United States Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1998
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period from ________ to ________
Commission File Number 0-14354
FIRST INDIANA CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-1692825
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
135 North Pennsylvania Street, Indianapolis, IN 46204
(Address of principal executive office) (Zip Code)
(317) 269-1200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes (X) No ( )
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date:
Common Stock, par value $0.01 per share 12,778,981 Shares
Class Outstanding at 4/30/98
<PAGE> 1
FIRST INDIANA CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX
Page
Part I Financial Information 3
Item 1. Financial Highlights
Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as
of March 31, 1998 and December 31, 1997 4
Condensed Consolidated Statements of
Earnings for the Three Months
Ended March 31, 1998 and 1997 5
Condensed Consolidated Statements of
Shareholders' Equity for the Three Months
Ended March 31, 1998 6
Condensed Consolidated Statements of Cash
Flows for the Three Months Ended
March 31, 1998 and 1997 7
Notes to Condensed Consolidated Financial
Statements 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 10
Item 3. Disclosures About Market Risk 17
Part II Other Information 18
Signatures 20
<PAGE> 2
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
First Indiana Corporation and Subsidiaries
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
For the Three Months Ended
March 31,
1998 1997
<S> <C> <C>
Total Interest Income $ 32,868 $ 30,881
Total Interest Expense 17,437 15,387
Net Earnings 4,418 4,079
Basic Earnings Per Share 0.35 0.32
Diluted Earnings Per Share 0.33 0.31
Dividends Per Share 0.12 0.10
Net Interest Margin 3.95 % 4.39 %
Net Interest Spread 3.28 3.79
Return on Average Equity 11.39 11.58
Return on Average Assets 1.08 1.11
Average Shares Outstanding 12,717,703 12,566,432
Diluted Shares Outstanding 13,311,207 13,042,140
<CAPTION>
At March 31,
1998 1997
<S> <C> <C>
Assets $ 1,687,938 $ 1,481,157
Loans-Net 1,394,604 1,224,652
Deposits 1,192,424 1,076,975
Shareholders' Equity 156,317 141,974
Shareholders' Equity/Assets 9.26 % 9.59 %
Shareholders' Equity Per Share $ 12.27 $ 11.26
Market Closing Price 26.88 15.32
Price/Earnings Multiple 20.36 x 12.09 x
<CAPTION>
At March 31, 1998
Actual Required
<S> <C> <C>
Capital Ratios
Tangible Capital/Total Assets 8.01 % 1.50 %
Core (Tier One) Capital/Total Assets 8.01 % 3.00 %
Risk-Based Capital/Risk-Weighted Assets 11.72 % 8.00 %
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS
First Indiana Corporation and Subsidiaries
(Dollars in Thousands, Except Share Data)
March 31, December 31,
1998 1997
(Unaudited)
<S> <C> <C>
Assets
Cash $ 39,474 $ 34,231
Federal Funds Sold 25,000 16,000
Total Cash and Cash Equivalents 64,474 50,231
Investments Available for Sale 122,949 106,095
Investments Held to Maturity 5,260 5,305
(Market Value of $5,348 and $5,419)
Mortgage-Backed Securities Available for Sale 16,258 17,077
Mortgage-Backed Securities Held to Maturity - Net
(Market Value of $20,446 and $21,549) 20,141 21,202
Loans Held for Sale 56,769 57,518
Loans Receivable 1,361,882 1,313,425
Less Allowance for Loan Losses (24,047) (22,414)
Loans Receivable - Net 1,394,604 1,348,529
Premises and Equipment 14,133 13,947
Accrued Interest Receivable 11,498 11,322
Real Estate Owned - Net 3,889 3,907
Prepaid Expenses and Other Assets 34,732 35,790
Total Assets $ 1,687,938 $ 1,613,405
Liabilities and Shareholders' Equity
Liabilities
Non-Interest-Bearing Deposits $ 111,570 $ 90,612
Interest-Bearing Deposits 1,080,854 1,016,943
Total Deposits 1,192,424 1,107,555
Federal Home Loan Bank Advances 259,429 257,458
Short-Term Borrowings 57,302 75,751
Accrued Interest Payable 3,356 2,715
Advances by Borrowers for Taxes and Insurance 3,526 1,419
Other Liabilities 11,083 10,733
Total Liabilities 1,527,120 1,455,631
Negative Goodwill 4,501 4,738
Shareholders' Equity
Preferred Stock, $.01 Par Value: 2,000,000 Shares
Authorized; None Issued -
Common Stock, $.01 Par Value: 16,000,000 Shares
Authorized; 13,458,141 and 13,374,799 Shares Issued and
Outstanding, Including Shares in Treasury 135 134
Paid-In Capital in Excess of Par 35,118 34,662
Retained Earnings 126,556 123,699
Accumulated Other Comprehensive Income 1,390 981
Treasury Stock-at Cost, 721,608 and 706,608 Shares (6,882) (6,440)
Total Shareholders' Equity 156,317 153,036
Total Liabilities and Shareholders' Equity $ 1,687,938 $ 1,613,405
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE> 4
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
First Indiana Corporation and Subsidiaries
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended
March 31,
1998 1997
<S> <C> <C>
Interest Income
