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, 1996
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period from ________ to ________
Commission File Number 0-14354
FIRST INDIANA CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-1692825
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
135 North Pennsylvania Street, Indianapolis, IN 46204
(Address of principal executive office) (Zip Code)
(317) 269-1200
(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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Common Stock, par value $0.01 per share 8,294,482 Shares
Class Outstanding at 7/31/96
<PAGE> 1
FIRST INDIANA CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX
Page
Part I Financial Information 3
Item 1. Financial Highlights 3
Financial Statements:
Condensed Consolidated Balance Sheets
as of June 30, 1996 and December 31, 1995 4
Condensed Consolidated Statements of Earnings for
the Three and Six Months Ended June 30, 1996 and 1995 5
Condensed Consolidated Statements of Shareholders'
Equity for the Six Months Ended June 30, 1996 6
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 1996 and 1995 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II Other Information 18
Signatures 19
<PAGE> 2
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
First Indiana Corporation and Subsidiaries
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
For the Three Months Ended
June 30,
--------------------------
1996 1995
<S> <C> <C>
Total Interest Income $ 30,928 $ 31,178
Total Interest Expense 15,720 16,910
Net Earnings 4,860 4,771
Primary Earnings Per Share 0.56 0.57
Fully Diluted Earnings Per Share 0.56 0.56
Dividends Per Share 0.14 0.12
Net Interest Margin 4.34 % 4.02 %
Net Interest Spread 3.67 3.53
Return on Average Equity 14.47 15.89
Return on Average Assets 1.33 1.30
Average Shares Outstanding 8,285,430 8,206,256
Primary Shares Outstanding 8,617,489 8,469,814
Fully Diluted Shares Outstanding 8,617,583 8,492,016
<CAPTION>
For the Six Months Ended
June 30,
------------------------
1996 1995
<S> <C> <C>
Total Interest Income $ 63,163 $ 59,830
Total Interest Expense 32,215 32,037
Net Earnings 9,369 9,071
Primary Earnings Per Share 1.09 1.06
Fully Diluted Earnings Per Share 1.09 1.05
Dividends Per Share 0.28 0.23
Net Interest Margin 4.37 % 4.00 %
Net Interest Spread 3.74 3.53
Return on Average Equity 14.10 15.10
Return on Average Assets 1.27 1.26
Average Shares Outstanding 8,280,294 8,341,320
Primary Shares Outstanding 8,600,692 8,588,363
Fully Diluted Shares Outstanding 8,611,750 8,629,560
<CAPTION>
At June 30,
1996 1995
----------------------------
<S> <C> <C>
Assets $ 1,473,094 $ 1,446,885
Loans-Net 1,209,085 1,151,883
Deposits 1,110,479 1,068,865
Shareholders' Equity 136,048 121,976
Shareholders' Equity/Assets 9.24 % 8.43 %
Shareholders' Equity Per Share $ 16.40 $ 14.87
Market Closing Price 24.00 16.46
Price/Earnings Multiple 10.71 x 7.37 x
<CAPTION>
At June 30, 1996
Actual Required
----------------------
Capital Ratios
<S> <C> <C>
Tangible Capital/Total Assets 8.82 % 1.50 %
Core (Tier One) Capital/Total Assets 8.82 % 3.00 %
Risk-Based Capital/Risk-Weighted Assets 12.47 % 8.00 %
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS
First Indiana Corporation and Subsidiaries
(Dollars in Thousands, Except Per Share Data)
June 30, December 31,
1996 1995
(Unaudited)
---------------------------------
<S> <C> <C>
Assets
Cash $ 22,442 $ 24,000
Federal Funds Sold 12,500 33,000
-------- -------
Total Cash and Cash Equivalents 34,942 57,000
Investments Held for Sale 116,337 96,813
Investments (Market Value of $5,767 and $5,949) 5,686 5,843
Mortgage-Backed Securities Held For Sale 734 -
Mortgage-Backed Securities - Net(Market Value of
$42,276 and $50,426) 41,970 49,498
Loans Held for Sale 38,891 52,733
Loans Receivable 1,186,502 1,214,227
Less Allowance for Loan Losses 16,308 16,234
--------- ---------
Loans Receivable - Net 1,209,085 1,250,726
Premises and Equipment 13,901 13,157
Accrued Interest Receivable 11,556 11,645
Real Estate Owned - Net 2,589 1,877
Prepaid Expenses and Other Assets 36,294 37,390
--------- ---------
Total Assets $ 1,473,094 $ 1,523,949
========= =========
Liabilities and Shareholders' Equity
Liabilities
Non-Interest-Bearing Deposits $ 81,575 $ 64,343
Interest-Bearing Deposits 1,028,904 1,054,743
--------- ---------
Total Deposits 1,110,479 1,119,086
Federal Home Loan Bank Advances 195,465 214,781
Short-Term Borrowings 10,000 38,642
Accrued Interest Payable 1,907 2,715
Advances by Borrowers for Taxes and Insurance 2,222 2,107
Other Liabilities 10,814 10,688
--------- ---------
Total Liabilities 1,330,887 1,388,019
Negative Goodwill 6,159 6,633
Shareholders' Equity
Preferred Stock, $.01 Par Value: 2,000,000 Shares
Authorized; None Issued - -
Common Stock, $.01 Par Value: 16,000,000 Shares
Authorized; 8,294,482 and 8,272,323 Shares Issued and
Outstanding 88 88
Paid-In Capital in Excess of Par 33,079 32,715
Retained Earnings 109,606 102,449
Net Unrealized (Loss) Gain on Securities Available
For Sale (375) 395
