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 September 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 8,300,014 Shares
Class Outstanding at 10/31/96
<PAGE> 1
FIRST INDIANA CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX
Page
Part I Financial Information 3
Item 1. Financial Highlights
Financial Statements:
Condensed Consolidated Balance Sheets
as of September 30, 1996 and December 31, 1995 4
Condensed Consolidated Statements of Earnings
for the Three and Nine Months Ended
September 30, 1996 and 1995 5
Condensed Consolidated Statements of Shareholders'
Equity for the Nine Months Ended September 30, 1996 6
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended September 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 11
Part II Other Information 19
Signatures 20
<PAGE> 2
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
First Indiana Corporation and Subsidiaries
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
For the Three Months Ended
September 30,
--------------------------
1996 1995
<S> <C> <C>
Total Interest Income $ 30,986 $ 31,510
Total Interest Expense 15,789 16,749
Net Earnings 20 4,174
Primary Earnings Per Share 0.00 0.49
Fully Diluted Earnings Per Share 0.00 0.49
Dividends Per Share 0.14 0.12
Net Interest Margin 4.33 % 4.17 %
Net Interest Spread 3.63 3.64
Return on Average Equity 0.06 13.43
Return on Average Assets 0.01 1.12
Average Shares Outstanding 8,294,482 8,233,853
Primary Shares Outstanding 8,610,449 8,540,744
Fully Diluted Shares Outstanding 8,623,910 8,560,508
<CAPTION>
For the Nine Months Ended
September 30,
-------------------------
1996 1995
<S> <C> <C>
Total Interest Income $ 94,149 $ 91,340
Total Interest Expense 48,004 48,786
Net Earnings 9,389 13,245
Primary Earnings Per Share 1.09 1.54
Fully Diluted Earnings Per Share 1.09 1.53
Dividends Per Share 0.42 0.35
Net Interest Margin 4.36 % 4.06%
Net Interest Spread 3.70 3.57
Return on Average Equity 9.32 14.53
Return on Average Assets 0.84 1.20
Average Shares Outstanding 8,285,023 8,305,498
Primary Shares Outstanding 8,603,984 8,572,489
Fully Diluted Shares Outstanding 8,616,972 8,645,262
<CAPTION>
At September 30,
1996 1995
----------------------------
<S> <C> <C>
Assets $ 1,485,436 $ 1,539,594
Loans-Net 1,221,050 1,235,765
Deposits 1,123,436 1,133,723
Shareholders' Equity 135,162 125,540
Shareholders' Equity/Assets 9.10 % 8.15 %
Shareholders' Equity Per Share $ 16.30 $ 15.23
Market Closing Price 24.50 20.83
Price/Earnings Multiple 3,062.50 x 10.59 x
<CAPTION>
At September 30, 1996
Actual Required
-------------------------
Capital Ratios
<S> <C> <C>
Tangible Capital/Total Assets 8.71 % 1.50 %
Core (Tier One) Capital/Total Assets 8.71 % 3.00 %
Risk-Based Capital/Risk-Weighted Assets 12.23 % 8.00 %
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS
First Indiana Corporation and Subsidiaries
(Dollars in Thousands, Except Per Share Data)
September 30, December 31,
1996 1995
(Unaudited)
--------------------------------
<S> <C> <C>
Assets
Cash $ 35,251 $ 41,894
Federal Funds Sold - 33,000
--------- ----------
Total Cash and Cash Equivalents 35,251 74,894
Investments Held for Sale 119,827 96,813
Investments (Market Value of $5,809 and $5,949) 5,614 5,843
Mortgage-Backed Securities Held For Sale - -
Mortgage-Backed Securities - Net(Market Value of
$39,335 and $50,426) 39,009 49,498
Loans Held for Sale 52,877 52,733
Loans Receivable 1,184,701 1,214,227
Less Allowance for Loan Losses 16,528 16,234
--------- ---------
Loans Receivable - Net 1,221,050 1,250,726
Premises and Equipment 13,921 13,157
Accrued Interest Receivable 11,426 11,645
Real Estate Owned - Net 3,271 1,877
Prepaid Expenses and Other Assets 36,067 37,390
---------------- ----------------
Total Assets $ 1,485,436 $ 1,541,843
================ ================
Liabilities and Shareholders' Equity
Liabilities
Non-Interest-Bearing Deposits $ 87,699 $ 82,237
Interest-Bearing Deposits 1,035,737 1,054,743
----------- -----------
Total Deposits 1,123,436 1,136,980
