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, 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 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. [x]
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: $268,782,000 as of February 28,
1998.
On February 28, 1998, the registrant had 12,733,732 shares of
common stock outstanding, $.01 par value (as adjusted for six-for-five stock
dividend paid March 6, 1998).
Documents Incorporated by Reference: See Page 2.
<PAGE> 1
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
Annual Report to Shareholders for 1997 Part II
Proxy Statement Dated March 12, 1998 Part III
Total Number of Pages in this Report 234
List of Exhibits on Pages 30-31
<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 24
Item 4. Submission of Matters to a Vote
of Security Holders 24
PART II 24
Item 5. Market for Registrant's Common Equity
and Related Shareholder Matters 24
Item 6. Selected Financial Data 25
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operation 25
Item 7a. Quantitative and Qualitative
Disclosures About Market Risk 25
Item 8. Financial Statements and
Supplementary Data 25
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 25
PART III 26
Item 10. Directors and Executive Officers
of the Registrant 26
Item 11. Executive Compensation 27
Item 12. Security Ownership of Certain
Beneficial Owners and Management 27
Item 13. Certain Relationships and
Related Transactions 27
PART IV 28
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K 28
SIGNATURES 29
EXHIBIT INDEX 30
<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 $1.6 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 and industrial loans, and consumer loans. First Indiana offers a
full range of banking services through 26 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. The Bank also originates home equity loans indirectly through a
network of loan originators and loan agents throughout the United States.
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, Ohio, and Oregon. 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 metropolitan area served by First Indiana's flagship division
consists of Indianapolis, the State's largest city and capital, and the
surrounding six-county suburban and agricultural areas in the central part of
the State. The population of the 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
(automotive), 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. 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 meeting and
exceeding customer expectations regarding office locations and flexible hours.
Direct competition for deposits comes from other depository institutions,
money market mutual funds, and other investment products. The primary
factors in competing for loans are
<PAGE> 4
interest rates, loan origination fees, and loan product variety.
Competition for origination of loans normally comes from
other depository institutions, lending 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, commercial and industrial 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 focus resources toward real estate
lending 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
commercial and industrial loans; (ii) selling most fixed-rate, longer-term loans
into 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,
---------------
1997 1996 1995
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 $ 750,619 49.4% $ 640,743 47.3%$ 625,133 45.0%
2-4 Family Units 1,093 0.1% 1,643 0.1% 1,885 0.1%
Over 4 Family Units 9,844 0.6% 9,586 0.7% 18,946 1.4%
Mortgage-Backed Securities 38,081 2.6% 36,152 2.8% 49,089 3.6%
Commercial Real Estate and
Other Mortgage Loans 32,269 2.1% 37,735 2.8% 46,137 3.3%
Consumer Loans 548,016 36.1% 526,769 38.9% 575,009 41.4%
Commercial and Industrial Loans 137,517 9.1% 100,513 7.4% 72,146 5.2%
---------- ------ ---------- ---------------- ------
Total Mortgage-Backed
Securities and Loans Receivable
(Before Net Items) $1,517,439 100.0% $1,353,141 100.0%$1,388,345 100.0%
========== ====== ========== ================ ======
Loans by Type of Loan:
Real Estate:
Conventional:
Loans on Existing Property $ 530,603 35.0% $ 463,211 34.2%$ 464,604 33.5%
Construction Loans:
Commercial Real Estate Loans 0 0.0% 11 0.0% 6,835 0.5%
Commercial and Industrial Loans 13,050 0.9% 7,944 0.6% 0 0.0%
Residential Loans 253,259 16.7% 214,433 15.8% 207,957 15.0%
Insured or Guaranteed:
Mortgage-Backed Securities 38,081 2.6% 36,152 2.8% 49,089 3.5%
FHA and VA Loans 9,963 0.7% 12,052 0.9% 12,705 0.9%
Total Real Estate Loans 844,956 55.8% 733,803 54.3% 741,190 53.4%
Consumer Loans 548,016 36.1 526,769 38.9 575,009 41.4
Commercial and Industrial Loans 124,467 8.2 92,569 6.8 72,146 5.2
---------- ----- ---------- ----- ---------- -----
Total Mortgage-Backed Securities
and Loans Receivable
(Before Net Items) $1,517,439 100.0% $1,353,141 100.0%$1,388,345 100.0%
========== ====== ========== ================ ======
<CAPTION>
At December 31,
----------------
1994 1993
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Loans by Type of Security:
First Mortgage Loans Secured by:
Single-Family Units $ 583,345 47.1% $ 561,413 48.7%
2-4 Family Units 2,173 0.2% 1,909 0.2%
Over 4 Family Units 21,881 1.8% 27,990 2.4%
Mortgage-Backed Securities 69,061 5.6% 100,924 8.7%
Commercial Real Estate and
Other Mortgage Loans 45,647 3.7% 50,294 4.4%
Consumer Loans 474,465 38.3% 382,360 33.1%
Commercial and Industrial Loans 41,770 3.4% 29,308 2.5%
---------- ------ ---------- ------
Total Mortgage-Backed
Securities and Loans Receivable
(Before Net Items) $1,238,342 100.0% $1,154,198 100.0%
========== ====== ========== ======
Loans by Type of Loan:
Real Estate:
Conventional:
Loans on Existing Property $ 450,935 36.4% $ 454,560 39.4%
Construction Loans:
Commercial Real Estate Loans 9,019 0.7% 3,213 0.3%
Commercial and Industrial Loans 0 0.0% 0 0.0%
Residential Loans 186,145 15.0% 167,077 14.5%
Insured or Guaranteed:
Mortgage-Backed Securities 69,061 5.6% 100,924 8.7%
FHA and VA Loans 6,947 0.6% 16,756 1.5%
Total Real Estate Loans 722,107 58.3% 742,530 64.3%
Consumer Loans 474,465 38.3 382,360 33.1
Commercial and Industrial Loans 41,770 3.4 29,308 2.5
-------- ----- ---------- -----
Total Mortgage-Backed Securities
and Loans Receivable
(Before Net Items) $1,238,342 100.0% $1,154,198 100.0%
========== ====== ========== ======
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
Loan Portfolio Composition
(Continued) At December 31,
----------------
1997 1996 1995 1994 1993
(Dollars in Thousands) ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Mortgage-Backed Securities $ 1,517,439 $ 1,353,141 $ 1,388,345 $ 1,238,342 $ 1,154,198
and Loans Receivable
(Before Net Items)
Less:
Undisbursed Portion of Loans 110,629 84,173 72,511 78,588 63,382
Deferred Income, Unearned Discounts,
and Unamortized Premiums (2,412) (1,762) (624) (521) 646
Plus:
Loan Valuation Adjustment
for Acquisitions 0 0 0 341 682
---------- ---------- ---------- --------- ---------
Total Mortgage-Backed Securities and Loans
Receivable Before Allowance for
Loan Losses 1,409,222 1,270,730 1,316,458 1,160,616 1,090,852
Less:
Allowance for Loan Losses 22,414 18,768 16,234 12,525 11,506
----------- ----------- ----------- ----------- -----------
Mortgage-Backed Securities and Loans
Receivable - Net $ 1,386,808 $ 1,251,962 $ 1,300,224 $ 1,148,091 $ 1,079,346
=========== =========== =========== =========== ===========
</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,
---------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Residential Mortgage Loans
Fixed Rates $ 189,323 $ 166,968 $ 186,886 $ 157,706 $ 225,305
Adjustable Rates 602,835 512,965 491,681 494,090 440,381
----------- ----------- ----------- ----------- -----------
Total $ 792,158 $ 679,933 $ 678,567 $ 651,796 $ 665,686
=========== =========== =========== =========== ===========
Commercial Real Estate Loans
Fixed Rates $ 6,099 $ 17,213 $ 11,948 $ 15,770 $ 21,835
Adjustable Rates 33,649 28,713 50,676 54,541 55,009
----------- ----------- ----------- ----------- -----------
Total $ 39,748 $ 45,926 $ 62,624 $ 70,311 $ 76,844
=========== =========== =========== =========== ===========
Total Residential Mortgage and
Commercial Real Estate Loans
Fixed Rates $ 195,422 $ 184,181 $ 198,833 $ 173,476 $ 247,140
Adjustable Rates 636,484 541,678 542,357 548,631 495,390
----------- ----------- ----------- ----------- -----------
Total $ 831,906 $ 725,859 $ 741,190 $ 722,107 $ 742,530
=========== =========== =========== =========== ===========
Consumer Loans
(Includes Home Equity Loans)
Fixed Rates $ 395,423 $ 368,697 $ 411,030 $ 307,136 $ 251,297
Adjustable Rates 152,593 158,072 163,980 167,329 131,063
----------- ----------- ----------- ----------- -----------
Total $ 548,016 $ 526,769 $ 575,009 $ 474,465 $ 382,360
=========== =========== =========== =========== ===========
Commercial and Industrial Loans
Fixed Rates $ 47,577 $ 0 $ 5,699 $ 2,028 $ 172
Adjustable Rates 89,940 100,513 66,447 39,742 29,136
----------- ----------- ----------- ----------- -----------
Total $ 137,517 $ 100,513 $ 72,146 $ 41,770 $ 29,308
=========== =========== =========== =========== ===========
Total Mortgage-Backed Securities
and Loans Receivable
Fixed Rates $ 638,422 $ 552,878 $ 615,562 $ 482,640 $ 498,609
Adjustable Rates 879,017 800,263 772,783 755,702 655,589
----------- ----------- ----------- ----------- -----------
Total $ 1,517,439 $ 1,353,141 $ 1,388,345 $ 1,238,342 $ 1,154,198
=========== =========== =========== =========== ===========
</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 most 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 $373 million in 1997, a 7.8
percent increase from 1996. Much of this increase resulted from the Bank's
continued efforts to consolidate and centralize origination and servicing
processes in its Commercial and Mortgage Banking Group. In 1997, First
Indiana strengthened its national presence by opening offices in the
southeastern United States and aggressively pursued alternative delivery
channels for its residential loans, including a telemarketing call center and
wholesale alliances. 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 $1.9 million during 1997. This compares with
gains of $1.4 million in 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, commercial and industrial
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, 1997 and 1996, the Bank's gross construction loans
outstanding equaled $253 million and $214 million, respectively.
Also included in commercial and industrial loans are $18 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 commercial and industrial 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 $ 140,261 $15,419 $ - $155,680 55.6 %
Commercial and Industrial 81,729 26,000 16,738 124,467 44.4
------------- ------- ------- -------- -------
Total $ 221,990 $41,419 $ 16,738 $280,147 100.0 %
============= ======= ======= ======== =======
Rate Sensitivity:
Fixed Rate $ 6,764 $24,831 $ 15,982 $ 47,577 17.0 %
Adjustable Rate 215,226 16,588 756 232,570 83.0
------------- ------- ------- -------- -------
Total $ 221,990 $41,419 $ 16,738 $280,147 100.0 %
============= ======= ======= ======== =======
</TABLE>
<PAGE> 9
Multi-family and commercial real estate lending was a substantial
part of First Indiana's business activities from the early 1970s until 1991,
when such activity was largely curtailed because of the economic environment.
With the changing economic 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, 1997 and 1996,
outstanding multi-family and commercial real estate loans originated and
purchased by First Indiana.
<TABLE>
<CAPTION>
1997 1996
(Dollars in Millions) Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Loans Originated $38.7 97.5 $44.7 97.4
Loans Purchased 1.0 2.5 1.2 2.6
----- ---- ----- ----
$39.7 100.0 $45.9 100.0
===== ===== ===== =====
</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, 1997, such loans totaled $548.0 million, or 36.1 percent of total
mortgage-backed securities and loans receivable, compared with $526.8
million, or 38.9 percent of total mortgage-backed securities and loans
receivable, at December 31, 1996. Much of the increase in 1997 occurred as
the Bank aggressively pursued originations of products with loan-to-value
ratios greater than 80 percent for sale into the secondary market. Additionally,
First Indiana capitalized on alternative delivery channels for originations by
utilizing a national network of originators and a telemarketing call center.
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 $548.0 million of consumer loans
outstanding at December 31, 1997, 96.4 percent were secured by first or
second mortgages on real property, 0.6 percent was secured by deposits, and
3.0 percent were secured by personal property or were unsecured.
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 typically 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, 1997,
the Bank had approximately $241.0 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, 1997, First Indiana
had approved $237 million of 80 percent LTV lines of credit, of which $114
million were outstanding, compared with $238 million of such lines which
had been approved at December 31, 1996, $118 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 real estate
lending activities 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 of
1996 at a loss of $898,000. The balances of First Indiana's installment loans
were $15 million and $22 million at December 31, 1997 and 1996. This
portfolio is expected to decline further, although First Indiana continues 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 $166 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, 1997, 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 Florida, Georgia,
and North Carolina. The Bank originates home equity loans through consumer
loan offices in those states and in Ohio and Illinois and in approximately 20
other states via an origination network of independent 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 commercial and industrial 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 second quarter of 1995, First
Indiana purchased servicing rights for approximately $310 million in mortgage
loans.
At December 31, 1997, First Indiana serviced approximately $969
million in loans and loan participations which it had sold. As of December 31,
1997, approximately $16.6 million in loans, or about 1.2 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, 1997 the balance of originated
mortgage servicing rights included in other assets was $4,522,000, with a fair
market value of $5,867,000. The amounts capitalized in 1997 and 1996 were
$893,000 and $986,000, and the amounts amortized to loan servicing income
were $819,000 and $92,000. There were no valuation allowances at
December 31, 1997, and no activity for the year then ended.
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" ("FAS 125"). FAS 125,
which supersedes FAS 122, 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. Since the Corporation had already adopted FAS 122, this
pronouncement had no material impact on the financial statements of the
Corporation.
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
without loan approval authority. This system provides an independent review
and assessment of 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 commercial and industrial 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 commercial and industrial 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.
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.
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
<PAGE> 13
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,
1997 on a net basis, First Indiana had classified $33.4 million as Substandard,
compared with $36.7 million and $34.5 million at December 31, 1996 and
1995, respectively. 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 $18.4 million at December 31,
1997, compared with $15.4 and $14.7 million at December 31, 1996 and
1995, respectively.
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 $5.9 million at December 31,
1995. 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. These loans were repaid in 1997.
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 in 1997 to $22.8 million at December 31, 1997 from $27.1 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, 1997, First Indiana's investments totaled $111.4
million, or 6.90 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.
First Indiana also purchased mortgage-backed securities available for
sale in 1997. At December 31, 1997, these mortgage-backed securities totaled
$17.1 million, or 1.06 percent of total assets. For additional information
concerning mortgage-backed securities held by the Corporation, see the
Corporation's Consolidated Financial Statements, including Note 3 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 1998, First Indiana plans 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) 1997 1996 1995
Rate
<S> <C> <C> <C>
Under 3.00% $205,265 $259,798 $213,082
3.00 - 5.00 385,859 110,786 177,524
5.01 - 7.00 493,012 689,390 695,103
7.01 - 9.00 23,032 35,156 50,354
9.01 - 11.00 387 356 917
--------- --------- --------
$1,107,555 $1,095,486 $1,136,980
</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,
1997 1996 1995
(Dollars in Thousands)
<S> <C> <C> <C>
NOW Checking and
Non-Interest-Bearing
Deposits $ 13,342 $ 12,300 $ 18,136
Money Market
Checking (9,106) (2,344) (3,355)
Passbook and
Statement Savings (1,056) 55,252 34,797
Money Market Savings (2,914) (4,495) (8,860)
Jumbo Certificates of
$100 or More 23,358 (23,067) 54,943
Fixed-Rate Certificates (11,555) (79,140) 9,408
-------- -------- --------
Net Increase (Decrease) $ 12,069 $(41,494) $105,069
======== ======== ========
</TABLE>
<PAGE> 16
First Indiana's jumbo certificates of $100,000 or more at
December 31, 1997, 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
Months or Six Months to Over One Percent of
Less Months One Year Year Total Deposits
(Dollars in Thousands) --------- ---------- --------- ---- ----- --------
<S> <C> <C> <C> <C> <C> <C>
Jumbo Certificates of $100
or More $41,658 $25,010 $14,339 $39,749 $120,756 10.90%
</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, 1997, First
Indiana had $257.5 million in FHLB advances (15.96 percent of total assets),
with a weighted average rate of 5.62 percent.
First Indiana also enters into repurchase agreements as a short-term
source of borrowing, but only with registered government securities dealers.
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,
1997 1996 1995
(Dollars in Thousands)
<S> <C> <C> <C>
Highest Month-End Balance of Short-Term Borrowings
During the Year $84,896 $39,651 $61,982
Average Month-End Balance of Short-Term Borrowings
During The Year 38,899 18,133 41,963
Weighted Average Interest Rate of Short-Term Borrowings
During the Year 5.45% 5.41% 6.17%
Weighted Average Interest Rate of Short-Term Borrowings
at End of the Year 5.48 5.19 5.81
</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, 1997,
First Indiana's risk-based capital was $148.4 million, or 11.99 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, 1997, First Indiana's core
capital and leverage ratio were $135.0 million and 8.37 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, 1997, were $135.0 million
and 8.37 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, 1997 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, 1997, 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, 1997, 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 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 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, 1997, the qualified thrift investment percentage test
for First Indiana was in excess of 86 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 United 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, 1997 was 7.30 percent. In 1997, the
OTS lowered the liquidity requirement to four percent of net withdrawable
assets, simplified the definition of net withdrawable assets, and eliminated a
separate requirement for short-term liquidity. At December 31, 1997, 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, 1997, First Indiana's loan-
to-one borrower limitation was approximately $22.2 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, 1997.
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, 1997, 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. Beginning January 1, 1997, deposit insurance premiums between
$.00 and $.27 per $100 of deposits are 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 separated, 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 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
<PAGE> 20
Indiana most recently paid $.0628 per $100 of deposits to comply with this
assessment.
First Indiana was a well-capitalized institution throughout 1997, and
paid no deposit insurance premiums other than the FICO assessment. Because
it is well-capitalized, First Indiana will continue to pay no deposit insurance
premiums in 1998, but these premiums could increase in the future 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. At December 31, 1997,
the Corporation's rating was "outstanding". 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). First Indiana was in compliance with these
regulations at December 31, 1997.
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, 1997, 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, 1997, 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 repealed 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 is required to use the specific charge-off
method on its tax returns for 1996 and thereafter. 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
had 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, 1997, First Indiana met all the above requirements
and had no adjustments to regulatory capital.
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 was reached, which the Bank received in 1997. The Internal
Revenue Service has examined the tax returns of First Indiana through 1991.
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 institu-
tion'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
Orlando, Tampa and West Palm Beach, 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, 1997, the Corporation and its subsidiaries
employed 625 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, medical reimbursement accounts,
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, 1997, the Corporation operated through 26 full-service
banking centers and 14 loan origination offices in addition to its
headquarters and operations locations. The Corporation leases its
headquarters location, 10 of the branches and 13 of the origination offices, and
owns the remaining locations. The aggregate carrying value at December 31,
1997 of the properties owned or leased, including headquarters properties and
leasehold improvements at the leased offices, was $13.9 million. See Note 6
to the Corporation's Consolidated Financial Statements. The carrying value of
First Indiana's data processing equipment at December 31, 1997 was $1.4
million.
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 has now received all refunds
required by the settlement.
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, 1997.
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 43 of the Corporation's 1997 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 33 - 35 of the Corporation's 1997 Annual Report, which is incorporated
herein by reference.
<PAGE> 24
The Corporation paid a cash dividend of $.10 per share outstanding
in each quarter of 1997 and $.095 per share outstanding in each quarter of
1996, as adjusted for a six-for-five stock dividend on March 6, 1998 and a
five-for-four stock split on March 18, 1997.
Item 6. Selected Financial Data
The information required by this item is incorporated by reference to
page 19 of the Corporation's 1997 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 8 - 18 of the Corporation's 1997 Annual Report from the material under
the heading "Financial Review."
Item 7a. Quantitative and Qualitative Disclosures About Market
Risk
The information required by this item is incorporated by reference to page 18
of the Corporation's 1997 Annual Report from the material under the heading
"Disclosures About Market Risk."
Item 8. Financial Statements and Supplementary Data
The Corporation's Consolidated Financial Statements and Notes to
Consolidated Financial Statements at December 31, 1997 and 1996 and for
each of the years in the three-year period ended December 31, 1997 are
incorporated by reference to pages 20 - 42 of the Corporation's 1997 Annual
Report. The Corporation's unaudited quarterly financial data for the two-year
period ended December 31, 1997 is incorporated by reference to Note 15 of
"Notes to Consolidated Financial Statements" on page 40 of the Corporation's
1997 Annual Report.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
<PAGE> 25
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 4-6 and page 23 of the Corporation's Proxy
Statement dated March 12, 1998 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 54 1981
of the Corporation; Chief
Financial Officer, Treasurer,
and Senior Vice President,
Internal Support Services
Group of the Bank
David A. Lindsey Senior Vice President, 47 1983
Consumer Finance Group
of the Bank;
Merrill E. Matlock Senior Vice President, 48 1984
Commercial and Mortgage
Banking Group of the Bank
Timothy J. O'Neill Senior Vice President, 50 1972
Correspondent Banking
Group of the Bank
Kenneth L. Turchi Senior Vice President, Retail 39 1987
Banking, Marketing, and Strategic
Planning Group 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 Group. 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 Finance Group. He
oversees the Bank's national consumer sales force.
Merrill E. Matlock is senior vice president of the Bank's Commercial
and Mortgage Banking Group. He is responsible for the Bank's residential,
construction, commercial and industrial, 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, Correspondent Banking Group. As
part of his current responsibilities, he develops relationships with smaller
community banks to provide private label products and services to their
customers.
Kenneth L. Turchi joined First Indiana in September 1985 and
currently serves as senior vice president, Retail Banking, Marketing, and
Strategic Planning Group. His duties include strategic planning, marketing,
advertising, market research, investor and public relations, telemarketing, and
supervision of retail banking center sales and operations.
<PAGE> 26
Item 11. Executive Compensation.
The information required by this item with respect to executive
compensation is incorporated by reference to pages 8-15 of the material under
the heading "Executive Compensation" in the Corporation's Proxy Statement.
During 1997, the Corporation effected change-of-control
arrangements with its key officers. The full text of these arrangements can be
found in Exhibits 10(j) and 10(k) on pages 117 to 156.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The information required by this item is incorporated by reference to
pages 1-6 of the material under the heading "Proxy Statement" 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
page 7 of the material under the heading "Certain Transactions" in the
Corporation's Proxy Statement.
<PAGE> 27
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:
1997 Annual
Report
(Exhibit 13)
Financial Statements Page(s)
-------------------- ------------
Consolidated Balance Sheets as of
December 31, 1997 and 1996 20
Consolidated Statements of Earnings
for the Years Ended December 31, 1997, 1996 and 1995 21
Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995 22
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1997, 1996 and 1995 23
Notes to Consolidated Financial Statements 24-41
Independent Auditors' Report 42
Exhibits
Refer to list of exhibits on pages 30-31
b. Reports on Form 8-K
No Reports on Form 8-K were filed during the three months ended
December 31, 1997.
c. The exhibits filed herewith or incorporated by reference herein are
set forth on the Exhibit index on pages 30-31.
d. Financial Statement Schedules required by Regulation S-X.
None
<PAGE> 28
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 26, 1998
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 26, 1998 Date: March 26, 1998
Directors
By: /s/Gerald L. Bepko By: /s/Robert H. McKinney
Gerald L. Bepko Robert H. McKinney
Date: March 26, 1998 Date: March 26, 1998
By: /s/Douglas W. Huemme By: /s/Owen B. Melton, Jr.
Douglas W. Huemme Owen B. Melton, Jr.
Date: March 26, 1998 Date: March 26, 1998
By: /s/Marni McKinney By: /s/Phyllis W. Minott
Marni McKinney Phyllis W. Minott
Date: March 26, 1998 Date: March 26, 1998
By: /s/John W. Wynne By: /s/Michael L. Smith
John W. Wynne Michael L. Smith
Date: March 26, 1998 Date: March 26, 1998
By: /s/H.J. Baker By: /s/Andrew Jacobs, Jr.
H.J. Baker Andrew Jacobs, Jr.
Date: March 26, 1998 Date: March 26, 1998
<PAGE> 29
<TABLE>
<CAPTION>
Exhibit Index
Page(s)
Exhibit (by Sequential
Number Numbering System)
<S> <C> <C>
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.
4(b) Shareholder Rights Agreement between First Indiana Corporation and
Harris Trust and Savings Bank dated November 14, 1997,
incorporated by reference to the Registrant's Form 8-A filed on
December 2, 1997.
10(a) First Indiana Bank 1997 Long-Term Management Performance Incentive
Plan 10-K 32-51
10(b) 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(c) First Indiana Corporation 1998 Stock Incentive Plan 10-K 52-76
10(d) 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(e) 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.
10(f) First Indiana Corporation Supplemental Benefit Plan effective May 1,
1997. 10-K 77-95
10(g) First Indiana Corporation Supplemental Benefit Plan Agreement
effective May 1, 1997 between Registrant and Robert H. McKinney. 10-K 96-104
10(h) First Indiana Corporation Supplemental Benefit Plan Agreement
effective May 1, 1997 between Registrant and each of Owen B.
Melton, Jr. and Marni McKinney. 10-K 105-111
10(i) Supplemental Benefit Plan Agreement effective May 1, 1997 between
First Indiana and each of David L. Gray, David A. Lindsey, Merrill E.
Matlock, Timothy J. O'Neill, and Kenneth L. Turchi 10-K 112-116
10(j) Form of Employment Agreement between Registrant and each of
Robert H. McKinney, Owen B. Melton, Jr. and Marni McKinney. 10-K 117-136
10(k) Form of Employment Agreement between First Indiana and each of
David L. Gray, David A. Lindsey, Merrill E. Matlock, Timothy J.
O'Neill and Kenneth L. Turchi. 10-K 137-156
13 1997 Annual Report. 10-K 157-203
<PAGE> 30
21 Subsidiaries of First Indiana Corporation and First Indiana Bank. 10-K 204
22 Definitive Proxy Statement relating to the 1998 Annual Meeting of
Shareholders. 10-K 205-232
23 Consent of KPMG Peat Marwick LLP. 10-K 233
27 Financial Data Schedule. 10-K 234
* Previously Filed
</TABLE>
<PAGE> 31
FIRST INDIANA CORPORATION
LONG-TERM MANAGEMENT PERFORMANCE
INCENTIVE PLAN
The Board of Directors of First Indiana
Corporation (the "Corporation") has established the
following Long-Term Management Performance
Incentive Plan (the "Plan") for senior executive officers
of the Corporation and its wholly-owned subsidiary,
First Indiana Bank (the "Bank"). All capitalized terms
used in the Plan have the meanings given them in
Section 12 below
1. Purposes
The purposes of the incentive plans of the
Corporation and the Bank are to attract, retain,
motivate and reward senior executive officers of the
highest caliber and quality by providing them with the
opportunity to earn incentive compensation directly
linked to the Corporation's performance. The specific
purpose of this Plan is to provide long-term incentives
to Participants, based on the performance of the
Corporation over a three-year Performance Period.
The object of the Plan is to ensure that the management
of the Corporation is not so preoccupied meeting the
annual target requirements of the annual Management
Performance Incentive Plan ("MIP") that the
Corporation's long-term growth and prosperity are
jeopardized. In addition, the Board is aware of the
many changes occurring in the financial services
industry and desires to keep its current management
team intact.
2. Eligibility.
Participation in the Plan is limited to senior
executive officers of the Corporation or the Bank who,
individually and as a management team, are in a
position to contribute materially to the long-term
success of the Corporation or the Bank. No such
officer may participate for a given Participation Period
both as a Group A Participant and as a Group B
Participant.
3. Administration
(a) Power and Authority of the
Committee. The Plan shall be administered by
the Committee which shall have full power and
authority, subject to the express provisions
hereof,
(i) to select Participants from
senior executive officers of the
Corporation and the Subsidiaries;
(ii) to establish the Performance
Goals for achievement during a
Performance Period and to determine
whether such Performance Goals have
been achieved;
<PAGE> 1 (10K page 32)
(iii) to determine the cash
amount or number of shares of Common
Stock payable in connection with an
award;
(iv) to prescribe, amend and
rescind rules and procedures relating to
the Plan;
(v) subject to the provisions of
the Plan and subject to such additional
limitations and restrictions as the
Committee may impose, to delegate to
one or more officers of the Corporation
or the Bank some or all of its authority
under the Plan;
(vi) to employ such legal
counsel, independent auditors and
consultants as it deems desirable for the
administration of the Plan and to rely
upon any opinion or computation
received therefrom; and
(vii) to make all other
determinations and to formulate such
procedures as may be necessary or
advisable for the administration of the
Plan.
(b) Plan Construction and
Interpretation. The Committee shall have full
power and authority, subject to the express
provisions hereof, to construe and interpret the
Plan.
(c) Liability of Committee. No member
of the Committee shall be liable for any action
or determination made in good faith, and the
members of the Committee shall be entitled to
indemnification and reimbursement in the
manner provided in the Corporation's articles of
incorporation and bylaws as amended from time
to time. In the performance of its
responsibilities with respect to the Plan, the
Committee shall be entitled to rely upon
information and advice furnished by the
Corporation's officers, the Corporation's
accountants, the Corporation's counsel and any
other party the Committee deems necessary,
and no member of the Committee shall be liable
for any action taken or not taken in reliance
upon any such advice.
4. Performance Goals
(a) Except as provided in Section 5(f)
below regarding additional awards to Group A
Participants, compensation under the Plan shall
be paid solely on account of the attainment
during the applicable Performance Period of one
or more preestablished, objective Performance
Goals. Such Performance Goals may relate to
the Participant or a particular group of
Participants, to the Corporation or the Bank, or
to the Corporation and its Subsidiaries as a
whole. The criteria with respect to which the
Committee may establish Performance Goals
include, without limitation, Net Income, Net
Income Growth Rate, Return on Equity, Fair
Market Value of Common Stock, economic
value added,
<PAGE> 2 (10K page 33)
level of non-performing loans,
expense management, deposits, loan
originations, market share, industry leadership
and organizational development.
(b) The Committee may establish a
Performance Goal with various levels of
performance, in which case the lowest level (the
"Base Level") shall be the level which must be
attained in order for any shares or incentive
amount to be earned and the highest or second
highest level (the "Target Level") shall be the
level which must be attained in order for the full
number of shares or incentive amount to be
earned. In the case of Group A Participants,
the Committee may provide for an "Extra
Achievement Level," this being a level higher
than the Target Level and being the level which
must be attained in order for the Committee to
consider an ward of extra shares. All
Performance Goals and all levels of attainment
thereof must be substantially uncertain as to
outcome when established by the Committee.
(c) The Committee shall review the
Performance Goals at least annually during the
course of a Performance Period. If it
determines, based on actual results achieved by
peer group institutions during the portion of a
Performance Period preceding its review, that
the economic environment in which the
Corporation and the Bank are operating is such
that the Performance Goals previously
established for such Performance Period or
portion thereof are too high or too low, the
Committee shall adjust the Performance Goals
accordingly; provided, however, that any such
adjustment shall be reported promptly to
Participants and shall be made far enough
before the end of the Performance Period, and
at a such level, that attainment of the
Performance Goal, as adjusted, is substantially
uncertain as to outcome at the time of such
announcement.
(d) The Committee may establish a
year-by-year schedule for the attainment of a
Performance Goal. For example, it may
determine that ROE must be 10% for the first
year of a Performance Period, 10.5% for the
second year and 11% for the third year. In such
a case, it shall adjust the percentages for all
three years after the end of the first year and
adjust the percentages for the second and third
years after the second year, if, with respect to
each such annual adjustment, it determines,
based on its annual review of actual results
achieved by peer group institutions for the prior
year, that the economic environment in which
the Corporation and the Bank are operating is
such that the percentages previously set are too
high or too low and that the adjustment is
needed in order for the original intent of the
Committee to be carried out. Normally, if the
percentage established for first or second year,
adjusted in accordance with the preceding
sentence, is not attained, the shares and
incentive amounts associated with the particular
Performance Goal shall be forfeited, even
though the percentage for one or both other
years of the Performance Period are attained.
However, the Committee in its discretion may
reduce the percentage for the first year to match
actual results and make a proportionate increase
in the percentages for the second and third
years, or reduce the percentage for the second
year to match actual results and make a
proportionate increase in the percentage for the
third year, to give Participants an opportunity to make up for a
<PAGE> 3 (10k page 34)
failure to attain in the first or
second year or both by exceeding the original
percentages, as previously adjusted, for the
second and third years, in the case of an
adjustment for the first year, or for the third
year, in the case of an adjustment for the second
year. All adjustments under this paragraph shall
be reported promptly to Participants and shall
be made far enough before the end of the
Performance Period, and at such a level, that
attainment of the Performance Goal, as
adjusted, is substantially uncertain as to
outcome at the time of the announcement.
(e) In determining the extent to which a
Performance Goal has been attained during the
Performance Period or any portion thereof, the
Committee shall adjust the actual results for
such Performance Period or portion to eliminate
the impact thereon of items that were not
considered by the Committee in establishing
such Performance Goal and that are deemed by
the Committee to be extraordinary.
(f) If a major change in the business of
the Corporation or the Bank occurs during a
Performance Period, and if the Committee
determines that because of such change the
Performance Goals initially established for such
Performance Period are no longer appropriate,
or can no longer be measured objectively on the
basis of readily available financial data, the
Committee may change such Performance
Goals in such a manner as it deems appropriate;
provided, however, that any such changes shall
be reported promptly to Participants and shall
be made far enough before the end of the
Performance Period, and shall be of such a
nature, that attainment of the Performance
Goals, as changed, is substantially uncertain as
to outcome at the time of the announcement.
5. Awards to Group A Participants
(a) Performance Goals. The Committee
shall determine in its sole discretion whether any
senior executive officer of the Corporation or
the Bank will have the opportunity to earn
incentive compensation under the Plan as a
Group A Participant during a Performance
Period. If the Committee decides to offer such
opportunity to one or more such senior
executive officers, then no later than 90 days
after the beginning of such Performance Period
[or such other time as may be required or
permitted under Section 162(m) of the Code],
the Committee shall (i) designate each Group A
Participant for such Performance Period, (ii)
establish the number of shares of Common
Stock which may be earned by each of such
Group A Participants for such Performance
Period, and (iii) establish for each of such
Group A Participants the Performance Goals
which must be attained in order for his or her
shares to be earned. If two or more
Performance Goals are specified, the Committee
may assign a portion of the shares to each and
provide that the portion assigned to a
Performance Goal that is attained will be earned
even though one or more other Performance
Goals are not attained. Alternatively, the
Committee may provide that all of the
Performance Goals must be attained in order for
any of the shares to
<PAGE> 4 (10k page 35)
be earned or that all of the
shares will be earned so long as a specified
number of the Performance Goals are attained.
(b) Maximum Limitation. Anything in
this Plan to the contrary notwithstanding, the
maximum number of shares of Common Stock
that may be earned under the Plan by any one
Group A Participant during any one
Performance Period shall be such number of
shares as shall have an aggregate Fair Market
Value at the beginning of such Performance
Period of $1 million, rounded down the nearest
whole number of shares.
(c) Following the completion of each
Performance Period, the Committee shall certify
in writing whether the applicable Performance
Goals have been achieved for such Performance
Period and the number of shares of Common
Stock, if any, earned by each Group A
Participant for such Performance Period. If the
Committee determines, based upon factors that
it deems relevant to the assessment of the
Participant's or the Corporation's performance
for the Performance Period, that vesting of all
shares subject to a Group A Participant's award
would be inconsistent with the intent and
expectations of the Committee at the time the
award was made, it may reduce the number of
shares as to which such Participant becomes
vested by reason of such Performance Goals
having been achieved; provided, however, that
no such reduction shall be made unless at least
one member of the Committee participating in
such action was a member of the Committee
when such award was made.
(d) Awards to Group A Participants
will be made in the form of restricted stock
grants under the Stock Option Plan. The
restricted stock agreement covering the grant (i)
shall be for the total number of shares which
may be earned (subject to adjustment in
accordance with the Stock Option Plan in the
event of certain changes in the Corporation's
capitalization), (ii) shall provide for a restricted
period which is the same as the Performance
Period during which the shares may be earned,
(iii) shall set forth or incorporate by reference
the Performance Goals which must be attained
in order for the shares subject thereto to be
earned (not forfeited) and (iv) shall provide that
the shares subject thereto shall not be deemed
earned until the Committee certifies pursuant to
subsection (c) above that such Performance
Goals were attained. Awards to Group A
Participants shall be subject not only to the
terms and conditions of this Plan but also to the
terms and conditions of the Stock Option Plan
and the restricted stock agreements issued
pursuant thereto. Accordingly, such awards
and determinations regarding the extent such
awards are earned shall require action by the
committee administering the Stock Option Plan
as well as action by the Committee
administering this Plan.
(e) In the event of a merger,
consolidation or combination of the
Corporation (other than a merger, consolidation
or combination in which the Corporation is the
continuing entity and which does not result in
the outstanding shares of Common Stock being
converted into or exchanged for different
securities, cash or other property, or any
combination thereof), any award then
outstanding to a Group A Participant thereafter shall
<PAGE> 5 (10k page 36)
relate to the securities, cash or other
property received in exchange for the shares of
Common Stock covered by the award.
Dividends and interest received on such
securities, cash or other property shall be
payable to the Participant when and as they are
received, to the same extent as dividends on
such shares of Common Stock would have been
payable to the Participant under the terms of the
Stock Option Plan and restricted stock
agreement applicable to the award. However,
the securities, cash or other property received in
exchange for such Common Stock shall remain
subject to forfeiture, as provided in this Plan, or
as provided in the Stock Option Plan or
restricted stock agreement applicable to the
award, to the same extent as such Common
Stock would have been subject to forfeiture.
(f) If the Committee specifies an Extra
Achievement Level with respect to a
Performance Goal for a Performance Period,
and if such Extra Achievement Level is
achieved, then the Committee may distribute
additional shares of Common Stock to one or
more Group A Participants, not to exceed, in
the case of any one Group A Participant, the
excess of the maximum number of shares that
could have been awarded to such Participant for
such Performance Period pursuant to subsection
5(b) above, over the number of shares actually
awarded to and earned by such Participant, in
each case adjusted for changes in the
Corporation's capitalization in accordance with
the Stock Option Plan. Additional shares so
distributed may be treasury shares or shares
purchased on the open market and need not be
shares issued under or subject to the Stock
Option Plan.
(g) In connection with an award to a
Group A Participant, the Committee may grant
the Participant a tax gross-up right. Such a
right may be granted when the award is made or
at any time thereafter and shall entitle the
Participant to receive in cash an amount equal
to the (i) the federal, state and local income
taxes on ordinary income for which the
Participant may be liable with respect to shares
earned under the award, determined by
assuming taxation at the highest marginal rate,
plus (ii) an additional amount on a gross-up
basis intended to make the Participant whole on
an after-tax basis after discharging all of the
Participant's income tax liabilities arising from
payments under this subsection (g). Such
amount shall be payable by the 15th day of the
fourth calendar month which begins after the
end of the Performance Period for which the
award is made, but not before the Committee
makes its certification with respect thereto
pursuant to subsection 4(c) above.
Notwithstanding the foregoing, if a tax gross-up
right is granted prior to the close of the
Performance Period to which the right relates,
and if the Committee thereafter determines,
based upon factors that it deems relevant to the
assessment of the Participant's or the
Corporation's performance for such
Performance Period, that payment of all of the
amounts potentially payable under such right
would be inconsistent with the intent and
expectations of the Committee at the time the
right was granted, it may reduce the aggregate
of such amounts; provided, however, that no
such reduction shall be made unless at least one
member of the Committee participating in such
action was a member of the Committee when
such right was granted.
<PAGE> 6 (10k page 37)
6. Awards to Group B Participants
(a) The Committee shall determine in its
sole discretion whether any senior executive
officer of the Corporation or the Bank will have
the opportunity to earn incentive compensation
under the Plan as a Group B Participant during
a Performance Period. If the Committee
decides to offer such opportunity to one or
more such senior executive officers, then no
later than 90 days after the beginning of the
Performance Period [or such other time as may
be required or permitted under Section 162(m)
of the Code], the Committee shall (i) designate
each Group B Participant for such Performance
Period, (ii) establish the aggregate of the
incentive amounts (the "Pool") which may be
earned by such Group B Participants for such
Performance Period, and (iii) establish the
Performance Goals which must be attained in
order for the Pool to be earned. If two or more
Performance Goals are specified, the Committee
may assign a portion of the Pool to each and
provide that the portion assigned to a
Performance Goal that is attained will be earned
even though one or more other Performance
Goals are not attained. Alternatively, the
Committee may provide that all of the
Performance Goals must be attained in order for
any of such Pool to be earned or that all of such
Pool will be earned so long as a specified
number of the Performance Goals are attained.
(b) The Pool which may be earned by
Group B Participants during a Performance
Period shall be expressed as a percentage of the
average annual rate of base salary paid or
accrued (or deemed to have been paid or
accrued) to such Participants during the
Performance Period [or during the portion of
the Performance Period after they are
designated as Group B Participants, in the case
of Participants whose participation is pro-rated
in accordance with subsection 6(c) below][or
during the portion of the Performance Period
preceding the applicable in the case of
Participants electing (or deemed to have
elected) to receive a Pro-Rata Award pursuant
to subsection 8(b) below]. If a Group B
Participant terminates employment prior to the
end of the Performance Period otherwise than
by reason of a qualifying circumstance as
provided in Section 7, the Pool shall be reduced
by the amount thereof attributable to the base
salary paid or accrued to such Participant prior
to such termination. If a Group B Participant is
employed under a written employment
agreement and is terminated by the
Corporation, the Bank or a Successor without
cause, or quits for Good Reason (as defined in
such employment agreement), upon or after the
occurrence of a Change of Control, and prior to
the end of the term of such employment
agreement, such Participant shall be deemed to
have received a base salary payment on the last
day of his or her employment equal to the
aggregate amount of base salary that would
have been paid or accrued to such Participant,
at his or her base salary then in effect, from that
day until the earlier of the end of such
Performance Period or the end of the term of
such agreement, and the Pool shall be increased
by the amount of such deemed payment. Each
Group B Participant's percentage share of the
Pool shall be the portion thereof attributable to the base salary
<PAGE> 7 (10k page 38)
paid or accrued (or deemed to
have been paid or accrued) to such Participant
during the Performance Period and included in
the computation of the Pool.
(c) The Committee may designate
additional Group B Participants for a
Performance Period, provided such designation
is made sooner than 16 months before the end
of the Performance Period. If a Group B
Participant is designated more than one year
after the beginning of the Performance Period,
such participation shall be on a pro-rated basis,
so that only the portion of his or her base salary
paid or accrued after such designation is taken
into account for purposes of determining the
Pool and his or her percentage share of the
Pool.
(d) Maximum Limitation. Anything in
this Plan to the contrary notwithstanding, the
maximum incentive amount that may be earned
under the Plan by any one Group B Participant
during any one Performance Period shall be the
lesser of $250,000 or 100% of the Participant's
annual rate of base salary in effect at the
beginning of the Performance Period.
(e) If the Committee determines that
distribution of the Pool as previously
constituted for a Performance Period would
cause the consolidated per share Net Income of
the Corporation and its Subsidiaries for one or
more years of such Performance Period to fall
substantially below historic levels, the
Committee may reduce the aggregate of the
incentive amounts which may be earned by
Group B Participants during such Performance
Period. Any such reduction shall be expressed
as a percentage of the average annual rate of
base salary paid or accrued (or deemed to have
been paid or accrued) to Group B Participants
during such Performance Period and included in
the computation of the Pool for such
Performance Period as previously constituted.
Accordingly, such a reduction will not operate
by itself to reduce any Group B Participant's
percentage share of the Pool. The Committee
may act with respect to such a reduction at any
time prior to payment of such incentive
amounts. Notwithstanding the foregoing, no
reduction under this subsection may be made
after a Change of Control with respect to a
Performance Period which commenced before
such Change of Control.
(f) Following the completion of each
Performance Period, the Committee shall certify
in writing whether the applicable Performance
Goals have been attained for such Performance
Period and the incentive amounts, if any,
payable to each Group B Participant for such
Performance Period. Subject to the maximum
limitation provided in subsection 6(d) above,
the Pool shall be allocated among Group B
Participants in proportion to their respective
percentage shares of the Pool. However, if the
Committee determines that a particular Group
B Participant's contribution to the attainment of
the Performance Goals for the Performance
Period was less than that of Group B
Participants generally, it may eliminate or
reduce the allocation to such Participant. Such
elimination or reduction shall not have the effect
of increasing the allocation to any other
Participant; rather, it shall have the effect of
reducing the distributable Pool. Notwithstanding the
<PAGE> 8 (10k page 39)
foregoing, if a Change of
Control occurs after the beginning of a
Performance Period and prior to the close
thereof, no such elimination or reduction shall
be made, and any distribution of the Pool for
such Performance Period shall be made strictly
on the basis of percentage shares.
(g) Payment of incentive amounts to
Group B Participants shall be as soon as
practicable after the Committee makes the
certification provided for in subsection 6(f)
above. The Committee in its sole discretion
shall determine whether such incentive amounts
shall be payable in cash, in the form of shares of
Common Stock, or in any combination thereof.
Settlement in the form of shares of Common
Stock shall be based on the Fair Market Value
of such shares as of the date the Committee
makes the certification provided for in
subsection 6(c) above. Such shares may be
treasury shares or shares purchased on the open
market for such purpose.
7. Termination of Employment
If a Participant's employment with the
Corporation and its Subsidiaries terminates during a
Performance Period otherwise than by reason of a
qualifying circumstance, the Participant's participation
in the Plan shall terminate forthwith, and he or she shall
not be entitled to receive any portion of his award for
such Performance Period, except as provided in Section
8 below in the event of a Change of Control. If a
Group A Participant's employment terminates during a
Performance Period by reason of a qualifying
circumstance, and if the Performance Goals for that
Performance Period ultimately are met, the Participant
shall receive his or her Pro-Rata Award for such
Performance Period [or his or her Full Share, to the
extent provided in subsection 8(c) below in the event of
a Change of Control]. A termination shall be deemed
to be by reason of a qualifying circumstance if (i) it
occurs due to the Participant's death or Disability, (ii) it
occurs after the Participant has attained age 62 and
completed five years of service, (iii) it occurs with the
consent of the Committee. A Participant who transfers
to an becomes an employee of a Successor shall not be
deemed to have terminated employment unless and
until his or her employment with such Successor (and
the successors to such Successor) terminates.
8. Provisions Applicable Upon Change of Control.
(a) If substantially all of the assets and
business of the Bank are acquired by a
Successor upon or after a Change of Control,
and if any awards under the Plan are then
outstanding for a Performance Period then still
open, then such Successor shall be required to
assume the Plan and such awards, and all rights
and obligations of the Corporation and the Bank
thereunder, as to all Participants who become
employees of such Successor or any affiliate
thereof in connection with such acquisition.
The Corporation and the Bank, in connection
with any transaction or series of transactions by
which a Successor acquires substantially all of
the assets and business of the Bank (whether
directly or indirectly, by purchase, merger, share
exchange, consolidation or
<PAGE> 9 (10k page 40)
otherwise), (i) shall
advise such Successor of the existence of the
Plan and of the terms of each award then
outstanding under the Plan and (ii) shall require
such Successor (A) to acknowledge that the
Plan and all such awards are valid and
enforceable against the Corporation and the
Bank in accordance with their terms and the
determinations of the Committee, (B) to assume
the rights and obligations of the Corporation
and the Bank with respect to the Plan and any
such awards then outstanding to Participants
who become employees of such Successor or
any affiliate thereof, and (C) to agree to impose
similar obligations upon any corporation or
other entity acquiring such assets and business
from such Successor or any subsequent
Successor.
(b) If a Change of Control occurs after
the beginning but not more than four months
before the end of a Performance Period, a
Participant may elect to receive his or her Pro-Rata
Share for the portion of such Performance
Period preceding the Effective Date of such
Change of Control (which Pro-Rata Share then
shall be payable regardless of whether the
Performance Goals for such Performance
Period ultimately are attained) in lieu of
continuing his or her participation for the
remainder of such Performance Period. Such an
election must be made in writing to the
Committee before or within 30 days after the
occurrence of such Change of Control and no
later than four months before the end of such
Performance Period. Payment of a Participant's
Pro-Rata Share pursuant to such an election
shall be made before or within 15 days after the
later of the occurrence of such Change of
Control or the delivery of such writing. If such
an election is made, then the Participant shall
forfeit the balance of his or her award for such
Performance Period, regardless of whether the
Performance Goals for such Performance
Period ultimately are achieved, unless
subsection 8(c) applies. [A Participant who
terminates employment within 30 days after the
occurrence of a Change of Control shall be
deemed to have made and perfected an election
under this subsection at the time of such
termination of employment, if he or she did not
actually do so earlier.]
(c) If a Change of Control occurs after
the beginning but before the end of a
Performance Period, then a Participant shall be
entitled to receive his or her Full Award for
such Performance Period, regardless of whether
the Performance Goals for such Performance
Period ultimately are achieved, in each of the
following events:
(i) Upon or after such Change
of Control, and prior to the end of such
Performance Period, a Successor
acquires substantially all of the assets
and business of the Bank (A) without
assuming (directly or through an
affiliate) such award and the Plan as to
such Participant or (B) if a written
employment agreement between such
Participant and the Corporation or the
Bank is in effect or becomes effective at
the time of such Change of Control,
without either (I) assuming or agreeing
to honor such agreement for the balance
of the term thereunder or (II) entering
into a new written employment
agreement with such Participant which
amends or supersedes such agreement.
<PAGE> 10 (10k page 41)
(ii) Upon or after such Change
of Control and prior to the end of such
Performance Period, the Corporation,
the Bank or a Successor terminates such
Participant's employment without cause
prior to the end of the term provided for
in any written employment agreement
between such Participant and the
Corporation or the Bank that is in effect
or becomes effective upon such Change
of Control or in any new written
agreement between such Participant and
the Corporation, the Bank or a
Successor which amends or supercedes
any such agreement.
(d) If substantially all of the assets and
business of the Bank are acquired by a
Successor in a transaction or series of
transactions that constitute or result in a Change
of Control, it is contemplated that the
Committee administering the Plan as to
Participants who transfer to and become
employees of such Successor or an affiliate
thereof will be a Committee appointed by such
Successor, and that such newly-appointed
Committee will be able to avail itself of the
authority granted under subsection 4(f) above
to establish new Performance Goals that relate
to the assets and business acquired from the
Bank and to the role of such Participants in
preserving and growing such assets and
business. Anything herein to the contrary
notwithstanding, in the event of a Change of
Control occurring after the beginning but before
the end of a Performance Period, no changes
shall be made pursuant to subsections 4(c), 4(d)
or (4(e) above in the Performance Goals
previously established for such Performance
Period, and no new Performance Goals shall be
established pursuant to subsection 4(f) for such
Performance Period, either by the Committee
appointed by the Corporation or by the
Committee appointed by the Successor to the
Bank's assets and business, unless such changed
or new Performance Goals are at least as likely
to be attained as the prior Performance Goals
would have been had there been no change in
the business of the Corporation or the Bank and
no Change of Control.
9. Effective Date
The Plan shall become effective upon its
adoption by the Board and shall apply to all
Performance Periods commencing on or after January
1, 1997, subject to its approval by the stockholders of
the Corporation. Prior to such stockholder approval,
the Committee may grant awards conditioned on
stockholder approval. If such stockholder approval is
not obtained by June 30, 1999, the Plan and any awards
made hereunder shall terminate ab initio and be of no
further force and effect. Notwithstanding the
foregoing, the Plan shall become effective without
shareholder approval, and awards made hereunder shall
not be subject to termination as aforesaid, in the event a
Change of Control occurs on or before June 30, 1999,
and before the Plan is brought before the stockholders
for approval.
10. Amendment and Termination
<PAGE> 11 (10k page 42)
The Board or the Committee may at any time
amend, suspend, discontinue or terminate the Plan;
provided, however, that no such action shall impair the
rights of Participants under awards for Performance
Periods that commenced prior to the date thereof;
provided further, that amendments to the Plan shall be
subject to stockholder approval to the extent required
in order for benefits under the Plan to qualify as
performance-based compensation under section 162(m)
of the Code.
11. Miscellaneous
(a) Tax Withholding. No later than the date as
of which an amount first becomes includable in the
gross income of the Participant for applicable income
tax purposes with respect to any award under the Plan,
the Participant shall pay to the Corporation or make
arrangements satisfactory to the Committee regarding
the payment of any federal, state or local taxes of any
kind required by law to be withheld with respect to
such amount. In the case of an award that is payable in
shares of Common Stock, the Corporation may permit
the Participant to satisfy, in whole or in part, such
obligation to remit taxes by directing the Corporation
to withhold shares of Common Stock that would
otherwise be received by such individual, pursuant to
such rules as the Committee may establish from time to
time.
(b) No Rights to Awards or Employment.
Except as otherwise expressly provided herein, no
person shall have any claim or right to receive shares of
Common Stock or incentive amounts for a Performance
Period, unless he or she is designated as a Participant
for such Performance Period, and unless the
Performance Goals and other conditions applicable to
his or her award are satisfied in full as determined by
the Committee. Nothing in the Plan shall confer upon
any employee of the Corporation or any Subsidiary any
right to continued employment with the Corporation or
such Subsidiary or interfere in any way with the right of
the Corporation or such Subsidiary to terminate the
employment of any of its employees at any time, with
or without cause, in accordance with applicable laws
and any applicable employment agreement.
(c) Other Compensation. Nothing in this Plan
shall preclude or limit the ability of the Corporation to
pay any compensation to a Participant under the
Corporation's other compensation and benefit plans and
programs, including without limitation any Stock
Option Plan.
(d) No Limitation on Corporate Actions.
