UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 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 of Incorporation) (I.R.S. Employer Identification No.)
135 N. Pennsylvania St.
Indianapolis, Indiana 46204
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(317) 269-1200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
Common Stock, $.01 par value NASDAQ
______________________________________
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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 ___.
State the aggregate market value of the voting stock held
by non-affiliates of the registrant: $174,658,000 as of February 28,
1997.
On February 28, 1997, the registrant had 10,509,263 shares of
common stock outstanding, $.01 par value (as adjusted for five-for-four
stock split paid March 18, 1997).
Documents Incorporated by Reference: See Page 2.
<PAGE> 1
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
Annual Report to Shareholders for 1996 Part II
Proxy Statement Dated March 12, 1997 Part III
Total Number of Pages in this Report 107
List of Exhibits on Pages 34-36
<PAGE> 2
FIRST INDIANA CORPORATION
FORM 10-K
Table of Contents
Page
PART I 4
Item 1. Business 4
Item 2. Properties 24
Item 3. Legal Proceedings 28
Item 4. Submission of Matters to a Vote
of Security Holders 28
PART II 28
Item 5. Market for Registrant's Common Equity
and Related Shareholder Matters 28
Item 6. Selected Financial Data 28
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operation 28
Item 8. Financial Statements and
Supplementary Data 29
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 29
PART III 29
Item 10. Directors and Executive Officers
of the Registrant 29
Item 11. Executive Compensation 30
Item 12. Security Ownership of Certain
Beneficial Owners and Management 30
Item 13. Certain Relationships and
Related Transactions 30
PART IV 31
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K 31
SIGNATURES 33
EXHIBIT INDEX 34
<PAGE> 3
PART I
Item I. Business
First Indiana Corporation
First Indiana Corporation, an Indiana corporation formed
in 1986 (the "Corporation"), is a nondiversified, unitary savings
and loan holding company. The principal asset of the Corporation
is the outstanding stock of First Indiana Bank ("First Indiana" or the
"Bank"), its wholly owned subsidiary. The Corporation has no
separate operations, and its business consists only of First Indiana
and its subsidiaries. First Indiana's subsidiaries include One
Mortgage Corporation, a mortgage origination subsidiary, and One
Property Corporation, a real estate investment subsidiary.
First Indiana Bank
First Indiana is a federally chartered stock savings bank
whose depository accounts are insured by the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation (the "FDIC"). Established in 1934, First Indiana was
operated as a federally chartered, mutual savings and loan
institution until August 1983, when it converted to a federal stock
savings bank. First Indiana has $1.5 billion in assets and is the
largest publicly-held bank based in Indianapolis.
First Indiana is engaged primarily in the business of
attracting deposits from the general public and originating
residential mortgage loans, commercial loans, and consumer loans.
First Indiana offers a full range of banking services through 28
banking offices located throughout metropolitan Indianapolis,
Evansville, Franklin, Pendleton, Westfield, Mooresville and
Rushville, Indiana. The Bank's divisions in Evansville,
Mooresville, and Rushville operated under the names Mid-West
Federal Savings Bank, Mooresville Savings Bank, and First
Federal Savings and Loan of Rushville until June 1996, when all
three divisions adopted the First Indiana Bank name.
First Indiana's subsidiary, One Mortgage Corporation,
operates mortgage origination offices in Florida and North
Carolina. First Indiana has mortgage and consumer loan service
offices throughout Indiana, Florida, Georgia, Illinois, North
Carolina, and Ohio. First Indiana's investment and insurance
subsidiaries, One Investment Corporation and One Insurance
Agency, Inc., were sold in the second quarter of 1996 to The
Somerset Group, Inc., a publicly held affiliate which owns
approximately 22 percent of the Corporation's stock.
The six-county area served by First Indiana consists of
Indianapolis, the State's largest city and capital, together with
outlying suburban and agricultural areas in the central part of the
State. The population of the six-county metropolitan Indianapolis
area in 1990 was approximately 1,200,000. Indianapolis'
diversified economy includes manufacturing and service industries,
such as Eli Lilly & Company (pharmaceuticals), the federal and
state governments, General Motors (engines), and Ameritech
(communications).
First Indiana's Evansville Division is based in the third
largest metropolitan area in Indiana, and conducts business through
five offices in Evansville and surrounding communities. The 1990
population of the Evansville metropolitan statistical area was about
280,000. The local economy is primarily agricultural- and
manufacturing-based, with local industries including aluminum,
plastics, health care products, and major household appliances.
Among the largest local employers are Bristol-Myers Squibb
(nutritional and pharmaceutical products), Whirlpool (refrigerators
and freezers), and General Electric Co. (plastics). Evansville is the
regional hub for a tri-state area which includes portions of Indiana,
Kentucky and Illinois.
First Indiana experiences substantial competition in
attracting and retaining deposits and in lending funds. The primary
factors in competing for deposits are the ability to offer attractive
interest rates and the availability of convenient office locations and
flexible hours. Direct competition for deposits comes from other
savings institutions, commercial banks, money market mutual
funds, and other investment products. The primary factors in
competing for loans are interest rates,
<PAGE> 4
loan origination fees, and loan product variety. Competition for origination
of loans normally comes from other banks, brokers, and insurance companies.
Lending Activities
General. First Indiana offers a broad range of lending
products to selected segments of the markets it serves. The Bank
has expanded upon its heritage as a single-family mortgage lender
by offering a complete array of loans secured primarily by real
estate. In addition to first mortgage loans, the Bank now has a
substantial market presence in residential construction lending,
commercial real estate lending, business loans to selected segments
of the market, and consumer loans, primarily home equity loans
originated both on a direct and indirect basis.
The Bank's management believes that the surest path for
the Bank's long-term success is to concentrate on selected product
lines sold to certain segments of the market. Accordingly, in 1994
the Bank discontinued its indirect (dealer) auto lending business to
redirect resources toward real estate-focused activities. The Bank
also implemented a series of process and operational enhancements
that enable it to act as both a mortgage banker and portfolio lender
with maximum efficiencies as interest rates cause consumer
preferences to shift between these two types of residential
mortgage loan products.
To minimize the mismatch between the duration of its
interest-rate-sensitive assets and liabilities, First Indiana has a
policy of (i) increasing its portfolio of adjustable-rate and shorter-term
mortgage, consumer and business loans; (ii) selling almost all
fixed-rate, longer-term loans to the secondary market unless those
loans can be funded by liabilities of a similar maturity; and (iii)
increasing transaction accounts, which are less volatile than
certificates of deposit.
Loan Portfolio Composition. The following tables set
forth information concerning the composition of First Indiana's loan
portfolio in dollar amounts and in percentages, by type of security,
and by type of loan. Also presented is a reconciliation of total
loans receivable and mortgage-backed securities ("loans") before
net items to loans receivable after net items. Net items consist of
loans in process (undisbursed portion of loan balances), deferred
income, unearned discounts and unamortized premiums, and
allowances for loan losses.
<PAGE> 5
<TABLE>
<CAPTION>
Loan Portfolio Composition
(Dollars in Thousands) At December 31,
---------------
1996 1995 1994
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Loans by Type of Security:
First Mortgage Loans Secured by:
Single-Family Units $ 640,743 47.3% $ 625,133 45.0%$ 583,345 47.1%
2-4 Family Units 1,643 0.1% 1,885 0.1% 2,173 0.2%
Over 4 Family Units 9,586 0.7% 18,946 1.4% 21,881 1.8%
Mortgage-Backed Securities 36,152 2.8% 49,089 3.6% 69,061 5.6%
Commercial Real Estate and
Other Mortgage Loans 37,735 2.8% 46,137 3.3% 45,647 3.7%
Consumer Loans 526,769 38.9% 575,009 41.4% 474,465 38.3%
Business Loans 100,513 7.4% 72,146 5.2% 41,770 3.4%
---------- ------ ---------- ---------------- ------
Total Mortgage-Backed
Securities and Loans Receivable
(Before Net Items) $1,353,141 100.0% $1,388,345 100.0%$1,238,342 100.0%
========== ====== ========== ================ ======
Loans by Type of Loan:
Real Estate:
Conventional:
Loans on Existing Property $ 463,211 34.2% $ 464,604 33.5%$ 450,935 36.4%
Construction Loans:
Commercial Real Estate Loans 11 0.0% 6,835 0.5% 9,019 0.7%
Residential Loans 214,433 15.8% 207,957 15.0% 186,145 15.0%
Insured or Guaranteed:
Mortgage-Backed Securities 36,152 2.8% 49,089 3.5% 69,061 5.6%
FHA and VA Loans 12,052 0.9% 12,705 0.9% 6,947 0.6%
Total Real Estate Loans 725,859 53.7% 741,190 53.4% 722,107 58.3%
Consumer Loans 526,769 38.9 575,009 41.4 474,465 38.3
Business Loans 100,513 7.4 72,146 5.2 41,770 3.4
---------- ----- ---------- ----- -------- -----
Total Mortgage-Backed Securities
and Loans Receivable
(Before Net Items) $1,353,141 100.0% $1,388,345 100.0%$1,238,342 100.0%
========== ====== ========== ================ ======
<CAPTION>
At December 31,
----------------
1993 1992
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Loans by Type of Security:
First Mortgage Loans Secured by:
Single-Family Units $ 561,413 48.7% $ 563,783 48.4%
2-4 Family Units 1,909 0.2% 4,033 0.3%
Over 4 Family Units 27,990 2.4% 25,166 2.2%
Mortgage-Backed Securities 100,924 8.7% 180,211 15.5%
Commercial Real Estate and
Other Mortgage Loans 50,294 4.4% 77,576 6.7%
Consumer Loans 382,360 33.1% 298,206 25.6%
Business Loans 29,308 2.5% 15,542 1.3%
---------- ------ ---------- ------
Total Mortgage-Backed
Securities and Loans Receivable
(Before Net Items) $1,154,198 100.0% $1,164,517 100.0%
========== ====== ========== ======
Loans by Type of Loan:
Real Estate:
Conventional:
Loans on Existing Property $ 454,560 39.4% $ 566,445 48.7%
Construction Loans:
Commercial Real Estate Loans 3,213 0.3% 5,178 0.4%
Residential Loans 167,077 14.5% 78,435 6.7%
Insured or Guaranteed:
Mortgage-Backed Securities 100,924 8.7% 180,211 15.5%
FHA and VA Loans 16,756 1.5% 20,500 1.8%
Total Real Estate Loans 742,530 64.3% 850,769 73.1%
Consumer Loans 382,360 33.1 298,206 25.6
Business Loans 29,308 2.5 15,542 1.3
---------- ----- ---------- -----
Total Mortgage-Backed Securities
and Loans Receivable
(Before Net Items) $1,154,198 100.0% $1,164,517 100.0%
========== ====== ========== ======
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
Loan Portfolio Composition
(Continued) At December 31,
----------------
1996 1995 1994 1993 1992
(Dollars in Thousands) ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Mortgage-Backed Securities $ 1,353,141 $ 1,388,345 $ 1,238,342 $ 1,154,198 $ 1,164,517
and Loans Receivable
(Before Net Items)
Less:
Undisbursed Portion of Loans 84,173 72,511 78,588 63,382 54,482
Deferred Income, Unearned Discounts,
and Unamortized Premiums (1,762) (624) (521) 646 2,016
Plus:
Loan Valuation Adjustment
for Acquisitions 0 0 341 682 1,024
---------- ---------- --------- --------- ---------
Total Mortgage-Backed Securities and Loans
Receivable Before Allowance for
Loan Losses 1,270,730 1,316,458 1,160,616 1,090,852 1,109,043
Less:
Allowance for Loan Losses 18,768 16,234 12,525 11,506 8,748
----------- ----------- ----------- ----------- -----------
Mortgage-Backed Securities and Loans
Receivable - Net $ 1,251,962 $ 1,300,224 $ 1,148,091 $ 1,079,346 $ 1,100,295
=========== =========== =========== =========== ===========
</TABLE>
<PAGE> 7
Adjustable- and Fixed-Rate Loans. The following
table sets forth the balances at the dates indicated of all loans
receivable and mortgage-backed securities before net items which
have fixed interest rates and adjustable interest rates. Adjustable-rate
loans include all loans with original maturities of five years or less.
<TABLE>
<CAPTION>
At December 31,
---------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Residential Mortgage Loans
Fixed Rates $ 166,968 $ 186,886 $ 157,706 $ 225,305 $ 317,808
Adjustable Rates 512,965 491,681 494,090 440,381 424,492
----------- ----------- ----------- ----------- -----------
Total $ 679,933 $ 678,567 $ 651,796 $ 665,686 $ 742,300
=========== =========== =========== =========== ===========
Commercial Real Estate Loans
Fixed Rates $ 17,213 $ 11,948 $ 15,770 $ 21,835 $ 39,434
Adjustable Rates 28,713 50,676 54,541 55,009 69,035
----------- ----------- ----------- ----------- -----------
Total $ 45,926 $ 62,624 $ 70,311 $ 76,844 $ 108,469
=========== =========== =========== =========== ===========
Total Residential Mortgage and
Commercial Real Estate Loans
Fixed Rates $ 184,181 $ 198,833 $ 173,476 $ 247,140 $ 357,242
Adjustable Rates 541,678 542,357 548,631 495,390 493,527
----------- ----------- ----------- ----------- -----------
Total $ 725,859 $ 741,190 $ 722,107 $ 742,530 $ 850,769
=========== =========== =========== =========== ===========
Consumer Loans
(Includes Home Equity Loans)
Fixed Rates $ 368,697 $ 411,030 $ 307,136 $ 251,297 $ 189,551
Adjustable Rates 158,072 163,980 167,329 131,063 108,655
----------- ----------- ----------- ----------- -----------
Total $ 526,769 $ 575,009 $ 474,465 $ 382,360 $ 298,206
=========== =========== =========== =========== ===========
Business Loans
Fixed Rates $ 20,479 $ 5,699 $ 2,028 $ 172 $ 0
Adjustable Rates 80,034 66,447 39,742 29,136 15,542
----------- ----------- ----------- ----------- -----------
Total $ 100,513 $ 72,146 $ 41,770 $ 29,308 $ 15,542
=========== =========== =========== =========== ===========
Total Mortgage-Backed Securities
and Loans Receivable
Fixed Rates $ 573,357 $ 615,562 $ 482,640 $ 498,609 $ 546,793
Adjustable Rates 779,784 772,783 755,702 655,589 617,724
----------- ----------- ----------- ----------- -----------
Total $ 1,353,141 $ 1,388,345 $ 1,238,342 $ 1,154,198 $ 1,164,517
=========== =========== =========== =========== ===========
</TABLE>
<PAGE> 8
Residential Mortgage Loans. The original contractual
loan payment period for residential loans originated by First
Indiana normally ranges from 10 to 30 years. Because borrowers
may refinance or prepay their loans, however, such loans normally
remain outstanding for a substantially shorter period. First Indiana
sells almost all fixed-rate residential loans to secondary market
investors, including the Federal Home Loan Mortgage Corporation
("FHLMC") and the Federal National Mortgage Association
("FNMA").
Residential originations amounted to $346 million in
1996, a 2.3 percent decrease from 1995. First Indiana sold
residential mortgage loans into the secondary market as part of the
Bank's normal mortgage banking activity, resulting in pre-tax
gains of $1.4 million during 1996.
First Indiana's fixed-rate mortgage loans include a due-on-sale clause,
which gives the Bank the right to declare a loan
immediately due and payable if, among other things, the borrower
sells or otherwise disposes of the real property subject to the
mortgage and the loan is not repaid. Due-on-sale clauses are
generally considered important tools to prevent both the
unrestricted transfer of low interest-rate loans in high interest-rate
environments and the corresponding increase in the average life of
such loans. First Indiana's policy is to enforce these clauses in its
loan contracts.
Commercial Loans. First Indiana offers a variety of
commercial loans, primarily residential construction loans,
business loans, and commercial real estate loans (including land
development loans).
First Indiana's construction loans are made both to
individuals and builders. These loans have terms ranging from six
months to one year and include options for the home buyer to
convert the loan to fixed- or adjustable-rate permanent financing.
The interest rate on construction loans is generally one percent
over the Bank's prime rate and adjusts upon changes in the prime
rate. At December 31, 1996 and 1995, the Bank's gross
construction loans outstanding equaled $214 million and $208
million.
Also included in business loans are $15 million in land
development loans, which are exclusively for the acquisition and
development of land into individual single-family building lots.
The interest rate on land development loans is generally one and
one-quarter percent over the Bank's prime rate, which adjusts upon
changes in the prime rate, and the term of these loans is generally
36 months.
The following table presents the remaining maturities and
rate sensitivity of residential construction and business loans.
<TABLE>
<CAPTION>
Remaining Maturities
--------------------
One Year Over One Year Over
or Less to Five Years Five Years Total Percent
(Dollars in Thousands) -------- ------------- ---------- ----- -------
<S> <C> <C> <C> <C> <C>
Type of Loan:
Residential Construction $ 124,577 $13,558 $ - $138,135 59.9 %
Business 61,239 20,477 10,843 92,559 40.1
------------- ------- ------- -------- -------
Total $ 185,816 $34,035 $ 10,843 $230,694 100.0 %
============= ======= ======= ======== =======
Rate Sensitivity:
Fixed Rate $ - $ 9,636 $ 10,843 $ 20,479 8.9 %
Adjustable Rate 185,816 24,399 - 210,215 91.1
------------- ------- ------- -------- -------
Total $ 185,816 $34,035 $ 10,843 $230,694 100.0 %
============= ======= ======= ======== =======
</TABLE>
<PAGE> 9
Multi-family and commercial real estate lending was a
substantial part of First Indiana's business activities from the early
1970's until 1991, when such activity was largely curtailed because
of the economic environment. With the changing environment and
improved market for commercial real estate lending, the Bank
intends to increase somewhat its volume of these loans to include
permanent financing for selected apartments, office buildings and
warehouses. The Bank's management continues to monitor the
credit quality of these loans aggressively, both with respect to new
originations and loans already in the portfolio.
The following table shows, as of December 31, 1996 and
1995, outstanding multi-family and commercial real estate loans
originated and purchased by First Indiana.
<TABLE>
<CAPTION>
1996 1995
(Dollars in Millions) Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Loans Originated $44.7 97.4 $54.5 97.7
Loans Purchased 1.2 2.6 1.3 2.3
----- ---- ----- ----
$45.9 100.0 $55.8 100.0
===== ===== ===== =====
</TABLE>
Consumer Lending. As part of its strategy for growth
in interest income, First Indiana has increased its origination and
purchase of consumer loans, primarily home equity loans and home
equity lines of credit. At December 31, 1996, such loans totaled
$526.8 million, or 38.9 percent of total mortgage-backed securities
and loans receivable, compared with $575.0 million, or 41.4
percent of total mortgage-backed securities and loans receivable,
at December 31, 1995. Much of the decrease in 1996 occurred
when the Bank completed the sale of approximately $32.8 million
of its indirect automobile portfolio during the third quarter at a loss
of $898,000. However, the Bank was able to recapture
$1,021,000 of its loan loss provision as a result of this sale.
Consumer loans generally have shorter terms and higher
interest rates than residential loans but involve somewhat higher
credit risks, particularly for unsecured lending. Of the $526.8
million of consumer loans outstanding at December 31, 1996, 94.7
percent were secured by first or second mortgages on real property,
0.7 percent was secured by deposits, and 4.6 percent were secured
by personal property.
First Indiana offers revolving lines of credit and loans
secured by a lien on the equity in the borrower's home in amounts
up to 100 percent of the appraised value of the real estate. For
lines of credit at or below an 80 percent loan-to-value ("LTV")
ratio, the interest rate is the Wall Street Journal prime rate plus one
or two percent, depending on the amount of the loan. The interest
rate rises in various increments as the LTV ratio increases. The
highest rate charged is the Wall Street Journal prime rate plus 3.5
percent for lines of credit at a 100 percent LTV. At December 31,
1996, the Bank had approximately $223.4 million in loans above
80 percent LTV. Each month, holders of revolving lines of credit
with up to an 80 percent LTV ratio are billed monthly for interest
at the daily periodic rate due on the daily loan balances for the
billing cycle. Holders of revolving lines of credit above 85 percent
LTV are required to pay at least two percent of the outstanding
loan balance.
First Indiana also offers variable- and fixed-rate term
home equity loans with up to a 100 percent LTV ratio. Borrowers
of fixed-rate term loans make fixed payments over a term ranging
from one to 15 years. Variable-rate term loans in excess of 80
percent LTV feature monthly payments equal to two percent of the
outstanding loan balance. At December 31, 1996, First Indiana
had approved $238 million of 80 percent LTV lines of credit, of
which $118 million were outstanding, compared with $260
million of such lines which had been approved at December 31,
1995, $154 million of which were outstanding.
<PAGE> 10
Until August 1994, First Indiana offered indirect auto
lending through a network of dealers throughout the Midwest. The
Bank discontinued this activity as part of its strategic plan to focus
its resources on core real estate businesses in which management
believes it can differentiate itself from the competition more
effectively. The Bank completed the sale of approximately $32.8
million of its indirect automobile portfolio during the third quarter
at a loss of $898,000. The balances of First Indiana's installment
loans were $22 million and $83 million (including the remaining
portfolio of automobile loans) at December 31, 1996 and 1995.
This portfolio is expected to decline further; although First Indiana
will continue to offer direct automobile loans through its banking
centers as an accommodation to its customers. These loans will be
made generally for terms of one to five years at variable and fixed
rates of interest.
First Indiana makes loans secured by deposits and
overdraft loans in connection with its checking accounts. First
Indiana also offers fixed-rate, fixed-term loans primarily for home
improvement purposes; unsecured loans; and Visa credit cards
through an agent.
Consumer loans may entail greater risk than residential
mortgage loans, particularly in the case of consumer loans that are
unsecured or secured by rapidly depreciating assets such as
automobiles. First Indiana has endeavored to reduce certain of
these risks by, among other things, employing individuals
experienced in this type of lending and emphasizing prompt
collection efforts. In addition, First Indiana adds general provisions
to its loan loss allowance, in amounts determined to be adequate to
cover future loan losses, at the time the loans are originated.
Federal regulations limit the amount of consumer loans
that savings institutions are able to originate and hold in their loan
portfolios. First Indiana complies with such regulations, and the
amount of its consumer loan portfolio is approximately $153
million below the maximum permitted.
Origination, Purchase, and Sale of Loans. As a
federally chartered savings bank, First Indiana has general authority
to make real estate loans throughout the United States. At
December 31, 1996, however, most of First Indiana's real estate
loans receivable were secured by real estate located in Indiana.
First Indiana also originates mortgage loans in Georgia and through
a subsidiary in Florida and North Carolina. The Bank originates
home equity loans through consumer loan offices in those states
and in Ohio and Illinois and in selected other states via an
origination network of loan agents.
Interest rates charged by First Indiana on its new loans are
affected primarily by the demand for such loans and the supply of
money available for lending purposes. These factors are in turn
affected by general economic conditions and such other factors as
monetary policies of the federal government, including the Federal
Reserve Board, the general supply of money in the economy,
legislative tax policies, and governmental budgetary matters.
Loan originations come from a number of sources.
Residential loan originations are attributable primarily to referrals
from real estate brokers, builders, and walk-in customers.
Construction loan originations are obtained primarily by direct
solicitation of builders and repeat business from builders. Multi-family
and commercial real estate loan originations are obtained
from previous borrowers and direct contacts with First Indiana.
Consumer loans come from walk-in customers, loan brokers,
agents and originators. First Indiana aggressively solicits
residential loans with a sales force that works with real estate
brokers and builders to obtain referrals.
First Indiana obtains title insurance on secured properties
and requires borrowers to obtain hazard insurance and, if
applicable, flood insurance. First Indiana's appraisers note any
obvious environmental problems, and the title companies used to
close loans give First Indiana an endorsement insuring over any
existing environmental liens.
Income from Lending Activities. In making long-term
one- to four-family home mortgage loans, First Indiana generally
charges an origination fee of one percent of the loan amount. As
part of the loan application, the applicant also reimburses First
Indiana for its out-of-pocket costs in reviewing the application,
such as the appraisal fee, whether or not the loan is closed. The
interest rate charged is normally the prevailing market rate at the
time the loan application is received. Commitments to home
purchasers generally have a term of 60 days or less from the date
First Indiana issues the loan commitment.
<PAGE> 11
In the case of one-to-four-family residential construction
loans, First Indiana charges a one to three percent non-refundable
commitment fee. Interest rates on construction loans are based on
the prevailing market rate at the time the commitment is extended.
Commitment fees and other terms of commercial real estate and
business loans are individually negotiated.
First Indiana earns fees on existing loans, including
prepayment charges, late charges, and assumption fees.
Servicing Activity. First Indiana's sale of whole loans
and loan participations in the secondary market generates income
and provides additional funds for loan originations. In the case of
mortgage loans sold with servicing retained where the stated
servicing fee differs materially from a current, normal servicing fee,
the sales price is adjusted to provide a normal servicing fee in each
subsequent year for purposes of determining gain or loss on the
sale. At December 31, 1996, the balance of deferred excess
servicing was approximately $636,000. The resulting deferred
balance is amortized in proportion to the related net servicing
income over the estimated life of the loans.
In the second quarter of 1995, First Indiana purchased
servicing rights for approximately $310 million in mortgage loans.
The related December 31, 1996 purchased mortgage servicing
rights balance of $2.9 million is being amortized in proportion to
the related net servicing income over the estimated life of the loans.
At December 31, 1996, First Indiana serviced
approximately $1.1 billion in loans and loan participations which
it had sold. As of December 31, 1996, approximately $20.5
million in loans, or about 1.6 percent of First Indiana's mortgage-backed
securities and loans receivable after net items, were
serviced by others.
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,
FAS 122 requires capitalization of the cost of mortgage servicing
rights, regardless of whether those rights were acquired through
purchase or origination. Prior to adoption of FAS 122, only
purchased and excess loan servicing rights were capitalized.
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 strata 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. At December 31, 1996 the balance of
originated mortgage servicing rights included in other assets was
$894,000, with a fair market value of $1,102,000. The amount
capitalized in 1996 was $986,000, and the amount amortized
against loan servicing income was $92,000. There were no
valuation allowances at December 31, 1996, and no activity for the
year then ended.
Asset Quality
General. First Indiana's asset quality is directly affected
by the credit risk of the assets on its balance sheet. Most of First
Indiana's credit risk is concentrated in its loan portfolios and, to a
lesser extent, its real estate owned ("REO") portfolio.
Consequently, First Indiana has established policies and procedures
to ensure accurate and timely assessment of credit risk from the
date the loan is originated.
<PAGE> 12
The procedures for reviewing the quality of First Indiana's
loans, the appropriateness of loan and REO classifications, and the
adequacy of loan and REO loss allowances fall within the purview
of First Indiana's Board of Directors. To manage these tasks, the
Board of Directors has established a two-tiered asset review
system. Under this system, standing management committees
regularly discuss and review potential losses on all loans and REO
and the adequacy of First Indiana's loan and REO loss allowances.
Recommendations on the allowances are forwarded to the
Investment Committee of First Indiana's Board of Directors for
approval each quarter, then presented to the full Board of Directors
for approval and ratification. Management committees also
recommend loan and REO classifications which, if approved by the
Advisory Committee of the Board of Directors, are referred to the
full Board for final approval and ratification.
The other part of First Indiana's asset review system is
managed by an independent credit review officer appointed by the
Board of Directors. The credit review officer makes an
independent evaluation of First Indiana's portfolio and
management's recommendations on allowances for loan and REO
losses. He regularly reviews these recommendations with First
Indiana's Chairman. These meetings give the credit review officer
a forum for discussing asset quality issues with a member of the
Board of Directors who has no loan approval authority. This
system provides an independent check on management's
recommendations about loan and REO classifications and loss
allowances. This entire process is subject to the continual review
and approval by the Board of Directors.
First Indiana establishes general allowances as
percentages of loans outstanding. The percentages are based on a
model that incorporates empirical data about loss experience,
credit risk, geographic diversity, general economic trends, and
other factors.
Management believes that First Indiana's current loan and
REO loss allowances are sufficient to absorb potential future
losses; however, there can be no assurance that additional
allowances will not be required or that the amount of any such
allowances will not be significant. In addition, various regulatory
agencies, as an integral part of their examinations, periodically
review these allowances and may require First Indiana to recognize
additions to the allowances based on their judgment about
information available at the time of their examination. No such
additions were required by the Office of Thrift Supervision (the
"OTS") in their most recent examinations of First Indiana.
The Bank reviews all loans for evidence of impairment
except those with smaller balances and homogeneous loans. The
homogeneous loan portfolios include residential mortgage loans
secured by one- to four-family dwellings, consumer loans, and
certain business and residential construction loans which do not
meet the Bank's parameters for review. Loans subject to review
include commercial real estate loans and larger business and
residential construction loans which, because of their size, nature
and unique characteristics, could negatively affect the Bank if the
borrower experiences credit deterioration.
First Indiana places loans on non-accrual status when
payments of principal or interest become 90 days or more past due,
or earlier when an analysis of a borrower's creditworthiness
indicates that payments could become past due. A loan is deemed
impaired when, in the opinion of management, full collection of the
contractual principal and interest is not probable.
At December 31, 1995, the Bank identified an impaired
loan totaling $3,306,000 with an allocated reserve of $167,000.
This loan was repaid in the first quarter of 1996, and the allocated
reserve was absorbed into the general loan loss allowances of the
Bank.
The Investment Committee of First Indiana's Board of
Directors is responsible for monitoring and reviewing First
Indiana's liquidity and investments. The Investment Committee
approves investment policies and meets quarterly to review
transactions. Credit risk is controlled by limiting the number and
size of investments and by approving the brokers and dealers
through which investments are made.
Regulatory Classification of Assets. Federal
regulations require that each savings institution regularly classify
its own assets. In addition, in connection with examinations of
savings institutions, the OTS and the FDIC examiners have
authority to identify problem assets and, if appropriate, to require
them to be classified.
<PAGE> 13
There are three classifications for problem assets:
Substandard, Doubtful and Loss. Substandard assets have one or
more defined weaknesses and are characterized by the distinct
possibility that the institution will sustain some loss if the
deficiencies are not corrected. Doubtful assets have the
weaknesses of Substandard assets, with the additional
characteristic that the weaknesses make collection or liquidation in
full on the basis of currently existing facts, conditions and values
questionable, and there is a significant possibility of loss. An asset
classified as Loss is considered uncollectible and of such little
value that continuation as an asset of the depository institution is
not warranted.
Assets classified as Substandard or Doubtful require the
depository institution to establish prudent general allowances for
loan losses. If an asset or portion thereof is classified as Loss, the
depository institution must either establish specific allowances for
loan losses in the amount of 100 percent of the portion of the asset
classified Loss or charge off such amount. If a depository
institution does not agree with an examiner's classification of an
asset, it may appeal this determination to the District Director of
the OTS.
On the basis of management's review of its assets as of
December 31, 1996 on a net basis, First Indiana had classified
$36.7 million as Substandard, compared with $34.5 million and
$31.2 million at December 31, 1995 and 1994. The amount of
First Indiana's Doubtful and Loss loans at each such date was
immaterial.
Non-Performing Assets. First Indiana categorizes its
non-performing assets into four categories: Non-Accrual Loans,
Impaired Loans, Restructured Loans, and Real Estate Owned.
First Indiana places loans on non-accrual status when
payments of principal or interest become 90 days or more past due,
or earlier when an analysis of a borrower's creditworthiness
indicates that payments could become past due. Total non-accrual
loans were $15.4 million at December 31, 1996, compared with
$14.7 and $11.0 million at December 31, 1995 and 1994.
At December 31, 1995, First Indiana identified an
impaired loan totaling $3,306,000 which had an allocated reserve
of $167,000. This loan was repaid in the first quarter of 1996, and
the allocated reserve was absorbed into the general loan loss
allowances of the Bank.
Loan modifications classified as troubled debt
restructuring as defined in Statement of Financial Accounting
Standard No. 15, "Accounting by Debtors and Creditors for
Troubled Debt Restructuring," amounted to $6.9 million at
December 31, 1996, compared with $6.9 and $10.7 million at
December 31, 1995 and 1994. Management modified the payment
terms, interest rates, and contractual maturities of these loans with
the objective of improving the likelihood of recovery of First
Indiana's investment.
REO is generally acquired by deed in lieu of foreclosure
and is carried at the lower of cost (the unpaid balance at the date of
acquisition plus foreclosure and other related costs) or fair market
value. A review of REO properties, including the adequacy of the
loss allowance and decisions whether to charge off REO, occurs in
conjunction with the review of the loan portfolios.
First Indiana has carefully managed its loan portfolio,
including its non-performing assets, to reduce exposure to the
commercial real estate loan sector and to diversify its assets
geographically and by type of loan. Accordingly, First Indiana has
not experienced the difficulties faced by depository institutions
which have had concentrations in areas of the country most
adversely affected by economic cycles. First Indiana's non-performing
assets fell slightly in 1996 to $27.1 million at
December 31, 1996 from $27.2 million one year earlier.
Summary of Loan Loss Experience. First Indiana
regularly reviews the status of all non-performing assets to evaluate
the adequacy of the allowances for losses on loans and REO. For
additional information relating to the Corporation's loan and REO
loss allowances, see the Corporation's Consolidated Financial
Statements, including Note 5 thereto.
