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, 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 of Incorporation) (I.R.S. Employer Identification No.)
135 N. Pennsylvania St.
Indianapolis, Indiana 46204
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(317) 269-1200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
Common Stock, $.01 par value NASDAQ
______________________________________
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No ___.
State the aggregate market value of the voting stock held
by non-affiliates of the registrant: $180,704,000 as of February 28,
1999.
On February 28, 1999, the registrant had 12,653,646 shares of
common stock outstanding, $.01 par value
Documents Incorporated by Reference: Portions of the Annual Report to
Shareholders for the Year Ended December 31, 1998 (Part II) and portions of
the definitive proxy statement for the 1998 Annual Meeting of Shareholders
(Part III).
<PAGE> 1
FIRST INDIANA CORPORATION
FORM 10-K
Table of Contents
Page
PART I 3
Item 1. Business 3
Item 2. Properties 23
Item 3. Legal Proceedings 23
Item 4. Submission of Matters to a Vote
of Security Holders 23
PART II 24
Item 5. Market for Registrant's Common Equity
and Related Shareholder Matters 24
Item 6. Selected Financial Data 24
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operation 24
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk 24
Item 8. Financial Statements and
Supplementary Data 24
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 24
PART III 25
Item 10. Directors and Executive Officers
of the Registrant 25
Item 11. Executive Compensation 26
Item 12. Security Ownership of Certain
Beneficial Owners and Management 26
Item 13. Certain Relationships and
Related Transactions 26
PART IV 27
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K 27
SIGNATURES 28
EXHIBIT INDEX 29
<PAGE> 2
This Annual Report on Form 10-K ("Form 10-K") contains
statements which constitute forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
These statements appear in a number of places in this Form 10-K and
include statements regarding the intent, belief, outlook, estimate or
expectations of the Corporation (as defined below), its directors or its
officers primarily with respect to future events and the future financial
performance of the Corporation. Readers of this Form 10-K are
cautioned that any such forward looking statements are not
guarantees of future events or performance and involve risks and
uncertainties, and that actual results may differ materially from those
in the forward looking statements as a result of various factors. The
accompanying information contained in this Form 10-K identifies
important factors that could cause such differences. These factors
include changes in interest rates, loss of deposits and loan demand to
other savings and financial institutions, substantial changes in
financial markets; changes in real estate values and the real estate
market; regulatory changes, or unanticipated results in pending legal
proceedings.
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, One Investment Corporation, an operating 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 $1.8 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, business loans, and consumer loans. First Indiana offers a full range
of banking services through 27 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 operates mortgage origination offices in Florida and
North Carolina as One Mortgage Corporation. 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 were sold in the second quarter of 1996 to The
Somerset Group, Inc., a publicly held affiliate which owns approximately
23 percent of the Corporation's stock. In early 1999, First Indiana
established a new operating subsidiary, One Investment Corporation. One
Investment Corporation may purchase and sell loan participations
originated by First Indiana and by others in the secondary market.
<PAGE> 3
In the fourth quarter of 1998, First Indiana established a new
division, FirstTrust Indiana. An investment advisory and trust fund
service, FirstTrust brings together First Indiana's reputation for local
decisions and responsive service with the talent of nine experienced former
executives of one of Indianapolis' leading bank trust departments.
FirstTrust will enable First Indiana to diversify sources of non-interest
income while providing a broader spectrum of products to retail and
commercial customers.
The metropolitan area served by First Indiana 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 products,
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
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, business loans to
selected segments of the market, and consumer loans, primarily home
equity loans originated both on a direct and indirect basis.
The Bank's management believes that the surest path for the
Bank's long-term success is to concentrate on selected product lines sold
to certain segments of the market. The Bank implemented a series of
process and operational enhancements that enable it to act as both a
mortgage banker and portfolio lender with maximum efficiencies as
interest rates cause consumer preferences to shift between these two types
of residential mortgage loan products.
To minimize the mismatch between the duration of its interest-rate-
sensitive assets and liabilities, First Indiana has a policy of (i)
increasing its portfolio of adjustable-rate and shorter-term mortgage,
consumer and business loans; (ii) selling 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> 4
<TABLE>
<CAPTION>
Loan Portfolio Composition
(Dollars in Thousands) At December 31,
---------------
1998 1997 1996
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 $ 937,321 52.9% $ 750,619 49.4% $ 640,743 47.3%
2-4 Family Units 1,489 0.1% 1,093 0.1% 1,643 0.1%
Over 4 Family Units 7,365 0.4% 9,844 0.6% 9,586 0.7%
Mortgage-Backed Securities 29,680 1.7% 38,081 2.6% 36,152 2.8%
Commercial Real Estate and
Other Mortgage Loans 25,411 1.4% 32,269 2.1% 37,735 2.8%
Consumer Loans 580,525 32.8% 548,016 36.1% 526,769 38.9%
Business Loans 189,074 10.7% 137,517 9.1% 100,513 7.4%
---------- ------ ---------- ----------------- ------
Total Mortgage-Backed
Securities and Loans Receivable
(Before Net Items) $1,770,865 100.0% $1,517,439 100.0% $1,353,141 100.0%
========== ====== ========== ====== ========== ======
Loans by Type of Loan:
Real Estate:
Conventional:
Loans on Existing Property $ 551,641 31.1% $ 530,603 34.9% $ 463,211 34.2%
Construction Loans:
Commercial Real Estate Loans 0 0.0% 0 0.0% 11 0.0%
Commercial and Industrial Loans 10,141 0.6% 13,050 0.8% 7,944 0.6%
Residential Loans 406,650 23.0% 253,259 16.7% 214,433 15.8%
Insured or Guaranteed:
Mortgage-Backed Securities 29,680 1.7% 38,081 2.6% 36,152 2.8%
FHA and VA Loans 13,295 0.7% 9,963 0.7% 12,052 0.9%
Total Real Estate Loans 1,011,407 57.1% 844,956 55.7% 733,803 54.3%
Consumer Loans 580,525 32.8% 548,016 36.1% 526,769 38.9%
Business Loans 178,933 10.1% 124,467 8.2% 92,569 6.8%
---------- ----- ---------- ----- ----------- -----
Total Mortgage-Backed Securities
and Loans Receivable
(Before Net Items) $1,770,865 100.0% $1,517,439 100.0% $1,353,141 100.0%
========== ====== ========== ====== ========== ======
<CAPTION>
At December 31,
----------------
1995 1994
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Loans by Type of Security:
First Mortgage Loans Secured by:
Single-Family Units $ 625,133 45.0% $ 583,345 47.1%
2-4 Family Units 1,885 0.1% 2,173 0.2%
Over 4 Family Units 18,946 1.4% 21,881 1.7%
Mortgage-Backed Securities 49,089 3.6% 69,061 5.6%
Commercial Real Estate and
Other Mortgage Loans 46,137 3.3% 45,647 3.7%
Consumer Loans 575,009 41.4% 474,465 38.3%
Business Loans 72,146 5.2% 41,770 3.4%
---------- ------ ---------- ------
Total Mortgage-Backed
Securities and Loans Receivable
(Before Net Items) $1,388,345 100.0% $1,238,342 100.0%
========== ====== ========== =====
Loans by Type of Loan:
Real Estate:
Conventional:
Loans on Existing Property $ 464,604 33.5% $ 450,935 36.4%
Construction Loans:
Commercial Real Estate Loans 6,835 0.5% 9,019 0.7%
Business Loans 0 0.0% 0 0.0%
Residential Loans 207,957 15.0% 186,145 15.0%
Insured or Guaranteed:
Mortgage-Backed Securities 49,089 3.5% 69,061 5.6%
FHA and VA Loans 12,705 0.9% 6,947 0.6%
Total Real Estate Loans 741,190 53.4% 722,107 58.3%
Consumer Loans 575,009 41.4% 474,465 38.3%
Business Loans 72,146 5.2% 41,770 3.4%
-------- ----- -------- -----
Total Mortgage-Backed Securities
and Loans Receivable
(Before Net Items) $1,388,345 100.0% $1,238,342 100.0%
========== ====== ========== ====
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
Loan Portfolio Composition
(Continued) At December 31,
----------------
1998 1997 1996 1995 1994
(Dollars in Thousands) ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Loans Receivable $ 1,741,185 $ 1,479,358 $ 1,316,989 $ 1,339,256 $ 1,169,281
(Before Net Items)
Less:
Undisbursed Portion of Loans 200,732 110,629 84,173 72,511 78,588
Deferred Income, Unearned Discounts,
and Unamortized Premiums (3,790) (2,412) (1,762) (624) (521)
Allowance for Loan Losses 25,700 22,414 18,768 16,234 12,525
Plus:
Loan Valuation Adjustment
for Acquisitions 0 0 0 0 341
---------- ---------- ---------- --------- ---------
Total Loans Receivable Before Mortgage-
Backed Securities 1,518,543 1,348,727 1,215,810 1,251,135 1,079,030
Plus:
Mortgage-Backed Securities 29,680 38,081 36,152 49,089 69,061
----------- ----------- ----------- ----------- -----------
Mortgage-Backed Securities and Loans
Receivable - Net $ 1,548,223 $ 1,386,808 $ 1,251,962 $ 1,300,224 $ 1,148,091
=========== =========== =========== =========== ===========
</TABLE>
<PAGE> 6
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,
---------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Residential Mortgage Loans
Fixed Rates $ 230,955 $ 189,323 $ 166,968 $ 186,885 $ 157,706
Adjustable Rates 737,500 602,835 512,965 491,681 494,090
----------- ----------- ----------- ----------- -----------
Total $ 968,455 $ 792,158 $ 679,933 $ 678,566 $ 651,796
=========== =========== =========== =========== ===========
Commercial Real Estate Loans
Fixed Rates $ 6,855 $ 6,099 $ 17,213 $ 11,948 $ 15,770
Adjustable Rates 25,956 33,649 28,713 50,676 54,541
----------- ----------- ----------- ----------- -----------
Total $ 32,811 $ 39,748 $ 45,926 $ 62,624 $ 70,311
=========== =========== =========== =========== ===========
Total Residential Mortgage and
Commercial Real Estate Loans
Fixed Rates $ 237,810 $ 195,422 $ 184,181 $ 198,833 $ 173,476
Adjustable Rates 763,456 636,484 541,678 542,357 548,631
----------- ----------- ----------- ----------- -----------
Total $ 1,001,266 $ 831,906 $ 725,859 $ 741,190 $ 722,107
=========== =========== =========== =========== ===========
Consumer Loans
(Includes Home Equity Loans)
Fixed Rates $ 437,267 $ 395,423 $ 368,697 $ 411,030 $ 307,136
Adjustable Rates 143,258 152,593 158,072 163,979 167,329
----------- ----------- ----------- ----------- -----------
Total $ 580,525 $ 548,016 $ 526,769 $ 575,009 $ 474,465
=========== =========== =========== =========== ===========
Business Loans
Fixed Rates $ 61,272 $ 47,577 $ 0 $ 5,699 $ 2,028
Adjustable Rates 127,802 89,940 100,513 66,447 39,742
----------- ----------- ----------- ----------- -----------
Total $ 189,074 $ 137,517 $ 100,513 $ 72,146 $ 41,770
=========== =========== =========== =========== ===========
Total Mortgage-Backed Securities
and Loans Receivable
Fixed Rates $ 736,349 $ 638,422 $ 552,878 $ 615,562 $ 482,640
Adjustable Rates 1,034,516 879,017 800,263 772,783 755,702
----------- ----------- ----------- ----------- -----------
Total $ 1,770,865 $ 1,517,439 $ 1,353,141 $ 1,388,345 $ 1,238,342
=========== =========== =========== =========== ===========
</TABLE>
<PAGE> 7
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 $744 million in 1998, nearly
double the level in 1997. 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. First Indiana
strengthened its national presence by opening additional 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 $3.0 million during 1998. This compares with
gains of $1.9 million in 1997.
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.
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, 1998 and 1997, the Bank's
gross construction loans outstanding equaled $407 million and $253
million, respectively.
Commercial Loans. First Indiana offers a variety of
commercial loans, primarily business loans and commercial real estate
loans (including land development loans).
Included in business loans are $38 million in land development
loans, which are exclusively for the acquisition and development of land
into individual single-family building lots. The interest rate on land
development loans is generally one and one-quarter percent over the
Bank's prime rate, which adjusts upon changes in the prime rate, and the
term of these loans is generally 36 months.
The following table presents the remaining maturities and rate
sensitivity of residential construction and business loans.
<TABLE>
<CAPTION>
Remaining Maturities
--------------------
One Year Over One Year Over
or Less to Five Years Five Years Total Percent
(Dollars in Thousands) -------- ------------- ---------- ----- -------
<S> <C> <C> <C> <C> <C>
Type of Loan:
Residential Construction $ 205,511 $10,548 $ - $216,059 54.7 %
Business 115,792 35,728 27,413 178,933 45.3
------------- ------- ------- -------- -------
Total $ 321,303 $46,276 $ 27,413 $394,992 100.0 %
============= ======= ======= ======== =======
Rate Sensitivity:
Fixed Rate $ 4,053 $32,374 $ 24,844 $ 61,271 15.5 %
Adjustable Rate 317,250 13,902 2,569 333,721 84.5
------------- ------- ------- -------- -------
Total $ 321,303 $46,276 $ 27,413 $394,992 100.0 %
============= ======= ======= ======== =======
</TABLE>
<PAGE> 8
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, 1998 and 1997,
outstanding multi-family and commercial real estate loans originated and
purchased by First Indiana.
<TABLE>
<CAPTION>
1998 1997
(Dollars in Millions) Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Loans Originated $32.0 97.6 $38.7 97.5
Loans Purchased 0.8 2.4 1.0 2.5
----- ---- ----- ----
$32.8 100.0 $39.7 100.0
===== ===== ===== =====
</TABLE>
Consumer Lending. As part of its strategy for growth, First
Indiana has increased its origination and purchase of consumer loans,
primarily home equity loans and home equity lines of credit. At December
31, 1998, such loans totaled $580.5 million, of which $45,929,000 were
held for sale, compared with $548.0 million, of which $24,828,000 were
held for sale, at December 31, 1997. Much of the increase in 1998
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 $580.5 million of consumer
loans outstanding at December 31, 1998, 97.5 percent were secured by
first or second mortgages on real property, 0.6 percent was secured by
deposits, and 1.9 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, 1998, the Bank had approximately $300.1 million in home
equity loans above 80 percent LTV. Monthly, holders of revolving lines
of credit with up to an 80 percent LTV ratio are billed 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. At December 31,
1998, First Indiana had approved $252 million of 80 percent LTV lines of
credit, of which $110 million were outstanding, compared with $237
million of such lines which had been approved at December 31, 1997,
$114 million of which were outstanding.
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.
<PAGE> 9
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 $10 million and $15
million at December 31, 1998 and 1997. 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 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 loan losses inherent in the portfolio, 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 $489 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, 1998,
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 13 other states via an origination network of
independent loan agents.
Interest rates charged by First Indiana on its 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, agents 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> 10
In the case of one-to-four-family residential construction loans,
First Indiana charges a one to three percent non-refundable commitment
fee. Interest rates on construction loans are based on the prevailing market
rate at the time the commitment is extended. Commitment fees and other
terms of commercial real estate and business loans are individually
negotiated.
First Indiana earns fees on existing loans, including prepayment
charges, late charges, and assumption fees.
Servicing Activity. First Indiana's sale of whole loans and loan
participations in the secondary market generates income and provides
additional funds for loan originations. During 1998, the Bank identified
and sold $187 million in out-of-market loan servicing at a gain of
$1,438,000.
At December 31, 1998, First Indiana serviced approximately
$909 million in loans and loan participations which it had sold. As of
December 31, 1998, approximately $10.9 million in loans, or about 0.7
percent of First Indiana's mortgage-backed securities and loans receivable
after net items, were serviced by others.
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 carrying value 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, 1998 and 1997, the
balance of mortgage servicing rights included in other assets was
$5,815,000 and $4,522,000, with a fair market value of $6,865,000 and
$5,867,000. The amounts capitalized in 1998, 1997 and 1996 were
$3,891,000, $893,000 and $986,000, and the amounts amortized to loan
servicing income were $1,823,000, $819,000 and $92,000. There was a
valuation allowance at December 31, 1998 of $45,000, all of which was
provided during 1998.
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.
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 Investment Committee of the
Board of Directors, are referred to the full Board for final approval and
ratification.
<PAGE> 11
The second part of First Indiana's asset review system is managed
by an independent chief credit officer appointed by the Board of Directors.
The chief credit 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 the
Corporation's Chairman and the Chairman of the Executive Committee of
the Board of Directors. These meetings give the chief credit officer a
forum for discussing asset quality issues with members of the Board of
Directors. 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.
An allowance for loan and lease losses ("ALLL") is established
for each significant loan portfolio of the Bank in an amount adequate to
absorb the losses inherent within each loan portfolio. The ALLL is
segmented into three major components based on the credit characteristics
of the underlying loans within each loan portfolio: Special Mention Loans,
Classified Loans and Pass Loans (loans not rated Special Mention or
Classified).
A Risk Rating Analysis (loan grade) is completed on all loans
that exceed a minimum loan amount threshold for the asset specific loan
portfolios, namely, construction, business, commercial real estate and land
development lending. The Risk Rating Analysis is an eight grade system
with five pass grades. The final three grades, Special Mention,
Substandard and Doubtful correlate to the Office of Thrift Supervision's
criticized assets. The loans with a grade of Special Mention or worse
exhibit or may exhibit certain defined weaknesses which, if left
uncorrected, may jeopardize the full repayment of the loan. These loans
pose a higher level of risk to the Bank than the loans in a Pass grade.
Therefore, loans with a grade of Special Mention, Substandard or Doubtful
are assigned a Target Reserve within the ranges established by the Office
of Thrift Supervision ("OTS").
For the homogeneous loan portfolios and the asset specific loan
portfolios where the loan amount is less than the minimum threshold
established for that portfolio, when a loan becomes contractually
delinquent 90 days in either interest or principal, the loan in considered
non-accrual and is classified as Substandard. All other loans within these
portfolio segments are considered pass loans. For the asset specific loan
portfolios, a loan is considered non-accrual based on the specific
circumstances but in no event later than a contractual delinquency of 90
days in either interest or principal.