Federal Home Loan Bank Advances 180,465 214,781
Short-Term Borrowings 17,566 38,642
Accrued Interest Payable 2,285 2,715
Advances by Borrowers for Taxes and Insurance 3,631 2,107
Other Liabilities 16,969 10,688
----------- ----------
Total Liabilities 1,344,352 1,405,913
Negative Goodwill 5,922 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; 8,764,615 and 8,742,456 Shares Issued and
Outstanding, including shares in treasury 88 88
Paid-In Capital in Excess of Par 33,079 32,715
Retained Earnings 108,538 102,449
Net Unrealized Loss on Securities Available For Sale (193) 395
Treasury Stock-at Cost, 470,133 Shares
in 1996 and 1995 (6,350) (6,350)
--------- --------
Total Shareholders' Equity 135,162 129,297
--------- --------
Total Liabilities and Shareholders' Equity $ 1,485,436 $ 1,541,843
=========== ============
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 September 30, Nine Months Ended September 30,
1996 1995 1996 1995
---------------------------- ----------------------
<S> <C> <C> <C> <C>
Interest Income
Loans $ 28,169 $ 27,826 $ 86,011 $ 80,345
Mortgage-Backed Securities 725 1,155 2,327 3,466
Investments 1,881 2,374 5,178 7,085
Federal Funds Sold and
Interest-Bearing Deposits 211 155 633 444
------ ------ ------ ------
Total Interest Income 30,986 31,510 94,149 91,340
------ ------ ------ ------
Interest Expense
Deposits 13,049 12,991 39,360 37,088
Federal Home Loan Bank Advances 2,620 3,061 7,987 9,663
Short-Term Borrowings 120 697 657 2,035
------ ------ ------ ------
Total Interest Expense 15,789 16,749 48,004 48,786
------ ------ ------ ------
Net Interest Income 15,197 14,761 46,145 42,554
Provision for Loan Losses 1,529 1,600 5,904 3,850
------ ------ ------ ------
Net Interest Income After Provision
For Loan Losses 13,668 13,161 40,241 38,704
------ ------ ------ ------
Non-Interest Income
Sale of Investments - (7) - (7)
Sale of Investments Held For Sale (16) - 207 (51)
Sale of Loans (360) 370 1,654 2,199
Sale of Subsidiary - - 1,204 -
Sale of Deposits - - - 1,497
Dividends on Federal Home Loan Bank Stock 261 267 773 730
Loan Servicing Income 776 725 2,064 2,180
Loan Fees 632 537 1,800 1,670
Insurance Commissions 33 367 599 932
Accretion of Negative Goodwill 237 237 711 711
Other 1,229 1,005 3,560 2,943
------ ------ ------ ------
Total Non-Interest Income 2,792 3,501 12,572 12,804
------ ------ ------ ------
Non-Interest Expense
Salaries and Benefits 4,165 5,173 14,413 15,927
Net Occupancy 778 774 2,318 2,286
Deposit Insurance 7,840 591 9,128 1,681
Real Estate Owned Operations - Net 214 (109) 305 (932)
Equipment 1,146 1,135 3,310 3,453
Office Supplies and Postage 459 487 1,581 1,472
Other 2,364 2,105 7,298 6,234
------ ------ ------ ------
Total Non-Interest Expense 16,966 10,156 38,353 30,121
------ ------ ------ ------
Earnings Before Income Taxes (506) 6,506 14,460 21,387
Income Taxes (526) 2,332 5,071 8,142
------ ------ ------ ------
Net Earnings $ 20 $ 4,174 $ 9,389 $ 13,245
====== ====== ====== ======
Primary Earnings Per Share $ 0.00 $ 0.49 $ 1.09 $ 1.54
====== ====== ====== ======
Fully Diluted Earnings Per Share $ 0.00 $ 0.49 $ 1.09 $ 1.53
====== ====== ====== ======
Dividends Per Common Share $ 0.14 $ 0.12 $ 0.42 $ 0.35
====== ====== ====== ======
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
First Indiana Corporation and Subsidiaries Net Unreal-
(Dollars in Thousands, Except Per Share Data) Paid-In ized Loss on Total
(Unaudited) Capital Securities Share-
Common Stock in Excess Retained Available Treasury holders'
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 - - 128 197 - - 325
Exercise of Stock Options 22,869 - 252 - - - 252
Unrealized Loss on Securities Available
for Sale, Net of Income Taxes of $(400) - - - - (588) - (588)
Common Stock Issued Under Deferred
Compensation Plan - - - (15) - - (15)
Net Earnings For The Nine Months
Ended September 30, 1996 - - 9,389 - - 9,389
Dividends on Common Stock - - - (3,482) - - (3,482)
Payment for Fractional Shares (710) - (16) - - - (16)