Treasury Stock-at Cost, 470,133 Shares in 1996 and 1995 (6,350) (6,350)
------- -------
Total Shareholders' Equity 136,048 129,297
--------- ---------
Total Liabilities and Shareholders' Equity $ 1,473,094 $ 1,523,949
========= =========
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
First Indiana Corporation and Subsidiaries
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
1996 1995 1996 1995
--------------------------- -------------------------
<S> <C> <C> <C> <C>
Interest Income
Loans $ 28,302 $ 27,569 $ 57,842 $ 52,519
Mortgage-Backed Securities 758 1,121 1,602 2,311
Investments 1,686 2,353 3,297 4,711
Federal Funds Sold and
Interest-Bearing Deposits 182 135 422 289
------ ------ ------ ------
Total Interest Income 30,928 31,178 63,163 59,830
------ ------ ------ ------
Interest Expense
Deposits 13,049 12,527 26,311 24,097
Federal Home Loan Bank Advances 2,496 3,625 5,367 6,602
Short-Term Borrowings 175 758 537 1,338
------ ------ ------ ------
Total Interest Expense 15,720 16,910 32,215 32,037
------ ------ ------ ------
Net Interest Income 15,208 14,268 30,948 27,793
Provision for Loan Losses 2,450 1,350 4,375 2,250
------ ------ ------ ------
Net Interest Income After
Provision For Loan Losses 12,758 12,918 26,573 25,543
------ ------ ------ ------
Non-Interest Income
Sale of Investments Held For Sale 15 - 223 (51)
Sale of Loans 921 1,710 2,014 1,829
Sale of Subsidiary 1,204 - 1,204 -
Sale of Deposits - - - 1,497
Dividends on Federal Home Loan Bank Stock 249 253 512 463
Loan Servicing Income 637 685 1,288 1,455
Loan Fees 618 646 1,168 1,133
Insurance Commissions 221 360 566 565
Accretion of Negative Goodwill 237 237 474 474
Other 1,153 1,027 2,331 1,938
------ ------ ------ ------
Total Non-Interest Income 5,255 4,918 9,780 9,303
------ ------ ------ ------
Non-Interest Expense
Salaries and Benefits 4,902 5,179 10,248 10,754
Net Occupancy 755 747 1,540 1,512
Deposit Insurance 644 554 1,288 1,090
Real Estate Owned Operations - Net (4) (199) 91 (823)
Equipment 1,088 1,164 2,164 2,318
Office Supplies and Postage 573 517 1,122 985
Other 2,330 2,041 4,934 4,129
------ ------ ------ ------
Total Non-Interest Expense 10,288 10,003 21,387 19,965
------ ------ ------ ------
Earnings Before Income Taxes 7,725 7,833 14,966 14,881
Income Taxes 2,865 3,062 5,597 5,810
------ ------ ------ ------
Net Earnings $ 4,860 $ 4,771 $ 9,369 $ 9,071
====== ====== ====== ======
Primary Earnings Per Share $ 0.56 $ 0.57 $ 1.09 $ 1.06
====== ====== ====== ======
Fully Diluted Earnings Per Share $ 0.56 $ 0.56 $ 1.09 $ 1.05
====== ====== ====== ======
Dividends Per Common Share $ 0.14 $ 0.12 $ 0.28 $ 0.23
====== ====== ====== ======
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Net
First Indiana Corporation and Subsidiaries Unrealized
(Dollars in Thousands, Except Per Share Data) Paid-In Loss on
(Unaudited) Capital Securities Total
Common Stock in Excess Retained Available Treasury Shareholders'
Shares Amount of Par Earnings for Sale Stock Equity
--------- ------ -------- -------- --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 8,272,323 $88 $32,715 $102,449 $395 ($6,350) $129,297
Common Stock Issued Under Restricted
Stock Plans-Net of Amortization - - 128 117 - - 245
Exercise of Stock Options 22,869 - 252 - - - 252
Unrealized Loss on Securities Available
for Sale, Net of Income Taxes of($524) - - - - (770) - (770)
Common Stock Issued Under Deferred
Compensation Plan - - - (8) - - (8)
Net Earnings For The Six Months
Ended June 30, 1996 - - - 9,369 - - 9,369
Dividends on Common Stock - - - (2,321) - - (2,321)
Payment for Fractional Shares (710) - (16) - - - (16)
--------- ------ -------- -------- --------- -------- ------------
Balance at June 30, 1996 8,294,482 $88 $33,079 $109,606 ($375) ($6,350) $136,048
========= ====== ======== ======== ========= ======== ============
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
First Indiana Corporation and Subsidiaries
(Dollars in Thousands)
(Unaudited)
Six Months Ended June 30,
1996 1995
-----------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net Earnings $ 9,369 $ 9,071
Adjustments to Reconcile Net Earnings to:
Net Cash Provided (Used) by Operating Activities
(Gain) Loss on Sale of Assets (2,227) (3,277)
Amortization 981 731
Amortization of Restricted Stock Plan 245 132
Depreciation 973 935
Net (Accretion) Amortization of Loans and
Mortgage-Backed Securities (79) (136)
Provision for Loan Losses 4,375 2,250
Origination of Loans Held For Sale Net of
Principal Collected (144,711) (33,638)
Origination of Mortgage Backed Securities
Available for Sale (734) -
Proceeds from Sale of Loans Held for Sale 160,567 16,432
Change In:
Accrued Interest Receivable 89 (243)
Other Assets (527) (5,163)
Accrued Interest Payable (808) 119
Other Liabilities 126 634
------- --------
Net Cash Provided (Used) by Operating Activities 27,639 (12,153)
------- --------
Cash Flows from Investing Activities
Proceeds from Maturities of Investment Securities 17,073 5,410
Proceeds from Sale of Investments Available for Sale 25,560 1,370