<PAGE> 14
Investment Activities
Federally chartered savings institutions have authority to
invest in various types of liquid assets, including United States
Treasury obligations, securities of various federal agencies, certain
certificates of deposits of insured banks and savings institutions,
certain bankers' acceptances, and federal funds. Subject to various
restrictions, federally chartered savings institutions may also invest
a portion of their assets in commercial paper and corporate debt
securities and in mutual funds whose assets conform to the
investments a federally chartered savings institution is otherwise
authorized to make directly.
As an Indiana corporation, the Corporation has authority
to invest in any type of investment permitted under Indiana law. As
a savings and loan holding company, however, its investments are
subject to certain regulatory restrictions described under "Savings
Institution Regulation."
The relative mix of investment securities and loans in
First Indiana's portfolio is dependent upon management's
evaluation of the yields available on loans compared to investment
securities. The Board of Directors has established an investment
policy, and the Investment Committee of the Board meets quarterly
with management to establish more specific investment guidelines
about types of investments, relative amounts, and maturities. First
Indiana's current investment guidelines do not permit investment
purchases in below investment grade corporate bonds (minimum
investment rating of A-) or "junk" bonds. Liquid investments are
managed to ensure that regulatory liquidity requirements are
satisfied.
At December 31, 1996, First Indiana's investments
totaled $106.9 million, or 7.14 percent of total assets, and
consisted primarily of U.S. Treasury and agency obligations,
corporate debt securities and asset-backed securities. For
additional information concerning investments held by the
Corporation at certain dates, see the Corporation's Consolidated
Financial Statements, including Note 2 thereto.
Sources of Funds
General. Deposits are an important source of the
Corporation's funds for use in lending and for other general
business purposes. In addition to deposits, First Indiana derives
funds from repayments of loans and mortgage-backed securities,
Federal Home Loan Bank of Indianapolis ("FHLB") advances,
repurchase agreements, short-term borrowings, and sales of loans.
Repayments of loans and mortgage-backed securities are a
relatively stable source of funds, while deposit inflows and
outflows are significantly influenced by general interest rates and
money market conditions. Borrowings may be used to compensate
for reductions in normal sources of funds, such as deposit inflows
at less than projected levels, or to support expanded activities.
Historically, First Indiana's borrowings have been primarily from
the FHLB and through repurchase agreements.
Deposits. First Indiana has a wide variety of deposit
programs designed to attract both short-term and long-term
deposits from the general public. These deposit accounts include
passbook accounts, non-interest-bearing consumer and commercial
demand accounts, NOW accounts, and money market checking
accounts, as well as fixed-rate certificates and money market
accounts. In 1997, First Indiana intends to increase consumer and
commercial checking accounts and certificates of deposit in an
effort to reduce funding costs and strengthen core deposits.
<PAGE> 15
The following table shows the distribution of First
Indiana's deposits by interest-rate categories at each of the dates
indicated:
<TABLE>
<CAPTION>
At December 31,
(Dollars in Thousands) 1996 1995 1994
Rate
<S> <C> <C> <C>
Under 3.00% $259,798 $213,082 $285,042
3.00 - 5.00 110,786 177,524 315,168
5.01 - 7.00 689,390 695,103 403,449
7.01 - 9.00 35,156 50,354 26,537
9.01 - 11.00 356 917 1,584
11.01 - 13.00 - - 131
--------- -------- -------
$1,095,486 $1,136,980 $1,031,911
</TABLE>
The following table reflects the increase (decrease) in
deposits for various types of deposit programs offered by First
Indiana for each of the periods indicated:
<TABLE>
<CAPTION>
At December 31,
1996 1995 1994
(Dollars in Thousands)
<S> <C> <C> <C>
NOW Checking and
Non-Interest-Bearing
Deposits $ 12,300 $ 18,136 $ (1,950)
Money Market
Checking (2,344) (3,355) (10,503)
Passbook and
Statement Savings 55,252 34,797 854
Money Market Savings (4,495) (8,860) (8,804)
Jumbo Certificates of
$100 or More (23,067) 54,943 7,831
Fixed-Rate Certificates (79,140) 9,408 14,226
-------- -------- --------
Total Increase (Decrease) $(41,494) $105,069 $ 1,654
======== ======== ========
</TABLE>
<PAGE> 16
First Indiana's jumbo certificates of $100,000 or more at
December 31, 1996, the maturities of such deposits, and the
percentage of total deposits represented by these certificates are set
forth in the table below:
<TABLE>
<CAPTION>
Over
Three
Three Months to Over Six % of
Months or Six Months to Over One Total
Less Months One Year Year Total Deposits
(Dollars in Thousands) --------- ---------- --------- ---- ----- --------
<S> <C> <C> <C> <C> <C> <C>
Jumbo Certificates of $100
or More $24,981 $22,189 $12,652 $37,576 $97,398 8.89%
</TABLE>
Borrowings. The FHLB functions as a central reserve
bank providing credit for depository institutions in Indiana and
Michigan. As a member of the FHLB, First Indiana is required to
own capital stock in the FHLB and is authorized to apply for
advances on the security of such stock and certain of First Indiana's
residential mortgage loans and other assets, subject to credit
standards. The FHLB advances are made pursuant to several
different credit programs, each with its own interest rate and range
of maturities.
The FHLB prescribes the acceptable uses for advances
and imposes size limits on them. Acceptable uses have included
expansion of residential mortgage lending and short-term liquidity
needs. Depending on the program, limitations on the amount of
advances are generally based on the FHLB's assessment of the
institution's creditworthiness. At December 31, 1996, First Indiana
had $215.5 million in FHLB advances (14.40 percent of total
assets), with a weighted average rate of 5.60 percent.
First Indiana also enters into repurchase agreements as a
short-term source of borrowing, but only with registered
government securities dealers.
Borrowings Balances. The following table sets forth
certain information regarding repurchase agreements and federal
funds purchased (short-term borrowings) at and for the years ended
on the dates indicated.
<TABLE>
<CAPTION>
At December 31,
1996 1995 1994
(Dollars in Thousands)
<S> <C> <C> <C>
Highest Month-End Balance of Short-Term Borrowings
During the Year $39,651 $61,982 $35,922
Average Month-End Balance of Short-Term Borrowings
During The Year 18,133 41,963 6,137
Weighted Average Interest Rate of Short-Term Borrowings
During the Year 5.53% 6.17% 5.23%
Weighted Average Interest Rate of Short-Term Borrowings
at End of the Year 4.80 5.81 6.14
</TABLE>
Regulatory Capital
Risk-Based Capital. Savings institutions are required
to have risk-based capital of eight percent of risk-weighted assets.
At December, 31, 1996, First Indiana's risk-based capital was
$144.6 million, or 12.53 percent of risk-weighted assets. Risk-based
capital is defined as common equity, less goodwill, the
excess portion of land loans with a loan-to-value ratio of greater
than 80 percent, and investments in non-mortgage-lending-related
subsidiaries, plus general allowances for
<PAGE> 17
loan losses. Risk-weighting of assets is derived from assigning one of
four risk-weighted categories to an institution's assets, based on the degree
of credit risk associated with the asset. The categories range from
zero percent for low-risk assets (such as United States Treasury
securities) to 100 percent for high-risk assets (such as real estate
owned). The carrying value of each asset is then multiplied by the
risk-weighting applicable to the asset category. The sum of the
products of the calculation equals total risk-weighted assets.
Core Capital. Savings institutions are also required to
maintain a minimum leverage ratio, under which core (Tier One)
capital must equal at least three percent of total assets, but not less
than the minimum required by the Office of the Comptroller of the
Currency (the "OCC") for national banks, which minimum
currently stands at four percent. First Indiana's primary regulator,
the OTS, is expected to adopt the OCC minimum. The
components of core capital are the same as those set by the OCC
for national banks, and consist of common equity, plus non-cumulative
preferred stock and minority interest in consolidated
subsidiaries, minus certain intangible assets, including purchased
loan servicing. At December 31, 1996, First Indiana's core capital
and leverage ratio were $131.3 million and 8.78 percent.
Tangible Capital. Savings institutions must also
maintain minimum tangible capital of 1.5 percent of total assets.
First Indiana's tangible capital and tangible capital ratio at
December 31, 1996, were $131.3 million and 8.78 percent
respectively. Management intends to maintain capital well in
excess of regulatory minimums.
Capital Regulations. The OTS has minimum capital
standards that place savings institutions into one of five categories,
from "critically undercapitalized" to "well-capitalized," depending
on levels of three measures of capital. A well-capitalized
institution as defined by the regulations has a total risk-based
capital ratio of at least ten percent, a Tier One (core) risk-based
capital ratio of at least six percent, and a leverage (core) risk-based
capital ratio of at least five percent. At December 31, 1996 First
Indiana was classified as "well-capitalized."
Effective January 1, 1994, the OTS adopted regulations
adding an interest-rate risk component to the proposed capital
regulations. Under this component, an institution with an "above
normal" level of interest-rate risk exposure is subject to an "add-on" to
its risk-based capital requirement. "Above normal" interest-rate risk is
defined as a reduction in "market value portfolio equity"
(as defined) resulting from a 200 basis point increase or decrease
in interest rates, if the decline in value exceeds two percent of the
institution's assets. Institutions failing to meet this test will be
required to add to their risk-based capital.
The OTS issued this final rule to implement the portions
of Section 305 of the Federal Deposit Insurance Corporation
Improvement Act of 1991, which requires the agencies to revise
their risk-based capital standards for insured depository institutions
to ensure that those standards take adequate account of
concentration of credit risk and the risks of nontraditional activities.
The final rule amends the risk-based capital standards by explicitly
identifying concentration of credit risk and certain risks arising
from nontraditional activities, as well as an institution's ability to
manage these risks, as important factors in assessing an institution's
overall capital adequacy. Based on its interest-rate risk at
December 31, 1996, First Indiana was not required to add to its
risk-based capital under the new regulation.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data
presented herein have been prepared in accordance with generally
accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical dollars
without considering changes in the relative purchasing power of
money over time due to inflation.
Almost all of the assets and liabilities of a depository
institution are monetary, which limits the usefulness of data derived
by adjusting a depository institution's financial statements for the
effects of changing prices.
<PAGE> 18
Regulation
Federal Deposit Insurance Corporation Improvement Act
of 1991
The Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA"), contains various provisions intended to
recapitalize the Bank Insurance Fund and enacts a number of
regulatory reforms that affect all insured depository institutions,
regardless of the insurance fund in which they participate. Among
other things, FDICIA grants the OTS broader regulatory authority
to take prompt corrective action against insured institutions that do
not meet capital requirements, including placing severely under-capitalized
institutions into conservatorship or receivership. Since
First Indiana exceeded all capital requirements at December 31,
1996, these provisions are not expected to have any significant
impact on its operations.
Savings and Loan Holding Company Regulations
General. Under the Home Owner's Loan Act ("HOLA"),
as amended, the Director of the OTS has regulatory jurisdiction
over savings and loan holding companies. The Corporation, as a
savings and loan holding company within the meaning of HOLA,
is subject to regulation, supervision and examination by and the
reporting requirements of the Director of OTS.
Savings Institution Regulation
General. As a SAIF-insured savings institution, First
Indiana is subject to supervision and regulation by the Director of
OTS. Under OTS regulations, First Indiana is required to obtain
audits by independent auditors and to be examined periodically by
the Director of OTS. First Indiana is subject to assessments by
OTS and the FDIC to cover the costs of such examinations. The
OTS may revalue assets of First Indiana based upon appraisals and
require the establishment of specified reserves in amounts equal to
the difference between such revaluation and the book value of the
assets. The Director of the OTS also is authorized to promulgate
regulations to ensure the safe and sound operations of savings
institutions and may impose various requirements and restrictions
on the activities of savings institutions.
The regulations and policies of the Director of the OTS
for the safe and sound operations of savings institutions can be no
less stringent than those established by the OCC for national
banks. Additionally, under the FDICIA, the OTS prescribed safety
and soundness regulations in 1995 relating to (i) internal controls,
information systems, and internal audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest-rate
exposure; (v) asset growth; and (vi) compensation and benefit
standards for officers, directors, employees and principal
shareholders. These regulations did not have a material effect on
First Indiana.
As a member of SAIF, First Indiana is also subject to
regulation and supervision by the FDIC, in its capacity as
administrator of SAIF, to ensure the safety and soundness of SAIF.
Qualified Thrift Lender Requirement. In order for
First Indiana to exercise the powers granted to federally chartered
savings institutions and maintain full access to FHLB advances, it
must be a "qualified thrift lender" ("QTL"). A savings institution
is a QTL if its qualified thrift investments equal or exceed 65
percent of the savings institution's portfolio assets on a monthly
average basis in nine out of 12 months. As amended by the
FDICIA, qualified thrift investments generally consist of (i) various
housing related loans and investments (such as residential
construction and mortgage loans, home improvement loans, mobile
home loans, home equity loans, and mortgage-backed securities);
(ii) certain obligations of the FDIC, the Federal Savings and Loan
Insurance Corporation Resolution Fund and the Resolution Trust
Corporation (for limited periods); and (iii) shares of stock issued
by any Federal Home Loan Bank, the Federal Home Loan
Mortgage Corporation, or the Federal National Mortgage
Association.
At December 31, 1996, the qualified thrift investment
percentage test for First Indiana was in excess of 88 percent. First
Indiana complies with the new QTL test as revised upon enactment
of FDICIA.
<PAGE> 19
Liquidity. Under applicable federal regulations, savings
institutions are required to maintain an average daily balance of
liquid assets (including cash, certain time deposits, certain banker's
acceptances, certain corporate debt securities and highly rated
commercial paper, securities of certain mutual funds and specified
Untied States government, state or federal agency obligations)
equal to a monthly average of not less than a specified percentage
of withdrawable deposits plus short-term borrowings. Under
HOLA, this liquidity requirement may be changed from time to
time by the Director of the OTS to any amount within the range of
four percent to ten percent, depending upon economic conditions
and the deposit flows of member institutions. The Bank's liquidity
ratio at December 31, 1996 was 8.20 percent. A savings
institution is also required to maintain an average daily balance of
short-term liquid assets at a specified percentage (currently one
percent) of the total of the average daily balance of its net
withdrawable deposits and short-term borrowing. At December
31, 1996, First Indiana was in compliance with these liquidity
requirements.
Loans-to-One-Borrower Limitations. HOLA generally
requires savings institutions to comply with the loans-to-one-borrower
limitations applicable to national banks. In general,
national banks may make loans to one borrower in amounts up to
15 percent of the bank's unimpaired capital and surplus, plus an
additional 10 percent of capital and surplus for loans secured by
readily marketable collateral. At December 31, 1996, First
Indiana's loan-to-one borrower limitation was approximately
$21.7 million, and no loans to a single borrower exceeded that
amount.
Commercial Real Property Loans. HOLA limits the
aggregate amount of commercial real estate loans that a federal
savings institution may make to an amount not in excess of 400
percent of the savings institution's capital. First Indiana was in
compliance with the commercial real property loan limitation at
December 31, 1996.
Limitation on Capital Distributions. Under OTS
regulations, a savings institution is classified as a tier 1 institution,
a tier 2 institution or a tier 3 institution, depending on its level of
regulatory capital both before and after giving effect to a proposed
capital distribution. A tier 1 institution may generally make capital
distributions in any calendar year up to 100 percent of its net
income to date during the calendar year plus the amount that would
reduce by one-half its "surplus capital ratio" (i.e., the percentage by
which the institution's capital-to-assets ratio exceeds the ratio of its
fully-phased-in capital requirements to its assets) at the beginning
of the calendar year. No regulatory approval of the capital
distribution is required, but prior notice must be given to the OTS.
Restrictions exist on the ability of tier 2 and tier 3 institutions to
make capital distributions. For purposes of these regulations, First
Indiana is a tier 1 institution.
Limitation of Equity Risk Investments. Under
applicable regulations, First Indiana is generally prohibited from
investing directly in equity securities and real estate (other than that
used for offices and related facilities or acquired through, or in lieu
of, foreclosure or on which a contract purchaser has defaulted). In
addition, OTS regulations limit the aggregate investment by
savings institutions in certain equity risk investments including
equity securities, real estate, service corporations and operating
subsidiaries and loans for the purchase of land and construction
loans made after February 27, 1987 on non-residential properties
with loan-to-value ratios exceeding 80 percent. At December 31,
1996, First Indiana was in compliance with the equity risk
investment limitations.
Insurance of Deposits. FDIC-insured institutions pay
deposit insurance premiums depending on their placement within
one of nine categories. The categories are determined by (i) the
insured institution's placement in capital group 1, 2, or 3,
depending on its classification as "well-capitalized," "adequately
capitalized," or "undercapitalized," and (ii) its supervisory rating of
A, B, or C. Prior to October 1, 1996, well-capitalized institutions
with a supervisory rating of A paid $.23 per $100 of deposits,
while undercapitalized institutions with a rating of C paid $.31 per
$100 of deposits.
In the third quarter of 1996, the FDIC levied an industry-wide special
assessment to recapitalize the Savings Association
Insurance Fund ("SAIF"), which insures First Indiana Bank's
customers' deposits. The Bank incurred a one-time pre-tax charge
to earnings of $6,749,000 to comply with this assessment. At that
time, an interim schedule of deposit insurance premiums ranging
from $.18 to $.27 per $100 of deposits was published for use
through the last quarter of 1996. Beginning January 1, 1997,
deposit insurance premiums between $.00 and $.27 per $100 of
deposits will be in effect, based on the same nine-category rating
system discussed in the previous paragraph. The Deposit
Insurance Funds Act of 1996 ("Funds Act") also separates,
effective January 1, 1997, the Financing Corporation ("FICO")
assessment to service the interest on its bond obligations from the
SAIF assessment. As part of the deposit insurance assessments,
institutions pay
<PAGE> 20
a FICO assessment for debt service requirements.
The FICO assessment rate is subject to change on a quarterly basis,
depending on the debt service requirements. First Indiana most
recently paid $.0648 per $100 of deposits to comply with this
assessment.
First Indiana was a well-capitalized institution throughout
1996, and paid the lowest deposit insurance premium rate in effect
at each assessment date. Because it is well-capitalized, First
Indiana will continue to pay the lowest rate of deposit insurance
premiums in 1997, but these premiums could increase in the future
from their current levels if the aggregate SAIF premiums paid by
all SAIF-insured institutions do not equal or exceed 1.25% of
insurable deposits.
Community Reinvestment Act. Ratings of depository
institutions under the Community Reinvestment Act of 1977
("CRA") must be disclosed. The disclosure includes both a four-tier
descriptive rating using terms such as satisfactory and
unsatisfactory and a written evaluation of each institution's
performance. Also, the FHLB is required to adopt regulations
establishing standards of community investment and service for
members of the FHLB System to meet to be eligible for long-term
advances. Those regulations are required to take into account a
savings institution's CRA record and the member's record of
lending to first-time home buyers. The Corporation intends to
maintain its long-standing record of community lending and to
meet or exceed the CRA standards under FIRREA.
Transactions with Affiliates
Pursuant to HOLA, transactions engaged in by a savings
institution or one of its subsidiaries with affiliates of the savings
institution generally are subject to the affiliate transaction
restrictions contained in Sections 23A and 23B of the Federal
Reserve Act. Section 23A of the Federal Reserve Act imposes
both quantitative and qualitative restrictions on transactions
engaged in by a member depository institution or one of its
subsidiaries with an affiliate, while Section 23B of the Federal
Reserve Act requires, among other things, that all transactions with
affiliates be on terms substantially the same as and at least as
favorable to the member bank or its subsidiary as the terms that
would apply to or would be offered in a comparable transaction
with an unaffiliated party.
Section 22(h) of the Federal Reserve Act imposes
restrictions on loans to executive officers, directors and principal
shareholders. Under Section 22(h), loans to an executive officer
or to a greater than 10 percent shareholder of a savings institution,
or certain affiliated entities of either, may not exceed the
institution's loan-to-one-borrower limit when considered with all
other outstanding loans to such person and affiliated entities.
Section 22(h) also prohibits loans above amounts prescribed by the
appropriate federal banking agency to directors, executive officers
and greater than 10 percent shareholders of a savings institution
and their respective affiliates, unless the loan is approved in
advance by a majority of the board of directors of the institution
with any interested director not participating in the voting. The
Federal Reserve Board has prescribed the loan amount (which
includes all other outstanding loans to such person) for which such
prior board of director approval is required, as the greater of
$25,000 or 5 percent of capital and surplus (up to $500,000).
Further, the Federal Reserve Board requires that loans to directors,
executive officers and principal shareholders be made on terms
substantially the same as offered in comparable transactions to
other persons. First Indiana was in compliance with these
regulations at December 31, 1996.
Federal Home Loan Bank System
The Federal Home Loan Bank System ("FHLBanks")
consists of 12 regional FHLBanks, each subject to supervision and
regulation by the Federal Housing Finance Board. The FHLBanks
provide a central credit facility for member savings institutions. As
a member of the FHLB, First Indiana is required to own shares of
capital stock in the FHLB in an amount at least equal to one
percent of the aggregate principal amount of its unpaid residential
mortgage loans, home purchase contracts and similar obligations
at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB, whichever is greater. As of December 31, 1996,
First Indiana was in compliance with this requirement.
<PAGE> 21
Federal Reserve System
The Federal Reserve Board has adopted regulations that
require savings institutions to maintain non-earning reserves
against their transaction accounts (primarily NOW and regular
checking accounts) and non-personal time deposits (those which
are transferable or held by a person other than a natural person)
with an original maturity of less than one and one-half years. At
December 31, 1996, First Indiana was in compliance with these
requirements. These reserves may be used to satisfy liquidity
requirements imposed by the Director of the OTS. Because
required reserves must be maintained in the form of vault cash or
non-interest-bearing account at a Federal Reserve Bank, the effect
of this reserve requirement is to reduce the amount of the
institution's interest-earning assets.
Savings institutions also have the authority to borrow
from the Federal Reserve discount window. Federal Reserve
Board regulations, however, require savings institutions to exhaust
all the FHLB sources before borrowing from a Federal Reserve
Bank. The FDICIA places limitations upon a Federal Reserve
Bank's ability to extend advances to under-capitalized and critically
under-capitalized depository institutions. The FDICIA provides
that a Federal Reserve bank generally may not have advances
outstanding to an under-capitalized institution for more than 60
days in any 120-day period.
Taxation
Federal. The Corporation, on behalf of itself, First
Indiana and its subsidiaries, files a calendar tax year consolidated
federal income tax return and reports items of income and expense
using the accrual method of accounting.
Savings institutions are generally taxed in the same
manner as other corporations. In August 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. Another provision of the Act disallows the
use of the experience method of accounting for bad debt for "large"
institutions, defined to include institutions with greater than $500
million in total assets. The Bank therefore will be required to use
the specific charge-off method on its tax returns for 1996 and
thereafter. Beginning in 1996, the Bank is required to recapture
ratably over 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 $1,001,000 of applicable excess reserves and has
provided a deferred tax liability related to this recapture.
In accordance with Statement of Financial Accounting
Standard No. 109, "Accounting for Income Taxes" ("SFAS 109"),
a deferred liability has not been established for the Bank's tax bad
debt base year reserves of $16,586,000. 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: (i) the Bank fails to qualify as a "bank" for federal
income tax purposes; (ii) certain distributions are made with
respect to the stock of the Bank; (iii) the bad debt reserves are used
for any purpose other than to absorb bad debt losses; or (iv) there
is a change in tax law. The enactment of this legislation is
expected to have no material impact on the Corporation's
operations or financial position.
Under SFAS 109, the Corporation may recognize
deferred tax assets for deductible temporary differences based on
an evaluation of the likelihood of realizing the underlying tax
benefits. The realization of these benefits principally depends upon
the following sources of taxable income: (i) taxable income in the
current year or prior years that is available through carryback
(potential recovery of taxes paid for the current year or prior years);
(ii) future taxable income that will result from the reversal of
existing taxable temporary differences (potential offsetting of
deferred tax liabilities); or (iii) future taxable income, exclusive of
the reversal of existing temporary differences, that is generated by
future operations.
In addition, tax-planning strategies may be available to
accelerate taxable income or deductions, change the character of
taxable income or deductions, or switch from tax-exempt to taxable
investments so that there would be sufficient taxable income of the
appropriate character and in the appropriate periods to allow for
realization of the tax benefits.
<PAGE> 22
The Federal Financial Institutions Examination Council
(the "FFIEC") has adopted all provisions of SFAS 109 for
regulatory reporting purposes, including those provisions related
to deferred tax assets. However, the FFIEC agencies have imposed
a limitation on the amount of net deferred tax assets that may be
included in the calculation of regulatory capital. The limitation
requires an institution to deduct from capital, when computing its
regulatory capital ratios, any amount of net deferred tax asset that
is not supported by the sum of the carryback potential of the
institution plus the lower of the next twelve months' estimated
earnings or ten percent of Tier 1 capital. At December 31, 1996,
First Indiana met all the above requirements and had no
adjustments to regulatory capital.
The Internal Revenue Service has examined the tax
returns of First Indiana through 1991.
As a result of a routine tax audit, the IRS adjusted certain
income taxes owed by First Indiana for the years ended December
31, 1985 and 1986. The adjustments involved the timing of First
Indiana's deduction of interest expense paid on customers'
certificate of deposit accounts. First Indiana paid the taxes and
interest and subsequently filed for a refund of these amounts. A
settlement has been reached, final governmental approval has been
obtained, and the Bank is awaiting the government's preparation
of the final closing agreement.
State. The State of Indiana imposes a franchise tax on
the "adjusted gross income" of depository institutions at a fixed rate
of 8.5 percent per year. This franchise tax is imposed in lieu of the
gross income tax, adjusted gross income tax, savings and loan
excise tax and supplemental net income tax otherwise imposed on
certain corporate entities and depository institutions. "Adjusted
gross income" is computed by making certain modifications to an
institution's federal taxable income. For example, tax-exempt
interest is included in the depository institution's adjusted gross
income for state franchise tax purposes.
The Indiana Department of Revenue has examined the
state income tax returns of First Indiana through 1994.
Service Corporation Subsidiaries
OTS regulations permit federal savings institutions to
invest in the capital stock, obligations or specified types of
securities of subsidiaries (referred to as "service corporations") and
to make loans to such subsidiaries and joint ventures in which such
subsidiaries are participants in an aggregate amount not exceeding
two percent of an institution's assets, plus an additional one percent
of assets if the amount over two percent is used for specified
community or inner-city development purposes. In addition,
federal regulations permit institutions to make specified types of
loans to such subsidiaries (other than special-purpose finance
subsidiaries), in which the institution owns more than ten percent
of the stock, in an aggregate amount not exceeding 50 percent of
the institution's regulatory capital if the institution's regulatory
capital is in compliance with applicable regulations. FIRREA
requires a savings institution which acquires a non-savings
institution subsidiary, or which elects to conduct a new activity
within a subsidiary, to give the FDIC and the OTS at least 30 days'
advance written notice. The FDIC may, after consultation with the
OTS, prohibit specific activities if it determines such activities
pose a serious threat to the SAIF. Moreover, savings institutions
must deduct from capital, for purposes of meeting the leverage
limit, tangible capital, and risk-based capital requirements, their
entire investment in and loans to a subsidiary engaged in activities
permissible for a national bank (other than exclusively agency
activities for its customers or mortgage banking subsidiaries).
One Mortgage Corporation. One Mortgage
Corporation is a wholly owned mortgage banking subsidiary which
originates single-family residential mortgage loans outside of
Indiana for sale to First Indiana or for sale into the secondary
market. It originates loans through offices located in Tampa and
Orlando, Florida, and in Charlotte and Raleigh, North Carolina.
One Property Corporation. One Property Corporation
is a wholly owned subsidiary formed in 1985 to engage in
commercial real estate investment activities. To date, One
Property Corporation has not engaged in any such activities.
<PAGE> 23
Pioneer Service Corporation. Pioneer Service
Corporation is a wholly owned subsidiary of the Bank. In April
1990, Pioneer Service Corporation invested in a limited
partnership which was formed to develop and own a 112-unit
apartment complex in Greencastle, Indiana.
Employees
At December 31, 1996, the Corporation and its
subsidiaries employed 601 persons, including part-time employees.
Management considers its relations with its employees to be
excellent. None of these employees is represented by any
collective bargaining group.
The Corporation and its subsidiaries currently maintain
a comprehensive employee benefit program providing, among
other benefits, a qualified pension plan, a 401(k) plan,
hospitalization and major medical insurance, paid sick leave, long-term
disability insurance, life insurance, an employees' stock
purchase plan, and reduced loan rates for employees who qualify.
Item 2. Properties
At December 31, 1996, the Corporation operated through
28 full-service banking centers and nine loan origination offices.
The aggregate carrying value at December 31, 1996 of the
properties owned or leased, including headquarters properties and
leasehold improvements at the leased offices, was $13.7 million.
See Note 6 to the Corporation's Consolidated Financial Statements.
The carrying value of First Indiana's data processing equipment at
December 31, 1996 was $1.7 million.
The following table sets forth information with respect to
the Corporation's offices and office leases as of December 31,
1996:
<TABLE>
<CAPTION>
Year Owned Expiration
Opened or or Date
Office Location Acquired Leased of Lease
- --------------- --------- ------ ----------
<S> <C> <C> <C>
First Indiana
- -------------
Downtown Banking Center 1988 Leased Mar. 1998 (a)
and Corporate Headquarters
135 N. Pennsylvania Street
Indianapolis, Indiana
Eastgate Banking Center 1957 Leased Jan. 1999 (b)
7150 E. Washington Street
Indianapolis, Indiana
West Side Banking Center 1988 Leased Oct. 2003 (c)
925 N. High School Road
Indianapolis, Indiana
Nora Plaza Banking Center 1959 Leased Mar. 1997
1300 E. 86th Street
Indianapolis, Indiana
Southern Plaza Banking Center 1960 Leased Apr. 1999(b)
4200 S. East Street
Indianapolis, Indiana
<PAGE> 24
Esquire Plaza Banking Center 1962 Leased May 2002(b)
8205 Pendleton Pike
Indianapolis, Indiana
Allisonville Banking Center 1972 Leased Sep. 2001
6254 Allisonville Road
Indianapolis, Indiana
Carmel Banking Center 1973 Owned
2138 E. 116th Street
Carmel, Indiana
Zionsville Banking Center 1973 Leased June 1998
75 Boone Village Shopping Center
Zionsville, Indiana
Greenwood Banking Center 1988 Leased Nov. 2008 (c)
8675 U.S. 31 South
Indianapolis, Indiana
Washington Square Banking Center 1988 Owned
10040 E. Washington Street
Indianapolis, Indiana
Brownsburg Banking Center 1979 Leased Dec. 2004 (b)
1073 N. Green Street
Brownsburg, Indiana
West 86th Banking Center 1983 Owned
1180 West 86th Street
Indianapolis, Indiana
Franklin Banking Center 1982 Owned
198 N. Main Street
Franklin, Indiana
North Shadeland Banking Center 1981 Owned
7652 N. Shadeland Avenue
Indianapolis, Indiana
Westfield Banking Center 1981 Owned
111 E. Main Street
Westfield, Indiana
Pendleton Banking Center 1981 Owned
115 W. State Street
Pendleton, Indiana
Fishers Banking Center 1990 Owned
11991 Fishers Crossing Drive
Fishers, Indiana
North 31 Banking Center 1993 Owned
14841 Greyhound Ct.
Carmel, Indiana
<PAGE> 25
Carmel Mortgage Services Office 1991 Leased Jan. 2000
10401 N. Meridian, Suite 100
Carmel, Indiana
Washington Square Office 1977 Owned
10044 E. Washington Street
Indianapolis, Indiana
Greenwood Mortgage 1984 Leased June 1997
Services Office
720 Fry Road
Indianapolis, Indiana
South Bend Consumer Loan Office 1992 Leased July 1997
6910 N. Main Street Suite 13D
Box 33
Granger, Indiana
Chicago Consumer Loan Office 1996 Leased Nov. 1998
825 N. Cass Avenue, Suite 206
Westmont, Illinois
Columbus Consumer Loan Office 1994 Leased Sep. 1997
425 W. Shrock, Suite 102
Westerville, Ohio
Fort Wayne Consumer Loan Office 1995 Leased Sep. 1997
3711 Rupp Drive, Suite 208
Fort Wayne, Indiana
Louisville Consumer Loan Office 1992 Leased Apr. 1997
3303 Plaza Drive, Suite 1
New Albany, Indiana
One Mortgage Corporation 1984 Leased June 1998
2100 Rexford Road, Suite 204
Charlotte, North Carolina
One Mortgage Corporation 1985 Leased Sep. 1997
4700 Homewood Court Suite 100
Raleigh, North Carolina
One Mortgage Corporation 1992 Leased May 1998
445 North Wymore Road,
Suite 201
Winter Park, Florida
One Mortgage Corporation 1990 Leased Jan. 2000
Sable Business Ctrs. V
3922 Coconut Palm Dr., Suite 106
Brandon, Florida
One Mortgage Corporation 1992 Leased Aug. 1997
9123 N. Military Trail Suite 216
Palm Beach Gardens, Florida
<PAGE> 26
Greenwood Operations Center 1993 Owned
1300 Windhorst Way
Greenwood, Indiana
Land - Outlot #1 1993 Owned
Meridian Oaks Commercial
Subdivision
State Road 135 South
Greenwood, Indiana
Downtown Evansville Banking Center 1977 Owned
123 Main Street
Evansville, Indiana
Mount Vernon Banking Center 1965 Owned
405 E. 4th Street
Mt. Vernon, Indiana
East Side Banking Center 1980 Owned
4720 Lincoln Avenue
Evansville, Indiana
Bell Oaks Banking Center 1980 Owned
8388 Bell Oaks Drive
Newburgh, Indiana
North Brook Banking Center 1986 Owned
3540 First Avenue
Evansville, Indiana
Mooresville Banking Center 1952 Owned
24 West Main Street
Mooresville, Indiana
Drive-Up Banking Center 1982 Owned
33 West Main Street
Mooresville, Indiana
Spring Mill Drive-Up Banking Center 1984 Owned
24 Springmill Court
Mooresville, Indiana
Rushville Banking Center 1985 Owned
201 Harcourt Way
Rushville, Indiana
Downtown Rushville Banking Center 1955 Owned (d)
201 Harcourt Way
Rushville, Indiana
(a) The lease also provides six ten-year renewal options.