Purchase of Treasury Stock - - - - - - 0
--------- -------- --------- --------- ------------ --------- ---------
Balance at September 30, 1996 8,294,482 $88 $33,079 $108,538 ($193) ($6,350) $135,162
========= ======== ========= ========= ============ ========= =========
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)
Nine Months Ended September 30,
1996 1995
----------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net Earnings $ 9,389 $ 13,245
Adjustments to Reconcile Net Earnings to:
Net Cash Provided (Used) by Operating Activities
(Gain) Loss on Sale of Assets (1,882) (3,643)
Amortization 1,249 1,317
Amortization of Restricted Stock Plan 325 279
Depreciation 1,453 1,408
Net (Accretion) Amortization of Loans and
Mortgage-Backed Securities (62) (310)
Provision for Loan Losses 5,904 3,850
Origination of Loans Held For Sale Net
of Principal Collected (232,785) (114,002)
Origination of Mortgage Backed Securities
Available for Sale (734) --
Proceeds from Sale of Loans Held for Sale 234,295 66,259
Proceeds from Sale of Mortgage-Backed Securities
Available for Sale 734 --
Change In:
Accrued Interest Receivable 219 (1,723)
Other Assets (1,687) (7,518)
Accrued Interest Payable (430) 2,042
Other Liabilities 6,281 359
--------- ---------
Net Cash Provided (Used) by Operating Activities 22,269 (38,437)
--------- ---------
Cash Flows from Investing Activities
Proceeds from Maturities of Investment Securities 18,931 5,730
Proceeds from Sale of Investment Securities 2,993
Proceeds from Sale of Investments Available for Sale 25,560 1,369
Purchase of Investment Securities Available for Sale (68,225) --
Principal Collected on Mortgage-Backed Securities 10,489 16,109
Originations of Loans Net of Principal Collected (11,224) (235,781)
Proceeds from Sale of Indirect Installment Portfolio 32,756 --
Proceeds from Sale of Loans 2,730 125,100
Purchase of Premises and Equipment (2,256) (1,136)
--------- ---------
Net Cash Provided (Used) by Investing Activities 8,761 (85,616)
--------- ---------
Cash Flows from Financing Activities
Net Change in Deposits (13,544) 128,771
Proceeds from Sale of Deposits -- (25,462)
Repayment of Federal Home Loan Bank Advances (219,026) (321,024)
Borrowings of Federal Home Loan Bank Advances 184,710 334,000
Net Change in Short-Term Borrowings (21,076) 7,642
Net Change in Advances by Borrowers
for Taxes and Insurance 1,524 2,017
Stock Option Proceeds 252 310
Payment for Fractional Shares (16) --
Dividends Paid (3,482) (2,912)
Purchase of Treasury Stock -- (6,203)
Common Stock Issued Under Deferred Compensation Plan (15) --
--------- ---------
Net Cash Provided (Used) by Financing Activities (70,673) 117,139
--------- ---------
Net Change in Cash and Cash Equivalents (39,643) (6,914)
Cash and Cash Equivalents at Beginning of Period 74,894 53,432
--------- ---------
Cash and Cash Equivalents at End of Period $ 35,251 $ 46,518
========= =========
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Period For:
Interest on Deposits, Advances, and
Other Borrowed Money $ 48,434 $ 46,744
Income Taxes 7,751 9,625
Transfer of Loans to Real Estate Owned 284 188
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE> 7
FIRST INDIANA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Nine Months Ended September 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 (8,610,449 and
8,623,910 for the three months ended September 30, 1996; 8,540,744 and
8,560,508 for the three months ended September 30, 1995; 8,603,984 and
8,616,972 for the nine months ended September 30, 1996; and 8,572,489
and 8,645,262 for the nine months ended September 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 and Regulatory Pronouncements
Mortgage Servicing Rights. 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" ("FAS 122"). 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 estimated 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 September 30, 1996, the balance
of capitalized loan servicing rights was $702,000.
