United States Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1998
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 12,781,125 Shares
Class Outstanding at 7/31/98
<PAGE> 1
FIRST INDIANA CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX
Page
Part I Financial Information 3
Item 1. Financial Highlights
Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as
of June 30, 1998 and December 31, 1997 4
Condensed Consolidated Statements of
Earnings for the Three and Six Months
Ended June 30, 1998 and 1997 5
Condensed Consolidated Statements of
Shareholders' Equity for the Six Months
Ended June 30, 1998 6
Condensed Consolidated Statements of Cash
Flows for the Six Months Ended
June 30, 1998 and 1997 7
Notes to Condensed Consolidated Financial
Statements 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 10
Item 3. Disclosures About Market Risk 19
Part II Other Information 20
Signatures 21
<PAGE> 2
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
First Indiana Corporation and Subsidiaries
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
For the Three Months Ended
June 30,
1998 1997
<S> <C> <C>
Total Interest Income $ 33,991 $ 31,253
Total Interest Expense 18,429 15,736
Net Earnings 4,617 3,973
Basic Earnings Per Share 0.36 0.31
Diluted Earnings Per Share 0.35 0.31
Dividends Per Share 0.12 0.10
Net Interest Margin 3.83 % 4.36 %
Net Interest Spread 3.15 3.73
Return on Average Equity 11.64 11.04
Return on Average Assets 1.08 1.07
Average Shares Outstanding 12,770,240 12,661,075
Diluted Shares Outstanding 13,303,957 13,015,505
For the Six Months Ended
June 30,
1998 1997
<S> <C> <C>
Total Interest Income $ 66,859 $ 62,134
Total Interest Expense 35,866 31,123
Net Earnings 9,035 8,052
Basic Earnings Per Share 0.71 0.64
Diluted Earnings Per Share 0.68 0.62
Dividends Per Share 0.24 0.20
Net Interest Margin 3.89 % 4.38 %
Net Interest Spread 3.21 3.75
Return on Average Equity 11.51 11.31
Return on Average Assets 1.08 1.09
Average Shares Outstanding 12,744,117 12,613,753
Diluted Shares Outstanding 13,301,737 13,029,025
<CAPTION>
At June 30,
1998 1997
<S> <C> <C>
Assets $ 1,750,819 $ 1,520,762
Loans-Net 1,453,826 1,259,829
Deposits 1,220,295 1,093,848
Shareholders' Equity 160,223 145,432
Shareholders' Equity/Assets 9.15 % 9.56 %
Shareholders' Equity Per Share $ 12.54 $ 11.48
Market Closing Price 26.13 18.75
Price/Earnings Multiple 18.66 x 15.20 x
<CAPTION>
At June 30, 1998
Actual Required
<S> <C> <C>
Capital Ratios
Tangible Capital/Total Assets 7.75 % 1.50 %
Core (Tier One) Capital/Total Assets 7.75 % 3.00 %
Risk-Based Capital/Risk-Weighted Assets 11.35 % 8.00 %
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS
First Indiana Corporation and Subsidiaries
(Dollars in Thousands, Except Share Data)
June 30, December 31,
1998 1997
(Unaudited)
<S> <C> <C>
Assets
Cash $ 50,489 $ 34,231
Federal Funds Sold 27,000 16,000
Total Cash and Cash Equivalents 77,489 50,231
Investments Available for Sale 112,931 106,095
Investments Held to Maturity 5,219 5,305
(Market Value of $5,306 and $5,419)
Mortgage-Backed Securities Available for Sale 15,208 17,077
Mortgage-Backed Securities Held to Maturity - Net
(Market Value of $17,861 and $21,549) 17,585 21,202
Loans Held for Sale 135,777 57,518
Loans Receivable 1,342,496 1,313,425
Less Allowance for Loan Losses (24,447) (22,414)
Loans Receivable - Net 1,453,826 1,348,529
Premises and Equipment 14,715 13,947
Accrued Interest Receivable 11,898 11,322
Real Estate Owned - Net 3,469 3,907
Prepaid Expenses and Other Assets 38,479 35,790
Total Assets $ 1,750,819 $ 1,613,405
Liabilities and Shareholders' Equity
Liabilities
Non-Interest-Bearing Deposits $ 111,560 $ 90,612
Interest-Bearing Deposits 1,108,735 1,016,943
Total Deposits 1,220,295 1,107,555
Federal Home Loan Bank Advances 286,797 257,458
Short-Term Borrowings 62,620 75,751
Accrued Interest Payable 3,335 2,715
Advances by Borrowers for Taxes and Insurance 2,654 1,419
Other Liabilities 10,631 10,733
Total Liabilities 1,586,332 1,455,631
Negative Goodwill 4,264 4,738
Shareholders' Equity
Preferred Stock, $.01 Par Value: 2,000,000 Shares
Authorized; None Issued -
Common Stock, $.01 Par Value: 33,000,000 Shares
Authorized; 13,502,733 and 13,374,799 Shares Issued and
Outstanding, Including Shares in Treasury 135 134
Paid-In Capital in Excess of Par 35,406 34,662
Retained Earnings 129,790 123,699
Accumulated Other Comprehensive Income 1,774 981
Treasury Stock-at Cost, 721,608 and 706,608 Shares (6,882) (6,440)
Total Shareholders' Equity 160,223 153,036
Total Liabilities and Shareholders' Equity $ 1,750,819 $ 1,613,405