Loans $ 30,208 $ 28,231
Investments 1,860 1,756
Mortgage-Backed Securities 634 626
Federal Funds Sold and
Interest-Bearing Deposits 166 268
Total Interest Income 32,868 30,881
Interest Expense
Deposits 13,171 12,228
Federal Home Loan Bank Advances 3,521 2,951
Short-Term Borrowings 745 208
Total Interest Expense 17,437 15,387
Net Interest Income 15,431 15,494
Provision for Loan Losses 2,820 2,820
Net Interest Income After
Provision for Loan Losses 12,611 12,674
Non-Interest Income
Sale of Investments Held For Sale 19 2
Sale of Loans 2,168 564
Dividends on Federal Home Loan Bank Stock 262 255
Loan Servicing Income 517 706
Loan Fees 772 601
Insurance Commissions 18 119
Accretion of Negative Goodwill 237 237
Deposit Product Fee Income 644 650
Other 596 450
Total Non-Interest Income 5,233 3,584
Non-Interest Expense
Salaries and Benefits 5,110 4,630
Net Occupancy 663 769
Deposit Insurance 167 179
Real Estate Owned Operations - Net 200 63
Equipment 1,174 1,153
Office Supplies and Postage 492 497
Other 2,760 2,282
Total Non-Interest Expense 10,566 9,573
Earnings Before Income Taxes 7,278 6,685
Income Taxes 2,860 2,606
Net Earnings $ 4,418 $ 4,079
Basic Earnings Per Share $ 0.35 $ 0.32
Diluted Earnings Per Share $ 0.33 $ 0.31
Dividends Per Common Share $ 0.12 $ 0.10
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE> 5
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
First Indiana Corporation and Subsidiaries Accumulated
(Dollars in Thousands, Except Share Data) Paid-In Other
(Unaudited) Capital Compre- Total
Common Stock in Excess Retained hensive Treasury Shareholders'
Shares Amount of Par Earnings Income Stock Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 12,668,191 $134 $34,662 $123,699 $981 $(6,440) $153,036
Comprehensive Income:
Net Earnings For The Three Months
Ended March 31, 1998 4,418 4,418
Unrealized Loss on Securities Available
for Sale, Net of Income Taxes of $(92)
and Reclassification Adjustment of $19 (136) (136)
Tax Benefit of Stock Options Exercised 545 545
Total Comprehensive Income 4,827
Common Stock Issued Under Restricted
Stock Plans-Net of Amortization 131 (31) 100
Common Stock Issued Under Deferred
Compensation Plan (2) (2)
Exercise of Stock Options 88,330 1 467 468
Dividends on Common Stock ($.12 per share) (1,528) (1,528)
Redemption of Common Stock (4,639) (132) (132)
Payment for Fractional Shares (349) (10) (10)
Purchase of Treasury Stock (15,000) (442) (442)
Balance at March 31, 1998 12,736,533 $135 $35,118 $126,556 $1,390 $(6,882) $156,317
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE> 6
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
First Indiana Corporation and Subsidiaries
(Dollars in Thousands)
(Unaudited)
Three Months Ended March 31,
1998 1997
<S> <C> <C>
Cash Flows from Operating Activities
Net Earnings $ 4,418 $ 4,079
Adjustments to Reconcile Net Earnings to
Net Cash Provided by Operating Activities:
Gain on Sale of Assets (2,187) (564)
Amortization 346 202
Amortization of Restricted Stock Plan 100 72
Depreciation 540 509
Net Amortization of Loans
and Mortgage-Backed Securities 103 16
Provision for Loan Losses 2,820 2,820
Origination of Loans Held For Sale
Net of Principal Collected (103,056) (37,842)
Proceeds from Sale of Loans Held for Sale 106,819 39,635
Change In:
Accrued Interest Receivable (176) (349)
Other Assets (1,942) (1,223)
Accrued Interest Payable 641 415
Other Liabilities 350 (400)
Net Cash Provided by Operating Activities 8,776 7,370
Cash Flows from Investing Activities
Proceeds from Maturities of
Investment Securities Held to Maturity 10,311 10,295
Proceeds from Sale of Investments Available for Sale 10,023 --
Purchase of Investment Securities Available for Sale (37,384) (19,958)
Principal Collected on Mortgage-Backed Securities 1,061 2,546
Originations of Loans Net of Principal Collected (51,731) (12,547)
Proceeds from Sale of Loans 4,516 906
Proceeds from Sale of Premises and Equipment -- 10
Purchase of Premises and Equipment (726) (232)
Net Cash Used by Investing Activities (63,930) (18,980)
Cash Flows from Financing Activities
Net Change in Deposits 84,869 (18,511)
Repayment of Federal Home Loan Bank Advances (83,029) (39,028)
Borrowings of Federal Home Loan Bank Advances 85,000 45,000
Net Change in Short-Term Borrowings (18,449) (7,895)
Net Change in Advances by Borrowers
for Taxes and Insurance 2,107 2,157
Stock Option Proceeds 336 316
Tax Benefit of Stock Options Exercised 545 376
Common Stock Issued Under Deferred Compensation Plan (2) (6)
Payment for Fractional Shares (10) (12)
Dividends Paid (1,528) (1,261)
Purchase of Treasury Stock (442) --
Net Cash Provided (Used) by Financing Activities 69,397 (18,864)
Net Change in Cash and Cash Equivalents 14,243 (30,474)
Cash and Cash Equivalents at Beginning of Period 50,231 73,618
Cash and Cash Equivalents at End of Period $ 64,474 $ 43,144