Nothing contained in the Plan shall be construed to give
a Participant the right to enjoin the Corporation or any
Subsidiary from taking any corporate action which is
deemed by it to be appropriate or in its best interest,
whether or not such action would have an adverse
effect on awards made under the Plan. Any right of a
Participant, beneficiary or other person respecting such
a corporate action shall be limited to a claim for actual
damages and attorneys fees.
<PAGE> 12 (10k page 43)
(e) Unfunded Plan. The Plan is intended to
constitute an unfunded plan for incentive compensation.
Prior to the payment of any award, nothing contained
herein shall give any Participant any rights that are
greater than those of a general creditor of his or her
employer. In its sole discretion, the Committee may
authorize the creation of trusts or other arrangements
to meet the obligations created under the Plan to
deliver payment in cash or Common Stock with respect
to awards hereunder.
(f) Successors and Assigns. Awards under the
Plan shall be binding upon and inure to the benefit of
the successors and assigns of the Corporation and the
Bank.
(g) Non-Transferability. Except as expressly
provided herein, no Participant or beneficiary shall have
the power or right to sell, transfer, assign, pledge or
otherwise encumber or dispose of the Participant's
interest under the Plan.
(g) Designation of Beneficiary. A Participant
may designate a beneficiary or beneficiaries to receive
any payments which may be made following the
Participant's death. Such designation may be changed
or canceled at any time without the consent of such
beneficiary. Any such designation, change or
cancellation must be made in a form approved by the
Committee and shall not be effective until received by
the Committee. If a Participant does not designate a
beneficiary, or if the designated beneficiary or
beneficiaries predecease the Participant, any payments
which may be made following the Participant's death
shall be made to the Participant's estate.
(i) Settlement by Subsidiaries. Settlement of
awards held by employees of the Bank shall be made by
and at the expense of the Bank.
(j) Expenses. The costs and expenses of
administering the Plan shall be borne by the
Corporation.
(k) Arbitration. In the event of any disputes,
differences, controversies or claims arising out of, or in
connection with, an award under the Plan, other than a
dispute in which the sole relief sought is an equitable
remedy, such as a temporary restraining order or a
permanent or temporary injunction, the parties to the
award (the Corporation , the Bank or a Successor being
one party, and the Participant or his or her beneficiary
being the other party) shall be required to have the
dispute, controversy, difference or claim settled
through binding arbitration pursuant to the American
Arbitration Association's rules of commercial
arbitration which are then in effect. The location of all
arbitration proceedings shall be Indianapolis, Indiana.
One arbitrator shall be selected by the parties and shall
be a current or former executive officer (vice president
or higher) of a publicly-traded corporation. In the
event the parties are unable mutually to agree upon a
person to act as the arbitrator, or in the event a
mutually-agreed upon arbitrator shall fail to accept the
appointment by the parties, the parties jointly shall
request from the American Arbitration Association a
list of the names of five persons who would be qualified
to act as an arbitrator under this subsection. The
selection of the final arbitrator then shall be achieved by
each party alternately striking a name, with the
Corporation or employing Subsidiary or its
<PAGE> 13 (10k page 44)
successor going first, until one name remains. In the event the
parties mutually agree that the five names submitted by
the American Arbitration Association are
unsatisfactory, they jointly may request a second list of
five names from the American Arbitration Association
and final selection shall be achieved through the
procedure set out herein. The decision of the arbitrator
shall be final and binding upon both parties, and any
award entered by the arbitrator shall be final, binding
and non-appealable and judgment may be entered
thereon by either party in accordance with the
applicable law in any court of competent jurisdiction.
The arbitrator shall not have authority to modify any
provision of this Plan nor to award a remedy for any
difference, dispute, controversy or claim arising under
this Plan or any award hereunder other than a benefit
specifically provided under or by virtue of this Plan or
such award. The Corporation, the Bank or the
Successor shall be responsible for all of the reasonable
expenses of the American Arbitration Association, the
arbitrator and the conduct of the selection and the
arbitration procedures set forth in this clause, including
reasonable attorneys' fees and expenses incurred by
either party which are associated with the arbitration
procedure through the time the final arbitration decision
or award is rendered. This arbitration provision shall
be specifically enforceable.
(l) Severability. If any provision of this Plan is
held unenforceable, the remainder of the Plan shall
continue in full force and effect without regard to such
unenforceable provision and shall be applied as though
the unenforceable provision were not contained in the
Plan.
(m) Governing Law. The Plan and all actions
taken thereunder shall be governed by and construed in
accordance with and governed by the laws of the State
of Indiana, without reference to the principles of
conflict of laws.
12. Definitions
For purposes of the Plan, the following terms
shall be defined as follows:
"Board" means the Board of Directors of the
Corporation.
"Change of Control" shall mean the first to
occur of the following:
(a) The acquisition by any individual,
entity or "group" within the meaning of Section
13(d)(3) or 14(d)(2) of the Securities Exchange
Act of 1934, as amended (the "Exchange
Act")(a "Person") of beneficial ownership
(within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of 25% or more of
either (i) the then outstanding shares of
common stock of the Corporation (the
"Outstanding Corporation Common Stock") or
(ii) the combined voting power of the then
outstanding voting securities of the Corporation
entitled to vote generally in the election of
directors (the "Outstanding Corporation Voting
Securities"); provided, however, that the
following acquisitions of common stock shall
not constitute a Change of Control: (i) any
acquisition directly from the Corporation
[excluding an acquisition by virtue of the
exercise of a conversion privilege by one or
more Persons acting in concert, and excluding
an acquisition that
<PAGE> 14 (10k page 45)
would be a Change of
Control under (c) below], (ii) any acquisition by
the Corporation, (iii) any acquisition by any
employee benefit plan (or related trust)
sponsored or maintained by the Corporation or
any corporation or other entity controlled by the
Corporation, (iv) any acquisition by any
corporation or other entity pursuant to a
reorganization, merger or consolidation which
would not be a Change of Control under (c)
below; or (v) any acquisition by an Exempt
Person; provided further, that the applicable
percentage shall be reduced from 25% to 20%
in the event of the occurrence of one transaction
or a series of transactions which results in the
beneficial ownership by Exempt Persons of less
than 15% of the Outstanding Corporation
Common Stock or the Outstanding Corporation
Voting Securities; or
(b) Individuals who, as of the beginning
of the Performance Period then in progress,
constitute the Board (the "Incumbent Board")
cease for any reason to constitute at least a
majority of the Board; provided, however, that
any individual becoming a director subsequent
to such beginning whose election, or
nomination for election by the Corporation's
shareholders, was approved by a vote of at least
a majority of the directors then comprising the
Incumbent Board shall be considered as though
such individual were a member of the
Incumbent Board, but excluding, for this
purpose, any such individual whose initial
assumption of office occurs as a result of either
an actual or threatened "election contest" or
other actual or threatened "solicitation" (as such
terms are used in Rule 14a-11 of Regulation
14A promulgated under the Exchange Act) of
proxies or consents by or on behalf of a person
other than the Incumbent Board; or
(c) Approval by the shareholders of the
Corporation of a reorganization, merger or
consolidation, unless, following such
reorganization, merger, share exchange or
consolidation, (i) 75% or more of, respectively,
the then outstanding shares of common stock of
the corporation or other entity resulting from
such reorganization, merger, share exchange or
consolidation and the combined voting power of
the then outstanding voting securities of such
corporation or other entity entitled to vote
generally in the election of directors is then
beneficially owned, directly or indirectly, by all
or substantially all of the individuals and entities
who were the beneficial owners, respectively, of
the Outstanding Corporation Common Stock
and Outstanding Corporation Voting Securities
immediately prior to such reorganization,
merger, share exchange or consolidation in
substantially the same proportions as their
ownership, immediately prior to such
reorganization, merger, share exchange or
consolidation, (ii) no Person (excluding the
Corporation, any Exempt Person, any employee
benefit plan (or related trust) of the Corporation
or such corporation or other entity resulting
from such reorganization, merger, share
exchange or consolidation and any person
beneficially owning, immediately prior to such
reorganization, merger, share exchange or
consolidation, directly or indirectly, 25% or
more of the Outstanding Corporation Common
Stock or Outstanding Voting Securities, as the
case may be) beneficially owns, directly or
indirectly, 25% or more of, respectively, the
then outstanding shares of common stock of the
corporation or other entity resulting from such
reorganization, merger, share exchange or
consolidation or the combined voting
<PAGE> 15 (10k page 46)
power of the then outstanding voting securities of such
corporation or other entity, entitled to vote
generally in the election of directors and (iii) at
least a majority of the members of the board of
directors of the corporation or other entity
resulting from such reorganization, merger,
share exchange or consolidation were members
of the Incumbent Board at the time of the
execution of the initial agreement providing for
such reorganization, merger, share exchange or
consolidation; provided however, that the
applicable percentage for purposes of clause (ii)
of this (c) shall be reduced from 25% to 20% in
the event of the occurrence of one transaction
or a series of transactions which results in the
beneficial ownership by Exempt Persons of less
than 15% of the Outstanding Corporation
Common Stock or the Outstanding Corporation
Voting Securities; or
(d) Approval by the shareholders of the
Corporation of (i) a complete liquidation or
dissolution of the Corporation or (ii) the sale or
other disposition of all or substantially all of the
assets of the Corporation, other than to a
corporation or other entity, with respect to
which following such sale or other disposition,
(A) 75% or more of, respectively, the then
outstanding shares of common stock of such
corporation or other entity and the combined
voting power of the then outstanding voting
securities of such corporation or other entity
entitled to vote generally in the election of
directors is then beneficially owned, directly or
indirectly, by all or substantially all of the
Persons who were the beneficial owners,
respectively, of the Outstanding Corporation
Common Stock and Outstanding Corporation
Voting Securities immediately prior to such sale
or other disposition in substantially the same
proportion as their ownership, immediately
prior to such sale or other disposition, of the
Outstanding Corporation Common Stock and
Outstanding Corporation Voting Securities, as
the case may be, (B) no Person (excluding the
Corporation, any Exempt Person, any employee
benefit plan (or related trust) of the Corporation
or such corporation or other entity and any
person beneficially owning, immediately prior to
such sale or other disposition, directly or
indirectly, 25% or more of the Outstanding
Corporation Common Stock or Outstanding
Corporation Voting Securities, as the case may
be) beneficially owns, directly or indirectly,
25% or more of, respectively, the then
outstanding shares of common stock of such
corporation or other entity or the combined
voting power of the then outstanding voting
securities of such corporation or other entity
entitled to vote generally in the election of
directors and (C) at least a majority of the
members of the board of directors of such
corporation or other entity were members of the
Incumbent Board at the time of the execution of
the initial agreement or action of the Board
providing for such sale or other disposition of
assets of the Corporation; provided however,
that the applicable percentage for purposes of
subclause (ii)(B) of this (d) shall be reduced
from 25% to 20% in the event of the
occurrence of one transaction or a series of
transactions which results in the beneficial
ownership by Exempt Persons of less than 15%
of the Outstanding Corporation Common Stock
or the Outstanding Corporation Voting
Securities; or
<PAGE> 16 (10k page 47)
(e) The occurrence of one transaction
or a series of transactions, which has the effect
of a divestiture by the Corporation of 25% or
more of the combined voting power of the
outstanding voting securities of the Bank; or
(f) The occurrence of any sale, lease or
other transfer, in one transaction or a series of
transactions, of all or substantially all of the
assets of the Bank (other than to the
Corporation or one or more Exempt Persons);
or
(g) The occurrence of one transaction
or a series of transactions which results in the
beneficial ownership by Exempt Persons of less
than 20% of the outstanding voting securities of
The Somerset Group, Inc. ("Somerset"), at any
time when Somerset beneficially owns 10% or
more of the combined voting power of the
outstanding voting securities of the
Corporation.
"Code" means the Internal Revenue Code of
1986, as amended, and the applicable rulings and
regulations (including any proposed regulations)
thereunder.
"Committee" means the Compensation
Committee of the Board, any successor committee
thereto or any other committee appointed by the Board
to administer the Plan. The Committee shall consist of
at least two individuals, each of whom shall be qualified
as an "outside director" (or shall satisfy any successor
standard thereto) for purposes of Section 162(m) of the
Code, and shall serve at the pleasure of the Board.
"Common Stock" means the Common Stock
of the Corporation.
"Disability" means eligibility for disability
benefits under the terms of the Corporation's long-term
disability plan in effect at the time the Participant
becomes disabled.
"Equity" means with respect to any calendar
year the average stockholders' equity of the
Corporation for such year as determined by the
Corporation's Independent Auditors.
"Exempt Descendant" means any child,
grandchild or other descendant of Robert H.
McKinney, or any spouse of any such child, grandchild
or other descendant, including in all cases adoptive
relationships.
"Exempt Person" means (i) Robert H.
McKinney; (ii) Arlene A. McKinney; (iii) any Exempt
Descendant; (iv) any corporation, partnership, trust or
other organization a majority of the beneficial
ownership interest of which is owned directly or
indirectly by one or more of Robert H. McKinney,
Arlene A. McKinney or any Exempt Descendant; (v)
any estate or other successor-in-interest by operation of
law of Robert H. McKinney, Arlene A. McKinney or
any Exempt Descendant; (vi) The Somerset Group,
Inc., so long as it is controlled by one or more
individuals and entities described in (i) through (v)
inclusive; and (vii) with reference to an issuer, any
group within the meaning of Rule 13d-5(b) under the
Exchange Act, if the majority of the shares of such
<PAGE> 17 (10k page 48)
issuer beneficially owned by such group is attributable
to shares of such issuer which would be considered
beneficially owned by individuals and entities described
in (i) through (vi) inclusive absent the existence of the
group.
"Fair Market Value" means, with reference to
a share of Common Stock and a given day, the per
share value of Common Stock on such day, determined
as follows.
(a) If the principal market for the
Common Stock (the "Market") is a
national securities exchange or the
National Association of Securities
Dealers Automated Quotation System
("NASDAQ") National Market, the last
sale price or, if no reported sales take
place on the applicable date, the average
of the high bid and low asked price of
Common Stock as reported for such
Market on such date ("average price")
or, if no such average price can be
determined on such date, the most
recent reported sale price within the
preceding ten (10) business days, or if
no such sale shall have occurred, on the
next preceding day on which the average
price can be determined, provided that
such determination can be made with
respect to the ten (10) business days
preceding the applicable date;
(b) If the Market is the NASDAQ
National List, the NASDAQ
Supplemental List or another market,
the average of the high bid and low
asked price for Common Stock on the
applicable date (the "average price"), or,
if no such average price can be
determined on such date, the most
recent reported sale price within the
preceding ten (10) business days, or, if
no such sale shall have occurred, on the
next preceding day on which the average
price can be determined, provided that
such determination can be made with
respect to the ten (10) business days
preceding the applicable date; or,
(c) In the event that neither paragraph
(a) nor (b) shall apply, the Fair Market
Value of a share of Common Stock on
any day shall be determined in good
faith by the Committee.
"Full Award" means: (i) with reference to a
Group A Participant, the full number of shares of
Common Stock which may be earned by such
Participant pursuant to an award made under Section 5
above, excluding, however, any additional shares which
may be awarded by the Committee in its discretion for
Extra Achievement; and (ii) with reference to a Group
B Participant, such Participant's percentage share of
the Pool as constituted under Section 6 above.
"Group A Participant" means, with respect to
a particular Performance Period, each senior executive
officer of the Corporation or the Bank whom the
Committee selects to participate under Section 5 of the
Plan for such Performance Period,
<PAGE> 18 (10k page 49)
"Group B Participant" means, with respect to
a particular Performance Period, each senior executive
officer of the Corporation or the Bank whom the
Committee selects to participate under Section 6 of the
Plan for such Performance Period.
"Growth Rate" with respect to a Performance
Period means the growth rate determined by measuring
the specific performance being measured during the
first year of the Performance Period as compared to
such performance during the calendar year immediately
preceding the beginning of the Performance Period; the
growth rate determined by measuring such performance
during the second year of the Performance Period as
compared to such performance during the first year of
the Performance Period; the growth rate determined by
measuring such performance during the third year of
the Performance Period as compared to such
performance during the second year of the Performance
Period; and then calculating a simple arithmetic average
of the individual year growth rates to determine the
applicable growth rate for the Performance Period.
"Independent Auditors" means with respect
to any calendar year the independent public accountants
appointed by the Board of Directors of the Corporation
to audit the consolidated financial statements of the
Corporation on behalf of the shareholders and Board of
Directors of the Corporation.
"Net Income" means with respect to any
calendar year the consolidated net income of the
Corporation for such year after provision for all costs
and expenses, including the expenses incurred by the
Plan, and federal, state and foreign income taxes; all as
determined by the Independent Auditors.
"Participant" means, with respect to a
Performance Period, each Group A Participant and
Group B Participant for such Performance Period..
"Performance Goals" means the goals related
to the performance criteria designated in Section 4
above, which Performance Goals will be established by
the Committee for a Performance Period.
"Performance Period" means each period of
three calendar years commencing on January 1, 1997 or
January 1 of every third year thereafter.
"Plan" means this First Indiana Corporation
Long-Term Management Performance Incentive Plan,
as set forth in this document, and as hereafter amended.
As implemented for a particular Performance Period,
the Plan may be referred to as the Plan for the year in
which such Performance Period begins. Thus, the Plan
as implemented and in effect for the Performance
Period beginning January 1, 1997 and ending December
31, 1999 may be referred to as the "1997 Long-Term
Management Performance Incentive Plan."
"Pro-Rata Award" means: (i) with reference
to a Group A Participant, a fraction of the Participant's
Full Award, the numerator of which fraction is the
number of full calendar months
<PAGE> 19 (10k page 50)
during the Performance Period for such award (and ending prior
to the last date for making the election referred to subsection 8(b)
above, if such election is made by such Participant) in
which the Participant was employed by the Corporation
or the Bank or a Successor, and the denominator of
which fraction is 36; and (ii) with reference to a Group
B Participant, the Participant's Full Award.
"Return on Equity" or "ROE" means, with
respect to any calendar year, Net Income for such year
divided by Equity for such year.
"Stock Option Plan" means the First Indiana
Corporation 1991 Stock Option and Incentive Plan and
any successor or similar plan of the Corporation.
"Subsidiary" means (i) the Bank, or (ii) any
other subsidiary of the Corporation within the meaning
of section 424(f) of the Code.
"Successor" means an entity, other than the
Corporation or the Bank, which upon or after a Change
of Control acquires substantially all of the assets and
business of the Bank and thereafter operates the
business of the Bank.
<PAGE> 20 (10k page 51)
FIRST INDIANA CORPORATION
1998 STOCK INCENTIVE PLAN
Table of Contents
Page
ARTICLE I GENERAL
1.1 Purpose 1
1.2 Administration 1
1.3 Persons Eligible for Awards 3
1.4 Types of Awards Under Plan 3
1.5 Shares Available for Awards 3
ARTICLE II AWARDS UNDER THE PLAN
2.1 Agreements Evidencing Awards 5
2.2 No Rights as a Shareholder 5
2.3 Grant of Stock Options, Stock
Appreciation Rights and Dividend
Equivalent Rights 5
2.4 Exercise of Options and Stock
Appreciation Rights 7
2.5 Termination of Continuous Status 8
2.6 Grant of Restricted Stock 10
2.7 Grant of Restricted Stock Units 12
2.8 Other Stock-Based Awards 12
2.9 Grant of Dividend Equivalent Rights 12
2.10 Deferral 13
2.11 Right of Recapture 13
ARTICLE III MISCELLANEOUS
3.1 Amendment of the Plan; Modification of
Awards 13
3.2 Tax Withholding 14
3.3 Nonassignability 14
3.4 Requirement of Notification of Election
Under Section 83(b) of
the Code 15
3.5 Requirement of Notification Upon
Disqualifying Disposition Under
Section 421(b) of the Code 15
3.6 Right of Discharge Reserved 15
3.7 Nature of Payments 15
3.8 Non-Uniform Determinations 16
3.9 Other Payments or Awards 16
3.10 Dissolution, Liquidation, Merger 16
3.11 Section 162(m) 17
3.12 Successors and Assigns 17
3.13 Designation of Beneficiary 17
<PAGE> i (10k page 52)
3.14 Settlement by Subsidiaries 18
3.15 Expenses 18
3.16 Arbitration 18
3.17 Sections Headings 19
3.18 Effective Date and Term of Plan 19
3.19 Governing Law 19
ARTICLE IV DEFINITIONS
4.1 "Award" 19
4.2 "Board" 19
4.3 "Cause" 19
4.4 "Change of Control" 20
4.5 "Compensation Committee" 22
4.6 "Consultant" 22
4.7 "Continuous Status" 22
4.8 "Disability" 23
4.9 "Exempt Descendant" 23
4.10 "Exempt Person" 23
4.11 "Fair Market Value" 23
4.12 "Incentive Stock Option" 24
4.13 "Non-Qualified Stock Option" 24
4.14 "Subsidiary" 24
<PAGE> ii (10k page 53)
FIRST INDIANA CORPORATION
1998 STOCK INCENTIVE PLAN
The Board of Directors of First Indiana
Corporation (the "Corporation") has established the
following Stock Incentive Plan (the "Plan") for
employees and directors of the Corporation and its
Subsidiaries. All capitalized terms used in the Plan
have the meanings given them in Article IV.
ARTICLE I
General
1.1 Purpose
The purpose of the First Indiana Corporation
1998 Stock Incentive Plan (the "Plan") is to provide for
officers, other employees and directors of, and
consultants to, the Corporation and its Subsidiaries
(collectively, the "Employers") an incentive (a) to enter
into and remain in the service of the Employers, (b) to
enhance the long-term performance of the Employers,
and (c) to acquire a proprietary interest in the
Corporation.
1.2 Administration
1.2.1 This Plan shall be administered by the
Compensation Committee. It is contemplated that the
Compensation Committee will consist of two or more
members of the Board. To the extent required for
transactions under the Plan to qualify for the
exemptions available under Rule 16b-3 ("Rule 16b-3")
promulgated under the Securities Exchange Act of
1934 (the "1934 Act"), all actions relating to Awards to
persons subject to Section 16 of the 1934 Act shall be
taken by the Board unless each person who serves on
the Compensation Committee is a "non-employee
director" within the meaning of Rule 16b-3 or such
actions are taken by another committee of the Board
comprised solely of "non-employee directors." To the
extent required for compensation realized from Awards
under the Plan to be deductible by the Employers
pursuant to Section 162(m) of the Internal Revenue
Code of 1986 (the "Code"), the members of the
Compensation Committee shall be "outside directors"
within the meaning of Section 162(m).
1.2.2 Subject to the provisions of the Plan and
directions from the Board, the Compensation
Committee is authorized to:
(a) determine the persons to whom
Awards are to be granted;
<PAGE> 1 (10k page 54)
(b) determine the type of Award to be
granted, the number of shares of Common Stock to be
covered by the Award, the pricing of the Award, the
time or times when the Award shall be granted and may
be exercised, any restrictions on the exercise of the
Award, and any restrictions upon shares of Common
Stock acquired pursuant to the exercise of any Award;
(c) provide for the extension of the
exercisability of an Award, accelerate the vesting or
exercisability of an Award, eliminate or make less
restrictive any restrictions contained in an Award,
waive any restriction or other provisions of the Plan or
in any Award, and to amend or modify any Award
provided such amendment or modification either is not
adverse to or is consented to by the grantee thereof;
(d) conclusively interpret the provisions
of the Plan and any Plan Agreement executed pursuant
to Section 2.1;
(e) prescribe, amend and rescind rules
and regulations relating to the Plan (including rules
governing its own operations) or make individual
decisions as questions arise, or both;
(f) correct any defect, supply any
omission or reconcile any inconsistency in the Plan;
(g) amend the Plan to reflect changes in
applicable law;
(h) delegate to one or more officers of
the Corporation or a Subsidiary some or all of its
authority under the Plan;
(i) employ such legal counsel,
independent auditors and consultants as it deems
desirable for the administration of the Plan and rely
upon any opinion or computation received therefrom;
(j) make all other determinations and
take all other actions necessary or advisable for the
administration of the Plan.
1.2.3 The determination of the Compensation
Committee on all matters relating to the Plan or any
Plan Agreement shall be final, binding and conclusive.
1.2.4 No member of the Compensation
Committee shall be liable for any action or
determination made in good faith, and the members of
such Committee shall be entitled to indemnification and
reimbursement in the manner provided in the
Corporation's articles of incorporation and bylaws as
amended from time to time. In the performance of its
responsibilities with respect to the Plan, such
Committee shall be entitled to rely upon information
and advice furnished by the Corporation's officers, the
Corporation's accountants, the Corporation's counsel
<PAGE> 2 (10k page 55)
and any other party such Committee deems necessary,
and no member of such Committee shall be liable for
any action taken or not taken in reliance upon any such
advice.
1.3 Persons Eligible for Awards
Awards under the Plan may be made to such
directors, officers and other employees of the
Employers (including prospective employees
conditioned on their becoming employees) and to such
Consultants to the Employers (collectively, "eligible
persons") as the Compensation Committee in its
discretion shall select.
1.4 Types of Awards Under Plan
Awards may be made under the Plan in the form
of (a) Incentive Stock Options (within the meaning of
Section 422 of the Code), (b) Non-Qualified Stock
Options, (c) stock appreciation rights, (d) dividend
equivalent rights, (e) restricted stock, (f) restricted
stock units and (g) other stock-based compensation, all
as more fully set forth in Article II. No Incentive Stock
Option may be granted to a person who is not an
employee of an Employer on the date of grant.
1.5 Shares Available for Awards
1.5.1 The maximum number of shares of
Common Stock that may be issued pursuant to this
Plan is 525,000, subject to adjustment in accordance
with Section 1.5.3. Shares issued pursuant the Plan
may be authorized but unissued shares or reacquired
shares, including shares purchased on the open market.
If any Award is canceled or forfeited, or terminates for
any other reason without all of the shares covered
thereby being issued or settled in cash, then the shares
as to which the Award is canceled or forfeited or so
terminates may again be awarded pursuant to the Plan.
Restricted shares issued under this Plan that are
repurchased by the Corporation, pursuant to an
exercise of its repurchase rights under the applicable
Plan Agreement, for the same price for which they were
sold to the grantee, shall be deemed forfeited for
purposes of the foregoing and be available for
reissuance pursuant to subsequent Awards. If
previously acquired shares of Common Stock are
delivered to the Corporation in full or partial payment
of the exercise price for the exercise of an option
granted under this Plan, the number of shares available
for future Awards under this Plan shall be reduced only
by the net number of shares issued upon the exercise of
the option. Awards that may be satisfied either by the
issuance of shares or by cash or other consideration
shall be counted against the maximum number of shares
that may be issued under this Plan, even though the
Award ultimately is satisfied by the payment of
consideration other than shares, as, for example, when
an option is granted in tandem with a stock
appreciation right that is settled by a cash payment of
the stock appreciation. However, Awards will not
reduce the number of shares that may be issued
pursuant to this Plan if the settlement of the Award will
not require the issuance of shares, as, for example, a
stock appreciation right that may be satisfied only by
the payment of cash. Shares of Common Stock issued
in settlement, assumption or substitution of outstanding
awards (or obligations to grant future awards) under
<PAGE> 3 (10k page 56)
the plans or arrangements of an unrelated entity shall
not reduce the maximum number of shares available for
issuance under this Plan, to the extent such settlement,
assumption or substitution is made in connection with
an Employer's acquisition of such unrelated entity or an
interest in such unrelated entity.
1.5.2 In no event may any eligible person be
granted Awards in any calendar year with respect to
more than 50,000 shares of Common Stock, subject to
adjustment from time to time in accordance with
Section 1.5.3. The number of shares relating to an
Award that is granted in a calendar year to an eligible
person and that subsequently is forfeited, canceled or
otherwise terminated shall continue to count toward
such limitation in such calendar year.
1.5.3 Subject to any required action by the
shareholders of the Corporation, the number of shares
of Common Stock covered by each outstanding Award,
the number of shares available for Awards, the number
of shares that may be subject to Awards to any one
employee, and the price per share of Common Stock
covered by each such outstanding Award shall be
proportionately adjusted for any increase or decrease in
the number of issued shares of Common Stock
resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the
Common Stock, or any other increase or decrease in
the number of issued shares of Common Stock, the
record date for which is after January 22, 1998,
effected without receipt of consideration by the
Corporation; provided, however, that conversion of any
convertible securities of the Corporation shall not be
deemed to have been "effected without receipt of
consideration." Such adjustment shall be made in a
manner which shall preclude the enlargement or
dilution of rights and benefits under such options. Such
adjustment shall be made by the Compensation
Committee, whose determination in that respect shall
be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Corporation of
shares of stock of any class, or securities convertible
into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect
to, the number or price of shares of Common Stock
subject to an Award. After any adjustment made
pursuant to this Section 1.5.3, the number of shares
subject to each outstanding Award shall be rounded to
the nearest whole number.
1.5.4 Except as provided in this Section 1.5
and in Section 2.3.8, there shall be no limit on the
number or the value of the shares of Common Stock
that may be subject to Awards to any individual under
the Plan.
<PAGE> 4 (10k page 57)
ARTICLE II
Awards under the Plan
2.1 Agreements Evidencing Awards
Each Award granted under the Plan (except an
Award of unrestricted stock) shall be evidenced by a
written agreement ("Plan Agreement") which shall
contain such provisions as the Compensation
Committee in its discretion deems necessary or
desirable. By accepting an Award pursuant to the Plan,
a grantee thereby agrees that the Award shall be subject
to all of the terms and provisions of the Plan and the
applicable Plan Agreement.
2.2 No Rights as a Shareholder
No grantee of an option or stock appreciation
right (or other person having the right to exercise such
Award) shall have any of the rights of a shareholder of
the Corporation with respect to shares subject to such
Award until the issuance of a stock certificate to such
person for such shares. Except as otherwise provided
in Section 1.5.3, no adjustment shall be made for
dividends, distributions or other rights (whether
ordinary or extraordinary, and whether in cash,
securities or other property) for which the record date
is prior to the date such stock certificate is issued.
2.3 Grant of Stock Options, Stock Appreciation
Rights and Dividend Equivalent Rights
2.3.1 The Compensation Committee may
grant Incentive Stock Options and Non-Qualified Stock
Options (collectively, "options") to purchase shares of
Common Stock from the Corporation, to such eligible
persons, in such amounts and subject to such terms and
conditions, as the Compensation Committee shall
determine in its discretion, subject to the provisions of
the Plan. The grantee and the Corporation shall enter
into separate Plan Agreements for Incentive Stock
Options and Non-Qualified Stock Options. At any time
and from time to time, the grantee and the Corporation
may agree to modify a Plan Agreement in order that an
Incentive Stock Option may be converted to a Non-Qualified Stock Option.
2.3.2 The Compensation Committee may
grant stock appreciation rights to such eligible persons,
in such amounts and subject to such terms and
conditions, as the Compensation Committee shall
determine in its discretion, subject to the provisions of
the Plan. Stock appreciation rights may be granted in
connection with all or any part of, or independently of,
any option granted under the Plan. A stock
appreciation right granted in connection with a Non-Qualified Stock
Option may be granted at or after the
time of grant of such option. A stock appreciation
right granted in connection with an Incentive Stock
Option may be granted only at the time of grant of such
option.
2.3.3 The grantee of a stock appreciation right
shall have the right, subject to the terms of the Plan and
the applicable Plan Agreement, to receive from the
Corporation an amount equal
<PAGE> 5 (10k page 58)
to (a) the excess of the Fair Market Value of a share of Common
Stock on the date of exercise of the stock appreciation right over (b)
the exercise price of such right as set forth in the Plan
Agreement (or over the option exercise price if the
stock appreciation right is granted in connection with
an option), multiplied by (c) the number of shares with
respect to which the stock appreciation right is
exercised. Except as otherwise provided in the
applicable Plan Agreement, payment upon exercise of a
stock appreciation right shall be in cash or in shares of
Common Stock (valued at their Fair Market Value on
the date of exercise of the stock appreciation right) or
both, as the Compensation Committee shall determine
in its discretion. Upon the exercise of a stock
appreciation right granted in connection with an option,
the number of shares subject to the option shall be
reduced by the number of shares with respect to which
the stock appreciation right is exercised. Upon the
exercise of an option in connection with which a stock
appreciation right has been granted, the number of
shares subject to the stock appreciation right shall be
reduced by the number of shares with respect to which
the option is exercised.
2.3.4 Each Plan Agreement with respect to an
option shall set forth the amount (the "option exercise
price") payable by the grantee to the Corporation upon
exercise of the option evidenced thereby. The option
exercise price per share shall be determined by the
Committee in its discretion; provided, however, that the
option exercise price of an Incentive Stock Option shall
be at least 100% of the Fair Market Value of a share of
Common Stock on the date the option is granted, and
provided further that in no event shall the option
exercise price be less than the par value of a share of
Common Stock.
2.3.5 Each Plan Agreement with respect to an
option or stock appreciation right shall set forth the
periods during which the Award evidenced thereby
shall be exercisable, whether in whole or in part. Such
periods shall be determined by the Compensation
Committee in its discretion; provided, however, that no
Incentive Stock Option (or a stock appreciation right
granted in connection with an Incentive Stock Option)
shall be exercisable more than 10 years after the date of
grant.
2.3.6 The Compensation Committee may in its
discretion include in any Plan Agreement with respect
to an option (the "original option") a provision that an
additional option (the "additional option") shall be
granted to any grantee who, pursuant to Section
2.4.3(b), delivers shares of Common Stock in partial or
full payment of the exercise price of the original option.
The additional option shall be for a number of shares of
Common Stock equal to the number thus delivered,
shall have an exercise price equal to the Fair Market
Value of a share of Common Stock on the date of
exercise of the original option, and shall have an
expiration date no later than the expiration date of the
original option. In the event that a Plan Agreement
provides for the grant of an additional option, such
Agreement shall also provide that the exercise price of
the original option be no less than the Fair Market
Value of a share of Common Stock on its date of grant,
and that any shares that are delivered pursuant to
Section 2.4.3(b) in payment of such exercise price shall
have been held for at least six months.
<PAGE> 6 (10k page 59)
2.3.7 To the extent that the aggregate Fair
Market Value (determined as of the time the option is
granted) of the stock with respect to which Incentive
Stock Options granted under this Plan and all other
plans of the Employers are first exercisable by any
employee during any calendar year shall exceed the
maximum limit (currently, $100,000), if any, imposed
from time to time under Section 422 of the Code, such
options shall be treated as Non-Qualified Stock
Options.
2.3.8 Notwithstanding the provisions of
Sections 2.3.4 and 2.3.5, to the extent required under
Section 422 of the Code, an Incentive Stock Option
may not be granted under the Plan to an individual
who, at the time the option is granted, owns stock
possessing more than 10% of the total combined voting
power of all classes of stock of his or her Employer or
of its parent or subsidiary corporations (as such
ownership may be determined for purposes of Section
422(b)(6) of the Code) unless (a) at the time such
Incentive Stock Option is granted the option exercise
price is at least 110% of the Fair Market Value of the
shares subject thereto and (b) the Incentive Stock
Option by its terms is not exercisable after the
expiration of 5 years from the date it is granted.
2.3.9 The Compensation Committee, in its
sole discretion, may include a provision in the Plan
Agreement for any Non-Qualified Stock Option that
provides for a cash payment, by the Corporation or
employing Subsidiary to the grantee, as soon as
practicable after the exercise thereof, of an amount
equal to all or a portion of the tax benefit to be received
by the Corporation or its Subsidiaries attributable to the
federal income tax deduction resulting from the
exercise of such Non-Qualified Stock Option.
2.4 Exercise of Options and Stock Appreciation
Rights
2.4.1 Subject to the provisions of this Article
II, each option or stock appreciation right granted
under the Plan shall be exercisable as follows:
2.4.2 Unless the applicable Plan Agreement
otherwise provides, an option or stock appreciation
right may be exercised from time to time as to all or
part of the shares as to which such Award is then
exercisable (but, in any event, only for whole shares).
A stock appreciation right granted in connection with
an option may be exercised at any time when, and to
the same extent that, the related option may be
exercised. An option or stock appreciation right shall
be exercised by the filing of a written notice with the
Corporation, on such form and in such manner as the
Compensation Committee shall prescribe.
2.4.3 Any written notice of exercise of an
option shall be accompanied by payment for the shares
being purchased. Such payment shall be made: (a) by
certified or official bank check (or the equivalent
thereof acceptable to the Corporation) for the full
option exercise price; or (b) unless the applicable Plan
Agreement provides otherwise, by delivery of shares of
Common Stock acquired at least six months prior to
the option exercise date and having a Fair Market Value
<PAGE> 7 (10k page 60)
(determined as of the exercise date) equal to all
or part of the option exercise price and a certified or
official bank check (or the equivalent thereof acceptable
to the Corporation) for any remaining portion of the
full option exercise price; or (c) at the discretion of the
Compensation Committee and to the extent permitted
by law, by such other provision as the Compensation
Committee may from time to time prescribe.
2.4.4 Promptly after receiving payment of the
full option exercise price, or after receiving notice of
the exercise of a stock appreciation right for which
payment will be made partly or entirely in shares, the
Corporation shall, subject to the provisions of Section
3.2 (relating to certain tax withholding requirements),
deliver to the grantee or to such other person as may
then have the right to exercise the Award, a certificate
or certificates for the shares of Common Stock for
which the Award has been exercised. If the method of
payment employed upon option exercise so requires,
and if applicable law permits, an optionee may direct
the Corporation to deliver the certificate(s) to the
optionee's stockbroker.
2.5 Termination of Continuous Status
2.5.1 Upon termination of the grantee's
Continuous Status other than for Cause, and other than
by reason of the grantee's death or Disability, the
grantee of an option or stock appreciation right may
exercise the same within such period of time as is
specified in the applicable Plan Agreement to the extent
that he or she is entitled to exercise it on the date of
such termination (but in no event later than the
expiration of the term of such option or stock
appreciation right as set forth in such Plan Agreement).
In the absence of a specified time in the Plan
Agreement, such option or stock appreciation right
shall remain exercisable for three months following
such termination. If, on the date of termination, the
grantee is not entitled to exercise such option or stock
appreciation right in full, the shares subject to the
unexercisable portion thereof shall revert to the Plan.
If, after termination, the grantee does not exercise such
option or stock appreciation right within the applicable
time period or such longer period as the Compensation
Committee may allow, such option or stock
appreciation right shall terminate, and the shares
covered thereby shall revert to the Plan.
Notwithstanding the above, in the event the
Corporation is involved in a merger as a result of which
grantees are precluded from selling shares of the
acquiring or successor company until the publication of
financial results covering post-merger combined
operations ("Pooling Restrictions"), options held by
grantees subject to such Pooling Restrictions shall
remain exercisable until five business days after the
expiration of such Pooling Restrictions (but not beyond
the original term of the option), notwithstanding an
earlier termination of such grantee's Continuous Status.
2.5.2 Notwithstanding the above, in the event
of a grantee's change in status from one relationship
with the Employers to another, the grantee's
Continuous Status shall not automatically terminate
solely as a result of such change in status. In the event
a grantee ceases to be an Employee but retains
Continuous Status, an Incentive Stock Option held by
that grantee shall cease to be treated as an Incentive
Stock Option and shall be treated for tax purposes as a
<PAGE> 8 (10k page 61)
Non-Qualified Stock Option three months and one day
following such termination of employment.
2.5.3 Upon termination of a grantee's
Continuous Status as a result of the grantee's Disability,
the grantee of an option or stock appreciation right may
exercise the same at any time within twelve months
from the date of termination (or within such longer or
shorter period of time as the applicable Plan Agreement
may specify or such longer period of time as the
Compensation Committee may allow), but only to the
extent that the grantee is entitled to exercise it on the
date of termination (and in no event later than the
expiration of the term of the option or stock
appreciation right as set forth in the applicable Plan
Agreement). If, on the date of termination, the grantee
is not entitled to exercise such option or stock
appreciation right in full, the shares subject to the
unexercisable portion thereof shall revert to the Plan.
If, after termination, the grantee does not exercise such
option or stock appreciation right within the applicable
time period or such longer period as the Compensation
Committee may allow, such option or stock
appreciation right shall terminate, and the shares
covered thereby shall revert to the Plan.
2.5.4 In the event of the grantee's death, an
option or stock appreciation right may be exercised at
any time within twelve months following the date of
death (or within such longer or shorter period of time
as the applicable Plan Agreement may specify or such
longer period of time as the Compensation Committee
may allow), but only to the extent that the grantee was
entitled to exercise the same on the date of his or her
death, and in no event later than the expiration of the
term of the option or stock appreciation right as set
forth in the applicable Plan Agreement. If, at the time
of death, the grantee was not entitled to exercise such
option or stock appreciation right in full, the shares
subject to the unexercisable portion thereof shall
immediately revert to the Plan. If, after death, such
option or stock appreciation right is not exercised
within the applicable time period or such longer period
as the Compensation Committee may allow, such
option or stock appreciation right shall terminate, and
the shares covered thereby shall revert to the Plan. If
the grantee's estate or a person who acquired the right
to exercise the option by bequest or inheritance does
not exercise the option with the time specified herein,
the option shall terminate, and the Shares covered by
such option shall revert to the Plan.
2.5.5 Any exercise of an option or stock
appreciation right following the grantee's death shall be
made only by the grantee's beneficiary, or by the legatee
thereof under the grantee's last will if no validly
designated beneficiary survives the grantee and such
will specifically disposes of such Award, or by the
grantee's personal representative if no validly
designated beneficiary and no such specific legatee
survives the grantee. If a grantee's beneficiary, specific
legatee or personal representative shall be entitled to
exercise any option or stock appreciation right pursuant
to the preceding sentence, such beneficiary, specific
legatee or personal representative shall be bound by all
the terms and conditions of the Plan and the applicable
Plan Agreement which would have applied to the
grantee.
<PAGE> 9 (10k page 62)
2.5.6 Anything herein to the contrary
notwithstanding, no option or stock appreciation right
may be exercised after the grantee's Continuous Status
is terminated or deemed to have been terminated for
Cause as provided in Section 4.3.
2.6 Grant of Restricted Stock
2.6.1 The Compensation Committee may
grant restricted shares of Common Stock to such
eligible persons, in such amounts, and subject to such
terms and conditions as the Compensation Committee
shall determine in its discretion, subject to the
provisions of the Plan. Awards of restricted stock may
be made independently of or in connection with any
other Award under the Plan. In addition, such Awards
may be made in combination with awards under other
incentive plans of the Corporation, and any
performance goals and standards adopted for purposes
of such other plans may be incorporated and applied for
purposes of the Award as conditions which must
satisfied in order for the shares covered by the Award
to become nonforfeitable and transferable. The grantee
of a restricted stock Award shall have no rights with
respect to such Award unless such grantee (i) accepts
the Award within such period as the Compensation
Committee shall specify by executing a Plan Agreement
in such form as the Compensation Committee shall
determine and (ii) makes payment to the Corporation
by certified or official bank check (or the equivalent
thereof acceptable to the Corporation) of the purchase
price, if any, for the shares covered by the Award in
such amount as the Compensation Committee may
determine.
2.6.2 Promptly after a grantee accepts a
restricted stock Award, the Corporation shall issue in
the grantee's name a certificate or certificates for the
shares of Common Stock covered by the Award. Upon
the issuance of such certificate(s), the grantee shall
have the rights of a shareholder with respect to the
restricted stock, subject to the nontransferability
restrictions and Corporation repurchase rights
described in Sections 2.6.4 and 2.6.5 and to such other
restrictions and conditions as the Compensation
Committee in its discretion may include in the
applicable Plan Agreement.
2.6.3 Unless the Compensation Committee
shall otherwise determine, any certificate issued
evidencing shares of restricted stock shall remain in the
possession of the Corporation until such shares are free
of any restrictions specified in the applicable Plan
Agreement.
2.6.4 Shares of restricted stock may not be
sold, assigned, transferred, pledged or otherwise
encumbered or disposed of, except as specifically
provided in this Plan or the applicable Plan Agreement.
The Compensation Committee shall specify in the
applicable Plan Agreement the date or dates and the
conditions (which may depend upon or be related to the
attainment of performance goals, maintaining
Continuous Status and other conditions) on which the
foregoing transfer restrictions shall lapse and the
restricted stock shall vest. Unless the applicable Plan
Agreement provides otherwise, additional shares of
Common Stock or other property distributed
<PAGE> 10 (10k page 63)
to the grantee in respect of shares of restricted stock, as
dividends or otherwise, shall be subject to the same
restrictions applicable to such restricted stock.
2.6.5 Except as otherwise specified in the
applicable Plan Agreement, shares covered by an
Award of restricted stock shall be forfeited if and when,
during the restricted period as to such shares, and prior
to the vesting of such shares, the grantee's Continuous
Status terminates or any condition to which the vesting
of such shares is subject can no longer be satisfied. It is
contemplated that a Plan Agreement (i) may provide
for the grantee to vest as to a pro rata portion of an
Award of restricted stock if the termination of his or
her Continuous Status is due to death, Disability or
retirement after age 62 and completing five years of
service, (ii) may permit the grantee, in the event of a
Change of Control of the Corporation occurring during
the applicable restricted period, to elect to become
vested as to a pro rata portion of an Award of
restricted stock and to forfeit the balance of the Award,
and (iii) may provide for an Award to become fully
vested in certain events upon the occurrence of a
Change of Control. In all events, however, shares
covered by an Award of restricted stock shall be
forfeited if, during the restricted period as to such
shares, the grantee's Continuous Status is terminated
for Cause.
2.6.6 If and when shares covered by an Award
of restricted stock are forfeited, the grantee shall be
deemed to have resold such shares to the Corporation
at the lesser of the purchase price paid by the grantee
(such purchase price shall be deemed to be zero dollars
if no purchase price was paid) or the Fair Market Value
of such shares on the date of such forfeiture. The
Corporation shall pay such amount to the grantee as
soon as is administratively practical. Such shares shall
cease to be outstanding, and shall no longer confer on
the grantee any rights as a stockholder of the
Corporation, from and after the date of such forfeiture.
2.6.7 Except as otherwise provided in the
applicable Plan Agreement or an agreement entered
into pursuant to Section 2.10, at the end of the period
during which shares covered by an Award of restricted
stock are subject to forfeiture or restrictions on
transfer, any of such shares that have not been forfeited
shall become nonforfeitable and fully transferable.
2.7 Grant of Restricted Stock Units
2.7.1 The Compensation Committee may
grant Awards of restricted stock units to such eligible
persons, in such amounts, and subject to such terms
and conditions as the Compensation Committee shall
determine in its discretion, subject to the provisions of
the Plan. Restricted stock units may be awarded
independently of or in connection with any other
Award under the Plan.
2.7.2 At the time of grant, the Compensation
Committee shall specify the date or dates on which the
restricted stock units shall become fully vested and
nonforfeitable, and may specify such conditions to
vesting as it deems appropriate. In the event of the
termination of the grantee's Continuous Status for any
reason, restricted stock units that have not become nonforfeitable shall
<PAGE> 11 (10k page 64)
be forfeited and canceled. The
Compensation Committee at any time may accelerate
vesting dates and otherwise waive or amend any
conditions of an Award of restricted stock units.
2.7.3 At the time of grant, the Compensation
Committee shall specify the maturity date applicable to
each grant of restricted stock units, which may be
determined at the election of the grantee. Such date
may be later than the vesting date or dates of the
Award. On the maturity date, the Corporation shall
transfer to the grantee one unrestricted, fully
transferable share of Common Stock for each restricted
stock unit scheduled to be paid out on such date and
not previously forfeited. The Compensation Committee
shall specify the purchase price, if any, to be paid by the
grantee to the Corporation for such shares of Common
Stock.
2.8 Other Stock-Based Awards
The Board may authorize other types of
stock-based Awards (including the grant of unrestricted
shares), which the Compensation Committee may grant
to such eligible persons, and in such amounts and
subject to such terms and conditions, as the
Compensation Committee shall in its discretion
determine, subject to the provisions of the Plan. Such
Awards may entail the transfer of actual shares of
Common Stock to grantees, or payment in cash or
otherwise of amounts based on the value of shares of
Common Stock.
2.9 Grant of Dividend Equivalent Rights
The Compensation Committee may in its
discretion include in the Plan Agreement with respect
to any Award a dividend equivalent right entitling the
grantee to receive amounts equal to the ordinary
dividends that would be paid on the shares of Common
Stock covered by such Award, during the time such
Award is outstanding and unexercised, if such shares
were then outstanding. In the event such a provision is
included in a Plan Agreement, the Compensation
Committee shall determine whether such payments shall
be made in cash, in shares of Common Stock or in
another form, whether they shall be conditioned upon
the exercise or vesting of the Award to which they
relate, the time or times at which they shall be made,
and such other terms and conditions as the
Compensation Committee shall deem appropriate.
2.10 Deferral
If permitted by the Compensation Committee, a
grantee may elect to enter into a written agreement
with his or her Employer providing for the deferral of
any form of payment hereunder (whether in the form of
cash or Common Stock), subject to such terms and
conditions as the Committee may deem appropriate.
2.11 Right of Recapture
<PAGE> 12 (10k page 65)
If at any time within one year after the date on
which a grantee exercises an option or stock
appreciation right, or on which restricted stock vests,
or which is the maturity date of restricted stock units,
or on which income is realized by a grantee in
connection with any other stock-based Award (each of
which events is a "Realization Event"), (a) the grantee's
Continuous Status is terminated for Cause or (b) the
grantee engages in any activity which the
Compensation Committee determines (i) was deliberate
and (ii) resulted in and was intended to result in
demonstrable material harm to the Corporation or any
Subsidiary, then any gain ("Gain") realized by the
grantee from the Realization Event shall be paid by the
grantee to the Corporation upon notice from the
Corporation. Such Gain shall be determined as of the
date of the Realization Event, without regard to any
subsequent change in the Fair Market Value of a share
of Common Stock. The Employers shall have the right
to offset such Gain against any amounts otherwise
owed to the grantee by the Employers (whether as
wages, vacation pay, or pursuant to any benefit plan or
other compensatory arrangement).
ARTICLE III
Miscellaneous
3.1 Amendment of the Plan; Modification of Awards
3.1.1 The Board may from time to time
suspend, discontinue, revise or amend the Plan in any
respect whatsoever, except that no such amendment
shall materially impair any rights or materially increase
any obligations under any Award theretofore made
under the Plan without the consent of the grantee (or,
after the grantee's death, the person having the right to
exercise the Award). For purposes of this Section 3.1,
any action of the Board or the Compensation
Committee that alters or affects the tax treatment of
any Award shall not be considered to materially impair
any rights of any grantee.
3.1.2 Shareholder approval of any amendment
shall be obtained to the extent necessary to comply with
Section 422 of the Code (relating to Incentive Stock
Options) or other applicable law or regulation.
3.1.3 The Compensation Committee may
amend any outstanding Plan Agreement (including,
without limitation, an amendment which would
accelerate the time or times at which the Award
becomes unrestricted or may be exercised) or may
waive or amend any goals, restrictions or conditions set
forth in the Plan Agreement. However, any such
amendment (other than an amendment pursuant to
Section 3.10, relating to dissolution, liquidation or
merger of the Corporation) that materially impairs the
rights or materially increases the obligations of a
grantee under an outstanding Award shall be made only
with the consent of the grantee (or, upon the grantee's
death, the person having the right to exercise the
Award).
3.2 Tax Withholding
<PAGE> 13 (10k page 66)
3.2.1 As a condition to the receipt of any
shares of Common Stock pursuant to any Award or the
lifting of restrictions on any Award, or in connection
with any other event that gives rise to a federal or other
governmental tax withholding obligation on the part of
the Employers relating to an Award (including, without
limitation, FICA tax), the Employers shall be entitled to
require that the grantee remit to the Employers an
amount sufficient in the opinion of the Employers to
satisfy such withholding obligation.
3.2.2 If the event giving rise to the
withholding obligation is a transfer of shares of
Common Stock, then, unless otherwise specified in the
applicable Plan Agreement, the grantee may satisfy the
withholding obligation imposed under Section 3.2.1 by
electing to have the Employers withhold shares of
Common Stock having a Fair Market Value equal to
the amount of tax to be withheld. For this purpose,
Fair Market Value shall be determined as of the date on
which the amount of tax to be withheld is determined
(and any fractional share amount shall be settled in
cash).
3.3 Nonassignability
Except to the extent otherwise provided in the
applicable Plan Agreement, no Award or right granted
to any person under the Plan shall be assignable or
transferable other than by will or by the laws of descent
and distribution, and all such Awards and rights shall be
exercisable during the life of the grantee only by the
grantee or the grantee's legal representative.
3.4 Requirement of Notification of Election Under
Section 83(b) of the Code
If any grantee shall, in connection with the
acquisition of shares of Common Stock under the Plan,
make the election permitted under Section 83(b) of the
Code (that is, an election to include in gross income in
the year of transfer the amounts specified in Section
83(b)), such grantee shall notify the Corporation of
such election within 10 days of filing notice of the
election with the Internal Revenue Service, in addition
to any filing and notification required pursuant to
regulations issued under the authority of Code Section
83(b).
3.5 Requirement of Notification Upon Disqualifying
Disposition Under Section 421(b) of the Code
If any grantee shall make any disposition of
shares of Common Stock issued pursuant to the
exercise of an Incentive Stock Option under the
circumstances described in Section 421(b) of the Code
(relating to certain disqualifying dispositions), such
grantee shall notify the Corporation of such disposition
within 10 days thereof.
3.6 Right of Discharge Reserved
<PAGE> 14 (10k page 67)
Nothing in the Plan shall confer upon any
employee of the Corporation or any Subsidiary any
right to continued employment with the Corporation or
such Subsidiary or interfere in any way with the right of
the Corporation or such Subsidiary to terminate the
employment of any of its employees at any time, with
or without cause, in accordance with applicable laws
and any applicable employment agreement.
3.7 Nature of Payments
3.7.1 Any and all grants of Awards and
issuances of shares of Common Stock under the Plan
shall be in consideration of services performed for the
Employers by the grantee.
3.7.2 All such grants and issuances shall
constitute a special incentive payment to the grantee
and shall not be taken into account in computing the
amount of salary or compensation of the grantee for the
purpose of determining any benefits under any pension,
retirement, profit-sharing, bonus, life insurance or other
benefit plan of the Employers or under any agreement
between an Employer and the grantee, unless such plan
or agreement specifically provides otherwise.