</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 Six Months Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest Income
Loans $ 31,345 $ 28,823 $ 61,553 $ 57,054
Investments 1,887 1,690 3,747 3,446
Mortgage-Backed Securities 558 595 1,192 1,221
Federal Funds Sold and
Interest-Bearing Deposits 201 145 367 413
Total Interest Income 33,991 31,253 66,859 62,134
Interest Expense
Deposits 13,968 12,292 27,139 24,520
Federal Home Loan Bank Advances 3,768 2,996 7,289 5,947
Short-Term Borrowings 693 448 1,438 656
Total Interest Expense 18,429 15,736 35,866 31,123
Net Interest Income 15,562 15,517 30,993 31,011
Provision for Loan Losses 2,320 2,680 5,140 5,500
Net Interest Income After
Provision for Loan Losses 13,242 12,837 25,853 25,511
Non-Interest Income
Sale of Investments Held For Sale - - 19 2
Sale of Loans 2,306 1,014 4,474 1,578
Dividends on Federal Home Loan Bank Stock 264 259 526 514
Loan Servicing Income 428 749 945 1,455
Loan Fees 668 661 1,440 1,262
Insurance Commissions 48 57 66 176
Accretion of Negative Goodwill 237 237 474 474
Deposit Product Fee Income 711 646 1,353 1,298
Other 862 643 1,460 1,091
Total Non-Interest Income 5,524 4,266 10,757 7,850
Non-Interest Expense
Salaries and Benefits 5,474 5,132 10,584 9,762
Net Occupancy 718 757 1,381 1,526
Deposit Insurance 169 175 336 354
Real Estate Owned Operations - Net 216 199 416 262
Equipment 1,293 1,141 2,467 2,294
Office Supplies and Postage 482 440 974 937
Other 2,890 2,747 5,650 5,029
Total Non-Interest Expense 11,242 10,591 21,808 20,164
Earnings Before Income Taxes 7,524 6,512 14,802 13,197
Income Taxes 2,907 2,539 5,767 5,145
Net Earnings $ 4,617 $ 3,973 $ 9,035 $ 8,052
Basic Earnings Per Share $ 0.36 $ 0.31 $ 0.71 $ 0.64
Diluted Earnings Per Share $ 0.35 $ 0.31 $ 0.68 $ 0.62
Dividends Per Common Share $ 0.12 $ 0.10 $ 0.24 $ 0.20
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE> 5
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
First Indiana Corporation and Subsidiaries Accumulated
(Dollars in Thousands, Except Share Data) Paid-In Other
(Unaudited) Capital Compre- Total
Common Stock in Excess Retained hensive Treasury Shareholders'
Shares Amount of Par Earnings Income Stock Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 12,668,191 $134 $34,662 $123,699 $981 $(6,440) $153,036
Comprehensive Income:
Net Earnings For The Six Months
Ended June 30, 1998 9,035 9,035
Unrealized Loss on Securities Available
for Sale, Net of Income Taxes of $(34)
and Reclassification Adjustment of $19 (51) (51)
Tax Benefit of Stock Options Exercised 844 844
Total Comprehensive Income 9,828
Common Stock Issued Under Restricted
Stock Plans-Net of Amortization 6,000 150 53 203
Common Stock Issued Under Deferred
Compensation Plan 65 65
Exercise of Stock Options 128,978 1 788 789
Dividends on Common Stock ($.24 per share) (3,062) (3,062)
Redemption of Common Stock (6,695) (184) (184)
Payment for Fractional Shares (349) (10) (10)
Purchase of Treasury Stock (15,000) (442) (442)
Balance at June 30, 1998 12,781,125 $135 $35,406 $129,790 $1,774 $(6,882) $160,223
</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)
Six Months Ended June 30,
1998 1997
<S> <C> <C>
Cash Flows from Operating Activities
Net Earnings $ 9,035 $ 8,052
Adjustments to Reconcile Net Earnings to
Net Cash Provided (Used) by Operating Activities:
Gain on Sale of Assets (4,493) (1,578)
Amortization 901 365
Amortization of Restricted Stock Plan 203 145
Depreciation 1,012 1,011
Net Amortization of Loans
and Mortgage-Backed Securities 279 195
Provision for Loan Losses 5,140 5,500
Origination of Loans Held For Sale
Net of Principal Collected (303,922) (79,992)
Proceeds from Sale of Loans Held for Sale 232,030 85,814
Change In:
Accrued Interest Receivable (576) (407)
Other Assets (8,849) (2,341)
Accrued Interest Payable 620 (2)
Other Liabilities (102) 1,706
Net Cash Provided (Used) by Operating Activities (68,722) 18,468
Cash Flows from Investing Activities
Proceeds from Maturities of
Investment Securities Held to Maturity 20,487 15,509
Proceeds from Sale of Investments Available for Sale 10,023 --
Purchase of Investment Securities Available for Sale (37,384) (19,958)
Principal Collected on Mortgage-Backed Securities 3,617 4,536
Originations of Loans Net of Principal Collected (32,460) (52,147)
Proceeds from Sale of Loans 5,294 59
Proceeds from Sale of Premises and Equipment -- 15
Purchase of Premises and Equipment (1,780) (605)
Net Cash Used by Investing Activities (32,203) (52,591)
Cash Flows from Financing Activities
Net Change in Deposits 112,740 (1,638)
Repayment of Federal Home Loan Bank Advances (209,048) (85,058)
Borrowings of Federal Home Loan Bank Advances 238,387 87,050