Purchase of Investment Securities Available for Sale (63,227) --
Principal Collected on Mortgage-Backed Securities 7,528 6,764
Originations of Loans Net of Principal Collected 20,938 (174,213)
Proceeds from Sale of Loans 2,730 117,876
Purchase of Premises and Equipment (1,756) (703)
------- ---------
Net Cash Provided (Used) by Investing Activities 8,846 (43,496)
------- ---------
Cash Flows from Financing Activities
Net Change in Deposits (8,607) 77,661
Proceeds from Sale of Deposits -- (25,462)
Repayment of Federal Home Loan Bank Advances (160,026) (206,024)
Borrowings of Federal Home Loan Bank Advances 140,710 194,000
Net Change in Short-Term Borrowings (28,642) 10,946
Net Change in Advances by Borrowers
for Taxes and Insurance 115 837
Stock Option Proceeds 252 108
Payment for Fractional Shares (16) --
Dividends Paid (2,321) (1,950)
Purchase of Treasury Stock -- (6,203)
Common Stock Issued Under Deferred Compensation Plan (8) --
-------- --------
Net Cash (Used) Provided by Financing Activities (58,543) 43,913
-------- --------
Net Change in Cash and Cash Equivalents (22,058) (11,736)
Cash and Cash Equivalents at Beginning of Period 57,000 39,684
-------- --------
Cash and Cash Equivalents at End of Period $ 34,942 $ 27,948
======== ========
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Period For:
Interest on Deposits, Advances, and
Other Borrowed Money $ 33,023 $ 31,918
Income Taxes 6,700 5,750
Transfer of Loans to Real Estate Owned 165 131
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE> 7
FIRST INDIANA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Six Months Ended June 30, 1996
(Unaudited)
Note 1 - Basis of Presentation
The foregoing condensed consolidated financial statements are
unaudited. However, in the opinion of management, all adjustments
(comprising only normal recurring accruals) necessary for a fair presentation
of the financial statements have been included. Results for any interim period
are not necessarily indicative of results to be expected for the year. The
consolidated financial statements include the accounts of First Indiana
Corporation and subsidiaries (the "Corporation"). The principal subsidiary
of the Corporation is First Indiana Bank and its subsidiaries (the "Bank"). A
summary of the Corporation's significant accounting policies is set forth in
Note 1 of the Notes to Consolidated Financial Statements in the
Corporation's Annual Report on Form 10-K for the year ended December
31, 1995.
Note 2 - Earnings Per Share
Earnings per share for 1996 and 1995 are computed by dividing net
earnings by the primary and fully diluted shares of common stock and
common stock equivalents outstanding during the period (8,617,489 and
8,617,583 for the three months ended June 30, 1996; 8,469,814 and
8,492,016 for the three months ended June 30, 1995; 8,600,692 and
8,611,750 for the six months ended June 30, 1996; and 8,588,363 and
8,629,560 for the six months ended June 30, 1995) after giving retroactive
effect to a six-for-five stock split in March 1996.
Note 3 - Allowance for Loan Loss Reserve
Allowances have been established for possible losses on loans and real
estate owned ("REO"). The provisions for losses charged to operations are
based on management's judgment of current circumstances and the credit risk
of the loan portfolio and REO. Management believes that these allowances
are adequate. While management uses available information to recognize
losses on loans and REO, future additions to the allowances may be
necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examinations, periodically
review these allowances and may require the Corporation to recognize
additions to the allowance based on their judgment about information
available to them at the time of their examination.
Note 4 - Current Accounting Pronouncements
The Bank originates mortgage loans for sale to the secondary market,
and sells the loans with servicing either retained or released. Effective
January 1, 1996, the Bank adopted Statement of Financial Accounting
Standard No. 122, "Accounting for Mortgage Servicing Rights" ("FAS122").
For servicing retained loan sales, this Statement requires capitalization of
the cost of mortgage servicing rights, regardless of whether those rights were
acquired through purchase or origination activities. Prior to adoption of FAS
122, only purchased loan servicing rights were capitalized.
<PAGE> 8
Beginning in 1996, the total cost of mortgage loans originated with
the intent to sell is allocated between the loan servicing right and the
mortgage loan without servicing based on their relative fair values at the date
of sale. The capitalized cost of loan servicing rights is amortized in
proportion to, and over the period of, estimated net servicing revenue. For
this purpose, estimated servicing revenues include late charges and other
ancillary income. Estimated servicing costs include direct costs associated
with performing the servicing function and appropriate allocations of other
costs.