3.8 Non-Uniform Determinations
The Compensation Committee's determinations
under the Plan need not be uniform and may be made
by it selectively among persons who receive, or are
eligible to receive, Awards under the Plan (whether or
not such persons are similarly situated). Without
limiting the generality of the foregoing, the
Compensation Committee shall be entitled, among
other things, to make non-uniform and selective
determinations, and to enter into non-uniform and
selective Plan Agreements, as to (a) the persons to
receive Awards under the Plan, (b) the terms and
provisions of Awards under the Plan, and (c) the
treatment of leaves of absence pursuant to Section 4.7.
3.9 Other Payments or Awards
Nothing contained in the Plan shall be deemed
in any way to limit or restrict the Employers from
making any Award or payment to any person under any
other plan, arrangement or understanding, whether now
existing or hereafter in effect.
3.10 Provisions Applicable Upon Change of Control
3.10.1 If a Change of Control occurs after the
grant of an option or stock appreciation right
hereunder, such Award shall continue in effect
according to its terms or, if there is a successor
employer, there shall be substituted for such option or
right an equivalent option or right relating to the stock
of the successor employer or a parent of the successor
employer. In the event the grantee's Continuous Status
is terminated by his or her Employer or its successor
without cause, as defined for purposes of any written
agreement under which the grantee is
<PAGE> 15 (10k page 68)
employed by such Employer or its successor, or by the grantee for good
reason, as defined for purposes of any such agreement,
prior to the end of the employment term provided in
any such agreement, the option or right or the
substitute option or right shall become and remain fully
exercisable for the remainder of the term thereof,
notwithstanding such termination of Continuous Status.
3.10.2 If a Change of Control occurs after the
grant of restricted stock hereunder, such Award shall
continue in effect according to its terms or, if there is a
successor employer, there shall be substituted for the
restricted stock covered by such Award restricted stock
of the successor employer or a parent of the successor
employer having the same value, as of the effective date
of such Change of Control, as the restricted stock of
the predecessor for which it is substituted. In the event
the grantee's Continuous Status is terminated by his or
her Employer or its successor without cause, as defined
for purposes of any written agreement under which the
grantee is employed by such Employer or its successor,
or by the grantee for good reason, as defined for
purposes of any such agreement, prior to the end of the
employment term provided in any such agreement, such
restricted stock or substituted restricted stock shall
become and remain fully vested and transferable,
notwithstanding such termination of Continuous Status.
3.10.3 Nothing contained in the Plan shall be
construed to give a grantee the right to enjoin the
Corporation or any Subsidiary from taking any
corporate action which is deemed by it to be
appropriate or in its best interest, whether or not such
action would have an adverse effect on Awards made
under the Plan. Any right of a grantee, beneficiary or
other person respecting such a corporate action shall be
limited to a claim for actual damages and attorneys
fees.
3.11 Section 162(m)
If this Plan is subject to Section 162(m) of the
Internal Revenue Code, it is intended that the Plan meet
all of the requirements of such section so that options
and stock appreciation rights granted hereunder and, if
determined by the Compensation Committee, restricted
stock and restricted stock units granted hereunder shall
constitute "performance-based" compensation within
the meaning of such section. If any provision of the
Plan would disqualify the Plan or would not permit the
Plan to comply with such section, such provision shall
be construed or deemed amended to conform to the
requirements of such section; provided that no such
construction or amendment shall have an adverse
impact on the economic value to the grantee of any
Award previously granted hereunder.
<PAGE> 16 (10k page 69)
3.12 Successors and Assigns
Awards under the Plan shall be binding upon
and inure to the benefit of the successors and assigns of
the Corporation and its Subsidiaries. In the event of a
sale of substantially all of the assets of the Corporation
or a Subsidiary, or a merger, consolidation or share
exchange involving the Corporation, all obligations of
the Corporation or such Subsidiary under the Plan with
respect to Awards granted hereunder shall be binding
on the successor to the transaction. Employment of a
grantee with such successor shall be considered
employment with the Corporation or such Subsidiary
for purposes of the Plan.
3.13 Designation of Beneficiary
A grantee may designate a beneficiary or
beneficiaries to receive any payments which may be
made following the grantee's death. Such designation
may be changed or canceled at any time without the
consent of such beneficiary. Any such designation,
change or cancellation must be made in a form
approved by the Compensation Committee and shall
not be effective until received by the Compensation
Committee. If a grantee does not designate a
beneficiary, or if the designated beneficiary or
beneficiaries predecease the grantee, any payments
which may be made following the grantee's death shall
be made to the grantee's estate.
3.14 Settlement by Subsidiaries
Settlement of Awards held by employees of a
Subsidiary shall be made by and at the expense of the
Subsidiary.
3.15 Expenses
The costs and expenses of administering the
Plan shall be borne by the Corporation.
3.16 Arbitration
To the extent any determination of the
Compensation Committee relating to an Award is
challenged as nonbinding, arbitrary and capricious or
otherwise subject to judicial review, the parties to the
Award (the grantee or his or her assignee, beneficiary,
legatee, guardian or personal representative being one
of the parties, and any or all of the Corporation, the
employing Subsidiary, any Successor to the
Corporation or the employing Subsidiary, and the
Compensation Committee being the other party) shall
be required to have the challenge settled through
binding arbitration pursuant to the American
Arbitration Association's rules of commercial
arbitration which are then in effect. The location of all
arbitration proceedings shall be Indianapolis, Indiana.
One arbitrator shall be selected by the parties and shall
be a current or former executive officer (vice president
or higher) of a publicly-traded corporation. In the
event the parties are unable mutually to agree upon a person
to act as the arbitrator, or in the event a mutually-agreed upon
<PAGE> 17 (10k page 70)
arbitrator shall fail to accept the
appointment by the parties, the parties jointly shall
request from the American Arbitration Association a
list of the names of five persons who would be qualified
to act as an arbitrator under this section. The selection
of the final arbitrator then shall be achieved by each
party alternately striking a name, with the party
consisting of those aligned against the grantee (or his or
her assignee, beneficiary, legatee, guardian or personal
representative) going first, until one name remains. In
the event the parties mutually agree that the five names
submitted by the American Arbitration Association are
unsatisfactory, they jointly may request a second list of
five names from the American Arbitration Association
and final selection shall be achieved through the
procedure set out herein. The decision of the arbitrator
shall be final and binding upon both parties, and any
award entered by the arbitrator shall be final, binding
and non-appealable and judgment may be entered
thereon by either party in accordance with the
applicable law in any court of competent jurisdiction.
The arbitrator shall not have authority to modify any
provision of this Plan, to award any benefit in a form
not authorized under this Plan and the applicable Plan
Agreement, or to review any exercise by the
Compensation Committee of its discretionary authority
under the Plan otherwise than on grounds of its being
arbitrary and capricious or constituting an abuse of
discretion. The Corporation shall be responsible for all
of the reasonable expenses of the American Arbitration
Association, the arbitrator and the conduct of the
selection and the arbitration procedures set forth in this
clause, including reasonable attorneys' fees and
expenses incurred by either party which are associated
with the arbitration procedure through the time the final
arbitration decision or award is rendered. This
arbitration provision shall be specifically enforceable.
3.17 Section Headings
The section headings contained herein are for
the purpose of convenience only and are not intended
to define or limit the contents of the sections.
3.18 Effective Date and Term of Plan
3.18.1 The Plan was adopted by the Board on
January 22, 1998, subject to approval by the
Corporation's shareholders. The Plan shall become
effective on the day following its approval by the
stockholders (the "Effective Date").
3.18.2 Unless sooner terminated by the Board,
the provisions of the Plan respecting the grant of
Incentive Stock Options shall terminate on the day
before the tenth anniversary of the adoption of the Plan
by the Board, and no Incentive Stock Option Awards
shall thereafter be made under the Plan. All Awards
made under the Plan prior to its termination shall
remain in effect until such Awards have been satisfied
or terminated in accordance with the terms and
provisions of the Plan and the applicable Plan
Agreements.
3.19 Governing Law
<PAGE> 18 (10k page 71)
All rights and obligations under the Plan shall be
construed and interpreted in accordance with the laws
of the State of Indiana, without giving effect to
principles of conflict of laws.
ARTICLE IV
Definitions
4.1 "Award" means a grant made under this
Plan of Incentive Stock Options, Non-Qualified Stock
Options, stock appreciation rights, dividend equivalent
rights, restricted stock, restricted stock units, or other
stock-based compensation.
4.2 "Board" means the Board of Directors
of the Corporation.
4.3 "Cause," when used in connection with
termination of a grantee's employment or Continuous
Status, shall have the meaning set forth in any
then-effective employment agreement between the
grantee and his or her Employer. In the absence of
such an employment agreement provision, "Cause"
means: (a) conviction of any crime (whether or not
involving an Employer) constituting a felony in the
jurisdiction involved; (b) engaging in any substantiated
act involving moral turpitude; (c) engaging in any act
which, in each case, subjects, or if generally known
would subject, an Employer to public ridicule or
embarrassment; (d) material violation of his or her
Employer's policies, including, without limitation, those
relating to sexual harassment or the disclosure or
misuse of confidential information; (e) serious neglect
or misconduct in the performance of the grantee's
duties for his or her Employer or willful or repeated
failure or refusal to perform such duties. The
Compensation Committee shall have the right to
determine whether the termination of a grantee's
employment or Continuous Status is a dismissal for
Cause and the date of termination in such a case, which
date the Compensation Committee may deem to be the
date of the action that is Cause for dismissal. Such
determinations of the Compensation Committee shall
be final, binding and conclusive.
4.4 "Change of Control" means, with
reference to an Award hereunder, the first of the
following to occur after the date of grant thereof:
(a) The acquisition by any individual,
entity or "group" within the meaning of Section
13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")(a "Person") of
beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 25% or more
of either (i) the then outstanding shares of common
stock of the Corporation (the "Outstanding
Corporation Common Stock") or (ii) the combined
voting power of the then outstanding voting securities
of the Corporation entitled to vote generally in the
election of directors (the "Outstanding Corporation
Voting Securities"); provided, however, that the
following acquisitions of common stock shall not
constitute a Change of Control: (i) any acquisition
directly from the Corporation [excluding an acquisition
by virtue of the exercise of a conversion privilege by
one or more Persons acting in concert, and excluding
an acquisition that would be a Change of Control under
(c) below], (ii) any acquisition by the Corporation, (iii) any
<PAGE> 19 (10k page 72)
acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Corporation or
any corporation or other entity controlled by the
Corporation, (iv) any acquisition by any corporation or
other entity pursuant to a reorganization, merger or
consolidation which would not be a Change of Control
under (c) below; or (v) any acquisition by an Exempt
Person; provided further, that the applicable percentage
shall be reduced from 25% to 20% in the event of the
occurrence of one transaction or a series of transactions
which results in the beneficial ownership by Exempt
Persons of less than 15% of the Outstanding
Corporation Common Stock or the Outstanding
Corporation Voting Securities; or
(b) Individuals who, as of such date of
grant, constitute the Board (the "Incumbent Board")
cease for any reason to constitute at least a majority of
the Board; provided, however, that any individual
becoming a director subsequent to such beginning
whose election, or nomination for election by the
Corporation's shareholders, was approved by a vote of
at least a majority of the directors then comprising the
Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose
initial assumption of office occurs as a result of either
an actual or threatened "election contest" or other
actual or threatened "solicitation" (as such terms are
used in Rule 14a-11 of Regulation 14A promulgated
under the Exchange Act) of proxies or consents by or
on behalf of a person other than the Incumbent Board;
or
(c) Approval by the shareholders of the
Corporation of a reorganization, merger or
consolidation, unless, following such reorganization,
merger, share exchange or consolidation, (i) 75% or
more of, respectively, the then outstanding shares of
common stock of the corporation or other entity
resulting from such reorganization, merger, share
exchange or consolidation and the combined voting
power of the then outstanding voting securities of such
corporation or other entity entitled to vote generally in
the election of directors is then beneficially owned,
directly or indirectly, by all or substantially all of the
individuals and entities who were the beneficial owners,
respectively, of the Outstanding Corporation Common
Stock and Outstanding Corporation Voting Securities
immediately prior to such reorganization, merger, share
exchange or consolidation in substantially the same
proportions as their ownership, immediately prior to
such reorganization, merger, share exchange or
consolidation, (ii) no Person (excluding the
Corporation, any Exempt Person, any employee benefit
plan (or related trust) of the Corporation or such
corporation or other entity resulting from such
reorganization, merger, share exchange or
consolidation and any person beneficially owning,
immediately prior to such reorganization, merger, share
exchange or consolidation, directly or indirectly, 25%
or more of the Outstanding Corporation Common
Stock or Outstanding Voting Securities, as the case
may be) beneficially owns, directly or indirectly, 25%
or more of, respectively, the then outstanding shares of
common stock of the corporation or other entity
resulting from such reorganization, merger, share
exchange or consolidation or the combined voting
power of the then outstanding voting securities of such
corporation or other entity, entitled to vote generally in
the election of directors and (iii) at least a majority of
the members of the board of directors of the
corporation or other entity resulting from such
reorganization, merger, share exchange or
consolidation were members of the
<PAGE> 20 (10k page 73)
Incumbent Board at the time of the execution of the initial agreement
providing for such reorganization, merger, share
exchange or consolidation; provided however, that the
applicable percentage for purposes of clause (ii) of this
(c) shall be reduced from 25% to 20% in the event of
the occurrence of one transaction or a series of
transactions which results in the beneficial ownership
by Exempt Persons of less than 15% of the Outstanding
Corporation Common Stock or the Outstanding
Corporation Voting Securities; or
(d) Approval by the shareholders of the
Corporation of (i) a complete liquidation or dissolution
of the Corporation or (ii) the sale or other disposition
of all or substantially all of the assets of the
Corporation, other than to a corporation or other
entity, with respect to which following such sale or
other disposition, (A) 75% or more of, respectively, the
then outstanding shares of common stock of such
corporation or other entity and the combined voting
power of the then outstanding voting securities of such
corporation or other entity entitled to vote generally in
the election of directors is then beneficially owned,
directly or indirectly, by all or substantially all of the
Persons who were the beneficial owners, respectively,
of the Outstanding Corporation Common Stock and
Outstanding Corporation Voting Securities immediately
prior to such sale or other disposition in substantially
the same proportion as their ownership, immediately
prior to such sale or other disposition, of the
Outstanding Corporation Common Stock and
Outstanding Corporation Voting Securities, as the case
may be, (B) no Person (excluding the Corporation, any
Exempt Person, any employee benefit plan (or related
trust) of the Corporation or such corporation or other
entity and any person beneficially owning, immediately
prior to such sale or other disposition, directly or
indirectly, 25% or more of the Outstanding
Corporation Common Stock or Outstanding
Corporation Voting Securities, as the case may be)
beneficially owns, directly or indirectly, 25% or more
of, respectively, the then outstanding shares of common
stock of such corporation or other entity or the
combined voting power of the then outstanding voting
securities of such corporation or other entity entitled to
vote generally in the election of directors and (C) at
least a majority of the members of the board of
directors of such corporation or other entity were
members of the Incumbent Board at the time of the
execution of the initial agreement or action of the
Board providing for such sale or other disposition of
assets of the Corporation; provided however, that the
applicable percentage for purposes of subclause (ii)(B)
of this (d) shall be reduced from 25% to 20% in the
event of the occurrence of one transaction or a series of
transactions which results in the beneficial ownership
by Exempt Persons of less than 15% of the Outstanding
Corporation Common Stock or the Outstanding
Corporation Voting Securities; or
(e) The occurrence of one transaction
or a series of transactions, which has the effect of a
divestiture by the Corporation of 25% or more of the
combined voting power of the outstanding voting
securities of First Indiana Bank; or
(f) The occurrence of any sale, lease or
other transfer, in one transaction or a series of
transactions, of all or substantially all of the assets of
First Indiana Bank (other than to the Corporation or
one or more Exempt Persons); or
<PAGE> 21 (10k page 74)
(g) The occurrence of one transaction
or a series of transactions which results in the beneficial
ownership by Exempt Persons of less than 20% of the
outstanding voting securities of The Somerset Group,
Inc. ("Somerset"), at any time when Somerset
beneficially owns 10% or more of the combined voting
power of the outstanding voting securities of the
Corporation.
4.5 "Compensation Committee" means the
Compensation Committee of the Board.
4.6 "Consultant" means any person,
including an advisor, who is engaged by an Employer
to render services on a regular or periodic basis and
who is compensated for such services.
4.7 "Continuous Status" means that the
Grantee's relationship with the Employers as a director,
officer, employee or Consultant, is not interrupted or
terminated. Continuous Status shall not be considered
interrupted in the case of transfers between locations of
an Employer, or between Employers, or from an
Employer to any successor. The Compensation
Committee in its discretion may determine (a) whether
any leave of absence constitutes a termination of
Continuous Status for purposes of the Plan, (b) the
impact, if any, of any such leave of absence on Awards
theretofore made under the Plan, and (c) when a
change in a Consultant's association with the
Employers constitutes a termination of Continuous
Status for purposes of the Plan. For purposes of
Incentive Stock Options, no leave of absence may
exceed 90 days, unless reemployment upon expiration
of such leave is guaranteed by statute or contract. If
reemployment upon expiration of a leave of absence is
not so guaranteed, then on the 181st day of such leave
any Incentive Stock Option held by the grantee shall
cease to be treated as an Incentive Stock Option and
shall be treated for tax purposes as a Non-Qualified
Stock Option.
4.8 "Disability" means, with respect to any
termination of Continuous Status, any physical or
mental impairment of a grantee which (i) prevents the
grantee from doing any substantial gainful activity for
which he or she is fitted by education, training or
experience, and (ii) is expected to last at least 12
months from the date of such termination of
Continuous Service or to result in death within such
period of 12 months.
4.9 "Exempt Descendant" means any child,
grandchild or other descendant of Robert H.
McKinney, or any spouse of any such child, grandchild
or other descendant, including in all cases adoptive
relationships.
4.10 "Exempt Person" means (i) Robert H.
McKinney; (ii) Arlene A. McKinney; (iii) any Exempt
Descendant; (iv) any corporation, partnership, trust or
other organization a majority of the beneficial
ownership interest of which is owned directly or
indirectly by one or more of Robert H. McKinney,
Arlene A. McKinney or any Exempt Descendant; (v)
any estate or other successor-in-interest by operation of
law of Robert H. McKinney, Arlene A. McKinney or
any Exempt Descendant; (vi) The Somerset Group,
Inc., so long as it is controlled by one or more
individuals and entities described in (i) through (v)
inclusive; and (vii) with reference to an issuer, any group
<PAGE> 22 (10k page 75)
within the meaning of Rule 13d-5(b) under the
Exchange Act, if the majority of the shares of such
issuer beneficially owned by such group is attributable
to shares of such issuer which would be considered
beneficially owned by individuals and entities described
in (i) through (vi) inclusive absent the existence of the
group.
4.11 "Fair Market Value" means, with
reference to a share of Common Stock and a given day,
the per share value of Common Stock on such day,
determined as follows.
(a) If the principal market for the
Common Stock (the "Market") is a national securities
exchange or the National Association of Securities
Dealers Automated Quotation System ("NASDAQ")
National Market, the last sale price of Common Stock
on such day or, if no reported sale takes place on such
day, the average of the high bid and low asked price of
Common Stock as reported on such Market for such
day ("average price") or, if no such average price can
be determined for such day, the most recent reported
sale price of Common Stock within the preceding ten
business days, or if no such sale shall have occurred,
the average price for the most recent business day
preceding such day for which an average price can be
determined, provided an average price can be
determined for any of the ten business days preceding
such day;
(b) If the Market is the NASDAQ
National List, the NASDAQ Supplemental List or
another market, the average of the high bid and low
asked price for Common Stock on such day (the
"average price"), or, if no such average price can be
determined for such day, the most recent reported sale
price within the preceding ten business days, or, if no
such sale shall have occurred, the average price for the
most recent business day preceding such day for which
an average price can be determined, provided an
average price can be determined for any of the ten
business days preceding such day; or,
(c) In the event that neither paragraph
(a) nor (b) shall apply, the Fair Market Value of a share
of Common Stock on any day shall be determined in
good faith by the Compensation Committee.
4.12 "Incentive Stock Option" means an option
that is intended to qualify for special federal income tax
treatment pursuant to Sections 421 and 422 of the
Code, as now constituted or subsequently amended, or
pursuant to a successor provision of the Code, and
which is so designated in the applicable Plan
Agreement. Any option that is not specifically
designated as an Incentive Stock Option shall under no
circumstances be considered an Incentive Stock
Option.
4.13 "Non-Qualified Stock Option" means any
option that is not an Incentive Stock Option.
4.14 "Subsidiary" means any corporation,
partnership or other entity in which the Corporation,
directly or indirectly, owns a fifty percent (50%) or
greater interest.
<PAGE> 23 (10k page 76)
FIRST INDIANA CORPORATION
SUPPLEMENTAL BENEFIT PLAN
EFFECTIVE MAY 1, 1997
<PAGE> (10k page 77)
FIRST INDIANA CORPORATION
SUPPLEMENTAL BENEFIT PLAN
(EFFECTIVE MAY 1, 1997)
TABLE OF CONTENTS
ARTICLE SECTION PAGE
I Establishment and Purpose 1
1.1 Establishment 1
1.2 Purpose 1
1.3 Application of Plan 1
II Definitions and Construction 1
2.1 Definitions 1
2.2 Gender and Number 7
2.3 Severability 7
2.4 Applicable Law 7
2.5 Plan Not an Employment Contract 7
III Participation in the Plan 7
3.1 Participants 7
3.2 Benefit Payments 7
IV Benefits 8
4.1 Base Retirement Benefit 8
4.2 Default Retirement Benefit 9
4.3 Individualized Retirement Benefit 9
4.4 Effect of Certain Required DB Pension
Plan Distributions 9
4.5 Death Benefits 10
4.6 Funding 10
4.7 Tax Withholding 11
4.8 Nontransferability 11
V Administration 11
5.1 Administration 11
5.2 Costs 11
5.3 Finality of Determination 11
5.4 Indemnification and Exculpation 11
<PAGE> i (10k page 78)
TABLE OF CONTENTS
(Continued)
ARTICLE SECTION PAGE
VI Named Fiduciary and Claims Procedure 12
6.1 Named Fiduciary 12
6.2 Payment of Benefits 12
6.3 Denied Claim 12
6.4 Written Notice 12
6.5 Appeal 13
6.6 Review of Appeal 14
6.7 Hearing 14
6.8 Written Decision 14
VII Participating Employers, Corporate
Changes, Amendment, and Termination 15
7.1 Participation by Other Entitles 15
7.2 Merger, Consolidation, or Acquisition 15
7.3 Amendment and Termination 15
VIII Special Rules in the Event of a
Change of Control 16
8.1 Change of Control 16
8.2 Severance Pay 18
8.3 Legal Fees 18
<PAGE> ii (10k page 79)
FIRST INDIANA CORPORATION
SUPPLEMENTAL BENEFIT PLAN
ARTICLE I - ESTABLISHMENT AND PURPOSE
1.1 Establishment. First Indiana Corporation
("Company" or "Employer"), hereby establishes, effective as
of May 1, 1997, a nonqualified retirement and death benefit
plan to be known as the "FIRST INDIANA CORPORATION
SUPPLEMENTAL BENEFIT PLAN" (the "Plan"). Pursuant to
Section 7.1 of the Plan, the Company's wholly-owned
subsidiary, First Indiana Bank ("Bank" or "Employer"),
hereby adopts the Plan as a participating employer effective
as of May 1, 1997.
1.2 Purpose. The general purposes of this Plan are
(a) to provide the amount of the benefit which otherwise
would be paid under the Employers' defined benefit pension
plan as in effect from time to time (the "DB Pension Plan")
but which cannot be paid under that plan on account of the
limitations imposed by the Internal Revenue Code of 1986
("Code"), (b) to include bonuses in the definition of
compensation on which retirement benefits are based, (c) to
provide additional retirement benefits to certain
participants, and (d) to provide supplemental death benefits
to the beneficiaries of certain participants.
1.3 Application of Plan. The terms of this Plan are
applicable only to officers of the Employers who are in the
active employ of the Employers on or after the effective
date of the Plan and with whom an Employer, with the
approval of the Committee, has entered into a Plan
Agreement.
ARTICLE II - DEFINITIONS AND CONSTRUCTION
2.1 Definitions. For purposes of this Plan and any
amendments hereto, the terms defined in the DB Pension Plan
shall have the same meanings as the meanings ascribed to
them for purposes of the DB Pension Plan, unless a different
meaning is set forth below, or unless a different meaning is
clearly required by the context. For purposes of this Plan
and any amendments hereto, the following terms when
capitalized shall have the following meanings, unless a
different meaning is plainly required by the context:
2.1(a) "Actual DB Plan Benefit" means, with
reference to a participant, the actual
<PAGE> 1 (10k page 80)
retirement benefit that is payable to
the participant under the DB Pension
Plan.
2.1(b) "Base Date" means the retirement or
other date as of which a benefit
calculation is being made.
2.1(c) "Bonus" means, with reference to a
participant, the excess of the
participant's Total Compensation over
the participant's Total Salary.
2.1(d) "Committee" means the Compensation
Committee of the Company's Board of
Directors.
2.1(e) "High-Five Average Total Salary" means,
with reference to a participant, the
participant's average annual salary over
the five consecutive years of highest
salary, as the same would be determined
under the DB Pension Plan, if such
determination were based on the
participant's Total Salary, for purposes
of calculating the participant's
retirement benefits under the DB Pension
Plan.
2.1(f) "High-Three Average Bonus" means, with
reference to a participant and a Base
Date, the average annual Bonus paid by
the Employers to the participant for the
three consecutive calendar years, out of
the nine calendar years commencing
before the Base Date, which produce the
highest such average. However, this may
be varied by the following special rules
and exceptions:
(i) In determining the participant's
Bonus for the calendar year which
includes the Base Date, amounts
received or realized after the Base
Date shall be disregarded.
(ii) For purposes of determining the
participant's High-Three Average
Bonus, awards paid under a Long-Term Management
Performance Incentive Plan ("LTP"), and amounts
realized upon the vesting of
restricted stock grants issued in
conjunction with a LTP, shall be treated
<PAGE> 2 (10k page 81)
as received or realized
ratably over the applicable plan
term or the portion thereof
preceding the Base Date.
[For example, if a participant realizes
$75,000 in 1999 upon the vesting of restricted
stock granted in conjunction with the 1997
LTP, such $75,000 will be deemed to have been
realized $25,000 in 1997, $25,000 in 1998 and
$25,000 in 1999.]
Notwithstanding the foregoing, if
all three of the years included in
the High-Three Average Bonus
computation end before 1997, the
rule set out in this clause (ii)
shall apply only if application of
the rule to all such amounts
received or realized during those
years benefits the participant.
(iii)For purposes of any benefit
calculation required under this
Plan, the Base Date with respect to
a participant's High-Three Average
Bonus shall be the same as the Base
Date with respect to the
participant's High-Five Average
Total Salary to which it would be
added, but the three years included
in the former need not include any
of the five years included in the
latter.
[For example, in the case of a participant born on
August 1, 1929, who retires at the age of 68
on August 1, 1997, and whose Total Compensation
Full DB Plan Benefit would be determined as a
multiple of his age 65 Total Compensation Full
DB Plan Benefit, the Base Date would be August 1,
1994, the participant's 65th birthday, and the 60
months included in the participant's High-Five
Average Total Salary
<PAGE> 3 (10k page 82)
could be any 60 months ending before the Base
Date, and the three years included in the
participant's High-Three Average Bonus could be
any three contiguous calendar years beginning
after 1985 and before the Base Date.]
2.1(g) "Plan Agreement" means, with reference
to a participant, the written agreement
which is approved by the Committee,
which is entered into between the
participant and his Employer, and which
specifies and evidences the retirement
or death benefits to which the
Participant is entitled under the Plan.
2.1(h) "Section 401 Limits" mean the
limitations which the DB Pension Plan,
in order to qualify under Section 401 of
the Code is required to impose on the
maximum amount of employee compensation
which may be taken into account for
purposes determining benefits paid under
the DB Pension Plan.
2.1(i) "Section 415 Limits" mean the
limitations under Section 415 of the
Code which the DB Pension Plan, in order
to qualify under Section 401 of the
Code, is required to impose on the
maximum benefits that can be paid under
the DB Pension Plan.
2.1(j) "Total Compensation" generally includes,
with reference to a participant, all of
the participant's pay from the Employers
reportable on IRS Form W-2 under Section
3401(a) of the Internal Revenue Code,
disregarding limitations based on the
nature or location of the employment.
This general definition is subject to
the following specific clarifications
and exceptions:
(i) Total Compensation" includes
elective contributions made by an
Employer on the participant's
behalf (for example, elective
deferrals under a 401(k) plan or a
cafeteria plan).
<PAGE> 4 (10k page 83)
(ii)"Total Compensation" includes
amounts electively deferred by the
participant under the terms of any
nonqualified deferred compensation
plan maintained by an Employer.
(iii)"Total Compensation" includes
amounts realized by the participant
when stock or other property
transferred by an Employer to the
participant either becomes freely
transferable or is no longer
subject to a substantial risk of
forfeiture (for example, when
grants of restricted stock become
vested).
(iv)"Total Compensation" does not
include amounts realized from the
exercise of a non-qualified stock
option or from the sale, exchange
or other disposition of stock
acquired under an incentive stock
option or other stock option
described in Part II, Subchapter D,
Chapter 1 of the Code.
(v)"Total Compensation" does not include
tax gross-up payments (for example,
amounts paid by an Employer to a
participant as reimbursement for
federal, state or local taxes
payable by the participant on
amounts realized by the participant
when grants of restricted stock
become vested or payable by the
participant on such tax
reimbursements).
(vi)"Total Compensation" does not
include non-cash fringe benefits,
premiums paid for life insurance,
payments made for group insurance,
hospitalization or similar
benefits, or amounts paid as an
expense or automobile allowance or
as reimbursement for expenses
incurred. Nor does it include
disability pay, severance pay, or
amounts received under employee
welfare benefit plans. Nor does it
include distributions under this
Plan or under qualified employee
pension benefit plans.
<PAGE> 5 (10k page 84)
2.1(k) "Total Compensation Full DB Plan
Benefit" means, with reference to a
participant, the benefit that would be
payable under the DB Pension Plan to the
participant if benefits under that plan
were based on the sum of the
participant's High-Five Average Total
Salary and the participant's High-Three
Average Bonus and were not subject to
the Section 401 Limits or the Section
415 Limits.
2.1(l) "Total Salary" means, with reference to
a participant, the participant's Salary
as defined in the DB Pension Plan, but
determined without regard to the Section
401 Limits.
2.1(m) "Total Salary Full DB Plan Benefit"
means, with reference to a participant,
the benefit that would be payable under
the DB Pension Plan to the participant
if benefits under that plan were based
on the participant's High-Five Average
Total Salary and were not subject to the
Section 401 Limits or the Section 415
Limits.
2.2 Gender and Number. Except when otherwise
indicated by the context, any masculine terminology when
used in the Plan shall also include the feminine gender, and
the definition of any term in the singular shall also
include the plural.
2.3 Severability. In the event any provision of the
Plan shall be held invalid or illegal for any reason, any
illegality or invalidity shall not affect the remaining
parts of the Plan, but the Plan shall be construed and
enforced as if the illegal or invalid provision had never
been inserted, and the Employers shall have the privilege
and opportunity to correct and remedy such questions of
illegality or invalidity by amendment as provided in the
Plan.
2.4 Applicable Law. This Plan shall be governed and
construed in accordance with the laws of the State of
Indiana.
2.5 Plan Not an Employment Contract. Neither the Plan
nor any Plan Agreement entered into pursuant to the Plan
shall be deemed to constitute an employment contract or to
give any person
<PAGE> 6 (10k page 85)
the right to be continued in employment.
Except in the case of participants having written employment
contracts that provide otherwise, all participants remain
subject to change of salary, transfer, change of job,
discipline, layoff, discharge, or any other change of
employment status.
ARTICLE III - PARTICIPATION IN THE PLAN
3.1 Participants. Eligibility for membership in the
Plan shall be determined by the Committee, in its sole
discretion, on an individual basis.
3.2 Benefit Payments. The payment of benefits to the
participant or his beneficiary under this Plan is
conditioned upon the continuous employment of the
participant by the Employers (including periods of
disability and authorized leaves of absence) from the date
of participation in the Plan until the participant's
retirement from the Employers at or after attainment of age
65, or until the participant dies or becomes permanently and
totally disabled, or until a change of control (as defined
in Article VIII), whichever first occurs; provided, however,
that a participant who does not satisfy the foregoing
condition shall be vested with respect to the "excess plan
portion" of the retirement benefit provided hereunder (but
not with respect to the balance of such benefit or with
respect to any special death benefit provided under the
participant's Plan Agreement) to the same extent the
participant is vested with respect to benefits payable under
the DB Pension Plan; provided further, that a participant's
Plan Agreement may provide for any or all of the
participant's additional retirement benefit (the balance of
the participant's retirement benefit over the excess plan
portion, and any special death benefit, whether provided
under the Plan or under the participant's Plan Agreement) to
become fully vested upon the attainment by the participant
of a specified sum (which may vary as between participants)
of years of age plus years of service. For purposes of the
foregoing, the "excess plan portion" of a participant's
retirement benefit is the portion of such benefit, if any,
that represents the excess of the Total Salary Full DB Plan
Benefit over the Actual DB Plan Benefit.
ARTICLE IV - BENEFITS
4.1 Base Retirement Benefit. The base retirement
benefit shall be a monthly retirement benefit, payable as a
straight life annuity, commencing upon termination of
employment, or upon attainment of age 65, whichever is
later, in an amount equal to
<PAGE> 7 (10k page 86)
the excess of the Total Compensation Full DB Plan Benefit over the
Actual DB Plan Benefit, assuming both were payable in the same form,
commencing at the same time, as such base retirement
benefit. A participant's Plan Agreement may provide for an
alternative calculation of the base retirement benefit, or
for a base retirement benefit payable in an alternative
form, or both. It is intended that the base retirement
benefit be calculated only as a step in calculating the
participant's default retirement benefit payable in
accordance with Section 4.2 below or the participant's
individualized retirement benefit payable in accordance with
the participant's Plan Agreement and Section 4.3 below.
Benefits shall be payable in the form of the base retirement
benefit only if the participant's Plan Agreement provides
for an individualized retirement benefit payable in such
form.
4.2 Default Retirement Benefit. Unless otherwise
provided in the participant's Plan Agreement, the retirement
benefit payable to a participant under this Plan shall a
benefit which is actuarially equivalent to the base
retirement benefit and which is paid in the same form,
commencing at the same time, as benefits are paid to the
participant under the DB Pension Plan. If the lump sum
actuarial equivalent of the base retirement benefit is
$10,000 or less, the Committee, in its sole discretion, may
direct the payment of the participant's benefit in the form
of such lump sum amount. The payment of such lump sum shall
be in full discharge of the Employers' obligations under the
Plan to the participant, his spouse, or beneficiaries. For
purposes of determining the form and amount of the default
retirement benefit, actuarial equivalence shall be
determined the same way it is determined under the DB
Pension Plan.
4.3 Individualized Retirement Benefit. A
participant's Plan Agreement may provide for the retirement
benefit payable under this Plan to be paid in a special
form, commencing at any time at or after the participant's
termination of employment, that is specified in the Plan
Agreement. Any such individualized retirement benefit shall
be actuarially equivalent to the base retirement benefit.
For this purpose, benefits based on investment results that
would accrue if a lump sum were set aside at the
commencement date for the base retirement benefit and then
invested at the participant's direction until fully
distributed, shall be deemed actuarially equivalent to the
base retirement benefit, provided such lump sum, if deemed
fully distributed on such commencement date, is actuarially
equivalent to the base retirement benefit. In all other
respects, actuarial equivalence shall be determined the same
way it is determined under the DB Pension Plan.
<PAGE> 8 (10k page 87)
4.4 Effect of Certain Required DB Pension Plan
Distributions. Benefits under this Plan shall not commence
or be paid prior to the participant's termination of
employment. If distributions to a participant under the DB
Pension Plan commence prior to the Participant's termination
of employment due to the requirements of Section
401(a)(9)(C) of the Code or due to provisions of the DB
Pension Plan designed to comply with the current or any
prior version of Section 401(a)(9)(C) of the Code, such
distributions shall not be deemed distributions of the
participant's retirement benefit under the DB Pension Plan,
and computations hereunder of the participant's Actual DB
Plan Benefit, Full DB Plan Benefit, base retirement benefit,
default retirement benefit and individualized retirement
benefit shall be made as though such distributions had not
been required and had not been made.
4.5 Death Benefits. No death benefit shall be paid
under this Plan except as provided in this section or in a
participant's Plan Agreement. A death benefit shall be
payable to a surviving spouse or other designated
beneficiary of the participant if a death benefit is payable
under the terms of the DB Pension Plan. Such death benefit
shall be computed using the same factors and assumptions
used to compute the applicable death benefit under the DB
Pension Plan and shall be paid in the same form as such
death benefit, except that the amount of the death benefit
shall be computed with respect to the amount of the benefit
the participant accrues under this Plan.
4.6 Funding. All amounts paid under this Plan shall
be paid in cash from the general assets of the Employers.
Benefits shall be reflected on the accounting records of the
Employers but shall not be construed to create, or require
the creation of, a trust, custodial or escrow account. No
participant shall have any right, title, or interest
whatever in or to any investment reserves, accounts, or
funds that the Employers may purchase, establish, or
accumulate to aid in providing the benefits described in
this Plan. Nothing contained in this Plan, and no action
taken pursuant to its provisions, shall create or be
construed to create a trust or a fiduciary relationship of
any kind between an Employer and a participant or any other
person. Neither a participant nor a beneficiary of a
participant shall acquire any interest greater than that of
an unsecured creditor.
4.7 Tax Withholding. The Employers may withhold from
a payment any federal, state, or local taxes required by law
to be withheld with respect to such payment and such sum as
the Employers may reasonably estimate as necessary to cover any taxes
<PAGE> 9 (10k page 88)
for which the Employers may be liable and which
may be assessed with regard to such payment.
4.8 Nontransferability. A participant or his
beneficiary shall have no rights by way of anticipation or
otherwise to assign or otherwise dispose of any interest
under this Plan, nor shall rights be assigned or transferred
by operation of law.
ARTICLE V - ADMINISTRATION
5.1 Administration. The Plan shall be administered by
the Committee. The Committee shall have the authority to
interpret the Plan and all Plan Agreements entered into
pursuant to the Plan, to adopt and review rules relating to
the Plan and to make any other determinations for the
administration of the Plan.
Subject to the terms of the Plan, the Committee
shall have exclusive jurisdiction to (a) select the
employees eligible to become participants, (b) determine the
eligibility for, and form and method of any benefit
payments, (c) establish the timing of benefit distributions,
and (d) settle claims according to the provisions in Article
VI.
5.2 Costs. The Committee may employ such counsel,
accountants, actuaries, and other agents as it shall deem
advisable. The Employer shall pay the compensation of such
counsel, accountants, actuaries, and other agents and any
other expenses incurred by the Committee in the
administration of the Plan.
5.3 Finality of Determination. The determination of
the Committee as to any disputed questions arising under
this Plan or any Plan Agreement, including questions of
construction and interpretation, shall be final, binding,
and conclusive upon all persons.
5.4 Indemnification and Exculpation. The members of
the Committee, its agents, and officers, directors, and
employees of the Employers and its affiliates shall be
indemnified and held harmless by the Employers against and
from any and all loss, cost, liability, or expense that may
be imposed upon or reasonably incurred by them in connection
with or resulting from any claim, action, suit, or
proceeding to which they may be a party or in which they may
be involved by reason of any action taken or failure to act
under this Plan and against and from any and all amounts
paid by them in settlement (with the Employers' written
approval) or paid by them in satisfaction of a judgment
<PAGE> 10 (10k page 89)
in any such action, suit, or proceeding. The foregoing
provision shall not be applicable to any person if the loss,
cost, liability, or expense is due to such person's gross
negligence or willful misconduct.
ARTICLE VI - NAMED FIDUCIARY AND CLAIMS PROCEDURE
6.1 Named Fiduciary. For purposes of the claims
procedure under this Plan, the named fiduciary of the Plan
is the Chairman of the Committee.
6.2 Payment of Benefits. Benefits shall be paid in
accordance with the provisions of this Plan or the
participant's Plan Agreement. The participant, or his
beneficiary or contingent beneficiary (hereinafter
collectively referred to as the "claimant") shall make a
written request for the benefits provided under this Plan.
This written claim shall be mailed or delivered to the named
fiduciary by registered mail.
6.3 Denied Claim. If the claim is denied, either
wholly or partially, notice of the decision shall be sent by
registered mail to the claimant within a reasonable time
period. This time period shall not exceed 90 days after the
receipt of the claim by the named beneficiary.
6.4 Written Notice. The named fiduciary shall provide
such written notice to every claimant who is denied a claim
for benefits under this Plan. The notice shall set forth
the following information:
6.4(a) the specific reasons for the denial;
6.4(b) the specific reference to pertinent Plan
provisions on which the denial is based;
6.4(c) a description of any additional material
or information necessary for the
claimant to perfect the claim and an
explanation of why such material or
information is necessary; and
6.4(d) appropriate information and explanation
of the claims procedure under this Plan
to permit the claimant to submit his
claim for review.
6.5 Appeal. The claims procedure under this Plan
shall allow the claimant a reasonable opportunity to appeal a denied
<PAGE> 11 (10k page 90)
claim and to get a full and fair review of that
decision from the Board.
6.5(a) The claimant shall exercise his right of
appeal by submitting a written request
for a review of the denied claim to the
named fiduciary. This written request
for review must be submitted to the
named fiduciary within sixty (60) days
after receipt by the claimant of the
written notice of denial.
6.5(b) The claimant shall have the following
rights under this appeal procedure:
(1) to request a review by the
Committee upon written application
to the named fiduciary;
(2) to review pertinent documents with
regard to the employee benefit plan
created under this Plan;
(3) the right to submit issues and
comments in writing;
(4) to request an extension of time to
make a written submission of issues
and comments; and
(5) to request that a hearing be held
to consider claimant's appeal.
6.6 Review of Appeal. The decision on the review of
the denied claim shall promptly be provided by the
Committee:
6.6(a) within forty-five (45) days after the
receipt of the request for review if no
hearing is held; or
6.6(b) within ninety (90) days after the
receipt of the request for review, if an
extension of time is necessary in order
to hold a hearing.
(1) If an extension of time is
necessary in order to hold a
hearing, the Committee shall give
the claimant written notice of the
extension of time and of the
<PAGE> 12 (10k page 91)
hearing. This notice shall be
given prior to any extension.
(2) The written notice of extension
shall indicate that an extension of
time will occur in order to hold a
hearing on claimant's appeal. The
notice shall also specify the
place, date, and time of that
hearing and the claimant's
opportunity to participate in the
hearing. It may also include any
other information the Committee
believes may be important or useful
to the claimant in connection with
the appeal.
6.7 Hearing. The decision to hold a hearing to
consider the Claimant's appeal of the denied claim shall be
within the sole discretion of the Committee, whether or not
the Claimant requests such a hearing.
6.8 Written Decision. The Committee's decision on
review shall be made in writing and provided to the Claimant
within the specified time periods. This written decision on
review shall contain the following information:
6.8(a) the decision(s);
6.8(b) the reasons for the decision(s); and
6.8(c) specific references to the Plan
provisions of the Plan on which the
decision(s) is/are based.
All of this information shall be written in a manner
calculated to be understood by the claimant.
ARTICLE VII - PARTICIPATING EMPLOYERS,
CORPORATE CHANGES, AMENDMENT,
AND TERMINATION
7.1 Participation By Other Entities. Any entity,
whether or not presently existing, may, with the approval of
the Company's Board of Directors, adopt this Plan pursuant
to appropriate written resolutions of the governing body of
such entity. An entity which adopts the Plan shall
thereafter be an Employer for purposes of the Plan. By its
adoption of this Plan, an entity shall be deemed to have
appointed the Company (in the case of powers conferred upon
the Company) and the Committee (in
<PAGE> 13 (10k page 92)
the case of powers conferred upon the Committee) as its exclusive
agent to exercise on its behalf all of the power and authority
conferred by this Plan upon the Company or the Committee.
The authority of the Company and the Committee to act as
such agent shall continue until the Plan is terminated as to
such entity.
7.2 Merger, Consolidation, or Acquisition. The Plan
shall be binding upon the Employers, their assigns, and any
successor which shall succeed to substantially all of the
assets and business of an Employer through merger,
consolidation or acquisition.
7.3 Amendment and Termination. The Company's Board of
Directors may amend, modify, or terminate the Plan with
respect to all Employers, and the governing body of an
Employer may amend the Plan with respect to such Employer,
pursuant to a written resolution adopted by such board or
governing body, at any time, and from time to time.
Amendments shall be made by means of a written instrument
that is identified as an amendment of the Plan and that is
effective as of a specified date. Such instrument shall be
set forth in a manner consistent with the terms, provisions
and format of this Plan instrument. No such amendment,
modification or termination shall affect the benefits of
participants theretofore accrued, to the extent such
benefits are vested as provided in Section 3.2 or the
participant's Plan Agreement.
ARTICLE VIII - SPECIAL RULES
IN THE EVENT OF A CHANGE OF CONTROL
8.1 Change of Control. Notwithstanding anything to
the contrary in any other section of this Plan, in the event
a change of control shall occur (as defined below), neither
the Employers nor their Boards of Directors shall thereafter
remove a participant from the Plan, nor shall the Employers
or their Boards of Directors terminate, modify, or amend, in
whole or in part, any or all of the provisions of this Plan,
unless a majority of the participants covered by the Plan at
the time of the change of control give their written consent
to such termination, modification or amendment. In no event
shall such action reduce the benefits of any terminated
participant or his beneficiary. In the event of a change of
control, participants shall immediately become vested in
benefits payable from this Plan.
In the case of any participant employed by an Employer
under a written agreement that defines the term "change of control"
<PAGE> 14 (10k page 93)
(including any such agreement that becomes
effective upon the occurrence of a change of control as so
defined), the term "change of control" shall have the same
meaning for purposes of this Plan and such participant's
Plan Agreement as it then has for purposes of such
agreement. In the case of any other participant, "change of
control" means with respect to the Plan and such
participant's Plan Agreement any one of the events specified
in the following clauses (a) through (d) occurring after the
date of such Plan Agreement:
(a) any third person, including a "group" as
defined in Section 12(d)(3) of the Securities
Exchange Act of 1934, shall become the
beneficial owner of shares of the Company
with respect to which 20% or more of the
total number of votes for the election of the
Board of Directors of the Company may be
cast,
(b) as a result of, or in connection with, any
cash tender offer, exchange offer, merger or
other business combination, sale of assets or
contested election, or combination of the
foregoing, the persons who were directors of
the Company shall cease to constitute a
majority of the Board of Directors of the
Company,
(c) the shareholders of the Company shall approve
an agreement providing either for a
transaction in which the Company will cease
to be an independent publicly-owned
corporation or for a sale or other
disposition of all or substantially all the
assets of the Company, or
(d) with respect to any period of two consecutive
years commencing with or after the date of
such Plan Agreement, individuals, who at the
beginning of such period constitute the Board
of Directors of the Company, cease for any
reason to constitute at least a majority
thereof, unless the election of each Director
who was not a Director at the beginning of
such period has been approved in advance by
Directors then in office who were Directors
at the beginning of such period;
provided, however, that the occurrence of any of such events
specified in the foregoing clauses (a) through (c) shall not
be deemed a "change of control" if, prior to such occurrence,
a resolution specifically exempting such event specified in the
<PAGE> 15 (10k page 94)
foregoing clauses (a) through (c) shall
have been adopted by at least a majority of the Board of
Directors of the Company; provided further, that a "change
of control" shall not be deemed to occur by reason of (i)
any subsequent acquisition of shares by a person or group
(including any member or members of such group) which as of
the date of such Plan Agreement was the beneficial owner of
shares with respect to which twenty percent (20%) or more of
the total number of votes for the election of the Board of
Directors of the Company could be cast (a "Prior Owner"),
(ii) any change in the members of a group which is a Prior
Owner, or (iii) the occurrence of an event specified in
clause (i) until such third person shall become the
beneficial owner of a greater number of shares of the
Company than the number of shares beneficially owned by any
Prior Owner.
8.2 Severance Pay. Payment of any benefits to a
participant who is also entitled to receive severance pay
(due to termination of employment after a change of control)
shall not be offset by such severance pay.
8.3 Legal Fees. The legal fees incurred by any
participant (or former participant who was a participant
when the change of control occurred) to enforce his rights
under this article shall be paid by the Employers in
addition to sums due under this Plan.
<PAGE> 16 (10k page 95)
FIRST INDIANA CORPORATION
SUPPLEMENTAL BENEFIT PLAN
PLAN AGREEMENT
THIS AGREEMENT is made as of the first day of May, 1997, by
and between First Indiana Corporation (hereinafter referred to as
the "Employer") and Robert H. McKinney, (hereinafter referred to
as the "Employee").
WITNESSETH:
WHEREAS, the Board of Directors of the Employer has
determined that it is desirable and in the best interest of the
Employer to adopt a Supplemental Benefit Plan;
WHEREAS, the Board of Directors at its meeting on April 16,
1997, approved and adopted such a plan; and
WHEREAS, the Board of Directors at said meeting authorized
the officers of the Employer to do any and all things necessary
or desirable to put said Supplemental Benefit Plan in effect; and
WHEREAS, the Employee has been selected to become a
participant of said Plan, and the Employee elects to so
participate.
IT IS THEREFORE AGREED:
1. The Employee shall be eligible to receive any and all
benefits to which he is entitled under the terms of the
Plan.
2. In addition to any death benefit payable to the Employee's
beneficiary under Section 4.6 of the Plan, the Employee's
beneficiary shall be entitled to a special lump
sum death benefit equal to 300% of the Employee's highest
annual rate of Total Salary paid by the Employer or its affiliates.
Such death benefit shall be paid as of the Employee's death (at any
time, whether while employed by the Employer or its affiliates or
thereafter) and shall be grossed up for federal, state and local income
taxes at the highest applicable marginal rate in effect
at the time of the Employee's death.
<PAGE> 1 (10k page 96)
3. In lieu of the form of base retirement benefit provided for
in Section 4.1 of the Plan, the form of the Employee's base
retirement benefit shall be a monthly amount, payable for a
period of 15 years certain and life thereafter, commencing
on the Employee's termination of employment, or upon the
Employee's attainment of age 65, whichever is later. In
lieu of the monthly amount provided for in Section 4.1 of
the Plan, the monthly amount of the Employee's base
retirement benefit shall be the greater of:
(a) the monthly amount payable as a straight-life
annuity under Section 4.1 of the Plan, or
(b) a monthly amount equal to the excess of:
(i) one-twelfth of 80% of the sum of:
(A) the Employee's highest annual rate of
Total Salary paid by the Employer or its
affiliates and
(B) the greater of: (I) 37.5% of the
Employee's highest annual rate of Total
Salary paid by the Employer or its
affiliates, or (II) the Employee's High-
Three Average Bonus, over
(ii) the sum of:
(A) 100% of the Employee's monthly primary
Social Security benefit payable at age
65 (determined without regard to whether
or when such benefits actually
commence), and
(B) 100% of the Employee's monthly benefit
from the DB Pension Plan payable at the
time of his termination of employment
(determined as though such benefit were
paid as a straight life annuity and as
though no portion of such benefit had
become payable or been paid prior to
such termination).
<PAGE> 2 (10k page 97)
4. Individualized Retirement Benefit. The Employee's
retirement benefit shall not be paid in the form provided
for in Section 4.2 of the Plan but instead shall be paid as
a fixed-term variable annuity. The term of such annuity
shall begin on the date of the Employee's termination of
employment and shall end on the later of: (i) the last
December 31 occurring within five years after such
termination, or (ii) the last December 31 occurring within
the Employee's remaining life expectancy, determined as of
such termination, based on the life expectancy tables then
used for purposes of determining actuarial equivalence under
the DB Pension Plan. Distributions shall be made annually,
with the first such distribution being made as of the
December 31 next following the Employee's termination of
employment, and with subsequent distributions being made as
of each December 31 thereafter, until the benefit has been
distributed fully. The amount of each distribution shall be
determined as though an amount equal to the lump sum
actuarial equivalent of the Employee's base retirement
benefit were set aside on the date of the Employee's
termination of employment and then were invested at the
Employee's direction, with each distribution being
calculated as a fraction of such hypothetical investment
fund, the denominator of which is the total number of
distributions to be made, and the numerator of which is one
more than the number of distributions previously made, and
with each distribution being deducted from the balance of
the fund on the date as of which it is made.
[For example, if the Employee terminates employment on
November 7, 1999, when he's 74 years old and has a life
expectancy of 11.2 years, his benefit will be paid in
13 installments, the first as of December 31, 1999, in
an amount equal to one-thirteenth of the hypothetical
investment fund, and the last as of December 31, 2011,
in an amount equal to the remaining balance of the
fund. If the value of the fund on December 31, 1999,
adjusted for investment increases and decreases for the
period subsequent to November 7, 1999, is $1,300,000,
the distribution to be made as of December 31, 1999,
will be $100,000. if the value of the fund on December
31, 2000, is $1,272,000 (reflecting a $100,000
deduction for the distribution made as of December 31,
<PAGE> 3 (10k page 98)
1999, and a $72,000 addition representing the net
investment increase for the period subsequent to
December 31, 1999), the distribution to be made as of
December 31, 2000, will be $106,000.]