Net Change in Short-Term Borrowings (13,131) 15,474
Net Change in Advances by Borrowers
for Taxes and Insurance 1,235 590
Stock Option Proceeds 605 363
Tax Benefit of Stock Options Exercised 844 656
Common Stock Issued Under Deferred Compensation Plan 65 (12)
Payment for Fractional Shares (10) (12)
Dividends Paid (3,062) (2,528)
Purchase of Treasury Stock (442) --
Net Cash Provided (Used) by Financing Activities 128,183 14,885
Net Change in Cash and Cash Equivalents 27,258 (19,238)
Cash and Cash Equivalents at Beginning of Period 50,231 73,618
Cash and Cash Equivalents at End of Period $ 77,489 $ 54,380
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Period For:
Interest on Deposits, Advances, and
Other Borrowed Money $ 35,246 $ 31,125
Income Taxes 6,014 3,900
Transfer of Loans to Real Estate Owned 5,291 2,130
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE> 7
FIRST INDIANA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Six Months Ended June 30, 1998
(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 condensed consolidated financial statements have been included.
Results for any interim period are not necessarily indicative of results to be
expected for the year. The condensed consolidated financial statements
include the accounts of First Indiana Corporation and its subsidiaries (the
"Corporation"). The principal subsidiary of the Corporation is First Indiana
Bank and its subsidiaries (the "Bank"). A summary of the Corporation's
significant accounting policies is set forth in Note 1 of the Notes to
Consolidated Financial Statements in the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1997.
Note 2 - Earnings Per Share
In February 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standard No. 128,
"Earnings per Share" ("FAS 128"). FAS 128 provides computation,
presentation, and disclosure requirements for earnings per share and
supersedes Accounting Principles Board Opinion No. 15. Basic earnings per
share for 1998 and 1997 were computed by dividing net earnings by the
weighted averages shares of common stock outstanding (12,770,240 and
12,661,075 for the three months ended June 30, 1998 and 1997 and
12,744,117 and 12,613,753 for the six months ended June 30, 1998 and
1997). Diluted earnings per share for 1998 and 1997 were computed by
dividing net earnings by the weighted average shares of common stock and
common stock that would have been outstanding assuming the issuance of
all dilutive potential common shares outstanding (13,303,957 and
13,015,505 for the three months ended June 30, 1998 and 1997 and
13,301,737 and 13,029,025 for the six months ended June 30, 1998 and
1997) after giving retroactive effect to a six-for-five stock dividend in March
1998 and a five-for-four stock split in March 1997. Dilution of the per-share
calculation relates to stock options.
Note 3 - Allowance for Loan Loss Reserve
Allowances have been established for possible losses on loans and
real estate owned ("REO"). The provisions for losses charged to operations
are based on management's judgment of current circumstances and the
credit risk of the loan portfolio and REO. Management believes that these
allowances are adequate. While management uses available information to
recognize losses on loans and REO, future additions to the allowances may
be necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examinations, periodically
review these allowances and may require the Corporation to recognize
additions to the allowance based on their judgment about information
available to them at the time of their examination.
<PAGE> 8
Note 4 - Current Accounting Pronouncements
In June 1997, FASB issued Statement of Financial Accounting
Standard No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("FAS 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 when adopted in 1998.
In February 1998, FASB issued Statement of Financial Accounting
Standard No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("FAS 132"). The Statement does not alter the
measurement and recognition provisions currently outlined in generally
accepted accounting principles, but merely standardizes the disclosure
requirements. 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 when adopted in 1998.
In June 1998, FASB issued Statement of Financial Accounting
Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities. The Statement is effective for fiscal years beginning after June
15, 1999, with earlier application allowed. Management is currently
assessing the impact of this Statement on the financial condition and results
of operations of the Corporation upon adoption.
