United States Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1997
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period from ________ to ________
Commission File Number 0-14354
FIRST INDIANA CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-1692825
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
135 North Pennsylvania Street, Indianapolis, IN 46204
(Address of principal executive office) (Zip Code)
(317) 269-1200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes (X) No ( )
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date:
Common Stock, par value $0.01 per share 10,561,326 Shares
Class Outstanding at 10/31/97
<PAGE> 1
FIRST INDIANA CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX
Page
Part I Financial Information 3
Item 1. Financial Highlights
Financial Statements:
Condensed Consolidated Balance Sheets as
of September 30, 1997 and December 31, 1996 4
Condensed Consolidated Statements of
Earnings for the Three and Nine Months
Ended September 30, 1997 and 1996 5
Condensed Consolidated Statements of
Shareholders' Equity for the Nine Months
Ended September 30, 1997 6
Condensed Consolidated Statements of Cash
Flows for the Nine Months Ended
September 30, 1997 and 1996 7
Notes to Condensed Consolidated Financial
Statements 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 11
Part II Other Information 19
Signatures 20
<PAGE> 2
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
First Indiana Corporation and Subsidiaries
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
For the Three Months Ended
September 30,
1997 1996
<S> <C> <C>
Total Interest Income $ 32,518 $ 30,986
Total Interest Expense 16,240 15,789
Net Earnings 4,706 20
Primary Earnings Per Share 0.43 0.00
Fully Diluted Earnings Per Share 0.43 0.00
Dividends Per Share 0.12 0.11
Net Interest Margin 4.49 % 4.33 %
Net Interest Spread 3.81 3.63
Return on Average Equity 12.75 0.06
Return on Average Assets 1.25 0.01
Average Shares Outstanding 10,561,326 10,368,103
Primary Shares Outstanding 10,877,203 10,763,061
Fully Diluted Shares Outstanding 10,894,352 10,779,888
<CAPTION>
For the Nine Months Ended
September 30,
1997 1996
<S> <C> <C>
Total Interest Income $ 94,652 $ 94,149
Total Interest Expense 47,363 48,004
Net Earnings 12,758 9,389
Primary Earnings Per Share 1.17 0.87
Fully Diluted Earnings Per Share 1.17 0.87
Dividends Per Share 0.36 0.34
Net Interest Margin 4.42 % 4.36
Net Interest Spread 3.77 3.70
Return on Average Equity 11.80 9.32
Return on Average Assets 1.14 0.84
Average Shares Outstanding 10,528,083 10,356,279
Primary Shares Outstanding 10,864,072 10,754,980
Fully Diluted Shares Outstanding 10,887,474 10,771,215
<CAPTION>
At September 30,
1997 1996
<S> <C> <C>
Assets $ 1,547,121 $ 1,485,436
Loans-Net 1,284,800 1,221,050
Deposits 1,094,468 1,123,436
Shareholders' Equity 149,177 135,162
Shareholders' Equity/Assets 9.64 % 9.10 %
Shareholders' Equity Per Share $ 14.12 $ 13.04
Market Closing Price 23.75 19.60
Price/Earnings Multiple 13.81 x 3062.50 x
<CAPTION>
At September 30, 1997
Actual Required
<S> <C> <C>
Capital Ratios
Tangible Capital/Total Assets 8.63 % 1.50 %
Core (Tier One) Capital/Total Assets 8.63 % 3.00 %
Risk-Based Capital/Risk-Weighted Assets 12.46 % 8.00 %
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS
First Indiana Corporation and Subsidiaries
(Dollars in Thousands, Except Share Data)
September 30, December 31,
1997 1996
(Unaudited)
<S> <C> <C>
Assets
Cash $ 43,621 $ 31,618
Federal Funds Sold 5,500 42,000
Total Cash and Cash Equivalents 49,121 73,618
Investments Available for Sale 106,168 101,356
Investments (Market Value of $5,398 and $5,673) 5,354 5,539
Mortgage-Backed Securities Available for Sale 17,620 -
Mortgage-Backed Securities - Net(Market Value of
$22,795 and $36,984) 22,373 36,412
Loans Held for Sale 38,594 23,223
Loans Receivable 1,268,426 1,211,095
Less Allowance for Loan Losses (22,220) (18,768)
Loans Receivable - Net 1,284,800 1,215,550
Premises and Equipment 13,864 13,705
Accrued Interest Receivable 11,354 10,696
Real Estate Owned - Net 4,042 4,285
Prepaid Expenses and Other Assets 32,425 35,260
Total Assets $ 1,547,121 $ 1,496,421
Liabilities and Shareholders' Equity
Liabilities
Non-Interest-Bearing Deposits $ 91,836 $ 83,259
Interest-Bearing Deposits 1,002,632 1,012,227
Total Deposits 1,094,468 1,095,486
Federal Home Loan Bank Advances 227,458 215,466
Short-Term Borrowings 56,285 30,055
Accrued Interest Payable 2,368 2,018
Advances by Borrowers for Taxes and Insurance 3,598 1,120
Other Liabilities 8,792 7,933
Total Liabilities 1,392,969 1,352,078
Negative Goodwill 4,975 5,685
Shareholders' Equity