The determination of the required ALLL (the "Target Reserve")
for Pass Loans is based on two different analyses of the empirical data for
each loan portfolio over the preceding 36 months. The first analysis, the
Trend Forecast, consists of linear and non-linear regression analysis of the
loans outstanding, the level and trend of delinquencies and the level and
trend of net charge-offs for the portfolio. The second analysis, the Formula
Calculation, is completed for each loan portfolio and is based on the
correlation of the level of loans delinquent 60 days or more to the level of
net charge-offs. The result of each analysis is the projected level of net
charge-offs for the next twelve months for the individual loan portfolio.
Due to the potentially positive impact to net charge-offs of other
factors specific to a loan portfolio's performance and for new loan
products within a loan portfolio, a Policy Limit is established for each loan
portfolio. The Policy Limit represents the minimum level of loss
established for each portfolio and is based on historical losses for the
Bank's loan portfolios in conjunction with expected losses for similar loan
types within the Bank's loan portfolio.
The greater of the Policy Limit, Trend Forecast or Formula Ratio
for each loan portfolio is set as the Base Reserve for that portfolio. The
Base Reserve is then adjusted for factors that may influence the loan
portfolio's actual net charge-offs. The final adjusted Base Reserve is equal
to the Target Reserve for the Pass Loans for an individual loan portfolio.
The regulatory classification of loans and determination of non-accrual
status is completed each month. The determination of the Target
Reserve for the pass portfolio using the analyses discussed above is
completed on a quarterly basis and the Target Reserve adjusted
accordingly.
In addition to the ALLL established for each loan portfolio, the
Bank maintains an unallocated ALLL to cover the residual losses inherent
in the loan portfolio. As discussed above, the Target Reserve for the Pass
Loans is established for a 12-month period. A residual loss is the inherent
loss within the loan portfolio over the life of the loans in the portfolio.
Management believes that First Indiana's current loan and REO
loss allowances are sufficient to absorb potential
<PAGE> 12
losses which are inherent in the loan portfolio; 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 OTS in their most recent examinations of First Indiana.
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
agents 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 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 savings institution is not warranted.
Assets classified as Substandard or Doubtful require the savings
institution to establish prudent general allowances for loan losses. If an
asset or portion thereof is classified as Loss, the savings 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 savings 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, 1998 on a net basis, First Indiana had classified $31.8 million as
Substandard, compared with $33.4 million and $36.7 million at December
31, 1997 and 1996, 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 $17.2 million at
December 31, 1998, compared with $18.4 and $15.4 million at December
31, 1997 and 1996, respectively.
Loans are classified as impaired when an analysis of a borrower's
creditworthiness indicates it is unlikely that the borrower can meet
contractual obligations for principal and interest repayments.
Loan modifications classified as troubled debt restructuring
amounted to $6.9 million at December 31, 1996. 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
<PAGE> 13
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 savings institutions which have had
concentrations in areas of the country most adversely affected by economic
cycles. First Indiana's non-performing assets fell in 1998 to $19.9 million
at December 31, 1998 from $22.8 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.
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.
As required by SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, First Indiana continually
reassesses the classification of securities as either available-for-sale or
held-to-maturity. During the third quarter of 1998, management changed
its positive intent to hold held-to-maturity investments and mortgage-backed
securities. Accordingly, the entire portfolios of mortgage-backed
securities with an amortized cost of $19,274,000 and investment securities
with an amortized cost of $5,243,000 were transferred from held-to-maturity
to available-for-sale. At the time of the transfer, these mortgage-backed
securities and investment securities had unrecognized gains of
$374,000 and $86,000, respectively, which were recognized as a separate
component of accumulated other comprehensive income. Management
elected to transfer these securities which had been previously designated
as held-to-maturity.
At December 31, 1998, First Indiana's investments totaled
$113.3 million, or 6.31 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 1998. At December 31, 1998, these mortgage-backed securities
totaled $29.7 million, or 1.65 percent of total assets. For additional
information concerning mortgage-backed securities held by the
Corporation, see the Corporation's Consolidated Financial Statements,
including Notes 2 and 3 thereto.
<PAGE> 14
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 1999, First Indiana plans to continue to
increase consumer and commercial checking accounts and certificates of
deposit in an effort to reduce funding costs and strengthen core deposits.
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) 1998 1997 1996
Rate
<S> <C> <C> <C>
Under 3.00% $551,421 $205,265 $259,798
3.00 - 5.00 217,244 385,859 110,786
5.01 - 7.00 457,988 493,012 689,390
7.01 - 9.00 756 23,032 35,156
9.01 - 11.00 509 387 356
--------- --------- ---------
$1,227,918 $1,107,555 $1,095,486
</TABLE>
<PAGE> 15
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,
1998 1997 1996
(Dollars in Thousands)
<S> <C> <C> <C>
NOW Checking and
Non-Interest-Bearing
Deposits $ 41,210 $ 13,342 $ 12,300
Money Market
Checking (1,858) (9,106) (2,344)
Passbook and
Statement Savings 63,052 (1,056) 55,252
Money Market Savings (661) (2,914) (4,495)
Jumbo Certificates of
$100 or More 49,232 23,358 (23,067)
Fixed-Rate Certificates (30,612) (11,555) (79,140)
-------- -------- --------
Net Increase (Decrease) $120,363 $ 12,069 $(41,494)
======== ======== ========
</TABLE>
First Indiana's jumbo certificates of $100,000 or more at
December 31, 1998, 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 $59,272 $26,234 $42,861 $41,621 $169,988 13.84%
</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, 1998, First Indiana had $327.2 million in FHLB advances
(18.22 percent of total assets), with a weighted average rate of 5.44
percent.
First Indiana also enters into repurchase agreements as a short-term
source of borrowing, but only with registered government securities
dealers.
<PAGE> 16
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,
1998 1997 1996
(Dollars in Thousands)
<S> <C> <C> <C>
Highest Month-End Balance of Short-Term Borrowings
During the Year $62,620 $84,896 $39,651
Average Month-End Balance of Short-Term Borrowings
During The Year 51,166 38,899 18,133
Weighted Average Interest Rate of Short-Term Borrowings
During the Year 5.29% 5.45% 5.41%
Weighted Average Interest Rate of Short-Term Borrowings
at End of the Year 4.81 5.48 5.19
</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, 1998, First Indiana's risk-based capital was $155.8 million, or 11.24
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 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, 1998, First Indiana's core capital and leverage ratio were
$140.0 million and 7.80 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, 1998, were
$140.0 million and 7.80 percent respectively.
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,
1998 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.
<PAGE> 17
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, 1998, 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 savings institution are
monetary, which limits the usefulness of data derived by adjusting a
savings institution's financial statements for the effects of changing prices.
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, 1998, these provisions are not expected to have an 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.
<PAGE> 18
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, 1998, the qualified thrift investment percentage
test for First Indiana was near 86 percent. First Indiana complies with the
new QTL test as revised upon enactment of FDICIA.
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, 1998 was 8.00 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, 1998, 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, 1998, First Indiana's loan-to-one borrower limitation was
approximately $23.4 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, 1998.
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, 1998, First Indiana was in compliance with the equity risk investment
limitations.
<PAGE> 19
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'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 Indiana most recently paid $.0610 per $100 of
deposits to comply with this assessment.
First Indiana was a well-capitalized institution throughout 1998,
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 1999, 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 savings 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, 1998, the Bank's rating was
"outstanding". The Bank 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, 1998.
<PAGE> 20
Federal Home Loan Bank System
The Federal Home Loan Bank System ("FHLB") consists of 12
regional Banks, each subject to supervision and regulation by the Federal
Housing Finance Board. The FHLB provides 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 from the
FHLB, whichever is greater. As of December 31, 1998, First Indiana was
in compliance with this requirement.
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, 1998, 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.
Federal Securities Law
The stock of the Corporation is registered with the Securities and
Exchange Commission ("SEC") under the Securities Exchange Act of
1934 (the "Exchange Act"). The Corporation will be subject to the
information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Exchange Act.
Corporation stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Corporation may not
be resold without registration or unless sold in accordance with certain
resale restrictions. If the Corporation meets specified current public
information requirements, each affiliate of the Corporation is able to sell
in the public market, without registration, a limited number of shares in
any three-month 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.
<PAGE> 21
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.
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, 1998, 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 1996.
State. The State of Indiana imposes a franchise tax on the
"adjusted gross income" of depository institutions at a fixed rate of 8.5
percent per year. This franchise tax is imposed in lieu of the gross income
tax, adjusted gross income tax, savings and loan excise tax and
supplemental net income tax otherwise imposed on certain corporate
entities and depository institutions. "Adjusted gross income" is computed
by making certain modifications to an institution's federal taxable income.
For example, tax-exempt interest is included in the depository institution's
adjusted gross income for state franchise tax purposes. The Indiana
Department of Revenue has examined the state income tax returns of First
Indiana through 1994.
Service Corporation Subsidiaries
OTS regulations permit federal savings institutions to invest in
the capital stock, obligations or specified types of securities of subsidiaries
(referred to as "service corporations") and to make loans to such
subsidiaries and joint ventures in which such subsidiaries are participants
in an aggregate amount not exceeding two percent of an institution's assets,
plus an additional one percent of assets if the amount over two percent is
used for specified community or inner-city development purposes. In
addition, federal regulations permit institutions to make specified types of
loans to such subsidiaries (other than special-purpose finance
subsidiaries), in which the institution owns more than ten percent of the
stock, in an aggregate amount not exceeding 50 percent of the institution's
regulatory capital if the institution's regulatory capital is in compliance
with applicable regulations. FIRREA requires a savings institution which
acquires a non-savings institution subsidiary, or which elects to conduct a
new activity within a subsidiary, to give the FDIC and the OTS at least 30
days' advance written notice. The FDIC may, after consultation with the
OTS, prohibit specific activities if it determines such activities pose a
<PAGE> 22
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 Investment Corporation. One Investment Corporation is
a wholly owned subsidiary formed in January, 1999 to engage in the
purchase and sale of loan participations originated both by First Indiana
and by others in the secondary market.
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.
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, 1998, the Corporation and its subsidiaries
employed 752 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, short-term
and long-term disability insurance, life insurance, an employees' stock
purchase plan, tuition reimbursement, and reduced loan rates for
employees who qualify.
Item 2. Properties
At December 31, 1998, the Corporation operated through 27 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, 1998 of the properties owned or leased, including
headquarters properties and leasehold improvements at the leased offices,
was $18.5 million. See Note 6 to the Corporation's Consolidated Financial
Statements. The carrying value of First Indiana's data processing
equipment at December 31, 1998 was $1.7 million.
Item 3. Legal Proceedings
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, 1998.
<PAGE> 23
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 47 of the Corporation's 1998 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 37 - 39 of the Corporation's 1998 Annual Report,
which is incorporated herein by reference.
The Corporation paid a cash dividend of $.12 per share
outstanding in each quarter of 1998 and $.10 per share outstanding in each
quarter of 1997, as adjusted for a six-for-five stock dividend on March 6,
1998.
Item 6. Selected Financial Data
The information required by this item is incorporated by
reference to page 23 of the Corporation's 1998 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 12 - 22 of the Corporation's 1998 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
22 of the Corporation's 1998 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, 1998 and 1997 and
for each of the years in the three-year period ended December 31, 1998 are
incorporated by reference to pages 24 - 46 of the Corporation's 1998
Annual Report. The Corporation's unaudited quarterly financial data for
each of the years in the two-year period ended December 31, 1998 is
incorporated by reference to Note 15 of "Notes to Consolidated Financial
Statements" on page 43 of the Corporation's 1998 Annual Report.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
<PAGE> 24
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 5-7 and page 19 of the Corporation's
Proxy Statement dated March 11, 1999 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 55 1981
of the Corporation; Chief
Financial Officer, Treasurer,
and Senior Vice President,
Financial Management
Group of the Bank
David A. Lindsey Senior Vice President, 48 1983
Consumer Finance Group
of the Bank;
Merrill E. Matlock Senior Vice President, 49 1984
Commercial and Mortgage
Banking Group of the Bank
Timothy J. O'Neill Senior Vice President, 51 1972
Correspondent Banking
Services Group of the Bank
Edward E. Pollack Senior Vice President, 50 1998
Technology and Operations
Group of the Bank
Kenneth L. Turchi Senior Vice President, Retail 40 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,
Financial Management 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, business, and commercial real estate
lending. Mr. Matlock has worked for First Indiana since 1984 and was
most recently first vice president of the construction lending department.
Timothy J. O'Neill has been with the Bank since 1970. He
currently serves as the Bank's senior vice president, Correspondent
Banking Services Group. As part of his current responsibilities, he
develops relationships with smaller community banks to provide private
label products and services to their customers.
Edward E. Pollack joined the Bank in 1998, and offers many
years of experience in operations and technology at the nation's largest
guarantor of student loans. He is serving as senior vice president,
Technology and Operations Group.
<PAGE> 25
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.
Item 11. Executive Compensation.
The information required by this item with respect to executive
compensation is incorporated by reference to pages 9-18 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) of the 1997 Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The information required by this item is incorporated by
reference to pages 1-7 of the material under the heading "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 8 of the material under the heading "Certain
Transactions" in the Corporation's Proxy Statement.
<PAGE> 26
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:
1998 Annual
Report
(Exhibit 13)
Financial Statements Page(s)
-------------------- ------------
Consolidated Balance Sheets as of
December 31, 1998 and 1997 24
Consolidated Statements of Earnings
for the Years Ended December 31, 1998, 1997 and 1996 25
Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 1998, 1997 and 1996 26
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1998, 1997 and 1996 27
Notes to Consolidated Financial Statements 28-45
Independent Auditors' Report 46
Exhibits
Refer to list of exhibits on pages 29-30
b. Reports on Form 8-K
No Reports on Form 8-K were filed during the three months ended
December 31, 1998.
c. The exhibits filed herewith or incorporated by reference herein are
set forth on the Exhibit index on pages 29-30.
d. Financial Statement Schedules required by Regulation S-X.
None
<PAGE> 27
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 18, 1999
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 18, 1999 Date: March 18, 1999
Directors
By: /s/Gerald L. Bepko By: /s/Robert H. McKinney
Gerald L. Bepko Robert H. McKinney
Date: March 18, 1999 Date: March 18, 1999
By: /s/Andrew Jacobs, Jr. By: /s/Owen B. Melton, Jr.
Andrew Jacobs, Jr. Owen B. Melton, Jr.
Date: March 18, 1999 Date: March 18, 1999
By: /s/Marni McKinney By: /s/Phyllis W. Minott
Marni McKinney Phyllis W. Minott
Date: March 18, 1999 Date: March 18, 1999
By: /s/John W. Wynne By: /s/Michael L. Smith
John W. Wynne Michael L. Smith
Date: March 18, 1999 Date: March 18, 1999
By: /s/H.J. Baker
H.J. Baker
Date: March 18, 1999
<PAGE> 28
<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 10-K 31
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, incorporated by reference to Exhibit 10(a) of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997
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, incorporated by
reference to Exhibit 10(c) of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1997
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, incorporated by reference to Exhibit 10(f) of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997.
10(g) First Indiana Corporation Supplemental Benefit Plan Agreement
effective May 1, 1997 between Registrant and Robert H. McKinney,
incorporated by reference to Exhibit 10(g) of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997.
<PAGE> 29
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, incorporated by reference to Exhibit
10(h) of the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.
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, incorporated
by reference to Exhibit 10(i) of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997.
10(j) Form of Employment Agreement between Registrant and each of
Robert H. McKinney, Owen B. Melton, Jr. and Marni McKinney,
incorporated by reference to Exhibit 10(j) of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997.
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, incorporated by reference to Exhibit
10(k) of the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.
13 1998 Annual Report. 10-K 54
21 Subsidiaries of First Indiana Corporation and First Indiana Bank. 10-K 106
22 Definitive Proxy Statement relating to the 1999 Annual Meeting of
Shareholders. 10-K 107
23 Consent of KPMG Peat Marwick LLP. 10-K 131
27 Financial Data Schedule. 10-K 133
</TABLE>
<PAGE> 30
FIRST INDIANA CORPORATION
Articles of Incorporation and Bylaws
ARTICLES OF INCORPORATION
OF
FIRST INDIANA CORPORATION
ARTICLE I
IDENTIFICATION
Section 1.01. Name. The name of this corporation is First
Indiana Corporation.
Section 1.02. Registered Agent. The address of this
corporation's principal office in the State of Indiana is First Indiana
Plaza, 135 North Pennsylvania Street, in the City of Indianapolis,
County of Marion, 46204. The name of its registered agent at such
address is Robert H. McKinney.
ARTICLE II
PURPOSE
The purpose of this corporation is the transaction of any and all
lawful business for which corporations may be incorporated under the
General Corporation Act of the State of Indiana.
ARTICLE III
CAPITAL STOCK
Section 3.01. Amount. The total number of shares of all
classes of stock which the corporation shall have authority to issue is
thirty-five million (35,000,000), of which thirty-three million
(33,000,000) shall be common stock, par value $.01 per share, and two
million (2,000,000) shall be serial preferred stock, par value $.01 per
share.
Section 3.02. Terms of Preferred Stock. The shares of
preferred stock may be issued from time to time in one or more series.
The board of directors of this corporation shall have authority to fix by
resolution or resolutions the designations and the powers, preferences
and relative, participating, optional or other special rights and
qualifications, limitations or restrictions thereof, including, without
limitation, the voting rights, the dividend rate, conversion rights,
redemption price and liquidation preference, of any series of shares of
preferred stock, to fix the number of shares constituting any such series,
and to increase or decrease the number of shares of any such series (but
not below the number of shares thereof then outstanding). In case the
number of shares of any such series shall be so decreased, the shares
constituting such decrease shall resume the status which they had prior
to the adoption of the resolution or resolutions originally fixing the
number of shares of such series.
Section 3.03. Terms of Common Stock. The shares of
common stock may be issued from time to time. Each share of
common stock shall have the same relative rights as and be identical in
all respects with all the other shares of common stock. Except as
provided in Article VIII, every holder of common stock shall have the
right, at every stockholders' meeting, to one vote for each share
standing in his name on the books of the corporation.
Whenever there shall have been paid, or declared and set aside
for payment, to the holders of the outstanding shares of any class of
stock having preference over the common stock as to the payment of
dividends, the full amount of dividends and of sinking fund or
retirement fund or other retirement payments, if any, to which such
holders are respectively entitled in preference to the common stock,
then dividends may be paid on the common stock and on any class or
series of stock entitled to participate therewith as to dividends, out of
any assets legally available for the payment of dividends; but only when
and as declared by the board of directors.