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Period For:
Interest on Deposits, Advances, and
Other Borrowed Money $ 16,796 $ 14,972
Income Taxes 737 --
Transfer of Loans to Real Estate Owned 2,532 1,526
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE> 7
FIRST INDIANA CORPORATION AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Three Months Ended March 31, 1998
(Unaudited)
Note 1 - Basis of Presentation
The foregoing condensed consolidated financial statements are
unaudited. However, in the opinion of management, all adjustments
(comprising only normal recurring accruals) necessary for a fair
presentation of the condensed consolidated financial statements have
been included. Results for any interim period are not necessarily
indicative of results to be expected for the year. The condensed
consolidated financial statements include the accounts of First Indiana
Corporation and subsidiaries (the "Corporation"). The principal
subsidiary of the Corporation is First Indiana Bank and its subsidiaries
(the "Bank"). A summary of the Corporation's significant accounting
policies is set forth in Note 1 of the Notes to Consolidated Financial
Statements in the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1997.
Note 2 - Earnings Per Share
In February 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standard No. 128,
"Earnings per Share" ("FAS 128"). FAS 128 provides computation,
presentation, and disclosure requirements for earnings per share and
supersedes Accounting Principles Board Opinion No. 15. Basic
earnings per share for 1998 and 1997 were computed by dividing net
earnings by the weighted averages shares of common stock outstanding
(12,717,703 and 12,566,432 for the three months ended March 31,
1998 and 1997). Diluted earnings per share for 1998 and 1997 were
computed by dividing net earnings by the weighted average shares of
common stock and common stock that would have been outstanding
assuming the issuance of all dilutive potential common shares
outstanding (13,311,207 and 13,042,140 for the three months ended
March 31, 1998 and 1997) after giving retroactive effect to a six-for-five
stock dividend in March 1998 and a five-for-four stock split in
March 1997. Dilution of the per-share calculation relates to stock
options.
Note 3 - Allowance for Loan Loss Reserve
Allowances have been established for possible losses on loans
and real estate owned ("REO"). The provisions for losses charged to
operations are based on management's judgment of current
circumstances and the credit risk of the loan portfolio and REO.
Management believes that these allowances are adequate. While
management uses available information to recognize losses on loans and
REO, future additions to the allowances may be necessary based on
changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examinations, periodically review
these allowances and may require the Corporation to recognize
additions to the allowance based on their judgments about information
available to them at the time of their examination.
<PAGE> 8
Note 4 - Current Accounting Pronouncements
In June 1997, FASB issued Statement of Financial Accounting
Standard No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("FAS 131"), which introduces new guidance on
segment reporting. The Statement is effective for fiscal years beginning
after December 15, 1997, with earlier application encouraged. The
Statement is not expected to have a material impact on the financial
condition or results of operations of the Corporation when adopted in
1998.
In February 1998, FASB issued Statement of Financial
Accounting Standard No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits" ("FAS 132"). The Statement does
not alter the measurement and recognition provisions currently outlined
in generally accepted accounting principles, but merely standardizes the
disclosure requirements. The Statement is effective for fiscal years
beginning after December 15, 1997, with earlier application
encouraged. The Statement is not expected to have a material impact
on the financial condition or results of operations of the Corporation
when adopted in 1998.
Note 5 - Reclassifications
Certain amounts in the 1997 Condensed Consolidated Financial
Statements have been reclassified to conform to the 1998 presentation.
<PAGE> 9
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Summary of Corporation's Results
First Indiana Corporation and subsidiaries had net earnings of
$4,418,000 for the first quarter of 1998, compared with net earnings of
$4,079,000 in the first quarter of 1997. Diluted earnings per share for
the three months ended March 31, 1998 were $.33, compared with $.31
per share for the same period one year ago. Cash dividends per share
for the first three months of 1998 and 1997 were $.12 and $.10 per
share, respectively.