(b) The lease also provides a five-year renewal option.
(c) The lease also provides two five-year renewal options.
(d) This banking center was closed in February 1997, and the building
donated to the Rushville United Way.
</TABLE>
<PAGE> 27
Item 3. Legal Proceedings
As a result of a routine tax audit, the Internal Revenue
Service assessed additional income taxes of approximately
$1,500,000 related to the years ended December 31, 1986 and
1985. The assessment involved the timing of First Indiana's
deduction for accrued interest expense relating to customers'
certificate of deposit accounts. The assessed tax and interest were
paid in the tax year ending December 31, 1990 and claim for
refund was subsequently filed. The Corporation negotiated a
settlement with the United States Department of Justice - Tax
Division and is awaiting final closing documents to be prepared by
the government.
Other than the above mentioned item, there are no
pending legal proceedings to which the Corporation or any
subsidiary was a party or to which any of their property is subject
other than litigation which, in the opinion of management, is not
material to the Corporation's business, operations, or financial
condition.
Item 4. Submission of Matters to a Vote of Security
Holders
No matters were submitted to a vote of the Corporation's
security holders during the three months ended December 31,
1996.
Part II
Item 5. Market for the Registrant's Common Equity and
Related Shareholder Matters
The information required by this item is incorporated by
reference from page 40 of the Corporation's 1996 Annual Report
under the heading, "Corporate Information."
For restrictions on the Corporation's present or future
ability to pay dividends, see Note 11 of "Notes to Consolidated
Financial Statements" on page 32 - 33 of the Corporation's 1996
Annual Report, which is incorporated herein by reference.
The Corporation paid a cash dividend of $.11 per share
outstanding in each quarter of 1996 and $.10 per share outstanding
in each quarter of 1995, as adjusted for a five-for-four stock split
on March 18, 1997 and a six-for-five stock split on March 1, 1996.
Item 6. Selected Financial Data
The information required by this item is incorporated by
reference to page 17 of the Corporation's 1996 Annual Report from
the material under the heading "Five-Year Summary of Selected
Financial Data."
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations
The information required by this item is incorporated by
reference to pages 7 - 16 of the Corporation's 1996 Annual Report
from the material under the heading "Financial Review."
<PAGE> 28
Item 8. Financial Statements and Supplementary Data
The Corporation's Consolidated Financial Statements and
Notes to Consolidated Financial Statements at December 31, 1996
and 1995 and for each of the years in the three-year period ended
December 31, 1996 are incorporated by reference to pages 18 - 39
of the Corporation's 1996 Annual Report. The Corporation's
unaudited quarterly financial data for the two-year period ended
December 31, 1996 is incorporated by reference to Note 15 of
"Notes to Consolidated Financial Statements" on page 38 of the
Corporation's 1996 Annual Report.
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
None.
Part III
Item 10. Directors and Executive Officers of the
Registrant
The information required by this item with respect to the
directors is incorporated by reference to pages 3-5 and page 15 of
the Corporation's Proxy Statement dated March 12, 1997 under the
heading "Election of Directors," and "Section 16(a) Beneficial
Ownership Reporting Compliance."
The following table sets forth information about the
executive officers of the Corporation and the Bank who are not
directors of the Corporation or the Bank. All executive officers are
appointed by the Board of Directors and serve at the discretion of
the Board of Directors.
<TABLE>
<CAPTION>
Year First
Name Position Age Elected Officer
------------- ------------- ------- ---------------
<S> <C> <C> <C>
David L. Gray Vice President and Treasurer 53 1981
of the Corporation; Chief
Financial Officer, Treasurer,
and Senior Vice President,
Internal Support Services
Division of the Bank
David A. Lindsey Senior Vice President, 46 1983
Consumer Banking Sales
Division of the Bank;
President, One Mortgage Corporation
Merrill E. Matlock Senior Vice President, 47 1984
Commercial Banking Division
of the Bank
Timothy J. O'Neill Senior Vice President, 49 1972
Consumer Banking Services
Division of the Bank
Kenneth L. Turchi Senior Vice President, Retail 38 1987
Banking, Marketing, and Strategic
Planning Division of the Bank
</TABLE>
David L. Gray has been with the Bank since July 1981,
and currently serves as the Corporation's vice president and
treasurer, and the Bank's chief financial officer, treasurer, and
senior vice president, Internal Support Services Division. He also
serves as the chairman of the Bank's Asset/Liability Committee.
David A. Lindsey has been with the Bank since January
1983, serving as the Bank's senior vice president, Consumer
Banking Sales Division. His duties include mortgage and
consumer lending and management of the Bank's mortgage banking
subsidiary.
<PAGE> 29
Merrill E. Matlock is senior vice president of the Bank's
Commercial Banking Division. He is responsible for the Bank's
construction, business, and commercial real estate lending. Mr.
Matlock has worked for First Indiana since 1984 and was most
recently first vice president of the construction lending department.
Timothy J. O'Neill has been with the Bank since 1970.
He currently serves as the Bank's senior vice president, Consumer
Banking Services Division. He is responsible for the
administration of the processing and servicing of the Bank's
lending and deposit products.
Kenneth L. Turchi joined First Indiana in September 1985
and currently serves as senior vice president, Retail Banking,
Marketing, and Strategic Planning Division. His duties include
strategic planning, marketing, advertising, market research,
investor and public relations, and supervision of retail banking
center sales and operations.
Item 11. Executive Compensation.
The information required by this item with respect to
executive compensation is incorporated by reference to pages 7-14
of the material under the heading "Executive Compensation" in the
Corporation's Proxy Statement.
Item 12. Security Ownership of Certain Beneficial
Owners and Management
The information required by this item is incorporated by
reference to pages 1-7 of the material under the heading "Voting
Securities and Beneficial Owners" and "Proposal No 1: Election of
Directors" in the Corporation's Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by
reference to pages 6 - 7 of the material under the heading "Certain
Transactions" in the Corporation's Proxy Statement.
<PAGE> 30
Part IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
a. The following documents are filed as part of this report:
1996 Annual
Report
(Exhibit 13)
Financial Statements Page(s)
-------------------- ------------
Consolidated Balance Sheets as of
December 31, 1996 and 1995 18
Consolidated Statements of Earnings
for the Years Ended December 31, 1996, 1995 and 1994 19
Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 1996, 1995 and 1994 20
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1996, 1995 and 1994 21
Notes to Consolidated Financial Statements 22-39
Independent Auditors' Report 41
<PAGE> 31
Exhibits
Refer to list of exhibits on pages 34-36
b. Reports on Form 8-K
No Reports on Form 8-K were filed during the three
months ended December 31, 1996.
c. The exhibits filed herewith or incorporated by reference
herein are set forth on the Exhibit index on pages 34-36.
d. Financial Statement Schedules required by Regulation S-X.
None
<PAGE> 32
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
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
By: /s/Owen B. Melton, Jr.
Owen B. Melton, Jr.
President and Chief Operating Officer
Date: March 19, 1997
Pursuant to the requirements of the Securities and
Exchange Act of 1934, this annual report has been signed below
by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Officers
By: /s/Robert H. McKinney By: /s/David L. Gray
Robert H. McKinney David L. Gray
Chairman and Chief Vice President and
Executive Officer Treasurer
Date: March 19, 1997 Date: March 19, 1997
Directors
By: /s/Gerald L. Bepko By: /s/Robert H. McKinney
Gerald L. Bepko Robert H. McKinney
Date: March 19, 1997 Date: March 19, 1997
By: /s/Douglas W. Huemme By: /s/Owen B. Melton, Jr.
Douglas W. Huemme Owen B. Melton, Jr.
Date: March 19, 1997 Date: March 19, 1997
By: /s/Marni McKinney By: /s/Phyllis W. Minott
Marni McKinney Phyllis W. Minott
Date: March 19, 1997 Date: March 19, 1997
By: /s/John W. Wynne By: /s/Michael L. Smith
John W. Wynne Michael L. Smith
Date: March 19, 1997 Date: March 19, 1997
By: /s/H.J. Baker
H.J. Baker
Date: March 19, 1997
<PAGE> 33
<TABLE>
<CAPTION>
Exhibit Index
Page(s)
Exhibit (by Sequential
Number Numbering System)
<S> <C> <C>
2(a) Amended and Restated Merger Agreement, dated as of February 28,
1992 and restated as of September 8, 1992, among Registrant,
Mooresville Savings Bank ("Mooresville"), and First Indiana.*
2(b) Amended and Restated Merger Agreement, dated as of November 8,
1991 and restated as of September 4, 1992, among Registrant, First
Federal Savings and Loan Association of Rushville ("Rushville"), and
First Indiana.*
2(c) Amended and Restated Mooresville Plan of Merger Conversion. *
2(d) Amended and Restated Rushville Plan of Merger Conversion. *
3(a) Articles of Incorporation and Bylaws of First Indiana Corporation,
incorporated by reference to Exhibit 3(a) of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994.
4(a) Form of Certificate of Common Stock of Registrant, incorporated by
reference to Exhibit 4(c) of the Registrant's registration statement on
Form S-1, filed as No. 33-46547 on March 20, 1992.
10(a) First Indiana Bank 1983 Stock Option and Incentive Plan,
incorporated by reference to Exhibit 10(a) of the Registrant's statement
on Form S-4 filed as File No. 33-3273 on February 18, 1986, as
amended.
10(b) First Indiana Bank 1988 Management Performance Incentive Plan,
incorporated by reference to Exhibit 10(b) of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1987.
10(c) First Indiana Bank 1988 Long-Term Management Performance Plan,
incorporated by reference to Exhibit 10(c) of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1987.
10(d) First Indiana Corporation 1987 Stock Option and Incentive Plan,
incorporated by reference to Exhibit 1 of the Registrant's February 27,
1987 Proxy Statement pages E-1 to E-8.
10(e) First Indiana Corporation Directors' Deferred Fee Plan, incorporated
by reference to Exhibit 10(e) of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1988.
10(f) First Indiana Bank 1990 Management Performance Incentive Plan,
incorporated by reference to Exhibit 10(f) of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1988.
10(g) Form of Employment Agreement between Registrant and Maurice E.
Mobley, incorporated by reference to Exhibit 10(a) of the Registrant's
registration statement on Form S-1, filed as File No. 33-27459 on
March 9, 1989.
<PAGE> 34
10(h) Form of Amended and Restated Supplemental Pension Benefits
Agreement between Registrant and Maurice E. Mobley, incorporated
by reference to Exhibit 10(b) of the Registrant's registration statement
on Form S-1, filed as File No. 33-27459 on March 9, 1989.
10(i) First Indiana Corporation 1989 Stock Option Plan, incorporated by
reference to Exhibit 10(i) of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1989.
10(j) First Indiana Bank 1991 Management Performance Incentive Plan,
incorporated by reference to Exhibit 10(j) of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1990.
10(k) First Indiana Bank 1991 Long-Term Management Performance
Incentive Plan, incorporated by reference to Exhibit 10(k) of the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1990.
10(l) Mid-West Federal Savings Bank Nonqualified Retirement Plan for
Directors, incorporated by reference to Exhibit 10(l) of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1990.
10(m) Nonqualified Deferred Compensation Program for the Directors of
Mid-West Federal Savings Bank, incorporated by reference to Exhibit
10(m) of the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1990.
10(n) First Indiana Corporation 1991 Stock Option and Incentive Plan,
incorporated by reference to Exhibit A of the Registrant's March 20,
1991 Proxy Statement, Pages A-1 to A-8.
10(o) First Indiana Corporation 1992 Director Stock Option Plan,
incorporated by reference to Exhibit A of the Registrant's March 13,
1992 Proxy Statement, Pages A-1 to A-3.
10(p) Form of Employment Agreement between First Indiana and each of
Boyd C. Head, N. Thomas Lloyd and John D. Ehrhart (included as
Exhibits A, B and C, respectively, to Exhibit 2(a) above).
10(q) Form of Employment Agreement between First Indiana and each of
Eugene Spurlin and Garry E. Cooley (included as Exhibits A and B,
respectively, to Exhibit 2(b) above).
10(r) Form of Executive Supplement Retirement Income Agreement
between First Indiana and each of Boyd C. Head, N. Thomas Lloyd and
John D. Ehrhart (included as Exhibits D, E and F, respectively, to
Exhibit 2(a) above.
10(s) First Indiana Corporation 1992 Stock Option Plan, incorporated by
reference to Exhibit A of the Registrant's March 12, 1993 Proxy
Statement, pages 15 to 19.
13 1996 Annual Report. 10-K 37-84
21 Subsidiaries of First Indiana Corporation and First Indiana Bank. 10-K 85
<PAGE> 35
22 Definitive Proxy Statement relating to the 1997 Annual Meeting of
Shareholders. 10-K 86-105
23 Consent of KPMG Peat Marwick LLP. 10-K 106
27 Financial Data Schedule. 10-K 107
* Previously Filed
</TABLE>
<PAGE> 36
[front cover of annual report]
[navy blue with embossing of a penny containing
the First Indiana Bank building and the following
caption]
FIRST INDIANA CORPORATION
ANNUAL REPORT
1996
<PAGE> 10k page 37
<TABLE>
<CAPTION>
Table of Contents
<S> <C>
Financial Highlights 1
Message to Shareholders 2
Board of Directors 5
Management and Advisory Boards 6
Financial Review 7
Five-Year Summary of Selected Financial Data 17
Consolidated Balance Sheets 18
Consolidated Statements of Earnings 19
Consolidated Statements of Shareholders' Equity 20
Consolidated Statements of Cash Flows 21
Notes to Consolidated Financial Statements 22
Corporate Information 40
Independent Auditors' Report 41
Statement of Management Responsibility 42
Affirmative Action Policy 43
Mission Statement 44
</TABLE>
<PAGE> 10k page 38
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
First Indiana Corporation and Subsidiaries
For the Years Ended
December 31,
-------------------
(Dollars in Thousands, Except Per Share Data) 1996 1995
-------------------
<S> <C> <C>
Net Earnings $13,704 $17,267
Primary Earnings Per Share 1.27 1.62
Fully Diluted Earnings Per Share 1.27 1.60
Dividends Per Common Share 0.45 0.38
Return on Average Total Assets 0.92% 1.16%
Return on Average Shareholders' Equity 10.15 14.03
Yield on Interest-Earning Assets 8.89% 8.80%
Cost of Interest-Bearing Liabilities 5.19 5.20
Net Interest Margin 4.37 4.12
Net Interest Spread 3.70 3.60
<CAPTION>
At December 31,
-------------------
1996 1995
-------------------
<S> <C> <C>
Assets $1,496,421 $1,541,843
Loans Receivable, Net 1,215,550 1,250,726
Deposits 1,095,486 1,136,980
Shareholders' Equity $ 138,658 $ 129,297
Shareholders' Equity/Assets 9.27% 8.39%
Book Value Per Share $ 13.36 $ 12.50
Market Closing Price 21.40 17.17
Price/Earnings Multiple 16.85x 10.73x
<CAPTION>
--------------------
At December 31, 1996
--------------------
Actual Required
<S> <C> <C>
Tangible Capital/Total Assets 8.78% 1.50%
Core Capital/Total Assets 8.78 3.00
Risk-Based Capital/Risk-Weighted Assets 12.53 8.00
</TABLE>
[This page contains bar graphs showing the following information]
<TABLE>
<CAPTION>
Net Earnings (Dollars in Thousands) Earnings Per Primary Share
- ----------------------------------- --------------------------
<S> <C> <S> <C>
1992 $11,002 1992 $1.18
1993 15,101 1993 1.41
1994 10,636 1994 0.96
1995 17,267 1995 1.62
1996 13,704 1996 1.27
<CAPTION>
Shareholders' Equity
Net Interest Margin (Dollars in Thousands)
- ------------------- --------------------
<S> <C> <S> <C>
1992 3.28% 1992 $100,735
1993 3.64 1993 113,583
1994 3.96 1994 120,712
1995 4.12 1995 129,297
1996 4.37 1996 138,658
<CAPTION>
Price/Earnings Multiple
- -----------------------
<S> <C>
1992 7.34x
1993 8.00x
1994 10.94x
1995 10.73x
1996 16.85x
</TABLE>
<PAGE> 1 10k page 39
In 1996, First Indiana Corporation announced record earnings, continuing
a trend as a comprehensive provider of real estate and business lending
products and services. For the year ended December 31, 1996, First Indiana's
earnings were $17.7 million, or $1.64 per primary share before a one-time,
industry-wide FDIC special assessment, compared with $17.3 million,
or $1.62 per primary share, for the year ended December 31, 1995.
To reflect confidence in the continued earnings potential of the
Corporation, the Board of Directors has authorized a seven percent increase
in the Corporation's cash dividend through a five-for-four stock split
effective March 18, 1997 for shareholders of record as of March 3, 1997.
The Corporation's quarterly cash dividend for 1997 will be $.12 per share and
will be paid on shares outstanding after the stock split, which is equivalent
to an increase from $.14 to $.15 per share on pre-split shares.
Reported earnings for 1996 of $13.7 million, or $1.27 per share, include
a one-time after-tax charge of $4.0 million, or $.37 per share, for an
industry-wide special assessment in the third quarter by the Federal Deposit
Insurance Corporation to recapitalize the Savings Association Insurance Fund,
which insures First Indiana Bank's customers' deposits. This one-time charge is
expected to reduce First Indiana's future deposit insurance premiums by 72
percent. Earnings for 1996 further include an after-tax gain of $693,000,
or $.06 per share, from the previously announced sale of the Bank's investment
and insurance subsidiaries to First Indiana's affiliate, The Somerset
Group, Inc. Earnings for 1995 include an after-tax gain of $914,000, or $.09
per share, from the sale of the deposits of a branch in Southern Indiana.
Over the past three years, the Bank has continued an 80-year tradition
as Central Indiana's leading home lender. At the same time, we have implemented
strategies for increasing outstandings in product lines typical of commercial
banks, including business, construction, commercial real estate, and
home equity lending. These businesses entail greater risks than First Indiana's
traditional first-mortgage lending business. As a result, the Bank continued
increasing its loan loss allowance throughout the year. At December 31, 1996,
the loan loss allowance was $18.8 million, compared with $16.2 million one year
earlier, or 84 percent of non-performing loans, compared with 68 percent
one year earlier. The loan loss allowance reflects amounts necessary to protect
the Bank against normal losses from highly profitable but riskier business
ventures.
The Bank's net interest margin, a clear indicator of success, rose to
record levels again in 1996. For the year ended December 31, the Bank's
margin was 4.37 percent, compared with 4.12 percent in 1995. The higher
margin results from higher-yielding business, construction, and home
equity loans funded with low-cost or non-interest-bearing savings and
checking deposits. Net interest income amounted to $61.7 million in 1996, a
6.4 percent increase over 1995 net interest income of $58.0 million.
The Bank's strategies contributed to total loan originations of $985
million in 1996, compared with $1 billion in 1995. Total assets were $1.5
billion in 1996 and 1995, and the Corporation's shareholders' equity
increased over seven percent to $139 million from $129 million last year.
First Indiana's income in 1996 came from three principal businesses
serving three distinct market segments:
Residential mortgage lending focusing on home buyers throughout the
Midwest and Southeast.
Construction and business lending centering on builder lines of
credit and loans to small- and medium-sized businesses in the
Midwest and the Southeast.
Home equity lending throughout all of First Indiana's retail
markets and through a nationwide network of loan originators.
[This page contains a photograph of the following persons and
this caption]
Marni McKinney
Vice Chairman (13 years' service)
Owen B. Melton, Jr.
President and Chief Operating Officer (19 years)
Robert H. McKinney
Chairman and Chief Executive Officer (44 years)
<PAGE> 2 10k page 40
The Bank's retail banking franchise in two major metropolitan markets,
Indianapolis and Evansville, helps deliver these products to the customer.
Residential Lending
Making money available for Hoosiers to buy homes has been the centerpiece
of First Indiana's business since our founding in 1915 as Ashland Savings
Association. Although the consumer's needs have remained the same, the
residential mortgage lending business has changed dramatically in
the past decade, and First Indiana has remained on the leading edge of
those changes.
In 1996, the Bank finished consolidating and centralizing its origination
and servicing processes, allowing us to originate loans at lower costs and
to share those savings with the customer in the form of lower rates. We are
implementing new technologies for streamlining the loan application process
at the point of sale with laptop computers and automated underwriting.
Additionally, the entire sales process was redesigned to emphasize relationship
building and better customer service. These strategies, many of them
implemented by a new national sales manager who brought to the Bank over
30 years' experience with a major superregional competitor, helped lead to
residential mortgage loan originations of $346 million. Although extremely
competitive conditions caused 1996 originations to fall slightly from
$354 million in 1995, higher originations are expected for 1997 now that
the consolidation and reorganization strategies are nearing completion. Our
telemarketing department is expected to help contribute to loan growth in 1997.
The Bank sells most of its fixed-rate loan production in the secondary
market but retains the processing and servicing of loan payments as a source of
fee income. At December 31, 1996, the Bank's loan servicing portfolio was $1.06
billion, compared with $1.13 billion one year ago.
The maturity of the residential lending business proposes a continual
challenge to First Indiana. We must always seek newer and more cost-effective
ways of originating these commoditized products. Several initiatives are
under way for further consolidation and streamlining of processes with
the hope of originating more loans at lower cost and more favorable rates to the
consumer. These initiatives will take shape in 1997 as part of the Bank's
Strategic Plan.
Again in 1996, First Indiana made home ownership possible for people
who do not have access to traditional financing. Our relationships with
community development corporations and other neighborhood organizations,
together with innovative lease-to-buy and purchase-planning programs,
resulted in the origination of $10 million in community development loans
and lines. First Indiana made the dream of home ownership a reality for
hundreds of Hoosier families who might not have been able to own a home.
Construction and Business Lending
First Indiana continued to serve several segments of the business
lending market in 1996 with a variety of loan products and services.
Construction lending remained the focal point of the Bank's business lending
activity. Construction loan originations grew to $310 million from $284 million
in 1995. Construction loans outstanding at year-end 1996 were $138 million
compared with $142 million at the end of 1995.
The Bank continued to expand its construction lending activities
outside Central Indiana to include new markets in Atlanta, Georgia and the
development of wholesale construction lending sources in Cincinnati and Dayton,
Ohio. Geographic expansion, together with the introduction of creative
new products to link builder lines of credit with the home buyer's permanent
financing, will further enhance the growth of this line of business in 1997.
In 1994, First Indiana recognized that the small business market in
Indianapolis was being underserved as larger banks consolidated operations
and shifted loan approval authority to headquarters in other states. The
Bank seized this market opportunity by hiring experienced loan officers
from other banks with portfolios of seasoned loans and avenues for additional
relationships. As a result, First Indiana's business loans outstanding grew
to $93 million at the end of 1996 from $72 million one year earlier.
Chief among the strategies for expanding the Bank's business lending
potential in 1996 was the introduction of a full range of business services,
including cash management, account reconciliation, lockbox, and automated
banking via personal computers. These additional services benefit
the Bank's customers by giving them a full range of borrowing and cash
management products from a single provider, and they benefit the Bank by
enabling us to offer more competitive loan pricing in exchange for the
borrower's deposit relationship. Expansion of this line of business
is crucial to First Indiana's long-term strategies. Business lending enables
the Bank to diversify into different types of credit risk while meeting the
needs of underserved segments of the market. These efforts are expected
to continue in 1997.
[This page contains bar graphs and pie charts showing the following
information]
<TABLE>
<CAPTION>
Total Loans Originated (Dollars in Thousands)
- ---------------------------------------------
<S> <C>
1992 $ 999,948
1993 1,161,519
1994 982,754
1995 1,012,753
1996 985,165
<CAPTION>
Composition of Loan Portfolio 1990 vs. 1996
- -------------------------------------------
1990 1996
---- ----
<S> <C> <C>
Residential Mortgage 58% 35%
Residential Construction 6 11
Commercial Real Estate 13 4
Consumer 23 43
Business 0 7
<CAPTION>
Non-Performing Assets (Dollars in Thousands)
- --------------------------------------------
<S> <C>
1992 $39,781
1993 36,474
1994 29,077
1995 27,165
1996 27,121
</TABLE>
<PAGE> 3 10k page 41
Home Equity Lending
The Bank's heritage as a provider of real estate finance and strong
consumer demand make this product a perfect fit for First Indiana. We were
the first bank in Indianapolis to offer home equity lending some 15 years ago,
and we have retained our market presence while expanding both the geographic
and market reach of the product.
First Indiana originates home equity loans not only through retail
channels in Indianapolis and throughout the state, but also through a national
network of agents who bring us loans via third-party originators. This unique
program gives the Bank the opportunity to select loans from around the
country, thus diversifying geographic and credit risk.
Retail Banking
Complementing all of these strategies in 1996 was the further development
of the Bank's retail delivery channels. The Bank continued to pursue checking
accounts vigorously, with enhanced sales training and new products, including
Frequent Flyer Checking. A first in the Indianapolis market, Frequent Flyer
Checking rewards customers with frequent flyer miles on several airlines every
time they use First Indiana's check card. We recognize that today's consumers
want accuracy, convenience, and streamlined service so that they can think
about more important things than going to the bank. Toward that end, the
Bank established a home page on the World Wide Web in 1996 and plans to have
a full range of interactive banking services via personal computer available
before the end of 1997.
A Look Ahead
As the Bank enters a new three-year planning cycle in 1997, our
positioning as a comprehensive provider of real estate and business services
is not expected to change. However, the Bank's management team will examine
with renewed vigor the importance of market segments in determining the
Corporation's long-range strategies. First Indiana's continued success in the
marketplace depends on bringing something different to the market in an
industry with increasingly homogeneous and commoditized products.
A special team of the Corporation's managers is examining market and
consumer trends in full detail as the groundwork for the Bank's strategies
for 1997 and beyond. These strategies include further development of
acquisition strategies, continuing a trend that has led to First Indiana's
acquisition of six other banks since 1980, most recently First Federal
Savings and Loan of Rushville and Mooresville Savings Bank in 1992. These
two banks, along with the Evansville's Mid-West Federal Savings Bank, adopted
First Indiana's name in 1996. The name change enables the Bank to advertise
its services more consistently and at lower costs while expanding the range
of branded products and services into those markets.
The Board of Directors and management of First Indiana have much
confidence in the Bank's future as a specialized provider in a market where
the competition is doing the same thing as everyone else. To demonstrate its
confidence, the Board of Directors adopted stock ownership guidelines in 1996
for all officers and directors of the Bank. The Chairman, Vice Chairman,
and President of the Corporation currently own First Indiana stock
valued at more than five times their salary, and members of the Board of
Directors have made the same commitment. The Bank's senior vice presidents
have committed to own at least three times their base salary by the end of
year 2000. The Bank's first vice presidents and vice presidents have made
similar commitments. These guidelines reflect the determination of the
Board of Directors and management team to increase shareholder value and
symbolize their willingness to invest substantial amounts of their income
in the future of First Indiana Corporation.
The coming years promise to be interesting and challenging ones for First
Indiana. Our pledge to you as shareholders is that we will continue to do
our best to provide you with the return that you expect on your investment.
We believe that we can readily fulfill this pledge. Our commitment
to customer-focused, market-based products and services for segments in
which a specialized provider such as First Indiana can make a difference
will create wins for both the customer and the shareholder.
We appreciate your continued support and look forward to the years ahead.
Sincerely,
/s/Robert H. McKinney
Robert H. McKinney
Chairman and Chief Executive Officer
/s/Marni McKinney
Marni McKinney
Vice Chairman
/s/Owen B. Melton, Jr.
Owen B. Melton, Jr.
President and Chief Operating Officer
Indianapolis, Indiana
January 1997
<PAGE> 4 10k page 42
[This page contains a photograph of the following persons and
this caption]
BOARD OF DIRECTORS
Front Row
Robert H. McKinney
(44 years' service) Chairman and Chief Executive Officer,
First Indiana Corporation
Owen B. Melton, Jr.
(19 years) President and Chief Operating Officer,
First Indiana Corporation
Michael L. Smith
(12 years) President and Chief Operating Officer, American
Health Network, Inc.
H.J. Baker
(30 years) Chairman, BMW Constructors, Inc.
Back Row
Marni McKinney
(13 years) Vice Chairman, First Indiana Corporation; President and
Chief Executive Officer, The Somerset Group, Inc.
Gerald L. Bepko
(10 years) Vice President for Long-Range Planning, Indiana
University, Chancellor, IUPUI
Phyllis W. Minott
(21 years) Chairman and Chief Executive Officer, Minott Motion
Pictures, Inc.
John W. Wynne
(7 years) Chairman of the Board, Duke Realty Investments, Inc.
Douglas W. Huemme
(3 years) Chairman, President, and Chief Executive Officer,
Lilly Industries, Inc.
<PAGE> 5 10k page 43
MANAGEMENT AND ADVISORY BOARDS
FIRST INDIANA BANK
Robert H. McKinney* (44 years' service), Chairman
Marni McKinney* (13 years), Vice Chairman
Owen B. Melton, Jr.* (19 years), President and Chief Executive Officer
David J. Gunderson (14 years), Vice President and Credit Review Officer
Richard E. Walke (11 years), Director of Internal Audit
David A. Butcher* (14 years), Secretary
Marketing and Strategic Planning Division
Kenneth L. Turchi (12 years), Senior Vice President
Vice Presidents
Richard C. Fattic (30 years)
Michael C. Wise (15 years)
Central Indiana Advisory Boards
Franklin
Gilmore C. Abplanalp (26 years)
Timothy J. Dell (4 years)
Jerry B. Maguire (7 years)
Jerry D. Petro (5 years)
Norbert C. Smith (7 years)
Pendleton
Hugh W. Begley (28 years)
F. G. Hinkle (36 years)
Ralph E. Miller (18 years)
David L. Puckett (18 years)
L. Ann Reeder (5 years)
Phillip R. Shirley, DVM (21 years)
Westfield
Manson E. Church (40 years)
Toni K. Dickover (2 years)
J. Joseph Edwards (4 years)
James Gapenski (4 years)
Jerry C. McMullan (28 years)
Consumer Banking Sales Division
David A. Lindsey (14 years), Senior Vice President, and President, One
Mortgage Corporation
First Vice President
Larry L. Grubbs (2 years), Executive Vice President, One Mortgage Corporation
Vice President
Allen D. McIlwraith (10 years)
Regional Vice Presidents
N. Jeanne Bowling (13 years)
Steven J. Schilling (14 years)
Darrel D. Thornton (25 years)
Market Vice President
Kim D. LaSota (3 years)
One Mortgage Corporation
Vice Presidents
Thomas E. Helms (4 years), Orlando Office
Terry C. Barrett (1 year), Raleigh Office
Wilbur L. Harwell (1 year), Charlotte Office
Market Vice Presidents
Cynde G. Emory (8 years)
Rick L. Lynch (1 year)
Charles E. Roser (4 years)
Internal Support Services Division
David L. Gray* (15 years), Senior Vice President, Chief Financial Officer, and
Treasurer
Vice Presidents
John D. Ehrhart (19 years)
John M. Huter (30 years)
John V. Kirby (1 year)
Michael T. McAninch (14 years), Controller
Thomas M. Ryan (17 years)
Commercial Banking Division
Merrill E. Matlock (13 years), Senior Vice President
First Vice President
Gregory P. O'Connor (5 years)
Vice Presidents
E. Christian Barham (4 years)
Daniel R. Dierlam (5 years)
John H. Goggins (4 years)
Max E. Inglert (25 years)
Mark S. Kesner (3 years)
Fred J. Merritt (2 years)
Thomas E. Mock (6 years)
Mark S. Stevenson (3 years)
Regional Vice Presidents
Victoria H. Duckworth (14 years)
Bronda C. Hensley (12 years)
Michael D. Mathew (2 years)
Consumer Banking Services Division
Timothy J. O'Neill (27 years), Senior Vice President
First Vice Presidents
Larry F. Meadows (21 years)
David L. Sewell (6 years)
Vice Presidents
David J. Fitzgerald (6 years)
John M. Ramsey (6 years)
Mickey J. Walden (14 years)
*Officer--First Indiana Corporation<PAGE>
EVANSVILLE DIVISION
Maurice E. Mobley (44 years), Chairman of the Board
Sherry F. Haynes (2 years), President
Vice Presidents
Patrick L. Boyle (14 years)
Sandra K. Potter (9 years)
Wayne R. Stovall (30 years)
Market Vice President
Rick G. McDonald (6 years)
Advisory Directors
James O. Baxter (23 years)
Sherry F. Haynes (2 years)
Maurice E. Mobley (44 years)
Paul G. Mosier (19 years)
Lewis A. Plane (32 years)
Ben M. Redden (25 years)
Dr. David L. Rice (19 years)
MOORESVILLE DIVISION
Boyd C. Head (36 years), Chairman of the Board
Charles D. Swisher (14 years), Vice Chairman of the Board
Norman T. Lloyd (24 years), President
Advisory Directors
Robert S. Gregory (32 years)
Boyd C. Head (36 years)
Russell J. Lockwood (13 years)
Eugene D. Perry (14 years)
Charles F. Quillen (13 years)
Charles D. Swisher (14 years)
George Watson (24 years)
RUSHVILLE DIVISION
W. Richard Waggoner (31 years), Chairman of the Board
E. Eugene Spurlin (27 years), Vice Chairman of the Board
Garry E. Cooley (12 years), President
Advisory Directors
Dr. Frank H. Green (37 years)
Richard K. Levi (9 years)
Marjorie Shoemaker (16 years)
E. Eugene Spurlin (27 years)
W. Richard Waggoner (31 years)
<PAGE> 6 10k page 44
Financial Review
First Indiana Corporation posted yet another year of record earnings in
1996 as a result of a renewed focus on real estate finance, which created
efficiencies and emphasized selected lines of business. Earnings for 1996
were $17,720,000, or $1.64 per share before a one-time, industry-wide FDIC
special assessment. Reported net earnings were $13,704,000 for the year
ended December 31, 1996, compared with $17,267,000 for the same period in
1995 and $10,636,000 for the year ended December 31, 1994. Reported
net earnings for 1996 include a one-time pre-tax charge of $6,749,000 for
an industry-wide special assessment in the third quarter by the Federal
Deposit Insurance Corporation to recapitalize the Savings Association
Insurance Fund, which insures the Bank's customers' deposits. This one-time
charge is expected to reduce future deposit insurance premiums 72 percent
to $.064 per $100 of deposits, compared with the current premium of $.23
per $100 of deposits.