In the event of any liquidation, dissolution or winding up of this
corporation, after there shall have been paid to or set aside for the
holders of any class having preferences over the common stock in the
event of liquidation, dissolution or winding up the full preferential
amounts to which they are respectively entitled, the holders of the
common stock, and any class or series of stock entitled to participate
therewith, in whole or in part, as to the distribution of assets, shall be
entitled after payment or provision for payment of all debts and
liabilities of this corporation, to receive the remaining assets of this
corporation available for distribution, in cash or in kind.
Section 3.04. Series A Junior Participating Preferred Stock.
(a) Designation and Amount. The shares of such series shall be
designated as "Series A Junior Participating Preferred Stock" (the
"Series A Preferred Stock") and the number of shares constituting the
Series A Preferred Stock shall be one million (1,000,000). Such
number of shares may be increased or decreased by resolution of the
Board of Directors; provided, that no decrease shall reduce the number
of shares of Series A Preferred Stock to a number less than the number
of shares then outstanding plus the number of shares reserved for
issuance upon the exercise of outstanding options, rights or warrants or
upon the conversion of any outstanding securities issued by the
Corporation convertible into Series A Preferred Stock.
(b) Dividends and Distributions.
(1) Subject to the rights of the holders of any shares of any
series of Preferred Stock (or any similar stock) ranking prior and
superior to the Series A Preferred Stock with respect to dividends, the
holders of shares of Series A Preferred Stock, in preference to the
holders of Common Stock, par value $.01 per share (the "Common
Stock"), of the Corporation, and of any other junior stock, shall be
entitled to receive, when, as and if declared by the Board of Directors
out of funds legally available for the purpose, quarterly dividends
payable in cash on the first day of March, June, September and
December in each year (each such date being referred to herein as a
"Quarterly Dividend Payment Date"), commencing on the first
Quarterly Dividend Payment Date after the first issuance of a share or
fraction of a share of Series A Preferred Stock, in an amount per share
(rounded to the nearest cent) equal to the greater of (i) $1 or (ii) subject
to the provision for adjustment hereinafter set forth, 100 times the
aggregate per share amount of all cash dividends, and 100 times the
aggregate per share amount (payable in kind) of all non-cash dividends
or other distributions, other than a dividend payable in shares of
Common Stock or a subdivision of the outstanding shares of Common
Stock (by reclassification or otherwise), declared on the Common Stock
since the immediately preceding Quarterly Dividend Payment Date or,
with respect to the first Quarterly Dividend Payment Date, since the
first issuance of any share or fraction of a share of Series A Preferred
Stock. In the event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock,
or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise
than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such
case the amount to which holders of shares of Series A Preferred Stock
were entitled immediately prior to such event under clause (ii) of the
preceding sentence shall be adjusted by multiplying such amount by a
fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding
immediately prior to such event.
(2) The Corporation shall declare a dividend or distribution on
the Series A Preferred Stock as provided in paragraph (b)(1) of this
Section immediately after it declares a dividend or distribution on the
Common Stock (other than a dividend payable in shares of Common
Stock); provided that, in the event no dividend or distribution shall have
been declared on the Common Stock during the period between any
Quarterly Dividend Payment Date and the next subsequent Quarterly
Dividend Payment Date, a dividend of $1 per share on the Series A
Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
(3) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of such shares,
unless the date of issue of such shares is prior to the record date for the
first Quarterly Dividend Payment Date, in which case dividends on such
shares shall begin to accrue from the date of issue of such shares, or
unless the date of issue is a Quarterly Dividend Payment Date or is a
date after the record date for the determination of holders of shares of
Series A Preferred Stock entitled to receive a quarterly dividend and
before such Quarterly Dividend Payment Date, in either of which events
such dividends shall begin to accrue and be cumulative from such
Quarterly Dividend Payment Date. Accrued but unpaid dividends shall
not bear interest. Dividends paid on the shares of Series A Preferred
Stock in an amount less than the total amount of such dividends at the
time accrued and payable on such shares shall be allocated pro rata on
a share-by-share basis among all such shares at the time outstanding.
The Board of Directors may fix a record date for the determination of
holders of shares of Series A Preferred Stock entitled to receive
payment of a dividend or distribution declared thereon, which record
date shall be not more than 60 days prior to the date fixed for the
payment thereof.
(c)Voting Rights. The holders of shares of Series A Preferred
Stock shall have the following voting rights:
(1) Subject to the provision for adjustment hereinafter set
forth, each share of Series A Preferred Stock shall entitle the holder
thereof to 100 votes on all matters submitted to a vote of the
stockholders of the Corporation. In the event the Corporation shall at
any time declare or pay any dividend on the Common Stock payable in
shares of Common Stock, or effect a subdivision or combination or
consolidation of the oustanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of
Common Stock) into a greater or lesser number of shares of Common
Stock, then in each such case the number of votes per share to which
holders of shares of Series A Preferred Stock were entitled immediately
prior to such event shall be adjusted by multiplying such number by a
fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding
immediately prior to such event.
(2) Except as otherwise provided herein, in any other
section of these Articles creating a series of Preferred Stock or any
similar stock, or by law, the holders of shares of Series A Preferred
Stock and the holders of shares of Common Stock and any other capital
stock of the Corporation having general voting rights shall vote
together as one class on all matters submitted to a vote of stockholders
of the Corporation.
(3) Except as set forth herein, or as otherwise provided by
law, holders of Series A Preferred Stock shall have no special voting
rights and their consent shall not be required (except to the extent they
are entitled to vote with holders of Common Stock as set forth herein)
for taking any corporate action.
(d) Certain Restrictions.
(1) Whenever quarterly dividends or other dividends or
distribtions payable on the Series A Preferred Stock as provided in
subsection (b) are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on shares of Series
A Preferred Stock outstanding shall have been paid in full, the
Corporation shall not:
(i) declare or pay dividends, or make any other
distributions, on any shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series
A Preferred Stock;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Series A Preferred Stock, except dividends paid ratably on the Series A
Preferred Stock and all such parity stock on which dividends are
payable or in arrears in proportion to the total amounts to which the
holders of all such shares are then entitled;
(iii)redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to dividends
or upon liquidation, dissolution or winding up) to the Series A
Preferred Stock, provided that the Corporation may at any time redeem,
purchase or otherwise acquire shares of any such junior stock in
exchange for shares of any stock of the Corporation ranking junior
(either as to dividends or upon liquidation, dissolution or winding up)
to the Series A Preferred stock; or
(iv) redeem or purchase or otherwise acquire for
consideration any shares of Series A Preferred Stock, or any shares of
stock ranking on a parity with the Series A Preferred Stock, except in
accordance with a purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of such shares
upon such terms as the Board of Directors, after consideration of the
respective annual dividend rates and other relative rights and
preferences of the respective series and classes, shall determine in good
faith will result in fair and equitable treatment among the respective
series or classes.
(2) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any
shares of stock of the Corporation unless the Corporation could, under
paragraph (1) of this subsection (d), purchase or otherwise acquire such
shares at such time and in such manner.
(e) Reacquired Shares. Any shares of Series A Preferred
Stock purchased or otherwise acquired by the Corporation in any
manner whatsoever shall be retired and cancelled promptly after the
acquisition thereof. All such shares shall upon their cancellation
become authorized but unissued shares of Preferred Stock and may be
reissued as part of a new series of Preferred Stock subject to the
conditions and restrictions on issuance set forth in this section or
elsewhere in these Articles, including but not limited to a section of
these Articles creating another series of Preferred Stock or any similar
stock, or as otherwise required by law.
(f) Liquidation, Dissolution or Winding Up. Upon any
liquidation, dissolution or winding up of the Corporation, no
distribution shall be made (1) to the holders of shares of stock ranking
junior (either as to dividends or upon liquidation, dissolution or winding
up) to the Series A Preferred Stock unless, prior thereto, the holders of
shares of Series A Preferred Stock shall have received $100 per share,
plus an amount equal to accrued and unpaid dividends and distributions
thereon, whether or not declared, to the date of such payment, provided
that the holders of shares of Series A Preferred Stock shall be entitled
to receive an aggregate amount per share, subject to the provision for
adjustment hereinafter set forth, equal to 100 times the aggregate
amount to be distributed per share to holders of shares of Common
Stock, or (2) to the holders of shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up)
with the Series A Preferred Stock, except distributions made ratably on
the Series A Preferred Stock and all such parity stock in proportion to
the total amounts to which the holders of all such shares are entitled
upon such liquidation, dissolution or winding up. In the event the
Corporation shall at any time declare or pay any dividend on the
Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares
of Common Stock (by reclassification or otherwise than by payment of
a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the aggregate
amount to which holders of shares of Series A Preferred Stock were
entitled immediately prior to such event under the proviso in clause (1)
of the preceding sentence shall be adjusted by multiplying such amount
by a fraction the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
(g) Consolidation, Merger, etc. In case the Corporation
shall enter into any consolidation, merger, combination or other
transaction in which the shares of Common Stock are exchanged for or
changed into other stock or securities, cash and/or any other property,
then in any such case each share of Series A Preferred Stock shall at the
same time be similarly exchanged or changed into an amount per share,
subject to the provision for adjustment hereinafter set forth, equal to
100 times the aggregate amount of stock, securities, cash and/or any
other property (payable in kind), as the case may be, into which or for
which each share of Common Stock is changed or exchanged. In the
event the Corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares
of Common Stock (by reclassification or otherwise than by payment of
a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the amount set
forth in the preceding sentence with respect to the exchange or change
of shares of Series A Preferred Stock shall be adjusted by multiplying
such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event.
(h) No Redemption. The shares of Series A Prefererd Stock
shall not be redeemable.
(i) Rank. The Series A Preferred Stock shall rank, with
respect to the payment of dividends and the distribution of assets, junior
to all series of any other class of the Corporation's Preferred Stock.
(j) Amendment. The Articles of Incorporation of the
Corporation and its bylaws shall not be amended in any manner which
would materially alter or change the powers, preferences or special
rights of the Series A Preferred Stock so as to affect them adversely
without the affirmative vote of the holders of at least two-thirds of the
outstanding shares of Series A Preferred Stock, voting together as a
single class.
ARTICLE IV
BOARD OF DIRECTORS
Section 4.01. General. All corporate powers shall be exercised
by or under the authority of, and the business and affairs of the
corporation shall be managed under the direction of, a board of
directors except as may be otherwise provided by law or these Articles
of Incorporation. The authorized number of directors shall in no case
be fewer than five (5). The exact number of directors shall be fixed in
the Bylaws.
Section 4.02. Election of Directors. When the board of
directors consists of nine (9) or more members, there shall be three (3)
classes of directors, each class to be as nearly equal in number as
possible. The directors of the first class shall hold office for a term
expiring at the annual meeting in 1987; directors of the second class
shall hold office for a term expiring at the annual meeting in 1988; and
directors of the third class shall hold office for a term expiring at the
annual meeting in 1989.
At each annual election beginning at the annual meeting of
stockholders in 1987, the successors to the class of directors whose
term then expires shall be elected to hold office for a term of three (3)
years, to succeed those directors whose term expires, so that the term
of one (1) class of directors shall expire each year, unless, by reason of
any intervening changes in the authorized number of directors, the
board of directors shall have designated one (1) or more directorships
whose term then expires as directorships of another class in order more
nearly to achieve equality of number of directors among the classes of
directors.
Notwithstanding the requirement that the three (3) classes of
directors shall be as nearly equal in number of directors as possible, in
the event of any change in the authorized number of directors, each
director then continuing to serve as such shall nevertheless continue as
a director of the class of which he is a member until the expiration of his
current term, or his prior resignation, disqualification, disability or
removal. There shall be no cumulative voting in the election of
directors.
Section 4.03. Newly Created Directorships and Vacancies.
Any vacancies on the board of directors resulting from death,
resignation, retirement, disqualification, removal from office or other
cause shall be filled by the affirmative vote of a majority of directors
then in office, although less than a quorum, or by the sole remaining
director, or, in the event of the failure of the directors or sole remaining
director so to act, by the stockholders at the next election of directors.
Directors so chosen shall hold office for a term expiring at the annual
meeting of stockholders at which the term of the class to which they
have been elected expires. A director elected to fill a vacancy by reason
of an increase in the number of directorships shall be elected by a
majority vote of the directors then in office, although less than a
quorum of the board of directors, to serve until the next election of the
class for which such director shall have been chosen. If the number of
directors is changed, any increase or decrease shall be apportioned
among the three (3) classes so as to make all classes as nearly equal in
number as possible. If, consistent with the preceding requirement, the
increase or decrease may be allocated to more than one (1) class, the
increase or decrease may be allocated to any such class the board of
directors selects in its discretion. No decrease in the number of
directors constituting the board of directors shall shorten the term of
any incumbent director.
Section 4.04. Removal. A director may be removed only for
cause as determined by the affirmative vote of the holders of at least a
two-thirds (2/3) majority of the shares then entitled to vote in an
election of directors, which vote may only be taken at a meeting of
stockholders called expressly for that purpose, or by a two-thirds (2/3)
majority vote of the entire board of directors. Cause for removal shall
be deemed to exist only if the director whose removal is proposed has
been convicted of a felony by a court of competent jurisdiction or has
been adjudged by a court of competent jurisdiction to be liable for gross
negligence or misconduct in the performance of such director's duty to
the corporation, in a matter of substantial importance to the corporation
and such conviction or adjudication is no longer subject to direct
appeal. At lease twenty (20) days prior to such meeting of
stockholders, written notice shall be sent to the director or directors
whose removal will be considered at such meeting.
ARTICLE V
BUSINESS COMBINATIONS
Section 5.01. Rights of Stockholders. Except as otherwise
expressly provided in Section 5.02 of this Article V, a Business
Combination (as hereinafter defined) shall be approved only upon the
affirmative vote of the holders of at least two-thirds (2/3) of the Voting
Stock (as hereinafter defined) of this corporation voting together as a
single class. Such affirmative vote shall be required notwithstanding the
fact that no vote may be required, or that a lesser percentage may be
provided, by law or regulation.
Section 5.02. Exceptions. The provisions of Section 5.01 of
this Article V shall not be applicable to any particular Business
Combination and such Business Combination shall require only such
affirmative vote of a majority of the Voting Stock except otherwise as
required by law, regulation or any other provision of these Articles of
Incorporation, if all of the conditions in either of the following
Subsections (1) or (2) are met:
(1) Approval by directors. The Business Combination
has been approved by a two-thirds (2/3) vote of all the Continuing
Directors (as hereinafter defined); or
(2) Combination with subsidiary. The Business
Combination is solely between this corporation and a subsidiary of this
corporation and such Business Combination does not have the direct or
indirect effect set forth in Subsection 5.03(2)(e) of this Article V.
Section 5.03. Certain Definitions. For purposes of this Article
V and of Article VI:
(1) The term "person" means any individual, corporation,
partnership, bank, association, joint stock company, trust, syndicate,
unincorporated organization or similar company, or a group of two or
more of the foregoing who act or agree to act together for the purpose
of acquiring, holding, voting or disposing of securities of the
corporation, or who seek to combine or pool their voting or other
interests in the equity securities of the corporation for a common
purpose, pursuant to any contract, understanding, relationship,
agreement or other arrangement, whether written or otherwise.
(2) "Business Combination" means any of the following
transactions, when entered into by this corporation or a subsidiary of
this corporation with, or upon a proposal by, a Related Person:
(a) the acquisition, merger or consolidation of this
corporation or any subsidiary of this corporation; or
(b) the sale, lease, exchange, mortgage, pledge, transfer
or other disposition (in one or a series of transactions) of any assets of
this corporation or any subsidiary of this corporation having an
aggregate fair market value of equal to at least five percent (5%) of the
consolidated assets of this corporation and its subsidiaries; or
(c) the issuance or transfer by this corporation or any
subsidiary of this corporation (in one or a series of transactions) of
securities of this corporation or that subsidiary having an aggregate fair
market value equal to at least five percent (5%) of the consolidated
assets of this corporation and its subsidiaries; or
(d) the adoption of a plan or proposal for the liquidation
or dissolution of this corporation; or
(e) the reclassification of securities (including a reverse
stock split), recapitalization, consolidation or any other transaction
(whether or not involving a Related Person) which has the direct or
indirect effect of increasing the voting power, whether or not then
exercisable, of a Related Person in any class or series of capital stock
of this corporation or any subsidiary of this corporation.
(3) "Related Person" means any person (other than this
corporation, a subsidiary of this corporation, or any profit sharing,
employee stock ownership or other employee benefit plan of this
corporation or a subsidiary of this corporation or any trustee of or
fiduciary with respect to any such plan acting in such capacity) that is
the direct or indirect beneficial owner (as defined in Rule 13d-3 and
Rule 13d-5 under the Securities Exchange Act of 1934, as in effect on
January 1, 1986) of more than ten percent (10%) of the outstanding
Voting Stock of this corporation, and any Affiliate or Associate of any
such person.
(4) "Continuing Director" means with respect to a particular
Related Person or a proposal by such a Related Person, any member of
the board of directors of this corporation who was a member of the
board of directors of this corporation immediately prior to the time that
the Related Person became a Related Person, and any director who is
recommended or nominated to succeed a Continuing Director, or to fill
a vacancy on the board of directors, by a majority of the Continuing
Directors.
(5) "Affiliate" and "Associate" have the respective meanings
ascribed to such terms in Rule 12b-2 under the Securities Exchange Act
of 1934, as in effect on January 1, 1986.
(6) "Voting Stock" means all outstanding shares of the common
or preferred stock of this corporation entitled to vote generally in the
election of directors and each reference to a proportion of Voting Stock
shall refer to shares having such proportion of the number of shares
entitled to be cast.
Section 5.04. Determinations by Continuing Directors. A
two-thirds (2/3) majority of all Continuing Directors shall have the
power to make all determinations with respect to this Article V,
including, without limitation, the transactions that are Business
Combinations, the persons who are Related Persons, and the time at
which a Related Person became a Related Person, and any such
determinations of such Continuing Directors shall be conclusive and
binding.
Section 5.05. Fiduciary Obligations. Nothing contained in
this Article V shall be construed to relieve any Related Person from any
fiduciary obligation imposed by law.
Section 5.06. Amendment. The affirmative vote of at least
two-thirds (2/3) of the total votes eligible to be cast at a legal meeting
of stockholders shall be required to amend, repeal or adopt any
provisions inconsistent with this Article V. Notwithstanding the
foregoing, this section shall be inapplicable and the provisions of Article
IX shall control in the event such action to amend, repeal or adopt
provisions inconsistent with this Article V is approved by a two-thirds
(2/3) majority of the Continuing Directors.