The Employee or his beneficiary may direct the investment of the
hypothetical investment fund. All such directions, and all
changes in such directions, shall be made in writing to the
Company. The Employee or his beneficiary may not direct the
investment of the hypothetical investment fund in any asset
which cannot be liquidated readily or which does not have a
readily ascertainable fair market value. If or to the
extent the Employee or his beneficiary fails to direct the
investment of the hypothetical investment fund, it shall be
deemed to be invested in such money fund as the Committee
from time to time shall designate. It is contemplated that
the Employer, in order to hedge part or all of its liability
for payment of the Employee's retirement benefit, may
establish an actual investment account and invest the same
in such a manner as to mirror the hypothetical investment
fund. The right of the Employee and his beneficiary to
direct the investment of the hypothetical investment fund
shall be subject to such reasonable rules and procedures as
the Committee may adopt to enable the Employer to hedge its
liability in this manner.
5. Arbitration. In the event of any disputes, differences,
controversies or claims arising out of, or in connection
with, the Employee's rights under the Plan or this
Agreement, other than a dispute in which the sole relief
sought is an equitable remedy, such as a temporary
restraining order or a permanent or temporary injunction,
the parties shall be required to have the dispute,
controversy, difference or claim settled through binding
arbitration pursuant to the American Arbitration
Association's rules of Commercial Arbitration which are then
in effect. The location of all arbitration proceedings
shall be Indianapolis, Indiana. One arbitrator shall be
selected by the parties and shall be a current or former
executive officer (vice president or higher) of a publicly-traded
corporation. In the event the parties are unable to
mutually agree upon a person to act as the arbitrator, or in
the event a mutually-agreed upon arbitrator shall fail to
<PAGE> 4 (10k page 99)
accept the appointment by the parties, the parties shall
jointly request from the American Arbitration Association a
list of the names of five persons qualified to act as an
arbitrator under this clause. The selection of the final
arbitrator then shall be achieved by each party alternately
striking a name, with the Employer going first, until one
name remains. In the event the parties mutually agree that
the five names submitted by the American Arbitration
Association are unsatisfactory, they jointly may request a
second list of five names from the American Arbitration
Association and final selection shall be achieved through
the procedure set out herein. The decision of the
arbitrator shall be final and binding upon both parties, and
any award entered by the arbitrator shall be final, binding
and non-appealable, and judgment may be entered thereon by
either party in accordance with the applicable law in any
court of competent jurisdiction. The arbitrator shall not
have authority to modify any provision of the Plan or this
Agreement nor to award a remedy for any difference, dispute,
controversy or claim arising under the Plan or this
Agreement other than a benefit specifically provided under
or by virtue of the Plan or this Agreement. The Employer
shall be responsible for all of the reasonable expenses of
the American Arbitration Association, the arbitrator and the
conduct of the selection and the arbitration procedures set
forth in this section, including reasonable attorneys' fees
and expenses incurred by either party which are associated
with the arbitration procedure through the time the final
arbitration decision or award is rendered. This arbitration
provision shall be specifically enforceable.
6. Limitation on Payments.
(a) Notwithstanding anything contained herein to the
contrary, prior to the payment of any amounts pursuant
to the Plan or this Agreement, an independent national
accounting firm designated by the Employer (the
"Accounting Firm") shall compute whether there would be
payable to the Employee any "excess parachute
payments," within the meaning of section 280G of the
Internal Revenue Code of 1986, as amended (the "Code"),
taking into account the total "parachute payments,"
within the meaning of section 280G of the Code, payable
<PAGE> 5 (10k page 100)
or to be provided to the Employee, whether by the
Employer or any of its affiliates or by any successor
to the Employer or any such affiliate, and whether
under the Plan or this Agreement or under any other
plan, practice or agreement. If there would be any
excess parachute payments, the Accounting Firm will
compute the net after-tax proceeds to the Employee,
taking into account the excise tax imposed by section
4999 of the Code, if (i) such parachute payments were
reduced to the point that the total thereof would not
exceed three times the "base amount" as defined in
section 280G of the Code, less One Dollar ($1.00), or
(ii) such parachute payments were not reduced. If not
reducing such parachute payments would result in a
greater after-tax amount to the Employee, such
parachute payments shall not be reduced. If reducing
such parachute payments would result in a greater
after-tax amount to the Employee, they shall be reduced
to such lesser amount. If such parachute payments must
be reduced, the Employee shall direct which of the
payments are to be reduced and the manner in which each
is to be limited or modified. The determination by the
Accounting Firm shall be binding upon the Employer and
the Employee subject to the application of subsection
(c) of this section.
(b) As a result of various incentive or other plans, the
Employee may be entitled to receive various parachute
payments over a period of several years. In such
event, the Accounting Firm may need to update its
calculations under subsection (a) of this section one
or more times. In the event that all or a portion of a
parachute payment is not made due to the limitations of
this Section 6, the Employer shall not be relieved of
liability for such amount but such parachute payment
shall be deferred and included in calculations with
respect to subsequent parachute payments.
(c) As a result of uncertainty in the application of
section 280G of the Code at the time of determinations
by the Accounting Firm hereunder and uncertainties in
the valuation of future payments, and deferrals pursuant
to Section 6(a), it is possible that parachute payments
<PAGE> 6 (10k page 101)
will have been made by the Employer
which should not have been made (an "Overpayment") or
that additional parachute payments which will not have
been made by the Employer could have been made (an
"Underpayment"), consistent in each case with the other
provisions of this Section 6. In the event that the
Accounting Firm, based upon the assertion of a
deficiency by the Internal Revenue Service against the
Employer or the Employee which the Accounting Firm
believes has a high probability of success, determines
that an Overpayment has been made, such Overpayment
shall be treated for all purposes as a loan to the
Employee which the Employee shall repay to the
Employer, together with interest at the applicable
federal rate provided for in section 7872(f)(2)(A) of
the Code; provided, however, that no amount shall be
payable by the Employee to the Employer if and to the
extent that such payment would not reduce the amount
which is subject to taxation under section 4999 of the
Code. In the event that the Accounting Firm determines
that an Underpayment has occurred, such Underpayment
shall promptly be paid or transferred by the Employer
to or for the benefit of the Employee, together with
interest at the applicable federal rate provided for in
section 7872(f)(2)(A) of the Code.
(d) All fees, costs and expenses (including, but not
limited to, the cost of retaining experts) of the
Accounting Firm shall be borne by the Employer and the
Employer shall pay such fees, costs and expenses as
they become due. In performing the computations
required hereunder, the Accounting Firm shall assume
that all parachute payments to be made to the Employee
will be subject to federal and state income tax at the
maximum rate in effect at the time the determination is
made unless the Employee provides the Accounting Firm
with evidence that it is more probable than not that
one or more parachute payments will be taxable at a
lower rate, or lower rates, in which case the
Accounting Firm shall assume that such parachute
payments will be taxed at the lower rate or rates.
Taxes will be paid for state and federal purposes at
the highest possible marginal tax rates which could be
<PAGE> 7 (10k page 102)
applicable to the Employee in the year of receipt of
the payments, unless the Employee agrees otherwise.
(e) In the event this Agreement is subject to section 18(k)
of the Federal Deposit Insurance Act (the "FDIA") at
the time any payment is to be made by the Employer to
the Employee pursuant to this Agreement or otherwise,
such payment will be subject to, and conditioned upon,
its compliance with section 18(k) of the FDIA and any
regulations promulgated thereunder.
7. Prior to the effective date of this Agreement, the Employee
was covered and receiving benefits under the First Indiana
Bank Supplemental Benefit Plan (the "Prior Plan"). The benefits
provided under this Agreement and the Plan to which this Agreement
relates include or are in lieu of the benefits provided to
the Employee under the Prior Plan. (As between the Employer
and its wholly owned subsidiary, First Indiana Bank (the
"Bank"), the Bank shall be and remain primarily liable, and
the Employer shall be liable only secondarily, for the
payment to the Employee or his beneficiaries of retirement
benefits, death benefits and special death benefits that
accrued and became vested prior to the effective date
hereof.)
IN WITNESS WHEREOF, this Agreement has been made as of the date
herein above written.
Employer:
By: /s/ Owen B. Melton, Jr.
Owen B. Melton, Jr.
President
First Indiana Corporation
<PAGE> 8 (10k page 103)
EMPLOYEE:
/s/ Robert H. McKinney
Robert H. McKinney
135 North Pennsylvania St., Suite 2800
- ---------------------------------------
Street Address or P. O. Box
Indianapolis, 46204
_____________________________
City, State, Zip
<PAGE> 9 (10k page 104)
FIRST INDIANA CORPORATION
SUPPLEMENTAL BENEFIT PLAN
PLAN AGREEMENT
THIS AGREEMENT is made as of the first day of May, 1997, by
and between First Indiana Corporation (hereinafter referred to as
the "Employer") and Named Executive, (hereinafter referred to
as the "Employee").
WITNESSETH:
WHEREAS, the Board of Directors of the Employer has
determined that it is desirable and in the best interest of the
Employer to adopt a Supplemental Benefit Plan;
WHEREAS, the Board of Directors at its meeting on April 16,
1997, approved and adopted such a plan; and
WHEREAS, the Board of Directors at said meeting authorized
the officers of the Employer to do any and all things necessary
or desirable to put said Supplemental Benefit Plan in effect; and
WHEREAS, the Employee has been selected to become a
participant of said Plan, and the Employee elects to so
participate.
IT IS THEREFORE AGREED:
1. The Employee shall be eligible to receive any and all
benefits to which he is entitled under the terms of the
Plan.
2. In addition to any death benefit payable under Section 4.6
of the Plan, the Employee's beneficiary shall be entitled to
receive the following special death benefit:
(a) In the event of the Employee's death while still
employed by the Employer or its affiliates, a lump sum
payment equal to 300% of the Employee's annual rate of
Salary paid by the Employer or its affiliates then in
effect, grossed up for federal, state and local income
taxes at the highest applicable marginal rate in effect
at the time of the Employee's death.
(b) In the event of the Employee's death after terminating
employment with the Employer and its affiliates, if
such termination occurs before a change of control or
before the Employee attains age 65 or becomes fully
vested as provided in Section 3 of this Agreement, a
lump sum payment of $100,000.00 grossed up for federal,
state and local income taxes at the highest applicable
marginal rate in effect at the time of the Employee's
death.
<PAGE> 1 (10k page 105)
(c) In the event of the Employee's death after terminating
employment with the Employer and its affiliates, if
such termination occurs after a change of control or
after the Employee attains age 65 or becomes fully
vested as provided in Section 3 of this Agreement, a
lump sum payment equal to 300% of the Employee's
highest annual rate of Salary paid by the Employer or
its affiliates, grossed up for federal, state and local
income taxes at the highest applicable marginal rate in
effect at the time of the Employee's death.
3. Vesting. The Employee shall be vested with respect to the
"excess plan portion" of his monthly retirement benefits
under the Plan to the same extent he is vested with respect
to benefits payable under the DB Pension Plan. He became or
shall become fully vested with respect to his other benefits
under the Plan and this Agreement (the remainder of his
monthly retirement benefit and his special death benefit) at
the time specified in the Plan or, if earlier, when the sum
of his whole years of age plus his whole years of service
with the Employer and its affiliates exceeded or exceeds xx,
provided he remains in the service of one or more of the
Employer and its affiliates until such time. For purposes
of the Plan and this Agreement, the Employee's whole years
of service with the Employer and its affiliates shall be
determined in the same manner as it is determined for
vesting purposes under the DB Pension Plan.
4. Individualized Retirement Benefit. The Employee's
retirement benefit shall not be paid in the form provided
for in Section 4.2 of the Plan but instead shall be paid as
a fixed-term variable annuity. The term of such annuity
shall begin on the date of the Employee's termination of
employment and shall end on the later of: (i) the last
December 31 occurring within five years after such
termination, or (ii) the last December 31 occurring within
the Employee's remaining life expectancy, determined as of
such termination, based on the life expectancy tables then
used for purposes of determining actuarial equivalence under
the DB Pension Plan. Distributions shall be made annually,
with the first such distribution being made as of the
December 31 next following the Employee's termination of
employment, and with subsequent distributions being made as
of each December 31 thereafter, until the benefit has been
distributed fully. The amount of each distribution shall be
determined as though an amount equal to the lump sum
actuarial equivalent of the Employee's base retirement
benefit were set aside on the date of the Employee's
termination of employment and then were invested at the
<PAGE> 2 (10k page 106)
Employee's direction, with each distribution being
calculated as a fraction of such hypothetical investment
fund, the denominator of which is the total number of
distributions to be made, and the numerator of which is one
more than the number of distributions previously made, and
with each distribution being deducted from the balance of
the fund on the date as of which it is made. The Employee
or his beneficiary may direct the investment of the
hypothetical investment fund. All such directions, and all
changes in such directions, shall be made in writing to the
Company. The Employee or his beneficiary may not direct the
investment of the hypothetical investment fund in any asset
which cannot be liquidated readily or which does not have a
readily ascertainable fair market value. If or to the
extent the Employee or his beneficiary fails to direct the
investment of the hypothetical investment fund, it shall be
deemed to be invested in such money fund as the Committee
from time to time shall designate. It is contemplated that
the Employer, in order to hedge part or all of its liability
for payment of the Employee's retirement benefit, may
establish an actual investment account and invest the same
in such a manner as to mirror the hypothetical investment
fund. The right of the Employee and his beneficiary to
direct the investment of the hypothetical investment fund
shall be subject to such reasonable rules and procedures as
the Committee may adopt to enable the Employer to hedge its
liability in this manner.
5. Arbitration. In the event of any disputes, differences,
controversies or claims arising out of, or in connection
with, the Employee's rights under the Plan or this
Agreement, other than a dispute in which the sole relief
sought is an equitable remedy, such as a temporary
restraining order or a permanent or temporary injunction,
the parties shall be required to have the dispute,
controversy, difference or claim settled through binding
arbitration pursuant to the American Arbitration
Association's rules of Commercial Arbitration which are then
in effect The location of all arbitration proceedings
shall be Indianapolis, Indiana. One arbitrator shall be
selected by the parties and shall be a current or former
executive officer (vice president or higher) of a publicly-traded
corporation. In the event the parties are unable to
mutually agree upon a person to act as the arbitrator, or in
the event a mutually-agreed upon arbitrator shall fail to
accept the appointment by the parties, the parties shall
jointly request from the American Arbitration Association a
list of the names of five persons qualified to act as an
arbitrator under this clause. The selection of the final
<PAGE> 3 (10k page 107)
arbitrator then shall be achieved by each party alternately
striking a name, with the Employer going first, until one
name remains. In the event the parties mutually agree that
the five names submitted by the American Arbitration
Association are unsatisfactory, they jointly may request a
second list of five names from the American Arbitration
Association and final selection shall be achieved through
the procedure set out herein. The decision of the
arbitrator shall be final and binding upon both parties, and
any award entered by the arbitrator shall be final, binding
and non-appealable, and judgment may be entered thereon by
either party in accordance with the applicable law in any
court of competent jurisdiction. The arbitrator shall not
have authority to modify any provision of the Plan or this
Agreement nor to award a remedy for any difference, dispute,
controversy or claim arising under the Plan or this
Agreement other than a benefit specifically provided under
or by virtue of the Plan or this Agreement. The Employer
shall be responsible for all of the reasonable expenses of
the American Arbitration Association, the arbitrator and the
conduct of the selection and the arbitration procedures set
forth in this section, including reasonable attorneys' fees
and expenses incurred by either party which are associated
with the arbitration procedure through the time the final
arbitration decision or award is rendered. This arbitration
provision shall be specifically enforceable.
6. Limitation on Payments.
(a) Notwithstanding anything contained herein to the
contrary, prior to the payment of any amounts pursuant
to the Plan or this Agreement, an independent national
accounting firm designated by the Employer (the
"Accounting Firm") shall compute whether there would be
payable to the Employee any "excess parachute
payments," within the meaning of section 280G of the
Internal Revenue Code of 1986, as amended (the "Code"),
taking into account the total "parachute payments,"
within the meaning of section 280G of the Code, payable
or to be provided to the Employee, whether by the
Employer or any of its affiliates or by any successor
to the Employer or any such affiliate, and whether
under the Plan or this Agreement or under any other
plan, practice or agreement. If there would be any
excess parachute payments, the Accounting Firm will
compute the net after-tax proceeds to the Employee,
taking into account the excise tax imposed by section
4999 of the Code, if (i) such parachute payments were
reduced to the point that the total thereof would not
<PAGE> 4 (10k page 108)
exceed three times the "base amount" as defined in
section 280G of the Code, less One Dollar ($1.00), or
(ii) such parachute payments were not reduced. If not
reducing such parachute payments would result in a
greater after-tax amount to the Employee, such
parachute payments shall not be reduced. If reducing
such parachute payments would result in a greater
after-tax amount to the Employee, they shall be reduced
to such lesser amount. If such parachute payments must
be reduced, the Employee shall direct which of the
payments are to be reduced and the manner in which each
is to be limited or modified. The determination by the
Accounting Firm shall be binding upon the Employer and
the Employee subject to the application of subsection
(c) of this section.
(b) As a result of various incentive or other plans, the
Employee may be entitled to receive various parachute
payments over a period of several years. In such
event, the Accounting Firm may need to update its
calculations under subsection (a) of this section one
or more times. In the event that all or a portion of a
parachute payment is not made due to the limitations of
this Section 6, the Employer shall not be relieved of
liability for such amount but such parachute payment
shall be deferred and included in calculations with
respect to subsequent parachute payments.
(c) As a result of uncertainty in the application of
section 280G of the Code at the time of determinations
by the Accounting Firm hereunder and uncertainties in
the valuation of future payments, it is possible that
parachute payments will have been made by the Employer
which should not have been made (an "Overpayment") or
that additional parachute payments which will not have
been made by the Employer could have been made (an
"Underpayment"), consistent in each case with the other
provisions of this Section 6. In the event that the
Accounting Firm, based upon the assertion of a
deficiency by the Internal Revenue Service against the
Employer or the Employee which the Accounting Firm
believes has a high probability of success, determines
that an Overpayment has been made, such Overpayment
shall be treated for all purposes as a loan to the
Employee which the Employee shall repay to the
Employer, together with interest at the applicable
federal rate provided for in section 7872(f)(2)(A) of
the Code; provided, however, that no amount shall be
payable by the Employee to the Employer if and to the
<PAGE> 5 (10k page 109)
extent that such payment would not reduce the amount
which is subject to taxation under section 4999 of the
Code. In the event that the Accounting Firm determines
that an Underpayment has occurred, such Underpayment
shall promptly be paid or transferred by the Employer
to or for the benefit of the Employee, together with
interest at the applicable federal rate provided for in
section 7872(f)(2)(A) of the Code.
(d) All fees, costs and expenses (including, but not
limited to, the cost of retaining experts) of the
Accounting Firm shall be borne by the Employer and the
Employer shall pay such fees, costs and expenses as
they become due. In performing the computations
required hereunder, the Accounting Firm shall assume
that all parachute payments to be made to the Employee
will be subject to federal and state income tax at the
maximum rate in effect at the time the determination is
made unless the Employee provides the Accounting Firm
with evidence that it is more probable than not that
one or more parachute payments will be taxable at a
lower rate, or lower rates, in which case the
Accounting Firm shall assume that such parachute
payments will be taxed at the lower rate or rates.
taxes will be paid for state and federal purposes at
the highest possible marginal tax rates which could be
applicable to the Employee in the year of receipt of
the payments, unless the Employee agrees otherwise.
(e) In the event this Agreement is subject to section 18(k)
of the Federal Deposit Insurance Act (the "FDIA") at
the time any payment is to be made by the Employer to
the Employee pursuant to this Agreement or otherwise,
such payment will be subject to, and conditioned upon,
its compliance with section 18(k) of the FDIA and any
regulations promulgated thereunder.
7. Prior to the effective date of this Agreement, the Employee
was covered under the First Indiana Bank Supplemental
Benefit Plan (the "Prior Plan"). The benefits provided
under this Agreement and the Plan to which this Agreement
relates include or are in lieu of the benefits provided to
the Employee under the Prior Plan. (As between the Employer
and its wholly owned subsidiary, First Indiana Bank (the
"Bank"), the Bank shall be and remain primarily liable, and
the Employer shall be liable only secondarily, for the
payment to the Employee or his beneficiaries of retirement
benefits, death benefits and special death benefits that
<PAGE> 6 (10k page 110)
accrued and became vested prior to the effective date
hereof.)
IN WITNESS WHEREOF, this Agreement has been made as of the date
herein above written.
Employer:
By: _________________________
Robert H. McKinney
Chairman
First Indiana Corporation
EMPLOYEE:
_____________________________
Named Executive
_____________________________
Street Address or P. O. Box
_____________________________
City, State, Zip
<PAGE> 7 (10k page 111)
FIRST INDIANA CORPORATION
SUPPLEMENTAL BENEFIT PLAN
PLAN AGREEMENT
THIS AGREEMENT is made as of the first day of May, 1997,
by and between First Indiana Bank (hereinafter referred to as
the "Employer") and Named Executive, (hereinafter referred to as
the "Employee").
WITNESSETH:
WHEREAS, the Board of Directors of the Employer has
determined that it is desirable and in the best interest of
the Employer to adopt a new Supplemental Benefit Plan (the
"Plan") and terminate its existing Supplemental Benefit Plan
(the "Prior Plan");
WHEREAS, the Board of Directors at its meeting on April
16, 1997, approved and adopted the Plan and terminated the
Prior Plan; and
WHEREAS, the Board of Directors at said meeting
authorized the officers of the Employer to do any and all
things necessary or desirable to put the Plan in effect; and
WHEREAS, the Employee has been selected to become a
participant of the Plan, and the Employee elects to so
participate.
IT IS THEREFORE AGREED:
1. The Employee shall be eligible to receive any and all
benefits to which he is entitled under the terms of the
Plan.
2. Vesting. The Employee shall be vested with respect to
the "excess plan portion" of his monthly retirement
benefits under the Plan to the same extent he is vested
with respect to benefits payable under the DB Pension
Plan. He became or shall become fully vested with
respect to his other benefits under the Plan and this
Agreement (the remainder of his monthly retirement
benefit) at the time specified in the Plan or, if
earlier, when the sum of his whole years of age plus his
whole years of service with the Employer and its
affiliates exceeded or exceeds 80, provided he remains in
the service of the Employer and its affiliates until such
time. For purposes of the Plan and this Agreement, the
Employee's whole years of service with the Employer and
its affiliates shall be determined in the same manner as
it is determined for vesting purposes under the DB
Pension Plan.
3. Arbitration. In the event of any disputes, differences,
controversies or claims arising out of, or in connection
<PAGE> 1 (10k page 112)
with, the Employee's rights under the Plan or this
Agreement, other than a dispute in which the sole relief
sought is an equitable remedy, such as a temporary
restraining order or a permanent or temporary injunction,
the parties shall be required to have the dispute,
controversy, difference or claim settled through binding
arbitration pursuant to the American Arbitration
Association's rules of Commercial Arbitration which are
then in effect The location of all arbitration
proceedings shall be Indianapolis, Indiana. One
arbitrator shall be selected by the parties and shall be
a current or former executive officer (vice president or
higher) of a publicly-traded corporation. In the event
the parties are unable to mutually agree upon a person to
act as the arbitrator, or in the event a mutually-agreed
upon arbitrator shall fail to accept the appointment by
the parties, the parties shall jointly request from the
American Arbitration Association a list of the names of
five persons qualified to act as an arbitrator under this
clause. The selection of the final arbitrator then shall
be achieved by each party alternately striking a name,
with the Employer going first, until one name remains.
In the event the parties mutually agree that the five
names submitted by the American Arbitration Association
are unsatisfactory, they jointly may request a second
list of five names from the American Arbitration
Association and final selection shall be achieved through
the procedure set out herein. The decision of the
arbitrator shall be final and binding upon both parties,
and any award entered by the arbitrator shall be final,
binding and non-appealable, and judgment may be entered
thereon by either party in accordance with the applicable
law in any court of competent jurisdiction. The
arbitrator shall not have authority to modify any
provision of the Plan or this Agreement nor to award a
remedy for any difference, dispute, controversy or claim
arising under the Plan or this Agreement other than a
benefit specifically provided under or by virtue of the
Plan or this Agreement. The Employer shall be
responsible for all of the reasonable expenses of the
American Arbitration Association, the arbitrator and the
conduct of the selection and the arbitration procedures
set forth in this section, including reasonable
attorneys' fees and expenses incurred by either party
which are associated with the arbitration procedure
through the time the final arbitration decision or award
is rendered. This arbitration provision shall be
specifically enforceable.
4. Limitation on Payments.
(a) Anything in the Plan or this Agreement to the contrary
notwithstanding, in the event that it shall be determined
that any payment or distribution by the Bank to or for
the benefit of the Executive pursuant to the terms of the
Plan or this Agreement (a "Payment"), would constitute an
"excess parachute payment" within the meaning of Section
280G of the Internal Revenue Code of 1986, as amended
(the "Code"), the aggregate present value of amounts
payable or distributable to or for the benefit of the
Executive pursuant to the Plan or this Agreement (such
payments or distributions pursuant to the Plan or this
Agreement are hereinafter
<PAGE> 2 (10k page 113)
referred to as "Agreement Payments") shall be reduced (but not
below zero) to the Reduced Amount. The "Reduced Amount" shall be an
amount expressed in present value which maximizes the aggregate
present value of Agreement Payments without causing any
Payment to be subject to tax under Section 4999 of the
Code. For purposes of this Section 4, present value
shall be determined in accordance with Section 280G(d)(4)
of the Code.
(b) All determinations to be made under this Section 4 shall
be made by an independent national accounting firm
designated by the Bank (the "Accounting Firm"), which
firm shall provide its determinations and any supporting
calculations both to the Bank and the Executive within 10
days after the date for payment of any Agreement Payment
subject to reduction under this section. Any such
determination by the Accounting Firm shall be binding
upon the Bank and the Executive. The Executive shall
then have the right to determine which of the Agreement
Payments shall be eliminated or reduced in order to
produce the Reduced Amount in accordance with the
requirements of this section. Within five days after
this determination, the Bank shall pay (or cause to be
paid) or distribute (or cause to be distributed) to or
for the benefit of the Executive such amounts as are then
due to the Executive under the Plan or this Agreement.
(c) As a result of the uncertainty in the application of
Section 280G of the Code, it is possible that Agreement
Payments will have been made by the Bank which should not
have been made ("Overpayment") or that additional
Agreement Payments which have not been made by the Bank
could have been made ("Underpayment"), in each case,
consistent with the calculations required to be made
hereunder. From time to time as the Bank or the
Executive shall deem appropriate, the Accounting Firm
shall review the determinations made by it pursuant to
subsection (b) of this section, and the Bank and the
Executive shall cooperate and provide all information
necessary for such review. In the event that the
Accounting Firm determines that an Overpayment has been
made, any such Overpayment shall be treated for all
purposes as a loan to the Executive which the Executive
shall repay to the Bank together with interest from the
date of payment under the Plan or this Agreement at the
applicable Federal rate provided for in Section
7872(f)(2) of the Code (the "Federal Rate"); provided,
however, that no amount shall be
<PAGE> 3 (10k page 114)
payable by the Executive to the Bank if and to the extent such
payment would not reduce the amount which is subject to tax under
Section 4999 of the Code. In the event that the Accounting Firm
determines that an Underpayment has occurred, any such
Underpayment shall be promptly paid by the Bank to or for
the benefit of the Executive together with interest from
the date of payment under the Plan or this Agreement at
the Federal Rate.
(d) All of the fees and expenses of the Accounting Firm in
performing the determinations referred to in subsections
(b) and (c) above shall be borne solely by the Bank. The
Bank agrees to indemnify and hold harmless the Accounting
Firm of and from any and all claims, damages and expenses
resulting from or relating to its determinations pursuant
to subsections (b) and (c) above, except for claims,
damages or expenses resulting from the gross negligence
or willful misconduct of the Accounting Firm.
(e) In the event the Plan or this Agreement is subject to
Section 18(k) of the Federal Deposit Insurance Act (the
"FDIA") at the time any payment is to be made by the Bank
to the Executive pursuant to the Plan or this Agreement
or otherwise, such payment will be subject to, and
conditioned upon, its compliance with Section 18(k) of
the FDIA and any regulations promulgated thereunder.
5. To the extent applicable to the Plan and this Agreement,
the required provisions of 12 C.F.R. Section 563.39(b) are
incorporated herein by reference. In the case of any
conflict between such required provisions and the other
provisions of this Agreement or between such required
provisions and the provisions of the Plan, such required
provisions shall control.
6. Prior to the effective date of this Agreement, the
Employee was covered under the Prior Plan. The benefits
provided under this Agreement and the Plan to which this
Agreement relates are in lieu of the benefits provided to
the Employee under the Prior Plan.
IN WITNESS WHEREOF, this Agreement has been made as of the
date herein above written.
Employer:
By: _________________________
<PAGE> 4 (10k page 115)
Owen B. Melton, Jr.,
President
First Indiana Bank
EMPLOYEE:
_____________________________
Named Executive
_____________________________
Street Address or P. O. Box
_____________________________
City, State, Zip
<PAGE> 5 (10k page 116)
[Note: This form of agreement was entered into by First Indiana
Corporation and each of Robert H. McKinney, Marni McKinney, and Owen
B. Melton, Jr. The agreements are identical except for the positions
held at the Company and the Bank (references to such are noted) and
for the clause in section 1(a) which reads "and provided, further, that the
Employment Term shall not be automatically extended beyond the
first day of the month following the month in which the Executive
attains age sixty-five (65)", which does NOT appear in Robert H. McKinney's
agreement]
EMPLOYMENT AGREEMENT
THIS AGREEMENT, entered into as of the 1st day of
May, 1997, by and between First Indiana Corporation (the
"Company"), and Named Executive (the "Executive")
(hereinafter collectively referred to as "the parties").
W I T N E S S E T H:
WHEREAS, the Board of Directors of the Company (the
"Board") recognizes that the possibility of a Change of Control
(as hereinafter defined in Section 2) exists and that the threat of or
the occurrence of a Change of Control can result in significant
distractions of its key management personnel because of the
uncertainties inherent in such a situation; and
WHEREAS, the Board has determined that it is essential
and in the best interest of the Company and its shareholders to
retain the services of the Executive in the event of a threat or
occurrence of a Change of Control and to ensure his continued
dedication and efforts in such event without undue concern for his
personal financial and employment security; and
WHEREAS, in order to induce the Executive to remain in
the employ of the Company, particularly in the event of a threat of
or the occurrence of a Change of Control, the Company desires to
enter into this Agreement with the Executive.
NOW, THEREFORE, in consideration of the respective
agreements of the parties contained herein, it is agreed as follows:
1. Employment Term.
(a) The "Employment Term" shall commence on the first
date during the Protected Period (as defined in Section 1(c),
below) on which a Change of Control (as defined in Section 2,
below) occurs (the "Effective Date") and shall expire on the third
anniversary of the Effective Date; provided, however, that at the
end of each day of the Employment Term the Employment Term
shall automatically be extended for one (1) day unless either the
Company or the Executive shall have given written notice to the
other at least thirty (30) days prior thereto that the Employment
Term shall not be so extended and provided, further, that the
Employment Term shall not be automatically extended beyond the
first day of the month following the month in which the Executive
attains age sixty-five (65).
(b) Notwithstanding anything contained in this Agreement
to the contrary, if the Executive's employment is terminated prior
to the Effective Date and the Executive reasonably demonstrates
that such termination (i) was at the request of a third party who
has indicated an intention or taken steps reasonably calculated to
effect a Change of Control, or (ii) otherwise occurred in
connection with or in anticipation of a Change of Control, then for
all purposes of this
<PAGE> 1 (10k page 117)
Agreement, the Effective Date shall mean the date immediately
prior to the date of such termination of the Executive's
employment.
(c) For purposes of this Agreement, the "Protected
Period" shall be the one year period commencing on the date
hereof, provided, however, that at the end of each day the
Protected Period shall be automatically extended for one day
unless at least 30 days prior thereto the Company shall have given
written notice to the Executive that the Protected Period shall not
be so extended; and provided, further, that notwithstanding any
such notice by the Company not to extend, the Protected Period
shall not end if prior to the expiration thereof any third party has
indicated an intention or taken steps reasonably calculated to
effect a Change of Control, in which event the Protected Period
shall end only after such third party publicly announces that it has
abandoned all efforts to effect a Change of Control.
2. Change of Control. For purposes of this Agreement, a
"Change of Control" shall mean the first to occur of the following:
(a) The acquisition by any individual, entity or "group"
within the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange
Act")(a "Person") of beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Exchange Act) of 25% or
more of either (i) the then outstanding shares of common stock of
the Company (the "Outstanding Company Common Stock") or
(ii) the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election
of directors (the "Outstanding Company Voting Securities");
provided, however, that the following acquisitions of common
stock shall not constitute a Change of Control: (i) any acquisition
directly from the Company (excluding an acquisition by virtue of
the exercise of a conversion privilege by one or more Persons
acting in concert, and excluding an acquisition that would be a
Change of Control under subsection (c) of this Section 2), (ii) any
acquisition by the Company, (iii) any acquisition by any employee
benefit plan (or related trust) sponsored or maintained by the
Company or any corporation or other entity controlled by the
Company, (iv) any acquisition by any corporation or other entity
pursuant to a reorganization, merger or consolidation which
would not be a Change of Control under subsection (c) of this
Section 2; or (v) any acquisition by an Exempt Person; provided
further, that the applicable percentage shall be reduced from 25%
to 20% in the event of the occurrence of one transaction or a
series of transactions which results in the beneficial ownership by
Exempt Persons of less than 15% of the Outstanding Company
Common Stock or the Outstanding Company Voting Securities;
or
(b) Individuals who, as of the date hereof, constitute the
Board (the "Incumbent Board") cease for any reason to constitute
at least a majority of the Board; provided, however, that any
individual becoming a director subsequent to the date hereof
whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the
Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result of
either an actual or threatened "election
<PAGE> 2 (10k page 118)
contest" or other actual or threatened "solicitation" (as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) of
proxies or consents by or on behalf of a person other than the Incumbent
Board; or
(c) Approval by the shareholders of the Company of a
reorganization, merger or consolidation, unless, following such
reorganization, merger, share exchange or consolidation, (i) 75%
or more of, respectively, the then outstanding shares of common
stock of the corporation or other entity resulting from such
reorganization, merger, share exchange or consolidation and the
combined voting power of the then outstanding voting securities
of such corporation or other entity entitled to vote generally in the
election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and entities
who were the beneficial owners, respectively, of the Outstanding
Company Common Stock and Outstanding Company Voting
Securities immediately prior to such reorganization, merger, share
exchange or consolidation in substantially the same proportions as
their ownership, immediately prior to such reorganization, merger,
share exchange or consolidation, (ii) no Person (excluding the
Company, any Exempt Person, any employee benefit plan (or
related trust) of the Company or such corporation or other entity
resulting from such reorganization, merger, share exchange or
consolidation and any person beneficially owning, immediately
prior to such reorganization, merger, share exchange or
consolidation, directly or indirectly, 25% or more of the
Outstanding Company Common Stock or Outstanding Voting
Securities, as the case may be) beneficially owns, directly or
indirectly, 25% or more of, respectively, the then outstanding
shares of common stock of the corporation or other entity
resulting from such reorganization, merger, share exchange or
consolidation or the combined voting power of the then
outstanding voting securities of such corporation or other entity,
entitled to vote generally in the election of directors and (iii) at
least a majority of the members of the board of directors of the
corporation or other entity resulting from such reorganization,
merger, share exchange or consolidation were members of the
Incumbent Board at the time of the execution of the initial
agreement providing for such reorganization, merger, share
exchange or consolidation; provided however, that the applicable
percentage for purposes of clause (ii) of this subsection (c) shall
be reduced from 25% to 20% in the event of the occurrence of
one transaction or a series of transactions which results in the
beneficial ownership by Exempt Persons of less than 15% of the
Outstanding Company Common Stock or the Outstanding
Company Voting Securities; or
(d) Approval by the shareholders of the Company of (i) a
complete liquidation or dissolution of the Company or (ii) the sale
or other disposition of all or substantially all of the assets of the
Company, other than to a corporation or other entity, with respect
to which following such sale or other disposition, (A) 75% or
more of, respectively, the then outstanding shares of common
stock of such corporation or other entity and the combined voting
power of the then outstanding voting securities of such
corporation or other entity entitled to vote generally in the
election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the Persons who were the
beneficial owners, respectively, of the Outstanding Company
Common Stock and Outstanding Company Voting Securities
immediately prior to such sale or other disposition in substantially
the same proportion as their ownership, immediately prior to
<PAGE> 3 (10k page 119)
such sale or other disposition, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities, as the case
may be, (B) no Person (excluding the Company, any Exempt
Person, any employee benefit plan (or related trust) of the
Company or such corporation or other entity and any person
beneficially owning, immediately prior to such sale or other
disposition, directly or indirectly, 25% or more of the Outstanding
Company Common Stock or Outstanding Company Voting
Securities, as the case may be) beneficially owns, directly or
indirectly, 25% or more of, respectively, the then outstanding
shares of common stock of such corporation or other entity or the
combined voting power of the then outstanding voting securities
of such corporation or other entity entitled to vote generally in the
election of directors and (C) at least a majority of the members of
the board of directors of such corporation or other entity were
members of the Incumbent Board at the time of the execution of
the initial agreement or action of the Board providing for such
sale or other disposition of assets of the Company; provided
however, that the applicable percentage for purposes of subclause
(ii)(B) of this subsection (d) shall be reduced from 25% to 20% in
the event of the occurrence of one transaction or a series of
transactions which results in the beneficial ownership by Exempt
Persons of less than 15% of the Outstanding Company Common
Stock or the Outstanding Company Voting Securities; or
(e) The occurrence of one transaction or a series of
transactions, which has the effect of a divestiture by the Company
of 25% or more of the combined voting power of the outstanding
voting securities of First Indiana Bank; or
(f) The occurrence of any sale, lease or other transfer, in
one transaction or a series of transactions, of all or substantially all
of the assets of First Indiana Bank (other than to the Company or
one or more Exempt Persons); or
(g) The occurrence of one transaction or a series of
transactions which results in the beneficial ownership by Exempt
Persons (determined without regard to clause (vi) of Section 2A)
of less than 20% of the outstanding voting securities of The
Somerset Group, Inc. ("Somerset"), at any time when Somerset
beneficially owns 10% or more of the combined voting power of
the outstanding voting securities of the Company.
2A. Exempt Person. For purposes of this Agreement,
"Exempt Person" shall mean (i) Robert H. McKinney; (ii) Arlene
A. McKinney; (iii) any Exempt Descendant (as defined below);
(iv) any corporation, partnership, trust or other organization a
majority of the beneficial ownership interest of which is owned
directly or indirectly by one or more of Robert H. McKinney,
Arlene A. McKinney or any Exempt Descendant; (v) any estate or
other successor-in-interest by operation of law of Robert H.
McKinney, Arlene A. McKinney or any Exempt Descendant; (vi)
The Somerset Group, Inc., so long as it is controlled by one or
more individuals and entities described in (i) through (v) inclusive;
and (vii) with reference to an issuer, any group within the meaning
of Rule 13d-5(b) under the Exchange Act, if the majority of the
shares of such issuer beneficially owned by such group is
attributable to shares of such issuer which would be considered
beneficially owned by individuals and entities described in (i)
through (vi) inclusive absent the existence of the group. For
purposes of this definition, "Exempt Descendant" shall
<PAGE> 4 (10k page 120)
mean any child, grandchild or other descendant of Robert H. McKinney, or
any spouse of any such child, grandchild or other descendant,
including in all cases adoptive relationships.
3. Employment.
(a) During the Employment Term, the Company agrees to
continue to employ the Executive, and the Executive agrees to
remain in the employ of the Company, subject to the terms and
conditions of this Agreement. During the Employment Term, the
Executive shall be employed as [insert name of position held
currently] of the Company or in such other executive capacity as
may be mutually agreed to in writing by the parties. During the
Employment Term, the Executive shall be responsible for
overseeing the Company's investment in First Indiana Bank and
shall function as, and have the titles of, [insert current title(s)]
of said Bank. During the Employment Term, the Executive's
position (including status, offices, titles and
reporting requirements), authority, duties and responsibilities shall
be at least commensurate in all material respects with the most
significant of those held or assigned at any time during the 12
month period immediately preceding the Effective Date, and the
Executive's services shall be performed at the location where the
Executive was employed immediately preceding the Effective
Date or at any office or location less than 35 miles from such
location, unless mutually agreed to in writing by the parties.
(b) The Company may assign to the Executive the
responsibility of serving not only as [insert current title] of the Company
but also as [insert position or title] of one or more of its
affiliates. When performing services for an affiliate, the Executive
shall do so, at the Company's option, either as an employee of the
Company or as a direct employee of the affiliate. Although part
or all of the Executive's compensation and benefits may be paid or
provided by affiliates, the Company shall be and remain ultimately
liable for the performance of its obligations hereunder, and it shall
be considered for purposes of Sections 6 and 23 that all of the
Executive's compensation and benefits are paid or provided by the
Company.
(c) Excluding periods of vacation and sick leave to which
the Executive is entitled, during the Employment Term the
Executive agrees to devote full time attention to the business and
affairs of the Company and its affiliates to the extent necessary to
discharge the responsibilities assigned to the Executive hereunder,
provided that the Executive may take reasonable amounts of time
to (i) serve on corporate, civil or charitable boards or committees,
and (ii) deliver lectures, fulfill speaking engagements or teach at
educational institutions, if such activities do not significantly
interfere with the performance of the Executive's responsibilities
hereunder. It is expressly understood and agreed that to the
extent any such activities have been conducted by the Executive
prior to the Effective Date, the continued conduct of such
activities (or the conduct of activities similar in nature and scope)
subsequent to the Effective Date shall not thereafter be deemed to
interfere with the performance of the Executive's responsibilities
hereunder.
4. Compensation.
<PAGE> 5 (10k page 121)
(a) Base Salary. During the Employment Term, the
Executive shall receive an annual base salary ("Annual Base
Salary"), which shall be paid at a monthly rate, at least equal to 12
times the highest monthly base salary paid or payable to the
Executive by the Company and its affiliated companies in respect
of the 12 month period immediately preceding the month in which
the Effective Date occurs. During the Employment Term, the
Annual Base Salary shall be reviewed at least annually and shall be
increased at any time and from time to time as shall be
substantially consistent with increases in base salary generally
awarded in the ordinary course of business to other peer
executives of the Company and its affiliated companies. Any
increase in Annual Base Salary shall not serve to limit or reduce
any other obligation to the Executive under this Agreement.
Annual Base Salary shall not be reduced after any such increase
and the term Annual Base Salary as utilized in this Agreement
shall refer to Annual Base Salary as so increased. As used in this
Agreement, the term "affiliated companies" shall include any
company controlled by, controlling or under common control with
the Company (including any successor or assign treated as the
Company pursuant to Section 9(a)).
(b) Discretionary Bonuses. During the Employment
Term, the Executive shall be entitled to participate, equitably in
relation to other peer executives of the Company and its affiliated
companies, in any incentive compensation plans or awards
adopted or made, and in any discretionary bonuses authorized or
paid, by the Company or its affiliated companies. No other
compensation provided for in this Agreement shall be deemed a
substitute for the Executive's right to participate in any such
incentive compensation plans and to receive any such awards and
bonuses.
(c) Savings and Retirement Plans. During the
Employment Term, the Executive shall be entitled to participate in
all savings and retirement plans, practices, policies and programs
applicable generally to other peer executives of the Company and
its affiliated companies, but in no event shall such plans, practices,
policies and programs provide the Executive with savings
opportunities and retirement benefit opportunities, in each case,
less favorable, in the aggregate, than the most favorable of those
provided by the Company and its affiliated companies for the
Executive under such plans, practices, policies and programs as in
effect at any time during the 12 month period immediately
preceding the Effective Date, or, if more favorable to the
Executive, those provided generally at any time after the Effective
Date to other peer executives of the Company and its affiliated
companies.
(d) Benefit Plans. During the Employment Term (and
thereafter to the extent provided in the applicable plan, practice,
policy or arrangement), the Executive and his family shall be
eligible for participation in, and shall receive benefits pursuant to,
all benefit plans, practices, policies and arrangements that are
maintained or provided by the Company or any of its affiliated
companies (including, without limitation, medical, prescription
drug, dental, disability, salary continuance, employee life, group
life, accidental death and travel accident insurance plans and
programs) and that are applicable generally to other peer
executives of the Company or any of its affiliated companies and
their families; provided, however, that in no event shall such plans,
practices, policies and arrangements provide the Executive and his
family with benefits that are less
<PAGE> 6 (10k page 122)
favorable, in the aggregate, than those provided under the most favorable
of such plans, practices, policies and arrangements in effect for the
Executive and his family at any time during the 12 month period immediately
preceding the Effective Date or, if more favorable to the
Executive and his family, those provided generally at any time
after the Effective Date to other peer executives of the Company
and its affiliated companies and their families. The Executive and
his family shall be entitled to the following specific benefits, to the
extent, as to each, the benefit would not be provided under the
preceding sentence or would exceed the benefit provided under
the preceding sentence:
(1) Defined Benefit Pension Benefits. The Executive and
his spouse or beneficiaries shall be entitled to defined
benefit pension benefits not less favorable, in the
aggregate, than the basic pension benefits provided for in
the Company's qualified defined benefit pension plan and
the supplemental pension benefits provided for in the
Executive's agreement under the Company's nonqualified
supplemental executive benefit plan, both as in effect on
the date hereof, subject to the terms of such plans and
such agreement.
(2) Death Benefit. The Executive's beneficiaries shall be
entitled to death benefits not less favorable, in the
aggregate, than the death benefits provided for in the
Executive's agreement under the Company's supplemental
executive benefit plan as in effect on the date hereof,
subject to the terms of such agreement.
(e) Expenses. During the Employment Term, the
Executive shall be entitled to receive prompt reimbursement for all
reasonable expenses incurred by the Executive in accordance with
the most favorable policies, practices and procedures of the
Company and its affiliated companies in effect for the Executive at
any time during the 12 month period immediately preceding the
Effective Date or, if more favorable to the Executive, as in effect
generally at any time thereafter with respect to other peer
executives of the Company and its affiliated companies.
(f) Fringe Benefits. During the Employment Term, the
Executive shall be entitled to fringe benefits (including but not
limited to club dues) in accordance with the most favorable plans,
practices, programs and policies of the Company and its affiliated
companies in effect for the Executive at any time during the 12
month period immediately preceding the Effective Date or, if
more favorable to the Executive, as in effect generally at any time
thereafter with respect to other peer executives of the Company
and its affiliated companies.
(g) Office and Support Staff. During the Employment
Term, the Executive shall be entitled to an office or offices of a
size and with furnishings and other appointments, and to exclusive
personal secretarial and other assistance, at least equal to the most
favorable of the foregoing provided to the Executive by the
Company and its affiliated companies at any time during the 12
month period immediately preceding the Effective Date or, if
more favorable to the Executive, as provided generally at any time
thereafter with respect to other peer executives of the Company
and its affiliated companies.
<PAGE> 7 (10k page 123)
(h) Vacation and Sick Leave. During the Employment
Term, the Executive shall be entitled to paid vacation and sick
leave (without loss of pay) in accordance with the most favorable
plans, policies, programs and practices of the Company and its
affiliated companies as in effect for the Executive at any time
during the 12 month period immediately preceding the Effective
Date or, if more favorable to the Executive, as in effect generally
at any time thereafter with respect to other peer executives of the
Company and its affiliated companies.
(i) Restrictions. As of the Effective Date, all restrictions
limiting the exercise, transferability or other incidents of
ownership of any outstanding award, including but not limited to
restricted stock, options, stock appreciation rights, or other
property or rights of the Company granted to the Executive shall
lapse, and such awards shall become fully vested and be held by
the Executive free and clear of all such restrictions. This
provision shall apply to all such property or rights notwithstanding
the provisions of any other plan or agreement, unless the effect of
the application of this provision to a particular right or property
would result in such right or property failing to qualify for
favorable tax treatment under the particular section of the Internal
Revenue Code for which it was designed to qualify, or would
result in the loss of favorable securities law treatment for
participants under the plan pursuant to which the award was
granted.
5. Termination of Employment. During the Employment
Term, the Executive's employment hereunder may be terminated
under the following circumstances:
(a) Death or Disability. The Executive's employment shall
terminate automatically upon the Executive's death during the
Employment Term. If the Company determines in good faith that
the Disability of the Executive has occurred during the
Employment Term (pursuant to the definition of Disability set
forth below), it may give to the Executive written notice in
accordance with Section 11 of this Agreement of its intention to
terminate the Executive's employment. In such event, the
Executive's employment with the Company shall terminate
effective on the 30th day after receipt of such notice by the
Executive (the "Disability Effective Date"), provided that, within
30 days after such receipt, the Executive shall not have returned
to full-time performance of the Executive's duties. For purposes
of this Agreement, "Disability" shall mean the absence of the
Executive from the Executive's duties with the Company and its
affiliated companies on a full-time basis for 180 consecutive
business days as a result of incapacity due to mental or physical
illness which is determined to be total and permanent by a
physician selected by the Company or its insurers and acceptable
to the Executive or the Executive's legal representative, provided
if the parties are unable to agree, the parties shall request the Dean
of the Indiana University School of Medicine to choose such
physician.
(b) Cause. The Company may terminate the Executive's
employment for "Cause." A termination for Cause is a termination
evidenced by a resolution adopted in good faith by a majority of
the Board that the Executive (i) willfully, deliberately and
continually failed to substantially perform his duties under Section
3, above (other than a failure resulting from the Executive's incapacity
due to physical or mental illness) which failure constitutes gross
<PAGE> 8 (10k page 124)
misconduct, and results in and was intended to
result in demonstrable material injury to the Company or any of its
affiliated companies, monetary or otherwise, or (ii) committed
acts of fraud and dishonesty constituting a felony, as determined
by a final judgment or order of a court of competent jurisdiction,
and resulting or intended to result in gain to or personal
enrichment of the Executive at the Company's expense, provided,
however, that no termination of the Executive's employment shall
be for Cause as set forth in (i), above, until (a) the Executive shall
have had at least 60 days to cure any conduct or act alleged to
provide Cause for termination after a written notice of demand
has been delivered to the Executive specifying in detail the manner
in which the Executive's conduct violates this Agreement, and (b)
the Executive shall have been provided an opportunity to be heard
by the Board (with the assistance of the Executive's counsel if the
Executive so desires). No act, or failure to act, on the Executive's
part, shall be considered "willful" unless he has acted or failed to
act in bad faith and without a reasonable belief that his action or
failure to act was in the best interest of the Company and its
affiliated companies. Notwithstanding anything contained in this
Agreement to the contrary, no failure to perform by the Executive
after Notice of Termination is given by the Executive shall
constitute Cause for purposes of this Agreement.
(c) Good Reason.
(1) The Executive may terminate his employment for
Good Reason. For purposes of this Agreement, "Good
Reason" shall mean the occurrence after a Change of
Control of any of the events or conditions described in
Subsections (i) through (vi) hereof:
(i) A change in the Executive's status, title, position or
responsibilities (including reporting
responsibilities) which, in the Executive's
reasonable judgment, does not represent a
promotion from his status, title, position or
responsibilities as in effect immediately prior
thereto; the assignment to the Executive of any
duties or responsibilities which, in the Executive's
reasonable judgment, are inconsistent with his
status, title, position or responsibilities in effect
immediately prior to such assignment; or any
removal of the Executive from or failure to
reappoint or reelect him to any position, except in
connection with the termination of his employment
for Disability, Cause, as a result of his death or by
the Executive other than for Good Reason;
(ii) Any involuntary reduction in the Executive's target
level of annual and long-term total compensation
as in effect immediately prior to the Effective Date;
(iii) A failure by the Company and its affiliated
companies, through incentive or bonus
arrangements, to provide the Executive with
incentive compensation opportunities comparable
to those it provided to the Executive in respect of
the three fiscal years immediately preceding the
fiscal year in which the Effective Date occurs;
<PAGE> 9 (10k page 125)
(iv) Any failure by the Company and its affiliated
companies to comply with any of the provisions of
Section 4 of this Agreement;
(v) The insolvency or the filing (by any party,
including the Company) of a petition for
bankruptcy of the Company;
(vi) Any material breach by the Company and its
affiliated companies of any provision of this
Agreement;
(vii) Any purported termination of the Executive's
employment for Cause by the Company and its
affiliated companies which does not comply with
the terms of Section 5(b) of this Agreement; and
(viii) The failure of the Company and its affiliated
companies to obtain an agreement, satisfactory to
the Executive, from any successor or assign of the
Company and its affiliated companies, to assume
and agree to perform this Agreement, as
contemplated in Section 9 hereof.
(2) Any event or condition described in Section 5(c)(1)
which occurs prior to the Effective Date but which the
Executive reasonably demonstrates (i) was at the request
of a third party who has indicated an intention or taken
steps reasonably calculated to effect a Change of Control,
or (ii) otherwise arose in connection with or in anticipation
of a Change of Control, shall constitute Good Reason for
purposes of this Agreement notwithstanding that it
occurred prior to the Effective Date.
(3) The Executive's right to terminate his employment
pursuant to this Section 5(c) shall not be affected by his
incapacity due to physical or mental illness. The
Executive's continued employment or failure to give
Notice of Termination shall not constitute consent to, or a
waiver of rights with respect to, any circumstances
constituting Good Reason hereunder.
(4) For purposes of this Section 5(c), any good faith
determination of Good Reason made by the Executive
shall be conclusive.
(d) Voluntary Termination. The Executive may
voluntarily terminate his employment hereunder at any time.
(e) Notice of Termination. Any purported termination by
the Company or by the Executive (other than by death of the
Executive) shall be communicated by Notice of Termination to the
other. For purposes of this Agreement, a "Notice of Termination"
shall mean a written notice which (i) indicates the specific
termination provision in this Agreement relied upon, (ii) to the
extent applicable, sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated, and (iii)
<PAGE> 10 (10k page 126)
the Termination Date. For purposes of this Agreement, no such
purported termination of employment shall be effective without
such Notice of Termination.