Note 5 - Reclassifications
Certain amounts in the 1997 Condensed Consolidated Financial
Statements have been reclassified to conform to the 1998 presentation.
<PAGE> 9
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Summary of Corporation's Results
First Indiana Corporation and subsidiaries had net earnings of
$4,617,000 for the second quarter of 1998, compared with net earnings of
$3,973,000 in the second quarter of 1997. Diluted earnings per share for the
three months ended June 30, 1998 were $.35, compared with $.31 per share
for the same period one year ago. Cash dividends for the second quarter of
1998 and 1997 were $.12 and $.10, respectively.
For the first six months of 1998, net earnings were $9,035,000,
compared with $8,052,000 one year ago. For the six months ended June 30,
1998, net earnings per share were $0.68, compared with $0.62 for the same
period one year ago. Cash dividends through the first six months of 1998
and 1997 were $.24 and $.20, respectively.
Net Interest Income
Net interest income was $15,562,000 for the three months ended
June 30, 1998, compared with $15,517,000 for the three months ended June
30, 1997. For the six months ended June 30, 1998, net interest income was
$30,993,000, compared with $31,011,000 for the six months ended June 30,
1997.
Total net loans outstanding grew to $1,453,826,000 at June 30,
1998, compared with $1,259,829,000 one year earlier. Residential loans
outstanding at June 30, 1998 were $552,805,000, up 27 percent from one
year ago. This dramatic increase in the residential portfolio illustrates the
successful implementation of strategies aimed at capitalizing upon alternative
product delivery channels, such as telemarketing and wholesale lending. At
June 30, 1998, home equity loans outstanding were $547,338,000,
compared with $507,164,000 at June 30, 1997, an eight percent increase.
Commercial and industrial loans were $150,759,000 at June 30, 1998,
compared with $111,480,000 one year earlier, a 35 percent increase. The
increase results from the Bank's focus on developing the commercial and
industrial market segment.
Interest income for the second quarter of 1998 was $33,991,000,
compared with $31,253,000 for the three months ended June 30, 1997.
Interest income for the six months ended June 30, 1998 was $66,859,000,
compared with $62,134,000 for the same period in 1997. Interest expense
for the second quarter of 1998 was $18,429,000, compared with
$15,736,000 for the three months ended June 30, 1997. Interest expense for
the six months ended June 30, 1998 and 1997 was $35,866,000 and
$31,123,000, respectively.
During the second quarter of 1998, the Corporation's cost of funds
was 5.21 percent, compared with 5.06 percent one year ago. For the six
months ended June 30, 1998, the cost of funds was 5.18 percent, compared
with 5.02 percent for the same period in 1997. The yield on earning assets
was 8.36 percent for the second quarter of 1998, compared with 8.79
percent one year ago. For the six months ended June 30, 1998, the yield on
earning assets was 8.39 percent, compared with 8.77 percent for the same
period in 1997.
<PAGE> 10
Annualized return on total average assets was 1.08 percent for the
three months ended June 30, 1998, compared with 1.07 percent one year
ago. For the six months ended June 30, 1998, the Corporation's annualized
return on total average assets was 1.08 percent, compared with 1.09 percent
for the same period in 1997.
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 effectively manage net
interest income.
<TABLE>
<CAPTION>
Three Months Ended June 30,
(Dollars in Thousands) 1998 1997
<S> <C> <C>
Net Interest Income $ 15,562 $ 15,517
Average Interest-Earning Assets $ 1,625,621 $ 1,422,121
Average Interest-Bearing Liabilities 1,414,995 1,243,257
Average Interest-Free Funds $ 210,626 $ 178,864
Yield on Interest-Earning Assets 8.36% 8.79%
Yield on Interest-Bearing Liabilities 5.21% 5.06%
Interest-Rate Spread 3.15% 3.73%
Impact of Interest-Free Funds 0.68% 0.63%
Net Interest Margin 3.83% 4.36%
<CAPTION>
All non-accruing delinquent loans have been included in average
interest-earning assets.
<CAPTION>
Six Months Ended June 30,
(Dollars in Thousands) 1998 1997
<S> <C> <C>
Net Interest Income $ 30,993 $ 31,011
Average Interest-Earning Assets $ 1,593,709 $ 1,416,240
Average Interest-Bearing Liabilities 1,385,965 1,240,880
Average Interest-Free Funds $ 207,744 $ 175,360
Yield on Interest-Earning Assets 8.39% 8.77%
Yield on Interest-Bearing Liabilities 5.18% 5.02%
Interest-Rate Spread 3.21% 3.75%
Impact of Interest-Free Funds 0.68% 0.63%
Net Interest Margin 3.89% 4.38%
<CAPTION>
All non-accruing delinquent loans have been included in average
interest-earning assets.