Preferred Stock, $.01 Par Value: 2,000,000 Shares
Authorized; None Issued -
Common Stock, $.01 Par Value: 16,000,000 Shares
Authorized; 11,145,166 and 10,966,934 Shares Issued and
Outstanding, Including Shares in Treasury 111 110
Paid-In Capital in Excess of Par 34,463 33,203
Retained Earnings 120,715 111,767
Net Unrealized Gain (Loss) on Securities
Available For Sale 196 (72)
Treasury Stock-at Cost, 583,840 and 587,666 Shares (6,308) (6,350)
Total Shareholders' Equity 149,177 138,658
Total Liabilities and Shareholders' Equity $ 1,547,121 $ 1,496,421
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE> 4
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
First Indiana Corporation and Subsidiaries
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Interest Income
Loans $ 30,117 $ 28,169 $ 87,171 $ 86,011
Mortgage-Backed Securities 559 725 1,780 2,327
Investments 1,692 1,881 5,138 5,178
Federal Funds Sold and
Interest-Bearing Deposits 150 211 563 633
Total Interest Income 32,518 30,986 94,652 94,149
Interest Expense
Deposits 12,590 13,049 37,110 39,360
Federal Home Loan Bank Advances 3,171 2,620 9,118 7,987
Short-Term Borrowings 479 120 1,135 657
Total Interest Expense 16,240 15,789 47,363 48,004
Net Interest Income 16,278 15,197 47,289 46,145
Provision for Loan Losses 2,600 1,529 8,100 5,904
Net Interest Income After
Provision for Loan Losses 13,678 13,668 39,189 40,241
Non-Interest Income
Sale of Investments Held For Sale 220 (16) 222 207
Sale of Loans 1,329 (360) 2,907 1,654
Sale of Subsidiary - - - 1,204
Dividends on Federal Home Loan Bank Stock 275 261 789 773
Loan Servicing Income 728 776 2,183 2,064
Loan Fees 580 632 1,842 1,800
Insurance Commissions 45 33 221 599
Accretion of Negative Goodwill 237 237 711 711
Deposit Product Fee Income 662 679 1,959 1,866
Other 643 550 1,735 1,694
Total Non-Interest Income 4,719 2,792 12,569 12,572
Non-Interest Expense
Salaries and Benefits 5,292 4,165 15,054 14,413
Net Occupancy 642 778 2,168 2,318
Deposit Insurance 169 7,840 523 9,128
Real Estate Owned Operations - Net 165 214 427 305
Equipment 1,205 1,146 3,499 3,310
Office Supplies and Postage 471 459 1,408 1,581
Other 2,702 2,364 7,731 7,298
Total Non-Interest Expense 10,646 16,966 30,810 38,353
Earnings Before Income Taxes 7,751 (506) 20,948 14,460
Income Taxes 3,045 (526) 8,190 5,071
Net Earnings $ 4,706 $ 20 $ 12,758 $ 9,389
Primary Earnings Per Share $ 0.43 $ 0.00 $ 1.17 $ 0.87
Fully Diluted Earnings Per Share $ 0.43 $ 0.00 $ 1.17 $ 0.87
Dividends Per Common Share $ 0.12 $ 0.11 $ 0.36 $ 0.34
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE> 5
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
First Indiana Corporation and Subsidiaries Net Unreal-
(Dollars in Thousands, Except Share Data) Paid-In ized Gain (Loss)
(Unaudited) Capital on Securities Total
Common Stock in Excess Retained Available for Treasury Shareholders
Shares Amount of Par Earnings Sale Stock Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 10,379,268 $110 $33,203 $111,767 ($72) ($6,350) $138,658
Common Stock Issued Under Restricted
Stock Plans-Net of Amortization 36,250 870 (652) 218
Exercise of Stock Options 167,255 1 863 864
Redemption of Common Stock (24,852) (501) (501)
Tax Benefit of Stock Options Exercised 656 656
Unrealized Gain on Securities Available
for Sale, Net of Income Taxes of $164 268 268
Common Stock Issued Under Deferred
Compensation Plan (18) (18)
Net Earnings For The Nine Months
Ended September 30, 1997 12,758 12,758
Dividends on Common Stock (3,796) (3,796)
Payment for Fractional Shares (421) (12) (12)
Treasury Stock Issued Under Long-
Term Incentive Plan 3,826 40 42 82
Balance at September 30, 1997 10,561,326 $111 $34,463 $120,715 $196 ($6,308) $149,177
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE> 6
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
First Indiana Corporation and Subsidiaries
(Dollars in Thousands)
(Unaudited)
Nine Months Ended September 30,
1997 1996
<S> <C> <C>
Cash Flows from Operating Activities
Net Earnings $ 12,758 $ 9,389
Adjustments to Reconcile Net Earnings to
Net Cash Provided (Used) by Operating Activities
(Gain) Loss on Sale of Assets (3,128) (1,882)
Amortization 533 1,249
Amortization of Restricted Stock Plan 218 325
Depreciation 1,515 1,453
Net (Accretion) Amortization of Loans
and Mortgage-Backed Securities 369 (62)
Provision for Loan Losses 8,100 5,904
Origination of Loans Held For Sale
Net of Principal Collected (139,901) (232,785)
Origination of Mortgage-Backed
Available for Sale (17,568) (734)
Proceeds from Sale of Loans Held for Sale 127,463 234,295