ARTICLE VI
NON-MONETARY FACTORS
The board of directors of this corporation, when evaluating any
offer of another person, (1) to make a tender or exchange offer for any
equity security of the corporation or (2) to effect a Business
Combination, shall, in connection with the exercise of its judgment in
determining what is in the best interests of the corporation as a whole,
be authorized to give due consideration to such factors as the board of
directors determines to be relevant, including, without limitation: (a) the
interests of the corporation's stockholders; (b) whether the proposed
transaction might violate federal or state laws; (c) not only the
consideration being offered in the proposed transaction, in relation to
the then current market price for the outstanding capital stock of the
corporation, but also to the market price for the capital stock of the
corporation over a period of years, the estimated price that might be
achieved in a negotiated sale of the corporation as a whole or in part or
through orderly liquidation, the premiums over market price for the
securities of other corporations in similar transactions, current political,
economic and other factors bearing on securities prices and the
corporation's financial condition and future prospects; and (d) the
social, legal and economic effects upon employees, customers and
others having relationships with the corporation, and the communities
in which the corporation conducts business.
In connection with any such evaluation, the board of directors
is authorized to conduct such investigations and to engage in such legal
proceedings as the board of directors may determine.
ARTICLE VII
STOCKHOLDER NOMINATIONS AND PROPOSALS
Stockholder nominations of persons for election as directors of
this corporation and stockholder proposals must, in order to be voted
upon, be made in writing and delivered to the secretary of this
corporation at least sixty (60) days prior to the date of the annual
meeting at which such nominations or proposals are proposed to be
voted upon; provided, however, that in the event that the date of the
annual meeting is advanced by more than thirty (30) days from that of
the prior year's annual meeting, such nominations or proposals must be
so delivered not later than the close of business on the tenth day
following the day on which notice of the date of the annual meeting was
mailed to stockholders. Stockholder nominations of persons for
election as directors of this corporation and stockholder proposals must
be in such form and contain such information as prescribed in the
Bylaws.
ARTICLE VIII
COMPLIANCE WITH FEDERAL LAWS AND
REGULATIONS
To promote compliance with the National Housing Act, as now
or hereafter amended, including the Change in Savings and Loan
Control Act, and the Savings and Loan Holding Company Act
(collectively, the "Acts"), and regulations of the Federal Home Loan
Bank Board and the Federal Savings and Loan Insurance Corporation
(the "FHLBB Regulations"), the board of directors may (i) prohibit the
ownership, voting or transfer of any portion of the corporation's
outstanding capital stock to the extent the ownership, voting or transfer
of such portion would violate or reasonably appear to violate any
provision of the Acts or the FHLBB Regulations; or (ii) place such
restrictions on the ownership, voting or transfer of any such portion of
the corporation's capital stock as the board of directors in its reasonable
judgment deems necessary to protect the corporation or the
corporation's other stockholders from the effects of an apparent
violation of the Acts or the FHLBB Regulations.
ARTICLE IX
AMENDMENT AND REPEAL OF ARTICLES OF
INCORPORATION
This corporation reserves the right to amend, alter, change or
repeal any provision contained in these Articles of Incorporation in the
manner now or hereafter prescribed by statute. Notwithstanding the
foregoing, the approval of at least a two-thirds (2/3) majority of the
directors then in office (or such greater proportion of directors and
stockholders as may otherwise be required pursuant to any specific
provision of these Articles of Incorporation) shall be required to amend,
alter, repeal or change any provision of these Articles of Incorporation.
ARTICLE X
AMENDMENT AND REPEAL OF BYLAWS
Bylaws may be adopted, amended or repealed by a resolution
adopted by a two-thirds (2/3) majority of the directors then in office.
BYLAWS
OF
FIRST INDIANA CORPORATION
ARTICLE I
OFFICES
Section 1. Principal Office. First Indiana Corporation
(hereinafter referred to as the "Corporation") shall at all times maintain
a principal office in the State of Indiana, which, except as otherwise
determined by the Board of Directors of the Corporation (hereinafter
referred to as the "Board"), shall be in the City of Indianapolis, County
of Marion.
Section 2. Other Offices. The Corporation may also have
offices at such other places within or without the State of Indiana as the
Board shall from time to time designate or the business of the
Corporation shall require.
ARTICLE II
STOCKHOLDERS
Section 1. Place of Meetings. All annual and special meetings
of stockholders shall be held at such places within or without the State
of Indiana as may from time to time be designated by the Board and
specified in the notice of meeting.
Section 2. Annual Meeting. A meeting of the stockholders of
the Corporation for the election of directors and for the transaction of
any other business of the Corporation shall be held annually at 10:00
a.m. on the fourth Thursday of March, if not a legal holiday, and if a
legal holiday, then on the next day following such day which is not a
legal holiday or at such other date and time as the Board may determine
and specify in the notice of the meeting. Failure to hold the annual
meeting at the designated time shall not work any forfeiture or
dissolution of the Corporation.
Section 3. Special Meetings. A special meeting of the
stockholders may only be called (1) by the Chairman, (2) by the
President, (3) by a majority of the entire Board, (4) or by stockholders
holding not less than twenty-five percent (25%) of all shares
outstanding and entitled by the Articles of Incorporation of the
Corporation to vote on the business proposed to be transacted thereat,
upon delivery to the Corporation's Secretary of one (1) or more signed
and dated written demands for the meeting describing the purpose or
purposes for which it is to be held. Business transacted at any special
meeting of the stockholders shall be confined to the purpose or
purposes stated in the notice of such meeting.
Section 4. Conduct of Meetings. Annual and special meetings
of the stockholders shall be conducted in accordance with Indiana law
unless otherwise prescribed by these Bylaws. The Chairman, or in the
absence of the Chairman, the highest ranking officer of the Corporation
who is present, or such other person as the Board shall have designated,
shall call to order any meeting of the stockholders and act as chairman
of the meeting. The Secretary of the Corporation, if present at the
meeting, shall be the secretary of the meeting. In the absence of the
Secretary of the Corporation, the secretary of the meeting shall be such
person as the chairman of the meeting shall appoint. The chairman of
any meeting of the stockholders, unless otherwise prescribed by law or
regulation or unless the Chairman has otherwise determined, shall
determine the order of business and the procedure at the meeting.
Section 5. Notice of Meetings. Written notice stating the
place, day and hour of the meeting and the purpose or purposes for
which the meeting of the stockholders is called shall be delivered not
less than ten (10) nor more than sixty (60) days before the date of the
meeting, either personally or by mail, by or at the direction of the
Chairman, the Secretary or the directors requesting the meeting, to each
stockholder of record entitled to vote at such meeting. If mailed, such
notice shall be deemed given when deposited in the United States mail,
postage prepaid, addressed to the stockholder at his address as it
appears on the stock transfer books or records of the Corporation as of
the record date prescribed in Section 6 of this Article II. When any
meeting of the stockholders, either annual or special, is adjourned for
more than thirty (30) days or if, after adjournment, a new record date
is fixed for the adjourned meeting, notice of the adjourned meeting shall
be given as in the case of an original meeting. It shall not be necessary
to give any notice of the time and place of any other adjourned meeting
of the stockholders, other than an announcement at the meeting at
which such adjournment is taken.
Section 6. Fixing of Record Date. For the purpose of
determining stockholders entitled to notice of or to vote at any meeting
of the stockholders or any adjournment thereof, or stockholders entitled
to receive payment of any dividend, or in order to make a determination
of stockholders for any other proper purpose under Indiana law, the
Board may fix, in advance, a date as the record date for any such
determination of stockholders. Such date shall not be less than ten (10)
days and not more than the maximum number of days before the date
of such meeting allowed by law, nor more than the maximum number
of days prior to any other action allowed by law.
Section 7. Voting Lists. The Secretary of the Corporation, or
other officer or agent of the Corporation having charge of the stock
transfer books for shares of the capital stock of the Corporation, shall
prepare and make, at least five (5) days before each meeting of the
stockholders, a complete list of the stockholders entitled to vote at such
meeting, or any adjournment thereof, arranged in alphabetical order,
with the address of and the number of shares held by each stockholder.
Such list shall be open to the examination of any stockholder, for any
purpose germane to the meeting, during ordinary business hours, for a
period of at least five (5) days prior to the meeting, either at a place
within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or at the Corporation's principal
office. Such list shall also be produced and kept open at the time and
place of the meeting during the whole time thereof and shall be subject
to the inspection of any stockholder present at the meeting. The stock
transfer books shall be the only evidence as to who are the stockholders
entitled to examine the stock transfer books, or to vote in person or by
proxy at any meeting of stockholders.
Section 8. Quorum. A majority of the outstanding shares of
the Corporation entitled to vote at a meeting of the stockholders,
represented in person or by proxy, shall constitute a quorum at a
meeting. If less than a majority of the outstanding shares are
represented at a meeting, a majority of the shares so represented may
adjourn the meeting from time to time without further notice except as
otherwise provided in Section 5 of this Article II. At such adjourned
meeting at which a quorum shall be present or represented, any business
may be transacted which might have been transacted at the meeting as
originally called. The stockholders present at a duly organized meeting
may continue to transact business until adjournment, notwithstanding
the withdrawal of enough stockholders to leave less than a quorum.
Section 9. Proxies. At any meeting of the stockholders, every
stockholder having the right to vote shall be entitled to vote in person,
or by proxy appointed by an instrument in writing and complying with
the requirements of Indiana law.
Section 10. Voting by the Corporation. Neither treasury
shares of its own capital stock held by the Corporation, nor shares held
by another corporation, a majority of the shares of which entitled to
vote for the election of directors are held by the Corporation, shall be
entitled to vote or be counted for quorum purposes at any meeting of
the stockholders; provided, however, that the Corporation may vote
shares of its capital stock held by it, or by any such other corporation,
if such shares of capital stock are held by the Corporation or such other
corporation in a fiduciary capacity.
Section 11. Nominating Committee. The Board shall act as
a nominating committee for selecting the management nominees for
election as directors. In accordance with the Articles of Incorporation,
no nominations for directors except those made by the nominating
committee shall be voted upon at the annual meeting unless other
nominations by stockholders are made in writing and delivered to the
Secretary of the Corporation at least sixty (60) days prior to the date of
the annual meeting; provided, however, that in the event that the date
of the annual meeting is advanced by more than thirty (30) days from
that of the prior year's annual meeting, such stockholder nominations
must be so delivered not later than the close of business on the tenth
day following the day on which such notice of the date of the meeting
was mailed. Such stockholder nominations shall set forth (a) as to each
person whom the stockholder proposes to nominate for election or re-election
as a director, (i) the name, age, business address and residence
address of such person, (ii) the principal occupation or employment of
such person, and (iii) such person's written consent to serve as a
director, if elected; and (b) as to the stockholder giving the notice (i)
the name and address of such stockholder and (ii) the class and the
number of shares of the Corporation which are owned of record by such
stockholder. At the request of the Board, any person nominated by the
Board for election as a director shall furnish to the Secretary of the
Corporation, that information required to be set forth in a stockholder's
notice of nomination which pertains to the nominee together with the
required written consent. Ballots bearing the names of all the persons
duly nominated by the nominating committee and by stockholders shall
be provided for use at the annual meeting.
Section 12. New Business. Any new business to be taken up
at the annual meeting of the stockholders shall be stated in writing and
filed with the Secretary of the Corporation at least sixty (60) days
before the date of the annual meeting; provided, however, that in the
event that the date of the annual meeting is advanced more than thirty
(30) days from that of the prior year's annual meeting such stockholder
proposals must be so stated and filed not later than the close of business
on the tenth day following the day on which such notice of the date of
the meeting was mailed. All business so stated, proposed and filed shall
be considered at the annual meeting, but no other proposal shall be
considered at the annual meeting. This provision shall not prevent the
consideration and approval or disapproval at the annual meeting of the
stockholders of reports of officers, directors, and committees, but, in
connection with such reports, no new business shall be acted upon at
such annual meeting unless stated and filed as herein provided.
ARTICLE III
BOARD OF DIRECTORS
Section 1. General Powers. All corporate powers shall be
exercised by or under the authority of, and the business and affairs of
the Corporation shall be managed under the direction of, the Board
except as may be otherwise provided by law or the Articles of
Incorporation. The Board shall annually elect from among its members
a Chairman, a President and may elect (1) or more Vice Chairmen of
the Board. The Chairman shall preside at all meetings of the Board.
Section 2. Number. The Board shall consist of nine (9)
members.
Section 3. Election of Directors. There shall be three (3)
classes of directors, each class to be as nearly equal in number as
possible. The directors of the first class shall hold office for a term
expiring at the annual meeting in 1987; directors of the second class
shall hold office for a term expiring at the annual meeting in 1988; and
directors of the third class shall hold office for a term expiring at the
annual meeting in 1989.
At each annual election beginning at the annual meeting of
stockholders in 1987, the successors to the class of directors whose
term then expires shall be elected to hold office for a term of three (3)
years, to succeed those directors whose term expires, so that the term
of one class of directors shall expire each year, unless, by reason of any
intervening changes in the authorized number of directors, the Board
shall have designated one (1) or more directorships whose term then
expires as directorships of another class in order more nearly to achieve
equality of number of directors among the classes.
Notwithstanding the requirement that the three (3) classes shall
be as nearly equal in number of directors as possible, in the event of any
change in the authorized number of directors, each director then
continuing to serve as such shall nevertheless continue as a director of
the class of which he is a member until the expiration of his current
term, or his prior resignation, disqualification, disability or removal.
There shall be no cumulative voting in the election of directors.
Section 4. Regular Meetings. A regular meeting of the Board
shall be held without other notice than this Bylaw immediately after,
and at the same place as, the annual meeting of the stockholders or at
such other place as may be designated by the Board. Additional
meetings shall be held at such time as the Board shall fix at such places
within or without the State of Indiana as shall be fixed by the Board.
No call shall be required for regular meetings for which the time and
place has been fixed.
Section 5. Special Meetings. Special meetings of the Board
may be called by or at the request of the Chairman, or in his absence or
disability, the President, or in the absence or disability of both of them,
a majority of the remaining directors. The persons authorized to call
special meetings of the Board may fix any place as the place for holding
any special meeting of the Board called by such persons.
Section 6. Participation in Meetings. Members of the Board
may participate in regular or special meetings by means of conference
telephone or similar communications equipment by which all persons
participating in the meeting can communicate with each other.
Section 7. Notice. The persons authorized to call special
meetings of the Board shall cause the Secretary of the Corporation to
give written or oral notice of the meeting, specifying the time and place
of the meeting, to each director, either personally, by mailing, or by
telegram, at least twenty-four (24) hours in advance of the meeting.
Any director may waive notice of any meeting by a writing filed with
the Secretary. The attendance of a director at a meeting shall constitute
a waiver of notice of such meeting, except in the event a director
attends a meeting for the express purpose of objecting to the transaction
of any business because the meeting is not lawfully called or convened.
Neither the business to be transacted at, nor the purpose of, any
meeting of the Board need be specified in the notice or waiver of notice
of such meeting.
Section 8. Quorum. A majority of the number of directors
fixed pursuant to Section 2 of this Article III shall constitute a quorum
for the transaction of business at any meeting of the Board, but if less
than such majority is present at a meeting, a majority of the directors
present may adjourn the meeting from time to time. Notice of any
adjourned meeting shall be given in the same manner as prescribed by
Section 7 of this Article III.
Section 9. Manner of Acting. Unless otherwise prescribed in
the Articles of Incorporation or these Bylaws, the act of the majority of
the directors present at a meeting at which a quorum is present shall be
the act of the Board.
Section 10. Action Without a Meeting. Any action required
or permitted to be taken by the Board at a meeting may be taken
without a meeting if a consent in writing, setting forth the action so
taken, shall be signed by all of the directors.
Section 11. Resignation. Any director may resign at any time
by sending a written notice of such resignation to the Corporation
addressed to the Chairman or the President. Unless otherwise specified
therein, such resignation shall take effect upon receipt thereof. More
than three (3) consecutive absences from regular meetings of the Board,
unless excused by resolution of the Board, shall automatically constitute
a resignation, effective when such resignation is accepted by the Board.
Section 12. Vacancies. Any vacancy occurring in the Board
may be filled in accordance with the Articles of Incorporation.
Section 13. Compensation. By resolution of the Board, a
reasonable fixed sum, and reasonable expenses of attendance, if any, for
actual attendance at each regular or special meeting of the Board may
be paid to directors. Members of either standing or special committees
may be allowed such compensation for actual attendance at committee
meetings as the Board may determine.
Section 14. Presumption of Assent. A director of the
Corporation who is present at a meeting of the Board at which action
is taken shall be presumed to have assented to the action taken unless
his dissent or absention shall be entered in the minutes of the meeting
or unless he shall file a written dissent to such action with the person
acting as the Secretary of the meeting before the adjournment thereof
or shall forward such dissent by registered mail to the Secretary of the
Corporation within five (5) days after the date a copy of the minutes of
the meeting is received. Such right to dissent shall not apply to a
director who voted in favor of such action.
Section 15. Removal. A director may be removed only for
cause as determined by the affirmative vote of the holders of at least
two-thirds (2/3) majority of the shares then entitled to vote in an
election of directors, which vote may only be taken at a meeting of
stockholders called expressly for that purpose, or by a two-thirds (2/3)
majority vote of the entire Board. Cause for removal of a director shall
be deemed to exist only if the director whose removal is proposed has
been convicted of a felony by a court of competent jurisdiction or has
been adjudged by a court of competent jurisdiction to be liable for gross
negligence or misconduct in the performance of such director's duty to
the Corporation and such conviction or adjudication is no longer subject
to direct appeal.
ARTICLE IV
EXECUTIVE AND OTHER COMMITTEES
Section 1. Appointment. The Board, by resolution adopted by
a majority of the Board, may designate the Chairman, the President and
one (1) or more of the other directors to constitute an Executive
Committee. The designation of any committee pursuant to this Article
IV and the delegation of authority thereto shall not operate to relieve
the Board, or any director, of any responsibility imposed by law or
regulation.
Section 2. Authority. The Executive Committee, when the
Board is not in session, shall have and may exercise all of the authority
of the Board except to the extent, if any, that such authority shall be
limited by the resolution appointing the Executive Committee, or as
otherwise expressly provided by law, the Articles of Incorporation or
these Bylaws.
Section 3. Tenure. Subject to the provisions of Section 8 of
this Article IV, each member of the Executive Committee shall hold
office until the next regular annual meeting of the Board following his
designation and until a successor is designated as a member of the
Executive Committee.