(f) Termination Date, Etc. "Termination Date" shall mean
in the case of the Executive's death, his date of death, or in the
case of the Executive's separation from the service of the
Company and its affiliated companies at the end of the
Employment Term, the date of such separation, or in all other
cases, the date specified in the Notice of Termination, subject to
the following:
(1) If the Executive's employment is terminated by the
Company, the date specified in the Notice of Termination
shall be at least 30 days after the date the Notice of
Termination is given to the Executive, provided, however,
that in the case of Disability, the Executive shall not have
returned to the full-time performance of his duties during
such period of at least 30 days;
(2) If the Executive's employment is terminated for Good
Reason, the date specified in the Notice of Termination
shall not be more than 60 days after the date the Notice of
Termination is given to the Company; and
(3) In the event that within 30 days following the date of
receipt of the Notice of Termination, one party notifies the
other that a dispute exists concerning the basis for
termination, the Executive's employment hereunder shall
not be terminated except after the dispute is finally
resolved and a Termination Date is determined either by a
mutual written agreement of the parties, or by a binding
and final judgment order or decree of a court of competent
jurisdiction (the time for appeal therefrom having expired
and no appeal having been perfected).
6. Obligations of the Company Upon Termination.
(a) Good Reason; Other Than for Cause, Death or
Disability. If, during the Employment Term, the Company shall
terminate the Executive's employment other than for Cause or
Disability or the Executive shall terminate employment for Good
Reason:
(i) The Company shall pay to the Executive in a lump
sum in cash within five days after the Termination
Date the sum of the amounts described in A, B, C,
D and E below:
A. The sum of:
(1) The Executive's Annual Base Salary
through the Termination Date to
the extent not theretofore paid; and
<PAGE> 11 (10k page 127)
(2) Any compensation previously
deferred by the Executive (together
with any accrued interest or
earnings thereon) and any accrued
vacation pay, in each case to the
extent not theretofore paid.
The sum of the amounts described in
Clauses (1) and (2) shall be hereinafter
referred to as the "Accrued Obligations."
B. The amount equal to "x" times "y",
where
"x"= the number of days remaining in the
Employment Term (determined
under Section 1 as though such
termination had not occurred and, if
neither the Company nor the
Executive gave the other a notice of
non-extension prior to the
Termination Date, as though the
Company had given the Executive a
notice of non-extension on the
Termination Date) divided by 365;
and
"y"= the Executive's Annual Base Salary
(increased for this purpose by any
Section 401(k) deferrals, cafeteria
plan elections, or other deferrals
that would have increased the
Executive's Annual Base Salary if
paid in cash to the Executive when
earned).
C. With respect to each savings or
retirement plan, practice, policy or
program described in Section 4(c),
a separate lump-sum supplemental
retirement benefit equal to the
excess of "x" over "y", where
"x"= the actuarial equivalent of the
benefit that would be payable to the
Executive under such plan, practice,
policy or program if the Executive's
employment continued for the
remainder of the Employment Term
(determined under Section 1 as
though such termination had not
occurred and, if neither the
Company nor the Executive gave
the other a notice of non-extension
prior to the Termination Date, as
though the Company had given the
Executive a notice of non-extension
on the Termination Date) with
annual compensation equal to the
Annual Base Salary, assuming for
this purpose that all accrued
benefits and contributions are fully
vested; and
"y"= the actuarial equivalent of the
Executive's actual benefit (paid or
payable), if any, under such plan,
practice, policy or program.
There shall be used, in determining the "x"
actuarial equivalent, the most favorable to
the Executive actuarial assumptions and
employer contribution
<PAGE> 12 (10k page 128)
history with respect to the applicable plan, practice,
policy or program during the 12 month period
immediately preceding the Effective Date.
There shall be used, in determining the "y"
actuarial equivalent, the actuarial
assumptions utilized with respect to the
applicable plan, practice, policy or program
during the 12 month period immediately
preceding the Effective Date).
D. With respect to each medical or
dental employee welfare benefit
plan in which the Executive
participates immediately before the
Termination Date, the amount equal
to the product of the excess of "x"
over "y" times "z" divided by 365
[(x-y)z/365], where
"x"= the number of days after the
Termination Date the Executive and
his spouse and eligible dependents
would have been entitled to
participate in said plan if his
employment had continued and said
plan had remained in effect in the
same form for the remainder of the
Employment Term (determined
under Section 1 as though such
termination had not occurred and, if
neither the Company nor the
Executive gave the other a notice of
non-extension prior to the
Termination Date, as though the
<PAGE> 13 (10k page 129)
Company had given the Executive a
notice of non-extension on the
Termination Date) and he had
continued to pay the same portion
of the cost of such participation as
he paid before; and
"y"= the number of days after the
Termination Date the Executive and
his spouse and eligible dependents
will be entitled to participate in said
plan (assuming said plan remains in
effect in the same form and he
continues to pay the same portion
of the cost of such participation as
he paid before); and
"z"= the premium paid or payable by the
Company (net of any portion
thereof paid or payable by the
Executive) attributable to the
participation of the Executive (and
his spouse and eligible dependents,
if applicable) in said plan for the last
calendar year ending before the
Termination Date.
E. The amount equal to "x" times "y",
where
"x"= the number of days remaining in the
Employment Term (determined
under Section 1 as though such
termination had not occurred and, if
neither the Company nor the
Executive gave the other a notice of
non-extension prior to the
Termination Date, as though the
Company had given the Executive a
notice of non-extension on the
Termination Date) divided by 365;
and
"y"= the club dues for the Executive paid
by the Company or its affiliated
companies attributable to the last
calendar year ending before the
Effective Date.
(ii) To the extent not theretofore paid or
provided, the Company shall timely pay or
provide to the Executive any other amounts
or benefits required to be paid or provided
or which the Executive is eligible to receive
pursuant to this Agreement or under any
plan, program, policy or practice or
contract or agreement of the Company or
any of its affiliated companies (such other
amounts and benefits shall be hereinafter
referred to as the "Other Benefits").
(b) Death. If the Executive's employment is terminated by
reason of the Executive's death during the Employment Term, this
Agreement shall terminate without further obligations to the
Executive's legal representatives under this Agreement, except
that after the Termination Date the Company and its affiliated
companies shall pay or provide the Accrued Obligations and the
Other Benefits.
(c) Disability. If the Executive's employment is
terminated by reason of the Executive's Disability during the
Employment Term, this Agreement shall terminate without further
obligations to the Executive, except that the Company and its
affiliated companies shall pay or provide the Accrued Obligations
and the Other Benefits.
(d) Cause; Other Than for Good Reason. If the
Executive's employment shall be terminated for Cause during the
Employment Term, or if the Executive voluntarily terminates
employment during the Employment Term for other than Good
Reason, this Agreement shall terminate without further obligations
to the Executive, except that the Company and its affiliated
companies shall pay or provide the Accrued Obligations and the
Other Benefits.
(e) Expiration of Employment Term. If the Executive's
employment terminates at the expiration of the original or any
extended Employment Term, the Executive (or his family with
respect to amounts or benefits payable or provided to the
Executive's family) shall be entitled to the Accrued Obligations
and the Other Benefits.
(f) Interest on Delinquent Payments. All amounts payable
under this Section 6 shall be paid to the Executive (or to the
Executive's estate or beneficiary, as applicable) in a lump sum, in
cash, within 30 days after the Date of Termination, or within such
lesser number of days after the Date of Termination as may be
provided elsewhere with respect to certain of such amounts, or, in
the case of amounts payable under an employee benefit plan or
arrangement or pursuant to the Executive's election, at the time
provided under such plan, arrangement or election. If any
<PAGE> 14 (10k page 130)
payment is not made on time (hereinafter a "Delinquent
Payment"), the Company and its affiliated companies shall pay to
the Executive, in addition to the principal sum, interest on such
Delinquent Payment computed at the prime rate as announced
from time to time by NBD Bank, N. A., of Indianapolis, Indiana,
or its successor, compounded monthly.
7. No Mitigation. In no event shall the Executive be
obligated to seek other employment to take any other action by
way of mitigation of the amounts payable to the Executive under
any of the provisions of this Agreement, and such amounts shall
not be reduced, whether or not the Executive obtains other
employment.
8. Unauthorized Disclosure. The Executive shall not
make any Unauthorized Disclosure. For purposes of this
Agreement, "Unauthorized Disclosure" shall mean disclosure by
the Executive without the consent of the Board to any person,
other than an employee of the Company or any of its affiliated
companies or a person to whom disclosure is reasonably necessary
or appropriate in connection with the performance by the
Executive of his duties as an executive of the Company or any of
its affiliated companies or as may be legally required, of any
confidential information obtained by the Executive while in the
employ of the Company and its affiliated companies (including,
but not limited to, any confidential information with respect to any
of the customers or methods of operation of the Company or any
of its affiliated companies) the disclosure of which he knows or
has reason to believe will be materially injurious to the Company
and its affiliated companies; provided, however, that such term
shall not include the use or disclosure by the Executive, without
consent, of any information known generally to the public (other
than as a result of disclosure by him in violation of this Section 8)
or any information not otherwise considered confidential by a
reasonable person engaged in the same business as that conducted
by the Company and its affiliated companies. In no event shall an
asserted violation of this Section 8 constitute a basis for deferring
or withholding any amounts otherwise payable to the Executive
under this Agreement.
9. Successors and Assigns.
(a) This Agreement shall be binding upon and shall inure
to the benefit of the Company and its successors and assigns. The
Company shall require any successor or assign (whether direct or
indirect, by purchase, merger, share exchange, consolidation or
otherwise), by agreement in form and substance satisfactory to the
Executive, to acknowledge expressly that this Agreement is
binding upon and enforceable against the Company in accordance
with the terms hereof, and to become jointly and severally
obligated with the Company to perform this Agreement in the
same manner and to the same extent that the Company would be
required to perform if no such succession or assignment had taken
place. Except for purposes of Sections 1(b), 1(c), 2, 11 and 15,
the term "Company" as used herein shall include such successors
and assigns. The term "successors and assigns" as used herein
shall mean a corporation or other entity acquiring all or
substantially all of the assets and business of the Company
(including this Agreement), whether by operation of law or
otherwise. In the event substantially all of the assets and business
of First Indiana Bank are acquired by another entity in a
transaction or series of
<PAGE> 15 (10k page 131)
transactions constituting a Change of Control, such term shall include the
entity acquiring such assets and thereafter operating such business (or the
ultimate corporate parent of such entity if such entity is a corporate
subsidiary).
(b) Neither this Agreement nor any right or interest
hereunder shall be assignable or transferable by the Executive, his
beneficiaries or legal representatives, except by will or by the laws
of descent and distribution. This Agreement shall inure to the
benefit of and be enforceable by the Executive's legal
representative.
10. Fees and Expenses. From and after the Effective
Date, the Company and its affiliated companies shall pay all legal
fees and related expenses (including the costs of experts, evidence
and counsel) reasonably incurred by the Executive as they become
due as a result of (i) the Executive's termination of employment
(including all such fees and expenses, if any, incurred in contesting
or disputing any such termination of employment), (ii) the
Executive's hearing before the Board as contemplated in Section
5(b) of this Agreement, (iii) the Executive's seeking to obtain or
enforce any right or benefit provided by this Agreement or by any
other plan or arrangement maintained by the Company or any of
its affiliated companies under which the Executive is or may be
entitled to receive benefits, or (iv) any contest by a taxing
authority of the Executive's tax treatment of any amounts
received under this Agreement or any other agreement with or
plan of the Company or any of its affiliated companies to the
extent such tax treatment is consistent with the determinations
made by the Accounting Firm under Section 23.
11. Notice. For the purposes of this Agreement, notices
and all other communications provided for in the Agreement
(including the Notice of Termination) shall be in writing and shall
be deemed to have been duly given when personally delivered or
sent by certified mail, return receipt requested, postage prepaid, if
to the Company, to First Indiana Corporation, 135 North
Pennsylvania Street, Indianapolis, Indiana 46204, or if to the
Executive, to the address set forth below the Executive's
signature, or to such other address as the party may be notified,
provided that all notices to the Company shall be directed to the
attention of the Board with a copy to the Secretary of the
Company. All notices and communications shall be deemed to
have been received on the date of delivery thereof or on the third
business day after the mailing thereof, except that notice of
change of address shall be effective only upon receipt.
12. Non-Exclusivity of Rights. Nothing in this
Agreement shall prevent or limit the Executive's continuing or
future participation in any benefit, bonus, incentive or other plan
or program provided by the Company or any of its affiliated
companies for which the Executive may qualify. Amounts which
are vested benefits or which the Executive is otherwise entitled to
receive under any plan or program of the Company or any of its
affiliated companies shall be payable in accordance with such plan
or program, except as explicitly modified by this Agreement.
13. Settlement of Claims. The Company's obligation to
make the payments provided for in this Agreement and otherwise
to perform its obligations hereunder shall not be affected by any
circumstances, including, without limitation, any set-off,
counterclaim, recoupment, defense or
<PAGE> 16 (10k page 132)
other right which the Company or any of its affiliated companies may have
against the Executive or others.
14. Miscellaneous. No provision of this Agreement may
be modified, waived or discharged unless such waiver,
modification or discharge is agreed to in writing and signed by the
Executive and the Company. No waiver by either party hereto at
any time of any breach by the other party hereto of, or compliance
with, any condition or provision of this Agreement to be
performed by such other party shall be deemed a waiver of similar
or dissimilar provisions or conditions at the same or at any prior
or subsequent time. No agreement or representations, oral or
otherwise, express or implied, with respect to the subject matter
hereof have been made by either party which are not expressly set
forth in this Agreement.
15. Employment. The Executive and the Company
acknowledge that, prior to the Effective Date, the employment of
the Executive by the Company and its affiliated companies is "at
will" and may be terminated by either the Executive or the
Company at any time. If the Executive's employment with the
Company and its affiliated companies terminates prior to the
Effective Date, then the Executive shall have no further rights
under this Agreement.
16. Governing Law. This Agreement shall be governed
by and construed and enforced in accordance with the laws of the
State of Indiana without giving effect to the conflict of law
principles thereof.
17. Severability. The provisions of this Agreement shall
be deemed severable and the invalidity or unenforceability of any
provision shall not affect the validity or enforceability of the other
provisions hereof.
18. Entire Agreement. This Agreement constitutes the
entire agreement between the parties hereto and supersedes all
prior agreements, if any, understandings and arrangements, oral or
written, between the parties hereto with respect to the subject
matter hereof.
19. Headings. The headings herein contained are for
reference only and shall not affect the meaning or interpretation of
any provision of this Agreement.
20. Modification. No provision of this Agreement may be
modified, waived or discharged unless such modification, waiver
or discharge is agreed to in writing signed by both the Executive
and the Company.
21. Arbitration. In the event of any disputes, differences,
controversies or claims arising out of, or in connection with, this
Agreement, other than a dispute in which the sole relief sought is
an equitable remedy, such as a temporary restraining order or a
permanent or temporary injunction, the parties shall be required to
have the dispute, controversy, difference or claim settled through
binding arbitration pursuant to the American Arbitration
Association's rules of commercial arbitration which are then in
effect. The location of all arbitration proceedings shall
<PAGE> 17 (10k page 133)
be Indianapolis, Indiana. One arbitrator shall be selected by the
parties and shall be a current or former executive officer (vice
president or higher) of a publicly-traded corporation. In the event
the parties are unable mutually to agree upon a person to act as
the arbitrator, or in the event a mutually-agreed upon arbitrator
shall fail to accept the appointment by the parties, the parties
jointly shall request from the American Arbitration Association a
list of the names of five persons who would be qualified to act as
an arbitrator under this section. The selection of the final
arbitrator then shall be achieved by each party alternately striking
a name, with the Company going first, until one name remains. In
the event the parties mutually agree that the five names submitted
by the American Arbitration Association are unsatisfactory, they
jointly may request a second list of five names from the American
Arbitration Association and final selection shall be achieved
through the procedure set out herein. The decision of the
arbitrator is final and binding upon both parties and any award
entered by the arbitrator shall be final, binding and non-appealable
and judgment may be entered thereon by either party in
accordance with the applicable law in any court of competent
jurisdiction. The arbitrator shall not have authority to modify any
provision of this Agreement nor to award a remedy for any
difference, dispute, controversy or claim arising under this
Agreement other than a benefit specifically provided under or by
virtue of this Agreement. The Company shall be responsible for
all of the reasonable expenses of the American Arbitration
Association, the arbitrator and the conduct of the selection and
the arbitration procedures set forth in this clause, including
reasonable attorneys' fees and expenses incurred by either party
which are associated with the arbitration procedure through the
time the final arbitration decision or award is rendered. This
arbitration provision shall be specifically enforceable.
22. Withholding. The Company and its affiliated
companies shall be entitled to withhold from amounts paid to the
Executive hereunder any federal, estate or local withholding or
other taxes or charges which it is, from time to time, required to
withhold. The Company and its affiliated companies shall be
entitled to rely on an opinion of counsel if any question as to the
amount or requirement of any such withholding shall arise.
23. Limitation on Payments.
(a) Notwithstanding anything contained herein to the
contrary, prior to the payment of any amounts pursuant to Section
6(a) hereof, an independent national accounting firm designated
by the Company (the "Accounting Firm") shall compute whether
there would be payable to the Executive any "excess parachute
payments," within the meaning of Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"), taking into
account the total "parachute payments," within the meaning of
Section 280G of the Code, payable or to be provided to the
Executive, whether by the Company or any of its affiliates or by
any successor to the Company or any such affiliate, and whether
under this Agreement or outside of this Agreement. If there
would be any excess parachute payments, the Accounting Firm
will compute the net after-tax proceeds to the Executive, taking
into account the excise tax imposed by Section 4999 of the Code,
if (i) such parachute payments were reduced to the point that the
total thereof would not exceed three times the "base amount" as
defined in Section 280G of the Code, less One Dollar ($1.00), or (ii)
<PAGE> 18 (10k page 134)
such parachute payments were not reduced. If not reducing
such parachute payments would result in a greater after-tax
amount to the Executive, such parachute payments shall not be
reduced. If reducing such parachute payments would result in a
greater after-tax amount to the Executive, they shall be reduced to
such lesser amount. If such parachute payments must be reduced,
the Executive shall direct which of the payments are to be reduced
and the manner in which each is to be limited or modified. The
determination by the Accounting Firm shall be binding upon the
Company and its affiliated companies and the Executive subject to
the application of Section 23(c) hereof.
(b) As a result of various incentive or other plans, the
Executive may be entitled to receive various parachute payments
over a period of several years. In such event, the Accounting
Firm may need to update its Section 23(a) calculations one or
more times. In the event that all or a portion of a parachute
payment is not made due to the limitations of this Section 23, the
Company and its affiliated companies shall not be relieved of
liability for such amount but such parachute payment shall be
deferred and included in calculations with respect to subsequent
parachute payments.
(c) As a result of uncertainty in the application of section
280G of the Code at the time of determinations by the Accounting
Firm hereunder, uncertainties in the valuation of future payments,
and deferrals pursuant to Section 6(a), it is possible that parachute
payments will have been made by the Company and its affiliated
companies which should not have been made (an "Overpayment")
or that additional parachute payments which will not have been
made by the Company and its affiliated companies could have
been made (an "Underpayment"), consistent in each case with the
other provisions of this Section 23. In the event that the
Accounting Firm, based upon the assertion of a deficiency by the
Internal Revenue Service against the Company or any of its
affiliated companies or the Executive which the Accounting Firm
believes has a high probability of success, determines that an
Overpayment has been made, such Overpayment shall be treated
for all purposes as a loan to the Executive which the Executive
shall repay to the Company or such affiliated company, together
with interest at the applicable federal rate provided for in section
7872(f)(2)(A) of the Code; provided, however, that no amount
shall be payable by the Executive to the Company or such
affiliated company if and to the extent that such payment would
not reduce the amount which is subject to taxation under section
4999 of the Code. In the event that the Accounting Firm
determines that an Underpayment has occurred, such
Underpayment shall promptly be paid or transferred by the
Company or such affiliated company to or for the benefit of the
Executive, together with interest at the applicable federal rate
provided for in section 7872(f)(2)(A) of the Code.
(d) All fees, costs and expenses (including, but not limited
to, the cost of retaining experts) of the Accounting Firm shall be
borne by the Company and the Company shall pay such fees, costs
and expenses as they become due. In performing the
computations required hereunder, the Accounting Firm shall
assume that all parachute payments to be made to the Executive
will be subject to federal and state income tax at the maximum
rate in effect at the time the determination is made unless the
Executive provides the Accounting Firm with evidence that it
<PAGE> 19 (10k page 135)
is more probable than not that one or more parachute payments will
be taxable at a lower rate, or lower rates, in which case the
Accounting Firm shall assume that such parachute payments will
be taxed at the lower rate or rates. Taxes will be paid for state and
federal purposes at the highest possible marginal tax rates which
could be applicable to the Executive in the year of receipt of the
payments, unless the Executive agrees otherwise.
(e) In the event this Agreement is subject to Section 18(k)
of the Federal Deposit Insurance Act (the "FDIA") at the time any
payment is to be made by the Company to the Executive pursuant
to this Agreement or otherwise, such payment will be subject to,
and conditioned upon, its compliance with Section 18(k) of the
FDIA and any regulations promulgated thereunder.
IN WITNESS WHEREOF, the Company has caused this
Agreement to be executed by its duly authorized officer and the
Executive has executed this Agreement as of the day and year first
above written.
FIRST INDIANA CORPORATION
By: ___________________________________
Owen B. Melton, Jr., President
"Company"
[Robert H. McKinney signed on behalf
of the Company in Owen B. Melton, Jr.'s
agreement]
ATTEST:
_______________________________
Secretary
______________________________________
Named Executive
"Executive"
Address: ______________________________
______________________________
<PAGE> 20 (10k page 136)
EMPLOYMENT AGREEMENT
THIS AGREEMENT, entered into as of the 1st day
of May, 1997, by and between First Indiana Bank (the
"Bank"), and Named Executive (the "Executive") (hereinafter
collectively referred to as "the parties").
W I T N E S S E T H:
WHEREAS, the Board of Directors of the Bank
(the "Board") recognizes that there exists the possibility of a
Change of Control (as hereinafter defined in Section 2) of
the Bank or its holding company, First Indiana Corporation
(the "Company"), and that the threat of or the occurrence of
a Change of Control can result in significant distractions of
its key management personnel because of the uncertainties
inherent in such a situation; and
WHEREAS, the Board has determined that it is
essential and in the best interest of the Bank and its
shareholders to retain the services of the Executive in the
event of a threat or occurrence of a Change of Control and
to ensure his continued dedication and efforts in such event
without undue concern for his personal financial and
employment security; and
WHEREAS, in order to induce the Executive to
remain in the employ of the Bank, particularly in the event
of a threat of or the occurrence of a Change of Control, the
Bank desires to enter into this Agreement with the
Executive.
NOW, THEREFORE, in consideration of the
respective agreements of the parties contained herein, it is
agreed as follows:
1. Employment Term.
(a) The "Employment Term" shall commence on the
first date during the Protected Period (as defined in Section
1(c), below) on which a Change of Control (as defined in
Section 2, below) occurs (the "Effective Date") and shall
expire on the first anniversary of the Effective Date;
provided, however, that at the end of each day of the
Employment Term the Employment Term shall
automatically be extended for one (1) day unless either the
Bank or the Executive shall have given written notice to the
other at least thirty (30) days prior thereto that the
Employment Term shall not be so extended; and provided
further, that the Employment Term shall not be
automatically extended beyond the first day of the month
following the month in which the Executive attains age
sixty-five (65).
(b) Notwithstanding anything contained in this
Agreement to the contrary, if the Executive's employment is
terminated prior to the Effective Date and the Executive
reasonably demonstrates that such termination (i) was at the
request of a third party who has indicated an intention or
taken steps reasonably calculated to effect a Change of
Control, or (ii) otherwise occurred in connection with or in
anticipation of a Change of Control, then for all purposes of this
<PAGE> 1 (10k page 137)
Agreement, the Effective Date shall mean the date
immediately prior to the date of such termination of the
Executive's employment.
(c) For purposes of this Agreement, the "Protected
Period" shall be the one year period commencing on the
date hereof, provided, however, that at the end of each day
the Protected Period shall be automatically extended for one
day unless at least 30 days prior thereto the Bank shall have
given written notice to the Executive that the Protected
Period shall not be so extended; and provided, further, that
notwithstanding any such notice by the Bank not to extend,
the Protected Period shall not end if prior to the expiration
thereof any third party has indicated an intention or taken
steps reasonably calculated to effect a Change of Control, in
which event the Protected Period shall end only after such
third party publicly announces that it has abandoned all
efforts to effect a Change of Control.
2. Change of Control. For purposes of this
Agreement, a "Change of Control" shall mean the first to
occur of the following:
(a) The acquisition by any individual, entity or
"group" within the meaning of Section 13(d)(3) or 14(d)(2)
of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")(a "Person") of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 25% or more of either (i) the then
outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the
combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the
election of directors (the "Outstanding Company Voting
Securities"); provided, however, that the following
acquisitions of common stock shall not constitute a Change
of Control: (i) any acquisition directly from the Company
(excluding an acquisition by virtue of the exercise of a
conversion privilege by one or more Persons acting in
concert, and excluding an acquisition that would be a
Change of Control under subsection (c) of this Section 2),
(ii) any acquisition by the Company, (iii) any acquisition by
any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation or other
entity controlled by the Company, (iv) any acquisition by
any corporation or other entity pursuant to a reorganization,
merger or consolidation which would not be a Change of
Control under subsection (c) of this Section 2; or (v) any
acquisition by an Exempt Person; provided further, that the
applicable percentage shall be reduced from 25% to 20% in
the event of the occurrence of one transaction or a series of
transactions which results in the beneficial ownership by
Exempt Persons of less than 15% of the Outstanding
Company Common Stock or the Outstanding Company
Voting Securities; or
(b) Individuals who, as of the date hereof,
constitute the Company's Board of Directors (the
"Incumbent Board") cease for any reason to constitute at
least a majority of the Company's Board of Directors;
provided, however, that any individual becoming a director
subsequent to the date hereof whose election, or nomination
for election by the Company's shareholders, was approved
by a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as
though such individual were a member of the Incumbent
Board, but excluding, for this purpose, any such individual
whose initial assumption of office occurs as a
<PAGE> 2 (10k page 138)
result of either an actual or threatened "election contest" or other
actual or threatened "solicitation" (as such terms are used in Rule
14a-11 of Regulation 14A promulgated under the Exchange
Act) of proxies or consents by or on behalf of a person
other than the Incumbent Board; or
(c) Approval by the shareholders of the Company of
a reorganization, merger or consolidation, unless, following
such reorganization, merger, share exchange or
consolidation, (i) 75% or more of, respectively, the then
outstanding shares of common stock of the corporation or
other entity resulting from such reorganization, merger,
share exchange or consolidation and the combined voting
power of the then outstanding voting securities of such
corporation or other entity entitled to vote generally in the
election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the
Outstanding Company Common Stock and Outstanding
Company Voting Securities immediately prior to such
reorganization, merger, share exchange or consolidation in
substantially the same proportions as their ownership,
immediately prior to such reorganization, merger, share
exchange or consolidation, (ii) no Person (excluding the
Company, any Exempt Person, any employee benefit plan
(or related trust) of the Company or such corporation or
other entity resulting from such reorganization, merger,
share exchange or consolidation and any person beneficially
owning, immediately prior to such reorganization, merger,
share exchange or consolidation, directly or indirectly, 25%
or more of the Outstanding Company Common Stock or
Outstanding Voting Securities, as the case may be)
beneficially owns, directly or indirectly, 25% or more of,
respectively, the then outstanding shares of common stock
of the corporation or other entity resulting from such
reorganization, merger, share exchange or consolidation or
the combined voting power of the then outstanding voting
securities of such corporation or other entity, entitled to
vote generally in the election of directors and (iii) at least a
majority of the members of the board of directors of the
corporation or other entity resulting from such
reorganization, merger, share exchange or consolidation
were members of the Incumbent Board at the time of the
execution of the initial agreement providing for such
reorganization, merger, share exchange or consolidation;
provided however, that the applicable percentage for
purposes of clause (ii) of this subsection (c) shall be reduced
from 25% to 20% in the event of the occurrence of one
transaction or a series of transactions which results in the
beneficial ownership by Exempt Persons of less than 15% of
the Outstanding Company Common Stock or the
Outstanding Company Voting Securities; or
(d) Approval by the shareholders of the Company
of (i) a complete liquidation or dissolution of the Company
or (ii) the sale or other disposition of all or substantially all
of the assets of the Company, other than to a corporation or
other entity, with respect to which following such sale or
other disposition, (A) 75% or more of, respectively, the
then outstanding shares of common stock of such
corporation or other entity and the combined voting power
of the then outstanding voting securities of such corporation
or other entity entitled to vote generally in the election of
directors is then beneficially owned, directly or indirectly, by
all or substantially all of the Persons who were the beneficial
owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities
immediately prior to such sale or
<PAGE> 3 (10k page 139)
other disposition in substantially the same proportion as their
ownership, immediately prior to such sale or other disposition,
of the Outstanding Company Common Stock and Outstanding
Company Voting Securities, as the case may be, (B) no
Person (excluding the Company, any Exempt Person, any
employee benefit plan (or related trust) of the Company or
such corporation or other entity and any person beneficially
owning, immediately prior to such sale or other disposition,
directly or indirectly, 25% or more of the Outstanding
Company Common Stock or Outstanding Company Voting
Securities, as the case may be) beneficially owns, directly or
indirectly, 25% or more of, respectively, the then
outstanding shares of common stock of such corporation or
other entity or the combined voting power of the then
outstanding voting securities of such corporation or other
entity entitled to vote generally in the election of directors
and (C) at least a majority of the members of the board of
directors of such corporation or other entity were members
of the Incumbent Board at the time of the execution of the
initial agreement or action of the Board providing for such
sale or other disposition of assets of the Company; provided
however, that the applicable percentage for purposes of
subclause (ii)(B) of this subsection (d) shall be reduced from
25% to 20% in the event of the occurrence of one
transaction or a series of transactions which results in the
beneficial ownership by Exempt Persons of less than 15% of
the Outstanding Company Common Stock or the
Outstanding Company Voting Securities; or
(e) The occurrence of one transaction or a series of
transactions, which has the effect of a divestiture by the
Company of 25% or more of the combined voting power of
the outstanding voting securities of the Bank; or
(f) The occurrence of any sale, lease or other
transfer, in one transaction or a series of transactions, of all
or substantially all of the assets of the Bank (other than to
the Company or one or more Exempt Persons); or
(g) The occurrence of one transaction or a series of
transactions which results in the beneficial ownership by
Exempt Persons (determined without regard to clause (vi)
of Section 2A) of less than 20% of the outstanding voting
securities of The Somerset Group, Inc. ("Somerset"), at any
time when Somerset beneficially owns 10% or more of the
combined voting power of the outstanding voting securities
of the Company.
2A. Exempt Person. For purposes of this
Agreement, "Exempt Person" shall mean (i) Robert H.
McKinney; (ii) Arlene A. McKinney; (iii) any Exempt
Descendant (as defined below); (iv) any corporation,
partnership, trust or other organization a majority of the
beneficial ownership interest of which is owned directly or
indirectly by one or more of Robert H. McKinney, Arlene
A. McKinney or any Exempt Descendant; (v) any estate or
other successor-in-interest by operation of law of Robert H.
McKinney, Arlene A. McKinney or any Exempt
Descendant; (vi) The Somerset Group, Inc., so long as it is
controlled by one or more individuals and entities described
in (i) through (v) inclusive; and (vii) with reference to an
issuer, any group within the meaning of Rule 13d-5(b)
under the Exchange Act, if the majority of the shares of
such issuer beneficially owned by such group is attributable
to shares of such issuer which would be
<PAGE> 4 (10k page 140)
considered beneficially owned by individuals and entities described
in (i) through (vi) inclusive absent the existence of the group. For
purposes of this definition, "Exempt Descendant" shall mean
any child, grandchild or other descendant of Robert H.
McKinney, or any spouse of any such child, grandchild or
other descendant, including in all cases adoptive
relationships.
3. Employment.
(a) During the Employment Term, the Bank agrees
to continue to employ the Executive, and the Executive
agrees to remain in the employ of the Bank, subject to the
terms and conditions of this Agreement. During the
Employment Term, the Executive shall be employed as
(list current position of Named Executive) or in such other
executive capacity as may be mutually agreed to in writing
by the parties. During the Employment Term, the
Executive's position (including status, offices, titles and
reporting requirements), authority, duties and
responsibilities shall be at least commensurate in all material
respects with the most significant of those held or assigned
at any time during the 12 month period immediately
preceding the Effective Date, and the Executive's services
shall be performed at the location where the Executive was
employed immediately preceding the Effective Date or at
any office or location less than 35 miles from such location,
unless mutually agreed to in writing by the parties.
(b) Excluding periods of vacation and sick leave to
which the Executive is entitled, during the Employment
Term the Executive agrees to devote full time attention to
the business and affairs of the Bank to the extent necessary
to discharge the responsibilities assigned to the Executive
hereunder, provided that the Executive may take reasonable
amounts of time to (i) serve on corporate, civil or charitable
boards or committees, and (ii) deliver lectures, fulfill
speaking engagements or teach at educational institutions, if
such activities do not significantly interfere with the
performance of the Executive's responsibilities hereunder.
It is expressly understood and agreed that to the extent any
such activities have been conducted by the Executive prior
to the Effective Date, the continued conduct of such
activities (or the conduct of activities similar in nature and
scope) subsequent to the Effective Date shall not thereafter
be deemed to interfere with the performance of the
Executive's responsibilities hereunder.
4. Compensation.
(a) Base Salary. During the Employment Term, the
Executive shall receive an annual base salary ("Annual Base
Salary"), which shall be paid at a monthly rate, at
least equal to 12 times the highest monthly base salary paid
or payable to the Executive by the Bank and its affiliated
companies in respect of the 12 month period immediately
preceding the month in which the Effective Date occurs.
During the Employment Term, the Annual Base Salary shall
be reviewed at least annually and shall be increased at any
time and from time to time as shall be substantially
consistent with increases in base salary generally awarded in
the ordinary course of business to other peer executives of
the Bank and its affiliated companies. Any increase in
Annual Base Salary shall not serve to limit or reduce any
other obligation to the Executive under
<PAGE> 5 (10k page 141)
this Agreement. Annual Base Salary shall not be reduced after any
such increase and the term Annual Base Salary as utilized in this
Agreement shall refer to Annual Base Salary as so
increased. As used in this Agreement, the term "affiliated
companies" shall include any company controlled by,
controlling or under common control with the Bank
(including any successor or assign treated as the Bank
pursuant to Section 9(a)).
(b) Discretionary Bonuses. During the Employment
Term, the Executive shall be entitled to participate,
equitably in relation to other peer executives of the Bank
and its affiliated companies, in any incentive compensation
plans or awards adopted or made, and in any discretionary
bonuses authorized or paid, by the Bank or its affiliated
companies. No other compensation provided for in this
Agreement shall be deemed a substitute for the Executive's
right to participate in any such incentive compensation plans
and to receive any such awards and bonuses.
(c) Savings and Retirement Plans. During the
Employment Term, the Executive shall be entitled to
participate in all savings and retirement plans, practices,
policies and programs applicable generally to other peer
executives of the Bank and its affiliated companies, but in
no event shall such plans, practices, policies and programs
provide the Executive with savings opportunities and
retirement benefit opportunities, in each case, less favorable,
in the aggregate, than the most favorable of those provided
by the Bank and its affiliated companies for the Executive
under such plans, practices, policies and programs as in
effect at any time during the 12 month period immediately
preceding the Effective Date, or, if more favorable to the
Executive, those provided generally at any time after the
Effective Date to other peer executives of the Bank and its
affiliated companies.
(d) Benefit Plans. During the Employment Term
(and thereafter to the extent provided in the applicable plan,
practice, policy or arrangement), the Executive and his
family shall be eligible for participation in, and shall receive
benefits pursuant to, all benefit plans, practices, policies and
arrangements that are maintained or provided by the Bank
or any of its affiliated companies (including, without
limitation, medical, prescription drug, dental, disability,
salary continuance, employee life, group life, accidental
death and travel accident insurance plans and programs) and
that are applicable generally to other peer executives of the
Bank or any of its affiliated companies and their families;
provided, however, that in no event shall such plans,
practices, policies and arrangements provide the Executive
and his family with benefits that are less favorable, in the
aggregate, than those provided under the most favorable of
such plans, practices, policies and arrangements in effect for
the Executive and his family at any time during the 12
month period immediately preceding the Effective Date or,
if more favorable to the Executive and his family, those
provided generally at any time after the Effective Date to
other peer executives of the Bank and its affiliated
companies and their families. The Executive and his family
shall be entitled to the following specific benefits, to the
extent, as to each, the benefit would not be provided under
the preceding sentence or would exceed the benefit
provided under the preceding sentence:
<PAGE> 6 (10k page 142)
(1) Defined Benefit Pension Benefits. The
Executive and his spouse or beneficiaries shall be
entitled to defined benefit pension benefits not less
favorable, in the aggregate, than the basic pension
benefits provided for in the Bank's qualified defined
benefit pension plan and the supplemental pension
benefits provided for in the Executive's agreement
under the Bank's nonqualified supplemental
executive benefit plan, both as in effect on the date
hereof, subject to the terms of such plans and such
agreement.
(e) Expenses. During the Employment Term, the
Executive shall be entitled to receive prompt reimbursement
for all reasonable expenses incurred by the Executive in
accordance with the most favorable policies, practices and
procedures of the Bank and its affiliated companies in effect
for the Executive at any time during the 12 month period
immediately preceding the Effective Date or, if more
favorable to the Executive, as in effect generally at any time
thereafter with respect to other peer executives of the Bank
and its affiliated companies.
(f) Fringe Benefits. During the Employment Term,
the Executive shall be entitled to fringe benefits (including
but not limited to club dues) in accordance with the most
favorable plans, practices, programs and policies of the
Bank and its affiliated companies in effect for the Executive
at any time during the 12 month period immediately
preceding the Effective Date or, if more favorable to the
Executive, as in effect generally at any time thereafter with
respect to other peer executives of the Bank and its
affiliated companies.
(g) Office and Support Staff. During the
Employment Term, the Executive shall be entitled to an
office or offices of a size and with furnishings and other
appointments, and to exclusive personal secretarial and
other assistance, at least equal to the most favorable of the
foregoing provided to the Executive by the Bank and its
affiliated companies at any time during the 12 month period
immediately preceding the Effective Date or, if more
favorable to the Executive, as provided generally at any
time thereafter with respect to other peer executives of the
Bank and its affiliated companies.
(h) Vacation and Sick Leave. During the
Employment Term, the Executive shall be entitled to paid
vacation and sick leave (without loss of pay) in accordance
with the most favorable plans, policies, programs and
practices of the Bank and its affiliated companies as in effect
for the Executive at any time during the 12 month period
immediately preceding the Effective Date or, if more
favorable to the Executive, as in effect generally at any time
thereafter with respect to other peer executives of the Bank
and its affiliated companies.
(i) Restrictions. As of the Effective Date, all
restrictions limiting the exercise, transferability or other
incidents of ownership of any outstanding award, including
but not limited to restricted stock, options, stock
appreciation rights, or other property or rights of the
Company or the Bank granted to the Executive shall lapse,
and such awards shall become fully vested and be held by
the Executive free and clear of all such restrictions. This
provision shall apply to all such property or rights
notwithstanding the provisions of any other plan or
agreement, unless the effect of the application of this
provision to a particular right or property would result in such
<PAGE> 7 (10k page 143)
right or property failing to qualify for favorable tax
treatment under the particular section of the Internal
Revenue Code for which it was designed to qualify, or
would result in the loss of favorable securities law treatment
for participants under the plan pursuant to which the award
was granted.
5. Termination of Employment. During the
Employment Term, the Executive's employment hereunder
may be terminated under the following circumstances:
(a) Death or Disability. The Executive's
employment shall terminate automatically upon the
Executive's death during the Employment Term. If the
Bank determines in good faith that the Disability of the
Executive has occurred during the Employment Term
(pursuant to the definition of Disability set forth below), it
may give to the Executive written notice in accordance with
Section 10 of this Agreement of its intention to terminate
the Executive's employment. In such event, the Executive's
employment with the Bank shall terminate effective on the
30th day after receipt of such notice by the Executive (the
"Disability Effective Date"), provided that, within 30 days
after such receipt, the Executive shall not have returned to
full-time performance of the Executive's duties. For
purposes of this Agreement, "Disability" shall mean the
absence of the Executive from the Executive's duties with
the Bank and its affiliated companies on a full-time basis for
180 consecutive business days as a result of incapacity due
to mental or physical illness which is determined to be total
and permanent by a physician selected by the Bank or its
insurers and acceptable to the Executive or the Executive's
legal representative, provided if the parties are unable to
agree, the parties shall request the Dean of the Indiana
University School of Medicine to choose such physician.
(b) Cause. The Board at any time may terminate
the Executive's employment for Cause [as defined in 12
C.F.R. 563.39(b)(1) of the regulations of the Office of
Thrift Supervision]. Any such termination shall be
evidenced by written notice thereof to the Executive, which
shall set forth all facts relied upon as constituting Cause.
No failure to perform by the Executive after Notice of
Termination is given by the Executive shall constitute Cause
for purposes of this Agreement.
(c) Good Reason.
(1) The Executive may terminate his employment for
Good Reason. For purposes of this Agreement,
"Good Reason" shall mean the occurrence after a
Change of Control of any of the events or conditions
described in Subsections (i) through (vi) hereof:
(i) A change in the Executive's status, title,
position or responsibilities (including
reporting responsibilities) which, in the
Executive's reasonable judgment, does not
represent a promotion from his status, title,
position or responsibilities as in effect
immediately prior thereto; the assignment to
the Executive of any duties or
<PAGE> 8 (10k page 144)
responsibilities which, in the Executive's reasonable
judgment, are inconsistent with his status,
title, position or responsibilities in effect
immediately prior to such assignment; or any
removal of the Executive from or failure to
reappoint or reelect him to any position,
except in connection with the termination of
his employment for Disability, Cause, as a
result of his death or by the Executive other
than for Good Reason;
(ii) Any involuntary reduction in the Executive's
target level of annual and long-term total
compensation as in effect immediately prior
to the Effective Date;
(iii) A failure by the Bank and its affiliated
companies, through incentive or bonus
arrangements, to provide the Executive with
incentive compensation opportunities
comparable to those it provided to the
Executive in respect of the three fiscal years
immediately preceding the fiscal year in
which the Effective Date occurs;
(iv) Any failure by the Bank and its affiliated
companies to comply with any of the
provisions of Section 4 of this Agreement;
(v) The insolvency or the filing (by any party,
including the Bank) of a petition for
bankruptcy of the Bank;
(vi) Any material breach by the Bank and its
affiliated companies of any provision of this
Agreement;
(vii) Any purported termination of the Executive's
employment for Cause by the Bank and its
affiliated companies which does not comply
with the terms of Section 5(b) of this
Agreement; and
(viii) The failure of the Bank and its affiliated
companies to obtain an agreement,
satisfactory to the Executive, from any
successor or assign of the Bank and its
affiliated companies, to assume and agree to
perform this Agreement, as contemplated in
Section 9 hereof.
(2) Any event or condition described in Section
5(c)(1) which occurs prior to the Effective Date but
which the Executive reasonably demonstrates (i)
was at the request of a third party who has indicated
an intention or taken steps reasonably calculated to
effect a Change of Control, or (ii) otherwise arose in
connection with or in anticipation of a Change of
Control, shall constitute Good Reason for purposes
of this Agreement notwithstanding that it occurred
prior to the Effective Date.
(3) The Executive's right to terminate his
employment pursuant to this Section 5(c) shall not
be affected by his incapacity due to physical or
mental illness. The Executive's continued
employment or failure to give Notice of Termination
shall not constitute
<PAGE> 9 (10k page 145)
consent to, or a waiver of rights
with respect to, any circumstances constituting
Good Reason hereunder.
(4) For purposes of this Section 5(c), any good faith
determination of Good Reason made by the
Executive shall be conclusive.
(d) Voluntary Termination. The Executive may
voluntarily terminate his employment hereunder at any time.
(e) Notice of Termination. Any purported
termination by the Bank or by the Executive (other than by
death of the Executive) shall be communicated by Notice of
Termination to the other. For purposes of this Agreement,
a "Notice of Termination" shall mean a written notice which
(i) indicates the specific termination provision in this
Agreement relied upon, (ii) to the extent applicable, sets
forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's
employment under the provision so indicated, and (iii) the
Termination Date. For purposes of this Agreement, no such
purported termination of employment shall be effective
without such Notice of Termination.
(f) Termination Date, Etc. "Termination Date" shall
mean in the case of the Executive's death, his date of death,
or in the case of the Executive's separation from the service
of the Bank and its affiliated companies at the end of the
Employment Term, the date of such separation, or in all
other cases, the date specified in the Notice of Termination,
subject to the following:
(1) If the Executive's employment is terminated by
the Bank, the date specified in the Notice of
Termination shall be at least 30 days after the date
the Notice of Termination is given to the Executive,
provided, however, that in the case of Disability, the
Executive shall not have returned to the full-time
performance of his duties during such period of at
least 30 days;
(2) If the Executive's employment is terminated for
Good Reason, the date specified in the Notice of
Termination shall not be more than 60 days after the
date the Notice of Termination is given to the Bank;
and
(3) In the event that within 30 days following the
date of receipt of the Notice of Termination, one
party notifies the other that a dispute exists
concerning the basis for termination, the Executive's
employment hereunder shall not be terminated
except after the dispute is finally resolved and a
Termination Date is determined either by a mutual
written agreement of the parties, or by a binding and
final judgment order or decree of a court of
competent jurisdiction (the time for appeal
therefrom having expired and no appeal having been
perfected).
6. Obligations of the Bank Upon Termination.
<PAGE> 10 (10k page 146)
(a) Good Reason; Other Than for Cause, Death or
Disability. If, during the Employment Term, the Bank shall
terminate the Executive's employment other than for Cause
or Disability or the Executive shall terminate employment
for Good Reason:
(i) The Bank shall pay to the Executive in a
lump sum in cash within five days after the
Termination Date the sum of the amounts
described in A, B, C, D and E below:
A. The sum of:
(1) The Executive's Annual Base
Salary through the
Termination Date to the
extent not theretofore paid;
and
(2) Any compensation previously
deferred by the Executive
(together with any accrued
interest or earnings thereon)
and any accrued vacation pay,
in each case to the extent not
theretofore paid.
The sum of the amounts described in
Clauses (1) and (2) shall be
hereinafter referred to as the
"Accrued Obligations."
B. The amount equal to "x"
times "y", where
"x"= the number of days remaining
in the Employment Term
(determined under Section 1
as though such termination
had not occurred and, if
neither the Bank nor the
Executive gave the other a
notice of non-extension prior
to the Termination Date, as
though the Bank had given
the Executive a notice of non-
extension on the Termination
Date) divided by 365; and
"y"= the Executive's Annual Base
Salary (increased for this
purpose by any Section
401(k) deferrals, cafeteria
plan elections, or other
deferrals that would have
increased the Executive's
Annual Base Salary if paid in
cash to the Executive when
earned).
C. With respect to each savings
or retirement plan, practice,
policy or program described
in Section 4(c), a separate
lump-sum supplemental
retirement benefit equal to the
excess of "x" over "y", where
"x"= the actuarial equivalent of the
benefit that would be payable
to the Executive under such
plan, practice, policy or
program if the Executive's
employment continued for the
remainder of the Employment
Term (determined under
Section 1 as though such
<PAGE> 11 (10k page 147)
termination had not occurred
and, if neither the Bank nor
the Executive gave the other
a notice of non-extension
prior to the Termination
Date, as though the Bank had
given the Executive a notice
of non-extension on the
Termination Date) with
annual compensation equal to
the Annual Base Salary,
assuming for this purpose that
all accrued benefits and
contributions are fully vested;
and
"y"= the actuarial equivalent of the
Executive's actual benefit
(paid or payable), if any,
under such plan, practice,
policy or program.
There shall be used, in determining
the "x" actuarial equivalent, the most
favorable to the Executive actuarial
assumptions and employer
contribution history with respect to
the applicable plan, practice, policy
or program during the 12 month
period immediately preceding the
Effective Date. There shall be used,
in determining the "y" actuarial
equivalent, the actuarial assumptions
utilized with respect to the applicable
plan, practice, policy or program
during the 12 month period
immediately preceding the Effective
Date).
D. With respect to each medical
or dental employee welfare
benefit plan in which the
Executive participates
immediately before the
Termination Date, the amount
equal to the product of the
excess of "x" over "y" times
"z" divided by 365 [(x-y)z/365], where
"x"= the number of days after the
Termination Date the
Executive and his spouse and
eligible dependents would
have been entitled to
participate in said plan if his
employment had continued
and said plan had remained in
effect in the same form for the
remainder of the Employment
Term (determined under
Section 1 as though such
termination had not occurred
and, if neither the Company
nor the Executive gave the
other a notice of non-extension prior to the
Termination Date, as though
the Company had given the
Executive a notice of non-extension on the
Termination Date) and he had continued
to pay the same portion of the
cost of such participation as
he paid before; and
"y"= the number of days after the
Termination Date the
Executive and his spouse and
eligible dependents will be
entitled to participate in said
plan (assuming said plan
remains in effect in the same
form and he continues to pay
the same portion of the cost
of such participation as he
paid before); and
<PAGE> 12 (10k page 148)
"z"= the premium paid or payable
by the Company (net of any
portion thereof paid or
payable by the Executive)
attributable to the
participation of the Executive
(and his spouse and eligible
dependents, if applicable) in
said plan for the last calendar
year ending before the
Termination Date.
E. The amount equal to "x" times "y", where
"x"= the number of days remaining
in the Employment Term
(determined under Section 1
as though such termination
had not occurred and, if
neither the Bank nor the
Executive gave the other a
notice of non-extension prior
to the Termination Date, as
though the Bank had given
the Executive a notice of non-
extension on the Termination
Date) divided by 365; and
"y"= the club dues for the
Executive paid by the Bank
or its affiliated companies
attributable to the last
calendar year ending before
the Effective Date.
(ii) To the extent not theretofore paid or
provided, the Bank shall timely pay
or provide to the Executive any other
amounts or benefits required to be
paid or provided or which the
Executive is eligible to receive
pursuant to this Agreement or under
any plan, program, policy or practice
or contract or agreement of the Bank
or any of its affiliated companies
(such other amounts and benefits
shall be hereinafter referred to as the
"Other Benefits").
(b) Death. If the Executive's employment is
terminated by reason of the Executive's death during the
Employment Term, this Agreement shall terminate without
further obligations to the Executive's legal representatives
under this Agreement, except that after the Termination
Date the Bank and its affiliated companies shall pay or
provide the Accrued Obligations and the Other Benefits.
(c) Disability. If the Executive's employment is
terminated by reason of the Executive's Disability during the
Employment Term, this Agreement shall terminate without
further obligations to the Executive, except that the Bank
and its affiliated companies shall pay or provide the Accrued
Obligations and the Other Benefits.
(d) Cause; Other Than for Good Reason. If the
Executive's employment shall be terminated for Cause
during the Employment Term, or if the Executive
voluntarily terminates employment during the Employment
Term for other than Good Reason, this Agreement shall
terminate without further obligations to the Executive,
except that the Bank and its affiliated companies shall pay
or provide the Accrued Obligations and the Other Benefits.
<PAGE> 13 (10k page 149)
(e) Expiration of Employment Term. If the
Executive's employment terminates at the expiration of the
original or any extended Employment Term, the Executive
(or his family with respect to amounts or benefits payable or
provided to the Executive's family) shall be entitled to the
Accrued Obligations and the Other Benefits.
(f) Interest on Delinquent Payments. All amounts
payable under this Section 6 shall be paid to the Executive
(or to the Executive's estate or beneficiary, as applicable) in
a lump sum, in cash, within 30 days after the Date of
Termination, or within such lesser number of days after the
Date of Termination as may be provided elsewhere with
respect to certain of such amounts, or, in the case of
amounts payable under an employee benefit plan or
arrangement or pursuant to the Executive's election, at the
time provided under such plan, arrangement or election. If
any payment is not made on time (hereinafter a "Delinquent
Payment"), the Bank and its affiliated companies shall pay
to the Executive, in addition to the principal sum, interest
on such Delinquent Payment computed at the prime rate as
announced from time to time by NBD Bank, N. A., of
Indianapolis, Indiana, or its successor, compounded
monthly.
7. No Mitigation. In no event shall the Executive
be obligated to seek other employment to take any other
action by way of mitigation of the amounts payable to the
Executive under any of the provisions of this Agreement,
and such amounts shall not be reduced, whether or not the
Executive obtains other employment.
8. Unauthorized Disclosure. The Executive shall
not make any Unauthorized Disclosure. For purposes of this
Agreement, "Unauthorized Disclosure" shall mean
disclosure by the Executive without the consent of the
Board to any person, other than an employee of the Bank or
any of its affiliated companies or a person to whom
disclosure is reasonably necessary or appropriate in
connection with the performance by the Executive of his
duties as an executive of the Bank or any of its affiliated
companies or as may be legally required, of any confidential
information obtained by the Executive while in the employ
of the Bank and its affiliated companies (including, but not
limited to, any confidential information with respect to any
of the customers or methods of operation of the Bank or
any of its affiliated companies) the disclosure of which he
knows or has reason to believe will be materially injurious
to the Bank and its affiliated companies; provided, however,
that such term shall not include the use or disclosure by the
Executive, without consent, of any information known
generally to the public (other than as a result of disclosure
by him in violation of this Section 8) or any information not
otherwise considered confidential by a reasonable person
engaged in the same business as that conducted by the Bank
and its affiliated companies. In no event shall an asserted
violation of this Section 8 constitute a basis for deferring or
withholding any amounts otherwise payable to the
Executive under this Agreement.
9. Successors and Assigns.
(a) This Agreement shall be binding upon and shall
inure to the benefit of the Bank and its successors and assigns.