Net Interest Income
Net interest income was $15,431,000 for the three months
ended March 31, 1998, compared with $15,494,000 for the three
months ended March 31, 1997.
Total net loans outstanding grew to $1,394,604,000 at March
31, 1998, compared with $1,224,652,000 one year earlier. Residential
loans outstanding at March 31, 1998 were $541,513,000, up 27 percent
from one year ago. This dramatic increase in the residential portfolio
illustrates the successful implementation of strategies aimed at
capitalizing upon alternative product delivery channels, such as
telemarketing and wholesale lending. At March 31, 1998, home equity
loans outstanding were $522,965,000, compared with $508,094,000 at
March 31, 1997, a three percent increase. Commercial and industrial
loans were $136,606,000 at March 31, 1998, compared with
$100,615,000 one year earlier, a 36 percent increase.
Interest income for the first quarter of 1998 was $32,868,000,
compared with $30,881,000 for the three months ended March 31,
1997. Interest expense for the first quarter of 1998 was $17,437,000,
compared with $15,387,000 for the three months ended March 31,
1997.
During the first quarter of 1998, the Corporation's cost of funds
was 5.14 percent, compared with 4.97 percent one year ago. The yield
on earning assets was 8.42 percent for the first quarter of 1998,
compared with 8.76 percent one year ago.
Annualized return on total average assets was 1.08 percent for
the three months ended March 31, 1998, compared with 1.11 percent
for the same period in 1997.
Net Interest Margin
Net interest margin consists of two components: interest-rate
spread and the contribution of interest-free funds (primarily capital and
other non-interest-bearing liabilities). The following analysis of net
interest margin reflects the Corporation's ability to generate strong net
interest income resulting from a prudent combination of assets and
liabilities.
<PAGE> 10
<TABLE>
<CAPTION>
Three Months Ended March 31,
(Dollars in Thousands) 1998 1997
<S> <C> <C>
Net Interest Income $ 15,431 $ 15,494
Average Interest-Earning Assets $ 1,561,800 $ 1,410,359
Average Interest-Bearing Liabilities 1,356,940 1,238,502
Average Interest-Free Funds $ 204,860 $ 171,857
Yield on Interest-Earning Assets 8.42% 8.76%
Yield on Interest-Bearing Liabilities 5.14% 4.97%
Interest-Rate Spread 3.28% 3.79%
Impact of Interest-Free Funds 0.67% 0.60%
Net Interest Margin 3.95% 4.39%
<CAPTION>
All non-accruing delinquent loans have been included in average
interest-earning assets.
Because residential loans offer a lower yield, the expansion into
this area resulted in a short-term negative impact on the Corporation's
interest-rate margin when compared with last year. Management has
intentionally adjusted the mix of loans with the realization that the
margin would decrease in the near term. However, management
believes the Corporation is strategically positioned for long-term
growth by developing a customer base that has the potential of utilizing
other First Indiana Bank products and services.
Non-Performing Assets and Summary of Loan Loss Experience
The following table analyzes the allowance for losses on loans
and REO for the three months ended March 31, 1998 and 1997.
</TABLE>
<TABLE>
<CAPTION>
Loan Loss REO Loss Loan and REO
Allowance Allowance Loss Allowance
1998 1997 1998 1997 1998 1997
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance of Loss Allowance
at Beginning of Year $22,414 $18,768 $483 $ 543 $22,897 $19,311
Provision for Losses 2,820 2,820 39 -- 2,859 2,820
Charge-Offs -- Residential (36) -- -- -- (36) --
-- Consumer (1,544) (2,152) (95) (33) (1,639) (2,185)
-- Construction (9) (424) -- -- (9) (424)
-- Commercial and
Industrial -- (30) -- -- -- (30)
-- Commercial Real
Estate -- -- -- -- -- --
Recoveries -- Residential 1 -- 50 -- 51 --
-- Consumer 346 394 23 102 369 496
-- Construction 52 26 -- -- 52 26
-- Commercial and
Industrial 3 2 -- -- 3 2
-- Commercial Real
Estate -- 333 -- -- -- 333
Balance at March 31, $24,047 $19,737 $500 $612 $24,547 $20,349
Ratio of Allowance for Loan Losses to Loans
Receivable 1.70% 1.59%
Ratio of REO Loss Allowance to Real Estate Owned 11.39% 14.50%
Ratio of Total Loan and REO Loss Allowance to
Non-Performing Assets 105.30% 84.76%
</TABLE>
<PAGE> 11
Non-performing assets were $23,312,000, or 1.38 percent of
assets, at March 31, 1998. This compares with $22,822,000, or 1.41
percent of assets, at December 31, 1997 and $24,007,000, or 1.62
percent of assets, at March 31, 1997. This category includes not only
non-accrual loans and real estate owned, but also restructured loans on
which the Bank continues to accrue interest.