Proceeds from Sale of Mortgage-Backed
Securities Available for Sale - 734
Change In:
Accrued Interest Receivable (658) 219
Other Assets (3,632) (1,730)
Accrued Interest Payable 350 (430)
Other Liabilities 941 6,281
Net Cash Provided (Used) by Operating Activities (12,640) 22,226
Cash Flows from Investing Activities
Proceeds from Maturities of Investment Securities 15,727 18,931
Proceeds from Sale of Investments Available for Sale - 25,560
Purchase of Investment Securities Available for Sale (19,958) (68,225)
Principal Collected on Mortgage-Backed Securities 6,732 10,489
Proceeds from Sale of Mortgage-Backed Securities 7,528 -
Originations of Loans Net of Principal Collected (58,348) (11,224)
Proceeds from Sale of Indirect Installment Portfolio - 32,756
Proceeds from Sale of Loans 1,261 2,730
Proceeds from Sale of Premises and Equipment 20 43
Purchase of Premises and Equipment (1,694) (2,256)
Net Cash Provided (Used) by Investing Activities (48,732) 8,804
Cash Flows from Financing Activities
Net Change in Deposits (1,018) (13,544)
Repayment of Federal Home Loan Bank Advances (144,028) (219,026)
Borrowings of Federal Home Loan Bank Advances 156,020 184,710
Net Change in Short-Term Borrowings 26,230 (21,076)
Net Change in Advances by Borrowers
for Taxes and Insurance 2,478 1,524
Stock Option Proceeds 363 252
Payment for Fractional Shares (18) (16)
Dividends Paid (3,796) (3,482)
Tax Benefit of Stock Options Exercised 656 -
Common Stock Issued Under Deferred Compensation Plan (12) (15)
Net Cash Provided (Used) by Financing Activities 36,875 (70,673)
Net Change in Cash and Cash Equivalents (24,497) (39,643)
Cash and Cash Equivalents at Beginning of Period 73,618 74,894
Cash and Cash Equivalents at End of Period $ 49,121 $ 35,251
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Period For:
Interest on Deposits, Advances, and
Other Borrowed Money $ 47,013 $ 48,434
Income Taxes 8,560 7,751
Transfer of Loans to Real Estate Owned 5,261 284
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE> 7
FIRST INDIANA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Nine Months Ended September 30, 1997
(Unaudited)
Note 1 - Basis of Presentation
The foregoing condensed consolidated financial statements are
unaudited. However, in the opinion of management, all adjustments
(comprising only normal recurring accruals) necessary for a fair presentation
of the financial statements have been included. Results for any interim period
are not necessarily indicative of results to be expected for the year. The
consolidated financial statements include the accounts of First Indiana
Corporation and its subsidiary (the "Corporation"). The subsidiary of the
Corporation is First Indiana Bank and its subsidiaries (the "Bank"). A
summary of the Corporation's significant accounting policies is set forth in
Note 1 of the Notes to Consolidated Financial Statements in the
Corporation's Annual Report on Form 10-K for the year ended December 31,
1996.
Note 2 - Earnings Per Share
Earnings per share for 1997 and 1996 are computed by dividing net
earnings by the primary and fully diluted shares of common stock and
common stock equivalents outstanding during the period (10,877,203 and
10,894,352 for the three months ended September 30, 1997; 10,763,061 and
10,779,888 for the three months ended September 30, 1996; 10,864,072 and
10,887,474 for the nine months ended September 30, 1997; and 10,754,980
and 10,771,215 for the nine months ended September 30, 1996) after giving
retroactive effect to a five-for-four stock split in March 1997 and a
six-for-five stock split in March 1996. See Note 5 regarding impending changes
in the calculation of earnings per share.
Note 3 - Derivative Financial Instruments
The Bank enters into forward sales contracts for future delivery of
residential fixed-rate mortgage loans at a specified yield in order to limit
market risk associated with its pipeline of residential mortgage loans held for
sale and commitments to fund residential mortgage loans. Market risk arises
from the possible inability of either party to comply with the contract terms.
The Bank designates these forward sales contracts as hedges. To
qualify as a hedge, the forward sales contract must be effective in reducing the
market risk of the identified anticipated residential mortgage loan sale which
is probable to occur. Effectiveness is evaluated on an ongoing basis through
analysis of the residential mortgage loan pipeline position. Commitments
under these forward sales contracts and the underlying residential mortgage
loans are valued,and the net position is carried at the lower of cost or market.