Tax Bad Debt Reserves. On August 20, 1996, President Clinton
signed the Small Business Job Protection Act (the "Act") into law. One
provision of the Act repeals the reserve method of accounting for bad debts
for savings institutions, effective for taxable years beginning after 1995.
The Bank therefore will be required to use the specific charge-off method
on its 1996 and subsequent federal income tax returns. The Bank will be
required to recapture over approximately six years its "applicable excess
reserves", which are its federal tax bad debt reserves in excess of the base
year reserve amount described in the following paragraph. The Bank has
approximately $1,200,000 of "applicable excess reserves" and has provided
a deferred tax liability related to this recapture.
In accordance with SFAS No. 109, "Accounting for Income Taxes,"
a deferred liability has not been established for the Bank's tax bad debt base
year reserves of $16,300,000. The base year reserves are generally the
balance of reserves as of December 31, 1987, reduced proportionally for
reductions in the Bank's loan portfolio since that date. The base year
reserves will continue to be subject to recapture, and the Bank could be
required to recognize a tax liability if: (1) the Bank fails to qualify as a
"bank" for federal income tax purposes; (2) certain distributions are made
with respect to the stock of the Bank; (3) the bad debt reserves are used for
any purpose other than to absorb bad debt losses; or (4) there is a change
in tax law. The enactment of this legislation is expected to have no material
impact on the Bank's operations or financial position.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. During June 1996, the FASB issued SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities ("SFAS 125"). SFAS 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of
a financial components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. The financial components approach focuses on the assets and
liabilities that exist after the transfer.
<PAGE> 9
SFAS 125 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996, and
is to be applied prospectively. Earlier or retroactive application is not
permitted. Due to the timing of the issuance of this pronouncement,
management is currently reviewing SFAS 125 to determine the effect, if
any, it will have on the financial statements of the Bank.
Note 5 - 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 6 - Regulatory Issues
In September 1996, the Federal Deposit Insurance Corporation
("FDIC") levied a special deposit insurance assessment on all savings
institutions intended to recapitalize its Savings Association Insurance Fund
("SAIF"), which insures the Bank's deposits. First Indiana incurred a one-time
pre-tax charge to earnings in this quarter of $7,191,000 to comply with
this assessment. This one-time charge will reduce First Indiana's future
deposit insurance premiums to $.064 per $100 of deposits, compared with
the current premium of $.23 per $100 of deposits.
Note 7 - Reclassifications
Certain amounts in the 1995 Condensed Consolidated Financial
Statements have been reclassified to conform to the 1996 presentation.
<PAGE> 10
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
$20,000 for the third quarter of 1996, compared with net earnings of
$4,174,000 in the third quarter of 1995. Earnings per share for the three
months ended September 30, 1996 were $.00, compared with $.49 per
share for the same period one year ago.
For the first nine months of 1996, net earnings were $9,389,000,
compared with $13,245,000 one year ago. For the nine months ended
September 30, 1996, net earnings per share were $1.09, compared with
$1.53 for the same period one year ago. Included in net earnings this year
is a third quarter one-time after-tax charge of $4,278,000, or $.50 per
share, to cover an assessment by the FDIC to recapitalize SAIF, as well as
a second quarter 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
company that owns approximately 22 percent of First Indiana Corporation.
Cash dividends per share for the first nine months of 1996 and 1995
were $.42 and $.35 per share, respectively.
Net Interest Income
Net interest income was $15,197,000 for the three months ended
September 30, 1996, compared with $14,761,000 for the three months
ended September 30, 1995. For the nine months ended September 30,
1996, net interest income was $46,145,000, compared with $42,554,000
for the nine months ended September 30, 1995. The increase in net interest
income can be attributed to loan growth in targeted higher-yielding
portfolios.
Total net loans outstanding declined one percent to $1,221,050,000
at September 30, 1996, compared with $1,235,765,000 one year earlier.
Much of the Bank's growth in loans stemmed from two areas targeted for
aggressive expansion: home equity and business loans. At September 30,
1996, home equity loans outstanding were $507,420,000, compared with
$449,289,000 at September 30, 1995, a 13 percent increase. Business
loans outstanding at September 30, 1996 were $85,193,000, compared with
$59,720,000 at September 30, 1995, a 43 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.
During the third quarter, the Bank completed the sale of
approximately $32,756,000 of its indirect automobile portfolio. The Bank
discontinued this business in June 1994 to focus its attention on lending
areas more closely related to the Bank's mission as a comprehensive
provider of real estate financial services.