The Bank regularly reviews all non-performing assets to
evaluate the adequacy of the allowances for losses on loans and REO.
The allowance for loan losses is maintained through a provision for loan
losses, which is charged to earnings. The provisions are determined in
conjunction with management's review and evaluation of current
economic conditions, changes in the character and size of the loan
portfolio, estimated charge-offs, and other pertinent information derived
from a quarterly review of the loan portfolio and REO properties.
The provision for losses on loans and REO in the first quarter
of 1998 and 1997 was $2,820,000.
The Bank's charge-off policy has been realigned to more closely
mirror that of other banks. The Bank writes down consumer loans at
the date of foreclosure and charges off the entire balance of home
equity loans greater than 120 days delinquent with loan-to-value ratios
above 90 percent. If the loan has a loan-to-value ratio of less than 90
percent, the loan is written down to its estimated disposition value after
considering any first mortgage position and 15 percent disposition
costs. Indirect automobile loans greater than 120 days delinquent are
charged off in full. If collection efforts result in a subsequent recovery
of all or a portion of the loan amount, the Bank recognizes the recovery
at the time of receipt.
The amount of the provision in 1998 is the result of
management's ongoing evaluation of the adequacy of its loan and real
estate owned loss allowances and the changing composition of the
Corporation's loan portfolio and REO. Management will continue to
evaluate the adequacy of the provision and will adjust it if necessary to
reflect changes in the amount or category of loans originated, changes
in current economic conditions and the credit risk of the loan portfolio
and REO.
Non-Interest Income
Total non-interest income was $5,233,000 for the three months
ended March 31, 1998, compared with $3,584,000 for the same period
in 1997.
The 1998 gain on sale of loans of $2,168,000 is comprised of
both a $1,525,000 gain on the sale of fixed-rate home equity loans and
a $643,000 gain on residential mortgage loans. The Bank realized
$564,000 on the sale of residential mortgage loans in the normal course
of the Bank's mortgage banking operations during the first quarter of
1997. A national network of agents coupled with a call center, has
allowed the Bank to aggressively pursue originations of home equity
products with loan-to-value ratios of greater than 80 percent. The
Bank processes and underwrites these loans and subsequently sells them
into the secondary market. In some cases, the Bank retains the
servicing rights on the home equity loan sales.
Loan servicing income for the three months ended March 31,
1998 decreased to $517,000 from $706,000 from the comparable
period in 1997. This decrease primarily occurred as a result of the
Bank's amortization of mortgage servicing rights.
<PAGE> 12
Loan fees increased $171,000 for the first quarter of 1998
compared with last year due to the increased activity in the
commercial and industrial portfolio.
Insurance commissions decreased $101,000 for the three
months ended March 31, 1998 compared with last year because of the
wide availability of alternate investment vehicles for the consumer.
Non-Interest Expense
Total non-interest expense was $10,566,000 for the three
months ended March 31, 1998, compared with $9,573,000 for the same
period in 1997. Salaries and benefits increased $480,000 during the
three months ended March 31, 1998 from the first quarter of 1997 in
order to provide processing and sales support to the increased loan
origination volume efforts, both in residential and consumer lending.
A renewed commitment to increase community awareness of the Bank's
products and services led to a marketing expense increase of $403,000
in 1998 from the first quarter of 1997. Other operating expenses, such
as temporary help and home equity lending expenses, increased
approximately $146,000 over 1997 levels due to increased consumer
and residential loan volume.
Included in real estate owned operations-net are all of the
operating revenues and expenses associated with the Corporation's real
estate owned. Such net results declined by $137,000 for the three
months ended March 31, 1998 from one year ago due to the increased
asset balance of the consumer portion of real estate owned.
Capital Resources and Liquidity
At March 31, 1998, shareholders' equity was $156,317,000, or
9.26 percent of total assets, compared with $153,036,000, or 9.49
percent, at December 31, 1997 and $141,974,000, or 9.59 percent, at
March 31, 1997.
The Corporation paid a quarterly dividend of $.12 per common
share on March 17, 1998 to shareholders of record as of March 6,
1998. This reflects an increase from $.10 per share in 1997. On March
6, 1998, the Corporation effected a six-for-five stock dividend. On
March 18, 1997, the Corporation effected a five-for-four stock split.
All per-share amounts have been adjusted to reflect the stock dividends
and splits.
The following table shows First Indiana's strong capital levels
and compliance with all capital requirements at March 31, 1998. First
Indiana is classified as "well-capitalized" under the OTS regulatory
framework for prompt corrective action, its highest classification. To
be categorized as "well-capitalized," the Bank must maintain minimum
total risk-based, tier one risk-based and tier one leverage ratios as set
forth in the table. The table reflects categories of assets includable
under OTS regulations. There are no conditions or events since the
date of classification that management believes have changed the
Bank's category.