Mortgage servicing rights are periodically evaluated for impairment
by stratifying them based on predominant risk characteristics of the
underlying serviced loans. These risk characteristics include loan type (fixed
or adjustable rate), investor type (FHLMC, GNMA, private), term, and note
rate. Impairment represents the excess of cost of an individual mortgage
servicing rights stratum over its fair value, and is recognized through a
valuation allowance.
Fair values for individual stratum are based on the present value of
estimated future cash flows using a discount rate commensurate with the
risks involved. Estimates of fair value include assumptions about
prepayment, default and interest rates, and other factors which are subject to
change over time. Changes in these underlying assumptions could cause the
fair value of loan servicing rights, and the related valuation allowance, to
change significantly in the future. As of June 30, 1996, the balance of
capitalized loan servicing rights was $567,000.
Note 5 - Current Regulatory Issues
Legislation pending in Congress proposes a one-time assessment on
all SAIF-insured deposits in the range of $.85 to $.90 per $100 of domestic
deposits. This one-time assessment is intended to recapitalize the Savings
Association Insurance Fund to the required level of 1.25% of insured
deposits, and could be payable in 1996. The legislation is currently pending
in Congress, but there can be no assurances that Congress will take action in
1996. If the assessment is made, the effect on First Indiana would be a
pre-tax charge of approximately $9,000,000. The Bank's well-capitalized
ranking would not be adversely affected.
Note 6 - Current Events
In July 1996, the Corporation approved a program to repurchase
from time to time up to $5,000,000 of the Corporation's common stock in
the open market. The shares will be repurchased by the use of general
corporate funds and held on the Corporation's books as treasury stock. The
program replaces one previously adopted in August 1994.
Note 7 - Reclassifications
Certain amounts in the 1995 Condensed Consolidated Financial
Statements have been reclassified to conform to the 1996 presentation.
<PAGE> 9
Management's Discussion and Analysis of Results of Operations and
Financial Condition
Summary of Corporation's Results
First Indiana Corporation and subsidiaries had net earnings of
$4,860,000 for the second quarter of 1996, compared with net earnings of
$4,771,000 in the second quarter of 1995. Earnings per share for the three
months ended June 30, 1996 were $.56, compared with $.56 per share for the
same period one year ago.
For the first six months of 1996, net earnings were $9,369,000,
compared with $9,071,000 one year ago. For the six months ended June 30,
1996, net earnings per share were $1.09, compared with $1.05 for the same
period one year ago. Included in net earnings this quarter is a non-recurring
after-tax gain of $716,000, or $.08 per share, from the sale of the Bank's
investment and insurance subsidiaries, One Investment Corporation and One
Insurance Agency. These subsidiaries were sold to the Somerset Group, Inc.,
a publicly held affiliate that owns approximately 22 percent of First Indiana
Corporation. Somerset plans to expand the insurance and investment sales
franchise of One Investment and One Insurance through a larger network of
salespeople and an expanded range of products. First Indiana will earn an
immaterial amount of fee income from referrals of the Bank's investment
customers to Somerset. In 1995, second quarter earnings were enhanced by
the sale of $45 million in home equity loans at an after-tax gain of $937,000,
or $.11 per share. The Bank is continuing to sell current production home
equity loans as a means of generating servicing fee income. Cash dividends
per share for the first six months of 1996 and 1995 were $.28 and $.23 per
share, respectively.
Net Interest Income
Net interest income was $15,208,000 for the three months ended June
30, 1996, compared with $14,268,000 for the three months ended June 30,
1995. For the six months ended June 30, 1996, net interest income was
$30,948,000, compared with $27,793,000 for the six months ended June 30,
1995. The increase in net interest income can be attributed to loan growth.
Total loans outstanding grew five percent to $1,209,085,000 at June
30, 1996, compared with $1,151,883,000 one year earlier. Much of the
Bank's growth stemmed from two areas targeted for aggressive expansion:
home equity and commercial loans. At June 30, 1996, home equity loans
outstanding were $476,981,000, compared with $393,802,000 at June 30,
1995, a 21 percent increase. Commercial loans stood at $82,508,000,
compared with $50,248,000 at June 30, 1995, a 64 percent increase. The
Bank is capitalizing on consumer demand for home equity loans and lines of
credit by offering streamlined approval and no closing costs or annual fees.
These products help maintain the Bank's competitive edge and further
enhance its reputation as an innovative real estate lender. Compared with
year-end 1995, however, net loans fell $41,641,000. Most of this contraction
resulted from continued prepayments of residential mortgage loans and from
the deliberate contraction of the Bank's indirect auto lending portfolio. The
mortgage loan sales reflect the Bank's ongoing shift to a bank-like balance
sheet, and the auto loan contraction stems from the Bank's decision to depart
from the business in August 1994.
Interest income for the second quarter of 1996 was $30,928,000,
compared with $31,178,000 for the three months ended June 30, 1995.
Interest income for the six months ended June 30, 1996 was $63,163,000,
compared with $59,830,000 for the same period in 1995. Interest expense
for the second quarter of 1996 was $15,720,000, compared with
$16,910,000 for the three months ended
<PAGE> 10
June 30, 1995. Interest expense for the six months ended June 30, 1996 and
1995 was $32,215,000 and $32,037,000, respectively.