</TABLE>
Because residential loans offer a lower yield, the expansion into this
area resulted in a short-term negative impact on the Corporation's interest-
rate margin when compared with last year. Management has intentionally
adjusted the mix of loans with the realization that the margin would decrease
in the near term. However, management believes the Corporation is
strategically positioned for long-term growth by developing a customer base
that has the potential of utilizing other First Indiana Bank products and
services.
<PAGE> 11
Non-Performing Assets and Summary of Loan Loss Experience
The following table analyzes the allowance for losses on loans and
REO for the six months ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
Loan Loss REO Loss Loan and REO
Allowance Allowance Loss Allowance
1998 1997 1998 1997 1998 1997
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance of Loss Allowance
at Beginning of Year $22,414 $18,768 $483 $ 543 $22,897 $19,311
Provision for Losses 5,140 5,500 45 -- 5,185 5,500
Charge-Offs -- Residential (51) -- (7) -- (58) --
-- Consumer (3,686) (3,954) (193) (176) (3,879) (4,130)
-- Construction (9) (572) -- (6) (9) (578)
-- Commercial and
Industrial -- (30) -- -- -- (30)
-- Commercial Real
Estate -- -- -- -- -- --
Recoveries -- Residential 1 -- 75 6 76 6
-- Consumer 552 654 89 123 641 777
-- Construction 69 26 8 17 77 43
-- Commercial and
Industrial 17 4 -- -- 17 4
-- Commercial Real
Estate -- 333 -- -- -- 333
Balance at March 31, $24,447 $20,729 $500 $507 $24,947 $21,236
Ratio of Allowance for Loan Losses to Loans
Receivable 1.65% 1.62%
Ratio of REO Loss Allowance to Real Estate Owned 12.60% 11.67%
Ratio of Total Loan and REO Loss Allowance to
Non-Performing Assets 128.49% 91.76%
</TABLE>
Non-performing assets were $19,415,000, or 1.11 percent of assets,
at June 30, 1998. This compares with $22,822,000, or 1.41 percent of
assets, at December 31, 1997 and $23,142,000, or 1.52 percent of assets, at
June 30, 1997. This category includes not only non-accrual loans and REO,
but also restructured loans on which the Bank continues to accrue interest.
At June 30, 1997, $1,132,000 of non-performing assets were restructured
loans.
The Bank regularly reviews all non-performing assets to evaluate the
adequacy of the allowances for losses on loans and REO. The allowance for
loan losses is maintained through a provision for loan losses, which is
charged to earnings. The provisions are determined in conjunction with
management's review and evaluation of current economic conditions,
changes in the character and size of the loan portfolio, estimated charge-offs,
and other pertinent information derived from a quarterly review of the loan
portfolio and REO properties.
The provision for losses on loans in the second quarter of 1998 was
$2,320,000, compared with $2,680,000 in the second quarter of 1997. For
the six months ended June 30, 1998, the total provision for loan losses was
$5,140,000, compared with $5,500,000 for the same period in 1997.
The Bank writes down consumer loans at the date of foreclosure and
charges off the entire balance of home equity loans greater than 120 days
delinquent with loan-to-value ratios above 90 percent. If the loan has a
loan-to-value ratio of less than 90 percent, the loan is written down to its
estimated disposition value after considering any first mortgage position and
15 percent disposition costs. Indirect automobile loans greater than 120
days delinquent are charged off in full. If collection
<PAGE> 12
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 1998 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 $5,524,000 for the three months
ended June 30, 1998, compared with $4,266,000 for the same period in
1997. For the six months ended June 30, 1998 and 1997, total non-interest
income was $10,757,000 and $7,850,000, respectively.
The 1998 gain on sale of loans of $4,474,000 is comprised of both
a $2,967,000 gain on the sale of fixed-rate home equity loans and a
$1,507,000 gain on residential mortgage loans. In the second quarter of
1998 alone, the Bank recognized a gain of $1,442,000 on home equity loan
sales, and a $864,000 gain on residential sales. Throughout the first half of
1997, the Bank recognized $552,000 in gains on home equity sales and gains
of $1,026,000 through the sale of residential mortgage loans. A national
network of agents coupled with a call center, has allowed the Bank to
aggressively pursue originations of home equity products with loan-to-value
ratios of greater than 80 percent. The Bank processes and underwrites these
loans and subsequently sells them into the secondary market. In some cases,
the Bank retains the servicing rights on the home equity loan sales.
Loan servicing income for the three and six months ended June 30,
1998 decreased $321,000 and $510,000 from the comparable periods in
1997. This decrease primarily occurred as a result of the Bank's
amortization of mortgage servicing rights. During the second quarter of
1998, the Bank recognized a gain of $260,000 on the sale of loan servicing
rights.
Loan fees increased $178,000 for the first half of 1998 compared
with last year due to the increased activity in the commercial and industrial
portfolio.
Insurance commissions decreased $110,000 for the six months ended
June 30, 1998 compared with last year because of the wide availability of
alternate investment vehicles for the consumer.
