	1,038
Other comprehensive income:
Change in securities available for sale:
Transfer of securities from held-to-maturity to available-for-sale		—			3,478
Net unrealized gain (loss) during the period		366			(285	)
Tax effect		(145	)		(1,265	)
Total other comprehensive income		221			1,928
Comprehensive income	$	2,159		$	2,966

See notes to consolidated financial statements.

3

The National Bank of Indianapolis Corporation

Consolidated Statements of Comprehensive Income

(Unaudited, Dollars in thousands except per share data)

	Six months ended
	June 30,
	2012			2011
Interest income:
Interest and fees on loans	$	20,948		$	21,263
Interest on investment securities taxable		1,443			1,367
Interest on investment securities nontaxable		1,156			1,115
Interest on federal funds sold		14			18
Interest on due from banks		219			247
Total interest income		23,780			24,010
Interest expense:
Interest on deposits		2,002			2,938
Interest on other short term borrowings		65			134
Interest on short term debt		56			63
Interest on long term debt		782			776
Total interest expense		2,905			3,911
Net interest income		20,875			20,099
Provision for loan losses		1,204			2,678
Net interest income after provision for loan losses		19,671			17,421
Other operating income:
Wealth management fees		3,128			3,084
Service charges and fees on deposit accounts		1,564			1,492
Rental income		400			484
Mortgage banking income		1,890			217
Interchange income		758			709
Net loss on sale of securities		(13	)		—
Other		993			754
Total other operating income		8,720			6,740
Other operating expenses:
Salaries, wages and employee benefits		13,311			13,203
Occupancy		1,353			1,376
Furniture and equipment		601			582
Professional services		1,042			1,047
Data processing		1,770			1,671
Business development		965			892
FDIC Insurance		652			783
Non performing assets		909			832
Other		2,976			516
Total other operating expenses		23,579			20,902
Income before tax		4,812			3,259
Federal and state income tax		1,133			604
Net income	$	3,679		$	2,655
Basic earnings per share	$	1.58		$	1.15
Diluted earnings per share	$	1.48		$	1.09

4

The National Bank of Indianapolis Corporation

Consolidated Statements of Comprehensive Income (Continued)

(Unaudited, Dollars in thousands except per share data)

	Six months ended
	June 30,
	2012			2011
Net income	$	3,679		$	2,655
Other comprehensive income:
Change in securities available for sale:
Transfer of securities from held-to-maturity to available-for-sale		—			3,478
Net unrealized loss during the period		(266	)		(366	)
Tax effect		105			(1,233	)
Total other comprehensive income (loss)		(161	)		1,879
Comprehensive Income	$	3,518		$	4,534

See notes to consolidated financial statements.

5

The National Bank of Indianapolis Corporation

Consolidated Statements of Cash Flows

(Unaudited, Dollars in thousands)

	Six months ended
	June 30,
	2012			2011
Operating Activities
Net Income	$	3,679		$	2,655
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Provision for loan losses		1,204			2,678
Proceeds from sale of residential mortgage loans		48,527			22,310
Origination of loans held for sale		(54,207	)		(20,886	)
Depreciation and amortization		804			765
Fair value adjustment on mortgage servicing rights		300			296
Loss on sales of investment securities		13			—
Gain on sale of loans		(1,911	)		(276	)
Net gain on sales and writedowns of other real estate and repossessions		(2	)		(43	)
Net (increase) decrease in deferred income taxes		507			(187	)
Change in bank owned life insurance		(216	)		(171	)
Income tax effect from deferred stock compensation		(178	)		(60	)
Net accretion of discounts and amortization of premiums on investments		1,564			1,114
Compensation expense related to restricted stock and options		970			1,162
Changes in assets and liabilities:
Accrued interest receivable		(74	)		(167	)
Other assets		(2,122	)		(439	)
Other liabilities		(3,292	)		(1,006	)
Net cash provided by operating activities		(4,434	)		7,745
Investing Activities
Proceeds from maturities of investment securities held to maturity		20,855			15,693
Proceeds from maturities of investment securities available for sale		25,575			38,737
Proceeds from sales of investment securities available for sale		450			—
Purchases of investment securities held to maturity		(42,008	)		(76,455	)
Purchases of investment securities available for sale		(33,106	)		(56,757	)
Purchase of bank owned life insurance		(8,000	)		—
Net increase in loans		(6,833	)		(46,060	)
Proceeds from sale of loans		5,231			8,448
Proceeds from sales of other real estate and repossessions		3,481			1,609
Purchases of bank premises and equipment		(1,760	)		(1,692	)
Net cash used by investing activities		(36,115	)		(116,477	)
Financing Activities
Net increase (decrease) in deposits		96,725			(2,460	)
Net decrease in short term borrowings		(10,663	)		(1,580	)
Net change in revolving line of credit		(125	)		(125	)
Income tax effect from deferred stock compensation		178			60
Proceeds from issuance of stock		1,049			474
Repurchase of stock		(1,667	)		(1,085	)
Net cash provided (used) by financing activities		85,497			(4,716	)
Increase (decrease) in cash and cash equivalents		44,948			(113,448	)
Cash and cash equivalents at beginning of year		196,335			293,518
Cash and cash equivalents at end of year	$	241,283		$	180,070
Supplemental cash flow information
Interest paid	$	2,910		$	3,911
Income taxes paid		702			1,143
Supplemental non cash disclosure
Held to maturity investments transferred to available for sale investments	$	—		$	55,429
Loan balances transferred to foreclosed real estate		1,061			1,232
Loan balances transferred to loans held for sale		5,231			18,436

See notes to consolidated financial statements.

6

The National Bank of Indianapolis Corporation

Consolidated Statement of Shareholders’ Equity

(Unaudited, Dollars in thousands except share data)

											Accumulated
						Additional					Other
	Common		Treasury			Paid In			Retained		Comprehensive
	Stock		Stock			Capital			Earnings		Income			TOTAL
Balance at January 1, 2011	$	35,269	$	(20,953	)	$	12,866		$	51,853	$	322		$	79,357
Net income		—		—			—			2,655		—			2,655
Net gain on available-for-sale securities		—		—			—			—		1,879			1,879
Income tax effect from deferred stock compensation		—		—			60			—		—			60
Issuance of stock 15,900 shares of common stock under stock-based compensation plans		554		—			(80	)		—		—			474
Repurchase of stock 24,360 shares of common stock		—		(1,085	)		—			—		—			(1,085	)
Stock based compensation earned		—		—			1,162			—		—			1,162
Balance at June 30, 2011	$	35,823	$	(22,038	)	$	14,008		$	54,508	$	2,201		$	84,502
Balance at January 1, 2012	$	37,028	$	(22,771	)	$	15,089		$	57,209	$	3,564		$	90,119
Net income		—		—			—			3,679		—			3,679
Net loss on available-for-sale securities		—		—			—			—		(161	)		(161	)
Income tax effect from deferred stock compensation		—		—			178			—		—			178
Issuance of 34,615 shares of common stock under stock-based compensation plans		1,216		—			(167	)		—		—			1,049
Repurchase of 34,542 shares of common stock		—		(1,667	)		—			—		—			(1,667	)
Stock based compensation earned		—		—			970			—		—			970
Balance at June 30, 2012	$	38,244	$	(24,438	)	$	16,070		$	60,888	$	3,403		$	94,167

See notes to consolidated financial statements.

7

The National Bank of Indianapolis Corporation

Notes to Consolidated Financial Statements

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

Note 1: Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of The National Bank of Indianapolis Corporation (“Corporation”) and its wholly-owned subsidiary, The National Bank of Indianapolis (“Bank”). All intercompany transactions between the Corporation and its subsidiary have been properly eliminated. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 2012, are not necessarily indicative of the results that may be expected for the year ended December 31, 2012. For further information, refer to the consolidated financial statements and footnotes thereto included in the Corporation’s Form 10-K for the year ended December 31, 2011.

Note 2: Investment Securities

The following is a summary of available-for-sale and held-to-maturity securities:

June 30, 2012	Amortized Cost		Gross Unrealized Gain		Gross Unrealized (Loss)			Estimated Fair Value
Available-for-sale
U.S. Treasury securities	$	500	$	—	$	—		$	500
U.S. Government agencies		77,908		267		(4	)		78,171
Municipal securities		62,586		5,373		—			67,959
Total available-for-sale	$	140,994	$	5,640	$	(4	)	$	146,630
	Amortized Cost		Gross Unrecognized Gain		Gross Unrecognized (Loss)			Estimated Fair Value
Held-to-maturity
Collateralized mortgage obligations, residential	$	133,379	$	1,372	$	(226	)	$	134,525
Mortgage backed securities, residential		541		9		—			550
Other securities		125		—		—			125
Total Held-to-maturity	$	134,045	$	1,381	$	(226	)	$	135,200
December 31, 2011	Amortized Cost		Gross Unrealized Gain		Gross Unrealized (Loss)			Estimated Fair Value
Available-for-sale
U.S. Treasury securities	$	500	$	—	$	—		$	500
U.S. Government agencies		70,967		334		(35	)		71,266
Municipal securities		63,115		5,603		—			68,718
Total available-for-sale	$	134,582	$	5,937	$	(35	)	$	140,484
	Amortized Cost		Gross Unrecognized Gain		Gross Unrecognized (Loss)			Estimated Fair Value
Held-to-maturity
Collateralized mortgage obligations, residential	$	112,842	$	1,308	$	(119	)	$	114,031
Mortgage backed securities, residential		832		15		—			847
Other securities		125		—		—			125
Total Held-to-maturity	$	113,799	$	1,323	$	(119	)	$	115,003

8

Notes to Consolidated Financial Statements

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

During the six month period ending June 30, 2012, the Corporation sold one available-for-sale municipal security with a net carrying amount of $463 resulting in a loss of $13. The municipality had been downgraded and appeared to have increased credit risk. There were no sales of securities during the six month period ending June 30, 2011.

The fair value of debt securities and carrying amount, if different, at June 30, 2012, by contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

	June 30, 2012
	Amortized		Fair
	Cost		Value
Available-for-sale
Due in one year or less	$	32,476	$	32,618
Due from one to five years		67,569		69,300
Due from five to ten years		33,562		36,648
Due after ten years		7,387		8,064
Total	$	140,994	$	146,630
Held-to-maturity
Due in one year or less	$	25	$	25
Due from one to five years		100		100
CMO/Mortgage-backed, residential		133,920		135,075
Total	$	134,045	$	135,200

Investment securities with a carrying value of approximately $86,000 and $97,000 were pledged as collateral for Wealth Management accounts and securities sold under agreements to repurchase at June 30, 2012, and December 31, 2011, respectively.

Securities with unrealized losses at June 30, 2012, and December 31, 2011, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

	Less Than 12 Months					12 Months or Longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		(Loss)			Value		(Loss)			Value		(Loss)
June 30, 2012
Available-for-sale
U.S. Government agencies	$	3,693	$	(4	)	$	—	$	—		$	3,693	$	(4	)
Total available-for-sale	$	3,693	$	(4	)	$	—	$	—		$	3,693	$	(4	)
Held-to-maturity
Collateralized mortgage obligations, residential	$	40,645	$	(189	)	$	5,613	$	(37	)	$	46,258	$	(226	)
Total Held-to-maturity	$	40,645	$	(189	)	$	5,613	$	(37	)	$	46,258	$	(226	)
December 31, 2011
Available-for-sale
U.S. Government agencies	$	12,990	$	(35	)	$	—	$	—		$	12,990	$	(35	)
Total available-for-sale	$	12,990	$	(35	)	$	—	$	—		$	12,990	$	(35	)
Held-to-maturity
Collateralized mortgage obligations, residential	$	19,208	$	(119	)	$	—	$	—		$	19,208	$	(119	)
Total Held-to-maturity	$	19,208	$	(119	)	$	—	$	—		$	19,208	$	(119	)

In determining other-than-temporary-impairment (“OTTI”) for debt securities, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Corporation has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

9

Notes to Consolidated Financial Statements

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

When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

As of June 30, 2012, the Corporation held eleven investments of which the amortized cost was greater than fair value. The Corporation has no securities in which OTTI has been recorded.