During the second quarter of 1996, the Corporation's cost of funds
was 5.15 percent, compared with 5.25 percent one year ago. For the six
months ended June 30, 1996, the cost of funds was 5.18 percent, compared
with 5.09 percent for the same period in 1995. The yield on earning assets
was 8.82 percent for the second quarter of 1996, compared with 8.78 percent
one year ago. For the six months ended June 30, 1996, the yield on earning
assets was 8.92 percent, compared with 8.62 percent for the same period in
1995. Growth in higher-yielding loans contributed to the stronger margin.
Annualized return on total average assets was 1.33 percent for the
three months ended June 30, 1996, compared with 1.30 percent one year
ago. For the six months ended June 30, 1996, the Corporation's annualized
return on total average assets was 1.27 percent, compared with 1.26 percent
for the same period in 1995.
Net Interest Margin
Net interest margin consists of two components: interest-rate spread
and the contribution of interest-free funds (primarily capital and other
non-interest-bearing liabilities). The following analysis of net interest
margin reflects the favorable impact of the Corporation's asset-sensitive
position.
<TABLE>
<CAPTION>
Three Months Ended June 30,
(Dollars in Thousands) 1996 1995
-----------------------------
<S> <C> <C>
Net Interest Income $ 15,208 $ 14,268
========= =========
Average Interest-Earning Assets $ 1,402,184 $ 1,421,164
Average Interest-Bearing Liabilities 1,220,828 1,288,119
--------- ---------
Average Interest-Free Funds $ 181,356 $ 133,045
========= =========
Yield on Interest-Earning Assets 8.82% 8.78%
Yield on Interest-Bearing Liabilities 5.15% 5.25%
----- -----
Interest-Rate Spread 3.67% 3.53%
Impact of Interest-Free Funds 0.67% 0.49%
----- -----
Net Interest Margin 4.34% 4.02%
===== =====
All non-accruing delinquent loans have been included in average
interest-earning assets.
<CAPTION>
Six Months Ended June 30,
(Dollars in Thousands) 1996 1995
---------------------------
<S> <C> <C>
Net Interest Income $ 30,948 $ 27,793
========= =========
Average Interest-Earning Assets $ 1,416,596 $ 1,388,567
Average Interest-Bearing Liabilities 1,243,470 1,257,804
--------- ---------
Average Interest-Free Funds $ 173,126 $ 130,763
========= =========
Yield on Interest-Earning Assets 8.92% 8.62%
Yield on Interest-Bearing Liabilities 5.18% 5.09%
----- -----
Interest-Rate Spread 3.74% 3.53%
Impact of Interest-Free Funds 0.63% 0.47%
----- -----
Net Interest Margin 4.37% 4.00%
===== =====
All non-accruing delinquent loans have been included in average
interest-earning assets.
</TABLE>
<PAGE> 11
Non-Performing Assets and Summary of Loan Loss Experience
The following table analyzes the allowance for losses on loans and
REO for the six months ended June 30, 1996 and 1995.
<TABLE>
<CAPTION>
Loan REO Loss Loan and REO
Loss Allowance Allowance Loss Allowance
1996 1995 1996 1995 1996 1995
(Dollars in Thousands) ------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance of Loss Allowance
at Beginning of Year $16,234 $12,525 $1,066 $1,217 $17,300 $13,742
Provision for Losses 4,375 2,250 (100) -- 4,275 2,250
Charge-Offs -- Residential (8) (34) (4) (107) (12) (141)
-- Consumer (4,692) (1,457) (176) (69) (4,868) (1,526)
-- Construction (16) (18) (39) (67) (55) (85)
-- Business -- (46) -- -- 0 (46)
-- Commercial Real Estate -- (105) -- -- 0 (105)
Recoveries -- Residential 1 3 1 153 2 156
-- Consumer 356 90 58 19 414 109
-- Construction 1 10 -- 4 1 14
-- Business 57 -- -- -- 57 0
-- Commercial Real Estate -- 14 -- -- 0 14
Balance at June 30, $16,308 $13,232 $806 $1,150 $17,114 $14,382
Ratio of Allowance for Loan Losses
to Loans Receivable 1.33% 1.14%
Ratio of REO Loss Allowance
to Real Estate Owned 23.74% 22.37%
Ratio of Total Loan and REO Los Allowance to
Non-Performing Assets 69.90% 53.95%
</TABLE>
Non-performing assets were $24,484,000, or 1.66 percent of assets,
at June 30, 1996. This compares with $27,165,000, or 1.78 percent of
assets, at December 31, 1995 and $26,660,000, or 1.84 percent of assets, at
June 30, 1995. This category includes not only non-accrual loans and REO,
but also restructured loans on which the Bank continues to accrue interest.
At June 30, 1996, $5,879,000 of non-performing assets were restructured
loans.
The Bank regularly reviews all non-performing assets to evaluate the
adequacy of the allowances for losses on loans and REO. The allowance for
loan losses is maintained through a provision for loan losses, which is
charged to earnings. The provisions are determined in conjunction with
management's review and evaluation of current economic conditions,
changes in the character and size of the loan portfolio, estimated charge-offs,
and other pertinent information derived from a quarterly review of the loan
portfolio and REO properties.