<PAGE> 13
Non-Interest Expense
Non-interest expense was $11,242,000 for the three months ended
June 30, 1998, compared with $10,591,000 for the same period in 1997.
Non-interest expense for the six months ended June 30, 1998 and 1997 was
$21,808,000 and $20,164,000, respectively. Salaries and benefits increased
$342,000 and $822,000 during the three and six months ended June 30,
1998 from the first half of 1997 in order to provide processing and sales
support to the increased loan origination volume efforts, both in residential
and consumer lending. A renewed commitment to increase community
awareness of the Bank's products and services led to a marketing expense
increase of $479,000 in 1998 from the first six months of 1997.
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 $17,000 and $154,000 for the three and six
months ended June 30, 1998 from one year ago due to the increased asset
balance of the consumer portion of real estate owned.
In April 1998, Bank One and First Chicago NBD announced that
they would merge. Because both banks have large market shares in
Indianapolis, they will have to divest about $850 million in deposits.
Management is preparing strategies for First Indiana to take advantage of
the divestiture, which may include advertising campaigns to introduce the
Bank to new customers, launching new products into the market, and
obtaining associates who may be looking for work due to the divesture. The
Bank, therefore, expects to see an increase in non-interest expenses during
the latter half of 1998 until the tangible benefits of such an aggressive
strategy are realized.
Capital Resources and Liquidity
At June 30, 1998, shareholders' equity was $160,223,000, or 9.15
percent of total assets, compared with $153,036,000, or 9.49 percent, at
December 31, 1997 and $145,432,000, or 9.56 percent, at June 30, 1997.
<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 $135,699
Tangible Capital (1) $135,425 7.75% $26,227 1.50% N/A N/A
Core (Tier One) Capital 135,425 7.75% 52,454 3.00% 87,424 5.00%
Tier One Risk-Based Capital 135,425 10.23% N/A N/A 79,403 6.00%
Total Risk-Based Capital (2) 150,242 11.35% 105,870 8.00% 132,338 10.00%
(1) First Indiana Bank capital differs from tangible capital by the FAS115 equity
securities adjustment of $274.
(2) Risk-based capital includes a $16,640 addition for general loan loss reserves and
a $1,823 deduction for land loans with loan-to-value ratios in excess of 80 percent.
</TABLE>
<PAGE> 14
The preceding table shows First Indiana's strong capital levels and
compliance with all capital requirements at June 30, 1998. 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.
The Corporation paid a quarterly dividend of $.12 per common share
June 16, 1998 to shareholders of record as of June 4, 1998. This reflects an
increase from $.10 per share in 1997. For the six months ended June 30,
1998 the Corporation has paid $.24 per share in dividends, compared to $.20
for the same period in 1997. On March 6, 1998, the Corporation effected a
six-for-five stock dividend. On March 18, 1997, the Corporation effected
a five-for-four stock split. All per-share amounts have been adjusted to
reflect the stock dividends and splits.
The Corporation conducts its business through its subsidiaries. The
main source of funds for the Corporation is dividends from the Bank. The
Corporation has no significant assets other than its investment in the Bank.
Regulations require the director of the OTS to set minimum liquidity
levels between four and 10 percent of assets. In the fourth quarter of 1997,
the regulations were altered to lower the liquidity requirement to four
percent of net withdrawable assets, and the definition of net withdrawable
assets was simplified. This change did not have a significant impact on the
Corporation's liquidity position. The Corporation's liquidity ratio at June
30, 1998, was 9.40 percent.
Interest-Rate Sensitivity
First Indiana engages in rigorous, formal asset/liability management,
the objectives of which are to manage interest-rate risk, ensure adequate
liquidity, and coordinate sources and uses of funds. At June 30, 1998, the
Corporation's cumulative one-year interest-rate gap stood at 2.17 percent.
This means that 2.17 percent of First Indiana's assets will reprice within one
year without a corresponding repricing of the liabilities funding them.