Section 4. Meetings. Regular meetings of the Executive
Committee may be held without notice at such times and places as the
Executive Committee may fix from time to time. Special meetings of
the Executive Committee may be called by the Chairman, or in his
absence or disability, by the President, or in the absence or disability of
both of them, by a majority of the remaining members of the Executive
Committee upon not less than one (1) day's notice stating the place,
date and hour of the meeting, which notice may be written or oral. Any
member of the Executive Committee may waive notice of any meeting
and no notice of any meeting need be given to any member thereof who
attends in person. The notice of a meeting of the Executive Committee
need not state the business proposed to be transacted at the meeting.
Regular or special meetings may be held by means of conference
telephone or similar communications equipment by which all persons
participating in the meeting can communicate with each other.
Section 5. Quorum. A majority of the members of the
Executive Committee shall constitute a quorum for the transaction of
business at any meeting thereof, and action of the Executive Committee
must be authorized by the affirmative vote of a majority of the members
present at a meeting at which a quorum is present.
Section 6. Action Without a Meeting. Any action required or
permitted to be taken by the Executive Committee at a meeting may be
taken without a meeting if a consent in writing, setting forth the action
so taken, shall be signed by all of the members of the Executive
Committee.
Section 7. Vacancies. Any vacancy in the Executive
Committee may be filled by a resolution adopted by a majority of the
Board.
Section 8. Resignations and Removal. Any member of the
Executive Committee may be removed at any time with or without
cause by resolution adopted by a majority of the Board. Any member
of the Executive Committee may resign from the Executive Committee
at any time by giving written notice to the Chairman or the President.
Unless otherwise specified thereon, such resignation shall take effect
upon receipt. The acceptance of such resignation shall not be necessary
to make it effective.
Section 9. Procedure. The Chairman shall be presiding officer
of the Executive Committee, or, in his absence or disability, the
President, or in the absence or disability of both of them, such other
person as may be elected by a majority of the members present. The
Executive Committee may fix its own rules of procedure which shall not
be inconsistent with these Bylaws. It shall keep regular minutes of its
proceedings and report the same to the Board for its information at the
meeting thereof held next after the proceedings shall have been taken.
Section 10. Other Committees. The Board may by resolution
establish an audit committee or other committees composed of directors
as they may determine to be necessary or appropriate for the conduct
of the business of the Corporation and may prescribe the duties,
constitution and procedures thereof.
ARTICLE V
OFFICERS
Section 1. Positions. The officers of the Corporation shall be
a Chairman, a Vice Chairman, a President, one (1) or more Vice
Presidents, a Secretary and a Treasurer, each of whom shall be elected
by the Board. The Chairman shall be the Chief Executive Officer, and
the President shall be the Chief Operating Officer. The Vice Chairman
shall perform the duties of the Chairman in the absence or disability of
the Chairman. The offices of the Secretary and Treasurer may be held
by the same person and a Vice President may also be either the
Secretary or the Treasurer. The Board may designate one (1) or more
Vice Presidents as Executive Vice President or Senior Vice President.
The Board may also elect or authorize the appointment of such other
officers as the business of the Corporation may require. The officers
shall have such authority and perform such duties as the Board may
from time to time authorize or determine. In the absence of action by
the Board, the officers shall have such powers and duties as generally
pertain to their respective offices.
Section 2. Election and Term of Office. The officers of the
Corporation shall be elected annually at the first meeting of the Board
held after each annual meeting of the stockholders. If the election of
officers is not held at such meeting, such election shall be held as soon
thereafter as possible. Each officer shall hold office until his successor
shall have been duly elected and qualified or until his death, resignation
or removal in the manner hereinafter provided. Election or appointment
of an officer, employee or agent shall not by itself create any contractual
rights. The Board may authorize the Corporation to enter into an
employment contract with any officer, but no contract shall impair the
right of the Board to remove any officer at any time in accordance with
Section 3 of this Article V.
Section 3. Removal. Any officer may be removed by the Board
whenever in its judgment the best interests of the Corporation will be
served thereby.
Section 4. Vacancies. A vacancy in any office because of
death, resignation, removal, disqualification or otherwise, may be filled
by a majority vote of the Board for the unexpired portion of the term.
Section 5. Remuneration. The remuneration of the officers
shall be fixed from time to time by the Board.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. Contracts. To the extent permitted by applicable
law, the Articles of Incorporation or these Bylaws, the Board may
authorize any officer, employee or agent of the Corporation to enter
into any contract or execute and deliver any instrument in the name of
and on behalf of the Corporation. Such authority may be general or
confined to specific instances.
Section 2. Loans. No loans shall be contracted on behalf of the
Corporation and no evidence of indebtedness shall be issued in its name
unless authorized by the Board. Such authority may be general or
confined to specific instances.
Section 3. Checks, Drafts, Etc. All checks, drafts or other
orders for the payment of money, notes or other evidences of
indebtedness issued in the name of the Corporation shall be signed by
one (1) or more officers, employees or agents of the Corporation in
such manner as shall from time to time be determined by the Board.
Section 4. Deposits. All funds of the Corporation not
otherwise employed shall be deposited from time to time to the credit
of the Corporation in any duly authorized depositories as the Board
may select.
ARTICLE VII
INDEMNIFICATION
The Corporation shall indemnify any person made a party to any
action, suit or proceeding by reason of the fact that he is or was a
director, officer, employee or agent of the Corporation against all
liability and reasonable expense incurred or suffered by such person in
connection therewith, if:
(a) the individual's conduct was in good faith; and
(b) the individual reasonably believed:
(i) in the case of conduct in the individual's official
capacity with the Corporation, that the individual's conduct was in its
best interests; and
(ii) in all other cases, that the individual's conduct
was at least not opposed to the Corporation's best interests; and
(c) in the case of any criminal proceeding, the individual
either:
(i) had reasonable cause to believe the individual's
conduct was lawful; or
(ii) had no reasonable cause to believe the
individual's conduct was unlawful.
The terms used in this Article VII shall have the same meaning
as set forth in Indiana Code 23-1-37. Nothing contained in this Article
VII shall limit or preclude the ability of the Corporation to otherwise
indemnify or to advance expenses to any director, officer, employee or
agent.
ARTICLE VIII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
Section 1. Certificates for Shares. Certificates representing
shares of capital stock of the Corporation shall be in such form as shall
be determined by the Board. Such certificates shall be signed by the
Chairman or any other officer of the Corporation authorized by the
Board, attested by the Secretary or an Assistant Secretary, and sealed
with the corporate seal or a facsimile thereof. The signatures of such
officers upon a certificate may be facsimiles if the certificate is manually
signed on behalf of a transfer agent or a registrar other than the
Corporation itself or one of its employees. Each certificate for shares
of capital stock shall be consecutively numbered or otherwise identified.
The name and address of the person to whom the shares are issued,
with the number of shares issued and date of issue, shall be entered on
the stock transfer books of the Corporation. All certificates
surrendered to the Corporation for transfer shall be canceled and no
new certificate shall be issued until the former certificate for a like
number of shares shall have been surrendered and canceled, except that
in the case of a lost, stolen or destroyed certificate, a new certificate
may be issued therefor upon such terms and indemnity to the
Corporation as the Board may prescribe as sufficient to indemnify the
Corporation against any claim that may be made against it on account
of such loss, theft or destruction.
Section 2. Transfer of Shares. Transfer of shares of capital
stock of the Corporation shall be made only on its stock transfer books.
Authority for such transfer shall be given only by the holder of record
thereof or by his legal representative, who shall furnish proper evidence
of such authority, or by his attorney thereunto duly authorized by power
of attorney duly executed and filed with the Corporation. Such transfer
shall be made only on surrender for cancellation of the certificate for
such shares. The person in whose name shares of capital stock stand on
the books of the Corporation shall be deemed by the Corporation to be
the owner thereof for all purposes.
ARTICLE IX
DIVIDENDS
Subject to applicable law, the Articles of Incorporation or these
Bylaws, the Board may, from time to time, declare, and the Corporation
may pay, dividends on the outstanding shares of capital stock of the
Corporation.
ARTICLE X
SECURITIES OF OTHER CORPORATIONS
Unless otherwise ordered by the Board, the Chairman shall have
full power and authority on behalf of the Corporation to purchase, sell,
transfer, encumber or vote any and all securities of any other
corporation owned by the Corporation, and may execute and deliver
such documents as may be necessary to effectuate such purchase, sale,
transfer, encumbrance or vote. The Board may, from time to time,
confer like powers upon any other person or persons.
ARTICLE XI
FISCAL YEAR, ANNUAL AUDIT
The fiscal year of the Corporation shall end on the 31st day of
December of each year. The Corporation shall be subject to an annual
audit as of the end of its fiscal year by independent public accountants
appointed by and responsible to the Board.
ARTICLE XII
CORPORATE SEAL
The corporate seal of the Corporation, if any, shall be in such
form as the Board shall prescribe.
ARTICLE XIII
AMENDMENTS
These Bylaws may be adopted, amended or repealed by a
resolution adopted by a two-thirds (2/3) majority of the directors then
in office.
ARTICLE XIV
NONAPPLICABILITY OF CERTAIN PROVISIONS
OF THE INDIANA BUSINESS CORPORATION LAW
Notwithstanding any election by the Board of Directors to have
the Corporation governed by the provisions of the Indiana Business
Corporation Law, IC 23-1-42 of the Indiana Business Corporation Law
shall not apply to "control share acquisitions" (as that term is defined
in IC 23-1-42-2) of shares of capital stock of the Corporation.
[front cover of 1998 annual report]
FIRST INDIANA CORPORATION
Discovery. Delivery. Dialogue.
1998 Annual Report to Shareholders
[First Indiana Logo]
<PAGE>
[inside front cover]
<PAGE>
<TABLE>
<CAPTION>
Contents
<S> <C>
Letter to Shareholders 2
Mission Statement 5
Management and Advisory Boards 6
Board of Directors 8
Year in Review 8
Financial Review 12
Five-Year Summary of Selected Financial Data 23
Consolidated Balance Sheets 24
Consolidated Statements of Earnings 25
Consolidated Statements of Shareholders' Equity 26
Consolidated Statements of Cash Flows 27
Notes to Consolidated Financial Statements 28
Independent Auditors' Report 46
Affirmative Action Policy 46
Corporate Information 47
Statement of Management Responsibility 48
</TABLE>
[This page contains bar graphs showing the following information]
<TABLE>
<CAPTION>
Net Earnings (Dollars in Thousands) Earnings Per Share
- ----------------------------------- --------------------------
<S> <C> <S> <C>
1994 10,636 1994 0.80
1995 17,267 1995 1.34
1996 13,704 1996 1.06
1997 17,744 1997 1.36
1998 19,147 1998 1.44
<CAPTION>
Shareholders' Equity
Net Interest Margin (Dollars in Thousands)
- ------------------- --------------------
<S> <C> <S> <C>
1994 3.96 1994 120,712
1995 4.12 1995 129,297
1996 4.37 1996 138,658
1997 4.36 1997 153,036
1998 3.85 1998 165,970
<CAPTION>
Price/Earnings Multiple
- -----------------------
<S> <C>
1994 10.94x
1995 10.73x
1996 16.85x
1997 18.56x
1998 13.89x
</TABLE>
<TABLE>
<CAPTION>
OUR FINANCIAL HIGHLIGHTS
First Indiana Corporation and Subsidiaries
Years Ended
December 31,
-------------------
(Dollars in Thousands, Except Per Share Data) 1998 1997
-------------------
<S> <C> <C>
Net Earnings $19,147 $17,744
Basic Earnings Per Share 1.50 1.40
Diluted Earnings Per Share 1.44 1.36
Dividends Per Common Share 0.48 0.40
Return on Average Total Assets 1.12% 1.17%
Return on Average Shareholders' Equity 11.96 12.16
Yield on Interest-Earning Assets 8.32% 8.81%
Cost of Interest-Bearing Liabilities 5.16 5.10
Net Interest Margin 3.85 4.36
Net Interest Spread 3.16 3.71
<CAPTION>
At December 31,
-------------------
1998 1997
-----------------------
<S> <C> <C>
Assets $1,795,990 $1,613,405
Loans Receivable, Net 1,518,543 1,348,529
Deposits 1,227,918 1,107,555
Shareholders' Equity $ 165,970 $ 153,036
Shareholders' Equity/Assets 9.24% 9.49%
Book Value Per Share $ 13.07 $ 12.08
Market Closing Price 20.00 25.21
Price/Earnings Multiple 13.89x 18.56x
<CAPTION>
--------------------
December 31, 1998
--------------------
Actual Required
<S> <C> <C>
Tangible Capital/Total Assets 7.80% 1.50%
Core Capital/Total Assets 7.80 3.00
Risk-Based Capital/Risk-Weighted Assets 11.24 8.00
</TABLE>
<PAGE> 1
[This page contains photographs of the following persons and
these captions]
Robert H. McKinney
Chairman and Chief Executive Officer (46 Years' Service)
Marni McKinney
Vice Chairman (15 Years' Service)
Owen B. Melton, Jr.
President and Chief Operating Officer (21 Years' Service)
[This page contains bar graphs showing the following
information]
<TABLE>
<CAPTION>
Total Loans Originated (Dollars in Thousands)
- ---------------------------------------------
<S> <C>
1994 982,754
1995 1,021,753
1996 985,165
1997 1,107,311
1998 1,506,789
<CAPTION>
Non-Performing Assets (Dollars in Thousands)
- --------------------------------------------
<S> <C>
1994 29,077
1995 27,165
1996 27,121
1997 22,822
1998 19,880
</TABLE>
LETTER TO THE SHAREHOLDERS
To Our Shareholders:
First Indiana Corporation again announced record earnings in 1998,
continuing a positive trend as a locally based, responsive provider of
financial services. For the year ended December 31, 1998, First
Indiana's net earnings were $19.1 million, or $1.44 per diluted share,
an eight percent increase over net earnings of $17.7 million, or $1.36
per diluted share, for the year ended December 31, 1997.
To reflect confidence in the continued earnings potential of the
Corporation, the Board of Directors has authorized an eight percent
increase in the Corporation's annual cash dividend, to $.52 per share
from $.48 per share, beginning with the first quarterly dividend
payment on March 16, 1999. This is the seventh such increase in
eight years, either through stock dividends and splits or through cash
dividends.
Record low interest rates and a strong national economy helped First
Indiana achieve its earnings in 1998. In addition, changes in the
markets in which First Indiana operates and new strategies for
building partnerships with customers helped the Corporation reach its
goals.
As successful as 1998 was, however, First Indiana's Board of
Directors and management are aware of the pressure always to bring
something different to the market, and a set of products and services
that customers cannot obtain from a competitor. This is a difficult
challenge, given trends toward consolidation and the commoditized
nature of the banking industry, but the Corporation made strides in
differentiating itself throughout 1998.
In the growing Central Indiana market, where much of First Indiana's
business is centered, two superregional banks each announced the
acquisition of another bank with a significant presence in
Indianapolis. The result has been a major consolidation of processes
and decisions, often in markets outside Indianapolis, which places
decisions farther away from the customer. First Indiana's local
presence gives the Bank an opportunity to form local partnerships
with customers and respond to requests quickly and efficiently.
To capitalize on competitors' mergers, First Indiana adopted a
comprehensive, detailed strategy for ascertaining the needs of
customers, working closely with them to develop their financial
goals, and following through with customers during their business or
personal life cycle. The chief benefit of this strategy in
<PAGE> 2
1998 was a 13 percent growth in loans outstanding, to $1.52 billion at De-
cember 31, 1998 from $1.35 billion at year-end 1997. Total loan originations
eclipsed all previous records, amounting to $1.5 billion, a 35 percent
increase over 1997's record levels.
The increases in the Bank's loans occurred in all of its targeted
portfolios. Loans to businesses increased 44 percent to $179 million
from $124 million at year-end 1997. Residential Construction loans
grew 19 percent, to $182 million from $153 million; and consumer
loans grew 6 percent to $581 million from $548 million at the end of
1997.
Growth in business loans was fueled by First Indiana's
relationship-building approach, centering on the needs of small and
middle-market business customers. The mergers of large bank
competitors create an opportunity for First Indiana to capitalize on
the lack of attention that small and middle market customers feel they
are receiving from their bank.
Construction loan growth occurred not only in Central Indiana, but
also in dynamic markets in North Carolina and Florida through
long-standing relationships with builders who are taking advantage of
expansion in these popular regions. First Indiana expanded its reach
in 1998 with new offices in Phoenix, Arizona, and Portland, Oregon.
The significant growth in the Bank's loan portfolios contributed to
net interest income of $62.8 million, a slight decrease from $63.0
million in 1997. The decrease arises from a compressed net interest
margin due to lower loan yields in the current interest-rate
environment. The net interest margin for 1998 was 3.85 percent,
compared with 4.36 percent in 1997. However, net interest margin
increased in the fourth quarter of 1998 to 3.84 percent over the 3.77
percent in the third quarter. Compression of margin is not
unexpected in a low interest-rate environment, but the improvement
in the fourth quarter bodes well for a higher margin in 1999.
First Indiana's strategies for building relationships also led to an 11
percent increase in deposits, which grew to $1.2 billion at December
31, 1998, compared with $1.1 billion at year-end 1997. The increases
occurred primarily through higher levels of business deposits, the
introduction of nine new consumer checking account products, and a
competitively priced liquid savings account that provides temporary
shelter for customers waiting for certificate of deposit rates to
rebound. All of these products are priced at lower rates than
traditional certificates of deposits, which will help alleviate pressure
on the Bank's funding costs, support its net interest margin, and
reduce reliance on borrowed funds.
Through concentrated marketing and sales efforts, First Indiana's
new checking account households grew over 200 percent in 1998.
This growth signifies expansion of the Bank's retail franchise and an
excellent opportunity for deepening relationships with new customers
through their checking account.
Recognizing the importance of fee income to First Indiana's earnings,
the Corporation expanded its production and sale of non-portfolio
loans in 1998. Through the sale of residential and consumer loans in
the secondary market, First Indiana earned $9.4 million pre-tax in
non-interest income, a 92 percent increase over 1997 sales of $4.9
million. Many of the loans sold represent consumer loans originated
through First Indiana's national network of loan originators, which
services consumer loan brokers in 19 states. Total non-interest
income was $23.8 million, a 32 percent increase over $18 million in
1997. The Corporation is exploring opportunities for heightened fee
income in 1999.