The provision for losses on loans and REO in the second quarter of
1996 was $2,450,000, compared with $1,350,000 in the second quarter of
1995. For the six months ended June 30, 1996, the total provision for loan
losses was $4,375,000, compared with $2,250,000 for the same period in
1995. The increase is attributable to greater originations of higher
loan-to-value home equity loans and to an increase in delinquencies in the
Bank's portfolio of home equity and automobile loans. At June 30, 1996, home
equity delinquencies increased to 2.32 percent of the total home equity
portfolio, an increase from the year-end 1995 level of 1.78 percent.
<PAGE> 12
While management believes that these portfolios have strong credit
quality, it recognizes the increased risk of such portfolios compared to
traditional residential loan portfolios, and has increased the Bank's loan loss
provision accordingly. The increased charge-offs in the first half of 1996 are
reflective of both the significant increase in home equity loans outstanding
and the adoption of a more conservative charge-off policy similar to that of
commercial banks. Under its new policy, the Bank now writes down
consumer loans at the date of foreclosure and charges off the entire balance
of home equity loans greater than 120 days delinquent with loan-to-value
ratios above 90 percent. If the loan has a loan-to-value ratio less than 90
percent, the loan is written down to its estimated disposition value after
considering any first mortgage position and 15 percent disposition costs.
Indirect automobile loans greater than 120 days delinquent are charged off
in full. If collection efforts result in a subsequent recovery of all or a
portion of the loan amount, the Bank recognizes the recovery at the time of
receipt. Of the $4,692,000 in consumer charge-offs (including both home equity
and indirect automobile loans) in 1996, approximately $800,000 can be directly
attributed to the policy change.
During the second quarter, the Bank decreased the allowance for
REO losses by $100,000. Due to the sale of many foreclosed commercial
real estate properties and after a careful review of the remaining REO
portfolio, and the adoption of the new charge-off policy discussed above, the
Bank's management determined that it was not necessary to maintain such
a high REO loss allowance. The amount of the provision in 1996 was the
result of management's ongoing evaluation of the adequacy of its loan and
real estate owned loss allowances and the changing composition of the
Corporation's loan portfolio and REO. Management will continue to
evaluate the adequacy of the provision and will adjust it if necessary to
reflect changes in the amount or category of loans originated.
Non-Interest Income
Total non-interest income was $5,255,000 for the three months ended
June 30, 1996, compared with $4,918,000 for the same period in 1995. For
the six months ended June 30, 1996 and 1995, total non-interest income was
$9,780,000 and $9,303,000, respectively. Non-interest income in 1996
includes a $1,204,000 pre-tax gain from the sale of the Bank's investment
and insurance subsidiaries, One Investment Corporation and One Insurance
Agency. Included in 1995 earnings is a gain of $1,497,000 from the sale of
approximately $25,462,000 of the Bank's deposits.
During the first half of 1996, the Bank sold some of its investments
available for sale at a gain of $223,000. This compares with the $51,000 loss
recognized in the first quarter of 1995 on investment sales.
The Bank realized $752,000 on the sale of approximately
$45,158,000 in fixed-rate home equity loans in the first half of 1996. These
loans were sold from the Bank's regular production as part of a strategy to
sell loans to targeted investors on an ongoing basis. The remaining gain on
sale of loans of $1,262,000 is attributable to the sale of residential mortgage
loans in the normal course of the Bank's mortgage banking operations.
During the second quarter of 1995, the Bank sold approximately
$44,769,000 in fixed rate home equity loans from the Bank's portfolio at a
pre-tax gain of $1,535,000.
Loan servicing income for the six months ended June 30, 1996
decreased from the comparable period in 1995 principally due to the
amortization of purchased and originated mortgage servicing right assets.
The Bank purchased $310 million in residential mortgage loan servicing
rights in the second quarter of 1995.
<PAGE> 13
Insurance commissions decreased $139,000 for the three months
ended June 30, 1996 due to the sale of the Bank's insurance subsidiary.
Non-Interest Expense
Non-interest expense was $10,288,000 for the three months ended
June 30, 1996, compared with $10,003,000 for the same period in 1995.
Non-interest expense for the six months ended June 30, 1996 and 1995 was
$21,387,000 and $19,965,000, respectively. Capitalized costs increased
$118,000 and $418,000 for the three and six months ended June 30, 1996,
respectively, compared with a year ago due to the increased home equity loan
volume. Marketing expense increased $197,000 for the six months ended
June 30, 1996 over last year because of a renewed commitment to research,
sales training, and advertising.
Included in real estate owned operations net are all of the operating
revenues and expenses associated with the Corporation's REO. Such net
results declined by $195,000 and $914,000 for the three and six months
ended June 30, 1996, respectively, from one year ago. This decline reflects
a 1995 first quarter gain of $713,000 on a payoff of a commercial real estate
REO property.
Capital Resources and Liquidity
At June 30, 1996, shareholders' equity was $136,048,000, or 9.24
percent of total assets, compared with $129,297,000, or 8.48 percent, at
December 31, 1995 and $121,976,000, or 8.43 percent, at June 30, 1995.