Compared with year-end 1995, net loans fell $29,676,000. This
contraction resulted from the auto loan sale discussed above and from
continued prepayments and sales of residential mortgage loans. The
mortgage loan sales reflect the Bank's ongoing shift to a bank-like balance
sheet.
<PAGE> 11
Interest income for the third quarter of 1996 was $30,986,000,
compared with $31,510,000 for the three months ended September 30,
1995. Interest income for the nine months ended September 30, 1996 was
$94,149,000, compared with $91,340,000 for the same period in 1995.
Interest expense for the third quarter of 1996 was $15,789,000, compared
with $16,749,000 for the three months ended September 30, 1995. Interest
expense for the nine months ended September 30, 1996 and 1995 was
$48,004,000 and $48,786,000, respectively.
During the third quarter of 1996, the Corporation's cost of funds
was 5.20 percent, compared with 5.27 percent one year ago. For the nine
months ended September 30, 1996, the cost of funds was 5.19 percent,
compared with 5.15 percent for the same period in 1995. The yield on
earning assets was 8.83 percent for the third quarter of 1996, compared
with 8.91 percent one year ago. For the nine months ended September 30,
1996, the yield on earning assets was 8.89 percent, compared with 8.72
percent for the same period in 1995. Growth in higher-yielding loans
contributed to the stronger margin.
Annualized return on total average assets was 0.01 percent for the
three months ended September 30, 1996, compared with 1.12 percent one
year ago. For the nine months ended September 30, 1996, the
Corporation's annualized return on total average assets was 0.84 percent,
compared with 1.20 percent for the same period in 1995. The 1996 returns
are depressed primarily because of the one-time SAIF assessment
previously discussed.
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 September 30,
(Dollars in Thousands) 1996 1995
--------------------------------
<S> <C> <C>
Net Interest Income $ 15,197 $ 14,761
============= =============
Average Interest-Earning Assets $ 1,404,160 $ 1,414,241
Average Interest-Bearing Liabilities 1,215,443 1,271,385
------------- -------------
Average Interest-Free Funds $ 188,717 $ 142,856
============= =============
Yield on Interest-Earning Assets 8.83% 8.91%
Yield on Interest-Bearing Liabilities 5.20% 5.27%
-------- --------
Interest-Rate Spread 3.63% 3.64%
Impact of Interest-Free Funds 0.70% 0.53%
-------- --------
Net Interest Margin 4.33% 4.17%
======== ========
All non-accruing delinquent loans have been included in average
interest-earning assets.
</TABLE>
<PAGE> 12
<TABLE>
<CAPTION>
Nine Months Ended September 30,
(Dollars in Thousands) 1996 1995
---------------------------------
<S> <C> <C>
Net Interest Income $ 46,145 $ 42,554
============= =============
Average Interest-Earning Assets $ 1,412,451 $ 1,397,125
Average Interest-Bearing Liabilities 1,234,125 1,262,333
------------- -------------
Average Interest-Free Funds $ 178,326 $ 134,792
============= =============
Yield on Interest-Earning Assets 8.89% 8.72%
Yield on Interest-Bearing Liabilities 5.19% 5.15%
-------- --------
Interest-Rate Spread 3.70% 3.57%
Impact of Interest-Free Funds 0.66% 0.49%
-------- --------
Net Interest Margin 4.36% 4.06%
======== ========
All non-accruing delinquent loans have been included in average
interest-earning assets.
</TABLE>
Non-Performing Assets and Summary of Loan Loss Experience
The following table analyzes the allowance for losses on loans and
REO for the nine months ended September 30, 1996 and 1995.