Net earnings per primary share for 1996 were $1.27, compared with $1.62
in 1995 and $.96 in 1994. Return on average equity for 1996 was 10.15 percent,
compared with 14.03 percent in 1995 and 9.08 percent in 1994.
To reflect confidence in the continued earnings potential of the
Corporation, the Board of Directors authorized a five-for-four stock split
effective March 18, 1997 for shareholders of record as of March 3, 1997.
The stock split will be the fifth one in six years and will be paid on shares
outstanding after the split, resulting in a seven percent dividend increase.
Dividends per common share (adjusted for stock splits) were $.45 in 1996,
$.38 in 1995, and $.34 in 1994. On February 1, 1996, the Corporation
announced a six-for-five stock split effective March 1, 1996. All per-share
amounts in the 1996 Annual Report have been adjusted for all of the stock
splits.
Residential mortgage loan originations, First Indiana Bank's heritage
and the basis for its mortgage banking growth, amounted to $346 million,
compared with $354 million in 1995. The Bank continued its efforts to
consolidate and centralize origination and servicing processes in the mortgage
banking line of business. These efforts resulted in lower operating expenses
and enhanced shareholder value. Originations in home equity lending were
$231 million, compared with $302 million in 1995. The decrease in home
equity originations stems from increased competition in this line of business.
The Bank continued building its franchise in construction lending,
with originations of $310 million, compared with $284 million last year.
A variety of unique products and the development of new markets contributed
to construction growth.
These three areas form the cornerstone of the Bank's lending portfolio,
and most experienced growth in outstandings during 1996. At December 31, 1996,
home equity and construction loans outstanding were $499 million and $138
million, compared with $485 million and $142 million one year earlier.
Additionally, the Bank's management saw opportunities for growth
in the Indianapolis small business market. By offering a full range of
business services delivered by highly experienced loan officers, the Bank
saw significant growth in business lending. Outstandings increased
to $93 million at year-end 1996, compared with $72 million one year earlier.
Expansion of the Bank's residential, business, and home equity lending
businesses is a focal point for growth in 1997. Toward that end,
the Bank completed the sale of approximately $32,756,000 of its indirect
automobile portfolio during the third quarter at a loss of $898,000.
However, the Bank was able to recapture $1,021,000 of its loan loss
provision as a result of this sale.
Included in 1996 earnings is a second quarter pre-tax gain of $1,165,000
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 which
owns approximately 22 percent of First Indiana Corporation. The Bank
also increased its loan loss provision in response to higher risk associated
with business, construction, commercial real estate, and home equity lending.
The net loan loss provision in 1996 was $10,794,000, compared with $7,900,000
in 1995 and $3,900,000 in 1994. The increased provision brought the Bank's
loan loss allowance to $18,768,000 at year-end, or 84 percent of non-performing
loans, compared with $16,234,000, or 68 percent, at December 31, 1995.
First Indiana's assets fell in 1996 to $1,496,421,000 at year-end,
compared with $1,541,843,000 at December 31, 1995. Shareholders' equity
increased to $138,658,000 at December 31, 1996, a seven percent increase
over the December 31, 1995 level of $129,297,000. The tangible and core
capital of the Bank was $131,322,000 or 8.78 percent of assets, which exceeded
regulatory minimums by $108,876,000 and $86,430,000 at year-end 1996. Average
shareholders' equity to average assets equaled 9.09 percent and 8.28
percent for 1996 and 1995.
Net Interest Income
Net interest income is the most critical component of First Indiana's
net earnings. It is affected by both the volume and interest rate of interest-
earning assets and interest-bearing liabilities.
Net interest income was $61,683,000 in 1996, compared with $58,044,000
in 1995 and $49,229,000 in 1994. The increase in 1996 is the result of
continued growth in the Bank's home equity, residential construction, and
business loan portfolios funded by non-interest-bearing deposits.
These loans generally have higher yields than a traditional residential
mortgage loan portfolio.
[This page contains a photograph of the following persons and
this caption]
Merrill E. Matlock (13 years' service) Commercial Banking Division
David A. Lindsey (14 years) Consumer Banking Sales Division
Kenneth L. Turchi (12 years) Marketing and Strategic Planning Division
Timothy J. O'Neill (27 years) Consumer Banking Services Division
David L. Gray (15 years) Internal Support Services Division
<PAGE> 7 10k page 45
Net Interest Margin
First Indiana's net interest margin is the clearest indicator of its
ability to generate core earnings. The margin rose to a record 4.37 percent
for the year ended December 31, 1996, compared with 4.12 percent in 1995 and
3.96 percent in 1994.
Net interest margin consists of two components: interest-rate spread
and the contribution of interest-free funds (primarily shareholders' equity and
other non-interest-bearing liabilities). Interest-rate spread is the difference
between the yield on total earning assets and the cost of total interest-bearing
liabilities.
The Corporation's average interest-rate spread on average interest-earning
assets for the year ended December 31, 1996 was 3.70 percent,
compared with 3.60 percent in 1995 and 3.57 percent in 1994. The increased
spread arose when the Bank's interest-earning assets repriced faster than the
liabilities funding them during 1996.
The contribution of interest-free funds to First Indiana's net interest
margin varies depending on the level of capital and use of interest-free
liabilities. Average interest-free funds provided an additional 67 basis points
to the margin in 1996, compared with 52 and 39 basis points in 1995 and
1994.
The following table analyzes First Indiana's net interest margin and
the components that contributed to it.
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------------------------------------------------------------
Average Average Average
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------------------------------------------------------------------------------------
Assets
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning Assets
Federal Funds Sold $14,782 $796 5.38% $10,399 $613 5.89% $ 11,123 $587 5.28%
Interest-Bearing
Deposits - - - - - - 3,478 175 5.03
Investments 115,836 6,887 5.95 139,569 9,181 6.58 160,030 9,784 6.11
Mortgage-Backed
Securities 42,958 2,986 6.95 60,602 4,396 7.25 82,566 5,473 6.63
Loans Receivable (1) 1,237,036 114,799 9.28 1,199,619 109,871 9.16 986,437 81,553 8.27
------------------ ------------------ -----------------
Total Earning Assets 1,410,612 125,468 8.89 1,410,189 124,061 8.80 1,243,634 97,572 7.85
Other Assets 74,904 ------- 76,370 ------- 83,498 ------
--------- --------- --------
Total Assets $1,485,516 $1,486,559 $1,327,132
========= ========= ========
Liabilities and Share-
holders' Equity
Liabilities
Interest-Bearing
Liabilities
Deposits:
NOW and Money
Market Checking $ 88,633 2,531 2.86 $ 99,405 2,334 2.35 $113,574 2,677 2.36
Passbook and
Statement Savings 284,471 12,954 4.55 224,282 10,414 4.64 215,781 8,156 3.78
Money Market Savings 17,481 575 3.29 22,582 730 3.23 33,485 906 2.71
Jumbo Certificates 111,318 6,370 5.72 108,834 6,572 6.04 56,549 2,320 4.10
Fixed-Rate
Certificates 524,064 29,647 5.66 560,279 30,483 5.44 551,505 25,283 4.58
Federal Home Loan
Bank Advances 185,551 10,706 5.77 212,696 12,891 6.06 121,333 6,952 5.73
Short-Term
Borrowings 18,518 1,002 5.41 42,019 2,593 6.17 6,308 330 5.23
Mortgage-Backed Bonds
and Floating-Rate
Note - - - - - - 31,440 1,719 5.47
------------------ ------------------ ------------------
Total Interest-Bearing
Liabilities 1,230,036 63,785 5.19 1,270,097 66,017 5.20 1,129,975 48,343 4.28
Other Liabilities 120,501 ------ 93,404 ------ 79,989 ------
Shareholders' Equity 134,979 123,058 117,168
--------- --------- ---------
Total Liabilities and
Shareholders' Equity $1,485,516 $1,486,559 $1,327,132
========= ========= =========
Net Interest
Income/Spread $61,683 3.70% $58,044 3.60% $49,229 3.57%
====== ===== ====== ===== ====== =====
Net Interest Margin 4.37% 4.12% 3.96%
===== ===== =====
(1) Included in loans receivable are loans held for sale totaling $42,872,
$35,953, and $24,086 in 1996, 1995, and 1994, and non-accrual loans.
</TABLE>
[This page contains the following bar graph]
<TABLE>
<CAPTION>
Net Interest Income (Dollars in Thousands)
- ------------------------------------------
<S> <C>
1992 $36,858
1993 45,905
1994 49,229
1995 58,044
1996 61,683
<PAGE> 8 10k page 46
Changes in Rate/Volume
The following table shows the impact on net interest income of
changes in interest rates and volume of the Corporation's assets and
liabilities.
</TABLE>
<TABLE>
<CAPTION>
1996 Compared with 1995 1995 Compared with 1994
------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
------------------------------------------------------------------------
Net Net
(Dollars in Thousands) Rate Volume Other Change Rate Volume Other Change
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income
Loans $1,456 $ 3,427 $ 45 $ 4,928 $8,793 $17,625 $1,900 $28,318
Mortgage-Backed Securities (184) (1,280) 54 (1,410) 516 (1,456) (137) (1,077)
Investments (883) (1,561) 150 (2,294) 743 (1,251) (95) (603)
Interest-Bearing Deposits -- -- -- -- (175) (175) 175 (175)
Federal Funds Sold (53) 258 (22) 183 69 (38) (5) 26
--------------------------------- ---------------------------------
336 844 227 1,407 9,946 14,705 1,838 26,489
--------------------------------- ---------------------------------
Interest Expense
Deposits
NOW and Money Market Checking 505 (253) (55) 197 (10) (334) 1 (343)
Passbook and Statement Savings (201) 2,795 (54) 2,540 1,864 322 73 2,259
Money Market Savings 13 (165) (3) (155) 176 (295) (57) (176)
Jumbo Certificates (344) 150 (8) (202) 1,095 2,145 1,012 4,252
Fixed-Rate Certificates 1,212 (1,970) (78) (836) 4,722 402 75 5,199
Federal Home Loan Bank Advances (619) (1,645) 79 (2,185) 402 5,235 302 5,939
Short-Term Borrowings (319) (1,451) 179 (1,591) 59 1,868 336 2,263
Mortgage-Backed Bonds and
Floating-Rate Notes -- -- -- -- (1,719) (1,719) 1,719 (1,719)
--------------------------------- ---------------------------------
247 (2,539) 60 (2,232) 6,589 7,624 3,461 17,674
--------------------------------- ---------------------------------
Net Interest Income $ 89 $3,383 $167 $3,639 $3,357 $7,081 $(1,623) $8,815
================================= =================================
</TABLE>
Non-Interest Income
The following table shows First Indiana's non-interest income for the
past three years.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------
(Dollars in Thousands) Increase (Decrease) Increase (Decrease)
----------------------------------------------------------
1996 Amount Percent 1995 Amount Percent 1994
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sale of Investments $ 281 $ 235 510.9% $ 46 $ 46 100.0% $ -
Trading Account Activity - - - - 335 100.0 (335)
Sale of Loans 3,075 326 11.9 2,749 3,455 489.4 (706)
Sale of Subsidiary 1,165 1,165 100.0 - - - -
Sale of Deposits - (1,497) (100.0) 1,497 1,497 100.0 -
Dividends on FHLB Stock 1,033 37 3.7 996 394 65.4 602
Loan Servicing Income 2,908 263 9.9 2,645 (216) (7.5) 2,861
Loan Fees 2,302 96 4.4 2,206 (172) (7.2) 2,378
Insurance Commissions 662 (618) (48.3) 1,280 544 73.9 736
Accretion of
Negative Goodwill 948 - - 948 0 0.0 948
Deposit Product Fee Income 2,593 469 22.1 2,124 214 11.2 1,910
Other 2,881 1,121 63.7 1,760 (171) (8.9) 1,931
---------------- ---------------- --------
$17,848 $1,597 9.8 $16,251 $5,926 57.4 $10,325
================ ================ ========
</TABLE>
<PAGE> 9 10k page 47
The increase in non-interest income in 1996 arose from a pre-tax gain
of $1,165,000 from the sale of the Bank's investment and insurance subsidiaries,
One Investment Corporation and One Insurance Agency, a $1,702,000 pre-tax
gain on the sale of over $63 million in fixed-rate home equity loans, and
gains on the sale of residential mortgage loans in the secondary market
as part of the Bank's normal mortgage banking activity throughout the year,
net of a pre-tax loss of $898,000 related to the sale of the Bank's indirect
automobile portfolio of approximately $33 million.
Losses in non-interest income in 1994 arose mainly from two sources.
First, a sudden, unexpected increase in interest rates in the first quarter led
to losses in the Bank's trading account, which consisted primarily of
Treasurys and other government securities. That account was immediately
closed and the Bank's trading desk disbanded. Second, as often occurs in
mortgage banking, losses from the sale of loans arose during the first quarter
of 1994, when rates increased quickly and the Bank had committed to deliver
loans to the secondary market. The value of these loans fell between the time
of their origination and the promised date of delivery. First Indiana
has since reduced the maximum amount permitted to be held in its pipeline for
sale to the secondary market, and losses of this magnitude are not
expected to recur.
Non-Interest Expense
The following table describes First Indiana's non-interest expense for
each of the past three years.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------
(Dollars in Thousands) Increase (Decrease) Increase (Decrease)
---------------------------- ------------------------------------
1996 Amount Percent 1995 Amount Percent 1994
---------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and Benefits $24,223 $(2,171) (8.2)% $26,394 $3,232 14.0% $23,162
Capitalized Salaries
and Benefits (6,129) (625) (11.4) (5,504) (1,807) (48.9) (3,697)
Net Occupancy 3,087 18 0.6 3,069 80 2.7 2,989
Deposit Insurance 9,186 6,888 299.7 2,298 (20) (0.9) 2,318
Real Estate Owned
Operations - Net 598 3,658 119.5 (3,060) (3,034) (11,169.2) (26)
Equipment 4,508 (128) (2.8) 4,636 147 3.3 4,489
Office Supplies and Postage 2,069 135 7.0 1,934 208 12.1 1,726
Other 9,711 831 9.4 8,880 1,339 17.8 7,541
---------------- ---------------- --------
$47,253 $8,606 22.3 $38,647 $ 145 0.4 $38,502
================ ================ ========
</TABLE>
In 1996, the FDIC levied a special deposit insurance assesment on all
savings institutions to recapitalize its Savings Association Insurance
Fund ("SAIF"), which insures the Bank's deposits. First Indiana incurred a
one-time pre-tax charge of $6,749,000 to comply with this assessment. This
one-time charge will reduce First Indiana's future deposit insurance premiums
72 percent to $.064 per $100 of deposits, compared with the current premium of
$.23 per $100 of deposits. Salary expenses were lower in 1996 as a result of
the sale of One Insurance Agency, combined with efficiencies achieved as a
result of the Corporation's consolidation and centralization of origination
and servicing processes. Operating expenses for 1995 include a pre-tax gain
of $2,156,000 from the sale of a foreclosed commercial real estate property.
Asset Quality
First Indiana's asset quality is directly affected by the credit risk of
the assets on its balance sheet. The procedures for reviewing the quality of
First Indiana's loans, the appropriateness of loan and real estate owned
("REO") classifications, and the adequacy of loan and REO loss allowances are
reviewed by First Indiana's Board of Directors.
General Allowances. First Indiana establishes general allowances as
percentages of loans outstanding. The percentages are based on the Bank's
risk model, which incorporates empirical data about loss experience, credit
risk, geographic diversity, general economic trends, and other factors.
Specified Reserves. Specified reserves are established through a
rating system based on numerous factors. Certain loans are placed on a
watch list. Management calculates the value of the collateral for all loans on
the watch list and recommends specified reserves.
Adequacy of Allowances. Management believes that First Indiana's
current loan and REO loss allowances are sufficient to absorb potential future
losses. However, there can be no assurance that additional allowances will
not be required or that the amount of any such allowances will not be
significant. Various regulatory agencies periodically review these allowances
and may require First Indiana to recognize additions to the allowances.
The Investment Committee of First Indiana's Board of Directors is
responsible for monitoring and reviewing investment quality and liquidity.
The Investment Committee approves investment policies and meets quarterly
to review investment transactions. Credit risk is controlled by limiting the
number and size of investments and by approving the brokers and dealers
through which investments are made.
<PAGE> 10 10k page 48
Non-Performing Assets.
First Indiana has managed its loan portfolio to reduce concentration
of loan types and to diversify assets geographically. Non-performing assets,
which consist of non-accrual, impaired and restructured loans,
REO, and other repossessed assets, fell slightly during 1996
to $27.1 million at December 31 from $27.2 million one year earlier.
The following table sets forth the amounts of First Indiana's non-
performing assets. The information pertaining to non-accrual loans and
restructured loans is set forth by type of loan. Most of the Bank's non-
performing commercial real estate loans consist of apartments and hotels
located in Indiana and contiguous states.
<TABLE>
<CAPTION>
Non-Performing Assets December 31,
------------------------------------------
(Dollars in Thousands) 1996 1995 1994 1993 1992
-------- ---------------------------------
<S>
Non-Accrual Loans <C> <C> <C> <C> <C>
Residential Mortgage $3,849 $2,399 $1,720 $3,796 $4,310
Residential Construction 4,573 2,229 2,212 3,029 2,879
Commercial Real Estate - 1,514 105 275 118
Business 166 428 331 775 387
Consumer 6,792 8,120 6,603 3,025 3,269
-------- ---------------------------------
Total Non-Accrual Loans 15,380 14,690 10,971 10,900 10,963
-------- ---------------------------------
Impaired Loans - 3,306 - - -
Restructured Loans
Residential Mortgage - - - - 448
Commercial Real Estate 6,913 5,909 10,730 11,311 16,465
------- --------------------------------
Total Restructured Loans 6,913 5,909 10,730 11,311 16,913
Real Estate Owned 4,828 2,943 7,012 13,961 11,748
Other Repossessed Assets - 317 364 302 157
-------------------------------------------
Total Non-Performing Assets $27,121 $27,165 $29,077 $36,474 $39,781
===========================================
</TABLE>
Non-Accrual, Impaired, and Restructured Loans. First Indiana
places loans on non-accrual status when payments of principal or interest
become 90 days or more past due, or earlier when an analysis of a borrower's
creditworthiness indicates that payments could become past due. At
December 31, 1995, First Indiana had identified an impaired loan totaling
$3,306,000 which had an allocated reserve of $167,000. In the first quarter of
1996, this loan was repaid and the allocated reserve was resorbed into the
general loan loss allowance.
Loan modifications classified as "restructured loans" under Statement
of Financial Accounting Standard No. 15 were $6.9 million at
December 31, 1996, compared with $5.9 million at December 31, 1995 and
$10.7 million at December 31, 1994. Management modified the payment
terms, interest rates, and contractual maturities of these loans to improve the
likelihood of recovery of the Bank's investment. The interest earned on
these loans in 1996 totaled $553,000, only $102,000 below the original
interest obligation.
Real Estate Owned. Real estate owned is generally acquired by deed
in lieu of foreclosure, and is carried at the lower of the Bank's book balance
in the property or the fair market value of the property, less reasonable costs
of disposition. A review of REO properties, including the adequacy of the
loss allowance and decisions whether to charge off REO, occurs in
conjunction with the review of the loan portfolios described above.
During 1996, the Corporation decreased the allowance for REO losses by
$400,000. Because of the sale of many foreclosed commercial real estate
properties and the careful review of the remaining REO portfolio, management
determined that it was not necessary to maintain an excess REO allowance.
The following schedule is a summary of REO, net of the allowance
for REO losses.
<TABLE>
<CAPTION>
Real Estate Owned
(Dollars in Thousands) December 31,
----------------------------------------
1996 1995 1994 1993 1992
------- --------------------------------
<S> <C> <C> <C> <C> <C>
Residential Mortgage $ 371 $ 430 $1,427 $ 1,112 $ 781
Residential Construction 915 713 791 1,204 1,405
Commercial Real Estate 95 94 3,503 9,267 9,204
Consumer 3,447 1,706 1,291 2,378 358
Allowance for REO Losses (543) (1,066) (1,216) (1,483) (1,630)
-------------------------------------------
Net Real Estate Owned $4,285 $1,877 $5,796 $12,478 $10,118
===========================================
</TABLE>
<PAGE> 11 10k page 49
Potential Problem Assets. The Corporation had $9.5 million in
potential problem loans at December 31, 1996. Of this amount, $4.1 million
consists of loans to residential builders. These loans are currently performing
according to their loan agreements, but the borrower's financial operations and
condition caused management to question their ability to comply with present
repayment terms. The collateral for these loans is one-to-four family
dwellings with loan-to-value ratios of 80 percent or less. The remaining $5.4
million represents a business loan which is currently performing; however, if
company management's current plans are not achieved, operations have declined
to a level that puts the Bank at risk. In December 1995, the Bank identified
a $3 million par value corporate debt security as a potential problem investment
because management questioned the issuer's ability to meet the security's
repayment terms. As a result, the Bank reduced the carrying value of the
available-for-sale security by $818,000 to its estimated recoverable value
through a charge to 1995 earnings. This investment was sold during 1996 at a
minimal gain.
Summary of Loan Loss Experience.
The following is a summary of activity in First Indiana's allowance for
loan losses for the periods indicated.
<TABLE>
<CAPTION>
Summary of Loan Loss Experience Years Ended December 31,
--------------------------------------------------
(Dollars in Thousands) 1996 1995 1994 1993 1992
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance of Allowance for Loan Losses at
Beginning of Year $16,234 $12,525 $11,506 $ 8,748 $ 7,797
Charge-Offs
Residential Mortgage (9) (34) (82) (294) (230)
Residential Construction (360) (231) (425) (279) (443)
Commercial Real Estate - (1,139) (167) (80) (33)
Consumer (9,592) (2,969) (2,181) (993) (904)
Business - (61) (194) (136) -
----------- ---------------------------------------
Total Charge-Offs (9,961) (4,434) (3,049) (1,782) (1,610)
----------- ---------------------------------------
Recoveries
Residential Mortgage 26 6 3 - 5
Residential Construction 69 16 - 33 18
Commercial Real Estate 135 13 - - -
Consumer 1,429 190 165 111 129
Business 42 18 - - -
----------- ---------------------------------------
Total Recoveries 1,701 243 168 144 152
----------- ---------------------------------------
Net Charge-Offs (8,260) (4,191) (2,881) (1,638) (1,458)
Provision for Loan Losses 11,815 7,900 3,900 4,396 2,250
Recapture of Loan Loss Provision Due to
Auto Portfolio Sale (1,021) - - - -
Allowance for Loan Losses for Acquisitions - - - - 159
Balance of Allowance for Loan Losses at ----------- ---------------------------------------
End of Year 18,768 16,234 12,525 11,506 8,748
----------- ---------------------------------------
Balance of REO Loss Allowance at
End of Year 543 1,066 1,216 1,483 1,630
----------- ---------------------------------------
Balance of Loan and REO Loss Allowance
at End of Year $19,311 $17,300 $13,741 $12,989 $10,378
====================================================
Ratio of Net Charge-Offs to Average Loans
Outstanding 0.67% 0.35% 0.29% 0.17% 0.16%
Ratio of Allowance for Loan Losses to
Loans Receivable 1.52% 1.28% 1.15% 1.16% 0.94%
Ratio of Total Loan and REO Loss Allowance to
Non-Performing Assets 71.20% 63.68% 47.26% 35.61% 26.09%
Ratio of Allowance for Loan Losses to
Non-Performing Loans 84.19% 67.91% 57.72% 51.80% 31.38%
</TABLE>
<PAGE> 12 10k page 50
During 1994, First Indiana decided to discontinue indirect automobile
lending, which incurs significant charge-offs as part of normal lending
activities. Management had provided for this risk in prior years in expectation
of delinquencies that normally occur when the automobile lending portfolio
reaches certain points in the maturity cycle. Based on an overall analysis
of the risk of loss in the loan portfolio, First Indiana reduced the
annual loan loss provision to $3.9 million during 1994.
The 1995 loan loss provision increased to $7.9 million in response to the
significant growth in the Bank's targeted portfolios of home equity, residential
construction, and business loans. While management believes that these
portfolios have strong credit quality, it recognizes the increased risk of
such portfolios compared to traditional residential portfolios, and has
increased the Bank's loan loss provision accordingly.
The increased charge-offs in 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 fore-
closure 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
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 charged-off amount, the Bank recognizes the recovery
at the time of receipt.
The Bank continued to increase its loan loss provision in 1996 to $11.8
million because of the new charge-off policy discussed above and an increase in
delinquencies in the Bank's portfolio of home equity and automobile loans.
During 1996, the Bank completed the sale of its indirect automobile portfolio
of approximately $32,756,000 at a loss of $898,000, and recaptured $1,021,000
of its loan loss provision as a result of this sale.
Allocation of Loan Loss Allowance.
The following table presents an allocation of First Indiana's allowance
for loan losses at the dates indicated.
<TABLE>
<CAPTION>
Allocation of Loan Loss Allowance
(Dollars in Thousands) December 31,
-----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------- -----------------------------------------------------------------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Amount Category Amount Category Amount Category Amount Category Amount Category
----------------- -----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance At End of Period
Applicable to:
Residential Mortgage
Loans $ 632 34.9% $ 426 33.3% $ 376 36.4% $ 796 40.1% $ 549 45.8%
Residential
Construction Loans 3,270 11.2 2,928 11.2 2,110 10.7 1,852 10.9 917 10.5
Commercial Real
Estate Loans 777 3.7 1,095 4.4 2,219 5.6 2,681 7.4 2,571 11.9
Consumer Loans 9,042 42.7 7,808 45.4 5,375 43.5 3,571 38.6 2,173 31.5
Business Loans 1,809 7.5 820 5.7 519 3.8 505 3.0 75 0.3
Unallocated 3,238 - 3,157 - 1,926 - 2,101 - 2,463 -
----------------- ----------------- ----------------- ----------------- ---------------
$18,768 100.0% $16,234 100.0% $12,525 100.0% $11,506 100.0% $8,748 100.0%
================= ================= ================= ================= ===============
</TABLE>
Capital Resources and Liquidity
Capital.
At December 31, 1996, First Indiana's shareholders' equity was
$138,658,000, or 9.27 percent of total assets, compared with $129,297,000,
or 8.39 percent of total assets, at December 31, 1995. Most of the
Corporation's equity consists of its investment in the Bank.
In July 1996, the Corporation's Board of Directors authorized the
repurchase from time to time of up to $5,000,000 of the Corporation's
outstanding common stock. At December 31, 1996, the Corporation had repurchased
587,666 shares of its common stock, or 5.7 percent of its shares outstanding.
The program replaces one previously adopted in August 1994.
[This page contains bar graphs showing the following information]
<TABLE>
<CAPTION>
Loan and REO Loss Allowances Loan Loss Allowance to
(Dollars in Thousands) Non-Performing Loans
-------------------------- -----------------------
<S> <C> <S> <C>
1992 $10,378 1992 31.38%
1993 12,989 1993 51.80
1994 13,741 1994 57.72
1995 17,300 1995 67.91
1996 19,311 1996 84.19
</TABLE>
<PAGE> 13 10k page 51
Liquidity.
First Indiana Corporation conducts its business through subsidiaries.
The main source of funds for the Corporation is dividends from the Bank.
The Bank's primary source of funds is its deposits, which were
$1,095,486,000 at December 31, 1996 and $1,136,980,000 at December
31, 1995.
In recent years, First Indiana has relied on loan payments, loan
payoffs, sale of loans, Federal Home Loan Bank advances, repurchase
agreements, mortgage-backed bonds, and floating-rate notes as sources of
funds. Although the Bank will continue to rely on core retail deposits as its
chief source of funds, the use of borrowed funds, including Federal Home
Loan Bank advances, is likely to increase because of expected growth.
Scheduled loan payments are a relatively stable source of funds, but
loan payoffs, the sale of loans, and deposit inflows and outflows fluctuate
significantly, depending on interest rates and economic conditions. However,
management does not expect any of these items to occur in amounts that
would affect the Corporation's ability to meet consumer demand for liquidity
or regulatory liquidity requirements.
Regulations require the director of OTS to set minimum liquidity
levels between four and ten percent of assets. The Bank's liquidity ratio at
December 31, 1996 was 8.20 percent.
Asset/Liability Management
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.
The management of interest-rate risk entails the control, within
acceptable limits, of the impact on earnings caused by fluctuating interest
rates and changing rate relationships. In this process, management examines
the Bank's interest-rate sensitivity using gap analysis. This method
recognizes the dynamics of the balance sheet and the effect of changing
interest rates on First Indiana's net earnings.
The cumulative rate-sensitivity gap reflects First Indiana's sensitivity
to interest-rate changes over time. It is a static indicator and does not
attempt to predict the net interest income of a dynamic business in a rapidly
changing environment. Significant adjustments are made when the rate
outlook changes.
At December 31, 1996, First Indiana's six-month and one-year
cumulative gap stood at 2.03 percent and 4.50 percent of total interest-
earning assets. This compares with 5.22 percent and 3.70 percent at
December 31, 1995. This means that 2.03 percent and 4.50 percent of First
Indiana's assets will reprice within six months and one year without a
corresponding repricing of the liabilities funding them. Management intends
to maintain a similar gap position to reduce the volatility of earnings.
[This page contains bar graphs showing the following information]
<TABLE>
<CAPTION>
Bank Capital/Assets Checking Deposits (Dollars in Thousands)
- ------------------- ----------------------------------------
Actual Required <S> <C>
- ------ -------- 1992 $138,825
<C> <C> 1993 175,476
8.78% 1.50% 1994 163,023
8.78 3.00 1995 177,804
12.53 8.00 1996 187,760
</TABLE>
<PAGE> 14 10k page 52
Interest-Rate Sensitivity.
The following table shows First Indiana's interest-rate sensitivity at
December 31, 1996 and 1995.