The unrealized losses for investments classified as available-for-sale are attributable to changes in interest rates and/or economic environment and individually were 0.11% or less of their respective amortized costs. The largest unrealized loss related to a FNMA that was purchased in June 2012. Given this investment is backed by the U.S. Government and its agencies, there is minimal credit risk at this time.

Although there were no unrealized losses on the municipals at June 30, 2012, the credit rating of the individual municipalities was assessed. As of June 30, 2012, all but two of the municipal debt securities were rated BBB or better (as a result of insurance of the underlying rating on the bond). The two municipal debt securities have no underlying rating. Credit reviews of the municipalities have been conducted. As a result, management has determined that all of the non-rated debt securities would be rated a “pass” asset and thus classified as an investment grade security. All interest payments are current for all municipal securities and management expects all to be collected in accordance with contractual terms.

The unrealized losses for investments classified as held-to-maturity are attributable to changes in interest rates and/or economic environment and individually were 1.12% or less of their respective amortized costs. The unrealized losses relate primarily to residential collateralized mortgage obligations. The residential collateralized mortgage obligations were purchased between October 2010 and April 2012. There has been a decrease in long-term interest rates from the time of the investment purchase and June 30, 2012, which affects the fair value of residential collateralized mortgage obligations and prepayment speeds. All residential collateralized mortgage obligations are backed by the U.S. Government and its agencies and represent minimal credit risk at this time.

10

Notes to Consolidated Financial Statements

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

Note 3: Loans and Allowance for Loan Losses

Loans, which are principally to borrowers in central Indiana, including unamortized deferred costs net of fees, consist of the following:

	June 30, 2012			December 31, 2011
Residential loans secured by real estate	$	276,162		$	262,092
Commercial loans secured by real estate		296,559			301,425
Construction loans		55,104			44,603
Other commercial and industrial loans		291,324			312,766
Consumer loans		33,551			32,166
Total loans		952,700			953,052
Net deferred loan costs		532			560
Allowance for loan losses		(12,614	)		(14,242	)
Total loans, net	$	940,618		$	939,370

The Corporation periodically sells residential mortgage loans it originates based on the overall loan demand of the Corporation and outstanding balances of the residential mortgage portfolio.

As of June 30, 2012, and December 31, 2011, there was $88,327 and $81,838, of 1-4 family residential mortgage loans, respectively, pledged as collateral for FHLB advances. There were no borrowings at June 30, 2012, and December 31, 2011.

There was an aggregate of $257,067 and $236,993 of commercial loans, commercial real estate, and construction loans pledged as collateral at the Federal Reserve Bank Discount Window at June 30, 2012, and December 31, 2011, respectively. There were no borrowings at June 30, 2012, and December 31, 2011.

The following table presents the activity in the allowance for loan losses by portfolio segment:

	Three months ended June 30, 2012
	Commercial			Commercial
	& industrial			real estate			Residential			Consumer			Unallocated			Total
Beginning balance	$	3,698		$	6,767		$	2,050		$	249		$	676		$	13,440
Loan charge offs		(365	)		(1,144	)		(142	)		(12	)		—			(1,663	)
Recoveries		535			—			3			3			—			541
Provision		(916	)		873			347			31			(39	)		296
Ending balance	$	2,952		$	6,496		$	2,258		$	271		$	637		$	12,614

	Three months ended June 30, 2011
	Commercial			Commercial
	& industrial			real estate			Residential			Consumer			Unallocated		Total
Beginning balance	$	3,773		$	9,495		$	2,414		$	343		$	17	$	16,042
Loan charge offs		(411	)		(384	)		(81	)		(137	)		—		(1,013	)
Recoveries		141			—			4			4			—		149
Provision		930			(385	)		(643	)		338			749		989
Ending balance	$	4,433		$	8,726		$	1,694		$	548		$	766	$	16,167

11

Notes to Consolidated Financial Statements

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

	Six months ended June 30, 2012
	Commercial			Commercial
	& industrial			real estate			Residential			Consumer			Unallocated			Total
Beginning balance	$	5,377		$	6,279		$	1,644		$	228		$	714		$	14,242
Loan charge offs		(1,789	)		(1,173	)		(463	)		(27	)		—			(3,452	)
Recoveries		547			—			57			16			—			620
Provision		(1,183	)		1,390			1,020			54			(77	)		1,204
Ending balance	$	2,952		$	6,496		$	2,258		$	271		$	637		$	12,614

	Six months ended June 30, 2011
	Commercial			Commercial
	& industrial			real estate			Residential			Consumer			Unallocated			Total
Beginning balance	$	3,870		$	7,845		$	2,400		$	200		$	819		$	15,134
Loan charge offs		(813	)		(793	)		(203	)		(144	)		—			(1,953	)
Recoveries		254			36			12			6			—			308
Provision		1,122			1,638			(515	)		486			(53	)		2,678
Ending balance	$	4,433		$	8,726		$	1,694		$	548		$	766		$	16,167

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method:

	June 30, 2012
	Commercial			Commercial
	& industrial			real estate			Residential			Consumer			Unallocated		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	267		$	740		$	737		$	67		$	—	$	1,811
Collectively evaluated for impairment		2,685			5,756			1,521			204			637		10,803
Total ending allowance balance	$	2,952		$	6,496		$	2,258		$	271		$	637	$	12,614
Allowance as a % of loans		1.01	%		1.85	%		0.82	%		0.81	%		N/A		1.32	%
Loans:
Loans individually evaluated for impairment	$	3,385		$	14,423		$	3,999		$	67		$	N/A	$	21,874
Loans collectively evaluated for impairment		288,152			337,000			272,690			33,516			N/A		931,358
Accrued interest receivable		802			927			1,289			62			N/A		3,080
Total recorded investment	$	292,339		$	352,350		$	277,978		$	33,645		$	N/A	$	956,312

	December 31, 2011
	Commercial			Commercial
	& industrial			real estate			Residential			Consumer			Unallocated		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	2,702		$	897		$	720		$	20		$	—	$	4,339
Collectively evaluated for impairment		2,675			5,382			924			208			714		9,903
Total ending allowance balance	$	5,377		$	6,279		$	1,644		$	228		$	714	$	14,242
Allowance as a % of loans		1.72	%		1.82	%		0.63	%		0.71	%		N/A		1.49	%
Loans:
Loans individually evaluated for impairment	$	7,872		$	14,409		$	4,480		$	20		$	N/A	$	26,781
Loans collectively evaluated for impairment		305,147			331,380			258,131			32,173			N/A		926,831
Accrued interest receivable		877			885			1,296			80			N/A		3,138
Total recorded investment	$	313,896		$	346,674		$	263,907		$	32,273		$	N/A	$	956,750

12

Notes to Consolidated Financial Statements

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

The above disclosure is required to be presented using the recorded investment of loans, which includes accrued interest receivable and net deferred loan costs. Although accrued interest receivable balances have been presented separately, all accrued interest receivable balances are related to the loans collectively evaluated for impairment as practically all loans individually evaluated for impairment are on nonaccrual.

Loans are considered to be impaired when it is determined that the obligor will not pay all contractual principal and interest when due. The following table presents loans individually evaluated for impairment by class. For purposes of this disclosure, the unpaid principal is not reduced for net charge-offs.

	June 30, 2012
	Unpaid				Allowance for
	Principal		Recorded		Loan Losses
	Balance		Investment		Allocated
With no related allowance recorded:
Commercial & industrial	$	3,428	$	2,709	$	—
Commercial real estate		12,522		11,057		—
Residential
1-4 family		1,587		1,167		—
Home equity		496		428		—
Consumer
Personal LOC		—		—		—
Personal Term		—		—		—
DDA Overdraft Protection		—		—		—
Credit cards		—		—		—
With an allowance recorded:
Commercial & industrial		731		676		267
Commercial real estate		3,861		3,366		740
Residential
1-4 family		309		305		61
Home equity		2,099		2,099		676
Consumer
Personal LOC		—		—		—
Personal Term		49		49		49
DDA Overdraft Protection		—		—		—
Credit cards		18		18		18
Total	$	25,100	$	21,874	$	1,811

13

Notes to Consolidated Financial Statements

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

	December 31, 2011
	Unpaid				Allowance for
	Principal		Recorded		Loan Losses
	Balance		Investment		Allocated
With no related allowance recorded:
Commercial & industrial	$	2,471	$	1,812	$	—
Commercial real estate		4,811		2,523		—
Residential
1-4 family		1,371		920		—
Home equity		1,399		1,245		—
Consumer
Personal LOC		—		—		—
Personal Term		—		—		—
DDA Overdraft Protection		—		—		—
Credit cards		—		—		—
With an allowance recorded:
Commercial & industrial		6,060		6,060		2,702
Commercial real estate		11,886		11,886		897
Residential
1-4 family		391		387		80
Home equity		1,928		1,928		640
Consumer
Personal LOC		—		—		—
Personal Term		—		—		—
DDA Overdraft Protection		11		11		11
Credit cards		9		9		9
Total	$	30,337	$	26,781	$	4,339

The following table presents the average balance of loans individually evaluated for impairment by class:

	Three months ended				Six months ended
	June 30, 2012		June 30, 2011		June 30, 2012		June 30, 2011
Commercial & industrial	$	3,976	$	4,268	$	5,042	$	4,068
Commercial real estate		16,874		4,808		16,132		4,582
Residential
1-4 family		1,478		1,063		1,544		944
Home equity		2,429		3,469		2,704		3,480
Consumer
Personal LOC		—		—		—		53
Personal Term		34		—		17		—
DDA Overdraft Protection		—		1		—		—
Credit cards		15		5		12		4
Total	$	24,806	$	13,614	$	25,451	$	13,131

There was $46 and $92 in interest income recorded on a cash or accrual basis for the three and six month period ending June 30, 2012, respectively. There was $1 and $2 in interest income recorded on a cash or accrual basis for the three and six month period ending and June 30, 2011, respectively.

14

Notes to Consolidated Financial Statements

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

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans:

					Loans Past Due
	Nonaccrual				Over 90 Days Still Accruing
	June 30, 2012		December 31, 2011		June 30, 2012		December 31, 2011
Commercial & industrial	$	2,675	$	7,384	$	—	$	—
Commercial real estate		11,818		12,130		—		—
Residential
1-4 family		1,366		1,061		—		—
Home equity		2,527		3,139		—		—
Consumer
Personal LOC		—		—		—		—
Personal Term		—		—		—		—
DDA Overdraft Protection		—		—		—		11
Credit cards		—		—		18		9
Total	$	18,386	$	23,714	$	18	$	20

The following table presents the aging of the recorded investment in past due loans by class of loans:

	June 30, 2012
	30 - 89			Greater than
	Days			90 Days			Total
	Past Due			Past Due			Past Due
Commercial & industrial	$	445		$	1,897		$	2,342
Commercial real estate		2,432			9,132			11,564
Residential
1-4 family		885			525			1,410
Home equity		1,419			259			1,678
Consumer
Personal LOC		—			—			—
Personal Term		116			—			116
DDA Overdraft Protection		—			—			—
Credit cards		75			18			93
Total	$	5,372		$	11,831		$	17,203
Past due as a % of loans		0.56	%		1.24	%		1.80	%

	December 31, 2011
	30 - 89			Greater than
	Days			90 Days			Total
	Past Due			Past Due			Past Due
Commercial & industrial	$	1,090		$	128		$	1,218
Commercial real estate		4,346			1,931			6,277
Residential
1-4 family		899			677			1,576
Home equity		32			1,070			1,102
Consumer
Personal LOC		—			—			—
Personal Term		8			—			8
DDA Overdraft Protection		1			11			12
Credit cards		78			9			87
Total	$	6,454		$	3,826		$	10,280
Past due as a % of loans		0.68	%		0.40	%		1.08	%

15

Notes to Consolidated Financial Statements

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

As of June 30, 2012, nonaccrual loans that were 0-29 days past due totaled $3,333. As of December 31, 2011, nonaccrual loans that were 0-29 days past due totaled $14,418.