Again in 1998, the Bank experienced a favorable trend in loan
charge-offs. Net loan charge-offs were $6.5 million for the year
ended December 31, 1998, compared with $7.1 million in 1997. First
Indiana's allowance for losses on loans and real estate owned at
year-end 1998 was $26.2 million, or 150 percent of non-performing
loans, compared with 122 percent one year earlier. Further
enhancements in underwriting, including automated credit scoring
and product design enhancements, will continue
[This page contains a pie chart showing the following
information]
<TABLE>
<CAPTION>
Composition of Loan Portfolio 1990 vs. 1998
- -------------------------------------------
1990 1998
---- ----
<S> <C> <C>
Residential Mortgage 58% 35%
Residential Construction 6 14
Commercial Real Estate 13 2
Consumer 23 38
Business 0 11
</TABLE>
<PAGE> 3
to keep the Bank's charge-off experience at acceptable levels.
In the fourth quarter of 1998, First Indiana established a new
subsidiary, FirstTrust Indiana. An investment advisory and trust fund
company, FirstTrust brings together First Indiana's reputation for
local decisions and responsive service with the talent of nine
experienced former executives of one of Indianapolis' leading bank
trust departments. FirstTrust will enable First Indiana to diversify
sources of non-interest income while providing a broader spectrum
of products to retail and commercial customers.
First Indiana's shareholders' equity amounted to $166 million at
December 31, 1998, compared with $153 million one year earlier,
well in excess of minimum requirements. Total assets grew to $1.8
billion at year-end 1998, up from $1.6 billion one year earlier.
Of concern in 1998 was the continued growth in First Indiana's
operating expenses. Non-interest expense grew 11% in 1998 to
$45.8 million from $41.1 million in 1997. Much of the expense arose
from higher commissions in connection with loan growth, but the
increase was nevertheless disappointing. The entire management
team has committed to the control of operating expenses in 1999.
Recognizing the importance of technology in keeping First Indiana
competitive while maintaining favorable operating expenses, a new
Senior Vice President for Technology and Operations joined First
Indiana on January 1, 1999. Edward E. Pollack comes to First
Indiana with many years experience in operations and technology at
the nation's largest guarantor of student loans. Ted will be able to
add new dimensions to First Indiana's technology and operations, not
only in connection with readiness for the Year 2000, but also in
Internet banking applications and backroom efficiencies.
The years ahead promise to be challenging, but the marketplace
continues to create opportunities for First Indiana to set itself apart.
We appreciate the confidence that you, our shareholders, have placed
in First Indiana, and we look forward to another productive year.
Sincerely,
/s/Robert H. McKinney
Robert H. McKinney
Chairman and Chief Executive Officer
/s/ Marni McKinney
Marni McKinney
Vice Chairman
/s/Owen B. Melton, Jr.
Owen B. Melton, Jr.
President and Chief Operating Officer
[The following sidebar text appears on this page]
FIRSTTRUST INDIANA LAUNCHED IN 1998
During the fourth quarter of 1998, First Indiana Bank launched FirstTrust
Indiana, a full-service investment advisory and trust company, with three
lines of business:
1. Institutional portfolio management
2. Fiduciary and investment services for high net worth individuals
3. Estate administration
FirstTrust was founded on the premise that Central Indiana investment
management accounts have favored the following five attributes: nationally
ranked investment performance, local decision making, local portfolio
construction, experienced and highly qualified personnel, and competitive
fees. To provide these important services to our customers, we have hired
nine former NBD trust professionals with over 168 years' combined experience
in this area.
FirstTrust is an example of putting into action the Bank's goal for a holistic
approach to our customers. As a bank, our desire is to provide full service
financial services to the Indianapolis community, and thereby produce
value for our shareholders. FirstTrust, working with our affiliate, The
Somerset Group, and our banking centers will allow us to do just that.
<PAGE> 4
MISSION STATEMENT
First Indiana Bank's mission is to deliver relationship-based service to
the individuals and businesses in our community by building and
preserving our brand. The First Indiana brand centers on:
Discovery of our customers' needs, by seeking information, forming
partnerships, and helping our customers attain their financial goals.
Delivery of innovative products designed around our customers and
brought to them efficiently and responsively through superior service.
Dialogue with our customers to give us direction for continuous
improvement of the products and services we have designed for
them.
We build and preserve the First Indiana brand through
six guiding principles:
Local, Hands-on Involvement - Customers want to be called by
name, given quick answers, and served by people they know. As a
locally owned bank, with a vested interest in the community, we are
dedicated to building strong partnerships with our customers and
earning their trust.
Discipline - We keep our eye on the long term by choosing a course
and sticking with it. We avoid today's fads in favor of tomorrow's
long-lasting solutions.
Efficiency - There are ways to be efficient other than by being the
biggest. We use discipline, organization, and lack of bureaucracy to
achieve even greater efficiencies.
Knowledge-based Marketing - Knowing the customer is the key. By
finding out as much as we can about our customers, we will know
their long-term goals and can anticipate their needs, add value, and
win their loyalty.
Strategic Niches - As a smaller bank in a world of giants, we have an
opportunity to be different by meeting the needs of unserved niches.
We are able to design products and specialized services and deliver
them to our customers quickly and flexibly. Our passion for
constructive, customer-driven change has helped us home in on this
segment, which has been all but ignored by big banks.
People - A company is its people. Our goal is to create an
environment that fosters creativity and maximizes our associates'
potential. We emphasize leadership at all levels in the organization
and give our associates the tools to provide customer-focused
solutions in all situations. To encourage our associates' ownership of
First Indiana's success, we promote their ownership of First Indiana
stock.
These principles serve as our compass for the future of First Indiana
Bank. They ensure growth. They ensure the Bank's independence.
And they ensure that First Indiana Bank can give back to the
community in which we live.
[The following sidebar text appears on this page]
THE TRIANGLE OF QUALITY
An important symbol of how First Indiana approaches our business is the
Joiner Triangle, developed by Brian L. Joiner in his book Fourth
Generation Management. The Joiner Triangle combines three aspects:
customer-defined quality, a scientific approach, and all-one-team.
At the top of the triangle is customer defined quality. This requires
various methods of gaining input from customer groups before developing
products or methods. Next is the scientific approach, which dictates
using data to make decisions, not only financial data, but also
customer data. In addition, it involves developing effective
methodology for determining needs, opportunities, success, and problems
associated with product lines and procedures. The all-one-team
approach reflects associates working together effectively, particularly
between departments and divisions, to use customer and product data
to cooperatively make changes and create esprit de corps.
At First Indiana, the Joiner Triangle represents our transition to the
true understanding of customer expectations and the scientific approach
of meeting those expectations. The Bank has placed great emphasis on
developing and utilizing data about our customers. This is critical to
our success because it allows us to manage our processes and develop a
deeper understanding of our customers and the financial services they need.
<PAGE> 5
MANAGEMENT AND ADVISORY BOARDS
FIRST INDIANA BANK
Robert H. McKinney* (46 years' service), Chairman, Execuitve Committee of
the Board of Directors
Marni McKinney* (15 years), Chairman
Owen B. Melton, Jr.* (21 years), President and Chief Executive Officer
David J. Gunderson (16 years), Vice President and Credit Review Officer
Richard E. Walke (13 years), Director of Internal Audit
David A. Butcher* (16 years), Secretary
Retail Banking Group
Marketing and Strategic Planning Group
Kenneth L. Turchi (14 years), Senior Vice President
Vice Presidents
Scott E. Baker (1 year)
Timothy J. Dell (6 years)
Toni K. Dickover (4 years)
Paul R. Wainman, Jr. (1 year)
Freda F. Wampner (19 years)
Central Indiana Advisory Boards
Franklin
Gilmore C. Abplanalp (28 years)
Timothy J. Dell (6 years)
Jerry B. Maguire (9 years)
Pendleton
Hugh W. Begley (30 years)
Ralph E. Miller (20 years)
David L. Puckett (20 years)
L. Ann Reeder (7 years)
Phillip R. Shirley, DVM (23 years)
Westfield
Manson E. Church (42 years)
Toni K. Dickover (4 years)
J. Joseph Edwards (6 years)
James Gapenski (6 years)
Jerry C. McMullan (30 years)
Consumer Finance Group
David A. Lindsey (16 years), Senior Vice President
Vice Presidents
Judi L. Cooper (3 years)
J. Michael B. MacDonald (1 year)
Connie L. Nelson (2 years)
Michael W. Olsen (1 year)
Market Vice Presidents
Stephen E. Buchanan (5 years)
Craig S. Hagen (1 year)
Hector X. Morris (1 year)
Toni R. Santo (5 years)
J. Tracy Whitaker (11 years)
Financial Management Group
David L. Gray* (17 years), Senior Vice President, Chief Financial Officer, and
Treasurer
Vice President
Michael T. McAninch (16 years), Controller
Commercial and Mortgage Banking Group
Merrill E. Matlock (15 years), Senior Vice President, and President,
One Mortgage Corporation
First Vice Presidents
Larry L. Grubbs (4 years), Executive Vice President, One Mortgage Corporation
Gregory P. O'Connor (7 years)
Vice Presidents
Daniel R. Dierlam (7 years)
David J. Fitzgerald (8 years)
Teresa E. Gray (1 year)
Max E. Inglert (27 years)
Beth A. Kouns (7 years)
Charles B. Lauck (1 year)
Michael D. Mathew (4 years)
Larry J. Northenor (1 year)
Michael S. Rigsby (2 years)
Susan Kaiser-Rohr (4 years)
Amanda K. St. Clair (3 years)
Anthony P. Schlicte (1 year)
William H. Shipley, Jr. (2 years)
Stephen M. Spicer (2 years)
Regional Vice Presidents
N. Jeanne Bowling (15 years)
Victoria H. Duckworth (16 years)
Bonnie J. Fletcher (2 years)
Darrel D. Thornton (27 years)
*Officer--First Indiana Corporation
<PAGE> 6
MANAGEMENT AND ADVISORY BOARDS
Market Vice Presidents
William N. Snodgrass (16 years)
Steven R. Waddell (4 years)
Correspondent Banking Services Group
Timothy J. O'Neill (29 years), Senior Vice President
Technology and Operations Group
Edward E. Pollack (1 year), Senior Vice President
Vice Presidents
John D. Ehrhart (21 years)
John M. Huter (32 years)
John V. Kirby (3 years)
Denise L. Maines (11 years)
Thomas M. Ryan (19 years)
Mickey J. Walden (16 years)
One Mortgage Corporation
Vice Presidents
Terry C. Barrett (3 years), Raleigh Office
Wilber L. Harwell (3 years), Charlotte Office
Thomas E. Helms (6 years), Orlando Office
Market Vice Presidents
Brian A. Carlson (5 years)
Cynde G. Emory (10 years)
Melia L. Favorite (2 years)
Salvatore S. Rodriguez (2 years)
Sylvia D. Stark (11 years)
Amy F. Watts (2 years)
Joseph A. Winsser (2 years)
Donald R. Witter III (5 years)
FIRSTTRUST INDIANA
Ralph G. Nowak, President and Chief Investment Officer
David G. King, Executive Vice President and Chief Operating Officer
Robert H. Everitt, Executive Vice President and Trust Counsel
James H. Hernandez, Senior Vice President, Estate Administration
Christian L. Rieddle, Senior Vice President, Institutional Portfolio
Management
Robert Todd Musser, Senior Vice President, Personal Portfolio Management
Mary Anne Smith, Vice President, Client Services and Technology
EVANSVILLE DIVISION
Maurice E. Mobley (46 years), Chairman of the Board
Sherry F. Haynes (4 years), President
Vice Presidents
Sandra K. Potter (11 years)
Wayne R. Stovall (32 years)
Regional Vice President
Patricia L. Griffin (2 years)
Market Vice President
Rick G. McDonald (8 years)
Advisory Directors
James O. Baxter (25 years)
Sherry F. Haynes (4 years)
Maurice E. Mobley (46 years)
Paul G. Mosier (21 years)
Lewis A. Plane (34 years)
Ben M. Redden (27 years)
Dr. David L. Rice (21 years)
MOORESVILLE DIVISION
Boyd C. Head (38 years), Chairman of the Board
Charles D. Swisher (16 years), Vice Chairman of the Board
Norman T. Lloyd (26 years), President
Advisory Directors
Robert S. Gregory (34 years)
Boyd C. Head (38 years)
Russell J. Lockwood (15 years)
Eugene D. Perry (16 years)
Charles F. Quillen (15 years)
Charles D. Swisher (16 years)
George Watson (26 years)
RUSHVILLE DIVISION
W. Richard Waggoner (33 years), Chairman of the Board
E. Eugene Spurlin (29 years), Vice Chairman of the Board
Garry E. Cooley (14 years), President
Advisory Directors
Dr. Frank H. Green (39 years)
Richard K. Levi (11 years)
Marjorie Shoemaker (18 years)
E. Eugene Spurlin (29 years)
W. Richard Waggoner (33 years)
<PAGE> 7
OUR YEAR IN REVIEW
Nineteen ninety-eight was a year of extremes in the financial
services industry. Interest rates fell to the lowest point in this
half of the century. Mergers between mega-banks intensified,
transforming big banks into giants. Financial services companies
glutted the market, escalating competition for customers. The
Internet assumed greater importance in the sale of financial services.
Complicating the situation are the facts that financial services
companies are alike in fundamental ways and that we are a relatively
small player in a field of giants.
Despite all that, we have demonstrated the vision and resolve to
compete and win in this aggressive environment.
This winning strategy revolves around several initiatives. First, we
have chosen to fill specific niches as opposed to trying to provide all
the services larger banks do. Second, we have chosen a path that
emphasizes the collection of data about our customers and providing
the experience and products they need based upon that data. Finally,
we have made a conscious effort to remain independent and run by
local management, with local decisions.
As a result, we have stayed close to our customers and remained
nimble in responding to them. This customer-focused approach
allows us to build strong relationships that provide a foundation for
success and growth.
The Three "D's"
In 1998, First Indiana articulated our guiding principles in a new
Mission Statement printed at the beginning of this report. Central to
the statement are the concepts of discovery, delivery, and dialogue.
These are not platitudes, but concrete representations of how we
approach our customers.
Consistently, we spend time researching our customers to discover
what they require from their financial services provider. This
information allows us to develop innovative products and dictates the
type of service used to deliver these products. But our
customer-focused approach doesn't stop there. We have continual
dialogue with our customers to determine adjustments or changes
that are inevitable with changing consumer expectations.
Each of our business units has built its strategies upon this
customer-focused approach. Here are highlights of their
accomplishments during 1998 as a result:
Retail Banking Group
In retail banking, our goal is to create a different experience for our
customers from what they can get at another bank. In addition to our
exemplary customer service, we take time to identify our customers'
current and future needs, so that we can offer them the right
products at the right time. This is done through
[This page contains photographs of the following persons and
these captions]
BOARD OF DIRECTORS
Robert H. McKinney
Chairman and Chief Executive Officer,
First Indiana Corporation (46 Years' Service)
Marni McKinney
Vice Chairman, First Indiana Corporation; President and
Chief Executive Officer, The Somerset Group, Inc.(15 Years)
Owen B. Melton, Jr.
President and Chief Operating Officer,
First Indiana Corporation (21 Years)
H.J. Baker
Chairman Emeritus, BMW Constructors, Inc. (32 Years)
Gerald L. Bepko
Vice President for Long-Range Planning, Indiana
University, Chancellor, IUPUI (12 Years)
<PAGE> 8
face-to-face consultations that we call profiling, which helps us anticipate
our customers' needs and follow up with them at the right time. The
strategic use of customer data in direct mail campaigns further helps
us broaden relationships by putting additional products in front of
customers when they need them.
We have found that deposit products - especially checking accounts
- - are the gateway to building share of customer. And as we develop
relationships through consumer and business checking and savings
products, we have the opportunity to determine other ways in which
we can meet customers' needs.
Our research shows that many consumers want a financial partner
who will help them reach their goals. By focusing on customer needs
rather than product sales, we have set ourselves apart from
mass-market competitors who compete on volume and price.
Guiding us in the selection of products and services we offer is the
idea that if we can't build share of customer and do it profitably, we
shouldn't do it. The addition of customer profitability measures in the
second half of 1999 will help us make informed decisions about
pricing and product strategies that build share of customer.
These strategies produced strong results in retail banking in 1998.
Checking accounts grew 20 percent, introducing the First Indiana
experience to thousands of new customers. We look forward to
deepening our relationships with these customers in the years ahead.
Business Consumer Group
Mergers in the Indianapolis market continue to present opportunities
for this group. In particular, the merger
of Bank One and First Chicago NBD created a window of
opportunity for capitalizing on the current confusion in
the minds of customers regarding the impact of these changes. These
competitors have transferred small business accounts out of state,
resulting in borrowers doing business via an 800 number. This has
led to dissatisfaction with the level of service.
We are keenly aware, however, that we are not the only institution
trying to take advantage of this opportunity. Over 30 other bank and
non-bank competitors in the market are looking for relationships in
our market niche. Our challenge is to create value for the consumer
through our understanding of their needs, so that we act as a
financial partner as our customers' businesses grow.
There are several main strategies we have used to overcome pricing
wars and the myriad of competition. First, many customers perceive
value beyond pricing and want to do business with a locally owned
financial institution that responds quickly and efficiently with minimal
bureaucracy. Second, our sales force is expert at the
partnership-based approach to business lending. Third, we take the
time to understand the customer's business through a proven
information-gathering sales method and provide customers with
solutions, not cookie-cutter products.
Mortgage Banking Group
Several environmental forces were at work in this line of business
during 1998. Continued consolidations gave the giants more pricing
power with investors who buy mortgage loans for sale in the
secondary market. These large financial institutions spend heavily on
technology, the benefits of which they extend to brokers as a strategy
to capture more wholesale business. Brokers, on the other hand,
increased pricing pressure on traditional lenders, even in specific
niche products.
Technology was an important factor in the Mortgage Banking
Group's success in meeting these challenges. During 1998, First
Indiana Bank invested in new technology to streamline processes for
both retail and wholesale channels, and the operations area became
proficient users of automated underwriting to approve more loans,
faster. Although it is not First Indiana's goal to become the lowest
cost provider, efficiencies gained from technology and continuous
improvement helped maintain our competitive edge.
Our competitors continued to compete on features and
[This page contains photographs of the following persons and
these captions]
BOARD OF DIRECTORS
Andrew Jacobs, Jr.
United States Congressional Representative (retired); Adjunct
Professor, IUPUI (2 Years)
Phyllis W. Minott
Chairman and Chief Executive Officer, Minott Motion
Pictures, Inc. (23 Years)
Michael L. Smith
Senior Vice President, Finance, Anthem, Inc. (14 Years)
John W. Wynne
Director, Duke Realty Investments, Inc. (9 Years)
<PAGE> 9
prices that First Indiana can't or won't match and still maintain appropriate
profitability. As a result, the competition has driven pricing lower in
established markets. While combating this environment with
strategies to maintain our presence in these markets, we countered by
seeking additional opportunities in new markets where better pricing
was available. For example, we opened offices in Portland, Oregon,
and Phoenix, Arizona. These offices brought with them quality
outstandings with fees and margins well above average.