<TABLE>
<CAPTION>
Loan REO Loan and REO
Loss Allowance Loss 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 6,925 3,850 (250) -- 6,675 3,850
Recapture of Provision Due to
Auto Portfolio Sale (1,021) -- -- -- (1,021) 0
Charge-Offs -- Residential (9) (33) (6) (130) (15) (163)
-- Consumer (6,286) (2,217) (307) (87) (6,593) (2,304)
-- Construction (212) (33) (40) (69) (252) (102)
-- Business -- (55) -- -- 0 (55)
-- Commercial Real Estate -- (105) -- -- 0 (105)
Recoveries -- Residential 9 3 1 153 10 156
-- Consumer 782 123 85 39 867 162
-- Construction 67 10 -- 5 67 15
-- Business 39 -- -- -- 39 0
-- Commercial Real Estate -- 14 -- -- 0 14
------- ------- ---- ------ ------- -------
Balance at September 30, $16,528 $14,082 $549 $1,128 $17,077 $15,210
======= ======= ==== ====== ======= =======
Ratio of Allowance for Loan Losses to Loans
Receivable 1.34% 1.13%
Ratio of REO Loss Allowance to Real Estate Owned 14.37% 17.86%
Ratio of Total Loan and REO Los Allowance to
Non-Performing Assets 60.21% 54.78%
</TABLE>
Non-performing assets were $28,364,000, or 1.91 percent of assets,
at September 30, 1996. This compares with $27,165,000, or 1.78 percent
of assets, at December 31, 1995 and $27,765,000, or 1.80 percent of assets,
at September 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 September 30, 1996, $5,862,000 of non-performing
assets were restructured loans.
<PAGE> 13
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 in the third quarter of 1996 was
$1,529,000, compared with $1,600,000 in the third quarter of 1995. The
1996 loan loss provision includes a $1,021,000 recapture of provision from
the sale of the auto loan portfolio. For the nine months ended September
30, 1996, the total provision for loan losses was $5,904,000, compared
with $3,850,000 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 September 30, 1996, home equity delinquencies
increased to 2.30 percent of the total home equity portfolio, an increase
from the year-end 1995 level of 1.78 percent. While management believes
that these consumer 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 1996 reflect both the significant
increase in home equity loans outstanding and a change to a more
conservative charge-off policy similar to that of commercial banks. 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 of 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.
During the third quarter, the Bank decreased the allowance for REO
losses by $150,000. Because of the sale of many foreclosed commercial
real estate properties, the careful review of the remaining REO portfolio,
and the change in charge-off policy discussed above, the Bank's
management determined that it was not necessary to maintain an excess
REO loss allowance.
The amount of the provision in 1996 is 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, changes in current economic conditions and
the credit risk of the loan portfolio and REO.
During the third quarter of 1996, a $5,300,000 commercial loan was
deemed to be a potential problem loan by management. Although the loan
is current and is adequately secured by accounts receivable, inventory and
other assets, a disruption in the cash flow generated by the borrower could
lead to further reclassification of this loan.
<PAGE> 14
Non-Interest Income
Total non-interest income was $2,792,000 for the three months
ended September 30, 1996, compared with $3,501,000 for the same period
in 1995. For the nine months ended September 30, 1996 and 1995, total
non-interest income was $12,572,000 and $12,804,000, 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 following its departure from the Princeton, Indiana market.
The Bank realized $882,000 on the sale of approximately
$45,158,000 in fixed-rate home equity loans during the first half of 1996
which were sold from the Bank's regular production as part of a strategy
to sell loans to targeted investors on an ongoing basis. During the third
quarter, the Bank completed the sale of the indirect installment lending
portfolio at a loss of $928,000. The remaining gain on sale of loans of
$1,700,000 in 1996 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 nine months ended September 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.
Insurance commissions decreased $334,000 for the three months
ended September 30, 1996 due to the sale of the Bank's investment and
insurance subsidiaries in the second quarter of 1996.
Non-Interest Expense
Non-interest expense was $16,966,000 for the three months ended
September 30, 1996, compared with $10,156,000 for the same period in
1995. Non-interest expense for the nine months ended September 30, 1996
and 1995 was $38,353,000 and $30,121,000, respectively. Included in
1996 non-interest expense is the one-time $7,191,000 assessment by the
FDIC intended to recapitalize SAIF. As a result of this one-time charge,
First Indiana will realize a reduction of nearly 75 percent in deposit
insurance costs in the future. Capitalized costs increased $181,000 and
$597,000 for the three and nine months ended September 30, 1996 over
1995 levels because of the increased home equity loan volume. Marketing
expense increased $287,000 for the nine months ended September 30, 1996
over the first nine months of 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 $323,000 and $1,237,000 for the three and nine months
ended September 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.
<PAGE> 15
Capital Resources and Liquidity
At September 30, 1996, shareholders' equity was $135,162,000,
or 9.10 percent of total assets, compared with $129,297,000, or 8.39
percent, at December 31, 1995 and $125,540,000, or 8.15 percent, at
September 30, 1995.
The Bank continues to exceed all minimum capital requirements.