Troubled Debt Restructurings:

As of June 30, 2012, the Corporation had $14,152 in outstanding balances and had allocated $1,237 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings. Of the total $14,152 in outstanding balances of troubled debt restructurings, $10,682 are non-accrual and have a specific reserve of $626 and those balances have been reported as such. As of December 31, 2011, the Corporation had $20,226 in outstanding balances and had allocated $4,160 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings. The Corporation has committed to lend an additional $624 and $2,695 to customers with outstanding loans that are classified as troubled debt restructurings as of June 30, 2012, and December 31, 2011, respectively.

During the six month period ending June 30, 2012, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

For the six month period ending June 30, 2012, modifications involving a reduction of the stated interest rate of the loans were for periods ranging from 4 years to 30 years. Modifications involving an extension of the maturity date were for periods ranging from 3 months to 4 years.

The following table presents loans by class modified as troubled debt restructurings that occurred during the three month period ending June 30, 2012:

	Number		Pre-Modification		Post-Modification
	of		Outstanding Recorded		Outstanding Recorded
	Loans		Investment		Investment
Troubled Debt Restructurings:
Commercial & industrial		3	$	787	$	787
Commercial real estate		2		1,680		1,680
Residential
1-4 family		—		—		—
Home equity		—		—		—
Consumer
Personal LOC		—		—		—
Personal Term		1		52		49
DDA Overdraft Protection		—		—		—
Credit cards		—		—		—
Total		6	$	2,519	$	2,516

The troubled debt restructurings described above increased the allowance for loan losses by $481 and resulted in charge offs of $0 during the three month period ending June 30, 2012.

16

Notes to Consolidated Financial Statements

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

The following table presents loans by class modified as troubled debt restructurings that occurred during the six month period ending June 30, 2012:

	Number		Pre-Modification		Post-Modification
	of		Outstanding Recorded		Outstanding Recorded
	Loans		Investment		Investment
Troubled Debt Restructurings:
Commercial & industrial		3	$	787	$	787
Commercial real estate		2		1,680		1,680
Residential
1-4 family		1		46		45
Home equity		—		—		—
Consumer
Personal LOC		—		—		—
Personal Term		1		52		49
DDA Overdraft Protection		—		—		—
Credit cards		—		—		—
Total		7	$	2,565	$	2,561

The troubled debt restructurings described above increased the allowance for loan losses by $481 and resulted in charge offs of $0 during the six month period ending June 30, 2012.

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months during the six months ended June 30, 2012, following the modification:

	Number
	of
	Loans		Recorded Investment
Troubled Debt Restructurings that subsequently defaulted:
Commercial & industrial		3	$	486
Commercial real estate		5		8,852
Residential
1-4 family		1		55
Home equity		1		131
Consumer
Personal LOC		—		—
Personal Term		—		—
DDA Overdraft Protection		—		—
Credit cards		—		—
Total		10	$	9,524

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.

The troubled debt restructurings that subsequently defaulted described above increased the allowance for loan losses by $0 and resulted in charge offs of $565 during the six month period ending June 30, 2012.

The terms of certain other loans were modified during the six month period ending June 30, 2012, that did not meet the definition of a troubled debt restructuring. These loans have a total recorded investment as of June 30, 2012, of $8,532. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be insignificant.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification.

17

Notes to Consolidated Financial Statements

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

Credit Quality Indicators:

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

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

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

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

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

	Not				Special
June 30, 2012	Rated		Pass		Mention		Substandard		Doubtful
Commercial & industrial	$	—	$	269,210	$	8,990	$	13,337	$	—
Commercial real estate		—		311,661		15,079		24,683		—
Total	$	—	$	580,871	$	24,069	$	38,020	$	—

	Not				Special
December 31, 2011	Rated		Pass		Mention		Substandard		Doubtful
Commercial & industrial	$	—	$	291,453	$	3,566	$	18,000	$	—
Commercial real estate		—		307,170		11,622		26,997		—
Total	$	—	$	598,623	$	15,188	$	44,997	$	—

The Corporation considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, the Corporation also evaluates credit quality based on the aging status of the loan, which are previously presented, and by payment activity. A loan is considered to be nonperforming when one or more of the following conditions exist: past due 90 days or greater, non accruing status, or troubled debt restructurings. The following table presents the recorded investment in residential and consumer loans based on payment activity:

	Consumer								Residential
June 30, 2012	Personal LOC		Personal Term		DDA Overdraft Protection		Credit cards		1-4 family		Home equity
Performing	$	17,376	$	10,454	$	528	$	5,158	$	120,661	$	152,029
Nonperforming		—		49		—		18		1,472		2,527
Total	$	17,376	$	10,503	$	528	$	5,176	$	122,133	$	154,556

18

Notes to Consolidated Financial Statements

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

	Consumer								Residential
December 31, 2011	Personal LOC		Personal Term		DDA Overdraft Protection		Credit cards		1-4 family		Home equity
Performing	$	17,541	$	9,223	$	460	$	4,949	$	112,791	$	145,340
Nonperforming		—		—		11		9		1,307		3,173
Total	$	17,541	$	9,223	$	471	$	4,958	$	114,098	$	148,513

Note 4: Other Real Estate Owned

The following table presents the activity in other real estate owned:

	Three months ended June 30,						Six months ended June 30,
	2012			2011			2012			2011
Balance at beginning of period	$	7,846		$	9,409		$	7,575		$	9,574
Additions		359			1,144			1,061			1,232
Net write (downs) ups		(54	)		51			(228	)		(151	)
Sales		(2,994	)		(1,364	)		(3,251	)		(1,415	)
Balance at end of period	$	5,157		$	9,240		$	5,157		$	9,240

The following table presents expenses related to other real estate owned:

	Three months ended June  30,						Six months ended June 30,
	2012			2011			2012			2011
Net (gain) loss on sales	$	(160	)	$	113		$	(230	)	$	(194	)
Net write downs (ups)		54			(51	)		228			151
Operating expenses, net of rental income		341			276			539			448
	$	235		$	338		$	537		$	405

Expenses related to real estate owned are included in non performing assets expenses. Other real estate rental income is included in rental income.

Note 5: Mortgage Servicing

Mortgage loans serviced for others are not reported as assets. The principal balances of these loans are as follows:

	June 30, 2012		December 31, 2011
Mortgage loan portfolios serviced for:
FNMA	$	203,325	$	188,332
Private		23,328		21,583
FHLBI		10,404		8,800
Balance at end of period	$	237,057	$	218,715

Custodial escrow balances maintained in connection with serviced loans were $944 and $876 at June 30, 2012, and December 31, 2011, respectively.

19

Notes to Consolidated Financial Statements

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

The following table includes activity for mortgage servicing rights:

	Three months ended June  30,						Six months ended June 30,
	2012			2011			2012			2011
Balance at beginning of period	$	1,590		$	1,751		$	1,455		$	1,624
Plus additions		237			114			414			274
Fair value adjustments		(258	)		(263	)		(300	)		(296	)
Balance at end of period	$	1,569		$	1,602		$	1,569		$	1,602

Mortgage servicing rights are carried at fair value at June 30, 2012, and December 31, 2011. Fair value at June 30, 2012, was determined using discount rates ranging from 10.5% to 15.0%, prepayment speeds ranging from 7.29% to 29.27%, depending on the stratification of the specific right, and a weighted average default rate of 0.37%. Fair value at December 31, 2011, was determined using discount rates ranging from 10.5% to 15.0%, prepayment speeds ranging from 6.77% to 31.62%, depending on the stratification of the specific right, and a weighted average default rate of 0.35%.

Note 6: Stock Based Compensation

During the first quarter of 2012, two officers of the Corporation exercised options to purchase 4,100 common shares in the aggregate. The weighted average exercise price was $43.38 and the weighted average fair market value of the stock was $47.17.

During the second quarter of 2012, fifteen officers of the Corporation exercised options to purchase 29,100 common shares in the aggregate. The weighted average exercise price was $27.75 and the weighted average fair market value of the stock was $48.56.

Due to the exercise of these options for the six months ended June 30, 2012, the Corporation will receive a deduction for tax purposes for the difference between the fair value of the stock at the date of grant and the date of exercise. The Corporation recorded an income tax benefit of $178 thousand as additional paid in capital for the six months ended June 30, 2012, as per guidance issued by the Financial Accounting Standards Board (FASB) on stock compensation.

Note 7: Earnings per Share

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

	Three months ended June 30,				Six months ended June 30,
	2012		2011		2012		2011
Basic average shares outstanding		2,328,484		2,314,333		2,329,246		2,316,042
Net income	$	1,938	$	1,038	$	3,679	$	2,655
Basic net income per common share	$	0.83	$	0.45	$	1.58	$	1.15
Diluted
Average shares outstanding		2,328,484		2,314,333		2,329,246		2,316,042
Nonvested restricted stock		140,355		98,183		134,827		90,964
Net effect of the assumed exercise of stock options		24,368		26,289		22,634		21,576
Diluted average shares		2,493,207		2,438,805		2,486,707		2,428,582
Net income	$	1,938	$	1,038	$	3,679	$	2,655
Diluted net income per common share	$	0.78	$	0.43	$	1.48	$	1.09

20

Notes to Consolidated Financial Statements

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

For the three and six month period ending June 30, 2012, options to purchase 14,600 shares and 0 restricted shares were outstanding but not included in the computation of diluted earnings per share because they were antidilutive.

For the three and six month period ending June 30, 2011, options to purchase 14,600 shares and 0 restricted shares were outstanding but not included in the computation of diluted earnings per share because they were antidilutive.

Note 8: Commitments and Contingencies

Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated.

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

	June 30, 2012		December 31, 2011
Committed, not funded, commercial loans	$	24,550	$	2,500
Committed, not funded, residential loans		28,711		17,753
Unused commercial credit lines		244,856		232,578
Unused revolving home equity and credit card lines		117,625		119,459
Standby letters of credit		8,991		9,066
Demand deposit account lines of credit		2,617		2,583
	$	427,350	$	383,939

The majority of commitments to fund loans are variable rate. The demand deposit account lines of credit are a fixed rate at 18% with no maturity.

The credit risk associated with loan commitments and standby letters of credit is essentially the same as that involved in extending loans to customers and is subject to normal credit policies. Collateral may be obtained based on management’s credit assessment of the customer.

A reserve for unfunded standby letters of credit and commercial credit lines in the amount of $150 was established for the six month period ending June 30, 2012, for two commercial relationships that are currently classified as impaired loans.

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

Note 9: Fair Value

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1: Quoted prices (unadjusted) of identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

21

Notes to Consolidated Financial Statements

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

The Corporation used the following methods and significant assumptions to estimate the fair value of each type of asset or liability carried at fair value:

Available for Sale Securities: The fair value of available-for-sale securities is determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on securities’ relationship to other benchmark quoted securities (Level 2 inputs).

Mortgage Servicing Rights: On a quarterly basis, loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. If the carrying amount of an individual tranche exceeds fair value, impairment is recorded on that tranche so that the servicing asset is carried at fair value. Fair value is determined at a tranche level based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model utilizes assumptions that market participants would use in estimating future net servicing income and that can be validated against available market data (Level 2).

Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value is commonly based on recent real estate appraisals, less costs to sell. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, which are considered unobservable inputs, resulting in a Level 3 fair value classification. None of the unobservable inputs are considered material for additional disclosure. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available, resulting in a Level 3 fair value classification. None of the unobservable inputs are considered material for additional disclosure.

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Corporation. Once received, a member of the Real Estate Due Diligence Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with via independent data sources such as recent market data or industry-wide statistics.