The Bank shall require any successor or assign (whether direct or
<PAGE> 14 (10k page 150)
indirect, by purchase, merger, share
exchange, consolidation or otherwise), by agreement in
form and substance satisfactory to the Executive, to
acknowledge expressly that this Agreement is binding upon
and enforceable against the Bank in accordance with the
terms hereof, and to become jointly and severally obligated
with the Bank to perform this Agreement in the same
manner and to the same extent that the Bank would be
required to perform if no such succession or assignment had
taken place. Except for purposes of Sections 1(b), 1(c), 2,
10 and 14, the term "Bank" as used herein shall include such
successors and assigns. The term "successors and assigns"
as used herein shall mean a corporation or other entity
acquiring all or substantially all of the assets and business of
the Bank (including this Agreement), whether by operation
of law or otherwise. In the event substantially all of the
assets and business of the Bank are acquired by another
entity in a transaction or series of transactions constituting a
Change of Control, such term shall include the entity
acquiring such assets and thereafter operating such business.
(b) Neither this Agreement nor any right or interest
hereunder shall be assignable or transferable by the
Executive, his beneficiaries or legal representatives, except
by will or by the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable
by the Executive's legal representative.
10. Notice. For the purposes of this Agreement,
notices and all other communications provided for in the
Agreement (including the Notice of Termination) shall be in
writing and shall be deemed to have been duly given when
personally delivered or sent by certified mail, return receipt
requested, postage prepaid, if to the Bank, to First Indiana
Bank, 135 North Pennsylvania Street, Indianapolis, Indiana
46204, or if to the Executive, to the address set forth below
the Executive's signature, or to such other address as the
party may be notified, provided that all notices to the Bank
shall be directed to the attention of the Board with a copy to
the Secretary of the Bank. All notices and communications
shall be deemed to have been received on the date of
delivery thereof or on the third business day after the
mailing thereof, except that notice of change of address
shall be effective only upon receipt.
11. Non-Exclusivity of Rights. Nothing in this
Agreement shall prevent or limit the Executive's continuing
or future participation in any benefit, bonus, incentive or
other plan or program provided by the Bank or any of its
affiliated companies for which the Executive may qualify.
Amounts which are vested benefits or which the Executive
is otherwise entitled to receive under any plan or program
of the Bank or any of its affiliated companies shall be
payable in accordance with such plan or program, except as
explicitly modified by this Agreement.
12. Settlement of Claims. The Bank's obligation to
make the payments provided for in this Agreement and
otherwise to perform its obligations hereunder shall not be
affected by any circumstances, including, without limitation,
any set-off, counterclaim, recoupment, defense or other
right which the Bank or any of its affiliated companies may
have against the Executive or others.
<PAGE> 15 (10k page 151)
13. Miscellaneous. No provision of this Agreement
may be modified, waived or discharged unless such waiver,
modification or discharge is agreed to in writing and signed
by the Executive and the Bank. No waiver by either party
hereto at any time of any breach by the other party hereto
of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be
deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time.
No agreement or representations, oral or otherwise, express
or implied, with respect to the subject matter hereof have
been made by either party which are not expressly set forth
in this Agreement.
14. Employment. The Executive and the Bank
acknowledge that, prior to the Effective Date, the
employment of the Executive by the Bank is "at will" and
may be terminated by either the Executive or the Bank at
any time. If the Executive's employment with the Bank
terminates prior to the Effective Date, then the Executive
shall have no further rights under this Agreement.
15. Governing Law. This Agreement shall be
governed by and construed and enforced in accordance with
the laws of the State of Indiana without giving effect to the
conflict of law principles thereof.
16. Severability. The provisions of this Agreement
shall be deemed severable and the invalidity or
unenforceability of any provision shall not affect the validity
or enforceability of the other provisions hereof.
17. Entire Agreement. This Agreement constitutes
the entire agreement between the parties hereto and
supersedes all prior agreements, if any, understandings and
arrangements, oral or written, between the parties hereto
with respect to the subject matter hereof; provided,
however, that this Agreement shall not affect or operate to
reduce any benefit or compensation inuring to the Executive
of a kind elsewhere provided and not otherwise expressly
provided in this Agreement.
18. Headings. The headings herein contained are
for reference only and shall not affect the meaning or
interpretation of any provision of this Agreement.
19. Modification. No provision of this Agreement
may be modified, waived or discharged unless such
modification, waiver or discharge is agreed to in writing
signed by both the Executive and the Bank.
20. Withholding. The Bank shall be entitled to
withhold from amounts paid to the Executive hereunder any
federal, estate or local withholding or other taxes or charges
which it is, from time to time, required to withhold. The
Bank shall be entitled to rely on an opinion of counsel if any
question as to the amount or requirement of any such
withholding shall arise.
21. Arbitration. In the event of any disputes,
differences, controversies or claims arising out of, or in
connection with, this Agreement, other than a dispute in
which the sole relief sought
<PAGE> 16 (10k page 152)
is an equitable remedy, such as a temporary restraining
order or a permanent or temporary injunction,
the parties shall be required to have the dispute,
controversy, difference or claim settled through binding
arbitration pursuant to the American Arbitration
Association's rules of commercial arbitration which are then
in effect. The location of all arbitration proceedings shall be
Indianapolis, Indiana. One arbitrator shall be selected by the
parties and shall be a current or former executive officer
(vice president or higher) of a publicly-traded corporation.
In the event the parties are unable mutually to agree upon a
person to act as the arbitrator, or in the event a mutually-
agreed upon arbitrator shall fail to accept the appointment
by the parties, the parties jointly shall request from the
American Arbitration Association a list of the names of five
persons who would be qualified to act as an arbitrator under
this section. The selection of the final arbitrator then shall
be achieved by each party alternately striking a name, with
the Bank going first, until one name remains. In the event
the parties mutually agree that the five names submitted by
the American Arbitration Association are unsatisfactory,
they jointly may request a second list of five names from the
American Arbitration Association and final selection shall be
achieved through the procedure set out herein. The
decision of the arbitrator is final and binding upon both
parties and any award entered by the arbitrator shall be final,
binding and non-appealable and judgment may be entered
thereon by either party in accordance with the applicable
law in any court of competent jurisdiction. The arbitrator
shall not have authority to modify any provision of this
Agreement nor to award a remedy for any difference,
dispute, controversy or claim arising under this Agreement
other than a benefit specifically provided under or by virtue
of this Agreement. The Bank shall be responsible for all of
the reasonable expenses of the American Arbitration
Association, the arbitrator and the conduct of the selection
and the arbitration procedures set forth in this clause,
including reasonable attorneys' fees and expenses incurred
by either party which are associated with the arbitration
procedure through the time the final arbitration decision or
award is rendered. This arbitration provision shall be
specifically enforceable.
22. Limitation on Payments.
(a) Anything in this Agreement to the contrary
notwithstanding, in the event that it shall be determined that
any payment or distribution by the Bank to or for the benefit
of the Executive, whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or
otherwise (a "Payment"), would constitute an "excess
parachute payment" within the meaning of Section 280G of
the Internal Revenue Code of 1986, as amended (the
"Code"), the aggregate present value of amounts payable or
distributable to or for the benefit of the Executive pursuant
to this Agreement (such payments or distributions pursuant
to this Agreement are hereinafter referred to as "Agreement
Payments") shall be reduced (but not below zero) to the
Reduced Amount. The "Reduced Amount" shall be an
amount expressed in present value which maximizes the
aggregate present value of Agreement Payments without
causing any Payment to be subject to tax under Section
4999 of the Code. For purposes of this Section 22, present
value shall be determined in accordance with Section
280G(d)(4) of the Code.
<PAGE> 17 (10k page 153)
(b) All determinations to be made under this
Section 22 shall be made by an independent national
accounting firm designated by the Bank (the "Accounting
Firm"), which firm shall provide its determinations and any
supporting calculations both to the Bank and the Executive
within 10 days after the date for payment of any Agreement
Payment subject to reduction under this section. Any such
determination by the Accounting Firm shall be binding upon
the Bank and the Executive. The Executive shall then have
the right to determine which of the Agreement Payments
shall be eliminated or reduced in order to produce the
Reduced Amount in accordance with the requirements of
this section. Within five days after this determination, the
Bank shall pay (or cause to be paid) or distribute (or cause
to be distributed) to or for the benefit of the Executive such
amounts as are then due to the Executive under this
Agreement.
(c) As a result of the uncertainty in the application
of Section 280G of the Code, it is possible that Agreement
Payments will have been made by the Bank which should
not have been made ("Overpayment") or that additional
Agreement Payments which have not been made by the
Bank could have been made ("Underpayment"), in each
case, consistent with the calculations required to be made
hereunder. From time to time as the Bank or the Executive
shall deem appropriate, the Accounting Firm shall review
the determinations made by it pursuant to subsection (b) of
this section, and the Bank and the Executive shall cooperate
and provide all information necessary for such review. In
the event that the Accounting Firm determines that an
Overpayment has been made, any such Overpayment shall
be treated for all purposes as a loan to the Executive which
the Executive shall repay to the Bank together with interest
from the date of payment under this Agreement at the
applicable Federal rate provided for in Section 7872(f)(2) of
the Code (the "Federal Rate"); provided, however, that no
amount shall be payable by the Executive to the Bank if and
to the extent such payment would not reduce the amount
which is subject to tax under Section 4999 of the Code. In
the event that the Accounting Firm determines that an
Underpayment has occurred, any such Underpayment shall
be promptly paid by the Bank to or for the benefit of the
Executive together with interest from the date of payment
under this Agreement at the Federal Rate.
(d) All of the fees and expenses of the Accounting
Firm in performing the determinations referred to in
subsections (b) and (c) above shall be borne solely by the
Bank. The Bank agrees to indemnify and hold harmless the
Accounting Firm of and from any and all claims, damages
and expenses resulting from or relating to its determinations
pursuant to subsections (b) and (c) above, except for claims,
damages or expenses resulting from the gross negligence or
willful misconduct of the Accounting Firm.
(e) In the event this Agreement is subject to Section
18(k) of the Federal Deposit Insurance Act (the "FDIA") at
the time any payment is to be made by the Bank to the
Executive pursuant to this Agreement or otherwise, such
payment will be subject to, and conditioned upon, its
compliance with Section 18(k) of the FDIA and any
regulations promulgated thereunder.
<PAGE> 18 (10k page 154)
23. Required Provisions.
(a) If the Executive is suspended and/or temporarily
prohibited from participating in the conduct of the Bank's
affairs by a notice served under Section 8(e)(3) or (g)(1) of
the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(3)
and (g)(1)), the Bank's obligations under this Agreement
shall be suspended as of the date of service unless stayed by
appropriate proceedings. If the charges in the notice are
dismissed, the Bank may in its discretion (i) pay the
Executive all or part of the compensation withheld while its
contract obligations were suspended, and (ii) reinstate (in
whole or in part) any of its obligations which were
suspended.
(b) If the Executive is removed and/or permanently
prohibited from participation in the conduct of the Bank's
affairs by an order issued under Section 8(e)(4) or (g)(1) of
the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(4) or
(g)(1)), all obligations of the Bank under this Agreement
shall terminate as of the effective date of the order, but
vested rights of the contracting parties shall not be affected.
(c) If the Bank is in default (as defined in
Section 3(x)(1) of the Federal Deposit Insurance Act), all
obligations under this Agreement shall terminate as of the
date of default, but this paragraph shall not affect any vested
rights of the contracting parties.
(d) All obligations under this Agreement shall be
terminated, except to the extent it is determined that
continuation of this Agreement is necessary for the
continued operation of the Bank: (i) by the Director of the
Federal Deposit Insurance Corporation (the "Director") or
his or her designee, at the time the Federal Deposit
Insurance Corporation enters into an agreement to provide
assistance to or on behalf of the Bank under the authority
contained in Section 13(c) of the Federal Deposit Insurance
Act; or (ii) by the Director or his or her designee at the time
the Director or his or her designee approves a supervisory
merger to resolve problems related to operation of the Bank
or when the Bank is determined by the Director to be in an
unsafe or unsound condition. All rights of the parties that
have already vested, however, shall not be affected by such
action.
IN WITNESS WHEREOF, the Bank has caused this
Agreement to be executed by its duly authorized officer and
the Executive has executed this Agreement as of the day
and year first above written.
FIRST INDIANA BANK
By: ___________________________________
Owen B. Melton, Jr., President
"Bank"
<PAGE> 19 (10k page 155)
ATTEST:
_______________________________
Secretary
______________________________________
Named Executive
"Executive"
Address: ______________________________
______________________________
<PAGE> 20 (10k page 156)
[front cover of annual report]
In a Sea of Mega-Banks, There's Still
<PAGE> (10k page 157)
First Indiana Corporation
1997 Annual Report
<PAGE> (10k page 158)
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
First Indiana Corporation and Subsidiaries
For the Years Ended
December 31,
-------------------
(Dollars in Thousands, Except Per Share Data) 1997 1996
-------------------
<S> <C> <C>
Net Earnings $17,744 $13,704
Basic Earnings Per Share 1.40 1.10
Diluted Earnings Per Share 1.36 1.06
Dividends Per Common Share 0.40 0.38
Return on Average Total Assets 1.17% 0.92%
Return on Average Shareholders' Equity 12.16 10.15
Yield on Interest-Earning Assets 8.81% 8.89%
Cost of Interest-Bearing Liabilities 5.10 5.19
Net Interest Margin 4.36 4.37
Net Interest Spread 3.71 3.70
<CAPTION>
December 31,
-------------------
1997 1996
-------------------
<S> <C> <C>
Assets $1,613,405 $1,496,421
Loans Receivable, Net 1,348,529 1,215,550
Deposits 1,107,555 1,095,486
Shareholders' Equity $ 153,036 $ 138,658
Shareholders' Equity/Assets 9.49% 9.27%
Book Value Per Share $ 12.08 $ 11.13
Market Closing Price 25.21 17.83
Price/Earnings Multiple 18.56x 16.85x
<CAPTION>
--------------------
December 31, 1997
--------------------
Actual Required
<S> <C> <C>
Tangible Capital/Total Assets 8.37% 1.50%
Core Capital/Total Assets 8.37 3.00
Risk-Based Capital/Risk-Weighted Assets 11.99 8.00
</TABLE>
[This page contains bar graphs showing the following information]
<TABLE>
<CAPTION>
Net Earnings (Dollars in Thousands) Earnings Per Share
- ----------------------------------- --------------------------
<S> <C> <S> <C>
1993 $15,101 1993 1.17
1994 10,636 1994 0.80
1995 17,267 1995 1.34
1996 13,704 1996 1.06
1997 17,744 1997 1.36
<CAPTION>
Shareholders' Equity
Net Interest Margin (Dollars in Thousands)
- ------------------- --------------------
<S> <C> <S> <C>
1993 3.64% 1993 $113,583
1994 3.96 1994 120,712
1995 4.12 1995 129,297
1996 4.37 1996 138,658
1997 4.36 1997 153,036
<CAPTION>
Price/Earnings Multiple
- -----------------------
<S> <C>
1993 8.00x
1994 10.94x
1995 10.73x
1996 16.85x
1997 18.56x
</TABLE>
<PAGE> 2 (10k page 159)
LETTER TO SHAREHOLDERS
Dear Shareholders:
Your investment in First Indiana Corporation has profited from another year
of solid performance. First Indiana had record earnings of $17.7 million, or
$1.36 per share, an increase of 29 percent, compared with $13.7 million, or
$1.06 per share, for the year ended December 31, 1996, which included an
industry-wide special assessment to recapitalize the Savings Association
Insurance Fund.
Our growth has come from successfully differentiating ourselves in a
marketplace that is highly competitive. Our strategic direction centers on a
passion for understanding our customers so we can provide services and
products that are customer-focused, satisfy customer expectations and
produce solid returns.
The Board of Directors' confidence in First Indiana's strength and earnings
potential was reflected in a six-for-five stock dividend effective for
shareholders of record as of February 19, 1998. The Corporation expects to
maintain its quarterly cash dividend for 1998 at $.12 per post-dividend share,
which is equivalent to a 20 percent cash dividend increase.
The Bank enjoyed steady, substantial growth in its net loans receivable during
1997. At December 31, the 1997 loan balance was $1.35 billion, compared with
$1.22 billion in 1996, an increase of 11 percent. This marks the third year out
of the last four in which loan growth has exceeded 10 percent.
To help provide a wider range of services for our customers and diversify our
balance sheet, the Bank began five years ago to implement strategies for
increasing outstandings in product lines typical of commercial banks. These
include business, construction, commercial real estate and consumer lending.
These strategies paid off as the Bank benefited from a 33 percent increase in
business lending in 1997. Business loans outstanding rose to $124 million at
December 31, 1997, from $93 million a year earlier. Construction loans
outstanding rose to $156 million at December 31, 1997, from $130 million
at year-end 1996, an increase of 13 percent. Consumer loans outstanding rose
to $598 million in 1997 from $499 million a year earlier.
These businesses, while highly profitable, bring with them greater risks than
First Indiana's traditional first-mortgage lending business. Acknowledging this
changing niche profile, the Bank increased its loan loss allowance during 1997.
At December 31, 1997, the loan loss allowance had risen to $22.4 million,
compared with $18.8 million one year earlier.
The Bank's net interest margin remained stable at 4.36 percent in 1997,
compared with 4.37 percent in 1996. Total assets grew to $1.6 billion, up from
December 31, 1996 levels of $1.5 billion, and shareholders' equity increased 10
percent to $153 million at December 31, 1997, compared with $139 million at
December 31, 1996.
We are pleased to report to you that First Indiana Corporation is in sound
financial health with well-defined direction for the future. We remain locally
owned and managed, with a staff of dedicated and talented associates who are
committed to implementing strategic, market-driven decisions to advance the
company so we may continue to deliver earnings growth and appropriate
shareholder returns.
We appreciate your continued support and look forward to the years ahead.
Sincerely,
/s/ Robert H. McKinney /s/Marni McKinney /s/Owen B. Melton, Jr.
Robert H. McKinney Marni McKinney Owen B. Melton, Jr.
Chairman and Vice Chairman President and
Chief Executive Officer Chief Operating Officer
[This page contains bar graphs and pie charts showing the following
information]
<TABLE>
<CAPTION>
Total Loans Originated (Dollars in Thousands)
- ---------------------------------------------
<S> <C>
1993 $1,161,519
1994 982,754
1995 1,021,753
1996 985,165
1997 1,107,311
<CAPTION>
Composition of Loan Portfolio 1990 vs. 1997
- -------------------------------------------
1990 1997
---- ----
<S> <C> <C>
Residential Mortgage 58% 37%
Residential Construction 6 11
Commercial Real Estate 13 3
Consumer 23 40
Commercial and Industrial 0 9
<CAPTION>
Non-Performing Assets (Dollars in Thousands)
- --------------------------------------------
<S> <C>
1993 $36,474
1994 29,077
1995 27,165
1996 27,121
1997 22,822
</TABLE>
[This page contains a photograph of the following persons and
this caption]
Robert H. McKinney
Chairman and Chief Executive Officer (45 years' service)
Owen B. Melton, Jr.
President and Chief Operating Officer (20 years)
Marni McKinney
Vice Chairman (14 years)
<PAGE> 3 (10k page 160)
YEAR IN REVIEW
Of the many environmental factors affecting the financial services industry,
one of the most influential is bank consolidation. In the past few years, we've
seen bank mergers reduce the number of competitors. The result has been
two-fold. First, the individual customer has gotten lost in the shuffle, and,
second, these mega-banks have made competition tougher by putting their
extensive resources behind all their efforts.
Operating in this environment taught us that winners in our industry will be
those who can effectively maximize their strengths, operate efficiently, and
increase profitability.
To accomplish this we had to differentiate ourselves.
That's not an easy assignment for any financial organization since our
environment is laden with financial services companies, none of which has a
proprietary product. We have often found ourselves competing with a
proliferation of brokers and mortgage companies as well as banks and thrifts,
all with similar products and services.
In the face of this increasingly competitive climate, First Indiana has chosen
to remain independent and run by local management. As a result, we have stayed
close to the customer and remained nimble in responding to their banking
requirements. This customer-focused approach has allowed us to build strong
relationships that provide a foundation for success and growth.
Armed with this in-depth understanding of the people with whom we do
business, we are creating a unique experience for customers of First Indiana.
We call this building the brand.
Building the Brand
In 1997, we undertook to enlarge the image of our brand in an effort to
solidify it in the minds of customers and potential customers. With a clear
vision of who we are and what we want people to think about us, we made a
concerted effort to promote ourselves so consumers associate our name with
personal service and customer-focused products delivered in a helpful, friendly
environment.
We have invested in marketing and advertising programs, including television
and print advertising and sales materials, to communicate the First Indiana
experience. But a brand name is not built by advertising and promotions
alone. It is built by living up to the promises we make.
Our Strategic Plan, developed by a group of the Corporation's leaders, outlines
how we are delivering this brand. We have developed specific strategies for
each of our customer groups, but all are based on a three-part approach:
1. Data-based decisions
2. Putting the customer first
3. Setting expectations for associates to work as one team
Here are our various customers and highlights from the strategies aimed at
creating a unique experience for each of them:
Commercial and Industrial Strategies
Astute awareness of customer needs through a proven information-gathering
sales method
Strengthening the sales force by attracting experienced talent from within
our markets
Local decision-making, fast responses, and flexible answers
Assisting customers with their strategic growth plans
A partnership-based approach to commercial and industrial lending
Developer, Builder and Realtor Strategies
Recognize the importance of the role of business alliances with Realtors,
mortgage brokers and mortgage bankers in providing mortgage loan products
Thorough understanding of the customer's business
Focusing on the special needs of small to medium-sized builders and
developers, who are often overlooked by the mega-banks and who can lead us
to residential customers
Capitalizing on the Bank's small size to develop products quickly and close
to the customer
Expanding the range of services and types of loans available as the
customer's needs grow
Retail Strategies
An approach that helps customers meet their dreams instead of pushing
products at them
A delivery system that operates with the same attention to customer needs
and customer service as offered by the finest retail stores
Clean, smooth links between the front line and the back room that fortify
the customer's confidence in our ability to deliver accurately and
consistently
A system that lets the customers choose the delivery channel that works
best for them
Innovative products designed around how consumers like to bank
Consumer Finance Strategies
Staying abreast of the market for new products, new methods, and new
technology
Ease of doing business in all respects, including speed, credit approval, loan
funding, and customer service
Forming strong partnerships among sales, operations, credit, and secondary
marketing, so that the needs of all stakeholders are acknowledged and kept
in balance
Accessibility from alternative networks with a nationwide geographic reach
<PAGE> 4 (10k page 161)
The market will continue to value companies that sell experiences. Customers
will pay for these experiences, and the higher earnings of an experience-
creating company will yield greater rewards for the shareholders.
Avenues for Growth
First Indiana's income in 1997 came from three principal businesses serving
three distinct market segments:
Residential mortgage lending focusing on home buyers throughout the
Midwest and Southeast
Construction and commercial and industrial lending that centers on builder
lines of credit and loans to small and medium-sized businesses in the
Midwest and Southeast
Home equity lending through a nationwide network of loan originators
Retail banking franchises operate in two Indiana metropolitan markets,
Indianapolis and Evansville. A total of 26 branches help deliver our products
to the customer. While these branches are important to us and many of our
customers as a delivery channel, we are allowing customers to choose the way
they prefer to do business with us as outlined in our retail strategies. As
evidence of consumers' drive for methods other than the branch to access
their bank, our telemarketing area has experienced significant growth. To
further serve our alternative access-oriented customers, we also redesigned
our web site to allow online banking.
Beyond our retail operations, we have increased our franchise through
additional offices for our mortgage and home equity lending in Florida and
South Carolina. We also expanded with a new residential construction lending
office serving Portland, Oregon and surrounding communities.
Our expansion, however, has not been tied just to investments in personnel
and brick and mortar. We have initiated an expansion through an alliance
with Peoples Mortgage Co. in Phoenix that did not require a capital investment
on our part. And we have expanded our nationwide network of home equity
loan originators throughout 1997.
A new niche we have identified and entered centers on the growth of small
community banks. While large mega-banks dot the financial services
landscape, there remains a group of consumers who prefer the high-touch
approach of small community-based banks. As a regional bank with similar
strategies relative to providing personal service, First Indiana has an affinity
with these banks, but more important, because of our size we can offer them
banking services and products they do not have the resources to deliver.
In the latter part of 1997, we initiated our Correspondent Banking Group to
service this niche of community banks. We provide these banks private label
products and services that allow them to furnish their customers with a wider
range of offerings. It is a win-win situation that is just beginning to show
rewards.
New Organizational Structure
This past year, First Indiana Bank was organized into a matrix structure. This
was done to facilitate working across department lines to help us better serve
the customer.
In traditional, hierarchical organizations there is only vertical flow. An
associate is responsible to his or her boss, who is responsible to his or her
boss, and so on. In a matrix organization, there is a vertical flow and a
horizontal flow. Jobs are structured so associates are encouraged to work across
departmental lines to resolve problems and complete projects. This new
structure encourages Bank associates to see themselves as
all one team and work together to make certain the customer has the best
service and products possible.
Looking to the Future
From First Indiana's beginnings over 80 years ago, we have actively served as
Central Indiana's leading home lender. During our history, we have
maintained a vision for asset growth and have developed a healthy base of
products, customer-focused service, and delivery channels to expand our
presence in our targeted markets.
While we are proud of our accomplishments, we are not complacent with these
achievements. The initiatives outlined above will help First Indiana continue to
be independent and strong. We look forward to the future and the rewards we
will be able to provide all our stakeholders.
<PAGE> 5 (10k page 162)
[This page contains a photograph of the following persons and
this caption]
BOARD OF DIRECTORS
Front Row
Marni McKinney
(14 years' service) Vice Chairman, First Indiana Corporation; President and
Chief Executive Officer, The Somerset Group, Inc.
Robert H. McKinney
(45 years) Chairman and Chief Executive Officer,
First Indiana Corporation
Owen B. Melton, Jr.
(20 years) President and Chief Operating Officer,
First Indiana Corporation
Back Row
Phyllis W. Minott
(22 years) Chairman and Chief Executive Officer, Minott Motion
Pictures, Inc.
Douglas W. Huemme
(4 years) Chairman, President, and Chief Executive Officer,
Lilly Industries, Inc.
John W. Wynne
(8 years) Chairman of the Board, Duke Realty Investments, Inc.
Andrew Jacobs, Jr.
(1 year)
United States Congressional Representative (retired); Adjunct
Professor, IUPUI
Michael L. Smith
(13 years) Chief Operating Officer, American
Health Network, Inc.
H.J. Baker
(31 years) Chairman, BMW Constructors, Inc.
Gerald L. Bepko
(11 years) Vice President for Long-Range Planning, Indiana
University, Chancellor, IUPUI
<PAGE> 6 (10k page 163)
MANAGEMENT AND ADVISORY BOARDS
FIRST INDIANA BANK
Robert H. McKinney* (45 years' service), Chairman
Marni McKinney* (14 years), Vice Chairman
Owen B. Melton, Jr.* (20 years), President and Chief Executive Officer
David J. Fitzgerald (7 years), Vice President
David J. Gunderson (15 years), Vice President and Credit Review Officer
Larry F. Meadows (22 years), First Vice President and Underwriting Manager
Richard E. Walke (12 years), Director of Internal Audit
David A. Butcher* (15 years), Secretary
Retail Banking Group
Marketing and Strategic Planning Group
Kenneth L. Turchi (13 years), Senior Vice President
Vice Presidents
Deborah L. Apgar (13 years)
Daniel R. Bohn (4 years)
Timothy J. Dell (5 years)
John D. Ehrhart (20 years)
Denise L. Maines (10 years)
John M. Ramsey (7 years)
Freda F. Wampner (18 years)
Michael C. Wise (16 years)
Central Indiana Advisory Boards
Franklin
Gilmore C. Abplanalp (27 years)
Timothy J. Dell (5 years)
Jerry B. Maguire (8 years)
Norbert C. Smith (8 years)
Pendleton
Hugh W. Begley (29 years)
Ralph E. Miller (19 years)
David L. Puckett (19 years)
L. Ann Reeder (6 years)
Phillip R. Shirley, DVM (22 years)
Westfield
Manson E. Church (41 years)
Toni K. Dickover (3 years)
J. Joseph Edwards (5 years)
James Gapenski (5 years)
Jerry C. McMullan (29 years)
Consumer Finance Group
David A. Lindsey (15 years), Senior Vice President
Vice President
Judi L. Cooper (2 years)
Internal Support Services Group
David L. Gray* (16 years), Senior Vice President, Chief Financial Officer, and
Treasurer
Vice Presidents
John M. Huter (31 years)
John V. Kirby (2 years)
Michael T. McAninch (15 years), Controller
Thomas M. Ryan (18 years)
Mickey J. Walden (15 years)
Commercial and Mortgage Banking Group
Merrill E. Matlock (14 years), Senior Vice President, and President,
One Mortgage Corporation
First Vice Presidents
Larry L. Grubbs (3 years), Executive Vice President, One Mortgage Corporation
Gregory P. O'Connor (6 years)
Vice Presidents
Daniel R. Dierlam (6 years)
John H. Goggins (5 years)
Max E. Inglert (26 years)
Michael D. Mathew (3 years)
Michael S. Rigsby (1 year)
Amanda K. St. Clair (2 years)
William H. Shipley (1 year)
Stephen M. Spicer (1 year)
Regional Vice Presidents
N. Jeanne Bowling (14 years)
Victoria H. Duckworth (15 years)
Bonnie J. Fletcher (1 year)
Darrel D. Thornton (26 years)
Market Vice Presidents
William N. Snodgrass (15 years)
Steven R. Waddell (3 years)
One Mortgage Corporation
Vice Presidents
Terry C. Barrett (2 years), Raleigh Office
Wilber L. Harwell (2 years), Charlotte Office
Thomas E. Helms (5 years), Orlando Office
Market Vice Presidents
Brian A. Carlson (4 years)
Cynde G. Emory (9 years)
Melia L. Favorite (1 year)
Salvatore S. Rodriguez (1 year)
Charles E. Roser (5 years)
Sylvia D. Stark (10 years)
Amy F. Watts (1 year)
Joseph A. Winsser (1 year)
Donald R. Witter III (4 years)
Correspondent Banking Group
Timothy J. O'Neill (28 years), Senior Vice President
EVANSVILLE DIVISION
Maurice E. Mobley (45 years), Chairman of the Board
Sherry F. Haynes (3 years), President
Vice Presidents
Sandra K. Potter (10 years)
Wayne R. Stovall (31 years)
Regional Vice President
Patricia L. Griffin (1 year)
Market Vice President
Rick G. McDonald (7 years)
Advisory Directors
James O. Baxter (24 years)
Sherry F. Haynes (3 years)
Maurice E. Mobley (45 years)
Paul G. Mosier (20 years)
Lewis A. Plane (33 years)
Ben M. Redden (26 years)
Dr. David L. Rice (20 years)
MOORESVILLE DIVISION
Boyd C. Head (37 years), Chairman of the Board
Charles D. Swisher (15 years), Vice Chairman of the Board
Norman T. Lloyd (25 years), President
Advisory Directors
Robert S. Gregory (33 years)
Boyd C. Head (37 years)
Russell J. Lockwood (14 years)
Eugene D. Perry (15 years)
Charles F. Quillen (14 years)
Charles D. Swisher (15 years)
George Watson (25 years)
RUSHVILLE DIVISION
W. Richard Waggoner (32 years), Chairman of the Board
E. Eugene Spurlin (28 years), Vice Chairman of the Board
Garry E. Cooley (13 years), President
Advisory Directors
Dr. Frank H. Green (38 years)
Richard K. Levi (10 years)
Marjorie Shoemaker (17 years)
E. Eugene Spurlin (28 years)
W. Richard Waggoner (32 years)
*Officer--First Indiana Corporation
<PAGE> 7 (10k page 164)
FINANCIAL REVIEW
First Indiana Corporation posted yet another year of record earnings in 1997
while enjoying substantial asset growth. Net earnings were $17,744,000 for
the year ended December 31, 1997, compared with $13,704,000 for the same
period in 1996 and $17,267,000 for the year ended December 31, 1995.
Reported net earnings for 1996 include a one-time after-tax charge of
$4,016,000 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 resulted in an ongoing reduction in deposit premiums
beginning in 1997.
Net earnings per share for 1997 were $1.36, compared with $1.06 in 1996 and
$1.34 in 1995. Return on average equity for 1997 was 12.16 percent, compared
with 10.15 percent in 1996 and 14.03 percent in 1995.
To reflect confidence in the continued earnings potential of the Corporation,
the Board of Directors authorized a six-for-five stock dividend effective March
6, 1998 for shareholders of record as of February 19, 1998. The stock dividend
will be the sixth in seven years and will be paid on shares outstanding after
the dividend. Dividends per common share (adjusted for stock dividends and
splits) were $.40 in 1997, $.38 in 1996, and $.32 in 1995. On February 20,
1997, the Corporation announced a five-for-four stock split effective March 18,
1997. All per-share amounts in the 1997 Annual Report have been adjusted for
all stock dividends and splits.
First Indiana Corporation is a nondiversified, unitary savings and loan holding
company. First Indiana 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.
Residential mortgage loan originations amounted to $373 million, compared
with $346 million in 1996. During 1997, the Bank opened several offices in the
southeastern United States and in Portland, Oregon, which further
strengthened its national presence. The Bank continued its efforts to
consolidate and centralize origination and servicing processes in its
Commercial and Mortgage Banking Group. Additionally, the Bank aggressively
pursued alternative delivery channels for its residential loans, such as
wholesale outlets and a telemarketing call center.
Originations in home equity lending were $276 million, compared with $231
million in 1996. A national network of originators, coupled with the call
center, allowed the Bank to capitalize on alternative delivery channels for
orginations. The Bank also aggressively pursued originations of products with
loan-to-value ratios greater than
80 percent for sale into the secondary market. Secondary market gains on the
sale of both first mortgage and home equity loans are expected to contribute
significantly to 1998 earnings.
The Bank continued to develop relationship banking in construction lending,
with originations of $334 million, compared with $310 million last year. A
variety of unique products and the development of new markets throughout
the United States contributed to construction loan growth.
The Bank's strategy of targeting the business-related segments of the market
continued to provide asset and earnings growth in 1997. Originations in this
segment totaled $117 million in 1997, a 23 percent increase over 1996.
Commercial and industrial loans outstanding increased to $124 million at
year-end 1997, from $93 million one year earlier.
The significant growth in originations in these four core areas translated into
growth on the balance sheet. At December 31, 1997, home equity, construction
and residential loans outstanding were $528 million, $156 million and $501
million compared with $499 million, $138 million and $429 million one year
earlier.
The net loan loss provision in 1997 was $10,700,000, compared with
$10,794,000 in 1996 and $7,900,000 in 1995. By continuing to provide for
loan losses in a manner consistent with the higher risk associated with
commercial and industrial, construction, and home equity lending, the Bank's
loan loss allowance was $22,414,000 at year-end, or 122 percent of non-
performing loans, compared with $18,768,000, or 84 percent of non-performing
loans, at December 31, 1996.
Total assets increased 7.8 percent to $1,613,405,000 at year-end, compared
with $1,496,421,000 at December 31, 1996. Shareholders' equity increased to
$153,036,000 at December 31, 1997, a ten percent increase over the
December 31, 1996 level of $138,658,000. The tangible and core capital of the
Bank was $134,990,000 or 8.37 percent of assets, which exceeded regulatory
minimums by $110,806,000 and $86,622,000 at year-end 1997. Average
shareholders' equity to average assets equaled 9.66 percent and 9.09 percent
for 1997 and 1996.
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 $62,979,000 in 1997, compared with $61,683,000 in
1996 and $58,044,000 in 1995. The increase in 1997 is the result of continued
growth in the Bank's home equity, residential construction, and commercial
and industrial loan portfolios. 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]
Timothy J. O'Neill
Correspondent Banking Services Group (28 years' service)
David L. Gray
Internal Support Services Group (16 years)
Kenneth L. Turchi
Retail Banking, Marketing and Strategic Planning Group (13 years)
Merrill E. Matlock
Commercial and Mortgage Banking Group (14 years)
David A. Lindsey
Consumer Finance Group (15 years)
<PAGE> 8 (10k page 165)
Net Interest Margin
First Indiana's net interest margin is the clearest indicator of its ability to
generate core earnings. The margin was 4.36 percent for the year ended
December 31, 1997, compared with 4.37 percent in 1996 and 4.12 percent in
1995.
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 return on total earning assets and the cost of total interest-
bearing liabilities.
The Corporation's average interest-rate spread for the year ended December 31,
1997 was 3.71 percent, compared with 3.70 percent in 1996 and 3.60 percent
in 1995. 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 65 basis points to the
margin in 1997, compared with 67 and 52 basis points in 1996 and 1995.
The following table analyzes First Indiana's net interest margin and the
components which contributed to it:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------------------------------------------------
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 $12,739 $695 5.46% $14,782 $796 5.38% $10,399 $613 5.89%
Investments 113,037 6,818 6.03 115,836 6,887 5.95 139,569 9,181 6.58
Mortgage-Backed
Securities 35,130 2,446 6.96 42,958 2,986 6.95 60,602 4,396 7.25
Loans Receivable (1) 1,284,212 117,371 9.14 1,237,036 114,799 9.28 1,199,619 109,871 9.16
------------------ ------------------ ------------------
Total Earning Assets 1,445,118 127,330 8.81 1,410,612 125,468 8.89 1,410,189 124,061 8.80
Other Assets 65,375 ------- 74,904 ------- 76,370 -------
--------- --------- ---------
Total Assets $1,510,493 $1,485,516 $1,486,559
========= ========= =========
Liabilities and Share-
holders' Equity
Interest-Bearing
Liabilities
Deposits:
NOW and Money
Market Checking $ 84,761 1,908 2.25 $ 88,633 2,531 2.86 $ 99,405 2,334 2.35
Passbook and
Statement Savings 302,635 13,881 4.59 284,471 12,954 4.55 224,282 10,414 4.64
Money Market Savings 30,416 1,001 3.29 17,481 575 3.29 22,582 730 3.23
Jumbo Certificates 113,632 6,583 5.79 111,318 6,370 5.72 108,834 6,572 6.04
Fixed-Rate
Certificates 470,853 26,563 5.64 524,064 29,647 5.66 560,279 30,483 5.44
Federal Home Loan
Bank Advances 219,685 12,288 5.59 185,551 10,706 5.77 212,696 12,891 6.06
Short-Term
Borrowings 39,018 2,127 5.45 18,518 1,002 5.41 42,019 2,593 6.17
------------------ ------------------ ------------------
Total Interest-Bearing
Liabilities 1,261,000 64,351 5.10 1,230,036 63,785 5.19 1,270,097 66,017 5.20
Other Liabilities 103,566 ------ 120,501 ------ 93,404 ------
Shareholders' Equity 145,927 134,979 123,058
--------- --------- ---------
Total Liabilities and
Shareholders' Equity $1,510,493 $1,485,516 1,486,559
========= ========= =========
Net Interest
Income/Spread $62,979 3.71% $61,683 3.70% $58,044 3.60%
====== ===== ====== ===== ====== =====
Net Interest Margin 4.36% 4.37% 4.12%
===== ===== =====
(1) Included in loans receivable are loans held for sale totaling $34,217,
$42,872, and $35,953 in 1997, 1996, and 1995, and non-accrual loans.
</TABLE>
[This page contains the following bar graph]
<TABLE>
<CAPTION>
Net Interest Income (Dollars in Thousands)
- ------------------------------------------
<S> <C>
1993 $45,905
1994 49,229
1995 58,044
1996 61,683
1997 62,979
</TABLE>
<PAGE> 9 (10k page 166)
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>
<CAPTION>
1997 Compared with 1996 1996 Compared with 1995
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 $(1,740)$ 4,378 $ (66) $ 2,572 $1,456 $ 3,427 $ 45 $ 4,928
Mortgage-Backed Securities 5 (544) (1) (540) (184) (1,280) 54 (1,410)
Investments 100 (166) (3) (69) (883) (1,561) 150 (2,294)
Federal Funds Sold 10 (110) (1) (101) (53) 258 (22) 183
--------------------------------- ---------------------------------
(1,625) 3,558 (71) 1,862 336 844 227 1,407
--------------------------------- ---------------------------------
Interest Expense
Deposits
NOW and Money Market Checking (536) (110) 23 (623) 505 (253) (55) 197
Passbook and Statement Savings 94 827 6 927 (201) 2,795 (54) 2,540
Money Market Savings 0 426 0 426 13 (165) (3) (155)
Jumbo Certificates 79 132 2 213 (344) 150 (8) (202)
Fixed-Rate Certificates (82) (3,010) 8 (3,084) 1,212 (1,970) (78) (836)
Federal Home Loan Bank Advances (327) 1,969 (60) 1,582 (619) (1,645) 79 (2,185)
Short-Term Borrowings 7 1,109 9 1,125 (319) (1,451) 179 (1,591)
--------------------------------- ---------------------------------
(765) 1,343 (12) 566 247 (2,539) 60 (2,232)
--------------------------------- ---------------------------------
Net Interest Income $ (860) $2,215 $(59) $1,296 $ 89 $3,383 $167 $3,639
================================= =================================
</TABLE>
<PAGE> 10 (10k page 167)
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)
----------------------------------------------------------
1997 Amount Percent 1996 Amount Percent 1995
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sale of Investments $ 217 $ (64) (22.8)%$ 281 $ 235 510.9% $ 46
Sale of Loans 4,932 1,857 60.4 3,075 326 11.9 2,749
Sale of Subsidiary - (1,165) (100.0) 1,165 1,165 100.0 -
Sale of Deposits - - - - (1,497) (100.0) 1,497
Dividends on FHLB Stock 1,055 22 2.1 1,033 37 3.7 996
Loan Servicing Income 2,767 (141) (4.8) 2,908 263 9.9 2,645
Loan Fees 2,358 56 2.4 2,302 96 4.4 2,206
Insurance Commissions 238 (424) (64.0) 662 (618) (48.3) 1,280
Accretion of
Negative Goodwill 948 - - 948 - - 948
Deposit Product Fee Income 2,646 53 2.0 2,593 469 22.1 2,124
Other 2,844 (37) (1.3) 2,881 1,121 63.7 1,760
---------------- ---------------- --------
$18,005 $ 157 0.9 $17,848 $1,597 9.8 $16,251
================ ================ ========
</TABLE>
The principal increase in non-interest income in 1997 occurred in the gains
realized by the Bank in the sale of residential and home equity loans into the
secondary market. Pre-tax gains during 1997 were $3,069,000 on the sale of
$72 million of fixed-rate home equity loans, while residential gains amounted
to $1,863,000 from sales of $144 million of loans. Insurance commission
income decreased from 1996 due to the sale of the Bank's investment and
insurance subsidiaries, One Investment Corporation and One Insurance
Agency, to The Somerset Group, Inc., an affiliate of the Bank. This sale
resulted in a pre-tax gain of $1,165,000 in 1996.
<PAGE> 11 (10k page 168)
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)
---------------------------- ------------------------------------
1997 Amount Percent 1996 Amount Percent 1995
---------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and Benefits $25,936 $ 1,713 7.1 % $24,223 $(2,171) (8.2)% $26,394
Capitalized Salaries
and Benefits (6,020) 109 1.8 (6,129) (625) (11.4) (5,504)
Net Occupancy 2,852 (235) (7.6) 3,087 18 0.6 3,069
Deposit Insurance 693 (8,493) (92.5) 9,186 6,888 299.7 2,298
Real Estate Owned
Operations - Net 652 54 9.0 598 3,658 119.5 (3,060)
Equipment 4,692 184 4.1 4,508 (128) (2.8) 4,636
Office Supplies and Postage 1,849 (220) (10.6) 2,069 135 7.0 1,934
Other 10,450 739 7.6 9,711 831 9.4 8,880
---------------- ---------------- --------
$41,104 $(6,149) (13.0) $47,253 $8,606 22.3 $38,647
================ ================ ========
</TABLE>
In 1996, the FDIC levied a special deposit insurance assessment 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 reduced First Indiana's
deposit insurance premiums 93 percent in 1997. Salary expenses increased in
1997 in order to maintain pace with the increased loan production levels in
the latter half of the year. The Bank renegotiated its lease to occupy First
Indiana Plaza in 1997, which resulted in occupancy expense reductions.
<PAGE> 12 (10k page 169)
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.
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 them.
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.
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, decreased to $22.8 million at December 31, 1997 from
$27.1 million one year earlier.
The table on the following page 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.
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.
Loan modifications classified as "restructured loans" under Statement of
Financial Accounting Standard No. 15 were $6.9 million at December 31, 1996.
Management modified the payment terms, interest rates, and contractual
maturities of these loans to improve the likelihood of recovery of the Bank's
investment. These loans were repaid in 1997.
Real Estate Owned. Real estate owned is generally acquired through
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.
Potential Problem Assets. The Corporation had $11 million in potential
problem loans at December 31, 1997. Of this amount, $6.5 million consists of
loans to residential builders and $4.5 million represents loans to commercial
and industrial borrowers. 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 the builder loans is one-to-four family
dwellings with loan-to-value ratios of 80 percent or less. The commercial and
industrial loans are also collateralized with real estate.
[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>
1993 $12,989 1993 51.80%
1994 13,741 1994 57.72
1995 17,300 1995 67.91
1996 19,311 1996 84.19
1997 22,897 1997 121.60
</TABLE>
<PAGE> 13 (10k page 170)
<TABLE>
<CAPTION>
Non-Performing Assets December 31,
------------------------------------------
(Dollars in Thousands) 1997 1996 1995 1994 1993
-------- ---------------------------------
<S>
Non-Accrual Loans <C> <C> <C> <C> <C>
Residential Mortgage $3,718 $3,849 $2,399 $1,720 $3,796
Residential Construction 6,059 4,573 2,229 2,212 3,029
Commercial Real Estate 99 - 1,514 105 275
Commercial and Industrial 254 166 428 331 775
Consumer 8,302 6,792 8,120 6,603 3,025
-------- ---------------------------------
Total Non-Accrual Loans 18,432 15,380 14,690 10,971 10,900
-------- ---------------------------------
Impaired Loans - - 3,306 - -
Restructured Loans - 6,913 5,909 10,730 11,311
Real Estate Owned 4,390 4,828 2,943 7,012 13,961
Other Repossessed Assets - - 317 364 302
-------------------------------------------
Total Non-Performing Assets $22,822 $27,121 $27,165 $29,077 $36,474
===========================================
</TABLE>
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,
----------------------------------------
1997 1996 1995 1994 1993
------- --------------------------------
<S> <C> <C> <C> <C> <C>
Residential Mortgage $ 858 $ 371 $ 430 $1,427 $ 1,112
Residential Construction 749 915 713 791 1,204
Commercial Real Estate 95 95 94 3,503 9,267
Consumer 2,688 3,447 1,706 1,291 2,378
Allowance for REO Losses (483) (543) (1,066) (1,216) (1,483)
-------------------------------------------
Net Real Estate Owned $3,907 $4,285 $1,877 $5,796 $12,478
===========================================
</TABLE>
Summary of Loan Loss Experience.
The following is a summary of activity in First Indiana's allowance for
loan losses for the periods indicated.
The 1995 loan loss provision increased to $7.9 million in response to
significant growth in the Bank's targeted portfolios of home equity, residential
construction, and
<TABLE>
<CAPTION>
Summary of Loan Loss Experience Years Ended December 31,
--------------------------------------------------
(Dollars in Thousands) 1997 1996 1995 1994 1993
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance of Allowance for Loan Losses at
Beginning of Year $18,768 $16,234 $12,525 $11,506 $ 8,748
Charge-Offs
Residential Mortgage (83) (9) (34) (82) (294)
Residential Construction (1,190) (360) (231) (425) (279)
Commercial Real Estate (75) - (1,139) (167) (80)
Consumer (7,210) (9,592) (2,969) (2,181) (993)
Commercial and Industrial (528) - (61) (194) (136)
----------- ----------- ---------------------------
Total Charge-Offs (9,086) (9,961) (4,434) (3,049) (1,782)
----------- ----------- ---------------------------
Recoveries
Residential Mortgage - 26 6 3 -
Residential Construction 40 69 16 - 33
Commercial Real Estate 727 135 13 - -
Consumer 1,261 1,429 190 165 111
Commercial and Industrial 4 42 18 - -
----------- ----------- ---------------------------
Total Recoveries 2,032 1,701 243 168 144
----------- ----------- ---------------------------
Net Charge-Offs (7,054) (8,260) (4,191) (2,881) (1,638)
Provision for Loan Losses 10,700 11,815 7,900 3,900 4,396
Recapture of Loan Loss Provision Due to
Auto Portfolio Sale - (1,021) - - -
Balance of Allowance for Loan Losses at ----------- ----------- ---------------------------
End of Year 22,414 18,768 16,234 12,525 11,506
----------- ----------- ---------------------------
Balance of REO Loss Allowance at
End of Year 483 543 1,066 1,216 1,483
----------- ----------- ---------------------------
Balance of Loan and REO Loss Allowance
at End of Year $22,897 $19,311 $17,300 $13,741 $12,989
====================================================
<PAGE> 14 (10k page 171)
Ratio of Net Charge-Offs to Average Loans
Outstanding 0.55% 0.67% 0.35% 0.29% 0.17%
Ratio of Allowance for Loan Losses to
Loans Receivable 1.63% 1.52% 1.28% 1.15% 1.16%
Ratio of Total Loan and REO Loss Allowance to
Non-Performing Assets 100.33% 71.20% 63.68% 47.26% 35.61%
Ratio of Allowance for Loan Losses to
Non-Performing Loans 121.60% 84.19% 67.91% 57.72% 51.80%
</TABLE>
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 portfolios, and has increased
the loan loss provision accordingly.
The net charge-offs of $7.1 million and $8.3 million in 1997 and 1996 reflect
both the significant increase in home equity loans outstanding and the
adoption of a more conservative charge-off policy similar to that of other
banks in 1996. 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 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's loan loss provision of $10.7 million and $11.8 million in 1997 and
1996, respectively, reflects the 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 loan 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.
As a result, the allowance for loan losses increased to $22,414,000 at
December 31, 1997, or 122 percent of the non-performing loans at year-end.
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,
-----------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- -----------------------------------------------------------------------
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 $ 588 36.7% $ 632 34.9% $ 426 33.3% $ 376 36.4% $ 796 40.1%
Residential
Construction Loans 3,663 11.4 3,270 11.2 2,928 11.2 2,110 10.7 1,852 10.9
Commercial Real
Estate Loans 330 2.9 777 3.7 1,095 4.4 2,219 5.6 2,681 7.4
Consumer Loans 9,706 39.9 9,042 42.7 7,808 45.4 5,375 43.5 3,571 38.6
Commercial and
Industrial 2,008 9.1 1,809 7.5 820 5.7 519 3.8 505 3.0
Unallocated 6,119 - 3,238 - 3,157 - 1,926 - 2,101 -
----------------- ----------------- ----------------- ----------------- -----------------
$22,414 100.0% $18,768 100.0% $16,234 100.0% $12,525 100.0% $11,506 100.0%
================= ================= ================= ================= ===============
</TABLE>
<PAGE> 15 (10k page 172)
Capital Resources and Liquidity
Capital
At December 31, 1997, First Indiana's shareholders' equity was $153,036,000,
or 9.49 percent of total assets, compared with $138,658,000, or 9.27 percent
of total assets, at December 31, 1996.
In July 1996, the Corporation's Board of Directors authorized the repurchase
from time to time of up to an additional $5,000,000 of the Corporation's
outstanding common stock. At December 31, 1997, the Corporation had
repurchased 706,608 shares of its common stock, or 5.6 percent of its shares
outstanding.
In November 1997, the Corporation's Board of Directors established a
shareholder rights agreement, whereby each common shareholder is entitled
to one preferred stock right for each share of common stock held. The rights
"flip in" upon the acquisition of 20 percent of the Corporation's outstanding
common stock in a takeover attempt, and offer current shareholders a
measure of protection of their investment in First Indiana. The complete terms
of the rights agreement have been filed on Form 8-A with the Securities and
Exchange Commission.
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 $1,107,555,000
at December 31, 1997 and $1,095,486,000 at December 31, 1996.
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. In 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 Bank's liquidity position. The Bank's
liquidity ratio at December 31, 1997 was 7.30 percent.
Impact of Accounting Standards Not Yet Adopted
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.
Year 2000 Compliance
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
compliant 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 compliance 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 compliance issues, and has begun
to develop action plans for assessing the impact of each issue. During 1998,
the Bank will be validating Year 2000 compliance, upgrading or replacing
existing hardware and software, or developing contingency plans in the event
the vendor or borrower will not assist the Bank in becoming Year 2000
compliant. The Bank already has plans to upgrade all of its personal
computers in 1998 at a cost of $539,000. 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.
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, 1997, First Indiana's six-month and one-year cumulative gap
stood at a negative 0.68 percent and a negative 0.20 percent of total interest-
earning assets. This compares with 2.03 percent and 4.50 percent at December
31, 1996. This means that
[This page contains bar graphs showing the following information]
<TABLE>
<CAPTION>
Bank Capital/Assets Checking Deposits (Dollars in Thousands)
- ------------------- ----------------------------------------
Actual Required <S> <C>
- ------ -------- 1993 $175,476
<C> <C> 1994 163,023
8.37% 1.50% 1995 177,804
8.37 3.00 1996 187,760
11.99 8.00 1997 191,996
</TABLE>
<PAGE> 16 (10k page 173)
The following table shows First Indiana's interest-rate sensitivity at
December 31, 1997 and 1996.