Unrecognized gains and losses on these forward sales contracts are generally
immaterial and are charged to current earnings as an adjustment to the gain
or loss on residential mortgage loan sales when realized, when the contract
matures, or is terminated.
<PAGE> 8
Note 4 - Allowance for Loan Loss Reserve
Allowances have been established for possible losses on loans and real
estate owned ("REO"). The provisions for losses charged to operations are
based on management's judgment of current circumstances and the credit risk
of the loan portfolio and REO. Management believes that these allowances
are adequate. While management uses available information to recognize
losses on loans and REO, future additions to the allowances may be necessary
based on changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examinations, periodically review these
allowances and may require the Corporation to recognize additions to the
allowance based on their judgment about information available to them at the
time of their examination.
Note 5 - Current Accounting Pronouncements
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. Effective January 1, 1997, the Bank adopted
Statement of Financial Accounting Standard No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" ("SFAS 125"). SFAS 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments
of liabilities based on consistent application of a financial components
approach that focuses on control. It distinguishes transfers of financial assets
that are sales from transfers that are secured borrowings. The financial
components approach focuses on the assets and liabilities that exist after the
transfer.
In December 1996, the Financial Accounting Standards Board
("FASB") issued SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of SFAS No. 125," deferring by one year the effective date of
certain provisions of SFAS 125, which was 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. These pronouncements had no material impact on the
financial statements of the Corporation.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per
Share" ("SFAS 128"). SFAS 128 provides computation, presentation, and
disclosure requirements for earnings per share. The current presentation of
primary and fully diluted earnings per share will be replaced with basic and
diluted earnings per share. The Statement is effective for financial statements
for both interim and annual periods ending after December 15, 1997, and
earlier application is not permitted. Because basic earnings per share under
SFAS 128 excludes dilutive securities, management expects that the new basic
earnings per share will be significantly higher than primary earnings per share,
which includes the effect of potentially dilutive securities. Diluted earnings
per share is not expected to materially change from the current fully diluted
earnings per share presentation.
In connection with SFAS 128, the FASB also issued SFAS No. 129,
"Disclosure of Information about Capital Structure" ("SFAS 129"). While
SFAS 128 applies only to public companies, SFAS 129 is applicable to both
public and nonpublic companies. This statement is not expected to have a
material impact on disclosures currently made by the Corporation.
<PAGE> 9
In June, 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), which establishes standards for
reporting and displaying comprehensive income and its components in the
financial statements. Comprehensive income is the total of net income and all
nonowner changes in shareholders' equity. The Statement is effective for
fiscal years beginning after December 15, 1997, with earlier application
permitted. The Statement will require new disclosures by the Corporation,
but is not expected to have an impact on the financial statements or results of
operations.
In June, 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information" ("SFAS 131"), which
introduces new guidance on segment reporting. The Statement is effective for
fiscal years beginning after December 15, 1997, with earlier application
encouraged. The statement is not expected to have a material impact on the
financial condition or results of operations of the Corporation.
Note 6 - Reclassifications
Certain amounts in the 1996 Condensed Consolidated Financial
Statements have been reclassified to conform to the 1997 presentation.
<PAGE> 10
Management's Discussion and Analysis of Results of
Operations and Financial Condition
Summary of Corporation's Results
First Indiana Corporation and subsidiaries had net earnings of
$4,706,000 for the third quarter of 1997, compared with net earnings of
$20,000 in the third quarter of 1996. Earnings per share for the three months
ended September 30, 1997 were $.43, compared with $.00 per share for the
same period one year ago. Included in net earnings in the third quarter of
1996 is a one-time after-tax charge of $4,016,000, or $.37 per share, to cover
an assessment by the FDIC to recapitalize the Savings Association Insurance
Fund.
For the first nine months of 1997, net earnings were $12,758,000,
compared with $9,389,000 one year ago. For the nine months ended
September 30, 1997, net earnings per share were $1.17, compared with $0.87
for the same period one year ago.
Cash dividends per share for the first nine months of 1997 and 1996
were $.36 and $.34 per share, respectively.
Net Interest Income
Net interest income was $16,278,000 for the three months ended
September 30, 1997, compared with $15,197,000 for the three months ended
September 30, 1996. For the nine months ended September 30, 1997, net
interest income was $47,289,000, compared with $46,145,000 for the nine
months ended September 30, 1996.
Total net loans outstanding grew five percent to $1,284,800,000 at
September 30, 1997, compared with $1,221,050,000 one year earlier. Much
of the Bank's growth stemmed from two areas targeted for expansion: home
equity and commercial and industrial loans. At September 30, 1997, home
equity loans outstanding were $518,397,000, compared with $507,420,000
at September 30, 1996. Commercial and industrial and land development
loans were $114,743,000, compared with $85,193,000 one year earlier, a 35
percent increase. Residential loans increased seven percent to $453,187,000
at September 30, 1997, compared with $424,765,000 last year. This increase
occurred as a result of the Bank's expansion of its wholesale lending network.
Interest income for the third quarter of 1997 was $32,518,000,
compared with $30,986,000 for the three months ended September 30, 1996.