Appraisals are obtained on an annual basis for other real estate owned and collateral dependent residential impaired loans. For collateral dependent commercial impaired loans, an annual appraisal is obtained for all impaired loans with a balance greater than $400 and for impaired loans with balances less than $400 and a loan to value equal or greater than 60%. An appraisal is obtained every two years for commercial impaired loans with balances less than $400 and a loan to value less than 60%.

A discount is applied to the appraisal to adjust for the costs to sell which is based on observable data and is not considered to be a part of the fair value determination. A discount of 20% is applied to properties with values equal to or less than $100 and a discount of 15% is applied to properties with values greater than $100. Selling costs from actual OREO sales are used to validate these discounts on an annual basis.

22

Notes to Consolidated Financial Statements

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

Assets and Liabilities Measured on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized below:

			Fair Value Measurements Using:
June 30, 2012	Carrying Value		Quoted Prices in Active  Markets for Identical Assets (Level 1)		Significant Other Observable  Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Available-for-sale securities:
U.S. Treasury securities	$	500	$	500	$	—	$	—
U.S. Government agencies		78,171		—		78,171		—
Municipal securities		67,959		—		67,959		—
Mortgage servicing rights		1,569		—		1,569		—
December 31, 2011
Assets:
Available-for-sale securities:
U.S. Treasury securities	$	500	$	500	$	—	$	—
U.S. Government agencies		71,266		—		71,266		—
Municipal securities		68,718		—		68,718		—
Mortgage servicing rights		1,455		—		1,455		—

A detailed breakdown of the fair value for the available-for-sale investment securities is provided in the Investment Securities note.

There were no transfers between Level 1 and Level 2 during the six month periods ending June 30, 2012 and 2011.

Assets and Liabilities Measured on a Non-Recurring Basis

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

			Fair Value Measurements Using:
June 30, 2012	Carrying Value		Quoted Prices in Active  Markets for Identical Assets (Level 1)		Significant Other Observable  Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans
Commercial
Commercial & industrial	$	146	$	—	$	—	$	146
Commercial real estate		536		—		—		536
Residential
1-4 family		157		—		—		157
Home equity		1,423		—		—		1,423
Other real estate
Commercial
Commercial real estate		1,549		—		—		1,549
Residential
1-4 family		29		—		—		29

23

Notes to Consolidated Financial Statements

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

December 31, 2011
Assets:
Impaired loans
Commercial
Commercial & industrial	$	2,987	$	—	$	—	$	2,987
Commercial real estate		8,991		—		—		8,991
Residential
1-4 family		104		—		—		104
Home equity		1,266		—		—		1,266
Other real estate
Commercial
Commercial real estate		3,547		—		—		3,547
Residential
1-4 family		115		—		—		115

The following represent impairment charges recognized during the period:

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a gross carrying amount of $3,463, with a valuation allowance of $1,200, at June 30, 2012. There was no additional provision for loan losses for the three and six month period ending June 30, 2012, respectively. At December 31, 2011, impaired loans had a gross carrying amount of $17,234, with a valuation allowance of $3,886. There was an additional provision for loan losses of $1,466 and $2,391 for the three and six month period ending June 30, 2011, respectively.

Other real estate owned measured at fair value less costs to sell subsequent to being transferred to other real estate, had a net carrying amount of $1,578, which is made up of the outstanding balance of $2,930, net of a valuation allowance of $1,352 at June 30, 2012. There was a charge to earnings through non performing asset expense of $54 and $228 for the three and six month period ending June 30, 2012, respectively. At December 31, 2011, other real estate owned measured at fair value less costs to sell subsequent to being transferred to other real estate, had a net carrying amount of $3,662, which is made up of the outstanding balance of $5,719, net of a valuation allowance of $2,057. There was a (credit)/charge to earnings through non performing asset expense of ($51) and $151 for the three and six month period ending June 30, 2011, respectively.

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

			Fair Value Measurements at June 30, 2012 using
	Carrying Value		Level 1		Level 2		Level 3		No level assigned		Total
Assets
Cash and due from banks	$	24,538	$	24,538	$	—	$	—	$	—	$	24,538
Interest bearing due from banks		206,377		206,377		—		—		—		206,377
Federal funds sold		9,368		9,368		—		—		—		9,368
Reverse repurchase agreements		1,000		1,000		—		—		—		1,000
Investment securities available-for-sale		146,630		500		146,130		—		—		146,630
Investment securities held-to-maturity		134,045		—		135,200		—		—		135,200
Loans held for sale		5,680		—		5,680		—		—		5,680
Net loans		940,618		—		—		—		955,879		955,879
Accrued interest receivable		4,458		—		1,379		—		3,079		4,458
Liabilities
Deposits		1,339,544		1,178,248		162,960		—		—		1,341,208
Repurchase agreements and other secured short-term borrowings		84,922		—		84,930		—		—		84,930
Short-term debt		2,313		—		2,313		—		—		2,313
Subordinated debt		5,000		—		5,000		—		—		5,000
Junior subordinated debentures		13,918		—		—		10,462		—		10,462
Accrued interest payable		1,411		28		140		463		780		1,411

24

Notes to Consolidated Financial Statements

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

	December 31, 2011
	Carrying		Fair
	Amount		Value
Assets
Cash and due from banks	$	192,424	$	192,424
Federal funds sold		2,911		2,911
Reverse repurchase agreements		1,000		1,000
Investment securities available-for-sale		140,484		140,484
Investment securities held-to-maturity		113,799		115,003
Net loans		939,370		948,559
Federal Reserve and FHLB stock		2,990		N/A
Accrued interest receivable		4,403		4,403
Liabilities
Deposits		1,242,819		1,244,367
Repurchase agreements and other secured short-term borrowings		95,585		95,596
Short-term debt		2,438		2,438
Subordinated debt		5,000		5,000
Junior subordinated debentures		13,918		10,389
Accrued interest payable		1,416		1,416

The following methods and assumptions, not previously presented, were used by the Corporation in estimating its fair value disclosures for financial instruments not recorded at fair value.

Cash and Cash Equivalents: The carrying amounts of cash and due from banks, interest bearing due from banks, federal funds sold, and reverse repurchase agreements approximate fair value and are classified as Level 1.

Federal Reserve and FHLB Stock: It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

Loans: The fair value of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for 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. Impaired loans are valued at the lower of cost or fair value, less cost to sell as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

Deposits: The fair value disclosed for demand deposits (e.g., interest and non-interest checking, savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. The carrying amount of certificates of deposit approximates their fair value at the reporting date. Fair value for 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 resulting in a Level 2 classification.

Short-Term Borrowing: The carrying amounts of borrowings under repurchase agreements and other secured short-term borrowings, generally maturing within thirty days, approximate their fair value resulting in a Level 2 classification.

Other Borrowing: The fair value of the short-term and subordinated debt are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

25

Notes to Consolidated Financial Statements

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

The fair value of the junior subordinated debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

Accrued Interest Receivable/Payable: The carrying amounts of accrued interest approximate fair value resulting in a Level 1, Level 2 or Level 3 classification which is consistent with its associated asset/liability.

Off-balance Sheet Instruments: The fair value of commitments is not material.

Note 10: Adoption of New Accounting Standards

At the date of this filing, there were no newly issued accounting pronouncements that were significant to the Corporation.

26

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

Corporation Overview

The National Bank of Indianapolis Corporation (the “Corporation”) is a one-bank holding company formed in 1993 which owns all of the outstanding stock of The National Bank of Indianapolis (the “Bank”). The Bank, a national banking association, was formed in 1993 and is headquartered in Indianapolis, Indiana. The primary business activity of the Corporation is providing financial services through the Bank’s twelve banking offices in Marion, Johnson, and Hamilton County, Indiana.

The primary source of the Corporation’s revenue is net interest income from loans and deposits and fees from financial services provided to customers. Overall economic factors including market interest rates, business spending, and consumer confidence, as well as competitive conditions within the marketplace tend to influence business volumes.

The Corporation recorded net income of $1.9 million or $0.78 per diluted share for the three month period ending June 30, 2012, as compared to $1.0 million or $0.43 per diluted share for the three month period ending June 30, 2011. Net income increased for the three month period ending June 30, 2012, as compared to the three month period ending June 30, 2011, primarily due to an increase in net interest income and mortgage banking income and a decrease in the provision for loan losses. The increase is partially offset by an increase in other expense.

The Corporation recorded net income of $3.7 million or $1.48 per diluted share for the six month period ending June 30, 2012, as compared to $2.7 million or $1.09 per diluted share for the six month period ending June 30, 2011. Net income increased for the six month period ending June 30, 2012, as compared to six month period ending June 30, 2011, primarily due to an increase in net interest income and mortgage banking income and a decrease in the provision for loan losses. The increase is partially offset by an increase in other expense.

The risks and challenges that management believes will be important for the remainder of 2012 are price competition for loans and deposits by competitors, marketplace credit effects, continued spread compression, a continuation of the slow recovery of the local economy that could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans, and the lingering effects from the financial crisis in the U.S. market and foreign markets.

The Corporation has determined that it has one reportable segment, banking services. The Bank provides a full range of deposit, credit, and money management services to its target markets, which are small to medium size businesses, affluent executive and professional individuals, and not-for-profit organizations in the Indianapolis Metropolitan Statistical Area of Indiana.

Forward-Looking Information

This section contains forward-looking statements. Forward-looking statements give current expectations or forecasts of future events and are not guarantees of future performance. The forward-looking statements are based on management’s expectations and are subject to a number of risks and uncertainties. Although management believes the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements. Risks and uncertainties that could cause actual results to differ materially include, without limitation, the Corporation’s ability to execute its business plans; changes in general economic and financial market conditions; changes in interest rates; changes in competitive conditions; continuing consolidation in the financial services industry; new litigation or changes in existing litigation; losses, customer bankruptcy, claims and assessments; changes in banking regulations or other regulatory or legislative requirements that impact the Corporation’s business; and changes in accounting policies and procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies. Additional information concerning factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements is available in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2011.

27

Critical Accounting Policies

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

Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the valuation of the mortgage servicing asset, the valuation of investment securities, foreclosed assets, and the determination of the allowance for loan losses to be the accounting areas that require the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.

Investment Securities Valuation

When the Corporation classifies debt securities as held-to-maturity, it has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. Debt securities not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net of tax, reported as a component of other comprehensive income. Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

The Corporation obtains fair values from a third party on a monthly basis in order to adjust the available-for-sale securities to fair value. Equity securities that do not have readily determinable fair values are carried at cost. When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment. In determining whether a market value decline is other-than-temporary, management considers the reason for the decline, the extent of the decline and the duration of the decline. Management evaluates securities for OTTI at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. In addition to a review of the investment portfolio for OTTI, a review of the reasonableness of the market values provided by the third party is performed at least on a quarterly basis.

28

Allowance for Loan Losses

The allowance for loan losses is a valuation allowance for probable incurred credit losses. The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance for loan losses.

Management estimates the allowance balance required for each loan portfolio segment by using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

Within the allowance, there are specific and general loss components. The specific loss component is assessed for loans that management believes to be impaired. All loan classes are considered to be impaired when it is determined that the obligor will not pay all contractual principal and interest due or they become 90 days past due. For loans determined to be impaired, the loan’s carrying value is compared to its fair value using one of the following fair value measurement techniques: present value of expected future cash flows, observable market price, or fair value of the associated collateral less costs to sell. An allowance is established when the fair value is lower than the carrying value of that loan. The general component covers non-impaired loans and is based on a three-year historical loss experience supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: changes in lending policies and procedures; effects of changes in risk selection and underwriting standards; national and local economic trends and conditions; trends in nature, volume, and growth rate of loans; experience, ability, and depth of lending management and other relevant staff; levels of and trends in past due and classified loans; collateral valuations in the market for collateral dependent loans; effects of changes in credit concentrations; and competition, legal, and regulatory factors. These loans are segregated by loan class and/or risk grade with an estimated loss ratio applied against each loan class and/or risk grade.

Loans for which the terms have been modified resulting in concessions and for which the borrower is experiencing financial difficulties are considered troubled debt restructuring and are classified as impaired. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, at the carrying value and a specific reserve is established if the fair value of the collateral is less than the carrying value.