<TABLE>
<CAPTION>
Interest-Rate Sensitivity
(Dollars in Thousands) Rate Sensitivity by Period of Maturity or Rate Change At December 31, 1996
--------------------------------------------------------------------------
Percent Over 180 Over One Over
of Within Days to Year to Five
Rate Balance Total 180 Days One Year Five Years Years
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Investment Securities
and Other 5.95%$ 148,895 10.49 % $ 74,991 $ 5,000 $ 68,904 $ --
Loans Receivable (1)
Mortgage-Backed
Securities 7.69 36,412 2.56 5,913 12,458 12,793 5,248
Residential Mortgage
Loans 7.89 431,063 30.36 184,465 67,839 125,591 53,168
Residential Construction
Loans 8.62 138,135 9.73 124,577 -- 13,558 --
Commercial Real
Estate Loans 11.12 45,792 3.23 11,400 6,108 14,397 13,887
Business Loans 9.69 92,559 6.52 60,902 337 20,477 10,843
Consumer Loans 10.38 526,769 37.11 204,901 42,725 188,404 90,739
-----------------------------------------------------------------
8.90 $1,419,625 100.00 % 667,149 134,467 444,124 173,885
===================== ----------------------------------------
Interest-Bearing Liabilities
Deposits
Demand Deposits (2) 2.51 $ 104,501 8.31 % -- -- -- 104,501
Passbook Deposits (3) 2.99 47,005 3.74 9,400 2,262 14,066 21,277
Money Market Savings 4.71 271,302 21.57 271,302 -- -- --
Jumbo Certificates 5.74 98,256 7.81 47,268 13,412 37,576 --
Fixed-Rate Certificates 5.63 491,163 39.05 181,331 63,684 246,148 --
----------------------------------------------------------------
4.95 1,012,227 80.48 509,301 79,358 297,790 125,778
Borrowings
FHLB Advances 5.60 215,466 17.13 99,000 20,000 94,000 2,466
Short-Term Borrowings 5.19 30,055 2.39 30,055 -- -- --
----------------------------------------------------------------
5.07 1,257,748 100.00 % 638,356 99,358 391,790 128,244
========
Net - Other (4) 161,877 161,877
---------- ----------------------------------------
Total $1,419,625 638,356 99,358 391,790 290,121
========== ----------------------------------------
Rate Sensitivity Gap $ 28,793 $ 35,109 $ 52,334 $ (116,236)
===========================================
December 31, 1996 Gap
Cumulative Rate-
Sensitivity Gap $ 28,793 $ 63,902 $ 116,236
================================
Percent of Total
Interest-Earning Assets 2.03% 4.50% 8.19%
================================
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 $18,812 of
Loans Held for Resale. Included in Consumer Loans are $4,411 of home equity loans held for
resale.
(2) These deposits have been included in the Over Five Years category to reflect management's
assumption that these accounts are not rate-sensitive. This assumption is based on 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 Five 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> 15 10k page 53
Financial Condition
First Indiana's total assets at December 31, 1996 were
$1,496,421,000, compared with $1,541,843,000 at December 31, 1995.
Loans receivable stood at $1,215,550,000 at year-end 1996, compared with
$1,250,726,000 one year earlier.
The composition of the Bank's loan portfolio changed in 1996, as the
Bank continued to execute its strategy of adding higher-yielding loans to the
balance sheet through the origination of home equity and residential
construction loans.
Residential loans outstanding amounted to $429,427,000 at
December 31, 1996, compared with $421,502,000 in 1995. Consumer loans
outstanding were $526,769,000 at the end of 1996, compared with
$575,009,000 one year earlier. Much of this decrease arose when the Bank sold
$32,756,000 of its indirect automobile portfolio. Construction loans
outstanding fell to $138,135,000, compared with $142,299,000 at the end
of 1995.
Total loan sales in 1996 amounted to $331,305,000, compared with
$264,116,000 in 1995 and $239,851,000 in 1994.
The Bank's loan servicing portfolio continued to produce fee income
in 1996. The portfolio stood at $1,057,731,000 at year-end, compared with
$1,130,209,000 and $802,191,000 at December 31, 1995 and 1994. The
servicing portfolio provides a source of fee income, but is subject to
fluctuations as rates fall and serviced loans pay off. During the second
quarter of 1995, the Bank purchased $310 million in residential mortgage
loan servicing rights.
Impact of Accounting Standards Not Yet Adopted
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities."
FAS 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. In December 1996,
the FASB issued statement No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB No.125," deferring by one year the effective date of
certain provisions of FAS 125 which is currently effective for transfers and
extinguishments occurring after December 31, 1996. The deferral applies to
the provisions that deal with secured borrowing and collateral, as well
as to transfers of financial assets for repurchase agreements, dollar rolls,
and securities lending. Due to the timing of the issuance of these
pronouncements, management is currently reviewing the effect, if any, these
pronouncements will have on the financial statements of the Corporation.
[This page contains the bar graphs showing the following information]
<TABLE>
<CAPTION>
Construction Loans Outstanding
Assets (Dollars in Thousands) (Dollars in Thousands)
- ----------------------------- -----------------------------
<S> <C> <S> <C>
1992 $1,319,770 1992 $ 94,961
1993 1,322,288 1993 107,695
1994 1,408,629 1994 117,170
1995 1,541,843 1995 142,299
1996 1,496,421 1996 138,135
<CAPTION>
Home Equity Loans Outstanding Loan Servicing Portfolio
(Dollars in Thousands) (Dollars in Thousands)
- ----------------------------- ------------------------
<S> <C> <S> <C>
1992 $198,557 1992 $ 792,808
1993 227,550 1993 806,874
1994 328,594 1994 802,191
1995 485,032 1995 1,130,209
1996 498,739 1996 1,057,731
</TABLE>
<PAGE> 16 10k page 54
Five Year Summary of Selected Financial Data
<TABLE>
<CAPTION>
First Indiana Corporation and Subsidiaries
At December 31,
--------------------------------------------------
(Dollars in Thousands, 1996 1995 1994 1993 1992
Except Per Share Data) -------- --------------------------------------------
Selected Financial Condition Data
<S> <C> <C> <C> <C> <C>
Total Assets $1,496,421 $1,541,843 $1,408,629 $1,322,288 $1,319,770
Loans Receivable -- Net 1,215,550 1,250,726 1,078,494 978,053 920,386
Mortgage-Backed Securities 36,412 49,498 69,597 101,293 179,909
Investments 106,895 102,656 149,529 113,165 92,570
Total Deposits 1,095,486 1,136,980 1,031,911 1,030,257 1,042,039
Federal Home Loan Bank Advances 215,466 214,781 201,155 106,877 21,159
Short-Term Borrowings 30,055 38,642 35,922 - 2,469
Floating-Rate Notes - - - - 70,000
Mortgage-Backed Bonds - - - 50,000 50,000
Shareholders' Equity 138,658 129,297 120,712 113,583 100,735
<CAPTION>
Years Ended December 31,
1996 1995 1994 1993 1992
Selected Operations Data
<S> <C> <C> <C> <C> <C>
Interest Income $125,468 $124,061 $97,572 $97,084 $95,711
Interest Expense 63,785 66,017 48,343 51,179 58,853
Provision for Losses on Loans and
Real Estate Owned, Net 10,794 7,900 3,900 4,396 3,219
Earnings Before Cumulative Effect
Change in Accounting Principle 13,704 17,267 10,636 15,101 9,484
Net Earnings 13,704 17,267 10,636 15,101 11,002
Net Interest Margin During Year 4.37% 4.12% 3.96% 3.64% 3.28%
Dividends Declared Per Common Share $ .45 $ .38 $ .34 $ .24 $ .19
Selected Ratios
Net Earnings to:
Average Total Assets .92% 1.16% .80% 1.12% .92%
Average Shareholders' Equity 10.15 14.03 9.08 14.05 12.73
Average Shareholders' Equity to
Average Total Assets 9.09 8.28 8.83 7.98 7.25
Dividend Payout Ratio 33.89 22.45 35.23 17.05 16.20
</TABLE>
<PAGE> 17 10k page 55
<TABLE>
<CAPTION>
Consolidated Balance Sheets
First Indiana Corporation and Subsidiaries
December 31,
------------------------
(Dollars in Thousands, Except Share Data) 1996 1995
------------------------
<S> <C> <C>
Assets
Cash $ 31,618 $ 41,894
Federal Funds Sold 42,000 33,000
-------------------------
Total Cash and Cash Equivalents 73,618 74,894
Investments Available For Sale (Note 2) 101,356 96,813
Investments Held to Maturity (Market Value of $5,673 and $5,949)
(Notes 2, 9, and 12) 5,539 5,843
Mortgage-Backed Securities Held to Maturity--Net
(Market Value of $36,984 and $50,426) (Notes 3,9, and 12) 36,412 49,498
Loans Held for Sale 23,223 52,733
Loans Receivable 1,211,095 1,214,227
Less Allowance for Loan Losses (18,768) (16,234)
---------------------------
Loans Receivable--Net(Notes 4,5,8, and 12) 1,215,550 1,250,726
Premises and Equipment (Note 6) 13,705 13,157
Accrued Interest Receivable 10,696 11,645
Real Estate Owned--Net (Note 5) 4,285 1,877
Prepaid Expenses and Other Assets 35,260 37,390
----------------------------
Total Assets $1,496,421 $1,541,843
============================
Liabilities and Shareholders' Equity
Liabilities
Non-Interest-Bearing Deposits $ 83,259 $ 82,237
Interest-Bearing Deposits 1,012,227 1,054,743
---------------------------
Total Deposits (Note 7) 1,095,486 1,136,980
Federal Home Loan Bank Advances (Note 8) 215,466 214,781
Short-Term Borrowings (Note 9) 30,055 38,642
Accrued Interest Payable 2,018 2,715
Advances by Borrowers for Taxes and Insurance 1,120 2,107
Other Liabilities 7,933 10,688
---------------------------
Total Liabilities 1,352,078 1,405,913
---------------------------
Negative Goodwill 5,685 6,633
---------------------------
Shareholders' Equity (Notes 11 and 13)
Preferred Stock, $.01 Par Value: 2,000,000 Shares Authorized; None Issued - -
Common Stock, $.01 Par Value: 16,000,000 Shares Authorized; 10,966,934
and 10,928,070 Shares Issued and Outstanding, Including Shares in Treasury 88 88
Paid-In Capital in Excess of Par 33,225 32,715
Retained Earnings 111,767 102,449
Net Unrealized Gain (Loss) on Securities Available For Sale (72) 395
Treasury Stock - At Cost, 587,666 Shares in 1996 and 1995 (6,350) (6,350)
--------------------------
Total Shareholders' Equity 138,658 129,297
Commitments and Contingencies (Note 12) - -
--------------------------
Total Liabilities and Shareholders' Equity $1,496,421 $1,541,843
===========================
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 18 10k page 56
<TABLE>
<CAPTION>
Consolidated Statements of Earnings
First Indiana Corporation and Subsidiaries Years Ended December 31,
-------------------------------------
(Dollars in Thousands, Except Per Share Data) 1996 1995 1994
--------------------------------------
<S> <C> <C> <C>
Interest Income
Loans $114,799 $109,871 $ 81,553
Investments 6,887 9,181 9,784
Mortgage-Backed Securities 2,986 4,396 5,473
Federal Funds Sold and Interest-Bearing Deposits 796 613 762
------------------------------------
Total Interest Income 125,468 124,061 97,572
------------------------------------
Interest Expense
Deposits (Note 7) 52,077 50,533 39,342
Federal Home Loan Bank Advances 10,706 12,891 6,952
Short-Term Borrowings 1,002 2,593 330
Mortgage-Backed Bonds - - 1,719
------------------------------------
Total Interest Expense 63,785 66,017 48,343
------------------------------------
Net Interest Income 61,683 58,044 49,229
Provision for Loan Losses, Net (Note 5) 10,794 7,900 3,900
------------------------------------
Net Interest Income After Provision for Loan Losses 50,889 50,144 45,329
------------------------------------
Non-Interest Income
Sale of Investments - (7) -
Trading Account Activity - - (335)
Sale of Investments Available for Sale 281 53 -
Sale of Loans 3,075 2,749 (706)
Sale of Subsidiary 1,165 - -
Sale of Deposits - 1,497 -
Dividends on FHLB Stock 1,033 996 602
Loan Servicing Income 2,908 2,645 2,861
Loan Fees 2,302 2,206 2,378
Insurance Commissions 662 1,280 736
Accretion of Negative Goodwill 948 948 948
Deposit Product Fee Income 2,593 2,124 1,910
Other 2,881 1,760 1,931
------------------------------------
Total Non-Interest Income 17,848 16,251 10,325
------------------------------------
Non-Interest Expense
Salaries and Benefits 18,094 20,890 19,465
Net Occupancy 3,087 3,069 2,989
Deposit Insurance 9,186 2,298 2,318
Real Estate Owned Operations--Net 598 (3,060) (26)
Equipment 4,508 4,636 4,489
Office Supplies and Postage 2,069 1,934 1,726
Other 9,711 8,880 7,541
------------------------------------
Total Non-Interest Expense 47,253 38,647 38,502
------------------------------------
Earnings Before Income Taxes 21,484 27,748 17,152
Income Taxes (Note 10) 7,780 10,481 6,516
------------------------------------
Net Earnings $13,704 $17,267 $10,636
====================================
Primary Earnings Per Share $ 1.27 $ 1.62 $ 0.96
====================================
Fully Diluted Earnings Per Share $ 1.27 $ 1.60 $ 0.96
====================================
Dividends Per Common Share $ 0.45 $ 0.38 $ 0.34
====================================
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 19 10k page 57
<TABLE>
<CAPTION>
Consolidated Statements of Shareholders' Equity
First Indiana Corporation and Subsidiaries
Net
Unrealized
Paid-In Gain (Loss) on
Common Stock Capital Securities Total
-------------------- in Excess Retained Available Treasury Shareholders'
(Dollars in Thousands, Except Per Share Data) Shares Amount of Par Earnings for Sale Stock Equity
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 10,725,611 $87 $31,028 $ 82,468 $ - $ - $113,583
Common Stock Issued Under Restricted
Stock Plans-Net of Amortization (Note 13) 48,000 - 563 (375) - - 188
Exercise of Stock Options 54,249 - 326 - - - 326
Unrealized Loss on Securities Available
for Sale, Net of Income Taxes of $(82) - - - - (120) - (120)
Net Earnings for 1994 - - - 10,636 - - 10,636
Dividends -- $.34 Per Share - - - (3,748) - - (3,748)
Payment for Fractional Shares (482) - (6) - - - (6)
Purchase of Treasury Stock (15,000) - - - - (147) (147)
---------------------------------------------------------------------------------
Balance at December 31, 1994 10,812,378 87 31,911 88,981 (120) (147) 120,712
Common Stock Issued Under Restricted
Stock Plans-Net of Amortization (Note 13) - - 268 99 - - 367
Common Stock Issued Under Deferred
Compensation Plan - - - (21) - - (21)
Exercise of Stock Options 100,692 1 536 - - - 537
Unrealized Gain on Securities Available
for Sale, Net of Income Taxes of $351 - - - - 515 - 515
Net Earnings for 1995 - - - 17,267 - - 17,267
Dividends -- $.38 Per Share - - - (3,877) - - (3,877)
Purchase of Treasury Stock (572,666) - - - - (6,203) (6,203)
--------------------------------------------------------------------------------
Balance at December 31, 1995 10,340,404 88 32,715 102,449 395 (6,350) 129,297
Common Stock Issued Under Restricted
Stock Plans-Net of Amortization (Note 13) - - 195 278 - - 473
Common Stock Issued Under Deferred
Compensation Plan - - - (20) - - (20)
Exercise of Stock Options 39,751 - 331 - - - 331
Unrealized Loss on Securities Available
for Sale, Net of Income Taxes of $(320) - - - - (467) - (467)
Net Earnings for 1996 - - - 13,704 - - 13,704
Dividends -- $.45 Per Share - - - (4,644) - - (4,644)
Payment for Fractional Shares (887) - (16) - - - (16)
----------------------------------------------------------------------------------
Balance at December 31, 1996 10,379,268 $88 $33,225 $111,767 $(72) $(6,350) $138,658
==================================================================================
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 20 10k page 58
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
First Indiana Corporation and Subsidiaries
(Dollars in Thousands)
Years Ended December 31,
-----------------------------------
1996 1995 1994
------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Earnings $ 13,704 $ 17,267 $ 10,636
Adjustments to Reconcile Net Earnings to Net Cash Provided
(Used) by Operating Activities
Loss (Gain) on Sale of Assets and Deposits (4,524) (4,307) 1,051
Amortization 1,325 2,197 1,609
Amortization of Restricted Stock Plan 473 367 188
Depreciation 1,958 1,909 1,922
Loan and Mortgage-Backed Securities Net Accretion (51) (366) (202)
Provision for Loan Losses,Net 10,794 7,900 3,900
Proceeds From Sales of Trading Investments -- -- 307,539
Purchase of Trading Investments -- -- (307,874)
Origination of Mortgage-Backed Securities
Available for Sale (734) -- --
Proceeds From Sale of Mortgage-Backed
Securities Available for Sale 716 -- --
Origination of Loans Held for Sale
Net of Principal Collected (262,463) (179,919) (177,085)
Proceeds from Sale of Loans Held for Sale 295,048 138,803 239,851
Change In:
Accrued Interest Receivable 949 (1,833) 76
Other Assets (1,166) (7,321) 3,132
Accrued Interest Payable (697) 1,019 (1,411)
Other Liabilities (2,755) 3,392 (561)
--------------------------------------
Net Cash (Used) Provided by Operating Activities 52,577 (20,892) 82,771
--------------------------------------
Cash Flows From Investing Activities
Proceeds From Sales of Investment Securities
Held to Maturity -- 2,993 --
Proceeds From Sales of Investments Available for Sale 35,703 72,857 --
Proceeds From Maturities of Investment Securities
Held to Maturity 27,611 6,018 28,525
Purchase of Investment Securities Held to Maturity -- (35,388) (66,381)
Purchase of Investment Securities Available for Sale (68,225) -- --
Principal Collected on Mortgage-Backed Securities 13,086 20,099 31,696
Originations of Loans Net of Principal Collected (41,050) (260,919) (167,336)
Proceeds From Sale of Indirect Installment Portfolio 32,756 -- --
Proceeds From Sale of Loans 3,501 125,313 1,819
Purchase of Premises and Equipment (2,653) (1,750) (1,615)
Proceeds From Sale of Premises and Equipment 150 32 10
--------------------------------------
Net Cash Provided (Used) by Investing Activities 879 (70,745) (173,282)
--------------------------------------
Cash Flows From Financing Activities
Net Change in Deposits (41,494) 132,028 1,654
Proceeds from Sale of Deposits -- (25,462) --
Repayments of Federal Home Loan Bank Advances (288,025) (366,024) (197,822)
Borrowings of Federal Home Loan Bank Advances 288,710 379,650 292,100
Net Change in Short-Term Borrowings (8,587) 2,720 35,922
Maturity of Mortgage-Backed Bond -- -- (50,000)
Net Change in Advances by Borrowers for Taxes and Insurance (987) (249) 277
Stock Option Proceeds 331 537 326
Common Stock Issued Under Deferred Compensation Plan (20) (21) --
Payment for Fractional Shares (16) -- (6)
Purchase of Treasury Stock -- (6,203) (147)
Dividends Paid (4,644) (3,877) (3,748)
--------------------------------------
Net Cash Provided (Used) By Financing Activities (54,732) 113,099 78,556
--------------------------------------
Net Change in Cash and Cash Equivalents (1,276) 21,462 (11,955)
Cash and Cash Equivalents at Beginning of Year 74,894 53,432 65,387
--------------------------------------
Cash and Cash Equivalents at End of Year $ 73,618 $ 74,894 $ 53,432
=====================================
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 21 10k page 59
Notes to Consolidated Financial Statements
First Indiana Corporation and Subsidiaries
Years Ended December 31, 1996, 1995, and 1994
(1) Nature of Operations and Summary of Significant
Accounting Policies
First Indiana Corporation ("First Indiana" or the "Corporation") is a
nondiversified, unitary savings and loan holding company. First Indiana Bank
and its subsidiaries (collectively the "Bank"), the principal asset of the
Corporation, is a federally chartered stock savings bank insured by the
Federal Deposit Insurance Corporation. First Indiana is the largest publicly
held bank based in Indianapolis.
The Bank is engaged primarily in the business of attracting deposits
from the general public and originating residential mortgage, commercial and
consumer loans. The Bank offers a full range of banking services from 26
banking offices located throughout Metropolitan Indianapolis, Evansville,
Franklin, Mooresville, Pendleton, Rushville, and Westfield, Indiana.
The Bank experiences substantial competition in attracting and
retaining deposits and in lending funds. The primary factors in competing for
deposits are the ability to offer attractive rates and the availability of
convenient access. Direct competition for deposits comes from other savings
institutions, commercial banks, money market mutual funds, corporate and
government securities, and other non-insured investments. The primary
factors in competing for loans are interest rates, loan origination fees, and
loan product variety. Competition for origination of loans normally comes
from other banks, brokers, and insurance companies.
The majority of the Bank's assets and liabilities is financial
instruments (investments, loans, deposits, and borrowings). Each of these
financial instruments earns or pays interest for a given term at a negotiated
rate of interest. First Indiana's Asset/Liability Committee manages these
financial instruments for the dual objectives of maximizing net interest income
(the difference between interest income and interest expense) while limiting
interest-rate risk. The Bank manages interest-rate risk by closely matching
both the maturities and interest-rate repricing dates of its assets and
liabilities. Should this matching objective not be achieved, significant,
rapid, and sustained changes in market interest rates will significantly
increase or decrease net interest income. Because of this risk, the Committee
continuously monitors its financial instruments to ensure that these dual
objectives are achieved.
The accounting and reporting policies of the Corporation and its
subsidiaries conform to generally accepted accounting principles and to
general practices within the savings bank industry. The more significant
policies are summarized below.
(A) Basis of Financial Statement Presentation. The consolidated
financial statements include the accounts of the Corporation and of the Bank.
All significant intercompany balances and transactions have been eliminated
in consolidation. The financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the date of the
balance sheet and revenues and expenses for the period. Actual results could
differ significantly from those estimates.
Material estimates that are particularly susceptible to significant
change in the near term relate to the determination of allowances for possible
loan and real estate owned losses.
(B) Investments and Mortgage-Backed Securities. The Bank
adopted the provisions of Statement of Financial Accounting Standard No.
115, "Accounting for Certain Investments in Debt and Equity Securities," as
of January 1, 1994. Under SFAS 115, the Bank classifies investments in debt
securities as either trading, held to maturity, or available for sale. In 1995,
the Bank reassessed the appropriateness of the classification of all
securities in accordance with the provisions of a special report issued by
the FASB.
Investments and debt securities classified as held to maturity are
stated at cost, as adjusted for amortization of premiums and accretion of
discounts using the level yield method. The Bank has the ability and positive
intent to hold these securities to maturity.
Investments in debt securities classified as available for sale are stated
at fair value, based on quoted market prices, with unrealized holding gains
and losses excluded from earnings and reported net of related income taxes
as a separate component of shareholders' equity until realized. A decline in
the fair value of any available-for-sale or held-to-maturity security below cost
that is deemed other than temporary is charged to earnings, resulting in the
establishment of a new cost basis for the security.
Investments in debt securities classified as trading are stated at fair
value. Unrealized holding gains and losses for trading securities are included
in earnings.
Dividend and interest income are recognized when earned. Realized
gains and losses for securities classified as available for sale and held to
maturity are included in earnings and are derived using the specific
identification method for determining the cost of securities sold.
<PAGE> 22 10k page 60
(C) Loans. Loans originated for portfolio are recorded at cost, with
any discount or premium amortized to maturity using the level-yield method.
Loans are placed on non-accrual status when payments of principal or
interest become 90 days or more past due or earlier when an analysis of a
borrower's creditworthiness indicates that payments could become past due.
Interest income on such loans is recognized only to the extent that cash is
received and where future collection is probable. Interest accruals are
resumed on such loans only when they are brought current with respect to
interest and principal and when, in the opinion of management, the loans are
estimated to be fully collectible.
(D) Mortgage and Home Equity Loan Origination Activities. In
general, the Bank originates fixed-rate mortgage loans and selected fixed-rate
home equity loans for sale in the secondary market. Adjustable-rate
mortgage and home equity loans are originated primarily for investment
purposes, with the intention of holding them to maturity. In certain instances,
adjustable-rate mortgage loans originated are identified as held for sale. This
action is taken primarily to manage effectively the total interest-rate risk
levels of the Bank's asset/liability structure.
Loans held for sale are carried at the lower of cost or estimated
market value in the aggregate. The Bank continuously monitors its pipeline
and conservatively manages the pipeline through limits on market exposure.
Currently, the Bank achieves this objective through the use of forward sales.
In the case of loans sold with servicing retained where the stated servicing
fee differs materially from a current, normal servicing fee, the sales price is
adjusted for purposes of determining gain or loss on the sale to provide a
normal servicing fee in each subsequent year. The resulting deferred balance is
amortized in proportion to the related net servicing income over the estimated
life of the loans. Commitment fees paid to an investor in connection with the
sale of loans are treated as a sales expense and reduce the net sales proceeds.
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, FAS 122 requires capitalization
of the cost of mortgage servicing rights, regardless of whether those rights
were acquired through purchase or origination. Prior to adoption of FAS 122,
only purchased loan servicing rights were capitalized.
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 strata 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 December 31, 1996, the balance
of capitalized loan servicing rights included in other assets was $894,000,
with a fair market value of $1,102,000. The amount capitalized in 1996 was
$986,000, and the amount amortized to loan servicing income was $92,000.
There were no valuation allowances at December 31, 1996, and no activity
for the year then ended.
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities"
("FAS 125"). FAS 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.
In December 1996, the FASB issued Statement of Financial Accounting Standard
No. 127, "Deferral of the Effective Date of Certain Provisions of FASB
No.125," deferring by one year the effective date of certain provisions
of FAS 125 which is currently effective for transfers and
extinguishments occurring after December 31, 1996. The deferral applies to
the provisions that deal with secured borrowing and collateral, as well
as to transfers of financial assets for repurchase agreements, dollar rolls,
and securities lending. Due to the timing of the issuance of these
pronouncements, management is currently reviewing the effect, if any, these
pronouncements will have on the financial statements of the Corporation.
(E) Loan Fees. Non-refundable loan fees and certain direct costs are
deferred and the net amount amortized over the contractual life of the related
loan as an adjustment of the yield.
(F) Discounts, Premiums, and Prepaid Dealer Fees. Discounts
and premiums on the purchase of loans and prepaid dealer fees are amortized
to interest income on a level-yield basis.
(G) Real Estate Owned. Real estate owned ("REO") generally is
acquired by deed in lieu of foreclosure and is carried at the lower of cost (the
unpaid balance at the date of acquisition plus foreclosure and other related
costs) or fair market value.
<PAGE> 23 10k page 61
(H) Loss Allowances. Allowances have been established for
possible loan and REO losses. The provisions for losses charged to
operations are based on management's judgment of current economic
conditions 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 real estate owned,
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 examination process, periodically review these allowances and
may require the Corporation to recognize additions to the allowances based
on their judgment about information available to them at the time of their
examination.
Loans considered to be impaired are reduced to the present value of
expected future cash flows or to the fair value of collateral by allocating
a portion of the allowance for loan losses to such loans. If these allocations
cause the allowance for loan losses to require an increase, allocations are
considered in relation to the overall adequacy of the allowance for loan losses
and subsequent adjustments to the loss provision.
The recorded investment in impaired loans is periodically adjusted to
reflect cash payments, revised estimates of future cash flows, and increases
in the present value of expected cash flows due to the passage of time. Cash
payments representing interest income are reported as such. Other cash
payments are reported as reductions in recorded investment. Increases or
decreases due to changes in estimates of future payments and due to the
passage of time are considered in relation to the overall adequacy of the
provision for the allowance for loan losses.
(I) Income Taxes. The Corporation uses the asset and liability
method to account for income taxes. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
First Indiana files a consolidated income tax return.
(J) Earnings Per Share. Earnings per share for 1996, 1995, and 1994 were
computed by dividing net earnings by the primary and fully diluted shares of
common stock and common stock equivalents outstanding (10,764,833 and
10,801,611 in 1996, 10,717,756 and 10,791,139 in 1995 and 11,110,554 and
11,116,438 in 1994). Dilution of the per-share calculation relates primarily
to stock options.
(K) Premises and Equipment. Premises and equipment are carried
at cost, less accumulated depreciation and amortization. Depreciation and
amortization are provided on a straight-line basis over the estimated useful
lives of the various classes of assets.
(L) Cash and Cash Equivalents. For purposes of reporting cash
flows, cash and cash equivalents include cash on hand, amounts due from
banks, interest-bearing deposits with banks, and federal funds sold.
Generally, federal funds are sold for one-day periods. All cash and cash
equivalents mature within 90 days.
(M) Reclassification. Certain amounts in the 1995 Financial
Statements have been reclassified to conform to the current year
presentation.
(N) Negative Goodwill. The excess of assigned value of assets and
liabilities acquired over the cost of the acquired enterprises ("negative
goodwill") aggregated $9,858,000 and is being accreted to earnings over a
ten-year period using the straight-line method. The negative goodwill arises
from the Bank's acquisition of Mooresville Savings Bank and First Federal
Savings and Loan Association of Rushville in 1992.
<PAGE> 24 10k page 62
(2) Investments and Their Scheduled Maturities
<TABLE>
<CAPTION>
Investments Available for Sale:
December 31,
----------------------------------------------------------------------
1996 1995
----------------------------------------------------------------------
Unreal- Unreal- Unreal- Unreal-
Book ized ized Market Book ized ized Market
Value Gains Losses Value Value Gains Losses Value
(Dollars in Thousands) ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and Government
Agencies' Obligations $78,305 $129 $(351) $78,083 $40,353 $115 $(13) $40,455
Corporate Debt Securities 10,394 92 (26) 10,460 36,182 439 - 36,621
Asset-Backed Securities 12,579 22 - 12,601 19,318 106 - 19,424
Other 200 12 - 212 295 18 - 313
----------------------------------------------------------------------
$101,478 $255 $(377)$101,356 $96,148 $678 $(13) $96,813
======================================================================
</TABLE>
<TABLE>
<CAPTION>
Scheduled Maturities:
December 31, 1996
------------------------------------------------------------------------------
U.S Treasury and Corporate Asset-
Government Agencies' Debt Backed
Obligations Securities Securities
------------------------------------------------------------------------------
Book Market Book Market Book Market
Value Value Yield Value Value Yield Value Value Yield
------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One Year or Less $19,995 $19,973 5.13% $ - $ - -% $ - $ - -%
After One Year to
Five Years 58,310 58,110 5.52 7,673 7,676 7.46 - - -
After Five Years to
Ten Years - - - 2,721 2,784 9.50 2,579 2,585 6.71
After Ten Years - - - - - - 10,000 10,016 6.90
---------------- ---------------- ----------------
$78,305 $78,083 $10,394 $10,460 $12,579 $12,601
================ ================ ================
<PAGE> 25 10k page 63
<CAPTION>
------------------------------------------------------
Other
Securities Total Portfolio
------------------------------------------------------
Book Market Book Market
Value Value Yield Value Value Yield
------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One Year or Less $ - $ - -% $19,995 $19,973 5.13%
After One Year to
Five Years 200 212 6.48 66,183 65,998 5.75
After Five Years to
Ten Years - - - 5,300 5,369 8.14
After Ten Years - - - 10,000 10,016 6.90
------------- ----------------
$200 $212 $101,478 $101,356 5.87
============= ================
</TABLE>
The weighted average yield on investments held for sale was 5.87
percent at December 31, 1996 and 7.16 percent at December 31, 1995.
The asset-backed securities are collateralized by student loan receivables.
While the majority of these securities have maturity dates in excess
of five years, they are expected to prepay within the next five to seven years.
At December 31, 1996, all of First Indiana's corporate debt
securities were issued by finance companies, with the highest concentration
with one issuer at $5,001,000 and the average concentration per issuer at
$3,465,000. At December 31, 1995, First Indiana held a $3,000,000 par value
corporate debt security which management identified as a potential problem
asset. As a result, the Bank reduced the carrying amount of the security by
$818,000 to its estimated recoverable value. This security was sold in 1996
at a minimal gain. All corporate debt securities held for sale at
December 31, 1996 were rated investment grade or higher by Standard & Poor's
or Moody's Investor Services. The Bank's investment policy prohibits invest-
ment in subprime issues. In 1996, realized gains (losses) from the sale of
investment securities available for sale were $307,000 and $(10,000).
Realized gains (losses) in 1995 from the sale of investment securities available
for sale were $961,000 and $(89,000). In 1994, there were no realized gains
or losses from the sale of investments available for sale.
<TABLE>
<CAPTION>
Investments Held to Maturity:
December 31,
------------------------------------------------------------------------------
1996 1995
------------------------------------------------------------------------------
Unreal- Unreal- Unreal- Unreal-
Book ized ized Market Book ized ized Market
(Dollars in Thousands) Value Gains Losses Value Value Gains Losses Value
---------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Asset-Backed Securities $5,539 $134 $ - $ 5,673 $ 5,843 $ 106 $ - $ 5,949
--------------------------------------------------------------------------------
$ 5,539 $ 134 $ - $ 5,673 $ 5,843 $ 106 $ - $ 5,949
===============================================================================
</TABLE>
Securities totaling $604,000 with a weighted average yield of 10
percent mature within five to 10 years, while the remaining $4,935,000 of
investments held to maturity, yielding 6.69 percent, have maturities in excess
of 10 years.
On December 1, 1995, First Indiana reassessed the
appropriateness of the classification of all investments and mortgage-backed
securities held as of that date. As a result, the Bank reclassified
$126,591,000 investments from held to maturity to available for sale and
$89,000 mortgage-backed securities from available for sale to held to
maturity.
The asset-backed securities are collateralized by consumer home
equity loans. While these securities have maturity dates in excess of 10
years, they are expected to prepay within the next five to seven years.