Interest income for the nine months ended September 30, 1997 was
$94,652,000, compared with $94,149,000 for the same period in 1996.
Interest expense for the third quarter of 1997 was $16,240,000, compared
with $15,789,000 for the three months ended September 30, 1996. Interest
expense for the nine months ended September 30, 1997 and 1996 was
$47,363,000 and $48,004,000, respectively.
During the third quarter of 1997, the Corporation's cost of funds was
5.16 percent, compared with 5.20 percent one year ago. For the nine months
ended September 30, 1997, the cost of funds was 5.07 percent, compared
with 5.19 percent for the same period in 1996. The yield on earning assets
was 8.97 percent for the third quarter of 1997, compared with 8.83 percent
one year ago. For the nine months ended September 30, 1997, the yield on
earning assets was 8.84 percent, compared with 8.89 percent for the same
period in 1996.
<PAGE> 11
Annualized return on total average assets was 1.25 percent for the
three months ended September 30, 1997, compared with 0.01 percent one
year ago. For the nine months ended September 30, 1997, the Corporation's
annualized return on total average assets was 1.14 percent, compared with
0.84 percent for the same period in 1996. The 1996 returns are depressed
primarily due to the one-time SAIF assessment.
Net Interest Margin
Net interest margin consists of two components: interest-rate spread
and the contribution of interest-free funds (primarily capital and other
non-interest-bearing liabilities). The following analysis of net interest
margin reflects the Corporation's ability to generate strong net interest
income resulting from a prudent combination of assets and liabilities.
<TABLE>
<CAPTION>
Three Months Ended September 30,
(Dollars in Thousands) 1997 1996
<S> <C> <C>
Net Interest Income $ 16,278 $ 15,197
Average Interest-Earning Assets $ 1,450,272 $ 1,404,160
Average Interest-Bearing Liabilities 1,258,489 1,215,443
Average Interest-Free Funds $ 191,783 $ 188,717
Yield on Interest-Earning Assets 8.97% 8.83%
Yield on Interest-Bearing Liabilities 5.16% 5.20%
Interest-Rate Spread 3.81% 3.63%
Impact of Interest-Free Funds 0.68% 0.70%
Net Interest Margin 4.49% 4.33%
<CAPTION>
All non-accruing delinquent loans have been included in average
interest-earning assets.
Nine Months Ended September 30,
(Dollars in Thousands) 1997 1996
<S> <C> <C>
Net Interest Income $ 47,289 $ 46,145
Average Interest-Earning Assets $ 1,427,585 $ 1,412,451
Average Interest-Bearing Liabilities 1,246,751 1,234,125
Average Interest-Free Funds $ 180,834 $ 178,326
Yield on Interest-Earning Assets 8.84% 8.89%
Yield on Interest-Bearing Liabilities 5.07% 5.19%
Interest-Rate Spread 3.77% 3.70%
Impact of Interest-Free Funds 0.65% 0.66%
Net Interest Margin 4.42% 4.36%
</TABLE>
All non-accruing delinquent loans have been included in average
interest-earning assets.
<PAGE> 12
Non-Performing Assets and Summary of Loan Loss Experience
The following table analyzes the allowance for losses on loans and
REO for the nine months ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>
Loan Loss REO Loss Loan and REO
Allowance Allowance Loss Allowance
1997 1996 1997 1996 1997 1996
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance of Loss Allowance
at Beginning of Year $18,768 $16,234 $543 $1,066 $19,311 $17,300
Provision for Losses 8,100 6,925 -- (250) 8,100 6,675
Recapture of Provision Due to Auto
Portfolio Sale -- (1,021) -- -- -- (1,021)
Charge-Offs -- Residential -- (9) (13) (6) (13) (15)
-- Consumer (5,287) (6,286) (179) (307) (5,466) (6,593)
-- Construction (1,079) (212) (8) (40) (1,087) (252)
-- Commercial and
Industrial (59) -- -- -- (59) 0
-- Commercial Real
Estate -- -- -- -- 0 0
Recoveries -- Residential -- 9 6 1 6 10
-- Consumer 1,011 782 159 85 1,170 867
-- Construction 35 67 17 -- 52 67
-- Commercial and
Industrial 4 39 -- -- 4 39
-- Commercial Real
Estate 727 -- -- -- 727 0
Balance at September 30, $22,220 $16,528 $525 $549 $22,745 $17,077
Ratio of Allowance for Loan Losses to Loans
Receivable 1.70% 1.34%
Ratio of REO Loss Allowance to Real Estate Owned 11.50% 14.37%
Ratio of Total Loan and REO Loss Allowance to
Non-Performing Assets 103.38% 60.21%
</TABLE>
Non-performing assets were $22,002,000, or 1.42 percent of assets,
at September 30, 1997. This compares with $27,121,000, or 1.81 percent of
assets, at December 31, 1996 and $28,364,000, or 1.91 percent of assets, at
September 30, 1996. This category includes non-accrual loans and REO.