At September 30, 1996, the Bank's tangible and core capital stood at
$129,395,000, or 8.71 percent of assets, $107,105,000 in excess of the 1.50
percent minimum tangible capital and $84,815,000 in excess of the three
percent minimum required core capital. Risk-based capital equaled
$142,852,000, or 12.23 percent of risk-weighted assets, $49,385,000 more
than the minimum eight percent risk-based level required.
<TABLE>
<CAPTION>
Regulatory Capital
September 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 $135,162
========
First Indiana Bank Capital $129,309 $129,309 $129,309 $129,309
========
Additional Capital Items:
SFAS 115 Adjustment 193 193 193
Non-Qualifying Servicing (107) (107) (107)
General Valuation Allowance 14,628
Land Loans above 80% Loan-to-Value (1,171)
------- ------- -------
Computed Regulatory Capital 129,395 8.71% 129,395 8.71% 142,852 12.23%
Minimum Capital Requirement (22,290) 1.50% (44,580) 3.00% (93,467) 8.00%
------- ------- -------
Excess Regulatory Capital $107,105 $84,815 $49,385
======== ======= =======
Fully Phased-in Requirement 1.50% 3.00% 8.00%
</TABLE>
The Corporation paid a quarterly dividend of $.14 per common
share September 17, 1996 to shareholders of record as of September 3,
1996. This reflects an increase from $.12 per share in 1995. On March
1, 1996, the Corporation effected a six-for-five stock split. All per-share
amounts have been adjusted to reflect the stock split.
The Corporation conducts its business through its subsidiaries.
The main source of funds for the Corporation is dividends from the
Bank. The Corporation has no significant assets other than its
investment in the Bank.
Regulations of the former Federal Home Loan Bank Board (the
Bank Board") required thrift institutions to maintain minimum levels of
certain liquid investments, as defined in the regulations, of at least five
percent of net withdrawable assets. The director of the OTS is required
to set minimum liquidity levels between four and 10 percent of assets.
Current regulations require a minimum liquidity level of five percent.
The Corporation's liquidity ratio at September 30, 1996, was 10.50
percent.
<PAGE> 16
Interest-Rate Sensitivity
The following schedule analyzes the difference or gap in rate-sensitive
assets and liabilities at September 30, 1996 and December 31, 1995.
<TABLE>
<CAPTION>
Rate Sensitivity by Period of Maturity or Rate Change
September 30, 1996
------------------------------------------------------
Over 180 Over
% of Within Days to 1 Year to Over
(Dollars in Thousands) Rate Balance Total 180 Days 1 Year 5 Years 5 Years
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Investment Securities & Other 6.01%$ 125,441 8.95%$ 34,966 4,997 82,744 2,734
Loans Receivable (1)
Mortgage-Backed Securities 7.54% 39,009 2.78% 6,071 13,380 12,924 6,634
Residential Mortgage Loans 7.85% 424,765 30.30% 185,326 69,931 123,403 46,105
Commercial Real Estate Loans 10.26% 41,293 2.94% 11,489 6,156 11,892 11,756
Business Loans 9.39% 85,193 6.08% 57,361 2,453 16,184 9,195
Consumer Loans 10.32% 537,694 38.35% 221,283 38,082 169,713 108,616
Residential Construction Loans 8.52% 148,633 10.60% 134,177 -- 14,456 --
----------- ------- ------- ------- ------- -------
Total 8.86%$ 1,402,028 100.00% 650,673 134,999 431,316 185,040
=========== ======= ------- ------- ------- -------
Interest-Bearing Liabilities
Deposits:
Demand Deposits (2) 2.50%$ 98,723 8.00%$ -- -- -- 98,723
Passbook Deposits (3) 2.99% 48,444 3.93% 9,861 1,376 9,689 27,518
Money Market Savings 4.79% 269,282 21.83% 269,282 -- -- --
Jumbo Certificates 5.66% 113,540 9.20% 60,919 14,934 37,687 --
Fixed-Rate Certificates 5.67% 505,748 40.99% 198,953 100,023 206,772 --
--------- ------ ------- ------- ------- -------
Total 5.01% 1,035,737 83.95% 539,015 116,333 254,148 126,241
Borrowings:
FHLB Advances 5.65% 180,465 14.63%$ 84,000 20,000 74,000 2,465
Short-Term Borrowings 4.65% 17,566 1.42% 17,566 -- -- --
--------- ------- ------- ------- ------- -------
Total 5.10% 1,233,768 100.00% 640,581 136,333 328,148 128,706
=======
Net - Other (4) 168,260 168,260
--------- -------
Total $ 1,402,028 640,581 136,333 328,148 296,966
=========== ------- ------- ------- -------
Rate Sensitivity Gap $ 10,092 $ (1,334)$ 103,168 $ (111,926)
======= ======= ======= ========
September 30, 1996
Cumulative Rate-Sensitivity Gap $ 10,092 $ 8,758 $ 111,926
======= ======= =======
Percent of Total Interest-Earning Assets 0.72% 0.62% 7.98%
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 repayment 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 $25,729,000 of
Loans Held for Sale. Included in Consumer Loans are $27,148,000 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 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 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> 17
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 September 30,
1996, the Corporation's cumulative one-year interest-rate gap stood at 0.62
percent. This means that 0.62 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 September 30, 1996, were $1,485,436,000, a
decrease from $1,541,843,000 at December 31, 1995.