<TABLE>
<CAPTION>
Interest-Rate Sensitivity
(Dollars in Thousands) Rate Sensitivity by Period of Maturity or Rate Change At December 31, 1997
--------------------------------------------------------------------------
Percent Over 180 Over One Over
of Within Days to Year to Five
Rate Balance Total 180 Days One Year Five Years Years
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Investment Securities
and Other 6.14%$ 127,400 8.29 % $ 58,297 $ 15,005 $ 54,098 $ --
Loans Receivable (1)
Mortgage-Backed
Securities 7.09 38,279 2.49 9,509 5,118 15,140 8,512
Residential Mortgage
Loans 7.37 503,212 32.75 222,684 87,298 163,669 29,561
Residential Construction
Loans 8.77 155,680 10.13 140,261 -- 15,419 --
Commercial Real
Estate Loans 8.52 39,568 2.58 10,805 6,029 13,555 9,179
Commercial and
Industrial Loans 10.01 124,467 8.10 79,858 1,871 26,000 16,738
Consumer Loans 10.51 548,016 35.66 236,961 52,954 193,903 64,198
-----------------------------------------------------------------
8.77 $1,536,622 100.00 % 758,375 168,275 481,784 128,188
===================== ----------------------------------------
Interest-Bearing Liabilities
Deposits
Demand Deposits (2) 2.53 $ 101,384 7.51 % -- -- -- 101,384
Passbook Deposits (3) 3.00 42,004 3.11 11,013 6,801 20,030 4,160
Money Market Savings 4.82 272,333 20.17 272,333 -- -- --
Jumbo Certificates 5.85 122,825 9.10 67,151 15,955 39,719 --
Fixed-Rate Certificates 5.70 478,397 35.43 190,550 128,244 159,603 --
----------------------------------------------------------------
5.06 1,016,943 75.32 541,047 151,000 219,352 105,544
Borrowings
FHLB Advances 5.62 257,458 19.07 152,000 10,000 92,000 3,458
Short-Term Borrowings 5.48 75,751 5.61 75,751 -- -- --
----------------------------------------------------------------
5.19 1,350,152 100.00 % 768,798 161,000 311,352 109,002
========
Net - Other (4) 186,470 186,470
---------- ----------------------------------------
Total $1,536,622 768,798 161,000 311,352 295,472
========== ----------------------------------------
Rate Sensitivity Gap $ (10,423)$ 7,275 $ 170,432 $ (167,284)
===========================================
December 31, 1997 Gap
Cumulative Rate-
Sensitivity Gap $ (10,423)$ (3,148)$ 167,284
================================
Percent of Total
Interest-Earning Assets (0.68)% (0.20)% 10.89%
================================
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%
================================
(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 $32,690 of
loans held for resale. Included in Consumer Loans are $24,828 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> 17 (10k page 174)
0.68 and 0.20 percent of First Indiana's liabilities will reprice within six
months and one year without a corresponding repricing of the assets they are
funding. Management intends to maintain a relatively neutral gap position to
manage the volatility of earnings.
Financial Condition
First Indiana's total assets at December 31, 1997 were $1,613,405,000,
compared with $1,496,421,000 at December 31, 1996. Loans receivable stood
at $1,348,529,000 at year-end 1997, compared with $1,215,550,000 one year
earlier.
The composition of the Bank's loan portfolio continued to change in 1997, as
the Bank added higher-yielding loans to the balance sheet through the
origination of home equity and residential construction loans.
Residential loans outstanding amounted to $500,817,000 at December 31,
1997, compared with $429,427,000 in 1996. This growth occurred through the
Bank's employment of alternative delivery channels, such as a call center,
wholesale lending, and the development of strategic alliances with builders
and realtors. Consumer loans outstanding were $548,016,000 at the end of
1997, compared with $526,769,000 one year earlier. This increase primarily
represents the Bank's efforts to build a portfolio of loans available for sale
to the secondary market. Construction loans outstanding increased to
$155,680,000, compared with $138,135,000 at the end of 1996. The Bank
focused on offering new products to builders and customers in 1997 in order
to develop a multi-faceted relationship.
Total loan sales in 1997 amounted to $217,132,000, compared with
$332,021,000 in 1996 and $264,116,000 in 1995.
The Bank's loan servicing portfolio was $969,089,000 at December 31, 1997,
compared with $1,057,731,000 and $1,130,209,000 at December 31, 1996 and
1995. The servicing portfolio provides a source of fee income, but is subject to
fluctuations as rates fall and serviced loans pay off.
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 origina-
tions, 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
December 31, 1997, management believes that a 100 basis point increase or
decrease in interest rates over a 12 month period would result in a 6.2 percent
increase and a 9.3 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.
[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>
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
1997 1,613,405 1997 155,680
<CAPTION>
Home Equity Loans Outstanding Loan Servicing Portfolio
(Dollars in Thousands) (Dollars in Thousands)
- ----------------------------- ------------------------
<S> <C> <S> <C>
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
1997 528,185 1997 969,089
</TABLE>
<PAGE> 18 (10k page 175)
Five Year Summary of Selected Financial Data
<TABLE>
<CAPTION>
First Indiana Corporation and Subsidiaries
At December 31,
--------------------------------------------------
(Dollars in Thousands, 1997 1996 1995 1994 1993
Except Per Share Data) -------- --------------------------------------------
Selected Financial Condition Data
<S> <C> <C> <C> <C> <C>
Total Assets $1,613,405 $1,496,421 $1,541,843 $1,408,629 $1,322,288
Loans Receivable -- Net 1,348,529 1,215,550 1,250,726 1,078,494 978,053
Mortgage-Backed Securities 38,279 36,412 49,498 69,597 101,293
Investments 111,400 106,895 102,656 149,529 113,165
Total Deposits 1,107,555 1,095,486 1,136,980 1,031,911 1,030,257
Federal Home Loan Bank Advances 257,458 s 215,466 214,781 201,155 106,877
Short-Term Borrowings 75,751 30,055 38,642 35,922 -
Mortgage-Backed Bonds - - - - 50,000
Shareholders' Equity 153,036 138,658 129,297 120,712 113,583
<CAPTION>
Years Ended December 31,
1997 1996 1995 1994 1993
Selected Operations Data
<S> <C> <C> <C> <C> <C>
Interest Income $127,330 $125,468 $124,061 $97,572 $97,084
Interest Expense 64,351 63,785 66,017 48,343 51,179
Provision for Losses on Loans and
Real Estate Owned, Net 10,700 10,794 7,900 3,900 4,396
Net Earnings 17,744 13,704 17,267 10,636 15,101
Net Interest Margin During Year 4.36% 4.37% 4.12% 3.96% 3.64%
Basic Earnings Per Share $ 1.40 $ 1.10 $ 1.39 $ .82 $ 1.17
Diluted Earnings Per Share 1.36 1.06 1.34 .80 1.17
Dividends Declared Per Common Share .40 .38 .32 .28 .20
Selected Ratios
Net Earnings to:
Average Total Assets 1.17% .92% 1.16% .80% 1.12%
Average Shareholders' Equity 12.16 10.15 14.03 9.08 14.05
Average Shareholders' Equity to
Average Total Assets 9.66 9.09 8.28 8.83 7.98
Dividend Payout Ratio 28.53 33.89 22.45 35.23 17.05
</TABLE>
<PAGE> 19 (10k page 176)
<TABLE>
<CAPTION>
Consolidated Balance Sheets
First Indiana Corporation and Subsidiaries
December 31,
------------------------
(Dollars in Thousands, Except Share Data) 1997 1996
-------------- --------
<S> <C> <C>
Assets
Cash $ 34,231 $ 31,618
Federal Funds Sold 16,000 42,000
-------------- --------
Total Cash and Cash Equivalents 50,231 73,618
Investments Available For Sale (Note 2) 106,095 101,356
Investments Held to Maturity (Market Value of $5,419 and $5,673)
(Notes 2 and 9) 5,305 5,539
Mortgage-Backed Securities Available for Sale (Notes 3 and 9) 17,077 -
Mortgage-Backed Securities Held to Maturity--Net
(Market Value of $21,549 and $36,984) (Notes 3 and 9) 21,202 36,412
Loans Held for Sale 57,518 23,223
Loans Receivable 1,313,425 1,211,095
Less Allowance for Loan Losses (22,414) (18,768)
---------------- ----------
Loans Receivable--Net(Notes 4,5,8, and 12) 1,348,529 1,215,550
Premises and Equipment (Note 6) 13,947 13,705
Accrued Interest Receivable 11,322 10,696
Real Estate Owned--Net (Note 5) 3,907 4,285
Prepaid Expenses and Other Assets 35,790 35,260
----------------------------
Total Assets $1,613,405 $1,496,421
============================
Liabilities and Shareholders' Equity
Liabilities
Non-Interest-Bearing Deposits $ 90,612 $ 83,259
Interest-Bearing Deposits 1,016,943 1,012,227
---------------- ----------
Total Deposits (Note 7) 1,107,555 1,095,486
Federal Home Loan Bank Advances (Note 8) 257,458 215,466
Short-Term Borrowings (Note 9) 75,751 30,055
Accrued Interest Payable 2,715 2,018
Advances by Borrowers for Taxes and Insurance 1,419 1,120
Other Liabilities 10,733 7,933
---------------- ----------
Total Liabilities 1,455,631 1,352,078
---------------- ----------
Negative Goodwill 4,738 5,685
---------------- ----------
Shareholders' Equity (Notes 10, 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; 13,374,799
and 13,160,321 Shares Issued and Outstanding, Including Shares in Treasury 134 132
Paid-In Capital in Excess of Par 34,662 33,181
Retained Earnings 123,699 111,767
Accumulated Other Comprehensive Income 981 (72)
Treasury Stock - At Cost, 706,608 and 705,199 Shares in 1997 and 1996 (6,440) (6,350)
--------------- ---------
Total Shareholders' Equity 153,036 138,658
Commitments and Contingencies (Note 12) - -
--------------- ---------
Total Liabilities and Shareholders' Equity $1,613,405 $1,496,421
============================
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 20 (10k page 177)
<TABLE>
<CAPTION>
Consolidated Statements of Earnings
First Indiana Corporation and Subsidiaries Years Ended December 31,
-------------------------------------
(Dollars in Thousands, Except Per Share Data) 1997 1996 1995
--------------------------------------
<S> <C> <C> <C>
Interest Income
Loans $117,371 $114,799 $109,871
Investments 6,818 6,887 9,181
Mortgage-Backed Securities 2,446 2,986 4,396
Federal Funds Sold and Interest-Bearing Deposits 695 796 613
------------- ----------------------
Total Interest Income 127,330 125,468 124,061
------------- ----------------------
Interest Expense
Deposits (Note 7) 49,936 52,077 50,533
Federal Home Loan Bank Advances 12,288 10,706 12,891
Short-Term Borrowings 2,127 1,002 2,593
------------- ----------------------
Total Interest Expense 64,351 63,785 66,017
------------- ----------------------
Net Interest Income 62,979 61,683 58,044
Provision for Loan Losses, Net (Note 5) 10,700 10,794 7,900
------------- ----------------------
Net Interest Income After Provision for Loan Losses 52,279 50,889 50,144
------------- ----------------------
Non-Interest Income
Sale of Investments - - (7)
Sale of Investments Available for Sale 217 281 53
Sale of Loans 4,932 3,075 2,749
Sale of Subsidiary - 1,165 -
Sale of Deposits - - 1,497
Dividends on FHLB Stock 1,055 1,033 996
Loan Servicing Income 2,767 2,908 2,645
Loan Fees 2,358 2,302 2,206
Insurance Commissions 238 662 1,280
Accretion of Negative Goodwill 948 948 948
Deposit Product Fee Income 2,646 2,593 2,124
Other 2,844 2,881 1,760
------------- ----------------------
Total Non-Interest Income 18,005 17,848 16,251
------------- ----------------------
Non-Interest Expense
Salaries and Benefits 19,916 18,094 20,890
Net Occupancy 2,852 3,087 3,069
Deposit Insurance 693 9,186 2,298
Real Estate Owned Operations--Net 652 598 (3,060)
Equipment 4,692 4,508 4,636
Office Supplies and Postage 1,849 2,069 1,934
Other 10,450 9,711 8,880
------------- ----------------------
Total Non-Interest Expense 41,104 47,253 38,647
------------- ----------------------
Earnings Before Income Taxes 29,180 21,484 27,748
Income Taxes (Note 10) 11,436 7,780 10,481
------------- ----------------------
Net Earnings $17,744 $13,704 $17,267
====================================
Basic Earnings Per Share $ 1.40 $ 1.10 $ 1.39
====================================
Diluted Earnings Per Share $ 1.36 $ 1.06 $ 1.34
====================================
Dividends Per Common Share $ 0.40 $ 0.38 $ 0.32
====================================
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 21 (10k page 178)
<TABLE>
<CAPTION>
Consolidated Statements of Shareholders' Equity
First Indiana Corporation and Subsidiaries
Accumulated
Paid-In Other
Common Stock Capital Compre- Total
-------------------- in Excess Retained hensive Treasury Shareholders'
(Dollars in Thousands, Except Per Share Data) Shares Amount of Par Earnings Income Stock Equity
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 12,974,854 $131 $31,867 $ 88,981 $(120) $ (147) $120,712
Comprehensive Income:
Net Earnings for 1995 - - - 17,267 - - 17,267
Unrealized Gain on Securities Available
for Sale, Net of Income Taxes of $351
and Reclassification Adjustment (Note 2) - - - - 515 - 515
Total Comprehensive Income 17,782
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 120,830 1 536 - - - 537
Dividends -- $.32 Per Share - - - (3,877) - - (3,877)
Purchase of Treasury Stock (687,199) - - - - (6,203) (6,203)
---------------------------------------------------------------------------------
Balance at December 31, 1995 12,408,485 132 32,671 102,449 395 (6,350) 129,297
Comprehensive Income:
Net Earnings for 1996 - - - 13,704 - - 13,704
Unrealized Loss on Securities Available
for Sale, Net of Income Taxes of $(320)
and Reclassification Adjustment (Note 2) - - - - (467) - (467)
Total Comprehensive Income 13,237
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 47,701 - 331 - - - 331
Dividends -- $.38 Per Share - - - (4,644) - - (4,644)
Payment for Fractional Shares (1,064) - (16) - - - (16)
--------------------------------------------------------------------------------
Balance at December 31, 1996 12,455,122 132 33,181 111,767 (72) (6,350) 138,658
Comprehensive Income:
Net Earnings for 1997 - - - 17,744 - - 17,744
Unrealized Gain on Securities Available
for Sale, Net of Income Taxes of $271
and Reclassification Adjustment (Note 2) - - - - 397 - 397
Tax Benefit of Stock Options Exercised - - - - 656 - 656
Total Comprehensive Income 18,797
Common Stock Issued Under Restricted
Stock Plans-Net of Amortization (Note 13) 43,500 - 1,088 (725) - - 363
Common Stock Issued Under Deferred
Compensation Plan - - - (24) - - (24)
Exercise of Stock Options 201,306 2 866 - - - 868
Dividends -- $.40 Per Share - - - (5,063) - - (5,063)
Redemption of Common Stock (29,823) (501) - - - (501)
Purchase of Treasury Stock (6,000) - - - (132) (132)
Reissuance of Treasury Stock 4,591 40 - - 42 82
Payment for Fractional Shares (505) - (12) - - - (12)
----------------------------------------------------------------------------------
Balance at December 31, 1997 12,668,191 $134 $34,662 $123,699 $981 $(6,440) $153,036
==================================================================================
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 22 (10k page 179)
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
First Indiana Corporation and Subsidiaries
(Dollars in Thousands Except Per Share Data)
Years Ended December 31,
-----------------------------------
1997 1996 1995
------------ ----------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Earnings $ 17,744 $ 13,704 $ 17,267
Adjustments to Reconcile Net Earnings to Net Cash Provided
(Used) by Operating Activities
Loss (Gain) on Sale of Assets and Deposits (5,148) (4,524) (4,307)
Amortization 864 1,325 2,197
Amortization of Restricted Stock Plan 363 473 367
Depreciation 2,022 1,958 1,909
Loan and Mortgage-Backed Securities Net Accretion 668 (51) (366)
Provision for Loan Losses,Net 10,700 10,794 7,900
Origination of Loans Held for Sale
Net of Principal Collected (240,558) (263,197) (179,919)
Proceeds from Sale of Loans Held for Sale 211,858 295,764 138,803
Change In:
Accrued Interest Receivable (626) 949 (1,833)
Other Assets (10,181) (1,166) (7,321)
Accrued Interest Payable 697 (697) 1,019
Other Liabilities 2,882 (2,755) 3,392
--------------------------------------
Net Cash (Used) Provided by Operating Activities (8,715) 52,577 (20,892)
--------------------------------------
Cash Flows From Investing Activities
Proceeds From Sales of Investment Securities
Held to Maturity -- -- 2,993
Proceeds From Sales of Investments Available for Sale 14,991 35,703 72,857
Proceeds From Maturities of Investment Securities
Held to Maturity 20,932 27,611 6,018
Purchase of Investment Securities Held to Maturity -- -- (35,388)
Purchase of Investment Securities Available for Sale (39,912) (68,225) --
Purchase of Mortgage-Backed Securities Available for Sale (17,568) -- --
Principal Collected on Mortgage-Backed Securities 7,903 13,086 20,099
Originations of Loans Net of Principal Collected (107,404) (41,050) (260,919)
Proceeds From Sale of Indirect Installment Portfolio -- 32,756 --
Proceeds From Sale of Loans 5,274 3,501 125,313
Proceed From Sale of Mortgage-Backed Securities 7,528 -- --
Purchase of Premises and Equipment (2,291) (2,653) (1,750)
Proceeds From Sale of Premises and Equipment 27 150 32
--------------------------------------
Net Cash (Used) Provided by Investing Activities (110,520) 879 (70,745)
--------------------------------------
Cash Flows From Financing Activities
Net Change in Deposits 12,069 (41,494) 132,028
Proceeds from Sale of Deposits -- -- (25,462)
Repayments of Federal Home Loan Bank Advances (174,028) (288,025) (366,024)
Borrowings of Federal Home Loan Bank Advances 216,020 288,710 379,650
Net Change in Short-Term Borrowings 45,696 (8,587) 2,720
Net Change in Advances by Borrowers for Taxes and Insurance 299 (987) (249)
Stock Option Proceeds 367 331 537
Tax Benefit of Option Compensation 656 -- --
Common Stock Issued Under Deferred Compensation Plan (24) (20) (21)
Payment for Fractional Shares (12) (16) --
Purchase of Treasury Stock (132) -- (6,203)
Dividends Paid (5,063) (4,644) (3,877)
--------------------------------------
Net Cash Provided (Used) By Financing Activities 95,848 (54,732) 113,099
--------------------------------------
Net Change in Cash and Cash Equivalents (23,387) (1,276) 21,462
Cash and Cash Equivalents at Beginning of Year 73,618 74,894 53,432
--------------------------------------
Cash and Cash Equivalents at End of Year $ 50,231 $ 73,618 $ 74,894
======================================
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 23 (10k page 180)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Indiana Corporation and Subsidiaries
Years Ended December 31, 1997, 1996, and 1995
(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 depository
institutions, 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
depository institutions, lending 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 classifies
investments in debt securities as either trading, held to maturity, or available
for sale.
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.
(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 orig-
<PAGE> 24 (10k page 181)
inated 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 loan pipeline and
conservatively manages through limits on market exposure. Currently, the
Bank achieves this objective through the use of forward sales contracts. 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.
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 adjusta-
ble 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, 1997, the balance of capitalized loan servi-
cing rights included in other assets was $4,522,000, with a fair market value of
$5,867,000. The amounts capitalized in 1997 and 1996 were $893,000 and
$986,000, and the amounts amortized to loan servicing income were
$819,000 and $92,000. There were no valuation allowances at December 31,
1997, and no activity for the year then ended.
Effective January 1, 1997, the Bank adopted Statement of Financial Accounting
Standard Nos. 125 and 127, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("FAS 125"). FAS 125,
which supersedes FAS 122, 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. Since the Corporation had already adopted FAS 122,
these pronouncements had no material impact 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.
(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
<PAGE> 25 (10k page 182)
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 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. In February 1997, the 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 15.
Basic earnings per share for 1997, 1996, and 1995 were computed by dividing
net earnings by the weighted average shares of common stock outstanding
(12,643,615, 12,433,282, and 12,440,944 in 1997, 1996, and 1995,
respectively). Diluted earnings per share for 1997, 1996, and 1995 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 (12,643,615,
12,920,510, and 12,869,531 in 1997, 1996 and 1995, respectively). Dilution of
the per-share calculation relates to stock options. Diluted earnings per share
for 1997, 1996, and 1995 are the same as primary earnings per share
calculated and reported under superseded APB 15. Fully diluted earnings per
share as previously reported under APB 15 are no longer required.
(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 1996 and 1995 Financial
Statements have been reclassified to conform to the current year presentation.
(N) Negative Goodwill. Negative goodwill (the excess of assigned value of
assets and liabilities acquired over the cost of the acquired enterprises)
arises from the Bank's acquisition of Mooresville Savings Bank and First Fed-
eral Savings and Loan Association of Rushville in 1992. The gross amount of
$9,858,000 is being accreted to earnings over a ten-year period using the
straight-line method.
(O) Comprehensive Income. In June 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standard No. 130,
"Reporting Comprehensive Income" ("FAS 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 equity. The Statement is effective for fiscal years
beginning after December 15, 1997 with earlier application permitted. The
Corporation elected to adopt FAS 130 as of December 31, 1997, and the
statement had no impact on the financial condition or results of operations.
<PAGE> 26 (10k page 183)
(2) Investments and Their Scheduled Maturities
<TABLE>
<CAPTION>
Investments Available for Sale:
December 31,
----------------------------------------------------------------------
1997 1996
------------------------------------ ----------------------------------
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 $83,355 $222 $ (42) $83,535 $78,305 $129 $(351) $78,083
Corporate Debt Securities 10,281 149 - 10,430 10,394 92 (26) 10,460
Asset-Backed Securities 11,884 37 - 11,921 12,579 22 - 12,601
Other 200 9 - 209 200 12 - 212
------------------------------------ ----------------------------------
$105,720 $417 $ (42)$106,095 $101,478 $255 $(377)$101,356
======================================================================
</TABLE>
<TABLE>
<CAPTION>
Scheduled Maturities:
December 31, 1997
------------------------------------------------------------------------------
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 $34,976 $35,020 5.53% $ 5,000 $ 5,000 6.39% $ - $ - -%
After One Year to
Five Years 48,379 48,515 5.78 5,281 5,430 9.68 - - -
After Five Years to
Ten Years - - - - - - 1,884 1,891 6.84
After Ten Years - - - - - - 10,000 10,030 6.96
---------------- ---------------- ----------------
$83,355 $83,535 $10,281 $10,430 $11,884 $11,921
================ ================ ================
<PAGE> 27 (10k page 184)
<CAPTION>
(2) Investments and Their Scheduled Maturities (continued)
------------------------------------------------------
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 $55 $55 6.30% $40,031 $40,075 5.64%
After One Year to
Five Years 145 154 6.50 53,805 54,099 6.16
After Five Years to
Ten Years - - - 1,884 1,891 6.84
After Ten Years - - - 10,000 10,030 6.96
------------- ----------------
$200 $209 $105,720 $106,095
============= ================
</TABLE>
The weighted average yield on investments held for sale was 6.05 percent at
December 31, 1997 and 5.87 percent at December 31, 1996. 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, 1997, all of First Indiana's corporate debt securities were
issued by finance companies and were rated investment grade or higher by
Standard & Poor's or Moody's Investor Services. The Bank's investment policy
prohibits investment in non-investment grade issues. In 1997, realized gains
(losses) from the sale of investment securities available for sale were $12,000
and $(17,000). 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 investments held for sale were $961,000 and
$(89,000).
The following table discloses the reclassification adjustments for
Comprehensive Income:
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
-----------------------------
<S> <C> <C> <C>
Unrealized Holding Gains (Losses)
Arising During the Period $614 $(186) $568
Reclassification Adjustment for
Gains Included in Net Earnings (217) (281) (53)
------------------------------
Net Unrealized Gain (Loss) on
Securities Available for Sale $397 $(467) $515
==============================
</TABLE>
<TABLE>
<CAPTION>
Investments Held to Maturity:
December 31,
------------------------------------------------------------------------------
1997 1996
------------------------------------------------------------------------------
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 $5,305 $114 $ - $ 5,419 $ 5,539 $ 134 $ - $ 5,673
--------------------------------------------------------------------------------
$ 5,305 $ 114 $ - $ 5,419 $ 5,539 $ 134 $ - $ 5,673
===============================================================================
</TABLE>
Investment securities held to maturity totaling $367,000 with a weighted
average yield of 10 percent mature within five to 10 years, while the
remaining $4,938,000 of investments held to maturity, yielding 7.38 percent,
have maturities in excess of 10 years.
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 held to maturity was 7.56 percent at
December 31, 1997 and 7.05 percent at December 31, 1996. In 1997 and 1996,
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> 28 (10k page 185)
(3) Mortgage-Backed Securities
<TABLE>
<CAPTION>
Held to Maturity:
December 31, 1997
------------------------------------------------
Unreal- Unreal-
Book ized ized Market
Value Gains Losses Value
(Dollars in Thousands) ------------------------------------------------
<S> <C> <C> <C> <C>
FHLMC $ 9,354 $ 324 $ - $ 9,678
FNMA 11,209 247 (31) 11,425
GNMA 116 5 - 121
Participation Certificates 325 - - 325
Deferred Income and Net Unearned Discounts 198 - (198) -
------------------------------------------------
$ 21,202 $ 576 $ (229) $ 21,549
================================================
<CAPTION>
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
================================================
</TABLE>
The weighted average yield on mortgage-backed securities was 7.19 percent
and 7.69 percent at December 31, 1997 and 1996. 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 10 years. Realized gains in 1997
on mortgage-backed securities near maturity were $221,000.
At December 31, 1996, First Indiana had no mortgage-backed securities
available for sale. The weighted average yield on mortgage-backed securities
available for sale was 6.96 percent at December 31, 1997, and the securities
have maturities in excess of 10 years.
<TABLE>
<CAPTION>
Available for Sale:
December 31, 1997
------------------------------------------------
Unreal- Unreal-
Book ized ized Market
Value Gains Losses Value
(Dollars in Thousands) ------------------------------------------------
<S> <C> <C> <C> <C>
FHLMC $ 9,736 $ 152 $ - $ 9,888
FNMA 7,083 106 - 7,189
GNMA - - - -
Participation Certificates - - - -
Deferred Income and Net Unearned Discounts 87 - (87) -
------------------------------------------------
$ 16,906 $ 258 $ (87) $ 17,077
================================================
</TABLE>
(4) Loans Receivable
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
(Dollars in Thousands) ----------------------------
<S> <C> <C>
Residential Mortgage Loans
Loans Held for Sale $ 32,690 $ 18,812
Loans Held in Portfolio 468,128 410,615
Residential Construction Loans 253,259 214,354
Commercial Real Estate Loans 39,748 45,936
Commercial and Industrial Loans 137,517 100,503
Consumer Loans
Home Equity Loans Held for Sale 24,828 4,411
Home Equity Loans Held in Portfolio 503,357 494,328
Installment Loans 14,994 22,223
Other Consumer Loans 4,837 5,807
Undisbursed Portion of Loans
Residential Construction Loans (97,579) (76,219)
Commercial Real Estate Loans - (10)
Commercial and Industrial Loans (13,050) (7,944)
Deferred Income and Net Unearned Discounts 2,214 1,502
Allowance for Loan Losses (22,414) (18,768)
----------------------------
$1,348,529 $1,215,550
===========================
</TABLE>
<PAGE> 29 (10k page 186)
(4) Loans Receivable (continued)
The weighted average yield on loans was 9.06 percent and 9.29 percent at
December 31, 1997 and 1996. Loans serviced for others amounted to
$969,089,000 and $1,057,731,000 at December 31, 1997 and 1996.
Total restructured loans amounted to $6,913,000 at December 31, 1996. These
loans were repaid in 1997.
Nearly 60 percent of First Indiana's residential construction and permanent
mortgage loans are secured by collateral located in Indiana, with another 19
percent and 18 percent located in North Carolina and Florida. Over 66 percent
of the Bank's consumer loans are secured by collateral located in Indiana and
its contiguous states, with over 45 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 $72 million and $63 million in fixed-rate
loans were sold in 1997 and 1996. In addition, at December 31, 1997 and
1996, the Bank had classified $24,828,000 and $4,411,000 of home equity
loans as held for sale.
During the third quarter of 1996, 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 1997, 1996, and 1995, the Bank transferred $7,922,000, $7,216,000
and $4,760,000 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,
-----------------------------------
1997 1996 1995
(Dollars in Thousands) -------------------------------------
<S> <C> <C> <C>
Balance of Allowance for Loan Losses at Beginning of Year $18,768 $16,234 $12,525
Charge-Offs
Residential Mortgage (83) (9) (34)
Residential Construction (1,190) (360) (231)
Commercial Real Estate (75) - (1,139)
Commercial and Industrial (528) - (61)
Consumer (7,210) (9,592) (2,969)
------------- ---------------------
Total Charge-Offs (9,086) (9,961) (4,434)
------------- ---------------------
Recoveries
Residential Mortgage - 26 6
Residential Construction 40 69 16
Commercial Real Estate 727 135 13
Commercial and Industrial 4 42 18
Consumer 1,261 1,429 190
------------- ---------------------
Total Recoveries 2,032 1,701 243
------------- ---------------------
Net Charge-Offs (7,054) (8,260) (4,191)
------------- ---------------------
Provision for Loan Losses 10,700 11,815 7,900
Recapture of Loan Loss Provision
Due to Auto Portfolio Sale - (1,021) -
------------- ---------------------
Balance of Allowance for Loan Losses at End of Year 22,414 18,768 16,234
Balance of REO Loss Allowance at End of Year 483 543 1,066
------------------------------------
Balance of Loan and REO Loss Allowance at End of Year $22,897 $19,311 $17,300
====================================
</TABLE>
A summary of activity in the allowance for REO losses for the years
ended December 31, 1997, 1996, and 1995 follows.
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996 1995
-------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at Beginning of Year $ 543 $1,066 $1,216
REO Charge-Offs (60) (123) (150)
Recapture of REO Loss Provision - (400) -
-------------------------
Balance at End of Year $ 483 $ 543 $1,066
========================
</TABLE>
(6) Premises and Equipment
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
(Dollars in Thousands) ------------------ --------
<S> <C> <C>
Land $ 2,313 $ 2,308
Buildings 8,769 8,741
Leasehold Improvements 1,343 1,300
Furniture, Fixtures, and Equipment 16,679 14,653
Accumulated Depreciation and Amortization (15,157) (13,297)
------------------ --------
$13,947 $13,705
==========================
</TABLE>
<PAGE> 30 (10k page 187)
(7) Deposits
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------
1997 1996
------------------------------- --------------------------------
Weighted Weighted
(Dollars in Thousands) Average Average
Amount Percent Rate Amount Percent Rate
Type ------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-Interest Bearing $ 90,612 8.18% - % $ 83,259 7.60% - %
NOW Checking 99,289 8.97 2.53 93,300 8.52 2.21
Money Market Checking 2,095 0.19 2.39 11,201 1.02 2.15
Passbook and Statement Savings 302,589 27.32 4.63 303,645 27.72 4.51
Money Market Savings 11,748 1.06 3.27 14,662 1.34 3.27
Jumbo Certificates of $100 or Greater 120,756 10.90 5.85 97,398 8.89 5.74
Fixed-Rate Certificates 480,466 43.38 5.70 492,021 44.91 5.63
----------------- -----------------
$1,107,555 100.00% 4.64 $1,095,486 100.00% 4.55
========= =========
<CAPTION>
Maturity Amount Percent Amount Percent
------------------ ------------------
<S> <C> <C> <C> <C>
Checking $ 191,996 17.34% $ 187,760 17.14%
Passbook and Statement Savings 302,589 27.32 303,645 27.72
Money Market Savings 11,748 1.06 14,662 1.34
Certificates Maturing in:
One Year 390,051 35.22 294,987 26.93
Two Years 123,231 11.13 193,567 17.67
Three Years 80,450 7.26 49,667 4.53
Four Years 4,553 0.41 46,844 4.28
Five Years 2,937 0.26 4,354 0.39
------------------ ------------------
$1,107,555 100.00% $1,095,486 100.00%
================== ==================
</TABLE>
Interest expense for the years ended December 31, 1997, 1996, and
1995 was as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31,
-----------------------------------
1997 1996 1995
-----------------------------------
<S> <C> <C> <C>
NOW and Money Market Checking $ 2,473 $ 2,531 $ 2,333
Passbook, Statement, and
Money Market Savings 14,317 13,529 11,144
Certificates of Deposit 33,146 36,017 37,056
-----------------------------------
$49,936 $52,077 $50,533
===================================
</TABLE>
Cash paid during the year for interest on deposits, advances, and other
borrowed money was $63,654,000, $64,482,000, and $64,998,000 for 1997, 1996,
and 1995.
Official checking accounts at December 31, 1997 and 1996 were $32,517,000
and $33,157,000 respectively. Included in official checking accounts deposits
at December 31, 1997 and 1996 were $4,624,000 and $5,321,000 of non-interest-
bearing escrows held for investors under the terms of various servicing
agreements.
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 were reduced for years beginning after 1996.
<PAGE> 31 (10k page 188)
(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) 1997 1996
--------------------------------- -------------------------
Interest Interest
Rates Amount Rates Amount
--------------------------------- -------------------------
<S> <C> <C> <C> <C>
Maturity
1997 - % $ - 5.54 to 7.05% $ 69,000
1998 4.98 to 5.95 87,000 4.98 to 5.89 62,000
1999 5.13 to 6.29 92,000 5.13 to 5.50 82,000
2000 5.52 to 6.01 75,000 - -
2001 - - - -
2002 - - - -
Thereafter 3.50 to 8.57 3,458 2.88 to 8.76 2,466
-------- ---------
$257,458 $215,466
======== ========
</TABLE>
The weighted average interest rate on advances was 5.62 and 5.60 percent at
December 31, 1997 and 1996. 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, 1997 and 1996, First
Indiana had sufficient collateral under this agreement.
(9) Other Borrowings
Short-term borrowings represent federal funds purchased and repurchase
agreements. At December 31, 1997 and 1996, short-term borrowings had
balances of $75,751,000 and $30,055,000 with weighted average interest
rates of 5.48 and 5.19 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 $38,899,000 and $18,133,000
during 1997 and 1996, and the maximum amounts outstanding at the end of
any month during 1997 and 1996 were $84,896,000 and $39,651,000. The
book value of the underlying securities at December 31, 1997 and 1996 was
$76,296,000 and $30,061,000 with market values of $76,741,000 and
$29,971,000. These securities are under the Bank's control.
First Indiana had $48,000,000 and $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, 1997 and 1996. 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, 1997:
Federal $10,564 $(1,590) $ 8,974
State and Local 2,927 (465) 2,462
----------------------------------------
$13,491 $(2,055) $11,436
========================================
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
========================================
</TABLE>
The effective income tax rate differs from the statutory federal
corporate tax rate as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
Statutory Rate 35.0% 35.0% 35.0%
State Income Taxes 5.5 5.1 5.3
Negative Goodwill (1.0) (1.4) (1.1)
Non-Taxable Interest Income (0.1) (0.3) (0.4)
Other (0.2) (0.7) (1.0)
-------------------------------------
Effective Rate 39.2% 37.7% 37.8%
=====================================
</TABLE>
<PAGE> 32 (10k page 189)
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 1997 1996
--------------------------
<S> <C> <C>
Allowance for Loan and REO Losses $ 9,400 $ 7,947
Pension and Retirement Benefits 2,750 2,497
Interest Credited 194 -
Premises and Equipment 275 298
Excess Servicing 29 47
Accrued Compensation 328 -
Other 328 236
----------------- -------
13,304 11,025
----------------- -------
Deferred Tax Liabilities
Originated Mortgage Servicing Right 641 370
FHLB Stock Dividends 574 575
Interest on Proposed Tax Deficiency 79 652
Net Deferred Loan Fees 3,388 2,880
Excess Tax Reserves 324 405
Unrealized Gain (Loss) on Investments 221 (50)
Other 220 120
----------------- -------
5,447 4,952
----------------- -------
Net Deferred Tax Assets $ 7,857 $ 6,073
========================
</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 is required to use the specific
charge-off method on its tax returns for 1996 and thereafter. The Bank is
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 had no material impact on
the Corporation's operations or financial position.
Cash paid during the year for income taxes was $11,360,000, $8,013,000, and
$12,375,000 for 1997, 1996, and 1995.
(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, 1997, 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
<PAGE> 33 (10k page 190)
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. At December 31, 1997, 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, 1997 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, 1997 and 1996, First Indiana
does not expect to be required to add to its risk-based capital under the
proposed regulation.
First Indiana Corporation is not required under OTS regulations to meet
regulatory capital restrictions. The following tables show First Indiana Bank's
strong capital levels and compliance with all capital requirements at
December 31, 1997 and 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 inclu-
dable under OTS regulations. There are no conditions or events since the date of
classification that management believes have changed the Bank's category.
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, 1997, 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 div-
<TABLE>
<CAPTION>
December 31, 1997
(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(1) $134,990 8.37% $24,184 1.50% $ N/A N/A
Core (Tier One)
Capital 134,990 8.37 48,368 3.00 80,614 5.00%
Tier One Risk-
Based Capital 134,990 10.91 N/A N/A 74,254 6.00
Total Risk-
Based Capital (2) 148,386 11.99 99,005 8.00 123,756 10.00
First Indiana Bank
Capital 135,315 N/A N/A N/A N/A N/A
(1) First Indiana Bank capital differs from tangible capital by the FAS115
equity securities adjustment of $325.
(2) Risk-based capital includes a $15,555 addition for general loan loss
reserves and a $2,159 deduction for land loans with loan-to-value
ratios in excess of 80 percent.
</TABLE>
<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 (1) $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 (2) 144,602 12.53 92,358 8.00 115,447 10.00
First Indiana Bank
Capital 131,283 N/A N/A N/A N/A N/A
(1) First Indiana Bank capital differs from tangible capital by the FAS115
equity securities adjustment of $(72) and non-qualifying servicing of $33.
(2) Risk-based capital includes a $14,484 addition for general loan loss
reserves and a $1,204 deduction for land loans with loan-to-value
ratios in excess of 80 percent.
</TABLE>
<PAGE> 34 (10k page 191)
idends 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.
In November 1997, the Corporation's Board of Directors established a
shareholder rights agreement, whereby each common shareholder is entitled
to one preferred stock right for each share of common stock owned. The
rights "flip in" upon the acquisition of 20 percent of the Corporation's
outstanding common stock in a takeover attempt, and offer current
shareholders a measure of protection for their investment in First Indiana.
First Indiana's stock has split six times since December 31, 1991. In January
1998, the Corporation announced a six-for-five stock dividend. The
Corporation's quarterly cash dividend will be paid on shares outstanding after
the stock dividend. In March 1997, the Corporation effected a five-for-four
stock split. The corporation effected a six-for-five stock dividend in February
1996. All per-share amounts in this Annual Report have been adjusted to
reflect the stock splits.
(12) Commitments and Contingencies
At December 31, 1997 and 1996, First Indiana had the following
outstanding commitments to fund loans:
<TABLE>
<CAPTION>
(Dollars in Thousands)
December 31,
-------------------------
1997 1996
-------------------------
<S> <C> <C>
Commitments to Fund:
Residential Mortgage Loans $ 83,109 $227,978
Commercial Real Estate Loans 8,796 5,250
Consumer Loans:
Home Equity Loans 133,470 130,218
Other 5,492 4,802
-------------------------
$230,867 $368,248
=========================
</TABLE>
Of the commitments to fund loans at December 31, 1997, nearly 87 percent
are commitments to fund variable-rate products, while the remaining 13
percent are commitments to fund fixed-rate products. Commitments to sell
residential loans at December 31, 1997 and 1996 were $45,379,000 and
$34,178,000.
At December 31, 1997, the Corporation had approximately $20,505,000 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, 1997, First Indiana had
outstanding lines of credit totaling $109,774,000, with $73,766,000 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, 1997, First
Indiana had a letter of credit outstanding totaling $5,750,000. 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, 1997 require minimum future payments of
$1,378,000 in 1998, $1,238,000 in 1999, $1,175,000 in 2000, $1,166,000 in
2001, $1,106,000 in 2002, and $5,250,000 thereafter. Minimum future
payments have not been reduced by minimum sublease rental income of
$207,000 receivable in the future under non-cancelable subleases. Rental
expense on office buildings was $1,616,000, $1,956,000, and $1,891,000 for
1997, 1996, and 1995.
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> 35 (10k page 192)
(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, 1997, the date of the latest actuarial valuation. Pension expense was
$59,000, $30,000, and $36,000 for 1997, 1996, and 1995.
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 $129,000, $80,000, and $49,000 in 1997, 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,
-------------------------
1997 1996 1995
------------------------
<S> <C> <C> <C>
Service Cost-Benefits Earned During the Year $150 $156 $113
Interest Cost on Projected Benefit Obligation 440 359 344
Net Amortization and Deferral 29 13 12
------------------------
Net Pension Costs $619 $528 $469
========================
</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,
-----------------------
1997 1996
-----------------------
<S> <C> <C>
Projected Benefit Obligation $6,849 $5,382
Fair Value of Plan Assets - -
-----------------------
Excess of Projected Benefit Obligation Over
Fair Value of Plan Assets 6,849 5,382
Unrecognized Net Transition Obligation (182) (218)
Unrecognized Loss (1,097) (180)
-----------------------
Accrued Pension Cost $5,570 $4,984
======================
</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, 1997 and 1996. The assumed long-term
salary increases were 5 percent at December 31, 1997 and 6.50 percent at
December 31, 1996, 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 $714,000 and $700,000, and the
accrued liability was $1,056,000 and $1,021,000 at December 31, 1997 and
1996. Expense under the programs was $35,000 in 1997, $28,000 in 1996 and
$16,000 in 1995.
<PAGE> 36 (10k page 193)
The accumulated post-retirement benefit obligation was determined using an
assumed discount rate of 7.50 percent at December 31, 1997 and 1996. The
assumed long-term salary increase was 5.00 percent for 1997 and 6.50
percent for 1996. 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.
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 $660,000,
$860,000 and $667,000 in 1997, 1996, and 1995. The compensation cost that
has been charged against income for the Employees' Stock Purchase Plan was
$153,000, $141,000, and $121,000 in 1997, 1996, and 1995. 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>
1997 1996
----------- --------------
<S> <C> <C>
Net Income
As Reported $17,744 $13,704
Pro Forma 17,675 13,360
Basic Earnings Per Share
As Reported $ 1.40 $ 1.10
Pro Forma 1.40 1.07
Diluted Earnings Per Share
As Reported $ 1.36 $ 1.06
Pro Forma 1.35 1.03
</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.
A summary of the status of First Indiana's fixed stock option plans
as of December 31, 1997, 1996, and 1995, and changes during the years ended
on those dates is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ ------------------
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 863,903 $ 7.16 754,723 $ 5.64 858,616 $ 5.39
Granted 25,479 16.30 156,881 14.43 22,482 9.45
Exercised (201,306) 4.32 (47,701) 6.95 (120,830) 4.43
Surrendered -- -- -- -- (5,545) 8.73
------- ------- -------
Outstanding at End of
Year 688,076 8.33 863,903 7.16 754,723 5.64
======= ======= =======
Options Exercisable
at Year End 662,597 707,022 732,241
======= ======= =======
Weighted Average Fair
Value of Options
Granted During the
Year $ 4.54 $ 3.68 $ 2.68
======= ======= =======
</TABLE>
<PAGE> 37 (10k page 194)
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 562,500 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 262,500 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 415,000 shares of common stock. In lieu of cash, some
optionees elect to fund their option exercises with stock they currently own. In
that event, the Corporation cancels the stock certificates received from the
optionee in the stock swap transaction.
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 1997 and 1996: dividend yield of 3.0 percent
for both years; expected volatility of 23 percent for both years; weighted
average risk-free interest rates of 6.89 percent and 5.75 percent for 1997 and
1996 grants, respectively; and expected lives of seven years for both years.
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
<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 12/31/97 Life Price At 12/31/97 Price
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 3- $6 249,661 2.62 $ 4.58 249,661 $4.58
$ 7-$9.49 256,044 5.32 7.49 256,044 7.49
$9.50-$20 182,371 8.22 14.60 156,892 14.32
----------------------------------------------------------------------------------
$ 3-$20 688,076 4.93 8.33 662,597 8.01
</TABLE>
In addition to the options outstanding at December 31, 1997, 248,502 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 to executive officers. On
January 26, 1994, First Indiana awarded 57,600 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 and $667,000 in 1996
and 1995.
On January 23, 1997, First Indiana awarded 43,500 shares of stock among
three executive officers. These shares are subject to recall by First Indiana in
the event certain specified performance objectives are not met by December
31, 1999. First Indiana expensed $660,000 in 1997 in connection with these
awards.
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 1997 and 1996 plan years, while a one-to-
four contribution was in effect for the 1995 plan year. First Indiana's
matching contributions for the years ended 1997, 1996, and 1995 were
$153,000, $141,000, and $121,000.
<PAGE> 38 (10k page 195)
(14) Parent Company Statements
<TABLE>
<CAPTION>
Condensed Balance Sheets
December 31,
--------------------------
1997 1996
(Dollars in Thousands) --------------------------
<S> <C> <C>
Assets
Certificate of Deposit and Interest-Bearing
Checking Account with the Bank $ 501 $ 501
Due from Bank 16,595 6,284
Investment in the Bank 135,315 131,283
Other Assets 689 631
---------------------------
Total Assets $153,100 $138,699
===========================
Liabilities $ 64 $ 41
Shareholders' Equity 153,036 138,658
---------------------------
Total Liabilities and Shareholders' Equity $153,100 $138,699
===========================
<CAPTION>
Condensed Statements of Earnings
Years Ended December 31,
--------------------------------
1997 1996 1995
(Dollars in Thousands) ----------------------------------
<S> <C> <C> <C>
Cash Dividends from the Bank $14,241 $ 9,951 $ 3,483
Interest Income on Certificate of Deposit and Checking Account 27 26 29
Expenses (240) (216) (211)
Income Tax Credit 81 73 71
------------ --------------------
Earnings Before Equity in Undistributed Net Earnings
of Subsidiaries 14,109 9,834 3,372
Equity in Undistributed Net Earnings of Subsidiaries 3,635 3,870 13,895
----------------------------------
Net Earnings $17,744 $13,704 $17,267
==================================
<CAPTION>
Condensed Statements of Cash Flows
Years Ended December 31,
-------------------------------
1997 1996 1995
(Dollars in Thousands) ----------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Earnings $17,744 $13,704 $17,267
Adjustments to Reconcile Net Earnings to Net Cash Provided
by Operating Activities
Equity in Undistributed Earnings of Subsidiaries (3,635) (3,870) (13,895)
Amortization of Restricted Stock Plan 363 473 367
Change in Other Liabilities 45 (21) (20)
Change in Due from the Bank and Other Assets (10,391) (5,980) 5,806
------------ ------------ -------
Net Cash Provided by Operating Activities 4,126 4,306 9,525
------------ ------------ -------
Cash Flows from Financing Activities
Proceeds from Exercise of Stock Options 367 331 537
Stock Issued Under Deferred Compensation Plan (24) 23 18
Payment for Purchase of Treasury Stock (132) - (6,203)
Reissuance of Treasury Stock 82 - -
Payment for Fractional Shares (12) (16) -
Tax Benefit of Option Compensation 656 - -
Cash Dividends Paid (5,063) (4,644) (3,877)
----------- -------------------
Net Cash Provided (Used) by Financing Activities (4,126) (4,306) (9,525)
----------- -------------------
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> 39 (10k page 196)
(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>
1997
Total Interest Income $30,881 $31,253 $32,518 $32,678
Net Interest Income 15,494 15,517 16,278 15,690
Provision for Loan Loss 2,820 2,680 2,600 2,600
Earnings Before Income Taxes 6,685 6,512 7,751 8,232
Net Earnings 4,079 3,973 4,706 4,986
Basic Earnings Per Share 0.32 0.31 0.37 0.39
Diluted Earnings Per Share 0.31 0.31 0.36 0.38
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
Basic Earnings Per Share 0.36 0.39 0.00 0.35
Diluted Earnings Per Share 0.35 0.37 0.00 0.33
</TABLE>
(16) Estimated Fair Value of Financial Instruments
The table at the right discloses the estimated fair value of financial
instruments and 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.
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 in the Bank's
portfolio at December 31, 1996 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.
<PAGE> 40 (10k page 197)
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
-------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
(Dollars in Thousands) Amount Value Amount Value
-------------------------------------
<S> <C> <C> <C> <C>
Assets
Cash and Cash Equivalents $50,231 $50,231 $73,618 $73,618
Investment Securities and Other 111,400 111,514 106,895 107,029
Loans Receivable
Mortgage-Backed Securities 38,279 38,626 36,412 36,984
Residential Mortgage Loans 502,624 516,416 430,431 441,804
Residential Construction Loans 152,017 151,935 134,865 134,858
Commercial Real Estate Loans 39,238 39,413 45,015 45,092
Business Loans 122,459 122,117 90,750 90,134
Consumer Loans 538,310 543,490 517,727 526,934
Unallocated Allowance
for Loan Losses (6,119) (6,119) (3,238) (3,238)
Accrued Interest Receivable 11,322 11,322 10,696 10,696
Loan Servicing Rights 4,522 5,867 4,424 5,315
Liabilities
Deposits
Demand Deposits 191,996 191,996 187,760 187,760
Passbook and Statement Deposits 42,004 42,004 47,005 47,005
Money Market Savings 272,333 272,333 271,302 271,302
Jumbo Certificates 122,825 123,093 98,256 98,301
Fixed-Rate Certificates 478,397 482,603 491,163 496,588
Borrowings
FHLB Advances 257,458 256,657 215,466 214,481
Short-Term Borrowings 75,751 75,743 30,055 30,050
Accrued Interest Payable 2,715 2,715 2,018 2,018
Advances by Borrowers for
Taxes and Insurance 1,419 1,419 1,120 1,120
Off-Balance-Sheet Instruments
(Unrealized Gains (Losses))
Commitments to Extend Credit - 129 - 116
Letters of Credit - (279) - (293)
Loan Servicing Rights - 5,075 - 7,438
---------------- ----------------
119,385 $141,174 103,450 $127,862
======== ========
Other Non-Financial Assets 49,122 48,826
Other Non-Financial Liabilities (10,733) (7,933)
Negative Goodwill (4,738) (5,685)
-------- --------
Shareholders' Equity $153,036 $138,658
======== ========
</TABLE>
Borrowings. Rates currently available to the Corporation for debt with similar
terms and remaining maturities are used to estimate fair value of existing
debt.
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.
Loan Servicing Rights. The fair value of residential and consumer 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, and Advances by
Borrowers for Taxes and Insurance. The estimated fair value of these financial
instruments approximates their carrying value.
(17) Subsequent Event
On January 22, 1998, the Board of Directors authorized a six-for-five stock
dividend whereby one additional share of common stock will be issued on
March 6, 1998 for every five shares owned of record as of February 19, 1998
The Corporation's quarterly cash dividend will be paid on shares outstanding
after the stock dividend. In March 1997, the Corporation effected a five-for-
four stock split, and in February 1996, the Corporation effected a six-for-five
stock dividend. All common share and per share amounts have been restated
to reflect the stock splits and dividends.
<PAGE> 41 (10k page 198)
INDEPENDENT AUDITORS' REPORT
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, 1997 and 1996 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, 1997. 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, 1997
and 1996 and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1997
in conformity with generally accepted accounting principles.
/s/KPMG Peat Marwick LLP
January 20, 1998
Except note 17, which is as of January 22, 1998.
Indianapolis, Indiana
<PAGE> 42 (10k page 199)
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, Ohio and Oregon. 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 Thursday, April 16, 1998, 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 bounds 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>
1997 1996
------------------------ -------------------------
Book Book
High Low Value High Low Value
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $20.17 $15.31 $11.26 $15.42 $13.19 $10.65
Second Quarter 18.75 14.48 11.48 16.75 15.33 10.93
Third Quarter 20.83 17.08 11.77 16.67 14.00 10.87
Fourth Quarter 26.46 19.58 12.08 17.83 16.00 11.13
</TABLE>
At December 31, 1997, there were approximately 2,100 shareholders of record
and 12,668,191 shares of common stock outstanding.
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 200)
STATEMENT OF MANAGEMENT RESPONSIBILITY
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 20, 1998
/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
<PAGE> 44 (10k page 201)
Member FDIC
Equal Housing Lender and Logo
design: Young and Laramore Advertising, Indianapolis, Indiana
<TABLE>
<CAPTION>
Table of Contents
<S> <C>
Financial Highlights 2
Letter to Shareholders 3
Year in Review 4
Board of Directors 6
Management and Advisory Boards 7
Financial Review 8
Five-Year Summary of Selected Financial Data 19
Consolidated Balance Sheets 20
Consolidated Statements of Earnings 21
Consolidated Statements of Shareholders' Equity 22
Consolidated Statements of Cash Flows 23
Notes to Consolidated Financial Statements 24
Independent Auditors' Report 42
Corporate Information 43
Affirmative Action Policy 43
Statement of Management Responsibility 44
</TABLE>
<PAGE> (10k page 202)
[back cover of annual report]
First Indiana Corporation
First Indiana Bank
One Mortgage Corporation
One Property Corporation
First Indiana Plaza
135 North Pennsylvania Street
Indianapolis, IN 46204
(317)26-1200
www.FirstIndiana.com
<PAGE> (10k page 203)
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 204)
[FIC LETTERHEAD]
March 12, 1998
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 Thursday, April 16, 1998 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 1997 as a comprehensive
provider of financial services emphasizing local decision-making,
customer relationships, and personalized service. To share our success
with our shareholders, we recently announced a six-for-five stock
dividend, resulting in a twenty percent increase in our cash dividend. At
the annual meeting, we will review our achievements in 1997 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
<PAGE> (10k page 205)
[IFC BLANK]
<PAGE> (10k page 206)
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, 1998, at 9:00 a.m. EST, to consider
and take action on the following matters:
1. The election of three (3) directors of the
Corporation;
2. The approval of an increase in the number of
authorized shares of the Corporation's common
stock;
3. The approval of the Corporation's 1998 Stock
Incentive Plan;
4. The approval of the Corporation's Long-Term
Management Performance Incentive Plan; and
5. 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 17,
1998 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, 1998
<PAGE> (10k page 207)
[ii BLANK]
<PAGE> (10k page 208)
FIRST INDIANA CORPORATION
First Indiana Plaza
135 North Pennsylvania Street
Indianapolis, Indiana 46204
PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation
by the Board of Directors of First Indiana Corporation (the
"Corporation") of proxies to be voted at the Annual Meeting of
Shareholders to be held on Thursday, April 16, 1998, and at any
adjournment thereof. The approximate date of mailing this proxy
statement is March 12, 1998. The following is important information in
a question-and-answer format regarding the Annual Meeting and this
Proxy Statement.