<PAGE> 13
<TABLE>
<CAPTION>
To Be Well
For FDICIA Capitalized Under OTS
(Dollars in Thousands) Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
First Indiana Bank Capital $135,303
Tangible Capital (1) $135,114 8.01% $25,296 1.50% N/A N/A
Core (Tier One) Capital 135,114 8.01% 50,592 3.00% 84,321 5.00%
Tier One Risk-Based Capital 135,114 10.63% N/A N/A 76,266 6.00%
Total Risk-Based Capital (2) 148,944 11.72% 101,688 8.00% 127,110 10.00%
(1) First Indiana Bank capital differs from tangible capital by the FAS115 equity
securities adjustment of $189.
(2) Risk-based capital includes a $15,989 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>
The Corporation conducts its business through its
subsidiaries. The main source of funds for the Corporation is
dividends from the Bank. The Corporation has no significant assets
other than its investment in the Bank.
Regulations require the director of the OTS to set minimum
liquidity levels between four and 10 percent of assets. In the fourth
quarter of 1997, the regulations were altered to lower the liquidity
requirement to four percent of net withdrawable assets, and the
definition of net withdrawable assets was simplified. This change did
not have a significant impact on the Corporation's liquidity position.
The Corporation's liquidity ratio at March 31, 1998, was 10.40 percent.
Financial Condition
Total assets at March 31, 1998, were $1,687,938,000, an
increase from $1,613,405,000 at December 31, 1997.
Net loans receivable at March 31, 1998, were $1,394,604,000,
compared with $1,348,529,000 at December 31, 1997. The
predominant growth in loans occurred in the residential portfolio, which
amounted to $541,513,000 at March 31, 1998, or an 8 percent increase
from year end. Mortgage-backed securities decreased $1,880,000 to
$36,399,000 at March 31, 1998 from year-end due to prepayments.
In the past three months, consumer loans decreased $7,158,000,
primarily because the Bank sold fixed-rate home equity loans more
quickly than in previous quarters due to processing and other
operational efficiencies. The Corporation's residential loan servicing
portfolio amounted to $954,107,000 at March 31, 1998, compared with
$1,035,410,000 at March 31, 1997.
Total deposits were $1,192,424,000 at March 31, 1998,
compared with $1,107,555,000 at December 31, 1997. Non-interest-bearing
deposits consist of retail and commercial checking accounts, as
well as official checking accounts. Commercial checking accounts are
expected to become a more significant source of funds. Included in
commercial checking accounts at March 31, 1998 and December 31,
1997 were approximately $8,583,000 and $4,624,000 of escrow balances
<PAGE> 14
maintained for loans serviced for others. These balances
represent principal, interest, taxes and insurance that require separate
maintenance at the request of the investor. Official checking accounts
at March 31,1998 and December 31, 1997 were $46,275,000 and
$32,517,000, respectively. Federal Home Loan Bank advances totaled
$259,429,000 at March 31, 1998, compared with $257,458,000 at
December 31, 1997.
The Corporation also uses short-term repurchase agreements as
sources of funds. Borrowings will continue to be used in the short run
to compensate for periodic or other reductions in deposits or inflows at
less than projected levels, and long-term to support mortgage lending
activities.
Year 2000 Readiness
The Bank is required by the Federal Financial Institutions
Examination Council ("FFIEC") to assess both the Bank's and its
vendors' ability to be Year 2000 ready by December 31, 1998. The
Year 2000 issue refers to shortcomings which exist in some current
computer hardware and software that preclude the correct calculation
of date-sensitive information from, into, and between the twentieth and
twenty-first centuries, including leap year calculations.
The Bank has assembled a team of associates which meets
regularly to lead the Bank's Year 2000 readiness efforts. All hardware
and software vendors, as well as significant other vendors and
borrowers, have been identified and contact has been initiated with
these individuals or companies. The Bank has an inventory of known
potential Year 2000 readiness issues, and has begun to develop action
plans for assessing the impact of each issue. During 1998, the Bank
will be validating Year 2000 readiness, upgrading or replacing existing
hardware and software, or developing contingency plans in the event
the vendor or borrower will not assist the Bank in its Year 2000 efforts.
The Bank already has plans to upgrade all of its personal computers in
1998 at a cost approximating $550,000. Although management is
confident of the Bank's ability to operate in the 21st century, it is not
possible to assess either the financial impact of non-compliance or
future expenditures at this time.
Interest-Rate Sensitivity
First Indiana engages in rigorous, formal asset/liability
management, the objectives of which are to manage interest-rate risk,
ensure adequate liquidity, and coordinate sources and uses of funds. At
March 31, 1998, the Corporation's cumulative one-year interest-rate
gap stood at a negative 0.82 percent. This means that 0.82 percent of
First Indiana's liabilities will reprice within one year without a
corresponding repricing of the assets they are funding.