Loans and mortgage-backed securities net at September 30, 1996,
were $1,221,050,000, compared with $1,250,726,000 at December 31,
1995. Most of this contraction resulted from the sale of the Bank's auto
loan portfolio, as well as continued sales and prepayments of residential
mortgage loans. Mortgage-backed securities decreased $10,489,000 due
to prepayments.
In the past nine months, consumer loans decreased $37,314,000,
mainly because of the sale of the indirect installment lending portfolio. The
Corporation's loan servicing portfolio amounted to $1,077,090,000 at
September 30, 1996, compared with $1,130,209,000 at December 31,
1995.
Total deposits were $1,123,436,000 at September 30, 1996,
compared with $1,136,980,000 at December 31, 1995. Non-interest-bearing
deposits consist of retail and commercial checking accounts, as well
as official checking accounts. Commercial checking accounts are expected
to become a more significant source of funds. Included in commercial
checking accounts at September 30, 1996 and December 31, 1995 were
approximately $10,271,000 and $6,815,000 of escrow balances maintained
for loans serviced for others. Official checking accounts at September 30,
1996 and December 31, 1995 were $38,664,000 and $18,276,000,
respectively. Federal Home Loan Bank advances totaled $180,465,000 at
September 30, 1996, compared with $214,781,000 at December 31, 1995.
The Corporation also 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> 18
Other Information
Items 1, 2, 3 , 4 and 5 are not applicable.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits Financial Data Schedule
(b) Reports on Form 8-K There were no reports on
Form 8-K filed during the three months ended
September 30, 1996.
<PAGE> 19
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
November 12, 1996 /s/Owen B. Melton, Jr.
--------------------------
Owen B. Melton, Jr.
President
November 12, 1996 /s/David L. Gray
--------------------------
David L. Gray
Vice President and Treasurer
<PAGE> 20
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for the nine months ended September 30, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1996
<CASH> 35,251
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 119,827
<INVESTMENTS-CARRYING> 44,623
<INVESTMENTS-MARKET> 45,144
<LOANS> 1,237,578
<ALLOWANCE> 16,528
<TOTAL-ASSETS> 1,485,436
<DEPOSITS> 1,123,436
<SHORT-TERM> 71,566
<LIABILITIES-OTHER> 28,807
<LONG-TERM> 126,465
0
0
<COMMON> 88
<OTHER-SE> 135,074
<TOTAL-LIABILITIES-AND-EQUITY> 1,485,436
<INTEREST-LOAN> 86,011
<INTEREST-INVEST> 7,505
<INTEREST-OTHER> 633
<INTEREST-TOTAL> 94,149
<INTEREST-DEPOSIT> 39,360
<INTEREST-EXPENSE> 48,004
<INTEREST-INCOME-NET> 46,145
<LOAN-LOSSES> 5,904
<SECURITIES-GAINS> 207
<EXPENSE-OTHER> 38,353
<INCOME-PRETAX> 14,460
<INCOME-PRE-EXTRAORDINARY> 14,460
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,389
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 1.09
<YIELD-ACTUAL> 4.36
<LOANS-NON> 16,967
<LOANS-PAST> 0
<LOANS-TROUBLED> 5,862
<LOANS-PROBLEM> 9,944
<ALLOWANCE-OPEN> 16,234
<CHARGE-OFFS> 6,507
<RECOVERIES> 897
<ALLOWANCE-CLOSE> 16,528
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,265
</TABLE>