The Bank regularly reviews all non-performing assets to evaluate the
adequacy of the allowances for losses on loans and REO. The allowance for
loan losses is maintained through a provision for loan losses, which is charged
to earnings. The provisions are determined in conjunction with management's
review and evaluation of current economic conditions, changes in the
character and size of the loan portfolio, estimated charge-offs, and other
pertinent information derived from a quarterly review of the loan portfolio and
REO properties.
The provision for losses on loans and REO in the third quarter of 1997
was $2,600,000, compared with $1,529,000 in the third quarter of 1996. The
1996 loan loss provision includes a $1,021,000 recapture of provision from
the Bank's sale of $32,756,000 in indirect automobile loans. For the nine
months ended September 30, 1997, the total provision for loan losses was
$8,100,000, compared with $5,904,000 for the same period in 1996. The
increase is attributable to the growth in home equity and commercial and
industrial loans. While management believes that these portfolios have strong
credit quality, it recognizes the increased risk of such portfolios compared to
traditional residential loan portfolios, and has increased the Bank's loan loss
provision accordingly.
<PAGE> 13
During the third quarter of 1996, the Bank decreased the allowance
for REO losses by $150,000. 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 increased charge-offs in 1996 and 1997 over previous levels
reflect both the significant increase in home equity loans outstanding and a
change to a more conservative charge-off policy. The Bank now writes
down consumer loans at the date of foreclosure and charges off the entire
balance of home equity loans greater than 120 days delinquent with loan-to-
value ratios above 90 percent. If the loan has a loan-to-value ratio less than
90 percent, the loan is written down to its estimated disposition value after
considering any first mortgage position and 15 percent disposition costs.
Indirect automobile loans greater than 120 days delinquent are charged off in
full. If collection efforts result in a subsequent recovery of all or a
portion of the loan amount, the Bank recognizes the recovery at the time of
receipt.
The amount of the provision in 1997 is the result of management's
ongoing evaluation of the adequacy of its loan and real estate owned loss
allowances and the changing composition of the Corporation's loan portfolio
and REO. Management will continue to evaluate the adequacy of the
provision and will adjust it if necessary to reflect changes in the amount or
category of loans originated, changes in current economic conditions and the
credit risk of the loan portfolio and REO.
Non-Interest Income
Total non-interest income was $4,719,000 for the three months ended
September 30, 1997, compared with $2,792,000 for the same period in 1996.
For the nine months ended September 30, 1997 and 1996, total non-interest
income was $12,569,000 and $12,572,000, respectively. Non-interest income
in 1996 includes a $1,204,000 pre-tax gain from the second quarter sale of the
Bank's investment and insurance subsidiaries, One Investment Corporation
and One Insurance Agency.
During the third quarter, the Bank sold $7,299,000 of mortgage-backed
securities near maturity at a gain of $220,000. During the first half of
1996, the Bank sold $15,336,000 of its investments available for sale at a gain
of $208,000.
During 1997, the Bank has realized $1,582,000 on the sale of fixed-rate
home equity loans. The remaining gain on sale of loans of $1,325,000 in
1997 is attributable to the sale of residential mortgage loans in the normal
course of the Bank's mortgage banking operations. The 1996 gain of
$1,654,000 is comprised of a $882,000 gain on home equity loans, a
$1,700,000 gain on residential mortgage loans, and a $928,000 loss on the
indirect automobile portfolio sale.
Insurance commissions decreased $378,000 for the nine months ended
September 30, 1997 compared to the same periods in 1996 due to the sale of
the Bank's insurance subsidiary in the second quarter of 1996.
<PAGE> 14
Non-Interest Expense
Non-interest expense was $10,646,000 for the three months ended
September 30, 1997, compared with $16,966,000 for the same period in
1996. Non-interest expense for the nine months ended September 30, 1997
and 1996 was $30,810,000 and $38,353,000, respectively. Included in 1996
non-interest expense is the one-time $7,191,000 assessment by the FDIC to
recapitalize SAIF. Capitalized costs decreased $247,000 and $596,000 for
the three and nine months ended September 30, 1997, respectively, compared
with a year ago due to lower loan origination volume. Deposit insurance
premiums decreased an additional $1,414,000 in 1997 as a result of lower
premium rates following the 1996 SAIF charge.
Included in real estate owned operations net are all of the operating
revenues and expenses associated with the Corporation's real estate owned.
Such net results declined by $122,000 for the nine months ended September
30, 1997, respectively, from one year ago. This decline resulted from an
increase in the general maintenance expenses of the consumer REO portfolio.
Capital Resources and Liquidity
At September 30, 1997, shareholders' equity was $149,177,000, or
9.64 percent of total assets, compared with $138,658,000, or 9.27 percent,
at December 31, 1996 and $135,162,000, or 9.10 percent, at September 30,
1996.