<PAGE> 15
The following schedule analyzes the difference in rate-sensitive
assets and liabilities or gap at March 31, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
Rate Sensitivity by Period of Maturity or Rate Change
March 31, 1998
Over 180 Over
% of Within Days to 1 Year to Over
(Dollars in Thousands) Rate Balance Total 180 Days 1 Year 5 Years 5 Years
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Investment Securities & Other 6.04%$ 153,209 9.53%$ 51,946 23,502 77,761 -
Loans Receivable (1)
Mortgage-Backed Securities 7.37% 36,399 2.26% 9,332 5,303 19,147 2,617
Residential Mortgage Loans 7.50% 541,513 33.67% 212,290 89,570 200,605 39,048
Commercial Real Estate Loans 8.43% 39,352 2.45% 11,108 6,267 18,657 3,320
Commercial and Industrial Loans 9.53% 136,606 8.49% 87,761 2,117 28,420 18,308
Consumer Loans 10.27% 540,858 33.63% 213,023 50,529 229,745 47,561
Residential Construction Loans 8.48% 160,322 9.97% 144,590 8,033 7,699 -
Total 8.58%$ 1,608,259 100.00% 730,050 185,321 582,034 110,854
Interest-Bearing Liabilities
Deposits:
Demand Deposits (2) 2.41%$ 80,386 5.75%$ - - - 80,386
Passbook Deposits (3) 3.00% 42,554 3.05% 3,562 1,008 8,064 29,920
Money Market Savings 4.76% 306,946 21.96% 306,946 - - -
Jumbo Certificates 5.79% 174,829 12.51% 99,754 18,023 57,052 -
Fixed-Rate Certificates 5.68% 476,139 34.07% 212,942 97,953 165,244 -
Total 5.09% 1,080,854 77.34% 623,204 116,984 230,360 110,306
Borrowings:
FHLB Advances 5.63% 259,429 18.56%$ 79,000 52,000 125,000 3,429
Short-Term Borrowings 5.33% 57,302 4.10% 57,302 - - -
Total 5.20% 1,397,585 100.00% 759,506 168,984 355,360 113,735
Net - Other (4) 210,674 210,674
Total $ 1,608,259 759,506 168,984 355,360 324,409
Rate Sensitivity Gap $ (29,456)$ 16,337 $ 226,674 $ (213,555)
March 31, 1998
Cumulative Rate-Sensitivity Gap $ (29,456)$ (13,119)$ 213,555
Percent of Total Interest-Earning Assets (1.83)% (0.82)% 13.28%
December 31, 1997
Cumulative Rate-Sensitivity Gap $ (10,423)$ (3,148)$ 167,284
Percent of Total Interest-Earning Assets (0.68)% (0.20)% 10.89%
(1) The distribution of fixed-rate loans is based upon contractual maturity and scheduled
contractual repayments adjusted for estimated prepayments. For adjustable-rate loans, interest
rates adjust at intervals of six months to five years. Included in Residential Mortgage Loans are
$44,818,000 of Loans Held for Sale. Included in Consumer Loans are $11,951,000 of Home
Equity Loans Held for Sale.
(2) These deposits have been included in the Over 5 Years category to reflect management's
assumption that these accounts are not rate-sensitive. This assumption is based upon historic
trends of these deposits through periods of significant increases and decreases in interest rates
without changes in rates paid on these deposits. Included in this category are NOW, money
market checking and non-interest bearing deposits. The rate represents a blended rate on all
deposit types in the category.
(3) A portion of these deposits has been included in the Over 5 Years category to reflect
management's assumption that these accounts are not rate-sensitive. This assumption is based
upon the historic minimal decay rates on these types of deposits experienced through periods of
significant increases and decreases in interest rates without changes in rates paid on these
deposits.
(4) Net Other is the excess of other non-interest-bearing liabilities and capital over other non-interest-bearing assets.
</TABLE>
<PAGE> 16
Disclosures About Market Risk
The Corporation's success is largely dependent upon its ability
to manage interest-rate risk, which is defined as the exposure of the
Corporation's net interest income and net earnings to changes in
interest rates. The Bank's Asset/Liability Committee ("ALCO") is
responsible for managing interest-rate risk and the Corporation has
established acceptable limits for interest-rate exposure, which are
reviewed on a monthly basis. The Bank uses a model which measures
interest-rate sensitivity to determine the impact on net earnings of
immediate and sustained upward and downward movements in interest
rates. Incorporated into the model are assumptions regarding the
current and anticipated interest rate environment, estimated prepayment
rates of certain assets and liabilities, forecasted loan and deposit
originations, contractual maturities and renewal rates on certificates of
deposits, estimated borrowing needs, anticipated loan loss provision,
projected secondary marketing gains and losses, expected repricing
spreads on variable-rate products, and contractual maturities and
repayments on lending and investment products. The model
incorporates interest-rate sensitive instruments which are held to
maturity or available for sale. The Bank has no trading assets. Based
on the information and assumptions in effect at March 31, 1998,
management believes that a 100 basis point increase or decrease in
interest rates over a 12 month period would result in a 4.0 percent
increase and a 5.5 percent decrease in net earnings, respectively,
because of the change in net interest income. Because of the numerous
assumptions used in the computation of interest-rate sensitivity, and the
fact that the model does not assume any actions the ALCO could take
in response to the change in interest rates, the results should not be
relied upon as indicative of actual results.