Consumer Finance Group
In 1998, First Indiana's Consumer Finance Group relied upon several
strategies to grow in this highly competitive market. Our two key
strategies were aggressively marketing to our broker network
throughout the country and the enlargement of our network. The
addition of WestNet, which operates home equity offices in three
states, was a major factor in network growth.
With falling interest rates, we've seen many competitors and brokers
pricing for survival in this tough market. First Indiana combated the
pricing situation in two main ways. First, we instituted a line of credit
recapture fee and capped waived closing costs to prevent consumers
from jumping from teaser rate to teaser rate. Second, we offered first
lien products redesigned for investor sales offering various rates and
prepay penalty options.
Internally, several changes helped this group prosper. Operations
hours were increased to 7:00 p.m. for better service, particularly on
the West Coast. Underwriter callbacks on all final turndowns were
initiated. The use of e-mailing closing documents was greatly
expanded to help us drive down costs. In addition, a re-engineering
project was initiated in the fourth quarter to further improve our level
of service.
Correspondent Banking Services Group
First Indiana's new Correspondent Banking Services Group was
launched in 1998. The initial challenge was to take the time to listen
to correspondent customers and determine the products and delivery
channels they required. As a result of this, the unit enjoyed a
profitable first year.
Achievements included the sale of $125 million in residential loans
while retaining the servicing. Sales and servicing is an excellent
method for First Indiana to establish a relationship with these banks.
We also formed an alliance with EDS for image processing of checks
to broaden our offering to community banks.
Correspondent Banking Services allows the Bank to leverage our
investment in products, people, and technology through a customer
group that has goals compatible with ours. The sale of residential and
consumer loans allows us to maximize our origination capacity and
efficiency. It also allows us to generate servicing income and utilize
availability of investment funds of correspondents, while fulfilling
their investment needs.
Looking to the Future
The real test of any organization comes not when the wind is at its
back, but when times get tough. We believe the next several years
will be challenging for First Indiana and our entire industry.
Companies that stay on top will be forward-thinking, disciplined, and
customer-focused. First Indiana is determined to be one of those
companies.
It is with pride and confidence that we look to the future and the
rewards we will be able to provide all our stakeholders.
[The following sidebar text appears on this page]
SHARE OF CUSTOMER
If we could summarize our guiding strategy into one idea, it would be to
bring something different to our customers-something they can't get across
the street. This is not an easy goal in the highly competitive environ-
ment in which we operate. That's why we have developed a holistic approach
to serving our customers.
In other words, we work toward building share of customer. To build share
of customer, we must look at the sum of our customers' financial needs and
offer the products that will help them reach their goals.
This can only be accomplished through dialogue with individuals and the
development of relationships based on what we learn from them. Therefore,
it is critical for us to form partnerships with our customers and work
with them one-to-one.
By adopting this strategy, we are able to add value to our shareholders
without relying so much on market share or being the biggest. We also
believe that putting the customer first will lead to greater profitability.
Our goal is simple: earn 100% of every profitable customer's business.
<PAGE> 10
FINANCIALS
First Indiana Corporation and Subsidiaries
<PAGE> 11
FINANCIAL REVIEW
First Indiana Corporation posted yet another year of record earnings
in 1998 while enjoying substantial asset growth. Net earnings were
$19,147,000 for the year ended December 31, 1998, compared with
$17,744,000 for the same period in 1997 and $13,704,000 for the
year ended December 31, 1996. 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 1998 were $1.44, compared with $1.36 in
1997 and $1.06 in 1996. Return on average equity for 1998 was
11.96 percent, compared with 12.16 percent in 1997 and 10.15
percent in 1996.
To reflect confidence in the continued earnings potential of the
Corporation, the Board of Directors authorized an 8 percent increase
in the Corporation's annual cash dividend, to $.52 per share from
$.48 per share, beginning with the first quarterly dividend payment
on March 6, 1999. The Board authorized a six-for-five stock
dividend effective March 6, 1998 for shareholders of record as of
February 19, 1998. Dividends per common share (adjusted for stock
dividends and splits) were $.48 in 1998, $.40 in 1997 and $.38 in
1996. All per-share amounts in the 1998 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 $744 million,
compared with $373 million in 1997. 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 $450 million, compared
with $276 million in 1997. 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 contributed significantly to 1998 earnings.
The Bank continued to develop relationship banking in construction
lending, with originations of $182 million, compared with $153
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 1998.
Originations in this segment totaled $126 million in 1998. Business
loans outstanding increased to $179 million at year-end 1998 from
$124 million one year earlier.
The significant growth in originations in these four core areas
translated into growth on the balance sheet. At December 31, 1998,
home equity, construction, and residential loans outstanding were
$532 million, $216 million and $566 million, compared with $528
million, $156 million and $501 million one year earlier.
The net loan loss provision in 1998 was $9,780,000, compared with
$10,700,000 in 1997 and $10,794,000 in 1996. By continuing to
provide for loan losses in a manner consistent with the higher risk
associated with, and losses inherent in, business, construction, and
home equity lending, the Bank's loan loss allowance was
$25,700,000 at year-end, or 150 percent of non-performing loans,
compared with $22,414,000, or 122 percent of non-performing
loans, at December 31, 1997.
Total assets increased 11.3 percent to $1,795,990,000 at year-end,
compared with $1,613,405,000 at December 31, 1997. Shareholders'
equity increased to $165,970,000 at December 31, 1998, an eight
percent increase over the December 31, 1997 level of $153,036,000.
The tangible and core capital of the Bank was $139,992,000 or 7.80
percent of assets, which exceeded regulatory minimums by
$113,077,000 and $86,161,000 at year-end 1998. Average
shareholders' equity to average assets equaled 9.33 percent and 9.66
percent for 1998 and 1997.
[This page contains photographs of the following persons and
these captions]
David L. Gray
Senior Vice President
Financial Management Group
(17 Years' Service)
David A. Lindsey
Senior Vice President
Consumer Finance Group
(16 Years)
Merrill E. Matlock
Senior Vice President
Commercial and Mortgage Banking Group
(15 Years)
Timothy J. O'Neill
Senior Vice President
Correspondent Banking Services Group
(29 Years)
Edward E. Pollack
Senior Vice President
Technology and Operations Group
(1 Year)
Kenneth L. Turchi
Senior Vice President
Retail Banking, Marketing and Strategic Planning Group
(14 Years)
<PAGE> 12
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 $62,754,000 in 1998, compared with
$62,979,000 in 1997 and $61,683,000 in 1996.
Net Interest Margin
First Indiana's net interest margin is the clearest indicator of its ability
to generate core earnings. The margin was 3.85 percent for the year
ended December 31, 1998, compared with 4.36 percent in 1997 and
4.37 percent in 1996. 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, 1998 was 3.16 percent, compared with 3.71 percent in
1997 and 3.70 percent in 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 69 basis points to the margin in
1998, compared with 65 and 67 basis points in 1997 and 1996.
The following table analyzes First Indiana's net interest margin and
the components which contributed to it:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------------------------------------------------
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 $ 9,469 $521 5.50% $12,739 $695 5.46% $14,782 $796 5.38%
Investments 124,756 7,465 5.98 113,037 6,818 6.03 115,836 6,887 5.95
Mortgage-Backed
Securities 32,446 2,065 6.36 35,130 2,446 6.96 42,958 2,986 6.95
Loans Receivable (1) 1,465,288 125,783 8.58 1,284,212 117,371 9.14 1,237,036 114,799 9.28
------------------ ------------------ ------------------
Total Earning Assets 1,631,959 135,834 8.32 1,445,118 127,330 8.81 1,410,612 125,468 8.89
Other Assets 83,056 ------- 65,375 ------- 74,904 -------
--------- --------- ---------
Total Assets $1,715,015 $1,510,493 $1,485,516
========= ========= =========
Liabilities and Share-
holders' Equity
Interest-Bearing
Liabilities
Deposits:
NOW and Money
Market Checking $ 84,891 1,951 2.30 $ 84,761 1,908 2.25 $ 88,633 2,531 2.86
Passbook and
Statement Savings 330,917 15,225 4.60 302,635 13,881 4.59 284,471 12,954 4.55
Money Market Savings 28,819 990 3.44 30,416 1,001 3.29 17,481 575 3.29
Jumbo Certificates 184,332 10,771 5.84 113,632 6,583 5.79 111,318 6,370 5.72
Fixed-Rate
Certificates 464,839 25,998 5.59 470,853 26,563 5.64 524,064 29,647 5.66
Federal Home Loan
Bank Advances 270,491 15,348 5.67 219,685 12,288 5.59 185,551 10,706 5.77
Short-Term
Borrowings 52,922 2,797 5.29 39,018 2,127 5.45 18,518 1,002 5.41
------------------ ------------------ ------------------
Total Interest-Bearing
Liabilities 1,417,211 73,080 5.16 1,261,000 64,351 5.10 1,230,036 63,785 5.19
Other Liabilities 137,737 ------ 103,566 ------ 120,501 ------
Shareholders' Equity 160,067 145,927 134,979
--------- --------- ---------
Total Liabilities and
Shareholders' Equity $1,715,015 $1,510,493 $1,485,516
========= ========= =========
Net Interest
Income/Spread $62,754 3.16% $62,979 3.71% $61,683 3.70%
====== ===== ====== ===== ====== =====
Net Interest Margin 3.85% 4.36% 4.37%
===== ===== =====
(1) Included in loans receivable are loans held for sale totaling $98,588,
$34,217, and $42,872 in 1998, 1997, and 1996, and non-accrual loans.
</TABLE>
[This page contains the following bar graph]
<TABLE>
<CAPTION>
Net Interest Income (Dollars in Thousands)
- ------------------------------------------
<S> <C>
1994 49,229
1995 58,044
1996 61,683
1997 62,979
1998 62,754
</TABLE>
<PAGE> 13
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>
1998 Compared with 1997 1997 Compared with 1996
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 $(7,132)$16,550 $(1,006) $ 8,412 $(1,740)$ 4,378 $ (66) $ 2,572
Investments (54) 707 (6) 647 100 (166) (3) (69)
Mortgage-Backed Securities (210) (187) 16 (381) 5 (544) (1) (540)
Federal Funds Sold 6 (178) (2) (174) 10 (110) (1) (101)
--------------------------------- ---------------------------------
(7,390) 16,892 (998) 8,504 (1,625) 3,558 (71) 1,862
--------------------------------- ---------------------------------
Interest Expense
Deposits
NOW and Money Market Checking 40 3 - 43 (536) (110) 23 (623)
Passbook and Statement Savings 43 1,297 4 1,344 94 827 6 927
Money Market Savings 44 (53) (2) (11) 0 426 0 426
Jumbo Certificates 57 4,096 35 4,188 79 132 2 213
Fixed-Rate Certificates (229) (339) 3 (565) (82) (3,010) 8 (3,084)
Federal Home Loan Bank Advances 177 2,842 41 3,060 (327) 1,969 (60) 1,582
Short-Term Borrowings (65) 758 (23) 670 7 1,109 9 1,125
--------------------------------- ---------------------------------
67 8,604 58 8,729 (765) 1,343 (12) 566
--------------------------------- ---------------------------------
Net Interest Income $(7,457) $8,288 $(1,056) $ (225) $ (860) $2,215 $(59) $1,296
================================= =================================
</TABLE>
<PAGE> 14
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)
----------------------------------------------------------
1998 Amount Percent 1997 Amount Percent 1996
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sale of Investments $ 395 $ 178 82.1% $ 217 $ (64) (22.8)%$ 281
Sale of Loans 9,786 4,854 98.4 4,932 1,857 60.4 3,075
Sale of Subsidiary - - - - (1,165) (100.0) 1,165
Dividends on FHLB Stock 1,097 42 4.0 1,055 22 2.1 1,033
Loan Servicing Income 1,635 (1,132) (40.9) 2,767 (141) (4.8) 2,908
Loan Fees 3,092 734 31.1 2,358 56 2.4 2,302
Insurance Commissions 106 (132) (55.5) 238 (424) (64.0) 662
Accretion of
Negative Goodwill 948 - - 948 - - 948
Deposit Product Fee Income 3,075 429 16.2 2,646 53 2.0 2,593
Other 3,639 795 28.0 2,844 (37) (1.3) 2,881
---------------- ---------------- --------
$23,773 $5,768 32.0 $18,005 $ 157 0.9 $17,848
================ ================ ========
</TABLE>
The principal increase in non-interest income in 1998 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 1998 were
$6,388,000 on the sale of $168 million of fixed-rate home equity
loans, while residential gains amounted to $3,031,000 from sales of
$434 million of loans. During 1998, the Bank identified and sold
$187 million in out-of-market loan servicing at a gain of $1,438,000,
a component of other non-interest income. Loan servicing income
declined in 1998 as a result of accelerated amortization of mortgage
servicing rights. The accelerated amortization resulted from higher
than anticipated prepayments on the underlying residential mortgage
loans. Insurance commission income decreased from 1997 and 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> 15
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)
---------------------------- ------------------------------------
1998 Amount Percent 1997 Amount Percent 1996
---------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and Benefits $33,378 $ 7,442 28.7 % $25,936 $ 1,713 7.1 % $24,223
Capitalized Salaries
and Benefits (10,677) (4,657) (77.4) (6,020) 109 1.8 (6,129)
Net Occupancy 2,893 41 1.4 2,852 (235) (7.6) 3,087
Deposit Insurance 691 (2) (0.3) 693 (8,493) (92.5) 9,186
Real Estate Owned
Operations - Net 858 206 31.6 652 54 9.0 598
Equipment 5,042 350 7.5 4,692 184 4.1 4,508
Office Supplies and Postage 2,032 183 9.9 1,849 (220) (10.6) 2,069
Other 11,539 1,089 10.4 10,450 739 7.6 9,711
---------------- ---------------- --------
$45,756 $ 4,652 11.3 $41,104 $(6,149) (13.0) $47,253
================ ================ ========
</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 1998 in order to maintain pace with the increased loan
production levels.
<PAGE> 16
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 $19.9 million at December 31,
1998 from $22.8 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.
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.
Potential Problem Assets. The Corporation had $10.5 million in
potential problem loans at December 31, 1998. Of this amount, $8
million consisted of loans to residential builders and $2.5 million
represented loans to business 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 business 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>
1994 13,741 1994 57.72
1995 17,300 1995 67.91
1996 19,311 1996 84.19
1997 22,897 1997 121.60
1998 26,200 1998 149.63
<CAPTION>
Bank Capital/Assets Checking Deposits (Dollars in Thousands)
- ------------------- ----------------------------------------
Actual Required <S> <C>
- ------ -------- 1994 163,023
<C> <C> 1995 177,804
7.80% 1.50% 1996 187,760
7.80 3.00 1997 191,996
11.24 8.00 1998 231,348
</TABLE>
<PAGE> 17
<TABLE>
<CAPTION>
Non-Performing Assets December 31,
------------------------------------------
(Dollars in Thousands) 1998 1997 1996 1995 1994
-------- -------- ------------------------
<S>
Non-Accrual Loans <C> <C> <C> <C> <C>
Residential Mortgage $4,268 $3,718 $3,849 $2,399 $1,720
Residential Construction 4,714 6,059 4,573 2,229 2,212
Commercial Real Estate - 99 - 1,514 105
Business 1,019 254 166 428 331
Consumer 7,175 8,302 6,792 8,120 6,603
-------- -------- ------------------------
Total Non-Accrual Loans 17,176 18,432 15,380 14,690 10,971
-------- -------- ------------------------
Other Impaired Loans - - - 3,306 -
Restructured Loans - - 6,913 5,909 10,730
Real Estate Owned 2,704 4,390 4,828 2,943 7,012
Other Repossessed Assets - - - 317 364
-------------------------------------------
Total Non-Performing Assets $19,880 $22,822 $27,121 $27,165 $29,077
===========================================
</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,
----------------------------------------
1998 1997 1996 1995 1994
------- ------- -----------------------
<S> <C> <C> <C> <C> <C>
Residential Mortgage $ 291 $ 858 $ 371 $ 430 $1,427
Residential Construction 563 749 915 713 791
Commercial Real Estate 154 95 95 94 3,503
Consumer 1,696 2,688 3,447 1,706 1,291
Allowance for REO Losses (500) (483) (543) (1,066) (1,216)
-------------------------------------------
Real Estate Owned-Net $2,204 $3,907 $4,285 $1,877 $5,796
===========================================
</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 loan loss provision since 1996 has increased in response to
significant growth in the Bank's targeted portfolios of home equity,
residential construction, and business loans. While management
believes that these portfolios have strong credit quality, it recognizes
the increased risk of such portfolios compared to traditional
residential portfolios, and has increased the loan loss
provision accordingly.
<TABLE>
<CAPTION>
Summary of Loan Loss Experience Years Ended December 31,
--------------------------------------------------
(Dollars in Thousands) 1998 1997 1996 1995 1994
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance of Allowance for Loan Losses at
Beginning of Year $22,414 $18,768 $16,234 $12,525 $11,506
Charge-Offs
Residential Mortgage (91) (83) (9) (34) (82)
Residential Construction (658) (1,190) (360) (231) (425)
Commercial Real Estate (93) (75) - (1,139) (167)
Consumer (6,934) (7,210) (9,592) (2,969) (2,181)
Business (15) (528) - (61) (194)
----------- ----------- ----------- -----------------
Total Charge-Offs (7,791) (9,086) (9,961) (4,434) (3,049)
----------- ----------- ----------- -----------------
Recoveries
Residential Mortgage 2 - 26 6 3
Residential Construction 270 40 69 16 -
Commercial Real Estate - 727 135 13 -
Consumer 986 1,261 1,429 190 165
Business 39 4 42 18 -
----------- ----------- ----------- -----------------
Total Recoveries 1,297 2,032 1,701 243 168
----------- ----------- ----------- -----------------
Net Charge-Offs (6,494) (7,054) (8,260) (4,191) (2,881)
Provision for Loan Losses 9,780 10,700 11,815 7,900 3,900
Recapture of Loan Loss Provision Due to
Auto Portfolio Sale - - (1,021) - -
Balance of Allowance for Loan Losses at ----------- ----------- ----------- -----------------
End of Year 25,700 22,414 18,768 16,234 12,525
----------- ----------- ----------- -----------------
Balance of REO Loss Allowance at
End of Year 500 483 543 1,066 1,216
----------- ----------- ----------- -----------------
Balance of Loan and REO Loss Allowance
at End of Year $26,200 $22,897 $19,311 $17,300 $13,741
======================================================
</TABLE>
The net charge-offs of $6.5 million, $7.1 million, and $8.3 million in
1998, 1997, and 1996, respectively, reflect both the significant
increase in home equity loans outstanding and the adoption of a more
conservative charge-off policy. 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
<PAGE> 18
<TABLE>
<CAPTION>
Summary of Loan Loss Experience (continued)
<S> <C> <C> <C> <C> <C>
Ratio of Net Charge-Offs to Average Loans
Outstanding 0.44% 0.55% 0.67% 0.35% 0.29%
Ratio of Allowance for Loan Losses to
Loans Receivable 1.66% 1.63% 1.52% 1.28% 1.15%
Ratio of Total Loan and REO Loss Allowance to
Non-Performing Assets 131.79% 100.33% 71.20% 63.68% 47.26%
Ratio of Allowance for Loan Losses to
Non-Performing Loans 149.63% 121.60% 84.19% 67.91% 57.72%
</TABLE>
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 $9.8 million and $10.7 million in
1998 and 1997, respectively, reflects the charge-off policy discussed
above and a decrease 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.