The following table shows First Indiana's strong capital levels and
compliance with all capital requirements at September 30, 1997. 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>
To Be Well
For FDICIA Capitalized Under OTS
(Dollars in Thousands) Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
First Indiana Bank Capital $133,857
Tangible Capital (1) $133,661 8.63% $23,240 1.50% N/A N/A
Core (Tier One) Capital 133,661 8.63% 46,481 3.00% 77,468 5.00%
Tier One Risk-Based Capital 133,661 11.32% N/A N/A 70,870 6.00%
Total Risk-Based Capital (2) 147,120 12.46% 94,493 8.00% 118,116 10.00%
(1) First Indiana Bank capital differs from tangible capital by the FAS115 equity
securities adjustment of $196.
(2) Risk-based capital includes a $14,857 addition for general loan loss reserves and
a $1,398 deduction for land loans with loan-to-value ratios in excess of 80 percent.
</TABLE>
<PAGE> 15
The Corporation paid a quarterly dividend of $.12 per common
share September 16, 1997 to shareholders of record as of September 2,
1997. This reflects an increase from $.11 per share in 1996. For the nine
months ended September 30, 1997 the Corporation has paid $.36 per share
in dividends, compared to $.34 for the same period in 1996. On March 18,
1997, the Corporation effected a five-for-four stock split. On March 1,
1996, the Corporation effected a six-for-five stock split. All per-share
amounts have been adjusted to reflect the stock splits.
The Corporation conducts its business through its subsidiaries. The
main source of funds for the Corporation is dividends from the Bank. The
Corporation has no significant assets other than its investment in the Bank.
Regulations of the former Federal Home Loan Bank Board (the
Bank Board") required thrift institutions to maintain minimum levels of
certain liquid investments, as defined in the regulations, of at least five
percent of net withdrawable assets. The director of the OTS is required to
set minimum liquidity levels between four and 10 percent of assets.
Current regulations require a minimum liquidity level of five percent. The
Corporation's liquidity ratio at September 30, 1997, was 7.70 percent. A
proposal currently being considered by the OTS would lower the liquidity
requirement to four percent of net withdrawable assets, as well as change
the definition of liquid assets and net withdrawable assets.
<PAGE> 16
Interest-Rate Sensitivity
The following schedule analyzes the difference in rate-sensitive assets
and liabilities or gap at September 30, 1997 and December 31, 1996.
<TABLE>
<CAPTION>
Rate Sensitivity by Period of Maturity or Rate Change
September 30, 1997
Over 180 Over
% of Within Days to 1 Year to Over
(Dollars in Thousands) Rate Balance Total 180 Days 1 Year 5 Years 5 Years
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Investment Securities & Other 6.03%$ 117,022 7.99%$ 48,102 15,047 53,873 -
Loans Receivable (1)
Mortgage-Backed Securities 7.16% 39,993 2.73% 6,851 8,147 14,990 10,005
Residential Mortgage Loans 7.83% 453,187 30.95% 181,787 71,138 147,230 53,032
Commercial Real Estate Loans 11.66% 39,613 2.71% 10,813 5,866 12,926 10,008
Commercial and Industrial Loans 8.96% 114,742 7.84% 72,445 1,191 26,581 14,525
Consumer Loans 10.21% 540,527 36.92% 224,754 49,309 196,055 70,409
Residential Construction Loans 9.15% 158,951 10.86% 143,224 - 15,727 -
Total 8.88%$ 1,464,035 100.00% 687,976 150,698 467,382 157,979
Interest-Bearing Liabilities
Deposits:
Demand Deposits (2) 2.42%$ 96,989 7.54%$ - - - 96,989
Passbook Deposits (3) 2.99% 42,786 3.33% 10,106 5,938 21,096 5,646
Money Market Savings 4.81% 265,242 20.62% 265,242 - - -
Jumbo Certificates 5.82% 115,285 8.96% 60,064 37,073 18,148 -
Fixed-Rate Certificates 5.66% 482,330 37.50% 120,028 164,162 198,140 -
Total 5.03% 1,002,632 77.95% 455,440 207,173 237,384 102,635
Borrowings:
FHLB Advances 5.54% 227,458 17.68%$ 143,000 4,000 77,000 3,458
Short-Term Borrowings 5.30% 56,285 4.37% 56,285 - - -
Total 5.13% 1,286,375 100.00% 654,725 211,173 314,384 106,093
Net - Other (4) 177,660 177,660
Total $ 1,464,035 654,725 211,173 314,384 283,753
Rate Sensitivity Gap $ 33,251 $ (60,475)$ 152,998 $ (125,774)
June 30, 1997
Cumulative Rate-Sensitivity Gap $ 33,251 $ (27,224)$ 125,774
Percent of Total Interest-Earning Assets 2.27% (1.86)% 8.59%
December 31, 1996
Cumulative Rate-Sensitivity Gap $ 28,793 $ 63,902 $ 116,236
Percent of Total Interest-Earning Assets 2.03% 4.50% 8.19%
(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
$21,152,000 of Loans Held for Sale. Included in Consumer Loans are $17,442,000 of Home
Equity Loans Held for Sale.