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

It is the policy of the Corporation to promptly charge off any loan, or portion thereof, which is deemed to be uncollectible. This includes, but is not limited to, any loan rated “Loss” by the regulatory authorities. All impaired loan classes are considered on a case-by-case basis.

An assessment of the adequacy of the allowance is performed on a quarterly basis. Management believes the allowance for loan losses is maintained at a level that is adequate to absorb probable losses inherent in the loan portfolio.

Other Real Estate Owned

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

29

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

Mortgage Servicing Assets

Mortgage servicing rights are recognized separately when they are acquired through sales of loans. When mortgage loans are sold, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Fair value is based on a valuation model that calculates the present value of estimated future net servicing income. The Corporation obtains fair value estimates from an independent third party. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses.

Under the fair value measurement method, the Corporation measures servicing rights at fair value at each reporting date and reports changes in fair value of servicing assets in earnings in the period in which the changes occur, and these changes are included in mortgage banking income on the income statement. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.

Results of Operations

Net Interest Income

The Corporation’s results of operations depend primarily on the level of its net interest income, its non-interest income and its operating expenses. Net interest income depends on the volume of and rates associated with interest earning assets and interest bearing liabilities which results in the net interest spread. The Corporation had net interest income fully taxable equivalent (“FTE”) of $21.9 million for the six month period ending June 30, 2012, as compared to net interest income FTE of $21.0 million for the six month period ending June 30, 2011. The increase in net interest income FTE is due to an increase in total earning assets of $62.6 million for the six month period ending June 30, 2012, as compared to the six month period ending June 30, 2011. Total interest bearing liabilities decreased $36.3 million for the six month period ending June 30, 2012, as compared to the six month period ending June 30, 2011. The net interest income spread FTE decreased 0.02% to 2.94% for the six month period ending June 30, 2012, from 2.96% for the six month period ending June 30, 2011. Due to the decrease in net interest income spread FTE, there was a decrease to the net interest margin FTE to 3.05% from 3.07% for the six month period ending June 30, 2012 and 2011, respectively.

30

The following table details average balances, interest income/expense and average rates/yields for the Corporation’s earning assets and interest bearing liabilities at the dates indicated (tax equivalent basis, dollars in thousands):

	Six months ended June 30,
	2012							2011
	Average Balance		Interest Income/ Expense		Average Rate/ Yield			Average Balance		Interest Income/ Expense		Average Rate/ Yield
Assets:
Interest bearing due from banks	$	174,124	$	219		0.25	%	$	197,558	$	247		0.25	%
Reverse repurchase agreements		1,000		—		0.01	%		1,000		—		0.01	%
Federal funds		14,250		14		0.20	%		14,906		18		0.24	%
Non taxable investment securities - FTE		62,829		1,668		5.31	%		60,904		1,727		5.67	%
Taxable investment securities		205,794		1,443		1.40	%		177,716		1,367		1.54	%
Loans (gross) - FTE		973,708		21,427		4.40	%		917,068		21,555		4.70	%
Total earning assets - FTE	$	1,431,705	$	24,771		3.46	%	$	1,369,152	$	24,914		3.64	%
Non-earning assets		94,455							92,486
Total assets	$	1,526,160						$	1,461,638
Liabilities:
Interest bearing DDA	$	225,883	$	114		0.10	%	$	205,222	$	155		0.15	%
Savings		618,219		880		0.28	%		642,241		1,423		0.44	%
CD’s under $100		45,110		264		1.17	%		69,923		466		1.33	%
CD’s over $100		96,427		588		1.22	%		95,402		704		1.48	%
Individual retirement accounts		22,299		156		1.40	%		22,129		190		1.72	%
Repurchase agreements and other secured short term borrowings		88,482		65		0.15	%		97,510		134		0.27	%
Short-term debt		2,405		56		4.66	%		2,655		63		4.75	%
Subordinated debt		5,000		44		1.76	%		5,000		38		1.52	%
Long term debt		13,918		738		10.60	%		13,918		738		10.60	%
Total interest bearing liabilities	$	1,117,743	$	2,905		0.52	%	$	1,154,000	$	3,911		0.68	%
Non-interest bearing liabilities		309,728							219,151
Other liabilities		6,124							6,298
Total liabilities	$	1,433,595						$	1,379,449
Equity		92,565							82,189
Total liabilities & equity	$	1,526,160						$	1,461,638
Recap:
Interest income - FTE			$	24,771		3.46	%			$	24,914		3.64	%
Interest expense				2,905		0.52	%			$	3,911		0.68	%
Net interest income/spread - FTE			$	21,866		2.94	%			$	21,003		2.96	%
Contribution of non-interest bearing funds						0.11	%						0.11	%
Net interest margin - FTE						3.05	%						3.07	%

Notes to the average balance and interest rate tables:

• Average balances are computed using daily actual balances.

• The average loan balance includes loans held for sale, as well as non-accrual loans and the interest recognized prior to becoming non-accrual is reflected in the interest income for loans.

31

• Interest income on loans includes loan costs net of loan fees, of $430 thousand and $351 thousand, for the six month period ending June 30, 2012 and 2011, respectively.

• Net interest income on a fully taxable equivalent basis, the most significant component of the Corporation’s earnings, is total interest income on a fully taxable equivalent basis less total interest expense. The level of net interest income on a fully taxable equivalent basis is determined by the mix and volume of interest earning assets, interest bearing deposits and borrowed funds, and changes in interest rates.

• Net interest spread is the difference between the fully taxable equivalent rate earned on interest earning assets less the rate expensed on interest bearing liabilities.

• Net interest margin represents net interest income on a fully taxable equivalent basis as a percentage of average interest earning assets. Net interest margin is affected by both the interest rate spread and the level of non-interest bearing sources of funds, primarily consisting of demand deposits and shareholders’ equity.

• Interest income on a fully taxable equivalent basis includes the additional amount of interest income that would have been earned on tax exempt loans and if investments in certain tax-exempt interest earning assets had been made in assets subject to federal taxes yielding the same after-tax income. Interest income on tax exempt loans and municipal securities has been calculated on a fully taxable equivalent basis using a federal and state income tax blended rate of 40%. The appropriate tax equivalent adjustments to interest income on loans were $479 thousand and $292 thousand for the six month period ending June 30, 2012 and 2011, respectively. The appropriate tax equivalent adjustments to interest income on municipal securities were $512 thousand and $612 thousand for the six month period ending June 30, 2012 and 2011, respectively.

• Management believes the disclosure of the fully taxable equivalent net interest income information improves the clarity of financial analysis, and is particularly useful to investors in understanding and evaluating the changes and trends in the Corporation’s results of operations. This adjustment is considered helpful in the comparison of one financial institution’s net interest income to that of another institution, as each will have a different proportion of tax-exempt interest from their earning asset portfolios.

Provision for Loan Losses

The amount charged to the provision for loan losses by the Bank is based on management’s evaluation as to the amounts required to maintain an allowance adequate to provide for probable incurred losses inherent in the loan portfolio. The provision for loan losses was at a level deemed necessary by management to absorb estimated, probable incurred losses in the loan portfolio. A detailed evaluation of the adequacy of the allowance for loan losses is completed quarterly by management, the results of which are used to determine the provision for loan losses. The level of this allowance is dependent upon the total amount of past due and non-performing loans, general economic conditions and management’s assessment of probable incurred losses based upon internal credit evaluations of loan portfolios and particular loans. Loans are principally to borrowers in central Indiana.

Past due loans increased $6.9 million from $10.3 million at December 31, 2011, to $17.2 million at June 30, 2012. This was primarily due to one relationship that was placed on nonaccrual and identified as impaired in the prior year. Thus, the allowance for loan losses was not negatively impacted by this increase in past due loans.

Due to the imprecise nature of estimating the allowance for loan losses, the allowance for loan losses includes a minor unallocated component. The unallocated component of the allowance for loan losses incorporates management’s judgmental determination of inherent losses that may not be fully reflected in other allocations, including factors such as economic uncertainties, industry trends impacting specific portfolio segments, and broad portfolio quality trends. Therefore, the ratio of allocated to unallocated components within the total allowance may fluctuate from period to period.

32

The provision for loan losses was $296 thousand and $989 thousand, for the three month periods ending June 30, 2012, and June 30, 2011, respectively. Provision expense is affected by the level of net chargeoffs as well as changes in specific and general loss components of the allowance for loan losses. Net chargeoffs were $1.1 million, of which $860 thousand was previously provided for, and $864 thousand, for the three month period ending June 30, 2012, and June 30, 2011, respectively.

The provision for loan losses was $1.2 million and $2.7 million, for the six month periods ending June 30, 2012, and June 30, 2011, respectively. Provision expense is affected by the level of net chargeoffs as well as changes in specific and general loss components of the allowance for loan losses. Net chargeoffs were $2.8 million and $1.6 million, for the six month period ending June 30, 2012, and June 30, 2011, respectively.

Non-performing loans decreased $4.9 million to $21.9 million as of June 30, 2012, from $26.8 million as of December 31, 2011. The specific allowance attributable to non-performing loans decreased $2.5 million to $1.8 million, or 8.3% of total non-performing loans, as of June 30, 2012, from $4.3 million, or 16.2% of total non-performing loans as of December 31, 2011. Contributing to the decrease in the outstanding balance and specific allowance were chargeoffs of $3.2 million, of which $2.2 million had been reserved for in a prior period, large paydowns on two commercial relationships, partially offset by new relationships transferred to non-performing loans.

Offsetting this decrease to the specific loss component of the allowance for loans losses was an increase in the general loss component of the allowance for loan losses. This is due to an overall increase in the balances of loans collectively evaluated for impairment as well as an increase in the three-year historical loss experience as a percentage of outstanding loans, which increased the general loss component of the allowance for loan losses. The allowance for loan losses allocation for loans collectively evaluated for impairment increased $900 thousand to $10.8 million, or 1.2% of total loans collectively evaluated for impairment, as of June 30, 2012, from $9.9 million, or 1.1% of total loans collectively evaluated for impairment, as of December 31, 2011.

Loans collectively evaluated for impairment are comprised of two components: loans with a defined weakness and the remaining loan portfolio. Both components of loans collectively evaluated for impairment increased as of June 30, 2012, compared to December 31, 2011. The outstanding balances of loans collectively evaluated for impairment increased $4.6 million to $931.4 million as of June 30, 2012, from $926.8 million as of December 31, 2011.

Other Operating Income

The following table details the components of other operating income (dollars in thousands):

	Three months ended June 30,					$			%
	2012		2011			Change			Change
Wealth management fees	$	1,750	$	1,704		$	46			2.7	%
Service charges and fees on deposit accounts		793		745			48			6.4	%
Rental income		189		265			(76	)		-28.7	%
Mortgage banking income		1,054		(2	)		1,056			52800.0	%
Interchange income		383		369			14			3.8	%
Other		449		385			64			16.6	%
Total other operating income	$	4,618	$	3,466		$	1,152			33.2	%

Total other operating income for the three month period ending June 30, 2012, increased as compared to the three month period ending June 30, 2011.

Wealth Management fees increased for the three month period ending June 30, 2012, as compared to the three month period ending June 30, 2011. The increase in wealth management fees is attributable to the overall increase in the stock market and assets under management, Irrevocable Life Insurance Trust (“ILIT”) fees, and tax preparation fees. Partially offsetting the increase is a decrease in the fees for mutual funds and estate fees.

33

Service charges and fees on deposit accounts increased for the three month period ending June 30, 2012, as compared to the three month period ending June 30, 2011. The increase is primarily attributable to an increase in service charges collected for checking accounts, overdraft and non sufficient fund fees, wire transfer fees, and ATM fees. In addition, the Corporation amended the fee schedule for deposit accounts during the second quarter of 2012.