<PAGE> 15
The following schedule analyzes the difference in rate-sensitive assets
and liabilities or gap at June 30, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
Rate Sensitivity by Period of Maturity or Rate Change
June 30, 1998
Over 180 Over
% of Within Days to 1 Year to Over
(Dollars in Thousands) Rate Balance Total 180 Days 1 Year 5 Years 5 Years
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Investment Securities & Other 6.07%$ 145,150 8.76%$ 48,768 23,538 72,844 -
Loans Receivable (1)
Mortgage-Backed Securities 7.07% 32,793 1.98% 3,853 8,369 15,711 4,860
Residential Mortgage Loans 7.40% 552,805 33.38% 289,213 76,206 152,289 35,097
Commercial Real Estate Loans 8.74% 40,197 2.43% 11,070 6,262 18,862 4,003
Commercial and Industrial Loans 9.98% 150,759 9.10% 101,251 1,506 27,993 20,009
Consumer Loans 9.65% 563,945 34.05% 224,235 57,976 245,776 35,958
Residential Construction Loans 8.86% 170,568 10.30% 153,840 8,547 8,181 -
Total 8.46%$ 1,656,217 100.00% 832,230 182,404 541,656 99,927
Interest-Bearing Liabilities
Deposits:
Demand Deposits (2) 2.37%$ 78,994 5.42%$ - - - 78,994
Passbook Deposits (3) 3.00% 42,637 2.92% 3,645 1,008 8,064 29,920
Money Market Savings 4.75% 321,789 22.07% 321,789 - - -
Jumbo Certificates 5.72% 202,495 13.89% 117,548 30,536 54,411 -
Fixed-Rate Certificates 5.64% 462,820 31.74% 196,381 88,235 178,204 -
Total 5.06% 1,108,735 76.04% 639,363 119,779 240,679 108,914
Borrowings:
FHLB Advances 5.65% 286,797 19.67%$ 115,000 42,000 125,000 4,797
Short-Term Borrowings 5.24% 62,620 4.29% 62,620 - - -
Total 5.19% 1,458,152 100.00% 816,983 161,779 365,679 113,711
Net - Other (4) 198,065 198,065
Total $ 1,656,217 816,983 161,779 365,679 311,776
Rate Sensitivity Gap $ 15,247 $ 20,625 $ 175,977 $ (211,849)
June 30, 1998
Cumulative Rate-Sensitivity Gap $ 15,247 $ 35,872 $ 211,849
Percent of Total Interest-Earning Assets 0.92 % 2.17 % 12.79%
December 31, 1997
Cumulative Rate-Sensitivity Gap $ (10,423)$ (3,148)$ 167,284
Percent of Total Interest-Earning Assets (0.68)% (0.20)% 10.89%
(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
$115,627,000 of Loans Held for Sale. Included in Consumer Loans are $20,150,000 of Home
Equity Loans Held for Sale.
(2) These deposits have been included in the Over 5 Years category to reflect management's
assumption that these accounts are not rate-sensitive. This assumption is based upon historic
trends of these deposits through periods of significant increases and decreases in interest rates
without changes in rates paid on these deposits. Included in this category are NOW, money
market checking and non-interest bearing deposits. The rate represents a blended rate on all
deposit types in the category.
(3) A portion of these deposits has been included in the Over 5 Years category to reflect
management's assumption that these accounts are not rate-sensitive. This assumption is based
upon the historic minimal decay rates on these types of deposits experienced through periods of
significant increases and decreases in interest rates without changes in rates paid on these
deposits.
(4) Net Other is the excess of other non-interest-bearing liabilities and capital over other non-interest-bearing assets.
</TABLE>
<PAGE> 16
Year 2000 Readiness
The Bank is required by the Federal Financial Institutions
Examination Council ("FFIEC") to assess both the Bank's and its vendors'
ability to be Year 2000 ready by December 31, 1998. The Year 2000 issue
refers to shortcomings which exist in some current computer hardware and
software that preclude the correct calculation of date-sensitive information
from, into, and between the twentieth and twenty-first centuries, including
leap year calculations.
The Bank has assembled a team of associates which meets regularly
to lead the Bank's Year 2000 readiness efforts. All hardware and software
vendors, as well as significant other vendors and borrowers, have been
identified and contact has been initiated with these individuals or companies.
The Bank has an inventory of known potential Year 2000 readiness issues,
and has developed action plans and contingency plans for each issue. During
1998, the Bank is validating Year 2000 readiness, upgrading or replacing
existing hardware and software, or implementing contingency plans in the
event the vendor or borrower will not assist the Bank in its Year 2000
efforts. The Bank is upgrading all of its personal computers in 1998 at a
cost approximating $550,000.
The OTS is conducting quarterly audits of all financial institutions to
assess Year 2000 readiness in accordance with FFIEC guidelines. The
Bank's data services bureau, which provides most of the automated
processing of First Indiana's customer transactions, is also being audited by
the OTS. Although management is confident of the Bank's ability to
operate in the 21st century, it is not possible to assess either the financial
impact of non-compliance or future expenditures at this time.
Financial Condition
Total assets at June 30, 1998, were $1,750,819,000, an increase
from $1,613,405,000 at December 31, 1997.
Net loans receivable at June 30, 1998, were $1,453,826,000,
compared with $1,348,529,000 at December 31, 1997. The predominant
growth in loans occurred in the residential portfolio, which amounted to
$552,805,000 at June 30, 1998, or a 10 percent increase from year-end.
Mortgage-backed securities decreased $5,486,000 to $32,793,0000 at June
30, 1998 due to normal principal repayments.
In the past six months, consumer loans increased $15,929,000,
primarily as the Bank built a portfolio of available-for-sale fixed-rate home
equity loans. The Corporation's residential loan servicing portfolio
amounted to $956,017,000 at June 30, 1998, compared with
$1,007,912,000 at June 30, 1997.