The Bank continues to exceed all minimum capital requirements. At
June 30, 1996, the Bank's tangible and core capital stood at $131,814,000,
or 8.82 percent of assets, $109,391,000 in excess of the 1.50 percent
minimum tangible capital and $86,969,000 in excess of the three percent
minimum required core capital. Risk-based capital equaled $145,300,000,
or 12.47 percent of risk-weighted assets, $52,103,000 more than the
minimum eight percent risk-based level required.
<TABLE>
<CAPTION>
Regulatory Capital
June 30, 1996
------------------
GAAP Tangible Core Risk-Based
(Dollars in Thousands) Capital Capital % Capital % Capital %
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
First Indiana Corporation Capital $136,048
========
First Indiana Bank Capital $131,579 $131,579 $131,579 $131,579
========
Additional Capital Items:
SFAS 115 Adjustment 375 375 375
Non-Qualifying Servicing (140) (140) (140)
General Valuation Allowance 14,584
Land Loans above 80% Loan-to-Value (1,098)
------- ------- -------
Computed Regulatory Capital 131,814 8.82% 131,814 8.82% 145,300 12.47%
Minimum Capital Requirement (22,423) 1.50% (44,845) 3.00% (93,197) 8.00%
------- ------- -------
Excess Regulatory Capital $109,391 $86,969 $52,103
======= ====== ======
Fully Phased-in Requirement 1.50% 3.00% 8.00%
</TABLE>
<PAGE> 14
The Corporation paid a quarterly dividend of $.14 per common
share June 14, 1996 to shareholders of record as of June 3, 1996. This
reflects an increase from $.12 per share in 1995. On March 1, 1996, the
Corporation effected a six-for-five stock split. All per-share amounts have
been adjusted to reflect the stock split.
The Corporation conducts its business through its subsidiaries.
The main source of funds for the Corporation is dividends from the Bank.
The Corporation has no significant assets other than its investment in the
Bank.
Regulations of the former Federal Home Loan Bank Board (the
Bank Board") required thrift institutions to maintain minimum levels of
certain liquid investments, as defined in the regulations, of at least five
percent of net withdrawable assets. The director of the OTS is required to
set minimum liquidity levels between four and 10 percent of assets.
Current regulations require a minimum liquidity level of five percent. The
Corporation's liquidity ratio at June 30, 1996, was 12.10 percent.
<PAGE> 15
Interest-Rate Sensitivity
The following schedule analyzes the difference in rate-sensitive assets
and liabilities or gap at June 30, 1996 and December 31, 1995.
<TABLE>
<CAPTION>
Rate Sensitivity by Period of Maturity or Rate Change
June 30, 1996
Over 180 Over
% of Within Days to 1 Year to Over
(Dollars in Thousands) Rate Balance Total 180 Days 1 Year 5 Years 5 Years
---- ------- ------- -------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Investment Securities & Other 6.00%$ 134,523 9.59%$ 37,551 $14,981 $81,991 $--
Loans Receivable (1)
Mortgage-Backed Securities 7.57 42,704 3.04 8,138 13,274 13,099 8,193
Residential Mortgage Loans 7.94 409,882 29.22 181,443 60,206 122,097 46,136
Commercial Real Estate Loans 10.56 46,563 3.32 12,746 7,204 15,432 11,181
Business Loans 9.76 82,508 5.88 61,383 3,521 17,604 --
Consumer Loans 10.17 544,855 38.86 231,314 54,966 194,622 63,953
Residential Construction Loans 8.68 141,584 10.09 128,072 -- 13,503 9
------- ------- -------- -------- --------- -------
Total 8.88 $ 1,402,619 100.00% 660,647 154,152 458,348 129,472
========= ======= -------- -------- --------- -------
Interest-Bearing Liabilities
Deposits:
Demand Deposits (2) 1.56 $ 167,263 12.71%$ -- -- -- 167,263
Passbook Deposits (3) 2.99 51,400 3.91 12,817 1,376 9,689 27,518
Money Market Savings 4.79 258,407 19.64 258,407 -- -- --
Jumbo Certificates 5.67 113,824 8.65 60,146 8,608 45,070 --
Fixed-Rate Certificates 5.62 519,585 39.48 220,315 94,016 205,254 --
------- ------- -------- -------- --------- -------
Total 4.70 1,110,479 84.39 551,685 104,000 260,013 194,781
Borrowings:
FHLB Advances 5.64 195,465 14.85 $ 95,000 4,000 94,000 2,465
Short-Term Borrowings 5.39 10,000 0.76 10,000 -- -- --
------- ------- -------- -------- --------- -------
Total 4.84 1,315,944 100.00% 656,685 108,000 354,013 197,246
=======
Net - Other (4) 86,675 86,675
--------- -------
Total $ 1,402,619 656,685 108,000 354,013 283,921
========== ------- ------- ------- --------
Rate Sensitivity Gap $ 3,962 $ 46,152 $ 104,335 $ (154,449)
===== ====== ======= ========
June 30, 1996
Cumulative Rate-Sensitivity Gap $ 3,962 $ 50,114 $ 154,449
===== ====== =======
Percent of Total Interest-Earning Assets 0.28% 3.57% 11.01%
December 31, 1995 Gap
Cumulative Rate-Sensitivity Gap $ 75,813 $ 53,781 $ 109,934
====== ====== =======
Percent of Total Interest-Earning Assets 5.22% 3.70% 7.57%
(1) The distribution of fixed-rate loans is based upon contractual maturity and scheduled contractual
repayments adjusted for estimated prepayments. For adjustable-rate loans, interest rates adjust at intervals
of six months to five years. Included in Residential Mortgage Loans are $24,330,000 of Loans Held for
Sale. Included in Consumer Loans are $14,561,000 of Home Equity Loans Held for Sale.