Q: What am I voting on?
1. Election of three directors (Robert H. McKinney, Owen B.
Melton, Jr. and Michael L. Smith)
2. Increase in the number of authorized shares of the
Corporation's common stock
3. Approval of the 1998 Stock Incentive Plan
4. Approval of the Long-Term Management Performance
Incentive Plan
Q: Who is entitled to vote?
Shareholders as of the close of business on February 17, 1998
(the "Record Date") are entitled to vote at the Annual Meeting. Each
shareholder is entitled to one vote for each share of common stock held
on the Record Date. As of the Record Date, 10,591,070 shares of the
Corporation's common stock were issued and outstanding.
Q: Can shares I received in the recent six-for-five stock dividend
be voted?
The Corporation recently paid a six-for-five stock dividend
to shareholders of record on February 19, 1998. Because the record date
for the stock dividend occurred after the Record Date for the Annual
Meeting, shares you received in the stock dividend cannot be voted at the
Annual Meeting. For that reason, none of the stock ownership and other
share information in this Proxy Statement reflects the recent stock
dividend.
Q: How do I vote?
Sign and date each proxy card you receive and return it in the
prepaid envelope. If you return your signed proxy card but do not
indicate your voting preferences, we will vote FOR the four proposals on
your behalf. You have the right to revoke your proxy any time before the
meeting by (1) notifying the Corporation's Secretary, or (2) returning a
later-dated proxy. You may also revoke your proxy by voting in person
at the meeting.
Q: What does it mean if I get more than one proxy card?
It means you hold shares registered in more than one account.
Sign and return all proxy cards to ensure that all your shares are voted.
<PAGE> 1 (10k page 209)
Q: Who will count the vote?
Representatives of Harris Trust & Savings Bank will tabulate
the votes and act as inspectors of the election.
Q: What constitutes a quorum?
A majority of the outstanding shares, present in person or
represented by proxy, constitutes a quorum for the Annual Meeting.
Q: How many votes are needed for approval of each item?
There are different voting requirements for the various
proposals. Directors will be elected by a plurality of the votes cast at the
Annual Meeting. Consequently, the three nominees receiving the most
votes will be elected directors. Only votes cast for a nominee will be
counted, except that the accompanying proxy will be voted for the three
management nominees unless the proxy contains instructions to the
contrary. Proxies submitted by brokers that do not indicate a vote for
some of the proposals because the holders do not have discretionary
voting authority and have not received instructions from the beneficial
owners on how to vote on those proposals are called "broker non-votes."
Broker non-votes, abstentions and instructions on the accompanying
proxy card to withhold authority to vote for one or more of the nominees
will result in those nominees receiving fewer votes.
The approvals of the 1998 Stock Incentive Plan and the
Long-Term Management Performance Incentive Plan each require an
affirmative vote of a majority of the shares present in person or by proxy
and entitled to vote at the Annual Meeting. For these proposals, an
abstention will have the same effect as a vote against the proposal.
Broker non-votes will not be voted for or against the proposals and will
not be counted as entitled to vote.
The amendment to the Articles of Incorporation increasing
the number of authorized shares of the Corporation's common stock
requires an affirmative vote of a majority of the shares outstanding and
entitled to vote as of the Record Date. Abstentions and broker non-votes
will have the same effect as votes against the proposal.
Q: Who can attend the Annual Meeting?
All shareholders as of the Record Date can attend.
Q: What percentage of stock do the directors and officers own?
Together, they own approximately 32.6% of Corporation's
common stock as of the Record Date. (See page 3 for details.)
Q: Who are the largest principal shareholders?
The Somerset Group, Inc., is the largest single shareholder of
the Corporation, owning 2,264,973 shares as of the Record Date. Robert
H. McKinney and Marni McKinney are each officers, directors and,
directly or indirectly, substantial shareholders of Somerset. Together,
Somerset, Mr. McKinney and Ms. McKinney beneficially own 2,786,635
shares (26.2%) of the Corporation's common stock as of the Record
Date. (See page 3 for details.)
Q: When are shareholder proposals and nominations for the 1999
meeting due?
The Corporation's 1999 Annual Meeting is currently
scheduled for April 15, 1999. To be considered for inclusion in next
year's Proxy Statement, shareholder proposals must be submitted in
writing by November 12, 1998 to the Corporation's Secretary, 2800
First Indiana Plaza, 135 N. Pennsylvania Street, Indianapolis, Indiana
46204. In addition, the Corporation's By-laws provide that any
shareholder wishing to nominate a candidate for director or propose
other business at the Annual Meeting must give the Corporation written
notice 60 days before the meeting, and the notice must provide certain
other information as described in the By-laws. Copies of the By-laws are
available to shareholders free of charge upon request to the
Corporation's Secretary.
<PAGE> 2 (10k page 210)
STOCK OWNERSHIP BY DIRECTORS, OFFICERS
AND CERTAIN SHAREHOLDERS
The following table shows, as of February 17, 1998, 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
shares held by the Corporation's directors and certain executive officers:
<TABLE>
<CAPTION>
Beneficial Amount and Nature of Percent
Owner Beneficial Ownership of Class
---------- -------------------- ---------
<S> <C> <C>
H. J. Baker 51,994 1 2
Gerald L. Bepko 22,295 1, 3 2
David L. Gray 59,886 4 2
Douglas W. Huemme 16,498 5 2
Andrew Jacobs, Jr. -- -
David A. Lindsey 91,076 6 2
Marni McKinney 2,786,636 7 26.2%
Robert H. McKinney 2,786,636 7 26.2%
Owen B. Melton, Jr. 254,284 8 2.4%
Phyllis W. Minott 24,101 1, 3, 9 2
Timothy J. O'Neill 83,894 10 2
Michael L. Smith 34,224 1, 11 2
The Somerset Group, Inc. 2,786,635 7 26.2%
John W. Wynne 36,394 1, 12 2
All Executive Officers and
Directors as a Group (15 Persons) 3,506,671 13 32.6%
</TABLE>
1 Includes 18,732 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 The number of shares represents less than one percent
of the Corporation's common stock outstanding.
3 Includes 690 shares held in trust under the First
Indiana Bank Directors' Stock Purchase Plan (the
"Directors' Stock Purchase Plan"), and 2,563 shares
held in trust under the Stock Purchase Plan.
4 Includes 957 shares held in trust under the Stock
Purchase Plan, 29,059 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 1,000
shares owned of record by Mr. Gray's spouse.
<PAGE> 3 (10k page 211)
5 Includes 490 shares held in trust under the Stock
Purchase Plan, 12,488 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 3,521
shares held in trust under the Directors' Deferred Fee
Plan.
6 Includes 1,914 shares held in trust under the Stock
Purchase Plan and 30,559 shares as to which there is a
right to acquire beneficial ownership as specified in
Rule 13d-3(d)(1) under the Exchange Act.
7 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 483,596 shares of the Corporation,
including 3,608 shares held in trust under the Stock
Purchase Plan, 53,433 shares of the Corporation as to
which Mr. McKinney has the right to acquire
beneficial ownership as specified in Rule 13d-3(d)(1)
under the Exchange Act and 15,000 shares of restricted
stock under the Company's 1997-1999 Long-Term
Incentive Plan. 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
2,264,973 shares of the Corporation. The total held by
the group also includes 38,067 shares of the
Corporation owned by Mr. McKinney's daughter,
Marni McKinney, including 2,686 shares held in trust
under the Stock Purchase Plan, 23,585 shares as to
which she has the right to acquire beneficial ownership
as specified in Rule 13d-3(d)(1) under the Exchange
Act, 1,006 shares held on her behalf under the Bank's
401(k) Plan and 6,250 shares of restricted stock under
the Company's 1997-1999 Long-Term Incentive 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.
8 Includes 51,870 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, 8,088
shares held in trust under the Stock Purchase Plan, 377
shares held on his behalf under the Bank's 401(k)
Plan, 89,997 shares owned of record jointly with Mr.
Melton's spouse, 51,562 owned of record by
Mr. Melton's spouse and 15,000 shares of restricted
stock under the Company's 1997-1999 Long-Term
Incentive Plan.
9 Includes 3,660 shares held in trust under the Stock
Purchase Plan, 145 shares held under the
Corporation's Dividend Reinvestment and Stock
Purchase Plan (the "DR Plan"), and 690 shares held
under Directors' Stock Purchase Plan.
10 Includes 1,526 shares held in trust under the Stock
Purchase Plan and 30,559 shares as to which there is a
right to acquire beneficial ownership as specified in
Rule 13d-3(d)(1) under the Exchange Act.
11 Includes 2,200 shares held in trust under the Stock
Purchase Plan.
12 Includes 1,755 shares held in trust under the Stock
Purchase Plan, 599 shares held under the DR Plan,
2,029 shares held under the Directors' Stock Purchase
Plan and 6,244 shares as to which there is a right to
acquire beneficial ownership as specified in
Rule 13d-3(d)(l) under the Exchange Act.
13 The address of The Somerset Group, Inc. is 135 North
Pennsylvania Street, Suite 2800, Indianapolis, Indiana
46204. This number includes 2,264,973 shares owned
of record by The Somerset Group, Inc. (see note 7),
31,260 shares held in trust under the Stock Purchase
Plan, 957 shares held under the DR Plan, 3,409 shares
held under the Directors' Stock Purchase Plan, 3,521
shares held under the Deferred Fee Plan, 2,632 shares
held under the Bank's 401(k) Plan, and 342,644
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
Three directors are to be elected. Robert H. McKinney, Owen
B. Melton, Jr. and Michael L. Smith have been nominated for a term of
three years and until their successors are elected and qualified. All
nominees are members of the present Board of Directors and have
consented to serve an additional term. 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"). 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. On February 19, 1998,
Douglas W. Huemme, whose term would have expired at the annual
meeting of shareholders in 2000, tendered his resignation from the Board
of Directors effective April 15, 1998 because of increased travel
responsibilities with Lilly Industries, Inc., of which he is chairman,
president
<PAGE> 4 (10k page 212)
and chief executive officer. While the Corporation's Articles
of Incorporation give the Board of Directors the authority to fill this
vacancy, a replacement has not yet been selected. The Board of
Directors thanks Mr. Huemme for his years of dedicated service to the
Corporation and the Bank.
The Board of Directors unanimously recommends the
election of the following nominees.
NOMINEES FOR TERMS EXPIRING IN 2001
<TABLE>
<CAPTION>
NOMINEES FOR TERMS EXPIRING IN 2001
Name, Age, Principal
Occupation(s) and
Business Experience Director
During Past 5 Years Since
- ------------------------------------------------------------------------------
<S> <C>
Robert H. McKinney, Age 72 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 51 1983
President and Chief Operating Officer of the Corporation and
President and Chief Executive Officer of the Bank.
Michael L. Smith, Age 49 1985
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.
<CAPTION>
DIRECTORS WHOSE TERMS EXPIRE IN 2000
Name, Age, Principal
Occupation(s) and
Business Experience Director
During Past 5 Years Since
- ------------------------------------------------------------------------------
<S> <C>
Gerald L. Bepko, Age 57 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.
Andrew Jacobs, Jr., Age 66 1997
Adjunct Professor, Indiana University-Purdue University at
Indianapolis; Attorney; Retired Member, United States Congress.
John W. Wynne, Age 65 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.
<PAGE> 5 (10k page 213)
<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 70 1966
Chairman Emeritus, BMW Constructors, Inc., industrial mechanical
contractors; Director of The Somerset Group, Inc. and Lilly
Industries, Inc.
Marni McKinney, Age 41 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 59 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.
</TABLE>
_____________________________________________________________________
During 1997, the Boards of Directors of the Corporation and
the Bank each met 12 times. All directors attended in excess of 75% of
the aggregate of the total number of meetings of the Boards of Directors
of the Corporation and the Bank (considered separately) and the total
number of meetings held by all Corporation and Bank committees
(considered separately) on which he or she served.
Certain Committees of the Boards of Directors of the
Corporation and the Bank
Among other committees, the Boards of Directors of the
Corporation has an Audit Committee and a Compensation Committee.
Audit Committee. The Audit Committee evaluates audit
performance, handles relations with the Corporation's independent
auditors, and evaluates policies and procedures related to internal audit
functions and controls. The members of the Corporation's Audit
Committee in 1997 were Phyllis W. Minott (Chairperson), Douglas W.
Huemme, and John W. Wynne. The Audit Committee met four times
during 1997.
Compensation Committee. The Compensation Committee
reviews and makes recommendations to the Board of Directors with
respect to the compensation of directors, officers, and employees of the
Corporation and the Bank, administers and grants options and other
stock awards under the Corporation's stock option plans, and
administers the Bank's Employees' Stock Purchase Plan. The
Corporation used to have a separate Stock Administration Committee to
administer stock-based compensation. However, the Stock
Administration Committee was dissolved and its duties were formally
transferred to the Compensation Committee in January of 1998. The
members of the Compensation Committee during 1997 were H. J. Baker
(Chairman), Gerald L. Bepko, and Phyllis W. Minott. The Committee
met four times during 1997.
Compensation of Directors
Directors of the Corporation and the Bank, other than Robert
H. McKinney, Marni McKinney and Owen B. Melton, Jr., received in
1997 a quarterly retainer of $2,150, plus $600 per meeting of the Board
of Directors attended and an additional $600 per committee meeting
attended.
<PAGE> 6 (10k page 214)
Under the First Indiana 1992 Director Stock Option Plan, the
Corporation reserved approximately 182,300 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 3,122 shares
to each outside director of the Corporation on the date of each annual
meeting of shareholders. The Corporation granted 3,122 shares to
each outside director on April 16, 1997, 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 Employees' 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.
In 1996, the Bank sold its insurance and non-FDIC-insured
investment business to The Somerset Group, Inc. At the same time, the
two companies entered into a multi-year operating agreement under
which Somerset provides insurance and non-FDIC-insured investment
products and services to the Bank's customers and pays the Bank a
commission on such sales. During the year ended December 31, 1997,
Somerset paid to the Bank $219,424 in accordance with the terms of the
purchase agreement and the operating agreement. 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 sale transaction, as well as 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 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 joint committee of the Corporation
and the Bank received an opinion from an independent appraiser that the
transaction was fair to the shareholders of the Bank and the Corporation.
<PAGE> 7 (10k page 215)
EXECUTIVE COMPENSATION
The following Report of the Compensation
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.
Report of the Compensation 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 competitive base salary and also have the opportunity
to earn bonuses tied to the Corporation's overall performance.
The Compensation Committee based the 1997 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 merits 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 1997 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
paid based on the Corporation's after-tax return on average equity for
1997. 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.
Corporate and individual bonuses were paid at a 36% level of the
participants potential bonus under the Short-Term Plan because the
Corporation's performance in 1997 called for such a payout in
accordance with the payout formulas pre-established under the
Short-Term Plan.
Under the Long-Term Management Performance Incentive Plan
(the "Long-Term Plan"), subject to its approval by Shareholders,
additional performance-based compensation will be awarded at the end
of fiscal year 1999 if certain performance targets are achieved. For
further information about the Long-Term Plan, see the discussion under
heading "Proposal No. 4: Approval of the Long-Term Management
Performance Incentive Plan."
The Compensation Committee believes that stock ownership
by management and stock-based performance compensation
arrangements are beneficial in aligning management's and shareholders'
interests in the enhancement of
<PAGE> 8 (10k page 216)
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 these stock ownership requirements
will further align the interests of the Bank's management with the
objectives of the Corporation's shareholders. Accordingly, each
recipient of a bonus under the Long-Term Plan who does not meet the
stock ownership requirements will be required to take at least one-third
of his or her bonus in stock.
Additionally, the Compensation Committee typically considers
granting stock options to various executive officers, including the
executive officers named in the Summary Compensation Table, every two years.
As stock options were awarded in 1996, no awards were made in 1997. 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
Employees' 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 Compensation 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, 1996, participant
contributions for the Plan Year beginning April 1, 1997 were matched
at a ratio of one to three. The Corporation also achieved the performance
objectives specified in the Stock Purchase Plan for the year ended
December 31, 1997, and participant contributions for the Plan Year
beginning April 1, 1998 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, 1997 are set forth in the column titled "All Other
Compensation."
In 1993, the Internal Revenue Code of 1986 (the "Code") was
amended to generally limit to $1 million the amount of compensation
(other than qualified performance-based 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 cash
bonuses of the Corporation's executive officers have historically been
structured so that such compensation will be deductible, the
Compensation Committee recognizes that certain executive officers may
receive compensation which cannot be deducted in full by the
Corporation. Because these situations are most likely to arise as a result
of the vesting of restricted stock under the Long-Term Plan, the
Compensation Committee has attempted to structure the Long-Term
Plan, to the extent possible within the Corporation's compensation
philosophy, so that compensation under the Plan will be
performance-based and will not count against the $1 million limit 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
<PAGE> 9 (10k page 217)
during the preceding year and his achievement of
the objectives described above. The Corporation's attainment of the
1996 performance goals resulted in an increase in both Mr. McKinney's
and Mr. Melton's salaries for 1997.
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 1997 a grant of restricted stock in lieu of their
participation in the bonus pool. The stock will be freed from the
restrictions at the end of 1999 if the Corporation attains the performance
objectives established under the Long-Term Plan and the Long-Term
Plan is approved by the shareholders. Further, if the stock is freed from
the restrictions, the Corporation will pay to Mr. McKinney and Mr.
Melton an amount equal to the tax liability they incur as a result of such
vesting. The Compensation Committee believes that such tax payments
are appropriate given the nature of the stock awards, which require 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 established under the Long-Term Plan.
Compensation Committee
H. J. Baker, Chairman
Gerald L. Bepko
Phyllis W. Minott
<PAGE> 10 (10k page 218)
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**
First Indiana Nasdaq Stock Nasdaq Bank
Period Corp. Market Index
- ------ ------------- ------------ -----------
<S> <C> <C> <C>
Dec-92 $100 $100 $100
Jun-93 $136 $104 $107
Dec-93 $136 $115 $114
Jun-94 $135 $105 $122
Dec-94 $135 $112 $114
Jun-95 $176 $140 $137
Dec-95 $234 $159 $169
Jun-96 $269 $180 $179
Dec-96 $370 $195 $223
Jun-97 $330 $218 $279
Dec-97 $452 $240 $377
* Assumes that the value of the investment in the Corporation's stock and
each index was $100 on December 31, 1992 and that all dividends were
reinvested.
**The NASDAQ Bank Index contains performance data for banks, savings
institutions and holding companies.
</TABLE>
Percent Change for 6 Months ended 12/31/97:
First Indiana Corporation +36.9%
Nasdaq Stock Market Index + 9.6%
Nasdaq Bank Index +35.1%
Percent Change for 12 Months ended 12/31/97:
First Indiana Corporation +47.5%
Nasdaq Stock Market Index +22.7%
Nasdaq Bank Index +68.9%
<PAGE> 11 (10k page 219)
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 1997 $210,000 $ 37,800 $ -- $357,000 (2) -- $ -- $6,404(3)
Chairman and Chief 1996 200,000 -- 395,910 -- 15,000 -- 6,055
Executive Officer 1995 190,000 95,000 -- -- -- -- 3,319
of the Corporation;
Chairman of the Bank
- --------------------------------------------------------------------------------------------------------------------------
Owen B. Melton, Jr. 1997 280,000 50,400 -- 357,000 (2) -- -- 4,550 (4)
President and Chief 1996 265,000 -- 398,818 -- 15,000 -- 3,905
Operating Officer of 1995 248,000 126,157 -- -- -- -- 1,350
the Corporation;
President and Chief
Executive Officer of
the Bank
- --------------------------------------------------------------------------------------------------------------------------
David L. Gray 1997 152,500 25,940 -- -- -- -- 9,065 (5)
Vice President and 1996 145,000 -- -- -- 7,500 69,167 8,131
Treasurer of the Corpor- 1995 138,000 65,000 -- -- -- -- 4,540
ation; Senior Vice
President-Internal
Support Services Group,
and Chief Financial Officer
of the Bank
- --------------------------------------------------------------------------------------------------------------------------
Timothy J. O'Neill 1997 145,500 19,528 -- -- -- -- 7,561 (6)
Senior Vice President 1996 140,000 -- -- -- 7,500 68,667 6,394
Correspondent Banking 1995 137,000 63,705 -- -- -- -- 3,459
Services Group of the Bank
- --------------------------------------------------------------------------------------------------------------------------
David A. Lindsey 1997 140,000 23,349 -- -- -- -- 8,309 (7)
Senior Vice President- 1996 132,000 -- -- -- 7,500 60,417 7,424
Consumer Finance Group 1995 120,000 60,850 -- -- -- -- 4,142
of the Bank
- --------------------------------------------------------------------------------------------------------------------------
1 Adjusted for all stock splits through December 31, 1997.
2 Represents the market value on the date of grant of 15,000 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 $453,750 on December 31, 1997, (ii) will
vest on December 31, 1999 if the Corporation attains the performance targets
described in the Joint Report of the Compensation Committee and the Stock
Administration Committee, and (iii) earns dividends while restricted.
3 Consists of a $4,261 contribution by the Bank to the Stock Purchase Plan, and a
$2,143 contribution by the Bank to Mr. McKinney's account in the Bank's 401(k)
Plan.
4 Consists of a $1,733 contribution by the Bank to the Stock Purchase Plan, and a
$2,817 contribution by the Bank to Mr. Melton's account in the Bank's 401(k)
Plan.
5 Consists of a $5,083 contribution by the Bank to the Stock Purchase Plan, the
payment by the Bank of $1,618 for term life insurance premiums, and a $2,364
contribution by the Bank to Mr. Gray's account in the Bank's 401(k) Plan.
<PAGE> 12 (10k page 220)
6 Consists of a $3,760 contribution by the Bank to the Stock Purchase Plan, the
payment by the Bank of $1,562 for term life insurance premiums, and a $2,239
contribution by the Bank to Mr. O'Neill's account in the Bank's 401(k) Plan.
7 Consists of a $4,666 contribution by the Bank to the Stock Purchase Plan, the
payment by the Bank of $1,473 for term life insurance premiums, and a $2,170
contribution by the Bank to Mr. Lindsey's account in the Bank's 401(k) Plan.
</TABLE>
Stock Options
The following table sets forth on an aggregate basis each
exercise of stock options during fiscal year 1997 by each of the Named
Executive Officers and the 1997 year-end value of the unexercised
options of each such executive officer.
<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 46,872 $660,192 53,433 -- $1,083,026 $ --
Owen B. Melton, Jr. 18,750 235,969 51,870 -- 1,042,747 --
David L. Gray 18,750 355,500 29,059 -- 601,883 --
Timothy J. O'Neill -- -- 30,559 -- 634,328 --
David A. Lindsey 16,500 299,640 30,559 -- 634,328 --
</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.
<PAGE> 13 (10k page 221)
<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
800,000 158,900 317,700 476,600 636,000
- ------------------------------------------------------------------------------------------
</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 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, and the
market value on the date of vesting of any restricted stock awards made
pursuant to the Long-Term Plan) paid to the participant for the three
years preceding the participant's retirement.
As of January 1, 1998, the number of years of credited benefit
service and the compensation covered by the Plans (based on average
annual salaries for 1993-1997 and average annual bonuses for
1995-1997) for each of the Named Executive Officers were as follows:
Robert H. McKinney, 45 years - $409,467; Owen B. Melton, Jr., 19
years - $485,252; David L. Gray, 16 years - $192,069; Timothy J.
O'Neill, 27 years - $187,993; David A. Lindsey, 15 years - $169,250.
Employment Agreements and Other Arrangements
Special retirement benefits are provided under the
Supplemental Plan to Mr. McKinney. His normal retirement benefit
under the Supplemental Plan is payable for life and 15 years certain. The
monthly amount of his normal 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-life 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
Corporation plus (ii) the greater of (a) 37.5% of his highest annual rate
of salary from the Corporation or (b) the annual average of all bonuses
paid to him by the Corporation for the three years next preceding his
retirement. In the last fiscal year, Mr. McKinney received $101,169 in
payments under the Qualified Plan.
<PAGE> 14 (10k page 222)
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 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 and is
payable whether he dies before or after separation from service and
without regard to when he separates from service.
The Board of Directors unanimously recommends that
shareholders vote in favor of this Proposal.
PROPOSAL NO. 2: AMENDMENT OF THE CORPORATION'S ARTICLES OF
INCORPORATION TO INCREASE THE AMOUNT OF AUTHORIZED COMMON STOCK
TO 33,000,000
The Board of Directors of the Corporation has proposed an
increase in the number of authorized shares of the Corporation's
common stock to 33,000,000 shares from 16,000,000 shares. The
proposed increase would result in 35,000,000 total authorized shares of
Corporation stock, consisting solely of 33,000,000 shares of common
stock, without par value and 2,000,000 shares of preferred stock, without
par value.
The terms of the additional authorized shares will be the same
as those that apply to the Corporation's currently authorized common
stock. There are 10,591,070 shares of common stock outstanding as of
the date of this Proxy Statement. During the last seven years, the
Corporation has declared six stock dividends (including the six-for-five
share dividend that was recently announced), resulting in a 275%
increase in the number of shares of common stock outstanding. The
increase in the authorized number of shares of common stock will
provide flexibility for corporate planning and result in shares being
available for future stock dividends or splits, as well as future equity
financing through issuances to the general public, future acquisitions
(such as mergers), and for other corporate purposes for which the
issuance of common stock may be advisable. The Corporation has no
current plans to undertake any of these issuances, but the Board of
Directors believes it is appropriate to provide the Corporation with this
flexibility at this time.
As stated above, the Corporation has no immediate plans,
arrangements, commitments, or understandings with respect to the
issuance of any additional shares of common stock which would be
authorized by the proposed amendment. However, the increased
authorized shares could also be used to make a takeover attempt more
difficult such as by using the shares to make a counter-offer for the
shares of the bidder or by selling shares to dilute the voting power of the
bidder. The additional shares could also be used, in part, to effectuate
the Shareholder Rights Plan adopted by the Corporation on November
14, 1997. As of this date, the Board is unaware of any effort to
accumulate the Corporation's shares or to obtain control of the
Corporation by means of a merger, tender offer, solicitation in opposition
to management or otherwise.
The current Articles of Incorporation contain other provisions
that may be viewed as having possible anti-takeover effects. Under these
provisions the Corporation's Board of Directors is divided into three
classes, with approximately one-third of the members of the Board
nominated for election each year. Thus, two Annual Meetings are
necessary for a majority shareholder to replace a majority of incumbent
directors. In addition, directors may be removed only for cause and only
upon the affirmative vote of either the holders of two-thirds of the
outstanding voting stock of the Corporation or two-thirds of the entire
Board of Directors. The current Articles of Incorporation further provide
that, in certain situations, the affirmative vote of the holders of two-thirds
of the Corporation's outstanding voting stock is required to approve
certain business transactions (such as mergers or sales of assets)
involving another entity that beneficially owns 10% or more of the voting
stock of the Corporation. The current Articles of Incorporation also
provide that the Board, when evaluating such transactions, shall, in
connection with the exercise of its judgment in determining what is in the
best interest of the Corporation and its shareholders, give due
consideration to all relevant
<PAGE> 15 (10k page 223)
factors including the social and economic
effects on employees, customers, suppliers, and other constituents of the
Corporation and on the communities in which the Corporation operates
or is located. As a result of the adoption of the Shareholder Rights Plan,
the current Articles of Incorporation also contain provisions for the
issuance of Series A Junior Participating Preferred Stock which could
have a deterrent effect against the takeover of the Corporation.
The Corporation is not proposing any increase in the number
of shares of authorized preferred stock of which 2,000,000 shares are
authorized but have not been issued. A total of 1,000,000 shares of the
preferred stock have been designated as Series A Junior Participating
Preferred Stock and reserved for issuance pursuant to the Shareholder
Rights Plan. The Board (subject to applicable law or rules of regulatory
agencies and requirements of national securities markets) has the power
to issue the existing preferred stock without further shareholder
approval, and with such rights as the Board deems advisable, including
conversion rights, redemption rights, voting rights, and liquidation rights.
The preferred stock could be issued to deter a takeover by establishing
the terms of the preferred stock so as to make the takeover substantially
more expensive. The preferred stock could also be issued with voting
rights intended to make acquisition of the Corporation more difficult.
Shareholders have no preemptive rights with respect to the
issuance of additional shares of common stock. Accordingly, any
issuance of authorized but unissued shares of common stock (which will
not require shareholder approval) could have the effect of diluting the
earnings per share and book value per share of currently outstanding
shares of common stock. However, the Corporation has no current plans
to issue any shares of its common stock in a transaction which is
expected to have such a dilutive effect.
The Board of Directors unanimously recommends that
shareholders vote in favor of this Proposal.
PROPOSAL NO. 3: APPROVAL OF THE 1998 STOCK INCENTIVE PLAN
There will be presented to the 1998 Annual Meeting a
proposal to approve the First Indiana Corporation 1998 Stock Incentive
Plan (the "1998 Plan"). The 1998 Plan was adopted by the Board of
Directors on January 22, 1998, subject to shareholder approval. The
purpose of the 1998 Plan is to attract and retain qualified persons as
employees and members of management to the Corporation so as to
maintain and enhance the Corporation's long-term performance.
The Corporation currently maintains four stock option plans:
the 1989 Stock Option Plan, the 1991 Stock Option and Incentive Plan,
the 1992 Directors Stock Option Plan (the "Directors' Plan"), and the
1992 Stock Option Plan. In addition, options are outstanding under a
fifth plan, the 1987 Stock and Incentive Plan, which terminated last year.
As of February 12, 1998, grants for 610,103 options and 36,250 shares
of restricted stock were outstanding under these five plans. This includes
grants for 71,950 options that were made on January 22, 1998. If the
1998 Plan is approved, no further grants will be made under the prior
plans, except for the Directors' Plan. Grants will continue to be made
under the Directors' Plan until its expiration in 2002. As of February 12,
1998, 103,234 options remained available for grants under the
Directors' Plan.
General
The 1998 Plan provides for the issuance of a total of up to
525,000 shares of common stock, which may be authorized and unissued
shares, treasury shares or reacquired shares. This is equivalent to
slightly less than five percent (5%) of the shares of Common Stock
outstanding (excluding treasury stock) as of the Record Date. As of the
Record Date, 32,901 shares of common stock remained available for
issuance under the three plans that are being replaced by the 1998 Plan.
Accordingly, the 525,000 shares authorized under the 1998 Plan
represent an increase of 492,099 shares over the number of shares
previously authorized by the shareholders.
Awards under the 1998 Plan may be made in the form of (i)
incentive stock options, (ii) non-qualified stock options, (iii) stock
appreciation rights, (iv) dividend equivalent rights,(v) restricted stock,
(vi) restricted stock units and
<PAGE> 16 (10k page 224)
(vii) other stock-based awards. Awards
may be made to any director, officer or employee of the Corporation and
its subsidiaries, and to such consultants to the Corporation as the
Compensation Committee may select.
Awards with respect to no more than 50,000 shares of
common stock may be granted to any one eligible person during any
one-year period. In the event of a stock dividend, stock split,
recapitalization or the like (including, but not limited to, the recently
announced six-for-five stock dividend, the effect of which has not been
reflected in the per share numbers set forth in this description of the
1998 Plan), the Compensation Committee will equitably adjust the aggregate
number of shares subject to the 1998 Plan, the number of shares
subject to each outstanding award, the exercise price of each
outstanding option, and any other share-based limits under the 1998
Plan.
The 1998 Plan will be administered by the Compensation
Committee, composed of not less than two directors, but the Board of
Directors may grant awards and assume all of the powers of the
Compensation Committee. To the extent required for compliance with
Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), all actions relating to awards to persons
subject to Section 16 of the Exchange Act will be taken by the Board of
Directors unless each person who serves on the Compensation
Committee is a "non-employee director" within the meaning of Rule
16b-3 promulgated under the Exchange Act. To the extent required for
compensation realized from awards under the 1998 Plan to be deductible
by the Corporation pursuant to Section 162(m) of the Internal Revenue
Code of 1986, as amended (the"Code"), the members of the
Compensation Committee will be "outside directors"within the meaning
of Section 162(m) of the Code. The Board of Directors, however,
reserves the right to grant awards that might fail to satisfy the
requirements for deductibility under Section 162(m) of the Code. The
Compensation Committee is authorized to construe, interpret and
implement the 1998 Plan, to select the eligible persons to whom awards
will be granted, to determine the terms and provisions of such awards,
and to amend outstanding awards. The determinations of the
Compensation Committee are made in its sole discretion and are
conclusive. The Compensation Committee presently consists H.J. Baker,
Gerald L. Bepko and Phyllis W. Minott.
Grants Under The 1998 Plan
Stock Options. Each stock option granted under the 1998
Plan will be exercisable during the period fixed by the Compensation
Committee; however, no incentive stock option will be exercisable more
than ten years after the date of grant. The purchase price per share
payable upon the exercise of an option (the "option purchase price") will
be established by the Compensation Committee, provided that the option
exercise price of an incentive stock option will not be less than 100% of
the fair market value of a share of the common stock on the date of grant.
The option exercise price is payable in cash, or by surrender of shares of
common stock acquired at least six months prior to the option exercise
date and having a fair market value on the date of the exercise equal to
part or all of the option exercise price, or by such other payment method
as the Compensation Committee may prescribe.
Stock Appreciation Rights. Stock appreciation rights may be
granted in connection with all or any part of, or independently of, any
option granted under the 1998 Plan. Generally, no stock appreciation
right will be exercisable at a time when any option to which it relates is
not exercisable. The grantee of a stock appreciation right has the right to
surrender the stock appreciation right and to receive from the
Corporation an amount equal to the aggregate appreciation (over the
exercise price of such right, or over the option exercise price if the stock
appreciation right is granted in connection with an option) in the shares
of common stock in respect of which such stock appreciation right is
being exercised. Payment due upon exercise of a stock appreciation
right may be in cash, in common stock, or partly in each, as determined
by the Compensation Committee in its discretion.
Dividend Equivalent Rights. The Compensation Committee
may include in any award a dividend equivalent right entitling the grantee
to receive amounts equal to the ordinary dividends that would be paid,
during the time such award is outstanding and unexercised, on the shares
of common stock covered by such award if the such shares were then
outstanding. The Compensation Committee will determine whether such
payments may be made in cash, in shares of common stock or in another
form, whether they will be conditioned upon the exercise of the award to
which they relate, and such other terms and conditions as the
Compensation Committee deems appropriate.
<PAGE> 17 (10k page 225)
Restricted Stock. The Compensation Committee may grant
restricted shares of common stock to such eligible persons, in such
amounts, and subject to such terms and conditions (which may depend
upon or be related to performance goals and other conditions) as the
Compensation Committee determines in its discretion. Certificates for
the shares of common stock covered by a restricted stock award will
remain in the possession of the Corporation until such shares are free of
restrictions. Subject to the applicable restrictions, the grantee has the
rights of a shareholder with respect to the restricted stock.
Restricted Stock Units. The Compensation Committee may
grant restricted stock units to such eligible persons, in such amounts, and
subject to such terms and conditions as the Compensation Committee
determines in its discretion. At the time of grant, the Compensation
Committee will specify the date or dates on which the restricted stock
units will become fully vested and nonforfeitable. On the maturity date,
the grantee will be entitled to one unrestricted, fully transferable share of
common stock for each restricted stock unit scheduled to be paid out on
such date. The purchase price, if any, to be paid by the grantee for such
shares of common stock will be determined by the Compensation
Committee.
Other Stock-Based Awards. The Board may authorize other
types of stock-based awards, which the Compensation Committee may
grant to such eligible persons, in such amounts and subject to such terms
and conditions as the Compensation Committee determines in its sole
discretion.
Except as otherwise specified in the applicable grant
agreement, no award or right granted to any person under the 1998 Plan
will be assignable or transferable other than by will or by laws of descent
and distribution.
Other Features of the 1998 Plan
Unless sooner terminated by the Board of Directors, the
provisions of the 1998 Plan with respect to the grant of incentive stock
options will terminate on January 21, 2008. All awards made under the
1998 Plan prior to its termination will remain in effect until they are
satisfied or terminated. The Board of Directors may, without shareholder
approval, suspend, discontinue, revise or amend the 1998 Plan at any
time or from time to time; provided, however, that shareholder approval
will be obtained for any amendment for which such approval is required
by Section 422 of the Code or under other applicable law.
In the event of a Change of Control (as defined in the 1998
Plan), any previously granted option or stock appreciation right will
continue in effect or be replaced by an equivalent substituted option or
right relating to the stock of the successor entity or its parent. Similarly,
any previously granted award of restricted stock will continue in effect
or, if there is a successor employer, be replaced with an equivalent award
of restricted stock of such successor or its parent. If the grantee's service
is terminated by the employer without cause or by the grantee for good
reason prior to the close of the employment term provided in any
applicable employment agreement, the grantee's options and rights will
become and remain exercisable for the remainder of the terms thereof,
and the grantee's restricted stock will become and remain fully vested
and transferable, notwithstanding such termination.
Right of Recapture
If at any time within one year after the date on which a grantee
exercises an option or stock appreciation right, or on which restricted
stock vests, or which is the maturity date of a restricted stock unit, or on
which income is realized by a grantee in connection with any other
stock-based award (each of which events is a "Realization Event"), the
grantee is terminated for cause or engages in any activity which is
deliberate and which results and is intended to result in demonstrable
material harm to the Corporation or any Subsidiary, then any gain
realized by the grantee from the Realization Event will be paid by the
grantee to the Corporation.
<PAGE> 18 (10k page 226)
Federal Income Tax Consequences of the 1998 Plan
The description of Federal tax consequences set forth below
is necessarily general in nature and does not purport to be complete.
There are generally no Federal tax consequences either to the
optionee or the Corporation upon the grant of a stock option. On
exercise of an incentive stock option, the optionee will not recognize any
income, and the Corporation will not be entitled to a deduction for tax
purposes, although such exercise may give rise to liability for the
optionee under the alternative minimum tax provisions of the Code.
However, if the optionee disposes of shares acquired upon exercise of an
incentive stock option within two years of the date of grant or one year
of the date of exercise, the optionee will recognize compensation income,
and the Corporation will be entitled to a deduction for tax purposes in the
same amount, equal to the excess of the fair market value of the shares
of common stock on the date of exercise over the option exercise price (or the
gain on sale, if less); the remainder of the gain to the optionee will
be treated as capital gain. Otherwise, the Corporation will not be entitled
to any deduction for tax purposes upon disposition of such shares, and
the entire gain for the optionee will be treated as a capital gain. On the
exercise of a non-qualified stock option, the amount by which the fair
market value of the common stock on the date of exercise exceeds the
option exercise price will generally be taxable to the optionee as
compensation income, and will generally be deductible for tax purposes
by the Corporation. The disposition of shares of common stock acquired
upon exercise of a non-qualified stock option will generally result in a
capital gain or loss for the optionee, but will have no tax consequences
for the Corporation.
The grant of a stock appreciation right, a dividend equivalent
right, restricted stock or a restricted stock unit generally will not result
in income for the grantee or in a tax deduction for the Corporation.
Upon the settlement of such a right or unit and upon the vesting of
restricted stock, the grantee will recognize ordinary income equal to the
fair market value of any shares of common stock and/or any cash
received, and the Corporation will be entitled to a tax deduction in the
same amount. With respect to an award of restricted stock the grantee
may elect to recognize ordinary income equal to the fair market value of
the shares less any amount paid for them at the time of grant, and the
Corporation will be entitled to a tax deduction in the same amount.
Dividends paid on forfeitable restricted shares are treated as
compensation for Federal tax purposes. A grant of unrestricted shares
of common stock will result in income for the grantee, and a tax
deduction for the Corporation, generally equal to the fair market value of
such shares less any amount paid for them.
Limitations on the Corporation's Compensation Deduction.
Section 162(m) of the Code limits the deduction which the Corporation
may take for otherwise deductible compensation payable to certain
executive officers to the extent that compensation paid to such officers
for a year exceeds $1 million, unless such compensation meets certain
criteria. Although it is contemplated that most awards granted under the
1998 Plan will satisfy the requirements of Section 162(m) of the Code,
there is no assurance such awards will satisfy such requirements. In
addition, the Compensation Committee has authority to make grants
under the 1998 Plan that will not meet the requirements of Section
162(m) of the Code. Accordingly, the deduction attributable to any
compensation realized by an affected executive officer may be limited
under Section 162(m) of the Code.
The benefits and amounts that may be received or allocated
in the future under the 1998 Plan are not generally determinable because
they are within the discretion of the Compensation Committee. To date,
no grants have been made under the 1998 Plan.
Any shareholder may request and receive a copy of the 1998
Plan from the Corporation's Secretary, 2800 First Indiana Plaza, 135
North Pennsylvania Street, Indianapolis, Indiana 46204
The Board of Directors unanimously recommends that
shareholders vote in favor of this Proposal.
<PAGE> 19 (10k page 227)
PROPOSAL NO. 4: APPROVAL OF THE LONG-TERM MANAGEMENT
PERFORMANCE INCENTIVE PLAN
The Board adopted the Long-Term Management Performance
Incentive Plan (the "Long-Term Plan") on January 23, 1997, subject to
shareholder approval at the Annual Meeting. The Long-Term Plan
authorizes the Corporation to continue its practice of providing incentive
compensation to key executives based on three-year performance
periods. The first performance period commenced on January 1, 1997,
and will end on December 31, 1999. Subsequent performance periods
will begin on January 1, 2000, and January 1 of each third year thereafter
subject to the approval by the Compensation Committee . In order for
payment of certain incentive awards to be fully deductible by the
Corporation for federal income tax purposes, they now must be paid
under a plan such as the Long-Term Plan that is approved by the
shareholders. The key provisions of the Long-Term Plan are
summarized below.
Purposes
The purposes of the Long-Term Plan are to attract, retain and
motivate executives and key employees of the highest caliber and quality
by providing them with the opportunity to earn incentive compensation
directly linked to the Corporation's long-term performance. In this respect,
the Long-Term Plan supplements the Annual Management Incentive
Plans of the Corporation by encouraging senior executive
officers to focus on long-term growth and prosperity and not
only on annual target requirements.
Administration
The Long-Term Plan will be administered by the
Compensation Committee, composed of not less than two directors. To
the extent required for compensation realized from awards under the
Long-Term Plan to be fully deductible by the Corporation pursuant to
Section 162(m) of the Internal Revenue Code of 1986, as amended
(the"Code"), the members of the Compensation Committee will be
"outside directors"within the meaning of Section 162(m) of the Code.
The Board of Directors, however, reserves the right to grant awards that
might fail to satisfy the requirements for deductibility under Section
162(m) of the Code. The Compensation Committee's powers include
authority, within the limitations set forth in the Long-Term Plan, to
construe, interpret and implement the Long-Term Plan, to prescribe,
amend and rescind rules and procedures relating to the Long-Term Plan,
to select the senior executive officers who will be permitted to
participate, to determine the amount of cash or stock which may be
earned and the performance goals which must be achieved in order for
such amount to be earned, to determine at the end of each performance
period whether the performance goals established for that period were
achieved and the extent to which the incentive amount for each
participant was earned, to determine whether a participant's incentive
amount, although earned, should be reduced or eliminated, and to
determine whether payment of a participant's incentive amount will be
made at the end of the performance period or deferred. The
determinations of the Compensation Committee are made in its sole
discretion and are conclusive. The Compensation Committee presently
consists of H.J. Baker, Gerald L. Bepko and Phyllis W. Minott.
Eligibility
Participation in the Long-Term Plan is limited to senior
executive officers of the Corporation or the Bank. Such officers may
participate in the Long-Term Plan either as Group A participants or as
Group B participants. An executive cannot participate both as a Group
A participant and as a Group B participant for the same performance
period.
The Committee will select participants for the Long-Term
Plan at the start of each three-year performance period. For the 1997-99
performance period, the Committee has designated three Group A
participants and five Group B participants. The Group A participants
are: Robert H. McKinney, Chairman and CEO of the Corporation and
Chairman of the Bank; Owen B. Melton, Jr., President of the Corporation
and President and CEO of the Bank; and Marni McKinney, Vice-Chairman of the
Corporation and the Bank. The Group B participants are: David L. Gray, Vice
<PAGE> 20 (10k page 228)
President and Treasurer of the Corporation and
Senior Vice President in charge of the Bank's Internal Support Services
Group and Chief Financial Officer of the Bank; David A. Lindsey, Senior
Vice President in charge of the Bank's Consumer Finance Group;
Merrill E. Matlock, Senior Vice President in charge of the Bank's
Commercial and Mortgage Banking Group; Timothy J. O'Neill, Senior
Vice President in charge of the Bank's Correspondent Banking Services
Group; and Kenneth L. Turchi, Senior Vice President in charge of the
Bank's Retail Banking Group and Marketing and Strategic Planning
Group.
Setting Performance Targets
The executives selected by the Committee for a performance
period will be eligible to earn an incentive amount for that performance
period. Payment will be conditioned upon attaining performance targets
selected by the Committee from among the following criteria: net
income, net income growth rate, return on equity, fair market value of
common stock, economic value added, level of non-performing loans,
expense management, deposits, loan originations, market share, industry
leadership and organizational development.
At the beginning of each performance period, the Committee
will establish the performance targets and specify the relationship
between performance targets and the award. The Committee also will
determine the maximum award which may be earned by each executive.
In the case of Group B participants, the Committee will determine
whether, as part of the award, the participant will receive a tax gross-up
right.
Following the completion of a performance period, the
Committee must certify in writing whether the applicable performance
targets have been achieved and specify the incentive amounts, if any,
payable to executives. The Committee may reduce (but may not increase)
the incentive amount payable to take into account additional factors that
the Committee deems relevant to assess individual or corporate
performance.
Paying Awards
Awards to Group A participants will be made in the form of
restricted stock grants under a stock option plan of the Corporation (the
1991 Plan in the case of awards for the 1997-99 performance period or,
subject to its approval by the shareholders, the 1998 Plan in the case of
grants for subsequent performance periods). In the event stock gross-up
rights are included as part of such awards, payment of a portion of the
award will be made in restricted stock and payment of the balance will
be made in cash, it being intended that the cash portion will approximate
the aggregate amount of federal, state and local income taxes that will be
payable by the participant on both the restricted stock and cash portions
of the award. Awards to Group B participants will be made in cash or
stock, or a combination thereof, at the election of the Committee.
Maximum Award Limits
The Committee specifies, when making an award to a
participant, the maximum incentive amount the participant may earn
under the award. The maximum so specified is subject to maximums set
out in the Long-Term Plan. In the case of a Group A participant, the
maximum allowable incentive amount for any three-year performance
period is the sum of (i) such number of such shares of common stock of
the Corporation as shall have a value of $1 million at the beginning of
such performance period, rounded down to the nearest whole number of
shares, plus (ii) a cash amount equal to the federal, state and local
income taxes for which the participant may be liable, assuming taxation
at the highest marginal rate, both with respect to the stock and with
respect to such cash amount. In the case of a Group B participant, the
maximum allowable incentive amount for any three-year performance
period is the lesser of $250,000 or 100% of the participant's annual
salary in effect at the beginning of the performance period.
Termination of Employment
If an executive's employment terminates during a
performance period by reason of death, disability or retirement (or with
the approval of the Committee), and if the performance goals for such
period ultimately are met,
<PAGE> 21 (10k page 229)
the executive will receive a pro rata payment
based upon the amount of time the executive was employed during the
performance period. If an executive's employment terminates during a
performance period for any other reason, the executive will not be
entitled to an award. However, in certain events involving a Change of
Control, an executive may receive a pro rata payment, or in some cases
full payment, of his or her incentive amount, notwithstanding termination
or his or her employment.
Amendment and Termination
The Board or the Committee may amend or terminate the
Long-Term Plan at any time. However, no action will be effective
without shareholder approval to the extent necessary to continue to
qualify the amounts payable to covered employees as performance-based
compensation under Section 162(m) of the Internal Revenue Code.
Term
The Long-Term Plan became effective upon its adoption by
the Board, subject to shareholder approval at the Annual Meeting.
New Plan Benefits
It is not possible to determine the benefits or amounts that
will be received by any executive for the current performance period
because the amount, if any, payable will depend upon the extent to which
the executive satisfies the performance targets determined by the Committee
at the beginning of the period. As to benefits or amounts that will be
received by any executive for future performance periods, such
determination cannot be made for the additional reason that the
performance targets for such future periods will not be determined by the
Committee until the beginning of each period.
In establishing the Long-Term Plan for the 1997-99
performance period, the Committee established the following maximum
number of shares of common stock (adjusted for the 1997 stock split)
which may be earned by Group A participants for such period: Mr.
McKinney, 15,000 shares; Mr. Melton, 15,000 shares; and Ms.
McKinney, 6,250 shares. (The maximums are subject to further
adjustment for stock splits occurring after February 12, 1998, including
the recently announced six-for-five share stock dividend.) In addition,
it included tax gross-up rights with respect to the full amount of the
shares so allocated. The Committee established the maximum incentive
amount which may be earned by any Group B participant for such period
as an amount equal to 50% of the participant's average annual rate of
base salary in effect during the performance period. As adopted for the
1997-99 performance period, the Long-Term Plan has interim
performance goals which must be attained during each of the years 1997
through 1999, inclusive, as well as overall goals which must be attained
for the entire period. The Committee has determined that the interim
performance goals for 1997 were satisfied and, accordingly, that the
incentive amounts for the 1997-99 performance period still may be
earned, provided the performance goals for 1998 and 1999 and the
overall goals for the entire period are met.
Any shareholder may request and receive a copy of the 1998
Plan from the Corporation's Secretary, 2800 First Indiana Plaza, 135
North Pennsylvania Street, Indianapolis, Indiana 46204
The Board of Directors unanimously recommends that
shareholders vote in favor of this Proposal.
APPOINTMENT OF AUDITORS
The Corporation's financial statements for the year ended
December 31, 1997 were audited by KPMG Peat Marwick LLP ("Peat
Marwick"). The Corporation has selected Peat Marwick as its
independent auditors for the fiscal
<PAGE> 22 (10k page 230)
year ending December 31, 1998.
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.
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 regulations 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 1997 all Reporting Persons complied with the filing
requirements of Section 16(a).
ANNUAL REPORT
A copy of the Corporation's Annual Report for the year ended
December 31, 1997 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, 1998
<PAGE> 23 (10k page 231)
[LOGO OF THE BANK]
Principal Subsidiary of First Indiana Corporation
<PAGE> (10k page 232)
[KPMG LETTERHEAD]
KPMG Peat Marwick LLP
2400 First Indiana Plaza
135 North Pennsylvania Street
Indianapolis, IN 46204-2452
The Board of Directors
First Indiana Corporation:
We consent to incorporation by reference in the registration statement
(No. 33-64851) on Form S-8 of First Indiana Corporation of our report dated
January 20, 1998, except note 17, which is as of January 22, 1998, relating
to the consolidated balance sheets of First Indiana Corporation as of
December 31, 1997 and 1996, 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, 1997, which report
appears in the December 31, 1997 annual report on Form 10-K of First
Indiana Corporation.
/s/KPMG Peat Marwick LLP
March 25, 1998
Member Firm of KPMG International
<PAGE> (10k page 233)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for the twelve months ended December 31, 1997 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-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 34,231
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 16,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 123,172
<INVESTMENTS-CARRYING> 26,507
<INVESTMENTS-MARKET> 26,968
<LOANS> 1,370,943
<ALLOWANCE> 22,414
<TOTAL-ASSETS> 1,613,405
<DEPOSITS> 1,107,555
<SHORT-TERM> 162,751
<LIABILITIES-OTHER> 19,605
<LONG-TERM> 170,458
0
0
<COMMON> 134
<OTHER-SE> 152,902
<TOTAL-LIABILITIES-AND-EQUITY> 1,613,405
<INTEREST-LOAN> 117,371
<INTEREST-INVEST> 9,264
<INTEREST-OTHER> 695
<INTEREST-TOTAL> 127,330
<INTEREST-DEPOSIT> 49,936
<INTEREST-EXPENSE> 64,351
<INTEREST-INCOME-NET> 62,979
<LOAN-LOSSES> 10,700
<SECURITIES-GAINS> 217
<EXPENSE-OTHER> 41,104
<INCOME-PRETAX> 29,180
<INCOME-PRE-EXTRAORDINARY> 29,180
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,744
<EPS-PRIMARY> 1.40<F1>
<EPS-DILUTED> 1.36<F2>
<YIELD-ACTUAL> 4.36
<LOANS-NON> 18,432
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 11,029
<ALLOWANCE-OPEN> 18,768
<CHARGE-OFFS> 9,086
<RECOVERIES> 2,032
<ALLOWANCE-CLOSE> 22,414
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 6,119
<FN>
<F1>With the issuance of FAS128, Earnings Per Share, the number entered on
this financial data schedule under the EPS-PRIMARY tag is actually
basic earnings per share in accordance with the new guidelines. Previously
filed financial data schedules have not been restated for FAS128. Basic
earnings per share for 1996 and 1995 under FAS128 would have been $1.10 and
$1.39, respectively. Diluted earnings per share for 1996 and 1995 under
FAS128 would have been $1.06 and $1.34, respectively.
<F2>Both EPS tags are reflective of a six-for-five stock dividend paid
March 6, 1998 to shareholders of record as of February 19, 1998. Prior
period EPS tags in previously filed financial data schedules have not
been restated to reflect this dividend.
</FN>
</TABLE>