The average yield on investments was 7.05 percent at December 31,
1996 and 7.63 percent at December 31, 1995. In 1996 and 1994, there were no
realized gains or losses from the sale of held-to-maturity investment
securities. In 1995, realized losses from the sale of held-to-maturity
investment securities which experienced a deterioration of credit quality
were $7,000.
<PAGE> 26 10k page 64
(3) Mortgage-Backed Securities
<TABLE>
<CAPTION>
Held to Maturity:
December 31, 1996
------------------------------------------------
Unreal- Unreal-
Book ized ized Market
Value Gains Losses Value
(Dollars in Thousands) ------------------------------------------------
<S> <C> <C> <C> <C>
FHLMC $ 21,531 $ 648 $ (45) $ 22,134
FNMA 13,888 295 (70) 14,113
GNMA 159 4 - 163
Participation Certificates 574 - - 574
Deferred Income and Net Unearned Discounts 260 - (260) -
------------------------------------------------
$ 36,412 $ 947 $ (375) $ 36,984
================================================
<CAPTION>
December 31, 1995
------------------------------------------------
Unreal- Unreal-
Book ized ized Market
Value Gains Losses Value
(Dollars in Thousands) ------------------------------------------------
<S> <C> <C> <C> <C>
FHLMC $ 28,862 $ 921 $ - $ 29,783
FNMA 19,006 408 - 19,414
GNMA 193 8 - 201
Participation Certificates 1,028 - - 1,028
Deferred Income and Net Unearned Discounts 409 - (409) -
------------------------------------------------
$ 49,498 $1,337 $ (409) $ 50,426
================================================
</TABLE>
The weighted average yield on mortgage-backed securities was 7.69
percent and 7.76 percent at December 31, 1996 and 1995. Seventy-one percent
of the Bank's mortgage-backed securities have maturities in excess of 10
years, with the remaining 29 percent maturing in five to ten years.
At December 31, 1996 and 1995, First Indiana had no mortgage-backed
securities available for sale. In 1996, realized losses on the sale of
mortgage-backed securities held for sale were $16,000. In 1995, realized
gains on the sale of mortgage-backed securities held for sale were $10,000.
(4) Loans Receivable
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
(Dollars in Thousands) ----------------------------
<S> <C> <C>
Residential Mortgage Loans
Loans Held for Sale $ 18,812 $ 16,889
Loans Held in Portfolio 410,615 404,613
Residential Construction Loans 214,354 207,975
Commercial Real Estate Loans 45,936 55,789
Business Loans 100,503 78,981
Consumer Loans
Home Equity Loans Held for Sale 4,411 35,844
Home Equity Loans Held in Portfolio 494,328 449,188
Installment Loans 22,223 83,266
Other Consumer Loans 5,807 6,711
Undisbursed Portion of Loans
Residential Construction Loans (76,219) (65,676)
Commercial Real Estate Loans (10) -
Business Loans (7,944) (6,835)
Deferred Income and Net Unearned Discounts 1,502 215
Allowance for Loan Losses (18,768) (16,234)
----------------------------
$1,215,550 $1,250,726
===========================
</TABLE>
<PAGE> 27 10k page 65
The weighted average yield on loans was 9.29 percent and 9.59
percent at December 31, 1996 and 1995. Loans serviced for others
amounted to $1,057,731,000 and $1,130,209,000 at December 31, 1996 and
1995.
Total restructured loans amounted to $6,913,000 and $5,909,000
at December 31, 1996 and 1995. In 1996, $655,000 in gross interest income
would have been recorded if these loans had been current in accordance with
their original terms. Actual interest income recognized on these loans
was $553,000 in 1996, only $102,000 below the original interest obligation. At
December 31, 1995, the Bank had identified an impaired loan totaling $3,306,000
which had an allocated reserve of $167,000. This loan was repaid in the first
quarter of 1996 and the allocated reserve was resorbed into the general loan
loss allowance.
Over 75 percent of First Indiana's residential construction and
permanent mortgage loans are secured by collateral located in Indiana, with
another 15 percent and 19 percent located in North Carolina and Florida.
Nearly 66 percent of the Bank's consumer loans are secured by collateral
located in Indiana and its contiguous states, with over 44 percent located in
Indiana itself. The Bank's commercial real estate and business loans are
secured primarily by collateral in Indiana and contiguous states.
In connection with the Bank's efforts to establish a secondary
market for its home equity loan originations, over $63 million in loans were
sold in 1996. In addition, at December 31, 1996 and 1995, the Bank
has classified $4,411,000 and $35,844,000 of home equity loans as held for sale.
During the third quarter, the Bank completed the sale of its $32,756,000
indirect installment portfolio at a pre-tax loss of $898,000. The Bank also
recaptured $1,021,000 of its loan loss provision in connection with the sale.
During 1996, 1995, and 1994, the Bank transferred $7,216,000,
$4,760,000, and $2,094,000 from loans to real estate owned. During 1995,
the Bank transferred $78,506,000 from residential loans receivable to
residential loans held for sale.
(5) Allowance for Loan and REO Losses
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1996 1995 1994
(Dollars in Thousands) -------------------------------------
<S> <C> <C> <C>
Balance of Allowance for Loan Losses at Beginning of Year $16,234 $12,525 $11,506
Charge-Offs
Residential Mortgage (9) (34) (82)
Residential Construction (360) (231) (425)
Commercial Real Estate - (1,139) (167)
Business - (61) (194)
Consumer (9,592) (2,969) (2,181)
-----------------------------------
Total Charge-Offs (9,961) (4,434) (3,049)
-----------------------------------
Recoveries
Residential Mortgage 26 6 3
Residential Construction 69 16 -
Commercial Real Estate 135 13 -
Business 42 18 -
Consumer 1,429 190 165
-----------------------------------
Total Recoveries 1,701 243 168
-----------------------------------
Net Charge-Offs (8,260) (4,191) (2,881)
-----------------------------------
Provision for Loan Losses 11,815 7,900 3,900
Recapture of Loan Loss Provision
Due to Auto Portfolio Sale (1,021) - -
-----------------------------------
Balance of Allowance for Loan Losses at End of Year 18,768 16,234 12,525
Balance of REO Loss Allowance at End of Year 543 1,066 1,216
------------------------------------
Balance of Loan and REO Loss Allowance at End of Year $19,311 $17,300 $13,741
====================================
</TABLE>
A summary of activity in the allowance for REO losses for the years
ended December 31, 1996, 1995, and 1994 follows.
<TABLE>
<CAPTION>
December 31,
------------------------
REO Loss Allowance 1996 1995 1994
------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at Beginning of Year $1,066 $1,216 $1,483
REO Charge-Offs (123) (150) (267)
Recapture of REO Loss Provision (400) - -
------------------------
Balance at End of Year $ 543 $1,066 $1,216
========================
</TABLE>
<PAGE> 28 10k page 66
(6) Premises and Equipment
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
(Dollars in Thousands) ---------------------------
<S> <C> <C>
Land $ 2,308 $ 2,383
Buildings 8,741 7,679
Leasehold Improvements 1,300 981
Furniture, Fixtures, and Equipment 14,653 13,955
Accumulated Depreciation and Amortization (13,297) (11,841)
------------------ --------
$13,705 $13,157
==========================
</TABLE>
(7) Deposits
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------
1996 1995
----------------------------------------------------------------
Weighted Weighted
(Dollars in Thousands) Average Average
Amount Percent Rate Amount Percent Rate
Type ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-Interest Bearing $ 83,259 7.60% - % $ 82,237 7.23% - %
NOW Checking 93,300 8.52 2.21 82,022 7.21 2.21
Money Market Checking 11,201 1.02 2.15 13,545 1.19 2.16
Passbook and Statement Savings 303,645 27.72 4.51 248,393 21.85 4.78
Money Market Savings 14,662 1.34 3.27 19,157 1.68 3.30
Jumbo Certificates of $100 or Greater 97,398 8.89 5.74 120,465 10.60 5.84
Fixed-Rate Certificates 492,021 44.91 5.63 571,161 50.24 5.70
----------------- -----------------
$1,095,486 100.00% 4.55 $1,136,980 100.00% 4.77
========= =========
<CAPTION>
Maturity Amount Percent Amount Percent
------------------ -------------------
<S> <C> <C> <C> <C>
Checking $ 187,760 17.14% $ 177,804 15.63%
Passbook and Statement Savings 303,645 27.72 248,393 21.85
Money Market Savings 14,662 1.34 19,157 1.68
Certificates Maturing in:
One Year 294,987 26.93 406,696 35.78
Two Years 193,567 17.67 126,064 11.09
Three Years 49,667 4.53 93,678 8.24
Four Years 46,844 4.28 27,623 2.43
Five Years 4,354 0.39 37,565 3.30
------------------ ------------------
$1,095,486 100.00% $1,136,980 100.00%
================== ==================
</TABLE>
Interest expense for the years ended December 31, 1996, 1995, and
1994 was as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31,
-----------------------------------
1996 1995 1994
-----------------------------------
<S> <C> <C> <C>
NOW and Money Market Checking $ 2,531 $ 2,333 $ 2,677
Passbook, Statement, and
Money Market Savings 13,529 11,144 9,061
Certificates of Deposit 36,017 37,056 27,604
-----------------------------------
$52,077 $50,533 $39,342
===================================
</TABLE>
Net earnings for 1996 include a one-time pre-tax charge of $6,749,000
to deposit insurance premiums for an industry-wide special assessment by the
FDIC to recapitalize SAIF, which insures First Indiana Bank's customers'
deposits. As a result of this one-time assessment, the Corporation's
deposit insurance premiums will be reduced in the future.
<PAGE> 29 10k page 67
Cash paid during the year for interest on deposits, advances, and
other borrowed money was $64,482,000, $64,998,000, and $49,754,000 for
1996, 1995, and 1994.
Included in checking deposits at December 31, 1996 and 1995 were
$5,321,000 and $6,815,000 of non-interest-bearing escrows held for
investors under the terms of various servicing agreements. Official
checking accounts at December 31, 1996 and 1995 were $33,157,000 and
$18,276,000 respectively.
(8) Federal Home Loan Bank Advances
Each Federal Home Loan Bank ("FHLB") is authorized to make
advances to its member institutions, subject to FHLB regulations and
limitations. First Indiana's advances outstanding and their stated rates were
as follows at the dates shown:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------
(Dollars in Thousands) 1996 1995
-----------------------------------------------------------
Interest Interest
Rates Amount Rates Amount
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Maturity
1996 - % $ - 5.71 to 6.96% $65,000
1997 5.54 to 7.05 69,000 6.13 to 7.05 24,000
1998 4.98 to 5.89 62,000 5.60 to 5.75 74,000
1999 5.13 to 5.50 82,000 5.87 50,000
2000 - - - -
2001 - - - -
Thereafter 2.88 to 8.76 2,466 2.79 to 8.76 1,781
-------- --------
$215,466 $214,781
======== ========
</TABLE>
The weighted average interest rate on advances was 5.60 and 5.97 percent
at December 31, 1996 and 1995. Under a security agreement with the FHLB,
First Indiana is required to pledge FHLB stock and qualifying first mortgages
equal to the sum of 160 percent of FHLB advances and a $5,000,000 line of
credit between First Indiana and the FHLB. As of December 31, 1996 and
1995, First Indiana had sufficient collateral under this agreement.
(9) Other Borrowings
Short-term borrowings represent federal funds purchased and
repurchase agreements. At December 31, 1996 and 1995, short-term
borrowings had balances of $30,055,000 and $38,642,000 with weighted
average interest rates of 5.19 and 5.81 percent, respectively.
Repurchase agreements represent an indebtedness of First Indiana
secured by investments and mortgage-backed securities issued by (or fully
guaranteed as to principal and interest by) the United States or an agency of
the United States. All agreements represent obligations to repurchase the
same securities at maturity. Repurchase agreements averaged $18,133,000
and $41,963,000 during 1996 and 1995, and the maximum amounts
outstanding at the end of any month during 1996 and 1995 were $39,651,000
and $61,982,000. The book value of the underlying securities at December
31, 1996 and 1995 was $30,061,000 and $38,639,000 with market values of
$29,971,000 and $39,191,000. These securities are under the Bank's
control.
First Indiana had $44,000,000 in unused lines of credit available from
local financial institutions, the Federal Reserve Bank, and the FHLB of
Indianapolis at December 31, 1996 and 1995. There are no fees associated
with these lines.
(10) Income Taxes
Income tax expense attributable to earnings before income taxes
consists of:
<TABLE>
<CAPTION>
(Dollars in Thousands) Current Deferred Total
----------------------------------------
<S> <C> <C> <C>
Year Ended December 31, 1996:
Federal $ 5,454 $ 668 $ 6,122
State and Local 1,481 177 1,658
----------------------------------------
$ 6,935 $ 845 $ 7,780
========================================
Year Ended December 31, 1995:
Federal $ 8,936 $ (714) $ 8,222
State and Local 2,449 (190) 2,259
----------------------------------------
$11,385 $ (904) $10,481
========================================
Year Ended December 31, 1994:
Federal $ 5,475 $ (382) $ 5,093
State and Local 1,524 (101) 1,423
----------------------------------------
$ 6,999 $ (483) $ 6,516
========================================
</TABLE>
<PAGE> 30 10k page 68
The effective income tax rate differs from the statutory federal
corporate tax rate as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1996 1995 1994
-------------------------------------
<S> <C> <C> <C>
Statutory Rate 35.0% 35.0% 35.0%
State Income Taxes 5.1 5.3 5.4
Negative Goodwill (1.4) (1.1) (1.8)
Non-Taxable Interest Income (0.3) (0.4) (0.5)
Other (0.7) (1.0) (0.1)
-------------------------------------
Effective Rate 37.7% 37.8% 38.0%
=====================================
</TABLE>
Internal Revenue Service examinations through December 31, 1991
were completed in 1993.
Deferred income tax credits result from temporary and timing
differences in the recognition of income and expense for income tax and
financial reporting purposes. The tax effects of temporary differences that
give rise to significant portions of the deferred tax assets included in other
assets are presented below:
<TABLE>
<CAPTION>
(Dollars in Thousands)
Deferred Tax Assets 1996 1995
-------------------------
<S> <C> <C>
Allowance for Loan and REO Losses $ 7,947 $ 7,132
Pension and Retirement Benefits 2,497 2,287
Premises and Equipment 298 377
Excess Servicing 47 67
Accrued Compensation - 543
Other 236 268
------------------------
11,025 10,674
----------------- ------
Deferred Tax Liabilities
Originated Mortgage Servicing Right 370 -
FHLB Stock Dividends 575 575
Interest on Proposed Tax Deficiency 652 450
Net Deferred Loan Fees 2,880 1,984
Excess Tax Reserves 405 583
Unrealized Gain on Investments (50) 270
Other (148) 294
----------------- ------
4,684 4,156
----------------- ------
Net Deferred Tax Assets $ 6,341 $ 6,518
========================
</TABLE>
In August 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 tax returns for 1996 and
thereafter. 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 $1,001,000 of applicable excess
reserves and has provided a deferred tax liability related to this recapture.
In accordance with Statement of Financial Accounting Standard No. 109,
"Accounting for Income Taxes," a deferred liability has not been established
for the Bank's tax bad debt base year reserves of $16,586,000. 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 Corporation's
operations or financial position.
Cash paid during the year for income taxes was $8,013,000,
$12,375,000, and $6,694,000 for 1996, 1995, and 1994.
<PAGE> 31 10k page 69
(11) Shareholders' Equity
The Corporation is subject to regulation as a savings and loan holding
company by the Office of Thrift Supervision. The Bank, as a subsidiary of
a savings and loan holding company, is subject to certain restrictions in its
dealings with the Corporation. The Bank is further subject to the regulatory
requirements applicable to a federal savings bank.
Savings institutions are required to have risk-based capital of eight
percent of risk-weighted assets. Risk-based capital is defined as the Bank's
common equity, less goodwill and investments in non-mortgage-lending-related
subsidiaries, plus general allowances for loan and REO losses. Risk
weighting of assets is derived from assigning one of five risk-weighted
categories to an institution's assets, based on the degree of credit risk
associated with the asset. The categories range from zero percent for low-risk
assets (such as United States Treasury securities) to 100 percent for
high-risk assets (such as real estate owned). The book value of each asset is
then multiplied by the risk weighting applicable to the asset category. The
sum of the products of the calculation equals total risk-weighted assets. At
December 31, 1996, the Bank's risk-based capital exceeded the minimum
requirement.
Savings institutions are also required to maintain a minimum leverage
ratio, under which core (Tier One) capital must equal at least three percent
of total assets. The components of core capital consist of common equity
plus non-cumulative preferred stock and minority interests in consolidated
subsidiaries, minus certain intangible assets, including purchased loan
servicing. Savings institutions must also maintain minimum tangible capital
of one and one-half percent of total assets. Until January 1, 1995, thrifts
could deduct a portion of intangible assets, including supervisory goodwill,
from their calculation. At December 31, 1996, the Bank exceeded the
minimum tangible and core capital requirements.
OTS has adopted additional minimum capital standards that place
savings institutions into one of five categories, from "critically
undercapitalized" to "well-capitalized," depending on levels of three
measures of capital. A well-capitalized institution as defined by the
regulations has a total risk-based capital ratio of at least 10 percent, a Tier
One risk-based capital ratio of at least six percent, and a leverage risk-based
capital ratio of at least five percent. At December 31, 1996, First Indiana
was classified as "well-capitalized."
OTS has further proposed an interest-rate risk component of the
proposed capital regulations. Under this component, an institution with an
"above normal" level of interest-rate risk exposure will be subject to an
"add-on" to its risk-based capital requirement. "Above normal" interest-rate
risk is defined as a reduction in "market value portfolio equity" (as defined)
resulting from a 200 basis point increase or decrease in interest rates, if the
decline in value exceeds two percent of the institution's assets. Institutions
failing to meet this test will be required to add to their risk-based capital.
Based on its interest-rate risk at December 31, 1996 and 1995, First Indiana
does not expect to be required to add to its risk-based capital under the
proposed regulation.
First Indiana Corporation, the holding company for the Bank, is not
required under OTS regulations to meet regulatory capital restrictions. The
following table shows First Indiana's strong capital levels and compliance
with all capital requirements at December 31, 1996. First Indiana is classified
as "well-capitalized" under the OTS regulatory framework for prompt corrective
action, its highest classification. To be categorized as "well-capitalized,"
the Bank must maintain minimum total risk-based, tier one risk-based
and tier one leverage ratios as set forth in the table.The table reflects
categories of assets includable under OTS regulations. There are no conditions
or events since the date of classification that management believes have
changed the Bank's category.
<TABLE>
<CAPTION>
December 31, 1996
(Dollars in Thousands) To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Tangible Capital $131,322 8.78% $22,446 1.50% $ N/A N/A
Core (Tier One)
Capital 131,322 8.78 44,892 3.00 74,820 5.00%
Tier One Risk-
Based Capital 131,322 11.38 N/A N/A 69,268 6.00
Total Risk-
Based Capital 144,602 12.53 92,358 8.00 115,447 10.00
Corporate
Consolidated
Capital 138,658 N/A N/A N/A N/A N/A
</TABLE>
Approximately $16,586,000 of First Indiana's retained earnings
attributable to the Bank at December 31, 1996 represent appropriations to
tax bad debt reserves for which no provision for income taxes has been made.
If these amounts are used for any purpose other than to absorb losses,
income taxes will be imposed at the then applicable rates. In addition, any
dividend or other shareholder distribution by the Bank in excess of current
year or accumulated earnings for income tax purposes will be treated as made
from the tax bad debt reserves.
<PAGE> 32 10k page 70
Pursuant to prior OTS regulations, liquidation accounts for the
benefit of eligible account holders were established in amounts equal to the
net worths of the merged or converted entities. At December 31, 1996, the
liquidation accounts relating to all prior transactions aggregated $12,907,000,
which amount satisfies the minimum required of each. The Bank is not
permitted to pay dividends on its common stock if its shareholders' equity
would be reduced below the aggregate amount then required for the
liquidation accounts.
The Corporation is not subject to any regulatory restrictions on the
payment of dividends to its shareholders. However, the Bank may not
declare or pay a cash dividend on its stock if, as a result, the Bank's capital
would be reduced below the minimum requirements. The Bank is required
to give OTS 30 days' advance notice before declaring a dividend. Under
OTS regulations, the Bank may, without prior OTS approval, make capital
distributions to the Corporation of up to all of the Bank's net earnings over
the most recent four-quarter period, less capital distributions made during
such four-quarter period.
First Indiana's stock has split five times since December 31, 1991.
In March 1997, the Corporation effected a five-for-four stock split. The
Corporation's quarterly cash dividend will be paid on shares outstanding
after the stock split, resulting in a seven percent divident increase.
In February 1996, the Corporation effected a six-for-five stock
split. All per-share amounts in this Annual Report have been adjusted
to reflect the stock splits.
(12) Commitments and Contingencies
At December 31, 1996 and 1995, First Indiana had the following
outstanding commitments to fund loans:
<TABLE>
<CAPTION>
(Dollars in Thousands)
December 31,
-------------------------
1996 1995
-------------------------
<S> <C> <C>
Commitments to Fund:
Residential Mortgage Loans $227,978 $169,608
Commercial Real Estate Loans 5,250 4,500
Consumer Loans:
Home Equity Loans 130,218 119,756
Other 4,802 4,942
-------------------------
$368,248 $298,806
=========================
</TABLE>
Of the commitments to fund loans at December 31, 1996,
nearly 90 percent are commitments to fund variable-rate products,
while the remaining 10 percent are commitments to fund fixed-rate products.
Commitments to sell residential loans at December 31, 1996 and 1995 were
$34,178,000 and $47,485,000.
At December 31, 1996, the Corporation had approximately
$51,415,000 in commitments to repurchase convertible adjustable-rate
mortgage loans from third-party investors. If the borrower under any of
these loans elects to convert the loan to a fixed rate during the first five
years of the loan, the investor has the option to require First Indiana to
repurchase it. If the investor exercises this option, First Indiana sets a
purchase price for the loan which equals its market value, and immediately
sells the loan in the secondary market. Thus, the Bank incurs minimal interest-
rate risk upon repurchase because of the immediate resale.
First Indiana issues lines of credit to residential builders to purchase
residential lots to build model or spec homes. The Bank receives a fee upon
issuing the lines of credit. At December 31, 1996, First Indiana had
outstanding lines of credit totaling $99,238,000, with $68,435,000 disbursed
against those lines. First Indiana's collateral policy on these residential
construction loans requires a first mortgage on the underlying real estate and
improvements.
In 1985, First Indiana issued a letter of credit to enhance the bond
rating of economic development bonds guaranteed by local government
authorities for the construction and permanent financing of multi-family
apartment buildings. First Indiana receives a fee upon issuing the letter of
credit and annual fees throughout the term of the bonds. At
December 31, 1996, First Indiana had a letter of credit outstanding
totaling $6,030,000. Should this letter of credit be submitted for payment,
First Indiana's collateral policy requires the assignment of the mortgage on
the underlying commercial real estate. Evaluation of the credit risk of this
property is part of First Indiana's commercial real estate loan review
procedures. This letter of credit is not required to be collateralized.
Rental Obligations. Obligations under non-cancelable operating
leases for office space at December 31, 1996 require minimum future
payments of $1,868,000 in 1997, $714,000 in 1998, $263,000 in 1999,
$198,000 in 2000, $188,000 in 2001, and $563,000 thereafter. Minimum
future payments have not been reduced by minimum sublease rental income
of $176,000 receivable in the future under noncancelable subleases. Rental
expense on office buildings was $1,956,000, $1,891,000, and $1,800,000 for
1996, 1995, and 1994.
Other Contingencies. Other lawsuits and claims are pending in the
ordinary course of business on behalf of and against First Indiana. In the
opinion of management, adequate provision has been made for these items
in the Consolidated Financial Statements.
<PAGE> 33 10k page 71
(13) Employee Benefit Plans
Retirement Plans. First Indiana is a participant in a pension fund
known as the Financial Institutions Retirement Fund ("FIRF"). This plan is
a multi-employer plan; separate actuarial valuations are not made with
respect to each participating employer. According to FIRF administrators,
the market value of the fund's assets exceeded the value of vested benefits
in the aggregate as of June 30, 1996, the date of the latest actuarial valu-
ation. Pension expense was $30,000, $36,000 and $14,000 for 1996, 1995, and
1994.
During 1995, the Bank established a voluntary savings plan for
eligible employees which qualifies under Section 401 (k) of the Internal
Revenue Code. Employees can participate after twelve months' employment
by designating a portion of their salary to purchase appropriate investment
options. The Corporation in turn matches the first six percent of the
employee contribution at a rate of $.25 for every $1 in employee
contributions. First Indiana made matching contributions of $80,000 and
$49,000 in 1996 and 1995.
In addition, First Indiana maintains non-qualified retirement plans for
the directors of its Mooresville, Evansville and Rushville Divisions
and supplemental pension benefit plans covering certain senior officers of the
Bank and its divisions. These supplemental benefit plans provide benefits
for some of their participants that normally would be paid under the FIRF or
Mooresville pension plans but are precluded from being paid by limitations
under the Internal Revenue Code.
Net periodic pension expense for the plans consists of the following:
<TABLE>
<CAPTION>
(Dollars in Thousands) Years Ended December 31,
-------------------------
1996 1995 1994
------------------------
<S> <C> <C> <C>
Service Cost-Benefits Earned During the Year $156 $113 $172
Interest Cost on Projected Benefit Obligation 359 344 392
Net Amortization and Deferral 13 12 74
------------------------
Net Pension Costs $528 $469 $638
========================
</TABLE>
The funded status of the plans and the amounts reflected in the accompanying
consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31,
-----------------------
1996 1995
-----------------------
<S> <C> <C>
Projected Benefit Obligation $5,382 $5,140
Fair Value of Plan Assets - -
-----------------------
Excess of Projected Benefit Obligation Over
Fair Value of Plan Assets 5,382 5,140
Unrecognized Net Transition Obligation (218) (219)
Unrecognized Loss (180) (847)
-----------------------
Accrued Pension Cost $4,984 $4,074
======================
</TABLE>
The unrecognized net transition obligation is being amortized over 15
years. The projected benefit obligations were determined using an assumed
discount rate of 7.50 percent at December 31, 1996 and seven percent at
December 31, 1995. The assumed long-term salary increases were 6.50
percent, compounded annually.
Post-Retirement Benefits Other Than Pension. The projected benefit
obligation for post-retirement medical, dental, and life insurance programs for
Board members and certain officers of those institutions relating to merger
agreements of prior acquisitions was $700,000 and $692,000, and the accrued
liability was $1,021,000 and $993,000 at December 31, 1996 and 1995. Expense
under the programs was $28,000 in 1996, $16,000 in 1995 and $88,000 in 1994.
The accumulated post-retirement benefit obligation was determined
using an assumed discount rate of 7.50 percent at December 31, 1996 and
seven percent at December 31, 1995. The assumed long-term salary increase
was 6.50 percent. The assumed health care cost trend rates used were 15
percent for each of the next four years with an approximate one percent per
year decrease from this level for years five through nine. The trend rate for
years 10 and thereafter was six percent per year.
<PAGE> 34 10k page 72
Stock-Based Compensation. First Indiana has four stock-based compensation
plans, which are described below. First Indiana applies APB Opinion No. 25,
"Accounting for Stock Issued to Employees" and related Interpretations in
accounting for these plans. Accordingly, no compensation cost has been
recognized for its fixed stock option plans. The compensation cost that has
been charged against income for its performance-based plan was $860,000,
$667,000 and $342,000 in 1996, 1995, and 1994. The compensation cost
that has been charged against income for the Employees' Stock Purchase Plan
was $141,000, $121,000, and $154,000 in 1996, 1995, and 1994. Had compensation
cost been determined based on the fair value at the grant date for awards
under those plans consistent with the method of Statement of Financial
Accounting Standard No. 123, First Indiana's net income and earnings per
share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
----------- --------------
<S> <C> <C>
Net Income
As Reported $13,704 $17,267
Pro Forma 13,360 17,231
Primary Earnings Per Share
As Reported $ 1.27 $ 1.62
Pro Forma 1.24 1.61
Fully Diluted Earnings Per Share
As Reported $ 1.27 $ 1.60
Pro Forma 1.24 1.60
</TABLE>
The effects of applying FAS No. 123 in this Pro Forma disclosure are
not indicative of future amounts. The Statement does not apply to awards
prior to 1995, and additional awards in the future are expected.
Fixed Stock Option Plans. First Indiana has two fixed stock option
plans: the 1991 Stock Option and Incentive Plan and the 1992 Directors'
Stock Option Plan. Under the 1991 Plan, First Indiana is authorized to grant
options to its employees for up to 468,750 shares of common stock.
Under the 1992 Plan, First Indiana is authorized to grant options to its
outside directors (i.e., directors who are not employees of the Corporation
or any subsidiary) for up to 218,750 shares. Under both plans, the exercise
price of each option equals the market price of the Corporation's stock
on the date of grant, the option's maximum term is ten years, and all options
fully vest at the end of one year. Similar plans were effected upon completion
of the mergers with the Evansville, Rushville and Mooresville divisions,
which allow grants for up to approximately 340,000 shares of common stock.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995: dividend yield of 3.0 percent for
both years; expected volatility of 23 percent for both years; weighted
average risk-free interest rates of 5.75 percent and 7.00 percent for 1996
and 1995 grants, respectively; and expected lives of seven years for both
years.
<PAGE> 35 10k page 73
A summary of the status of First Indiana's fixed stock option plans
as of December 31, 1996, 1995, and 1994, and changes during the years ended
on those dates is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
------------------ ------------------ -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at Beginning
of Year 630,433 $ 6.77 717,011 $ 6.47 747,549 $ 6.31
Granted 130,735 17.32 18,735 11.34 23,711 10.54
Exercised (39,751) 8.34 (100,692) 5.32 (54,249) 6.00
Surrendered -- -- (4,621) 10.47 -- --
------- ------- -------
Outstanding at End of
Year 721,417 8.59 630,433 6.77 717,011 6.47
======= ======= =======
Options Exercisable
at Year End 590,685 611,704 693,313
======= ======= =======
Weighted Average Fair
Value of Options
Granted During the
Year $ 4.42 $ 3.22
======= =======
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- ------------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices At 12/31/96 Life Price At 12/31/96 Price
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 3- $6 287,886 1.72 $ 4.50 287,886 $4.50
$ 6-$12 302,799 6.04 8.72 302,799 8.72
$16-$20 130,732 9.10 17.32 -- --
----------------------------------------------------------------------------------
$ 3-$20 721,417 4.87 8.59 590,685 6.66
</TABLE>
In addition to the options outstanding at December 31, 1996, 303,606
shares of common stock were available for future grants or awards.
Performance-Based Stock Plan. Under the 1991 Stock Option and Incentive
Plan, First Indiana may award restricted stock options to executive officers.
On January 26, 1994, First Indiana awarded 48,000 shares of stock to each
of two executive officers. These shares were subject to recall by First Indiana
in the event certain specified employment and performance objectives were
not met by December 31, 1996. The employment and performance objectives were
met on December 31, 1996, and the restrictions on the shares lapsed.
In connection with these awards, First Indiana expensed $860,000, $667,000,
and $342,000 in 1996, 1995, and 1994.
Employees' Stock Purchase Plan. Under the 1987 Employees' Stock Purchase
Plan, all full-time employees and directors are eligible to participate after
six months' employment. Approximately 49 percent of eligible employees have
participated in the plan in the last three years. Under the terms
of the Plan, employees can choose to have up to 10 percent of their annual base
earnings withheld to purchase the Corporation's common stock. The Corporation
in turn matches the employee contribution at a rate of $1 for every $3 or $4
in employee contributions, depending on whether the Corporation has met
specified performance objectives for the previous calendar year. The
contributions are then paid to a trustee, who purchases the Corporation's
stock each month at the then prevailing market price. A one-to-three
contribution was in effect for the 1996 and 1994 plan years, while a
one-to-four contribution was in effect for the 1995 plan year. A one-to-three
contribution will be in effect for the 1997 plan year. First Indiana's
matching contributions for the years ended 1996, 1995, and 1994 were
$141,000, $121,000, and $154,000.