(2) These deposits have been included in the Over 5 Years category to reflect management's
assumption that these accounts are not rate-sensitive. This assumption is based upon historic
trends of these deposits through periods of significant increases and decreases in interest rates
without changes in rates paid on these deposits. Included in this category are NOW, money
market checking and non-interest bearing deposits. The rate represents a blended rate on all
deposit types in the category.
(3) A portion of these deposits has been included in the Over 5 Years category to reflect
management's assumption that these accounts are not rate-sensitive. This assumption is based
upon the historic minimal decay rates on these types of deposits experienced through periods of
significant increases and decreases in interest rates without changes in rates paid on these
deposits.
(4) Net Other is the excess of other non-interest-bearing liabilities and capital over other non-interest-bearing assets.
</TABLE>
<PAGE> 17
First Indiana engages in rigorous, formal asset/liability management,
the objectives of which are to manage interest-rate risk, ensure adequate
liquidity, and coordinate sources and uses of funds. At September 30, 1997,
the Corporation's cumulative one-year interest-rate gap stood at a negative
1.86 percent. This means that 1.86 percent of First Indiana's liabilities will
reprice within one year without a corresponding repricing of the assets they
are funding.
Financial Condition
Total assets at September 30, 1997, were $1,547,121,000, an increase
from $1,496,421,000 at December 31, 1996.
Loans and mortgage-backed securities net at September 30, 1997,
were $1,284,800,000, compared with $1,215,550,000 at December 31, 1996.
During the third quarter, the Bank sold $7,299,000 in mortgage-backed
securities near maturity and purchased $17,620,000 in mortgage-backed
securities available for sale. The new mortgage-backed securities were
classified as available for sale primarily due to the increased flexibility the
Bank has in managing this portfolio of assets.
In the past nine months, loans increased $69,250,000, primarily as the
Bank built a portfolio of available-for-sale fixed-rate home equity loans and
expanded both its commercial and industrial and wholesale lending delivery
channels. The Corporation's residential loan servicing portfolio amounted to
$977,827,000 at September 30, 1997, compared with $1,077,090,000 at
September 30, 1996.
Total deposits were $1,094,468,000 at September 30, 1997, compared
with $1,095,486,000 at December 31, 1996. Non-interest-bearing deposits
consist of retail and commercial checking accounts, as well as official
checking accounts. Commercial checking accounts are expected to become
a more significant source of funds. Included in commercial checking accounts
at September 30, 1997 and December 31, 1996 were approximately
$9,339,000 and $5,321,000 of escrow balances maintained for loans serviced
for others. Official checking accounts included in total deposits at September
30, 1997 and December 31, 1996 were $36,671,000 and $33,157,000,
respectively. Federal Home Loan Bank advances totaled $227,458,000 at
September 30, 1997, compared with $215,466,000 at December 31, 1996.
In addition to deposits and advances, the Corporation uses short-term
repurchase agreements as sources of funds. Borrowings will continue to be
used in the short run to compensate for periodic or other reductions in
deposits or inflows at less than projected levels, and long-term to support
mortgage lending activities.
<PAGE> 18
Other Information
Items 1, 2, 3 , 4 and 5 are not applicable.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits Financial Data Schedule
(b) Reports on Form 8-K There were no reports on
Form 8-K filed during the nine months ended
September 30, 1997.
<PAGE> 19
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
First Indiana Corporation
November 7, 1997 /s/ Owen B. Melton, Jr.
Owen B. Melton, Jr.
President
November 7, 1997 /s/ David L. Gray
David L. Gray
Vice President and Treasurer
<PAGE> 20
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for the nine months ended September 30, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1997
<CASH> 43,621
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 5,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 123,788
<INVESTMENTS-CARRYING> 27,727
<INVESTMENTS-MARKET> 28,193
<LOANS> 1,307,020
<ALLOWANCE> 22,220
<TOTAL-ASSETS> 1,547,121
<DEPOSITS> 1,094,468
<SHORT-TERM> 128,285
<LIABILITIES-OTHER> 19,733
<LONG-TERM> 155,458
0
0
<COMMON> 111
<OTHER-SE> 149,066
<TOTAL-LIABILITIES-AND-EQUITY> 1,547,121
<INTEREST-LOAN> 87,171
<INTEREST-INVEST> 6,918
<INTEREST-OTHER> 563
<INTEREST-TOTAL> 94,652
<INTEREST-DEPOSIT> 37,110
<INTEREST-EXPENSE> 47,363
<INTEREST-INCOME-NET> 47,289
<LOAN-LOSSES> 8,100
<SECURITIES-GAINS> 222
<EXPENSE-OTHER> 30,810
<INCOME-PRETAX> 20,948
<INCOME-PRE-EXTRAORDINARY> 20,948
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,758
<EPS-PRIMARY> 1.17
<EPS-DILUTED> 1.17
<YIELD-ACTUAL> 4.42
<LOANS-NON> 17,489
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,974
<ALLOWANCE-OPEN> 18,768
<CHARGE-OFFS> 6,425
<RECOVERIES> 1,777
<ALLOWANCE-CLOSE> 22,220
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 6,119
</TABLE>