The Bank enters into forward sales contracts for future delivery
of residential fixed-rate mortgage loans at a specified yield in order to
limit market risk associated with its pipeline of residential mortgage
loans held for sale and commitments to fund residential mortgage loans.
Market risk arises from the possible inability of either party to comply
with the contract terms.
The Bank designates these forward sales contracts as hedges.
To qualify as a hedge, the forward sales contract must be effective in
reducing the market risk of the identified anticipated residential
mortgage loan sale which is probable to occur. Effectiveness is
evaluated on an ongoing basis through analysis of the residential
mortgage loan pipeline position. Commitments under these forward
sales contracts and the underlying residential mortgage loans are valued,
and the net position is carried at the lower of cost or market.
Unrecognized gains and losses on these forward sales contracts are
generally immaterial and are charged to current earnings as an
adjustment to the gain or loss on residential mortgage loan sales when
realized, when the contract matures, or is terminated.
<PAGE> 17
Other Information
Items 1, 2 and 3 are not applicable.
Item 4. Submission of Matters to Vote of Security Holders.
An annual meeting of shareholders was held April 16,
1998. The following directors were elected at this
meeting.
Votes For Votes Withheld
Robert H. McKinney 10,429,891 616,542
Owen B. Melton, Jr. 10,430,141 616,292
Michael L. Smith 10,429,891 616,542
The following directors' terms of office continued after
the meeting.
H. J. Baker
Marni McKinney
Phyllis W. Minott
Gerald L. Bepko
Andrew Jacobs, Jr.
John W. Wynne
The following other matters were voted on at the annual
meeting.
Votes Votes
For Against Withheld
Amendment of the Corporation's
Articles of Incorporation to
increase the amount of authorized
common stock to 33,000,000 9,817,376 1,188,260 40,795
Approval of the 1998 Stock
Incentive Plan 9,943,321 448,404 654,707
Approval of the Long-Term
Management Performance
Incentive Plan 10,769,437 210,396 66,599
<PAGE> 18
Item 5. When used in this Form 10-Q, the words "believes,"
"expects," "estimates," "will likely result," or "will continue"
and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and
uncertainties which could cause actual results to differ
materially. In particular, among the factors that could
cause actual results to differ materially are general business and
economic conditions, competitive and regulatory factors, credit
risks of lending activities, and interest rates. Readers are
cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The
Corporation undertakes no obligation to publicly release the
results of any revisions to these forward-looking
statements which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of
unanticipated events.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits - Financial Data Schedule
(b) Reports on Form 8-K - There were no reports
on Form 8-K filed during the three months
ended March 31, 1998.
<PAGE> 19
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
First Indiana Corporation
May 8, 1998 /s/Owen B. Melton, Jr.
Owen B. Melton, Jr.
President
May 8, 1998 /s/David L. Gray
David L. Gray
Vice President and
Treasurer
<PAGE> 20
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for the three months ended March 31, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1998
<CASH> 39,474
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 25,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 139,207
<INVESTMENTS-CARRYING> 25,401
<INVESTMENTS-MARKET> 25,794
<LOANS> 1,418,651
<ALLOWANCE> 24,047
<TOTAL-ASSETS> 1,687,938
<DEPOSITS> 1,192,424
<SHORT-TERM> 163,302
<LIABILITIES-OTHER> 22,466
<LONG-TERM> 153,429
0
0
<COMMON> 135
<OTHER-SE> 156,182
<TOTAL-LIABILITIES-AND-EQUITY> 1,687,938
<INTEREST-LOAN> 30,208
<INTEREST-INVEST> 2,494
<INTEREST-OTHER> 166
<INTEREST-TOTAL> 32,868
<INTEREST-DEPOSIT> 13,171
<INTEREST-EXPENSE> 17,437
<INTEREST-INCOME-NET> 15,431
<LOAN-LOSSES> 2,820
<SECURITIES-GAINS> 19
<EXPENSE-OTHER> 10,566
<INCOME-PRETAX> 7,278
<INCOME-PRE-EXTRAORDINARY> 7,278
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,418
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.33
<YIELD-ACTUAL> 3.95
<LOANS-NON> 18,900
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 10,716
<ALLOWANCE-OPEN> 22,414
<CHARGE-OFFS> 1,589
<RECOVERIES> 402
<ALLOWANCE-CLOSE> 24,047
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,320
</TABLE>