Rental income decreased for the three month period ending June 30, 2012, as compared to the three month period ending June 30, 2011. The decrease was primarily due to a decrease in other real estate rental income and the Bank occupying more space at the 107 North Pennsylvania Street location thus reducing the space available for tenants.

Mortgage banking income increased for the three month period ending June 30, 2012, as compared to the three month period ending June 30, 2011. The increase for the three month period ending June 30, 2012, as compared to the three month period ending June 30, 2011, is due to an increase in the net gain on the sale of mortgage loans. A net gain on the sale of mortgage loans of $1.2 million was recorded for the three month period ending June 30, 2012, as compared to a net gain on the sale of mortgage loans of $140 thousand for the three month period ending June 30, 2011. The increase in mortgage loan sales is due to increased volume as a result of lower interest rates period over period.

Interchange income increased for the three month period ending June 30, 2012, as compared to the three month period ending June 30, 2011. The increase is attributable to higher transaction volumes for debit cards and credit cards during the three month period ending June 30, 2012, as compared to the three month period ending June 30, 2011. The increase is partially offset by an increase in cash back rewards expense for the three month period ending June 30, 2012, as compared to the three month period ending June 30, 2011.

Other income increased for the three month period ending June 30, 2012, as compared to the three month period ending June 30, 2011. The increase is primarily due to an increase in Mastercard/VISA merchant fees, safe deposit box rental income, bank owned life insurance income, and loan extension fees. The increase is partially offset by a decrease in prepayment penalties collected, fees collected for loan covenant waivers, and a loss on CRA investments.

The following table details the components of other operating income (dollars in thousands):

	Six months ended
	June 30,					$			%
	2012			2011		Change			Change
Wealth management fees	$	3,128		$	3,084	$	44			1.4	%
Service charges and fees on deposit accounts		1,564			1,492		72			4.8	%
Rental income		400			484		(84	)		-17.4	%
Mortgage banking income		1,890			217		1,673			771.0	%
Interchange income		758			709		49			6.9	%
Net loss on sale of securities		(13	)		—		(13	)		-100.0	%
Other		993			754		239			31.7	%
Total other operating income	$	8,720		$	6,740	$	1,980			29.4	%

Total other operating income for the six month period ending June 30, 2012, increased as compared to the six month period ending June 30, 2011.

Wealth Management fees increased for the six month period ending June 30, 2012, as compared to the six month period ending June 30, 2011. The increase in wealth management fees is attributable to the overall increase in the stock market and assets under management, ILIT fees, and tax preparation fees. Partially offsetting the increase is a decrease in the fees for Dreyfus money market funds, mutual funds, and estate fees.

Service charges and fees on deposit accounts increased for the six month period ending June 30, 2012, as compared to the six month period ending June 30, 2011. The increase is primarily attributable to an increase in service charges collected for checking accounts, overdraft and non sufficient fund fees, wire transfer fees and ATM fees. The Corporation amended the fee schedule for deposit accounts during the second quarter of 2012.

34

Rental income decreased for the six month period ending June 30, 2012, as compared to the six month period ending June 30, 2011. The decrease was primarily a decrease in other real estate rental income and the bank occupying more space at the 107 North Pennsylvania Street location thus reducing the space available for tenants. The decrease is partially offset by the annual true up of the tenant’s operating costs.

Mortgage banking income increased for the six month period ending June 30, 2012, as compared to the six month period ending June 30, 2011. The increase for the six month period ending June 30, 2012, as compared to the six month period ending June 30, 2011, is due to an increase in the net gain on the sale of mortgage loans. A net gain on the sale of mortgage loans of $1.9 million was recorded for the six month period ending June 30, 2012, as compared to a net gain on the sale of mortgage loans of $276 thousand for the six month period ending June 30, 2011. The increase in mortgage loan sales is due to increased volume as a result of lower interest rates period over period.

Interchange income increased for the six month period ending June 30, 2012, as compared to the six month period ending June 30, 2011. The increase is attributable to higher transaction volumes for debit cards and credit cards during the six month period ending June 30, 2012, as compared to the six month period ending June 30, 2011. The increase is partially offset by an increase in cash back rewards expense for the six months ended June 30, 2012, as compared to the six months ended June 30, 2011.

Net loss on sale of securities increased for the six month period ending June 30, 2012, as compared the six month period ending June 30, 2011. One available-for-sale municipal security was sold during the six month period ending June 30, 2012. The municipality had been downgraded and appeared to have increased credit risk.

Other income increased for the six month period ending June 30, 2012, as compared to the six month period ending June 30, 2011. The increase is primarily due to an increase in Mastercard/VISA merchant fees, safe deposit box rental income, bank owned life insurance income, prepayment penalties collected, and loan extension fees. The increase is partially offset by a decrease in fees collected for loan covenant waivers and a loss on CRA investments.

Other Operating Expenses

The following table details the components of other operating expense (dollars in thousands):

	Three months ended
	June 30,				$			%
	2012		2011		Change			Change
Salaries, wages and employee benefits	$	6,661	$	6,776	$	(115	)		-1.7	%
Occupancy		736		732		4			0.5	%
Furniture and equipment		292		283		9			3.2	%
Professional services		515		534		(19	)		-3.6	%
Data processing		916		878		38			4.3	%
Business development		495		464		31			6.7	%
FDIC Insurance		332		244		88			36.1	%
Non performing assets		401		571		(170	)		-29.8	%
Other		1,938		977		961			-98.4	%
Total other operating expenses	$	12,286	$	11,459	$	827			7.2	%

Total other operating expenses for the three month period ending June 30, 2012, increased as compared to the three month period ending June 30, 2011.

Salaries, wages, and employee benefits decreased for the three month period ending June 30, 2012, as compared to the three month period ending June 30, 2011. The decrease is due to a decrease in group medical insurance, deferred compensation, and an increase in direct loan origination costs capitalized. The decrease is partially offset by an increase in salary expense, employer FICA expense, 401K expense, employee relations, and contract labor. There was an increase in the number of employees to 279 full time-equivalents at June 30, 2012, from 270 full-time equivalents at June 30, 2011.

35

Occupancy expense increased for the three month period ending June 30, 2012, as compared to the three month period ending June 30, 2011. The increase is due to a lease termination fee and an increase in building and improvements depreciation expense due to the relocation of the Carmel banking center from a leased location to an owned freestanding building. The increase is partially offset by a decrease in real estate taxes and building maintenance.

Furniture and equipment expense increased for the three month period ending June 30, 2012, as compared to the three month period ending June 30, 2011. This increase is due to an increase in furniture, fixture, and equipment depreciation expense due to the relocation of the Carmel banking center. The increase is partially offset by a decrease in computer equipment depreciation expense and equipment repair expense.

Professional services expense decreased for the three month period ending June 30, 2012, as compared to the three month period ending June 30, 2011. The decrease is due to decrease in advertising agency fees, attorney fees, and courier service. The decrease is partially offset by an increase in accounting fees, consulting fees, outsourced internal audit fees, and design services.

Data processing expenses increased for the three month period ending June 30, 2012, as compared to the three month period ending June 30, 2011. The increase is due to an increase in bill payment services, debit cards, credit cards, and software maintenance. The increase is partially offset by a decrease in fiduciary income tax preparation and transaction processing fees for Wealth Management accounts.

Business development expenses increased for the three month period ending June 30, 2012, as compared to the three period ending June 30, 2011. The increase is due to an increase in customer entertainment, customer promotions, advertising, market research, and customer relations. The increase is partially offset by a decrease in public relations, grand opening expense, and sales and product literature.

FDIC insurance expense increased for the three month period ending June 30, 2012, as compared to the three month period ending June 30, 2011. The increase is due to an increase in the FDIC assessment because of higher assets period over period.

Nonperforming assets expenses decreased for the three month period ending June 30, 2012, as compared to the three month period ending June 30, 2011. The decrease is due to an increase in the net gain on the sale of other real estate. The decrease is partially offset by an increase in the write down of the carrying value of other real estate owned period over period.

Other expenses increased for the three month period ending June 30, 2012, as compared to the three period ending June 30, 2011. The increase is due to an increase of $135 thousand in the allowance for off balance sheet credit losses and a $997 thousand wire loss resulting from an external fraud scheme. The matter has been turned over to the proper authorities. The increase is partially offset by a reversal of $157 thousand in check losses recorded in the fourth quarter of 2011.

The following table details the components of other operating expense (dollars in thousands):

	Six months ended
	June 30,				$			%
	2012		2011		Change			Change
Salaries, wages and employee benefits	$	13,311	$	13,203	$	108			0.8	%
Occupancy		1,353		1,376		(23	)		-1.7	%
Furniture and equipment		601		582		19			3.3	%
Professional services		1,042		1,047		(5	)		-0.5	%
Data processing		1,770		1,671		99			5.9	%
Business development		965		892		73			8.2	%
FDIC Insurance		652		783		(131	)		-16.7	%
Non performing assets		909		832		77			9.3	%
Other		2,976		516		2,460			476.7	%
Total other operating expenses	$	23,579	$	20,902	$	2,677			12.8	%

Total other operating expenses for the six month period ending June 30, 2012, increased as compared to the six month period ending June 30, 2011.

36

Salaries, wages, and employee benefits increased for the six month period ending June 30, 2012, as compared to the six month period ending June 30, 2011. The increase is the result of increased salary expense, employer FICA expense, contract labor, employee relations, 401K expense, and performance bonus expense. There was an increase in the number of employees to 279 full time-equivalents at June 30, 2012, from 270 full-time equivalents at June 30, 2011. The percentage accrued for the performance bonus is higher in 2012 as compared to the percentage in 2011. The increase is partially offset by an increase in direct loan origination costs capitalized and a decrease in group medical insurance and deferred compensation.

Occupancy expense decreased for the six month period ending June 30, 2012, as compared to the six month period ending June 30, 2011. The decrease is due to a decrease in real estate taxes, building utilities and maintenance, and snow removal. The decrease is partially offset by an increase in building and property repair expense, and a lease termination fee, and building and improvements depreciation expense due to the relocation of the Carmel banking center from a leased location to an owned freestanding building.

Furniture and equipment expense increased for the six month period ending June 30, 2012, as compared to the six month period ending June 30, 2011. This increase is due to an increase in furniture, fixture, and equipment depreciation expense due to the relocation of the Carmel banking center and furniture, fixture, and equipment repair expense. The increase is partially offset by a decrease in computer equipment depreciation expense and maintenance contracts.

Professional services expense decreased for the six month period ending June 30, 2012, as compared to the six month period ending June 30, 2011. The decrease is due to a decrease in advertising agency fees, attorney fees, and courier service. The decrease is partially offset by an increase in outsourced internal audit services, accounting fees, consulting fees, and design services.

Data processing expenses increased for the six month period ending June 30, 2012, as compared to the six month period ending June 30, 2011. The increase is due to an increase in service bureau fees of the Bank, bill payment services, ATM/debit cards, credit cards, and software maintenance. The increase is partially offset by a decrease in fiduciary income tax preparation, transaction processing fees, and mutual fund expense for Wealth Management accounts.

Business development expenses increased for the six month period ending June 30, 2012, as compared to the six period ending June 30, 2011. The increase is due to an increase in market research, customer entertainment, customer promotions, direct mail campaign, and advertising. The increase is partially offset by a decrease in sales and product literature.

FDIC insurance expense decreased for the six month period ending June 30, 2012, as compared to the six month period ending June 30, 2011. The decrease is due to the new rate schedule adopted by the FDIC effective April 1, 2011. The decrease is partially offset by an increase in the FDIC assessment because of higher assets period over period.

Nonperforming assets expenses increased for the six month period ending June 30, 2012, as compared to the six month period ending June 30, 2011. This increase is due to an increase in real estate taxes, lawn maintenance, and appraisal fees related to other real estate owned by the Corporation and classified loan expense. Additionally, there was an increase in the write down of the carrying value of other real estate owned period over period. The increase is partially offset by an increase in the net gain on the sale of other real estate.