(2) These deposits have been included in the Over 5 Years category to reflect management's assumption that
these accounts are not rate-sensitive. This assumption is based upon historic trends of these deposits
through periods of significant increases and decreases in interest rates without changes in rates paid on
these deposits. Included in this category are NOW, money market checking and non-interest bearing
deposits. The rate represents a blended rate on all deposit types in the category.
(3) A portion of these deposits has been included in the Over 5 Years category to reflect management's
assumption that these accounts are not rate-sensitive. This assumption is based upon the historic minimal
decay rates on these types of deposits experienced through periods of significant increases and decreases
in interest rates without changes in rates paid on these deposits.
(4) Net Other is the excess of other non-interest-bearing liabilities and capital over other non-interest-bearing
assets.
</TABLE>
<PAGE> 16
First Indiana engages in rigorous, formal asset/liability management,
the objectives of which are to manage interest-rate risk, ensure adequate
liquidity, and coordinate sources and uses of funds. At June 30, 1996, the
Corporation's cumulative one-year interest-rate gap stood at 3.57 percent.
This means that 3.57 percent of First Indiana's assets will reprice within one
year without a corresponding repricing of the liabilities funding them.
Financial Condition
Total assets at June 30, 1996, were $1,473,094,000, a decrease from
$1,523,949,000 at December 31, 1995.
Loans and mortgage-backed securities net at June 30, 1996, were
$1,209,085,000, compared with $1,250,726,000 at December 31, 1995.
Most of this contraction resulted from continued sales and prepayments of
residential mortgage loans and from the deliberate contraction of the Bank's
indirect auto lending portfolio. Mortgage-backed securities decreased
$7,528,000 due to prepayments.
In the past six months, consumer loans decreased $30,154,000,
mainly because of the sale of fixed-rate home equity loans during the year.
The Corporation's loan servicing portfolio amounted to $1,096,130,000 at
June 30, 1996, compared with $1,130,209,000 at December 31, 1995.
Total deposits were $1,110,479,000 at June 30, 1996, compared with
$1,119,086,000 at December 31, 1995. Non-interest-bearing deposits consist
of retail and commercial checking accounts. Commercial checking accounts
are expected to become a more significant source of funds. Included in
commercial checking accounts at June 30, 1996 and December 31, 1995
were approximately $7,345,000 and $6,815,000 of escrow balances
maintained for loans serviced for others. Federal Home Loan Bank advances
totaled $195,465,000 at June 30, 1996, compared with $214,781,000 at
December 31, 1995.
In addition to deposits and advances, the Corporation uses short-term
repurchase agreements as sources of funds. Borrowings will continue to be
used in the short run to compensate for periodic or other reductions in
deposits or inflows at less than projected levels, and long-term to support
mortgage lending activities.
<PAGE> 17
Other Information
Items 1, 2, 3 , 4 and 5 are not applicable.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits None
(b) Reports on Form 8-K There were no reports on
Form 8-K filed during the six months ended June 30,
1996.
<PAGE> 18
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.
First Indiana Corporation
August 12, 1996 /s/Owen B. Melton, Jr.
------------------------------
Owen B. Melton, Jr.
President
August 12, 1996 /s/David L. Gray
------------------------------
David L. Gray
Vice President and Treasurer
<PAGE> 19
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for the six months ended June 30, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1996
<CASH> 22,442
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 12,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 117,071
<INVESTMENTS-CARRYING> 47,656
<INVESTMENTS-MARKET> 48,043
<LOANS> 1,225,393
<ALLOWANCE> 16,308
<TOTAL-ASSETS> 1,473,094
<DEPOSITS> 1,110,479
<SHORT-TERM> 59,000
<LIABILITIES-OTHER> 21,102
<LONG-TERM> 146,465
0
0
<COMMON> 88
<OTHER-SE> 135,960
<TOTAL-LIABILITIES-AND-EQUITY> 1,473,094
<INTEREST-LOAN> 57,842
<INTEREST-INVEST> 4,899
<INTEREST-OTHER> 422
<INTEREST-TOTAL> 63,163
<INTEREST-DEPOSIT> 26,311
<INTEREST-EXPENSE> 32,215
<INTEREST-INCOME-NET> 30,948
<LOAN-LOSSES> 4,375
<SECURITIES-GAINS> 223
<EXPENSE-OTHER> 21,387
<INCOME-PRETAX> 14,966
<INCOME-PRE-EXTRAORDINARY> 14,966
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,369
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 1.09
<YIELD-ACTUAL> 4.37
<LOANS-NON> 14,957
<LOANS-PAST> 0
<LOANS-TROUBLED> 5,879
<LOANS-PROBLEM> 3,738
<ALLOWANCE-OPEN> 16,234
<CHARGE-OFFS> 4,716
<RECOVERIES> 415
<ALLOWANCE-CLOSE> 16,308
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,614
</TABLE>