<PAGE> 36 10k page 74
(14) Parent Company Statements
<TABLE>
<CAPTION>
Condensed Balance Sheets
December 31,
--------------------------
1996 1995
(Dollars in Thousands) --------------------------
<S> <C> <C>
Assets
Certificate of Deposit and Interest-Bearing
Checking Account with the Bank $ 501 $ 501
Due from Bank 6,284 399
Investment in the Bank 131,283 127,881
Other Assets 631 536
---------------------------
Total Assets $138,699 $129,317
===========================
Liabilities $ 41 $ 20
Shareholders' Equity 138,658 129,297
---------------------------
Total Liabilities and Shareholders' Equity $138,699 $129,317
===========================
<CAPTION>
Condensed Statements of Earnings
Years Ended December 31,
--------------------------------
1996 1995 1994
(Dollars in Thousands) ----------------------------------
<S> <C> <C> <C>
Cash Dividends from the Bank $ 9,951 $ 3,483 $ 7,207
Interest Income on Certificate of Deposit and Checking Account 26 29 19
Expenses (216) (211) (214)
Income Tax Credit 73 71 74
---------------------------------
Earnings Before Equity in Undistributed Net Earnings
of Subsidiaries 9,834 3,372 7,086
Equity in Undistributed Net Earnings of Subsidiaries 3,870 13,895 3,550
----------------------------------
Net Earnings $13,704 $17,267 $10,636
==================================
<CAPTION>
Condensed Statements of Cash Flows
Years Ended December 31,
-------------------------------
1996 1995 1994
(Dollars in Thousands) ----------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Earnings $13,704 $17,267 $10,636
Adjustments to Reconcile Net Earnings to Net Cash Provided
by Operating Activities
Equity in Undistributed Earnings of Subsidiaries (3,870) (13,895) (3,550)
Amortization of Restricted Stock Plan 473 367 188
Change in Other Liabilities (21) (20) -
Change in Due from the Bank and Other Assets (5,980) 5,806 (3,699)
------------ --------------------
Net Cash Provided by Operating Activities 4,306 9,525 3,575
------------ --------------------
Cash Flows from Financing Activities
Proceeds from Exercise of Stock Options 331 537 326
Stock Issued Under Deferred Compensation Plan 23 18 -
Payment for Purchase of Treasury Stock - (6,203) (147)
Payment for Fractional Shares (16) - (6)
Cash Dividends Paid (4,644) (3,877) (3,748)
--------------------------------
Net Cash Provided (Used) by Financing Activities (4,306) (9,525) (3,575)
-------------------------------
Net Decrease in Cash and Cash Equivalents - - -
Cash and Cash Equivalents at Beginning of Year 501 501 501
--------------------------------
Cash and Cash Equivalents at End of Year $ 501 $ 501 $ 501
================================
</TABLE>
<PAGE> 37 10k page 75
(15) Interim Quarterly Results (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
(Dollars in Thousands, Except Per Share Data) ------------------------------------------
<S> <C> <C> <C> <C>
1996
Total Interest Income $32,235 $30,928 $30,986 $31,319
Net Interest Income 15,740 15,208 15,197 15,538
Provision for Loan Loss 1,925 2,450 1,529 4,890
Earnings (Loss) Before Income Taxes 7,241 7,725 (506) 7,024
Net Earnings 4,509 4,860 20 4,315
Primary Earnings Per Share 0.42 0.45 0.00 0.40
Fully Diluted Earnings Per Share 0.42 0.45 0.00 0.40
1995
Total Interest Income $28,652 $31,178 $31,510 $32,721
Net Interest Income 13,525 14,268 14,761 15,490
Provision for Loan Loss 900 1,350 1,600 4,050
Earnings Before Income Taxes 7,048 7,833 6,506 6,361
Net Earnings 4,300 4,771 4,174 4,022
Primary Earnings Per Share 0.39 0.46 0.39 0.38
Fully Diluted Earnings Per Share 0.39 0.45 0.39 0.38
</TABLE>
(16) Estimated Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standard No. 107, "Disclosures about Fair Value of
Financial Instruments." The estimated fair value amounts have been
determined by the Corporation using available market information and
appropriate valuation methodologies. However, considerable judgment is
required to interpret market data to develop the estimates of fair value.
Accordingly, the estimates herein are not necessarily indicative of the
amounts the Corporation could realize in a current market exchange. The
use of different market assumptions and/or estimation methods may have a
material effect on the estimated fair value amount.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
-------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
(Dollars in Thousands) Amount Value Amount Value
-------------------------------------
<S> <C> <C> <C> <C>
Assets
Cash and Cash Equivalents $73,618 $73,618 $74,894 $74,894
Investment Securities and Other 106,895 107,029 102,656 102,762
Loans Receivable
Mortgage-Backed Securities 36,412 36,984 49,498 50,426
Residential Mortgage Loans 430,431 441,804 421,658 432,703
Residential Construction Loans 134,865 134,858 139,371 139,371
Commercial Real Estate Loans 45,015 45,092 54,327 55,715
Business Loans 90,750 90,134 71,326 71,326
Consumer Loans 517,727 526,934 567,201 569,483
Unallocated Allowance
for Loan Losses (3,238) (3,238) (3,157) (3,157)
Accrued Interest Receivable 10,696 10,696 11,645 11,645
Liabilities
Deposits
Demand Deposits 187,760 187,760 177,804 177,804
Passbook and Statement Deposits 47,005 47,005 54,020 54,020
Money Market Savings 271,302 271,302 213,530 213,530
Jumbo Certificates 98,256 98,301 122,082 123,170
Fixed-Rate Certificates 491,163 496,588 569,544 575,680
Borrowings
FHLB Advances 215,466 214,481 214,781 214,966
Short-Term Borrowings 30,055 30,050 38,642 38,642
Accrued Interest Payable 2,018 2,018 2,715 2,715
Advances by Borrowers for
Taxes and Insurance 1,120 1,120 2,107 2,107
Off-Balance-Sheet Instruments
(Unrealized Gains (Losses))
Interest Rate Swap Agreements, Net - - (32) (46)
Commitments to Extend Credit - 116 - 164
Letters of Credit - (293) - (330)
Residential Mortgage Loan Servicing 4,424 12,753 4,258 14,128
---------------- ----------------
103,450 $127,862 98,420 $116,450
======== ========
Other Non-Financial Assets 48,826 48,166
Other Non-Financial Liabilities (7,933) (10,656)
Negative Goodwill (5,685) (6,633)
-------- --------
Shareholders' Equity $138,658 $129,297
======== ========
</TABLE>
<PAGE> 38 10k page 76
Cash and Cash Equivalents. For cash and equivalents, the carrying
amount is a reasonable estimate of fair value.
Investment Securities and Other. For securities held for trading
purposes and securities held for investment purposes, fair values are based
on quoted market prices or dealer quotes.
Loans Receivable. For certain homogeneous categories of loans,
such as some residential mortgages, fair value is estimated using the quoted
market prices for securities backed by similar loans, adjusted for differences
in loan characteristics. The fair value of other types of loans is estimated by
discounting the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the
same remaining maturities. It was not practicable to estimate fair value of
non-performing commercial loans of approximately $6.9 million and $5.9
million in the Bank's portfolio at December 31, 1996 and 1995 because it
was not practicable to assess reasonably the credit adjustment that would be
applied in the marketplace for such loans. Consequently, the carrying amount
of these loans is also shown as their fair value. Interest rates on such loans
approximate current lending rates. The fair values of all categories of loans
receivable are shown net of their allocated share of the loan loss allowance.
Mortgage-Backed Securities. Estimated fair value for mortgage-backed
securities issued by quasi-governmental agencies is based on quoted
market prices. The fair value of mortgage-backed securities issued by
non-quasi-governmental agencies is estimated based on similar securities with
quoted market prices and adjusted for any differences in credit ratings or
maturities.
Deposits. The fair value of demand deposits, savings accounts, and
certain money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of deposit is
estimated using the rates currently offered for deposits of similar remaining
maturities.
Borrowings. Rates currently available to the Corporation for debt
with similar terms and remaining maturities are used to estimate fair value of
existing debt.
Interest-Rate Swap Agreements. The fair value of interest-rate swaps
used for hedging purposes is the estimated amount that the Corporation
would receive or pay to terminate the swap agreements at the reporting date,
taking into account current interest rates and the current creditworthiness of
the swap counterparties.
Commitments to Extend Credit and Letters of Credit. The fair value
of commitments is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also includes the difference between
current levels of interest rates and the committed rates. The fair value of
guaranties and letters of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise settle the
obligations with the counterparties at the reporting date.
Residential Loan Servicing, Purchased Servicing Rights, and Excess
Servicing. The fair value of residential loan servicing, purchased servicing
rights and excess servicing is determined based on the estimated discounted
net cash flows to be received less the estimated costs of servicing. This
estimated fair value approximates the amount for which the servicing could
currently be sold.
Accrued Interest Receivable, Accrued Interest Payable, Drafts
Payable, and Advances by Borrowers for Taxes and Insurance. The
estimated fair value of these financial instruments approximates their carrying
value.
(17) Subsequent Event
On February 20, 1997, the Board of Directors authorized a five-for-four
stock split whereby one additional share of common stock will be issued on
March 18, 1997 for every four shares owned of record as of March 3, 1997.
The Corporation's quarterly cash dividend will be paid on shares outstanding
after the stock split, resulting in a seven percent dividend increase. All
common share and per share amounts have been restated to reflect the stock
splits. In February 1996, the Corporation effected a six-for-five stock split.
<PAGE> 39 10k page 77
CORPORATE INFORMATION
First Indiana Corporation is a holding company whose
principal subsidiary is First Indiana Bank. The Bank is engaged
primarily in retail banking and lending through 26 banking centers in
Metropolitan Indianapolis, Evansville, Franklin, Pendleton, Westfield,
Rushville, and Mooresville. In addition, the Bank has mortgage and consumer
loan service offices throughout Indiana and in Florida, Georgia, Illinois,
North Carolina, and Ohio. One Mortgage Corporation, a subsidiary, operates
offices in Orlando, Tampa, and West Palm Beach, Florida and Charlotte and
Raleigh, North Carolina.
Stock Trading Information. First Indiana Corporation's
common stock is traded in the over-the-counter market and is quoted
on the National Association of Securities Dealers' Automated
Quotations (NASDAQ) National Market System under the symbol
FISB. The abbreviations often used in newspaper listings are "FstInd"
and "Fst Indiana."
Transfer Agent and Registrar. Harris Trust and Savings
Bank, Attention: Shareholder Services, P.O. Box A3504, Chicago,
Illinois 60690-3504, 1-800-573-4048.
Annual Meeting of Shareholders. The annual meeting of
shareholders will be held on Wednesday, April 16, 1997, at 9:00 a.m.
E.S.T., in the Conference Center of First Indiana Plaza, 135 North
Pennsylvania Street, Seventh Floor, Indianapolis, Indiana.
Annual Report on Form 10-K. Upon request, shareholders
may receive, without charge, a copy of the Annual Report on Form
10-K filed with the Securities and Exchange Commission. Requests
should be directed to First Indiana Corporation, Investor Relations
Department, First Indiana Plaza, 135 North Pennsylvania Street,
Indianapolis, Indiana 46204, (317) 269-1231.
Information on Forward-Looking Statements. The statements in the
Annual Report that are not historical are forward-looking statements.
Although the Corporation believes that its expectations are based upon
reasonable assumptions within the bound of its knowledge of its business,
there can be no assurance that the Corporation's financial goals will be
realized. Numerous factors may affect the Corporation's actual results and
may cause results to differ materially from those expressed in forward-
looking statements made by or on behalf of the Corporation.
Market Information. The following table sets forth the high
and low prices per share and ending book value per share of First
Indiana Corporation's common stock for the periods indicated.
<TABLE>
<CAPTION>
1996 1995
------------------------ -------------------------
Book Book
High Low Value High Low Value
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $18.50 $15.83 $12.78 $11.34 $10.50 $11.51
Second Quarter 20.10 18.40 13.12 13.66 11.00 11.90
Third Quarter 20.00 16.80 13.04 17.17 13.00 12.18
Fourth Quarter 21.40 19.20 13.36 18.17 16.66 12.50
</TABLE>
At December 31, 1996, there were approximately 2,100
shareholders of record and 10,379,268 shares of common stock
outstanding.
<PAGE> 40 10k page 78
INDEPENDENT AUDITORS' REPORT
[on KPMG letterhead]
KPMG Peat Marwick LLP
Certified Public Accountants
2400 First Indiana Plaza
135 North Pennsylvania Street
Indianapolis, IN 46204-2452
The Board of Directors and Shareholders of First Indiana
Corporation:
We have audited the accompanying Consolidated Balance
Sheets of First Indiana Corporation and Subsidiaries as of December
31, 1996 and 1995 and the related Consolidated Statements of
Earnings, Shareholders' Equity, and Cash Flows for each of the years
in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position
of First Indiana Corporation and subsidiaries as of December 31, 1996
and 1995 and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1996
in conformity with generally accepted accounting principles.
/s/KPMG Peat Marwick LLP
January 21, 1997
Except note 17, which is as of February 20, 1997.
Member Firm of Klynveld Peat Marwick Goerdeler
<PAGE> 41 10k page 79
STATEMENT OF MANAGEMENT RESPONSIBILITY
[on First Indiana Corporation letterhead]
Management of First Indiana Corporation has prepared and is
responsible for the financial statements and for the integrity and
consistency of other related information contained in the Annual
Report. In the opinion of management, the financial statements,
which necessarily include amounts based on management's estimates
and judgments, have been prepared in conformity with generally
accepted accounting principles appropriate to the circumstances.
The Corporation maintains a system of internal accounting
controls designed to provide reasonable assurance that assets are
safeguarded, that transactions are executed in accordance with the
Corporation's authorizations and policies, and that transactions are
properly recorded so as to permit preparation of financial statements
that fairly present the financial position and results of operations in
conformity with generally accepted accounting principles. Internal
accounting controls are augmented by written policies covering
standards of personal and business conduct and an organizational
structure providing for division of responsibility and authority.
The effectiveness of and compliance with established control
systems is monitored through a continuous program of internal audit
and credit examinations. In recognition of cost-benefit relationships
and inherent control limitations, some features of the control systems
are designed to detect rather than prevent errors, irregularities, and
departures from approved policies and practices. Management
believes the system of controls has prevented or detected on a timely
basis any occurrences that could be material to the financial statements
and that timely corrective actions have been initiated when
appropriate.
The Corporation engaged the firm of KPMG Peat Marwick,
independent certified public accountants, to render an opinion on the
financial statements. The accountants have advised management that
they were provided with access to all information and records
necessary to render their opinion.
The Board of Directors exercises its responsibility for the
financial statements and related information through the Audit
Committee, which is composed entirely of outside directors. The
Audit Committee meets regularly with management, the auditor of the
Corporation, and KPMG Peat Marwick to assess the scope of the
annual audit plan, to review the status and results of audits, to review
the Annual Report and Form 10-K, including major changes in
accounting policies and reporting practices, and to approve non-audit
services rendered by the independent auditors.
KPMG Peat Marwick also meets with the Audit Committee,
without management present, to afford the Committee the opportunity
to express its opinion on the adequacy of compliance with established
corporate policies and procedures and the quality of financial
reporting.
January 21, 1997
/s/Robert H. McKinney /s/Marni McKinney
Robert H. McKinney Marni McKinney
Chairman and Chief Executive Officer Vice Chairman
/s/Owen B. Melton, Jr. /s/David L. Gray
Owen B. Melton, Jr. David L. Gray
President and Chief Operating Officer Treasurer
First Indiana Plaza
135 North Pennsylvania Street
Indianapolis, IN 46204
317.269.1604 Fax 317.269.1341
<PAGE> 42 10k page 80
Affirmative Action Policy
It has been the policy and will continue to be the policy of First
Indiana Bank to afford equal-opportunity employment to qualified
individuals regardless of race, color, religion, sex, national origin,
veteran status, and mental or physical disability.
First Indiana Bank will continue to take affirmative action to
ensure that all recruitment, hiring, and promotion decisions are based
on the principles of equal employment opportunity and that all
personnel actions, such as compensation, transfers, layoffs, benefits,
educational assistance, and social and recreational programs, will be
administered without regard to race, color, religion, sex, national
origin, veteran status or mental or physical disability.
The successful achievement of a non-discriminatory
employment program requires cooperation between management and
employees. In fulfilling its part of this cooperative effort, management
will continue to lead the way by establishing and implementing
affirmative action procedures and practices which will ensure our
objective: equal employment for all.
<PAGE> 43 10k page 81
MISSION STATEMENT
First Indiana Bank is The Real Estate Bank.
Our mission is to be the premier real estate finance experts in
our markets. We serve three market segments: home buyers, home
builders, and users of home equity.
Our mission is directly tied to our commitment to providing
long-term value for our customers and shareholders. The best way to
achieve our commitment is by focusing on these three groups, with
additional banking products for targeted businesses and innovative
deposit products.
We believe in four key principles:
Focus only on market segments and lines of business
where we can bring something unique to the
marketplace.
Learn everything we can about our customers, so that
we design products from their point of view and
introduce them to additional products based on their
specific needs.
Continuously improve processes and systems, so that
the Bank operates efficiently.
Create a culture that embraces and develops
continuous, constructive change.
As a tightly focused bank, we are uniquely positioned to
advance home ownership, real estate finance, and efficient delivery of
products and services. As a locally owned bank, we are uniquely
positioned to advance corporate citizenship, community development,
and clear career paths for our associates.
<PAGE> 44 10k page 82
[inside back cover - intentionally blank]
<PAGE> 10k page 83
[back cover]
FIRST INDIANA CORPORATION [and logo]
First Indiana Bank
One Mortgage Corporation
One Property Corporation
First Indiana Plaza
135 North Pennsylvania Street
Indianapolis, Indiana 46204
(317) 269-1200
http://www.FirstIndiana.com
Equal Housing Lender Member FDIC
<PAGE> 10k page 84
Exhibit 21
SUBSIDIARIES OF FIRST INDIANA CORPORATION
AND
FIRST INDIANA BANK
First Indiana Corporation's wholly owned subsidiary is
First Indiana Bank, which is organized under the laws of the United
States.
First Indiana Bank has the following direct and indirect
subsidiaries:
Name State of Incorporation
One Mortgage Corporation Indiana
One Property Corporation Indiana
Pioneer Service Corporation Indiana
<PAGE> (10-K page 85)
[FIC LETTERHEAD]
March 12, 1997
Dear Shareholder:
The directors and officers of First Indiana Corporation join
me in extending to you a cordial invitation to attend the annual
meeting of our shareholders. This meeting will be held on
Wednesday, April 16, 1997 at 9:00 a.m., in the First Indiana Plaza
Conference Center, Ohio and Pennsylvania Streets, Seventh Floor,
Indianapolis, Indiana.
First Indiana enjoyed record earnings in 1996 as a strategic
provider of financial services within selected market segments.
To share our success with our shareholders, we recently announced a
five-for-four stock split, resulting in a seven percent increase in our
cash dividend. At the annual meeting, we will review our
achievements in 1996 and share our plans for additional growth.
The formal notice of this annual meeting and the proxy
statement appear on the following pages. After reading the proxy
statement, please mark, sign, and return the enclosed proxy card
to ensure that your votes on the business matters of the meeting
will be recorded.
We hope that you will attend this meeting. Whether or not
you attend, we urge you to return your proxy promptly in the postpaid
envelope provided. After returning the proxy, you may, of course,
vote in person on all matters brought before the meeting.
We look forward to seeing you on April 16.
Sincerely,
/s/ Robert H. McKinney
Robert H. McKinney,
Chairman and Chief Executive
Officer
First Indiana Plaza
135 North Pennsylvania Street
Indianapolis, IN 46204
317.269.1200 Fax 317.269.1341
<PAGE> 10k page 86
[IFC BLANK]
<PAGE> 10k page 87
FIRST INDIANA CORPORATION
INDIANAPOLIS, INDIANA
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
The annual meeting of the shareholders of First Indiana
Corporation (the "Corporation") will be held in the First Indiana
Plaza Conference Center, 135 North Pennsylvania Street, Seventh
Floor, Indianapolis, Indiana on April 16, 1997, at 9:00 a.m. EST, to
consider and to take action on the following matters:
1. The election of four (4) directors of the
Corporation; and
2. The transaction of such other business as may
properly come before the meeting and any
adjournments thereof.
Only shareholders of record at the close of business on February 14,
1997 are entitled to notice of and to vote at this meeting and any
adjournments thereof.
By order of the Board of Directors,
/s/ David A. Butcher
David A. Butcher
Secretary
Indianapolis, Indiana
March 12, 1997
<PAGE> 10k page 88
[ii BLANK]
<PAGE> 10k page 89
FIRST INDIANA CORPORATION
First Indiana Plaza
135 North Pennsylvania Street
Indianapolis, Indiana 46204
PROXY STATEMENT
The accompanying proxy is solicited by the Board of
Directors of First Indiana Corporation (the "Corporation") for use at
the annual meeting of shareholders to be held April 16, 1997 and any
adjournments thereof. When the proxy is properly executed and
returned, the shares it represents will be voted at the meeting in
accordance with any directions noted on that proxy. If no direction
is indicated, the proxy will be voted in favor of the proposals set forth
in the notice attached to this proxy statement.
The election of directors will be determined by a plurality
of the shares present in person or represented by proxy. The holder
of each outstanding share of common stock is entitled to vote for as
many persons as there are directors to be elected. All other matters
to come before the meeting will be determined by a majority of the
shares present in person or represented by proxy. An abstention or
broker non-vote on any matter will not change the number of votes
cast for or against the matter. Any shareholder giving a proxy has the
power to revoke it at any time before it is voted. The approximate
date of mailing of this proxy statement is March 12, 1997.
VOTING SECURITIES AND BENEFICIAL OWNERS
Only shareholders of record as of the close of business on
February 14, 1997 will be entitled to vote at the annual meeting.
The Corporation has only one class of stock outstanding, its common
stock, of which approximately 8,407,410 shares were outstanding as
of the close of business on February 28, 1997. While the Corporation
has announced a five-for-four stock split, the record date for
the stock split followed the record date for the annual meeting.
Accordingly, shares issued in the stock split may not be voted at the
annual meeting and share information set forth in this proxy statement has
not been restated to reflect the stock split.
The following table shows, as of February 7, 1997, the
number and percentage of shares of common stock held by each
person known to the Corporation who owned beneficially more than
five percent of the issued and outstanding common stock of the
Corporation and by the Corporation's directors and certain executive
officers:
<PAGE> 1 10k page 90
<TABLE>
<CAPTION>
Beneficial Amount and Nature of Percent
Owner Beneficial Ownership of Class
---------- -------------------- ---------
<S> <C> <C>
H. J. Baker 39,100 1, 2 4
Gerald L. Bepko 14,903 1, 3 4
David L. Gray 50,320 5 4
Douglas W. Huemme 9,678 6 4
Andrew Jacobs, Jr. -- -
David A. Lindsey 75,054 7 4
Marni McKinney 2,305,821 8 26.4%
Robert H. McKinney 2,305,821 8 26.4%
Owen B. Melton, Jr. 207,135 9 2.4%
Phyllis W. Minott 16,291 1, 3, 10 4
Timothy J. O'Neill 66,616 11 4
Michael L. Smith 24,849 1, 12 4
The Somerset Group, Inc. 2,305,821 8 26.4%
John W. Wynne 25,361 1, 13 4
All Executive Officers and
Directors as a Group (15 Persons) 2,937,987 14 34.0%
</TABLE>
- ------------
1 Includes 12,490 shares as to which the director has the right to
acquire beneficial ownership as specified in Rule 13d-3(d)(1)
under the Securities Exchange Act of 1934 (the "Exchange
Act").
2 Includes 2,417 shares held in trust under the First Indiana
Bank Employees' Stock Purchase Plan (the "Stock Purchase
Plan").
3 Includes 238 shares held in trust under the First Indiana Bank
Directors' Stock Purchase Plan (the "Directors' Stock Purchase
Plan"), and 1,926 shares held in trust under the Stock Purchase
Plan.
4 The number of shares represents less than one percent of the
Corporation's common stock outstanding.
5 Includes 850 shares held in trust under the Stock Purchase
Plan and 23,248 shares as to which there is a right to acquire
beneficial ownership as specified in Rule 13d-3(d)(1) under the
Exchange Act.
6 Includes 267 shares held in trust under the Stock Purchase
Plan, 7,494 shares as to which there is a right to acquire
beneficial ownership as specified in Rule 13d-3(d)(1) under
the Exchange Act and 1,917 shares held in trust under the
Directors' Deferred Fee Plan.
7 Includes 856 shares held in trust under the Stock Purchase Plan
and 24,448 shares as to which there is a right to acquire
beneficial ownership as specified in Rule 13d-3(d)(1) under
the Exchange Act.
8 These shares are beneficially owned by a group consisting of
The Somerset Group, Inc. ("Somerset"), Robert H. McKinney
and Marni McKinney. Robert H. McKinney owns 435,903
shares of the Corporation, including 2,239 shares held in trust
under the Stock Purchase Plan, and 80,245 shares of the
Corporation as to which Mr.
<PAGE> 2 10k page 91
McKinney has the right to
acquire beneficial ownership as specified in Rule 13d-3(d)(1)
under the Exchange Act. Mr. McKinney, his immediate
family, a family limited partnership, and various irrevocable
trusts established by Mr. McKinney for the benefit of his
children together beneficially own, directly or indirectly,
approximately 45% of the outstanding capital stock of
Somerset, which owns of record 1,811,979 shares of the
Corporation. The total held by the group also includes 57,939
shares of the Corporation owned by Mr. McKinney's
daughter, Marni McKinney, including 1,723 shares held in
trust under the Stock Purchase Plan, 18,869 shares as to
which she has the right to acquire beneficial ownership as
specified in Rule 13d-3(d)(1) under the Exchange Act, and 514
shares held on her behalf under the Bank's 401(k) Plan. Mr.
McKinney is the Chairman and a director of Somerset;
Ms. McKinney is the President and Chief Executive Officer
and a director of Somerset; and Mr. McKinney's son, Kevin
K. McKinney, is Vice President and a director of Somerset.
9 Includes 56,497 shares as to which Mr. Melton has the right
to acquire beneficial ownership as specified in Rule
13d-3(d)(1) under the Exchange Act, 6,012 shares held in
trust under the Stock Purchase Plan, 88 shares held on his behalf
under the Bank's 401(k) Plan, 43,687 shares owned of record
jointly with Mr. Melton's spouse, and 41,250 owned of record
by Mr. Melton's spouse.
10 Includes 2,763 shares held in trust under the Stock Purchase
Plan and 100 shares held under the Corporation's Dividend
Reinvestment and Stock Purchase Plan (the "DR Plan").
11 Includes 10,228 shares held in trust under the Stock Purchase
Plan and 24,448 shares as to which there is a right to acquire
beneficial ownership as specified in Rule 13d-3(d)(1) under
the Exchange Act.
12 Includes 1,725 shares held in trust under the Stock Purchase
Plan.
13 Includes 1,248 shares held in trust under the Stock Purchase
Plan, 259 shares held under the DR Plan, and 741 shares held
under the Directors' Stock Purchase Plan.
14 The address of The Somerset Group, Inc. is 135 North
Pennsylvania Street, Suite 2800, Indianapolis, Indiana 46204.
This number includes 1,811,979 shares owned of record by
The Somerset Group, Inc. (see note 8), 33,963 shares held in
trust under the Stock Purchase Plan, 731 shares held under the
DR Plan, 1,217 shares held under the Directors' Stock Purchase
Plan, 1,917 shares held under the Deferred Fee Plan, 1,136 shares
held under the Bank's 401(k) Plan, and 316,123 shares as to
which there is a right to acquire beneficial ownership as
specified in Rule 13d-3(d)(1) under the Exchange Act.
- -----------
Proposal No. 1: ELECTION OF DIRECTORS
Four directors are to be elected. Gerald L. Bepko, Douglas W. Huemme,
Andrew Jacobs, Jr., and John W. Wynne have been nominated for a term of
three years and until their successors are elected and qualified. Except
for Mr. Jacobs, all nominees are members of the present Board of Directors.
The other directors listed in the table below will continue in office until
the expiration of their terms. All of the nominees and the other directors
listed in the table below are also members of the Board of Directors
of First Indiana Bank, a wholly owned subsidiary of the Corporation (the
"Bank"), or will become members of the Board of Directors of the Bank upon
their election as directors of the Corporation. For directors of the
Corporation who were directors of the Bank before the Corporation was formed
in 1986, the table below lists the year in which the director became a
director of the Bank. If, at the time of the annual meeting, any of the
nominees is unable or declines to serve, the discretionary authority provided
in the proxy may be exercised to vote for a substitute or substitutes.
The Board of Directors has no reason to believe that any substitute
nominee or nominees will be required.
<PAGE> 3 10k page 92
The Board of Directors unanimously recommends the election of the
following nominees.
<TABLE>
<CAPTION>
NOMINEES FOR TERMS EXPIRING IN 2000
Name, Age, Principal
Occupation(s) and
Business Experience Director
During Past 5 Years Since
- ------------------------------------------------------------------------------
<S> <C>
Gerald L. Bepko, Age 56 1988
Vice President for Long-Range Planning of Indiana University and
Chancellor, Indiana University-Purdue University at Indianapolis;
previously Dean and Professor of Law, Indiana University School of
Law, Indianapolis.
Douglas W. Huemme, Age 55 1994
Chairman, President, and Chief Executive Officer, Lilly Industries,
Inc., industrial coatings; formerly Vice President and Group
Executive, Chemicals Group, Whittaker Corporation; Director of
The Somerset Group, Inc.
Andrew Jacobs, Jr., Age 65 Nominee
Adjunct Professor, Indiana University-Purdue University at
Indianapolis; Attorney; Retired Member, United States Congress.
John W. Wynne, Age 64 1991
Chairman of the Board and Director of Duke Realty Investments, Inc.,
a real estate investment trust; partner, Duke Associates, real
estate development; retired as counsel (previously partner), Bose
McKinney & Evans, attorneys.
<CAPTION>
DIRECTORS WHOSE TERMS EXPIRE IN 1999
Name, Age, Principal
Occupation(s) and
Business Experience Director
During Past 5 Years Since
- ----------------------------------------------------------------------------
<S> <C>
H. J. Baker, Age 69 1966
Chairman Emeritus, BMW Constructors, Inc., industrial mechanical
contractors; Director of The Somerset Group, Inc. and Lilly
Industries, Inc.
Marni McKinney, Age 40 1992
Vice Chairman of the Corporation and the Bank; Director, President,
and Chief Executive Officer, The Somerset Group, Inc., an affiliate
of the Corporation, financial services; previously Executive Vice
President of The Somerset Group, Inc., and Vice President of the
Corporation and the Bank.
Phyllis W. Minott, Age 58 1976
Chairman and Chief Executive Officer, Minott Motion Pictures, Inc.,
commercial movie production; previously General Auditor, Eli Lilly
& Company, a pharmaceutical company; Controller, Accounting and
Chief Accounting Officer, Eli Lilly & Company.
<PAGE> 4 10k page 93
<CAPTION>
DIRECTORS WHOSE TERMS EXPIRE IN 1998
Name, Age, Principal
Occupation(s) and
Business Experience Director
During Past 5 Years Since
- ------------------------------------------------------------------------------
<S> <C>
Robert H. McKinney, Age 71 1954
Chairman and Chief Executive Officer of the Corporation and
Chairman of the Bank; Chairman and Director, The Somerset Group,
Inc., an affiliate of the Corporation, financial services; Director of
Lilly Industries, Inc.; retired partner, Bose McKinney & Evans,
attorneys; Chairman, Federal Home Loan Bank Board, 1977-1979.
Owen B. Melton, Jr., Age 50 1983
President and Chief Operating Officer of the Corporation and
President and Chief Executive Officer of the Bank.
Michael L. Smith, Age 48 1985
President and Chief Operating Officer, American Health Network, Inc.,
a physician group practice; formerly President, Somerset Financial
Services, a division of The Somerset Group, Inc.; also formerly
Chairman, President and Chief Executive Officer, Mayflower Group,
Inc., diversified transportation services; Director of The Somerset
Group, Inc. and Acordia, Inc.
</TABLE>
The Boards of Directors of the Corporation and the Bank
each met 12 times during the last year. All directors attended in
excess of 75% of the aggregate of (1) the total number of meetings
of the Boards of Directors of the Corporation and the Bank
(considered separately) and (2) the total number of meetings held by
all Corporation and Bank committees (considered separately) on
which he or she served.
Nominees for election as a director of the Corporation are
selected by the full Board of Directors, acting as a nominating
committee. Nominations for directors, other than those made by the
nominating committee, will not be eligible to be voted upon at an
annual meeting unless submitted in accordance with the procedure
set forth under heading "SHAREHOLDER PROPOSALS AND
NOMINATIONS."
Certain Committees of the Boards of Directors of
the Corporation and the Bank
Among other committees, the Board of Directors of the
Corporation has an Audit Committee and a Stock Administration
Committee. The Board of Directors of the Bank has, among other
committees, an Audit Committee, a Compensation Committee, and
a Stock Administration Committee.
The functions of the Audit Committees are to evaluate audit
performance, handle relations with the Corporation's and the Bank's
independent auditors, and evaluate policies and procedures related
to internal audit functions and controls. The members of the
Corporation's and the Bank's Audit Committees in 1996 were
Phyllis W. Minott (Chairperson), Douglas W. Huemme, and John W.
Wynne. The Corporation's and the Bank's Audit Committees met
jointly three times during 1996.
The functions of the Compensation Committee are to
review and make recommendations to the Board of Directors with
respect to the compensation of directors, officers, and employees of
the Bank. Because the officers and employees of the Corporation, all
of whom are officers or employees of the Bank, receive no separate
cash compensation from the Corporation, the Compensation
Committee of the Board of Directors of the Bank effectively serves
as the compensation committee of the Board of Directors of the
Corporation. The members of the Compensation Committee are H.
J. Baker (Chairman), Gerald L. Bepko, and Phyllis W. Minott.
The Committee met twice during 1996.
<PAGE> 5 10k page 94
The Corporation's Stock Administration Committee
administers and grants options and other such stock awards under the
Corporation's stock option and incentive plans, and, together with
the Bank's Stock Administration Committee, administers the Bank's
Employees' Stock Purchase Plan. The members of the Corporation's
and the Bank's Stock Administration Committees are Gerald L.