Other expenses increased for the six month period ending June 30, 2012, as compared to the six period ending June 30, 2011. The increase is due an increase of $135 thousand in the allowance for off balance sheet credit losses. In addition, the Corporation recovered $395 thousand during the six month period ending June 30, 2011, relating to a wire transfer inadvertently sent to the wrong beneficiary in 2010, and a reversal of a $1.0 million accrual in 2011 established by the Corporation in 2008 relating to a certain deposit account. Also contributing to the increase was a $997 thousand wire loss resulting from an external fraud scheme. The matter has been turned over to the proper authorities. The increase is partially offset by a net decrease in check losses of $48 thousand during the six month period ending June 30, 2012.

37

Federal and State Income Tax

The following table presents the statutory rate reconciliation (dollars in thousands):

	Three months ended						Six months ended
	June 30,						June 30,
	2012			2011			2012			2011
Income before federal and state income tax	$	2,545		$	1,180		$	4,812		$	3,259
Tax expense at federal statutory rate		865			401			1,636		$	1,108
Increase (decrease) in taxes resulting from:
State income tax		127			45			240		$	122
Tax exempt interest		(357	)		(303	)		(711	)	$	(581	)
Bank owned life insurance		(42	)		(28	)		(73	)	$	(58	)
Customer entertainment		28			28			44		$	46
Other		(14	)		(1	)		(3	)	$	(33	)
Total income tax	$	607		$	142		$	1,133		$	604

Financial Condition

Total assets increased $86.0 million from $1,460 million at December 31, 2011, to $1,546 million at June 30, 2012. The increase is the result of an increase in investment securities of $26.4 million and an increase in cash and cash equivalents of $45.0 million from $196.3 million at December 31, 2011, to $241.3 million at June 30, 2012. Deposits increased $97.0 million from $1,243 million at December 31, 2011, to $1,340 million at June 30, 2012, due to new deposit relationships. The increase in deposits funded the increase in investment securities.

Liquidity and Interest Rate Sensitivity

The Corporation must maintain an adequate liquidity position in order to respond to the short-term demand for funds caused by withdrawals from deposit accounts, extensions of credit and for the payment of operating expenses. Maintaining an adequate liquidity position is accomplished through the management of the liquid assets—those which can be converted into cash—and access to additional sources of funds. The Corporation must monitor its liquidity ratios as established by the Asset Liability Committee (“ALCO”). In addition, the Corporation has established a contingency funding plan to address liquidity needs in the event of depressed economic or market conditions, unexpected events, and/or situations beyond the Corporation’s control. The liquidity position is continually monitored and reviewed by ALCO.

The Corporation has many sources of funds available, they include: cash and due from Federal Reserve, overnight federal funds sold, investments classified as available for sale, maturity of investments classified as held to maturity, deposits, Federal Home Loan Bank (“FHLB”) advances, and issuance of debt. Deposits were the most significant funding source and purchases of investment securities held to maturity and available for sale were the most significant use of funds during the six month period ending June 30, 2012. Proceeds from maturities of investment securities held to maturity and available for sale were the most significant funding source and purchases of investment securities held to maturity and available for sale were the most significant use of funds during the six month period ending June 30, 2011.

The Corporation entered into a $2.0 million revolving line of credit with U.S. Bank which matured on August 31, 2011. On September 1, 2011, the Corporation renewed the revolving loan agreement which will mature on August 31, 2012. As part of the renewal of the revolving loan agreement, the revolving loan amount was reduced from $2.0 million to $1.0 million. Under the terms of the revolving line of credit, the Corporation paid prime plus 1.25% which equated to 4.50% at June 30, 2012. In addition, the Corporation paid a 0.25% fee on the unused portion of the revolving line of credit. As of June 30, 2012, the outstanding balance of the revolving line of credit was $0.

38

The Corporation also has a $3.0 million one-year term facility with U.S. Bank which matured on August 31, 2011. The one-year term facility was renewed and will now mature on August 31, 2012. Under the terms of the one-year term facility, the Corporation pays prime plus 1.25% which equated to 4.50% at June 30, 2012. In addition to quarterly interest payments, the Corporation makes quarterly principal payments of $62.5 thousand. As of June 30, 2012, the outstanding balance of the term facility was $2.3 million.

All of the U.S. Bank agreements contain various financial and non-financial covenants. As of June 30, 2012, the Corporation was in compliance with all covenants.

Primary liquid assets of the Corporation are cash and due from banks, federal funds sold, investments held as available for sale, and maturing loans. Interest bearing due from banks represented the Corporation’s primary source of immediate liquidity and averaged $174.1 million and $197.6 million for the six month period ending June 30, 2012, and June 30, 2011, respectively. The Corporation believes these balances are maintained at a level adequate to meet immediate needs. Reverse repurchase agreements may serve as a source of liquidity, but are primarily used as collateral for customer balances in overnight repurchase agreements. Maturities in the Corporation’s loan and investment portfolios are monitored regularly to avoid matching short-term deposits with long-term loans and investments. Other assets and liabilities are also monitored to provide the proper balance between liquidity, safety, and profitability. This monitoring process must be continuous due to the constant flow of cash which is inherent in a financial institution.

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

The Corporation actively manages its interest rate sensitive assets and liabilities to reduce the impact of interest rate fluctuations. At June 30, 2012, the Corporation’s rate sensitive liabilities exceeded rate sensitive assets due within one year by $116.9 million.

As part of managing liquidity, the Corporation monitors its loan to deposit ratio on a monthly basis. At June 30, 2012, the ratio was 71.2%. This is well within the board approved policy.

The Corporation experienced an increase in cash and cash equivalents, another primary source of liquidity, of $45.0 million during the six month period ending June 30, 2012. Proceeds from the maturity of investment securities held to maturity and available for sale provided cash of $46.4 million and deposit growth provided cash of $96.7 million. Lending activities used cash of $17.7 million and purchases of investment securities held to maturity and available for sale used cash of $75.1 million.

The purpose of the Bank’s Investment Committee is to manage and balance interest rate risk of the investment portfolio, to provide a readily available source of liquidity to cover deposit runoff and loan growth, and to provide a portfolio of safe, secure assets of high quality that generate a supplemental source of income in concert with the overall asset/liability policies and strategies of the Bank.

Capital Resources

The Corporation has a $1.0 million revolving line of credit and a $2.3 million one-year term loan with U.S. Bank. See “Liquidity and Interest Rate Sensitivity” section of this report for further discussion.

On June 29, 2007, the Bank entered into a Subordinated Debenture Purchase Agreement with U.S. Bank in the amount of $5.0 million, which will mature on June 28, 2017. Under the terms of the Subordinated Debenture Purchase Agreement, the Bank pays 3-month London Interbank Offered Rate (LIBOR) plus 1.20% which equated to 1.70% at June 30, 2012. Interest payments are due quarterly.

39

In September 2000, the Trust, which is wholly owned by the Corporation, issued $13.5 million of company obligated mandatorily redeemable capital securities and $418 thousand of common securities. The proceeds from the issuance of the capital securities and the common securities were used by the Trust to purchase from the Corporation $13.9 million fixed rate junior subordinated debentures. The capital securities mature September 7, 2030, or upon earlier redemption as provided by the Indenture. The Corporation has the right to redeem the capital securities, in whole or in part, but in all cases in a principal amount with integral multiples of a thousand dollars on any March 7 or September 7 on or after September 7, 2010, at a premium of 104.8%, declining ratably to par on September 7, 2020. The capital securities and the debentures have a fixed interest rate of 10.60% and are guaranteed by the Bank. The net proceeds received by the Corporation from the sale of capital securities were used for general corporate purposes.

There were no FHLB advances outstanding as of June 30, 2012, or December 31, 2011.

The Bank may add indebtedness of this nature in the future if determined to be in the best interest of the Bank.

Capital for the Bank is at or above the well capitalized regulatory requirements at June 30, 2012. Pertinent capital ratios for the Bank as of June 30, 2012, are as follows:

				Well			Adequately
	Actual			Capitalized			Capitalized
Tier 1 risk-based capital ratio		9.8	%		6.0	%		4.0	%
Total risk-based capital ratio		11.4	%		10.0	%		8.0	%
Leverage ratio		6.5	%		5.0	%		4.0	%

Dividends from the Bank to the Corporation may not exceed the net undivided profits of the Bank (included in consolidated retained earnings) for the current calendar year and the two previous calendar years without prior approval from the Office of the Comptroller of the Currency. In addition, Federal banking laws limit the amount of loans the Bank may make to the Corporation, subject to certain collateral requirements. No loans were made by the Bank to the Corporation during the six month period ending June 30, 2012 or 2011. A dividend of $1.0 million and $712 thousand was declared and paid by the Bank to the Corporation during the six month period ending June 30, 2012 and 2011, respectively.

During February 2012, the Board of Directors approved a new stock repurchase plan. Under the terms of this stock repurchase plan, the Corporation can repurchase up to $3.8 million in net costs from employees, directors, and outside shareholders. The Corporation anticipates that it will fund the purchases under the repurchase program from working capital.

Under the new repurchase plan, the Corporation purchased $1.7 million in net costs during the six month period ending June 30, 2012, and $2.1 million is still available under the new repurchase plan as of June 30, 2012. The stock repurchase program does not require the Corporation to acquire any specific number of shares and may be modified, suspended, extended or terminated by Corporation at any time without prior notice. This stock repurchase program will expire on December 31, 2012.

The amount and timing of shares repurchased under the repurchase program, as well as the specific price, will be determined by management after considering market conditions, company performance and other factors.

Recent Accounting Pronouncements and Developments

Note 10 to the Consolidated Financial Statements under Item 1 discusses new accounting policies adopted by the Corporation during the second quarter of 2012 and the expected impact of the adoption of the new accounting policies.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the risk of loss due to adverse changes in market prices and rates. The Corporation’s market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. Management actively monitors and manages its interest rate exposure and makes monthly reports to ALCO. ALCO is responsible for reviewing the interest rate sensitivity position and establishing policies to monitor and limit exposure to interest rate risk. The guidelines established by ALCO are reviewed by the ALCO/Investment Committee of the Corporation’s Board of Directors.

40

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

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

At June 30, 2012, the interest rate risk position of the Corporation was liability sensitive, meaning net income should decrease as rates rise and increase as rates fall. The Corporation performs a 200 basis point upward and downward interest rate shock to determine whether there would be an adverse impact on its annual net interest income and that it is within the established policy limits. A downward interest rate shock scenario was not performed due to the low level of current interest rates. The earnings simulation model as of June 30, 2012, projects an approximate decrease of 1.90% in net interest income in a 200 basis point upward interest rate shock. The Corporation was well within the policy limits established by the ALCO policy at June 30, 2012.

See “Liquidity and Interest Rate Sensitivity” section of this report for further discussion.

There have been no material changes in the quantitative analysis used by the Corporation since filing the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2011, (the “2011 Form 10-K”); for further discussion of the quantitative analysis used by the Corporation refer to page 49 of the 2011 Form 10-K filed with the U.S. Securities and Exchange Commission on March 9, 2012.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Corporation’s management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of June 30, 2012, an evaluation was performed under the supervision and with the participation of management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. Based on that evaluation, the principal executive officer and principal financial officer concluded that the Corporation’s disclosure controls and procedures as of June 30, 2012, were effective in ensuring information required to be disclosed in this Quarterly Report on Form 10-Q was recorded, processed, summarized, and reported on a timely basis.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting that occurred during the quarter ended June 30, 2012, that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

41

Limitations on the Effectiveness of Controls

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

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

Part II – Other Information.

Item 1. Legal Proceedings

Neither the Corporation nor its subsidiaries are involved in any pending material legal proceedings at this time, other than routine litigation incidental to their business.

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed in the Corporation’s Form 10-K for the year ended December 31, 2011, as filed with the SEC on March 9, 2012.

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

(a) On March 14, 2012, the Corporation sold a total of 2,800 shares of common stock for proceeds of $121,464 to one officer of the Corporation pursuant to the exercise of stock options by the officer.