Total deposits were $1,220,295,000 at June 30, 1998, compared
with $1,107,555,000 at December 31, 1997. 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 as the Bank expands its commercial and
industrial portfolio and the related business services unit. Included in
commercial checking accounts at June 30, 1998 and December 31, 1997
were approximately $6,107,000 and $4,624,000 of escrow balances
maintained for loans serviced for others. These balances represent principal,
interest, taxes and insurance that require separate maintenance at the request
of the investor. Official checking accounts included in total deposits at June
30, 1998 and December 31, 1997 were $44,465,000 and
<PAGE> 17
$32,517,000, respectively. Federal Home Loan Bank advances totaled
$286,797,000 at June 30, 1998, compared with $257,458,000 at December 31, 1997.
The Corporation also uses short-term repurchase agreements as
sources of funds. Borrowings will continue to be used in the short run to
compensate for periodic or other reductions in deposits or inflows at less
than projected levels, and long-term to support mortgage lending activities.
<PAGE> 18
Disclosures About Market Risk
The Corporation's success is largely dependent upon its ability to
manage interest-rate risk, which is defined as the exposure of the
Corporation's net interest income and net earnings to changes in interest
rates. The Bank's Asset/Liability Committee ("ALCO") is responsible for
managing interest-rate risk and the Corporation has established acceptable
limits for interest-rate exposure, which are reviewed on a monthly basis.
The Bank uses a model which measures interest-rate sensitivity to determine
the impact on net earnings of immediate and sustained upward and
downward movements in interest rates. Incorporated into the model are
assumptions regarding the current and anticipated interest rate environment,
estimated prepayment rates of certain assets and liabilities, forecasted loan
and deposit originations, contractual maturities and renewal rates on
certificates of deposits, estimated borrowing needs, anticipated loan loss
provision, projected secondary marketing gains and losses, expected
repricing spreads on variable-rate products, and contractual maturities and
repayments on lending and investment products. The model incorporates
interest-rate sensitive instruments which are held to maturity or available for
sale. The Bank has no trading assets. Based on the information and
assumptions in effect at June 30, 1998, management believes that a 100 basis
point increase or decrease in interest rates over a 12 month period would
result in a 6.1 percent increase and a 6.5 percent decrease in net earnings,
respectively, because of the change in net interest income. Because of the
numerous assumptions used in the computation of interest-rate sensitivity,
and the fact that the model does not assume any actions the ALCO could
take in response to the change in interest rates, the results should not be
relied upon as indicative of actual results.
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> 19
Other Information
Items 1, 2, 3 and 4 are not applicable.
Item 5. When used in this Form 10-Q, the words "believes,"
"expects," "estimates," "will likely result," or "will continue"
and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and
uncertainties which could cause actual results to differ
materially. In particular, among the factors that could
cause actual results to differ materially are general business and
economic conditions, competitive and regulatory factors, credit
risks of lending activities, and interest rates. Readers are
cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The
Corporation undertakes no obligation to publicly release the
results of any revisions to these forward-looking
statements which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of
unanticipated events.
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 six months ended June 30,
1998.
<PAGE> 20
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
First Indiana Corporation
August 7, 1998 /s/Owen B. Melton, Jr.
Owen B. Melton, Jr.
President
August 7, 1998 /s/David L. Gray
David L. Gray
Vice President and
Treasurer
<PAGE> 21
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for the six months ended June 30, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1998
<CASH> 50,489
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 27,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 128,139
<INVESTMENTS-CARRYING> 22,804
<INVESTMENTS-MARKET> 23,167
<LOANS> 1,478,273
<ALLOWANCE> 24,447
<TOTAL-ASSETS> 1,750,819
<DEPOSITS> 1,220,295
<SHORT-TERM> 194,620
<LIABILITIES-OTHER> 20,884
<LONG-TERM> 154,797
0
0
<COMMON> 135
<OTHER-SE> 160,088
<TOTAL-LIABILITIES-AND-EQUITY> 1,750,819
<INTEREST-LOAN> 62,745
<INTEREST-INVEST> 3,747
<INTEREST-OTHER> 367
<INTEREST-TOTAL> 66,859
<INTEREST-DEPOSIT> 27,139
<INTEREST-EXPENSE> 35,866
<INTEREST-INCOME-NET> 30,993
<LOAN-LOSSES> 5,140
<SECURITIES-GAINS> 19
<EXPENSE-OTHER> 21,808
<INCOME-PRETAX> 14,802
<INCOME-PRE-EXTRAORDINARY> 14,802
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,035
<EPS-PRIMARY> 0.71
<EPS-DILUTED> 0.68
<YIELD-ACTUAL> 3.89
<LOANS-NON> 15,551
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 7,369
<ALLOWANCE-OPEN> 22,414
<CHARGE-OFFS> 3,746
<RECOVERIES> 639
<ALLOWANCE-CLOSE> 24,447
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 7,981
</TABLE>