Bepko (Chairman), H. J. Baker and Douglas W. Huemme. The
Corporation's and the Bank's Stock Administration Committees met
jointly one time during 1996.
Compensation of Directors
Directors of the Corporation and the Bank, other than
Robert H. McKinney, Marni McKinney and Owen B. Melton, Jr.,
received in 1996 a quarterly retainer of $2,150, plus $500 per
meeting of the Board of Directors attended and an additional $600
per committee meeting attended.
Under the First Indiana 1992 Director Stock Option Plan,
the Corporation reserved 145,809 shares of its common stock for
issuance upon the exercise of options to be granted under the plan.
The plan provides for the issuance of non-qualified options to
purchase 2,498 shares to each outside director of the Corporation on
the date of each annual meeting of shareholders. The Corporation
granted 2,498 shares to each outside director on April 17, 1996, in
accordance with the plan. No option is exercisable during the period
of one year following the date of grant, and options granted under the
plan must specify an exercise price of not less than 100% of the
market price of the shares at the date of grant.
Under the Directors' Deferred Fee Plan, directors of the
Corporation may elect to defer all or any portion of the fees paid for
attendance at a Board of Directors' or committee meeting. The
deferred fees are then contributed to a trust which buys stock with
such fees or invests such fees in an interest-bearing account.
Directors are not eligible to receive shares or cash held under the
plan until they cease to be a director, officer, or employee of the
Corporation. Amounts deferred are not taxable to the director until
the trust distributes the cash or stock to the director. In the event of
a change in control of the Corporation, amounts held under the plan
are payable immediately in one lump sum.
Directors may also elect to contribute part of their fees to
the Bank's Stock Purchase Plan. As with other participants, the
Bank matches a certain portion of such contributions and purchases
the Corporation's common stock on the open market at the prevailing
market price. The material features of the Stock Purchase Plan are
described under the heading "EXECUTIVE COMPENSATION."
Certain Transactions
The Bank offers its directors, officers and employees a loan plan involving
variable-rate mortgages, lines of credit, home equity loans, credit cards, and
various installment loans with a lower interest rate (not below the Bank's
cost of funds) and waiver of loan origination fees, and fixed-rate
mortgage loans with waiver of loan origination fees only. Except as described
above, all outstanding loans to directors, officers and employees have
been made in the ordinary course of business and on substantially the same
terms as those prevailing at the time for comparable transactions with non-
affiliated persons. Management believes that these loans neither involve more
than the normal risk of collectibility nor present other unfavorable features.
On June 17, 1996, the Bank sold to Somerset all of the outstanding
capital stock of One Investment Corporation, a wholly owned subsidiary of
the Bank that owned all of the outstanding capital stock of One Insurance
Agency, Inc. Prior to the transaction, the Bank had used One Investment
and One Insurance to provide Bank customers with certain insurance and
investment products and services. As a result of this transaction, and
through a multi-year operating agreement that the Corporation and the Bank
entered into with Somerset on the same day, the Bank will be able to focus
its efforts on delivering traditional banking services, and Somerset will
provide non-FDIC-insured investment and insurance products and services to
the Bank's customers. Robert H. McKinney and Marni McKinney are officers,
directors and substantial shareholders of Somerset, and H. J. Baker, Douglas
Huemme and Michael Smith are directors of Somerset. The transaction, including
the operating agreement, was approved by the Office of Thrift Supervision
and by a joint committee of the Board of Directors of the Bank and the
Corporation that consisted solely of directors who were not employees,
officers, directors, or significant shareholders of Somerset. This
independent committee determined that the transaction was in the best
interests of the Bank and the Corporation, and negotiated the
<PAGE> 6 10k page 95
transaction with a committee of the Board of Directors of Somerset that
consisted of Somerset directors who were not employees, officers, directors or
substantial shareholders of the Bank or the Corporation. Prior to the
consummation of the transaction, the committee received an opinion from an
independent appraiser that the transaction, which involved a $1.4 million
sale price, was fair to the shareholders of the Bank and the Corporation.
EXECUTIVE COMPENSATION
The following Joint Report of the Compensation Committee and the Stock
Administration Committee, as well as the following Performance Graph, shall
not be deemed incorporated by reference by any general statement
incorporating by reference this proxy statement into any of the Corporation's
filings under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, except to the extent that the Corporation
specifically incorporates this information by reference, and shall not
otherwise be deemed filed under such Acts.
Joint Report of the Compensation Committee and
the Stock Administration Committee
Policy and Performance Measures
In determining the compensation of executive officers, the
Compensation Committee strives to maintain an appropriate balance
between executive pay and the creation of shareholder value.
Executive compensation must attract and retain well qualified
officers while at the same time motivating them to achieve the
short-term and long-term strategic goals of the Corporation. To
achieve this balance, executive officers receive a reasonable base
salary and also have the opportunity to earn bonuses tied to the
Corporation's overall performance.
The Compensation Committee based the 1996 annual
salaries of the Corporation's executive officers on the results of
surveys compiled by an independent consultant. The compensation
consultant began with an analysis of the compensation of the
executive officers of two groups of financial institutions with assets
of up to $2.3 billion. The consultant derived the median salary of the
executive officers of the institutions contained in each of the two
surveys and then calculated an average (mean) salary. The
Compensation Committee relied on this calculation of average
salaries in setting the salaries of the Corporation's executive officers.
In order to more directly tie executive compensation to the
Corporation's overall performance, the Compensation Committee
also administers short-term and long-term bonus plans. These plans
are designed to increase the total compensation of the Corporation's
executive officers, but only if the Corporation's performance merited
such increases. The Compensation Committee is guided by the
principle that when certain corporate goals are achieved, the
compensation of the executive officers who contributed to the
Corporation's success should increase accordingly.
The 1996 One Year Management Incentive Plan (the
"Short-Term Plan") provided for a bonus pool in an amount equal to
between 10% and 50% of the participants' aggregate annual salaries,
with bonuses to be awarded based upon both overall corporate
performance and individual contributions to the Corporation. In the
case of each of the executive officers named in the Summary
Compensation Table, at least 50% of the amount contributed on
behalf of such executive officer to the bonus pool was allocated to
overall corporate performance. The corporate performance
component of the bonuses was to be paid based on the Corporation's
after-tax return on average equity for 1996. The individual
performance component of the bonuses depended on the extent to
which each participant achieved certain individual or division goals
and contributed to the Corporation's overall performance, and
whether or not the corporate performance targets were met. Neither
corporate nor individual bonuses were paid under the Short-Term Plan
because the Corporation did not achieve the performance targets for 1996.
Under the 1994-1996 Long-Term Plan (the "Long-Term
Plan"), additional performance-based compensation was awarded
at the end of fiscal year 1996. This plan provided for a bonus pool
in an amount equal to 50% of the
<PAGE> 7 10k page 96
average of the aggregate annual
salary of participants over the term of the Long-Term Plan, with
bonuses in an aggregate amount equal to 0% to 100% of the pool to
be paid if the Corporation's average after-tax return on average
equity for the three years 1994-96 compared favorably with the
aggregate reported returns on average equity of publicly traded thrifts
in Indiana and the four contiguous states (the "Midwest Thrift
Group"), and the Corporation achieved specific financial goals, such
as interest-rate margin and asset/liability maturity mix. Tying
long-term bonuses not only to the Corporation's attainment of its
own goals, but also to the performance of the Midwest Thrift Group,
enables the Compensation Committee to establish financial goals
that are objective and ambitious when compared with those of
similarly situated institutions. The Midwest Thrift Group serves as
an independent basis for assessing performance-based compensation
of the Corporation's executive officers.
While recipients of bonuses under the Long Term Plan typically have
the option to receive their bonuses in cash, the Corporation's common stock,
or a combination thereof, each recipient of a bonus under the Long Term Plan
who did not own at least three times his or her annual base salary in the
Corporation's stock (five times in the case of the Chairman, Vice Chairman,
and President of the Corporation) was required to take at least one-third of
his or her bonus in stock. Because the financial goals set forth in the
Long-Term Plan were achieved, the bonus pool was allocated among participants
according to their individual contributions to the attainment of the goals.
The Stock Administration and Compensation Committees
believe that stock ownership by management and stock-based
performance compensation arrangements are beneficial in aligning
management's and shareholders' interests in the enhancement of
shareholder value. Accordingly, the Bank has adopted management
stock ownership objectives to be attained by the end of the year 2000.
By the end of that year, each officer and director of the Bank must own
Corporation stock with a market value equal to a specified multiple of
such officer's or director's compensation. These multiples range from one
times base compensation for vice presidents to three times base compensation
for senior vice presidents, and five times base compensation for the
Bank's Chairman, Vice Chairman and President, as well as for the
Bank's Board of Directors. The Board of Directors believes that implementing
these stock ownership requirements will further align the interests of the
Bank's management with the objectives of the Corporation's shareholders.
Additionally, the Stock Administration and Compensation Committees
typically consider granting stock options to various executive officers,
including the executive officers named in the Summary Compensation Table,
every two years, and awarded such stock options in 1996. Any compensation
derived from the stock options will be directly related to the performance
of the Corporation's stock.
To further encourage Bank officers and employees, as well
as directors, to acquire ownership of the Corporation, such persons
are eligible to contribute a portion of their earnings to the Bank's
Employee's Stock Purchase Plan after completing six months of
service. Such contributions are used to purchase the Corporation's
stock each month at the then prevailing market price. If the
Corporation attains a specified after-tax return on average equity for
a calendar year (as determined by the Bank's Stock Administration
Committee), the Bank will match participant contributions during the
subsequent Plan Year (as defined in the Plan) at a ratio of one to
three. If such after-tax returns are not achieved for a calendar year,
participant contributions during the subsequent Plan Year will be
matched at a ratio of one to four. Because the Corporation
achieved the performance objectives specified in the Stock Purchase Plan for
the year ended December 31, 1995, participant contributions for the Plan Year
beginning April 1, 1996 were matched at a ratio of one to three. The
Corporation also achieved the performance objectives specified in the Stock
Purchase Agreement for the year ended December 31, 1996, and participant
constributions for the Plan Year beginning April 1, 1997 will continue to be
matched at a ratio of one to three. Contributions by the Bank to the accounts
of the executive officers named in the Summary Compensation Table during the
calendar year ended December 31, 1996 are set forth in the column
titled "All Other Compensation."
In 1993, the Internal Revenue Code of 1986 (the "Code")
was amended to limit to $1 million the amount of compensation that
may be deducted by the Corporation in any year with respect to
certain of the Corporation's executive officers. While annual salaries
and bonuses of the Corporation's executive officers have generally
been structured so that all compensation will be deductible, the Stock
Administration and Compensation Committees recognize that the
vesting of restricted stock under the Long-Term Plan may, in certain
instances, cause an executive officer to receive annual compensation
which cannot be deducted in full by the Corporation. The
Committees believe that such compensation is appropriate because
the inability to fully deduct compensation will be limited almost
exclusively to
<PAGE> 8 10k page 97
situations in which an executive officer has had to bear
the risk of a decline in the market price of the Corporation's stock
and has shared the rewards of an increase in such price with the
Corporation's shareholders. Nonetheless, the Stock Administration
and Compensation Committees may, from time to time, explore
the options available to the Corporation in order to qualify all of its
compensation for deductibility under the Code.
CEO Performance
Mr. McKinney serves as the chief executive officer of the
Corporation, and Mr. Melton serves as the chief executive officer of
the Corporation's principal operating unit, the Bank. While Mr.
McKinney devotes a major portion of his time to the operations of the
Corporation and the Bank, Mr. Melton devotes all of his time to
those operations.
Like the salaries of the Corporation's other executive
officers, Mr. Melton's and Mr. McKinney's salaries are also derived
from the data compiled by the independent consultant. Since these
two individuals have the greatest impact on the Corporation's
long-term performance, their salaries are determined based on their
achievement of certain goals relating to the Corporation's
performance during the prior year, such as return on equity, return on
assets, credit quality, and management of operating expenses.
Because Mr. Melton is the chief executive officer of the
Corporation's sole operating unit and responsible for its day-to-day
activities, the Compensation Committee gives special weight to Mr.
Melton's achievement of these objectives when determining his
salary for the coming year. In addition, the Compensation Committee
meets separately with Mr. McKinney for his candid evaluation of Mr.
Melton's performance during the preceding year and his achievement
of the objectives described above. The Corporation's attainment of the
1995 performance goals resulted in an increase in both Mr. McKinney's
and Mr. Melton's salaries for 1996.
Along with the Corporation's other executive officers, Mr.
McKinney and Mr. Melton participate in the Short-Term Plan and
the Long-Term Plan. However, under the Short-Term Plan, 60% of
the amount contributed to the bonus pool on behalf of Mr. McKinney
and Mr. Melton was allocated to the overall corporate performance
component, rather than the 50% contribution used for the remaining
executive officers named in the Summary Compensation Table. The
Compensation Committee believes that such modifications
emphasize Mr. McKinney's and Mr. Melton's leadership roles and
encourage them to manage the Corporation with the shareholders'
long-term interests in mind. Additionally, under the Long-Term
Plan, Mr. McKinney and Mr. Melton received in 1994 a grant of
restricted stock in lieu of their participation in the bonus pool. The
stock was freed from the restrictions at the end of 1996 because the
Corporation attained the performance objectives set forth in the
Long-Term Plan. Further, because the stock is freed from the restrictions,
the Corporation paid to Mr. McKinney and Mr. Melton an
amount equal to the tax liability they incurred as a result of such vesting.
The Compensation Committee believes that such tax payments are
appropriate given the nature of the stock awards, which required Mr.
McKinney and Mr. Melton to assume for three years the risk of a
decline in the market value of the Corporation's stock, and given that
such tax payments are only made when the Corporation meets the
performance targets set forth in the Long-Term Plan.
Compensation Committee Stock Administration Committee
---------------------- ------------------------------
H. J. Baker, Chairman Gerald L. Bepko, Chairman
Gerald L. Bepko H. J. Baker
Phyllis W. Minott Douglas W. Huemme
<PAGE> 9 10k page 98
Performance Graph
The following line graph compares the cumulative total
shareholder return on the common stock of the Corporation over the
last five fiscal years with the cumulative total return of the NASDAQ
Stock Market Index and the cumulative total return of the NASDAQ
Bank Index over the same period.
<TABLE>
<CAPTION>
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN*
FIRST INDIANA CORPORATION COMMON STOCK, NASDAQ STOCK MARKET INDEX
AND NASDAQ BANK INDEX**
TOTAL RETURN INDEX
----------------------------------------------
First Indiana Nasdaq Stock Nasdaq Bank
Period Corp. Market Index
- ------ ------------- ------------ -----------
<S> <C> <C> <C>
Dec-91 $100 $100 $100
Jun-92 $131 $ 96 $122
Dec-92 $161 $116 $146
Jun-93 $216 $121 $156
Dec-93 $214 $134 $166
Jun-94 $211 $122 $177
Dec-94 $209 $131 $165
Jun-95 $267 $163 $200
Dec-95 $354 $185 $246
Jun-96 $403 $209 $260
Dec-96 $456 $227 $326
* Assumes that the value of the investment in the Corporation's stock and
each index was $100 on December 31, 1991 and that all dividends were
reinvested.
**The NASDAQ Bank Index contains performance data for banks, savings
institutions and holding companies
<CAPTION>
Percent First Indiana Nasdaq Stock Nasdaq Bank
Change Corp. Market Index
- ------------- ------------- ------------ -----------
<S> <C> <C> <C>
Six Months
Ended 12/31/96 +13.2% + 8.7% +25.1%
Twelve Months
Ended 12/31/96 +28.7% +23.0% +32.2%
</TABLE>
<PAGE> 10 10k page 99
Summary
The following table sets forth the compensation awarded
to, earned by, or paid to the chief executive officer and the four most
highly compensated executive officers other than the chief executive
officer (collectively, the "Named Executive Officers") during the last
three fiscal years.
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term Compensation
----------------------
Annual Compensation Awards (1) Payouts
---------------------------- ------------------------ -------
Name and Restricted Securities
Principal Other Annual Stock Awards Underlying All Other
Position Year Salary Bonus Compensation Options (#) LTIP Payouts Compensation
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert H. McKinney 1996 $200,000 $ -- $395,910(2) $ -- 12,000 $ -- $129,093(4)
Chairman and Chief 1995 190,000 95,000 -- -- -- -- 111,230
Executive Officer 1994 190,000 -- -- 282,000 (3) -- -- 189,072
of the Corporation;
Chairman of the Bank
- --------------------------------------------------------------------------------------------------------------------------
Owen B. Melton, Jr. 1996 265,000 -- 398,818(2) -- 12,000 -- 131,117(5)
President and Chief 1995 248,000 126,157 -- -- -- -- 94,848
Operating Officer of 1994 248,000 -- -- 282,000 (3) -- -- 119,807
the Corporation;
President and Chief
Executive Officer of
the Bank
- --------------------------------------------------------------------------------------------------------------------------
Timothy J. O'Neill 1996 140,000 -- -- -- 6,000 68,667 27,927(6)
Senior Vice President 1995 137,000 63,705 -- -- -- -- 21,125
Consumer Banking Services 1994 135,000 -- -- -- -- -- 28,782
Division of the Bank
- --------------------------------------------------------------------------------------------------------------------------
David L. Gray 1996 145,000 -- -- -- 6,000 69,167 26,124(7)
Vice President and 1995 138,000 65,000 -- -- -- -- 17,958
Treasurer of the Corpor- 1994 132,000 -- -- -- -- -- 21,520
ation; Senior Vice
President-Internal
Support Services Division,
and Chief Financial Officer
and Treasurer of the Bank
- --------------------------------------------------------------------------------------------------------------------------
David A. Lindsey 1996 132,000 -- -- -- 6,000 60,417 20,246(8)
Senior Vice President- 1995 120,000 60,850 -- -- -- -- 12,610
Consumer Banking Sales 1994 110,500 -- -- -- -- -- 14,378
Division of the Bank;
President of One Mortgage
Corporation
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
1 Adjusted for all stock splits.
2 Represents payments made by the Corporation to reimburse Mr. McKinney and
Mr. Melton for income taxes payable due to the vesting of restricted stock
awarded in 1994 under the Long-Term Plan
3 Represents the market value on the date of grant of 19,200 shares of
restricted stock granted to each of Mr. McKinney and Mr. Melton under the
Long-Term Plan. The restricted stock (i) had a market value of $513,600 on
December 31, 1996, (ii) vested on December 31, 1996 because the
Corporation attained the performance targets described in the Joint Report
of the Compensation Committee and the Stock Administration Committee, and
(iii) earned dividends while restricted.
4 Consists of a $4,015 contribution by the Bank to the Stock Purchase Plan, a
$2,040 contribution by the Bank to Mr. McKinney's account in the Bank's
401(k) Plan, and the accrual by the Bank of $123,038 for Mr. McKinney's
supplemental pension.
5 Consists of a $1,633 contribution by the Bank to the Stock Purchase Plan, a
$2,272 contribution by the Bank to Mr. Melton's account in the Bank's 401(k)
Plan, and the accrual by the Bank of $127,212 for Mr. Melton's
supplemental pension.
<PAGE> 11 10k page 100
6 Consists of a $2,940 contribution by the Bank to the Stock Purchase Plan, the
payment by the Bank of $1,310 for term life insurance premiums, a $2,144
contribution by the Bank to Mr. O'Neill's account in the Bank's 401(k) Plan,
and the accrual by the Bank of $21,533 for Mr. O'Neill's supplemental pension.
7 Consists of a $4,525 contribution by the Bank to the Stock Purchase Plan, the
payment by the Bank of $1,357 for term life insurance premiums, a $2,249
contribution by the Bank to Mr. Gray's account in the Bank's 401(k) Plan, and
the accrual by the Bank of $17,993 for Mr. Gray's supplemental pension.
8 Consists of a $4,146 contribution by the Bank to the Stock Purchase Plan, the
payment by the Bank of $1,236 for term life insurance premiums, a $2,042
contribution by the Bank to Mr. Lindsey's account in the Bank's 401(k) Plan,
and the accrual by the Bank of $12,822 for Mr. Lindsey's supplemental pension.
Stock Options
The following table sets forth certain information with respect to
stock options granted to the Named Executive Officers during the last fiscal
year. The Potential Realizable Value columns on the right of this table
assume that the value of the underlying stock will appreciate each year
at the specified percentages.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
Potential Realizable Value
Number % of Total at Assumed Annual Rates of
of Securities Options/SARs Exercise Stock Price Appreciation
Underlying Granted to or Base for Option Term
Options/SARs Employees Price Expiration
Name Granted Fiscal Year ($/Share) Date 0% 5% 10%
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert H. McKinney 12,000 13.9% $21.15 1/23/06 $00.00 $159,613 $404,492
Owen B. Melton, Jr. 12,000 13.9 21.15 1/23/06 00.00 159,613 404,492
Timothy J. O'Neill 6,000 6.9 21.15 1/23/06 00.00 79,807 202,246
David L. Gray 6,000 6.9 21.15 1/23/06 00.00 79,807 202,246
David A. Lindsey 6,000 6.9 21.15 1/23/06 00.00 79,807 202,246
</TABLE>
The following table sets forth on an aggregate basis each
exercise of stock options during fiscal year 1996 by each of the
Named Executive Officers and the 1996 year-end value of the
unexercised options of each such executive officer.
<PAGE> 12 10k page 101
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND
FISCAL YEAR-END OPTION VALUES
Number of Securities Underlying Value of Unexercised
Unexercised Options at FY-End In-the-Money Options
at FY-End
------------------------------- ---------------------------
Shares
Acquired on
Name Exercise (#) Value Realized Exercisable Unexercisable Exercisable Unexercisable
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert H. McKinney -- $ -- 68,245 12,000 $1,275,556 $67,200
Owen B. Melton, Jr. -- -- 44,497 12,000 800,908 67,200
Timothy J. O'Neill -- -- 18,448 6,000 321,010 33,600
David L. Gray -- -- 32,248 6,000 601,696 33,600
David A. Lindsey -- -- 31,648 6,000 584,350 33,600
</TABLE>
Pension Plans
The following table sets forth, in specified compensation
and years of service classifications, the estimated annual benefits
payable upon retirement at age 65 under the Bank's
non-contributory, qualified defined benefit pension plan (the
"Qualified Plan"), as supplemented by the supplemental benefit plan
adopted by the Bank on January 17, 1992 (the "Supplemental Plan")
(the Qualified Plan and the Supplemental Plan are collectively
referred to as the "Plans"). While the table shows the annual benefit
payable, participants may elect to receive the present value of the
entire benefit in one lump sum.
<TABLE>
<CAPTION>
PENSION PLAN TABLE 1
Covered 10 Years' Benefit 20 Years' Benefit 30 Years' Benefit 40 Years' Benefit
Compensation Service Service Service Service
- ------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
<PAGE> 12
$100,000 $ 18,900 $ 37,700 $ 56,600 $ 76,000
120,000 22,900 45,700 68,600 92,000
140,000 26,900 53,700 80,600 108,000
160,000 30,900 61,700 92,600 124,000
180,000 34,900 69,700 104,600 140,000
200,000 38,900 77,700 116,600 156,000
220,000 42,900 85,700 128,600 172,000
240,000 46,900 93,700 140,600 188,000
260,000 50,900 101,700 152,600 204,000
280,000 54,900 109,700 164,600 220,000
300,000 58,900 117,700 176,600 236,000
320,000 62,900 126,700 188,600 252,000
340,000 66,900 133,700 200,600 268,000
360,000 70,900 141,700 212,600 284,000
380,000 74,900 149,700 224,600 300,000
400,000 78,900 157,700 236,600 316,000
500,000 98,900 197,700 296,600 396,000
600,000 118,900 237,700 356,600 476,000
700,000 138,900 277,700 416,600 556,000
- ------------------------------------------------------------------------------------------
</TABLE>
1 Amounts shown are based on an assumed Social Security integration base of
$22,716 and are not subject to any deduction for Social Security or other
offset amounts.
The annual retirement benefit displayed in the Pension
Plan Table is the product of (i) the participant's number of years of
credited benefit service, multiplied by (ii) the sum of 1.5% of that
portion of the participant's covered compensation that does not
exceed the Social Security integration base for the participant plus
2% of the participant's covered compensation that exceeds such
integration base. Compensation covered by the Plans is the sum
<PAGE> 13 10k page 102
of the average of a participant's annualized rate of base salary (as
reported in the Salary column of the Summary Compensation Table)
for the five consecutive years of employment which produce the
highest such average, plus the annual average of all bonuses
(including both the Bonus and the LTIP Payouts columns as reported
in the Summary Compensation Table, the market value on the date
of vesting of any restricted stock awards made pursuant to the
Long-Term Plan and any tax reimbursements paid in connection with
such vesting) paid to the participant for the three years next
preceding the participant's retirement.
As of January 1, 1997, the number of years of credited
benefit service and the compensation covered by the Plans (based on
average annual salaries for 1991-1995 and average annual bonuses
for 1993-1995) for each of the Named Executive Officers were as
follows: Robert H. McKinney, 41 years - $521,503; Owen B.
Melton, Jr., 17 years - $587,058; David L. Gray, 15 years - $176,522
Timothy J. O'Neill, 24 years - $175,724; David A. Lindsey, 12 years
- - $154,122.
Employment Contracts and Termination of
Employment and Change in Control Arrangements
Special retirement benefits are provided under the
Supplemental Plan to Mr. McKinney. His retirement benefit under
the Supplemental Plan is payable for life and 15 years certain. The
monthly amount of his benefit is the higher of two calculated
amounts. The first is his monthly retirement benefit that would be
payable to him under the Supplemental Plan if such benefit were
determined in the normal way and were payable for life only. The
second is a monthly retirement benefit equal to the excess of (i) 80%
of his adjusted monthly compensation over (ii) the sum of (a) his
monthly retirement benefit under the Qualified Plan (determined as
though such benefit were payable in the form of a straight-line
annuity) plus (b) his primary Social Security benefit payable at age
65. For purposes of the foregoing, Mr. McKinney's adjusted
monthly compensation is one-twelfth of the sum of (i) his highest
annual rate of salary from the Bank plus (ii) the greater of (a) 37.5%
of his highest annual rate of salary from the Bank or (b) the annual
average of all bonuses paid to him by the Bank for the three years
next preceding his retirement.
Special death benefits are provided under the
Supplemental Plan to Mr. McKinney and Mr. Melton. The death
benefit provided to Mr. McKinney equals three times his highest
annual rate of salary, grossed up for income taxes at the highest
applicable marginal rate in effect at the time of his death, and is
payable whether he dies before or after separation from service and,
because he has already attained age 65, without regard to when he
separates from service. The death benefit provided to Mr. Melton
equals three times his highest annual rate of salary, grossed up for
income taxes at the highest applicable marginal rate in effect at the
time of his death, unless his employment terminates prior to age 65
other than by reason of his death or disability or after a change of
control, in which case the death benefit provided to him is $100,000,
grossed up for income taxes.
APPOINTMENT OF AUDITORS
The Corporation's financial statements for the year ended
December 31, 1996 were audited by KPMG Peat Marwick LLP
("Peat Marwick"). The Corporation has selected Peat Marwick as
its independent auditors for the fiscal year ending December 31,
1997. Representatives of Peat Marwick are expected to attend the
annual meeting, will have the opportunity to make a statement if they
desire to do so, and will be available to respond to appropriate
questions.
SHAREHOLDER PROPOSALS AND NOMINATIONS
Any shareholder of the Corporation wishing to have a
proposal considered for inclusion in the Corporation's 1998 proxy
solicitation materials must set forth such proposal in writing and file
it with the Secretary of the Corporation on or before November 12,
1997. In order to be considered in the 1998 annual meeting,
shareholder proposals not included in the Corporation's 1997 proxy
solicitation materials, as well as shareholder nominations for
directors, must be submitted in writing to the Secretary of the
Corporation at least 60 days before the date of the 1998 annual
meeting, or, if the 1998 annual meeting is held prior to March 16,
1998, within ten days after notice of the annual meeting is
<PAGE> 14 10k page 103
mailed to shareholders. The Board of Directors of the Corporation will
review any shareholder proposals that are filed as required, and will
determine whether such proposals meet applicable criteria for
inclusion in its 1998 proxy solicitation materials or consideration at
the 1998 annual meeting. Shareholder nominations must set forth
(a) as to each person whom the shareholder proposes to nominate for
election or re-election as a director, (i) the name, age, business
address and residence address of such person, (ii) the principal
occupation or employment of such person, and (iii) such person's
written consent to serve as a director, if elected; and (b) as to the
shareholder giving the notice (i) the name and address of such
shareholder and (ii) the class and the number of shares of the
Corporation which are owned of record by such shareholder.
SECTION 16(a) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as
amended, requires the Corporation's officers and directors, and
persons who own more than 10% of the Corporation's common
stock, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. Officers, directors and
greater than 10% shareholders (the "Reporting Persons") are
required by Securities and Exchange Commission regulation to
furnish the Corporation with copies of all Section 16(a) forms they
file.
Based solely on review of the copies of such forms
furnished to the Corporation, the Corporation believes that during
1996 all Reporting Persons complied with the filing requirements of
Section 16(a), except that contributions to the respective 401(k) accounts
of Douglas W. Huemme, Marni McKinney and Kenneth L. Turchi were not
timely reported on the year-end reports.
ANNUAL REPORT
A copy of the Corporation's Annual Report for the year
ended December 31, 1996 has been provided to all shareholders as
of the record date. The Annual Report is not to be considered as
proxy solicitation material.
OTHER MATTERS
The Board of Directors knows of no other matters to be
brought before this annual meeting. However, if other matters
should come before the meeting, it is the intention of each person
named in the proxy to vote such proxy in accordance with his or her
judgment on such matters.
EXPENSES OF SOLICITATION
The entire expense of preparing, assembling, printing and
mailing the proxy form and the material used in the solicitation of
proxies will be paid by the Corporation. The Corporation does not
expect that the solicitation will be made by specially engaged
employees or paid solicitors. Although the Corporation might use
such employees or solicitors if it deems them necessary, no
arrangements or contracts have been made with any such employees
or solicitors as of the date of this statement. In addition to the use of
the mails, solicitation may be made by telephone, telegraph, cable or
personal interview. The Corporation will request record holders of
shares beneficially owned by others to forward this proxy statement
and related materials to the beneficial owners of such shares, and will
reimburse such record holders for their reasonable expenses incurred
in doing so.
IT IS IMPORTANT THAT PROXIES BE
RETURNED PROMPTLY. Whether or not you attend the
meeting, you are urged to execute and return the proxy.
For the Board of Directors,
/s/ Robert H. McKinney
Robert H. McKinney
Chairman
March 12, 1997
<PAGE> 15 10k page 104
[LOGO OF THE BANK]
Principal Subsidiary of First Indiana Corporation
<PAGE> 16 10k page 105
[KPMG LETTERHEAD]
KPMG Peat Marwick LLP
2400 First Indiana Plaza
135 North Pennsylvania Street
Indianapolis, IN 46204-2452
The Board of Directors and Shareholders
First Indiana Corporation:
We consent to incorporation by reference in the registration statement
on Form S-8 of First Indiana Corporation of our report dated January 21,
1997, except note 17, which is as of February 20, 1997, relating to the
consolidated balance sheets of First Indiana Corporation as of
December 31, 1996 and 1995, and the related consolidated statements of
earnings, shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1996, which report appears in the
December 31, 1996 annual report on Form 10-K of First Indiana Corporation.
/s/KPMG Peat Marwick LLP
Indianapolis, Indiana
March 24, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for the twelve months ended December 31, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 31,618
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 42,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 101,356
<INVESTMENTS-CARRYING> 41,951
<INVESTMENTS-MARKET> 42,657
<LOANS> 1,234,318
<ALLOWANCE> 18,768
<TOTAL-ASSETS> 1,496,421
<DEPOSITS> 1,095,486
<SHORT-TERM> 99,055
<LIABILITIES-OTHER> 16,756
<LONG-TERM> 146,466
0
0
<COMMON> 88
<OTHER-SE> 138,570
<TOTAL-LIABILITIES-AND-EQUITY> 1,496,421
<INTEREST-LOAN> 114,799
<INTEREST-INVEST> 9,873
<INTEREST-OTHER> 796
<INTEREST-TOTAL> 125,468
<INTEREST-DEPOSIT> 52,077
<INTEREST-EXPENSE> 63,785
<INTEREST-INCOME-NET> 61,683
<LOAN-LOSSES> 10,794
<SECURITIES-GAINS> 281
<EXPENSE-OTHER> 47,253
<INCOME-PRETAX> 21,484
<INCOME-PRE-EXTRAORDINARY> 21,484
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,704
<EPS-PRIMARY> 1.27
<EPS-DILUTED> 1.27
<YIELD-ACTUAL> 4.37
<LOANS-NON> 15,380
<LOANS-PAST> 0
<LOANS-TROUBLED> 6,913
<LOANS-PROBLEM> 9,504
<ALLOWANCE-OPEN> 16,234
<CHARGE-OFFS> 9,961
<RECOVERIES> 1,701
<ALLOWANCE-CLOSE> 18,768
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,238
</TABLE>