On March 15, 2012, the Corporation sold a total of 1,300 shares of common stock for proceeds of $56,394 to one officer of the Corporation pursuant to the exercise of stock options by the officer.

On April 2, 2012, the Corporation sold a total of 1,600 shares of common stock for proceeds of $44,400 to one officer of the Corporation pursuant to the exercise of stock options by the officer.

On April 9, 2012, the Corporation sold a total of 2,600 shares of common stock for proceeds of $72,150 to two officers of the Corporation pursuant to the exercise of stock options by the officers.

On April 12, 2012, the Corporation sold a total of 1,600 shares of common stock for proceeds of $44,400 to one officer of the Corporation pursuant to the exercise of stock options by the officer.

On April 24, 2012, the Corporation sold a total of 800 shares of common stock for proceeds of $22,200 to one officer of the Corporation pursuant to the exercise of stock options by the officer.

42

On April 25, 2012, the Corporation sold a total of 1,600 shares of common stock for proceeds of $44,400 to one officer of the Corporation pursuant to the exercise of stock options by the officer.

On April 30, 2012, the Corporation sold a total of 1,600 shares of common stock for proceeds of $44,400 to one officer of the Corporation pursuant to the exercise of stock options by the officer.

On May 4, 2012, the Corporation sold a total of 3,000 shares of common stock for proceeds of $88,800 to two officers of the Corporation pursuant to the exercise of stock options by the officers.

On May 8, 2012, the Corporation sold a total of 1,600 shares of common stock for proceeds of $44,400 to one officer of the Corporation pursuant to the exercise of stock options by the officer.

On May 15, 2012, the Corporation sold a total of 800 shares of common stock for proceeds of $22,200 to one officer of the Corporation pursuant to the exercise of stock options by the officer.

On June 4, 2012, the Corporation sold a total of 1,600 shares of common stock for proceeds of $44,400 to one officer of the Corporation pursuant to the exercise of stock options by the officer.

On June 11, 2012, the Corporation sold a total of 1,000 shares of common stock for proceeds of $27,750 to one officer of the Corporation pursuant to the exercise of stock options by the officer.

On June 14, 2012, the Corporation sold a total of 11,100 shares of common stock for proceeds of $308,025 to two officers of the Corporation pursuant to the exercise of stock options by the officers.

These sales were made pursuant to an exemption from registration under Sections 3(a)(11) and 4(2) of the Securities Act of 1933, as amended.

(b) Not applicable.

43

(c) The following table sets forth the issuer repurchases of equity securities that are registered by the Corporation pursuant to Section 12 of the Securities Exchange Act of 1934 during the second quarter of 2012.

							Maximum
							Number (or
							Approximate
					Total		Dollar Value)
					Number of		of Shares that
					Shares		May Yet Be
					Purchased as		Purchased
					Part of		Under the
	Total				Publicly		Plans or
	Number of		Average		Announced		Programs
	Shares		Price Paid		Plans or		(Dollars in
Period	Purchased		per Share		Programs**		thousands)
April 1 -
April 30, 2012		8,997	$	48.70		8,997	$	2,977
May 1 -
May 31, 2012		5,195	$	48.94		5,195	$	2,723
June 1 -
June 30, 2012		12,950	$	48.27		12,950	$	2,098
Total		27,142		*		27,142

* The weighted average price per share for the period April 2012 through June 2012 was $48.54.

** All shares repurchased by the Corporation during 2012 were completed pursuant to the repurchase program.

During February 2012, the Board of Directors approved a new stock repurchase plan. Under the terms of this stock repurchase plan, the Corporation can repurchase up to $3.8 million in net costs from employees, directors, and outside shareholders. The Corporation anticipates that it will fund the purchases under the repurchase program from working capital.

Under the new repurchase plan, the Corporation purchased $1.7 million in net costs during the six month period ending June 30, 2012, and $2.1 million is still available under the new repurchase plan as of June 30, 2012. The stock repurchase program does not require the Corporation to acquire any specific number of shares and may be modified, suspended, extended or terminated by Corporation at any time without prior notice. This stock repurchase program will expire on December  31, 2012.

Item 3. Defaults on Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

44

Item 6. Exhibits

3.01	Articles of Incorporation of the Corporation, filed as Exhibit 3(i) to the Corporation’s Form 10-QSB as of September 30, 1995, are incorporated by reference and Articles of Amendment filed as Exhibit 3(i) to the Form 10-K for the fiscal year ended December 31, 2001.
3.02	Bylaws of the Corporation, filed as Exhibit 3(ii) to the Corporation’s Form 8-K filed July 30, 2011, are incorporated by reference.
10.01*	1993 Key Employees’ Stock Option Plan of the Corporation, as amended, filed as Exhibit 10(a) to the Form 10-K for the fiscal year ended December 31, 2004, is incorporated by reference.
10.02*	1993 Directors’ Stock Option Plan of the Corporation, as amended, filed as Exhibit 10(b) to the Corporation’s Form 10-Q as of June 30, 2001, is incorporated by reference.
10.03*	1993 Restricted Stock Plan of the Corporation, as amended, filed as Exhibit 10(c) to the Form 10-K for the fiscal year ended December 31, 2004, is incorporated by reference.
10.04*	Form of agreement under the 1993 Key Employees Stock Option Plan, filed as Exhibit 10(d) to the Form 10-K for the fiscal year ended December 31, 2004, is incorporated by reference.
10.05*	Form of agreement under the 1993 Restricted Stock Plan, filed as Exhibit 10(e) to the Form 10-K for the fiscal year ended December 31, 2004, is incorporated by reference.
10.06*	Schedule of Directors Compensation Arrangements, filed as Exhibit 10.6 to the Corporation’s Form 10-K dated December 31, 2011, is incorporated by reference.
10.07*	Schedule of Named Executive Officers Compensation Arrangements, filed as Exhibit 10.07 to the Corporation’s Form 8-K dated May 18, 2006, is incorporated by reference, as amended by the Corporation’s Form 8-K filed January 25, 2012 and April 4, 2012.
10.08*	The National Bank of Indianapolis Corporation Amended and Restated 2005 Equity Incentive Plan, filed as Exhibit 10.01 to the Corporation’s Form 8-K dated June 23, 2010, is incorporated by reference.
10.09*	Form of Restricted Stock Award Agreement for The National Bank of Indianapolis Corporation 2005 Equity Incentive Plan, filed as Exhibit 10.02 to the Corporation’s Form 8-K dated June 22, 2005, is incorporated by reference.
10.10*	Form of Stock Option Award Agreement for The National Bank of Indianapolis Corporation 2005 Equity Incentive Plan, filed as Exhibit 10.03 to the Corporation’s Form 8-K dated June 22, 2005, is incorporated by reference.
10.11*	Employment Agreement dated December 15, 2005, between Morris L. Maurer and the Corporation, filed as Exhibit 10.06 to the Corporation’s Form 8-K dated December 21, 2005, and as amended by Exhibit 10.06 to the Corporation’s Form 8-K dated November 26, 2008, is incorporated by reference.

45

10.13*	The National Bank of Indianapolis Corporation Executive’s Deferred Compensation Plan, filed as Exhibit 10.08 to the Corporation’s Form 8-K dated December 21, 2005, and as amended by Exhibit 10.08 to the Corporation’s Form 8-K dated November 26, 2008, is incorporated by reference.
10.14*	The National Bank of Indianapolis Corporation 401(k) Savings Plan (as amended and restated generally effective January 1, 2006), filed as Exhibit 10.14 to the Corporation’s Form 10-K dated December 31, 2005, is incorporated by reference.
31.1	Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2	Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1	Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350.
32.2	Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350.
101.	The following material from The National Bank of Indianapolis Corporation’s Form 10-Q Report for the quarterly period ended June 30, 2012, formatted in XBRL pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Cash Flows, (iv) the Consolidated Statements of Shareholders’ Equity, and (v) the Notes to Consolidated Financial Statements.**

* Management contract or compensatory plan or arrangement.

** Furnished, not filed, for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

46

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 3, 2012

THE NATIONAL BANK OF INDIANAPOLIS CORPORATION

/s/ Debra L. Ross

Debra L. Ross

Chief Financial Officer

(Principal Financial Officer)

47

EXHIBIT INDEX

3.01	Articles of Incorporation of the Corporation, filed as Exhibit 3(i) to the Corporation’s Form 10-QSB as of September 30, 1995, are incorporated by reference and Articles of Amendment filed as Exhibit 3(i) to the Form 10-K for the fiscal year ended December 31, 2001.
3.02	Bylaws of the Corporation, filed as Exhibit 3(ii) to the Corporation’s Form 8-K filed July 30, 2011, are incorporated by reference.
10.01*	1993 Key Employees’ Stock Option Plan of the Corporation, as amended, filed as Exhibit 10(a) to the Form 10-K for the fiscal year ended December 31, 2004, is incorporated by reference.
10.02*	1993 Directors’ Stock Option Plan of the Corporation, as amended, filed as Exhibit 10(b) to the Corporation’s Form 10-Q as of June 30, 2001, is incorporated by reference.
10.03*	1993 Restricted Stock Plan of the Corporation, as amended, filed as Exhibit 10(c) to the Form 10-K for the fiscal year ended December 31, 2004, is incorporated by reference.
10.04*	Form of agreement under the 1993 Key Employees Stock Option Plan, filed as Exhibit 10(d) to the Form 10-K for the fiscal year ended December 31, 2004, is incorporated by reference.
10.05*	Form of agreement under the 1993 Restricted Stock Plan, filed as Exhibit 10(e) to the Form 10-K for the fiscal year ended December 31, 2004, is incorporated by reference.
10.06*	Schedule of Directors Compensation Arrangements, filed as Exhibit 10.6 to the Corporation’s Form 10-K dated December 31, 2011, is incorporated by reference.
10.07*	Schedule of Named Executive Officers Compensation Arrangements, filed as Exhibit 10.07 to the Corporation’s Form 8-K dated May 18, 2006, is incorporated by reference, as amended by the Corporation’s Form 8-K filed January 25, 2012 and April 4, 2012.
10.08*	The National Bank of Indianapolis Corporation Amended and Restated 2005 Equity Incentive Plan, filed as Exhibit 10.01 to the Corporation’s Form 8-K dated June 23, 2010, is incorporated by reference.
10.09*	Form of Restricted Stock Award Agreement for The National Bank of Indianapolis Corporation 2005 Equity Incentive Plan, filed as Exhibit 10.02 to the Corporation’s Form 8-K dated June 22, 2005, is incorporated by reference.
10.10*	Form of Stock Option Award Agreement for The National Bank of Indianapolis Corporation 2005 Equity Incentive Plan, filed as Exhibit 10.03 to the Corporation’s Form 8-K dated June 22, 2005, is incorporated by reference.
10.11*	Employment Agreement dated December 15, 2005, between Morris L. Maurer and the Corporation, filed as Exhibit 10.06 to the Corporation’s Form 8-K dated December 21, 2005, and as amended by Exhibit 10.06 to the Corporation’s Form 8-K dated November 26, 2008, is incorporated by reference.

48

10.13*	The National Bank of Indianapolis Corporation Executive’s Deferred Compensation Plan, filed as Exhibit 10.08 to the Corporation’s Form 8-K dated December 21, 2005, and as amended by Exhibit 10.08 to the Corporation’s Form 8-K dated November 26, 2008, is incorporated by reference.
10.14*	The National Bank of Indianapolis Corporation 401(k) Savings Plan (as amended and restated generally effective January 1, 2006), filed as Exhibit 10.14 to the Corporation’s Form 10-K dated December 31, 2005, is incorporated by reference.
31.1	Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2	Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1	Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350.
32.2	Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350.
101.	The following material from The National Bank of Indianapolis Corporation’s Form 10-Q Report for the quarterly period ended June 30, 2012, formatted in XBRL pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Cash Flows, (iv) the Consolidated Statements of Shareholders’ Equity, and (v) the Notes to Consolidated Financial Statements.**

* Management contract or compensatory plan or arrangement.

** Furnished, not filed, for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

49