The allowance for loan losses increased to $25,700,000 at December
31, 1998, or 150 percent of the non-performing loans at year-end.
Capital Resources and Liquidity Capital
At December 31, 1998, First Indiana's shareholders' equity was
$165,970,000, or 9.24 percent of total assets, compared with
$153,036,000, or 9.49 percent of total assets, at December 31, 1997.
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, 1998,
the Corporation had repurchased 809,608 shares of its common
stock, at a cost of $8,682,000, or six percent of its shares
outstanding.
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,
-----------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- -----------------------------------------------------------------------
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 $ 609 34.6% $ 588 36.7% $ 632 34.9% $ 426 33.3% $ 376 36.4%
Residential
Construction Loans 4,613 14.0 3,663 11.4 3,270 11.2 2,928 11.2 2,110 10.7
Commercial Real
Estate Loans 298 2.1 330 2.9 777 3.7 1,095 4.4 2,219 5.6
Consumer Loans 9,508 37.7 9,706 39.9 9,042 42.7 7,808 45.4 5,375 43.5
Business Loans 2,727 11.6 2,008 9.1 1,809 7.5 820 5.7 519 3.8
Unallocated 7,945 - 6,119 - 3,238 - 3,157 - 1,926 -
----------------- ----------------- ----------------- ----------------- ------------------
$25,700 100.0% $22,414 100.0% $18,768 100.0% $16,234 100.0% $12,525 100.0%
================= ================= ================= ================= ===============
</TABLE>
<PAGE> 19
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.
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
$1,227,918,000 at December 31, 1998 and $1,107,555,000 at
December 31, 1997.
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, 1998 was 8.00 percent.
Impact of Accounting Standards Not Yet Adopted
In June 1998, FASB issued Statement of Financial Accounting
Standard No. 133, "Accounting for Derivative Instruments and
Hedging Activities". The Statement is effective for fiscal years
beginning after June 15, 1999, with earlier application allowed.
Management is currently assessing the impact of this Statement on
the financial condition and results of operations of the Corporation
upon adoption.
In October 1998, FASB issued Statement of Financial Accounting
Standard No. 134, "Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise." This Statement is effective for
fiscal quarters beginning after December 15, 1998, with earlier
application permitted. Management has determined the impact of
this Statement on the financial condition and results of operations of
the Corporation to be immaterial.
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 ready by December 31, 1998 for all mission critical systems.
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
years 1999 and 2000, including leap year calculations. Because the
Bank relies heavily on technology for transaction processing and
interest calculation, preparing for the Year 2000 is a
critical focus of the Bank's resources. In addition to testing the
technology, the Bank also has embedded systems in elevators, alarm
systems, and HVAC units which must be checked for Year 2000 readiness.
The Bank has assembled a team of associates which meets regularly
to lead the Bank's Year 2000 readiness efforts. All hardware and software
vendors, as well as significant other vendors and borrowers, have
been identified and contact has been initiated with these individuals
or companies. The Bank has an inventory of known potential Year
2000 readiness issues, and has developed action plans and
contingency plans for each issue. During 1998, the Bank tested
systems for the purpose of validating Year 2000 readiness, began
upgrading or replacing existing hardware, software, or embedded
systems, and implementing contingency plans in the event a particular
vendor or borrower will not assist the Bank in its Year 2000 efforts.
The team is monitoring significant vendor and borrower relationships
to ensure that no issues arise which cause management to question
the ability of the vendor or borrower to adequately prepare for the
Year 2000, and thus possibly affect the Bank's own ability to conduct
business beyond the century change.
The OTS is conducting quarterly audits of all financial institutions to
assess Year 2000 readiness in accordance with FFIEC guidelines. The Bank
uses an external data services bureau which provides most of the
automated processing of First Indiana's customer transactions. Proxy
testing is being conducted with the service bureau. The service
bureau is also being examined by the OTS.
The Bank completed an upgrade of all personal computers in the
fourth quarter at a cost approximating $550,000. Although
management sees no internal impact or risk to the Bank's ability to
operate in the 21st Century, it is not possible to assess the financial
impact of lost revenue due to Year 2000 issues or future expenditures
due to external factors at this time.
As the June 1999 compliance date approaches for non-mission
critical applications, First Indiana will maintain the Year 2000
situation as a priority to provide a smooth transition for customers
and prevent unnecessary risk to its shareholders.
<PAGE> 20
Interest-Rate Sensitivity
The following table shows First Indiana's interest-rate sensitivity at
December 31, 1998 and 1997.
<TABLE>
<CAPTION>
(Dollars in Thousands) Rate Sensitivity by Period of Maturity or Rate Change At December 31, 1998
--------------------------------------------------------------------------
Percent Over 180 Over One Over
of Within Days to Year to Five
Rate Balance Total 180 Days One Year Five Years Years
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Investment Securities
and Other 6.04%$ 125,791 7.40 % $ 47,373 $ 12,621 $ 65,797 $ --
Loans Receivable (1)
Mortgage-Backed
Securities 4.95 29,680 1.75 6,751 4,782 18,147 --
Residential Mortgage
Loans 7.24 536,124 31.54 293,454 74,743 150,609 17,318
Residential Construction
Loans 8.48 216,059 12.71 194,695 10,816 10,548 --
Commercial Real
Estate Loans 8.93 32,602 1.92 9,396 4,738 14,463 4,005
Business Loans 8.87 178,933 10.53 113,419 2,373 35,728 27,413
Consumer Loans 9.49 580,525 34.15 250,081 55,429 231,478 43,537
-----------------------------------------------------------------
8.24 $1,699,714 100.00 % 915,169 165,502 526,770 92,273
===================== ----------------------------------------
Interest-Bearing Liabilities
Deposits
Demand Deposits (2) 1.64 $ 86,414 5.84 % -- -- -- 86,414
Passbook Deposits (3) 3.00 41,233 2.78 2,241 1,008 8,064 29,920
Money Market Savings 4.54 351,387 23.74 351,387 -- -- --
Jumbo Certificates 5.49 171,171 11.56 86,388 43,076 41,707 --
Fixed-Rate Certificates 5.40 448,670 30.31 146,066 126,216 176,388 --
----------------------------------------------------------------
4.76 1,098,875 74.23 586,082 170,300 226,159 116,334
Borrowings
FHLB Advances 5.44 327,247 22.11 142,000 10,000 170,000 5,247
Short-Term Borrowings 4.81 54,219 3.66 54,219 -- -- --
----------------------------------------------------------------
4.91 1,480,341 100.00 % 782,301 180,300 396,159 121,581
========
Net - Other (4) 219,373 219,373
---------- ----------------------------------------
Total $1,699,714 782,301 180,300 396,159 340,954
========== ----------------------------------------
Rate Sensitivity Gap $ 132,868 $ (14,798)$ 130,611 $ (248,681)
===========================================
December 31, 1998 Gap
Cumulative Rate-
Sensitivity Gap $ 132,868 118,070 $ 248,681
================================
Percent of Total
Interest-Earning Assets 7.82 % 6.95 % 14.63%
================================
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%
================================
(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 $66,469 of
loans held for sale. Included in Consumer Loans are $45,929 of home equity loans held for
sale.
(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> 21
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, 1998, First Indiana's six-month and one-year
cumulative gap stood at 7.82 percent and 6.95 percent of total
interest-earning assets. This compares with a negative 0.68 percent
and a negative 0.20 percent at December 31, 1997. This means that
7.82 and 6.95 percent of First Indiana's assets will reprice within six
months and one year without a corresponding repricing of the
liabilities funding them. The 1998 gap position represents funding
choices made by the Bank late in the year and is not indicative of
future anticipated gap position. 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, 1998 were
$1,795,990,000, compared with $1,613,405,000 at December 31,
1997. Loans receivable stood at $1,518,543,000 at year-end 1998,
compared with $1,348,529,000 one year earlier.
The composition of the Bank's loan portfolio continued to change in
1998, as the Bank added higher-yielding loans to the balance sheet
through the origination of home equity and residential construction,
and business loans.
Residential loans outstanding amounted to $532,123,000 at
December 31, 1998, compared with $500,818,000 in 1997. 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 $580,525,000 at the end of
1998, compared with $548,016,000 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
$216,059,000, compared with $155,680,000 at the end of 1997. The
Bank focused on offering new products to builders and customers in
1998 in order to develop a multi-faceted relationship.
Total loan sales in 1998 amounted to $608,243,000, compared with
$217,132,000 in 1997 and $332,021,000 in 1996.
The Bank's loan servicing portfolio was $908,582,000 at December
31, 1998, compared with $969,089,000 and $1,057,731,000 at
December 31, 1997 and 1996. 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 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 December 31,
1998, management believes that a 100 basis point increase or
decrease in interest rates over a 12 month period would result in a
9.8 percent increase and a 9.5 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
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> 22
Five Year Summary of Selected Financial Data
<TABLE>
<CAPTION>
First Indiana Corporation and Subsidiaries
At December 31,
--------------------------------------------------
(Dollars in Thousands, 1998 1997 1996 1995 1994
Except Per Share Data) -------- --------------------------------------------
Selected Financial Condition Data
<S> <C> <C> <C> <C> <C>
Total Assets $1,795,990 $1,613,405 $1,496,421 $1,541,843 $1,408,629
Loans Receivable -- Net 1,518,543 1,348,529 1,215,550 1,250,726 1,078,494
Mortgage-Backed Securities 29,680 38,279 36,412 49,498 69,597
Investments 113,291 111,400 106,895 102,656 149,529
Total Deposits 1,227,918 1,107,555 1,095,486 1,136,980 1,031,911
Federal Home Loan Bank Advances 327,247 s 257,458 s 215,466 214,781 201,155
Short-Term Borrowings 54,219 75,751 30,055 38,642 35,922
Shareholders' Equity 165,970 153,036 138,658 129,297 120,712
<CAPTION>
For the Year Ended December 31,
1998 1997 1996 1995 1994
Selected Operations Data
<S> <C> <C> <C> <C> <C>
Interest Income $135,834 $127,330 $125,468 $124,061 $97,572
Interest Expense 73,080 64,351 63,785 66,017 48,343
Provision for Losses on Loans and
Real Estate Owned, Net 9,780 10,700 10,794 7,900 3,900
Net Earnings 19,147 17,744 13,704 17,267 10,636
Net Interest Margin During Year 3.85% 4.36% 4.37% 4.12% 3.96%
Basic Earnings Per Common Share $ 1.50 $ 1.40 $ 1.10 $ 1.39 $ .82
Diluted Earnings Per Common Share 1.44 1.36 1.06 1.34 .80
Dividends Declared Per Common Share .48 .40 .38 .32 .28
Selected Ratios
Net Earnings to:
Average Total Assets 1.12% 1.17% .92% 1.16% .80%
Average Shareholders' Equity 11.96 12.16 10.15 14.03 9.08
Average Shareholders' Equity to
Average Total Assets 9.33 9.66 9.09 8.28 8.83
Dividend Payout Ratio 31.99 28.53 33.89 22.45 35.23
</TABLE>
[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>
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
1998 1,795,990 1998 216,059
<CAPTION>
Home Equity Loans Outstanding Loan Servicing Portfolio
(Dollars in Thousands) (Dollars in Thousands)
- ----------------------------- ------------------------
<S> <C> <S> <C>
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
1998 565,932 1998 908,582
</TABLE>
<PAGE> 23
<TABLE>
<CAPTION>
Consolidated Balance Sheets
First Indiana Corporation and Subsidiaries
December 31,
------------------------
(Dollars in Thousands, Except Share Data) 1998 1997
-------------- -----------
<S> <C> <C>
Assets
Cash $ 45,153 $ 34,231
Federal Funds Sold 12,500 16,000
-------------- -----------
Total Cash and Cash Equivalents 57,653 50,231
Investments Available For Sale (Notes 2 and 9) 113,291 106,095
Investments Held to Maturity (Market Value of $5,419)
(Notes 2 and 9) -- 5,305
Mortgage-Backed Securities Available for Sale (Notes 3 and 9) 29,680 17,077
Mortgage-Backed Securities Held to Maturity--Net
(Market Value of $21,549) (Notes 3 and 9) -- 21,202
Loans Held for Sale 112,398 57,518
Loans Receivable 1,431,845 1,313,425
Less Allowance for Loan Losses (25,700) (22,414)
---------------- -------------
Loans Receivable--Net(Notes 4,5,8, and 12) 1,518,543 1,348,529
Premises and Equipment (Note 6) 18,546 13,947
Accrued Interest Receivable 11,680 11,322
Real Estate Owned--Net (Note 5) 2,204 3,907
Prepaid Expenses and Other Assets (Note 10) 44,393 35,790
-------------------------------
Total Assets $1,795,990 $1,613,405
===============================
Liabilities and Shareholders' Equity
Liabilities
Non-Interest-Bearing Deposits $ 129,043 $ 90,612
Interest-Bearing Deposits 1,098,875 1,016,943
---------------- -------------
Total Deposits (Note 7) 1,227,918 1,107,555
Federal Home Loan Bank Advances (Note 8) 327,247 257,458
Short-Term Borrowings (Note 9) 54,219 75,751
Accrued Interest Payable 2,646 2,715
Advances by Borrowers for Taxes and Insurance 1,958 1,419
Other Liabilities 12,242 10,733
---------------- -------------
Total Liabilities 1,626,230 1,455,631
---------------- -------------
Negative Goodwill 3,790 4,738
---------------- -------------
Shareholders' Equity (Notes 10, 11, and 13)
Preferred Stock, $.01 Par Value: 2,000,000 Shares Authorized; None Issued - -
Common Stock, $.01 Par Value: 33,000,000 Shares Authorized; 13,512,902
and 13,374,799 Shares Issued and Outstanding, Including Shares in Treasury 135 134
Paid-In Capital in Excess of Par 37,029 35,318
Retained Earnings 137,063 123,699
Accumulated Other Comprehensive Income 425 325
Treasury Stock - At Cost, 809,608 and 706,608 Shares in 1998 and 1997 (8,682) (6,440)
--------------- ------------
Total Shareholders' Equity 165,970 153,036
Commitments and Contingencies (Note 12) - -
--------------- ------------
Total Liabilities and Shareholders' Equity $1,795,990 $1,613,405
===============================
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 24
<TABLE>
<CAPTION>
Consolidated Statements of Earnings
First Indiana Corporation and Subsidiaries Years Ended December 31,
-------------------------------------
(Dollars in Thousands, Except Per Share Data) 1998 1997 1996
--------------------------------------
<S> <C> <C> <C>
Interest Income
Loans $125,783 $117,371 $114,799
Investments 7,465 6,818 6,887
Mortgage-Backed Securities 2,065 2,446 2,986
Federal Funds Sold and Interest-Bearing Deposits 521 695 796
------------- ------------- --------
Total Interest Income 135,834 127,330 125,468
------------- ------------- --------
Interest Expense
Deposits (Note 7) 54,935 49,936 52,077
Federal Home Loan Bank Advances 15,348 12,288 10,706
Short-Term Borrowings 2,797 2,127 1,002
------------- ------------- --------
Total Interest Expense 73,080 64,351 63,785
------------- ------------- --------
Net Interest Income 62,754 62,979 61,683
Provision for Loan Losses, Net (Note 5) 9,780 10,700 10,794
------------- ------------- --------
Net Interest Income After Provision for Loan Losses 52,974 52,279 50,889
------------- ------------- --------
Non-Interest Income
Sale of Investments Available for Sale 395 217 281
Sale of Mortgage-Backed Securities Available for Sale 368 - -
Sale of Loans 9,418 4,932 3,075
Sale of Subsidiary - - 1,165
Dividends on FHLB Stock 1,097 1,055 1,033
Loan Servicing Income 1,635 2,767 2,908
Loan Fees 3,092 2,358 2,302
Insurance Commissions 106 238 662
Accretion of Negative Goodwill 948 948 948
Deposit Product Fee Income 3,075 2,646 2,593
Other 3,639 2,844 2,881
------------- ------------- --------
Total Non-Interest Income 23,773 18,005 17,848
------------- ------------- --------
Non-Interest Expense
Salaries and Benefits 22,701 19,916 18,094
Net Occupancy 2,893 2,852 3,087
Equipment 5,042 4,692 4,508
Deposit Insurance 691 693 9,186
Real Estate Owned Operations--Net 858 652 598
Office Supplies and Postage 2,032 1,849 2,069
Other 11,539 10,450 9,711
------------- ------------- --------
Total Non-Interest Expense 45,756 41,104 47,253
------------- ------------- --------
Earnings Before Income Taxes 30,991 29,180 21,484
Income Taxes (Note 10) 11,844 11,436 7,780
------------- ------------- --------
Net Earnings $19,147 $17,744 $13,704
============= ======================
Basic Earnings Per Share $ 1.50 $ 1.40 $ 1.10
============= ======================
Diluted Earnings Per Share $ 1.44 $ 1.36 $ 1.06
============= ======================
Dividends Per Common Share $ 0.48 $ 0.40 $ 0.38
====================================
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 25
<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, 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
Total Comprehensive Income 18,141
Tax Benefit of Stock Options Exercised - - 656 - - - 656
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 $35,318 $123,699 $325 $(6,440) $153,036
Comprehensive Income:
Net Earnings for 1998 - - - 19,147 - - 19,147
Unrealized Gain on Securities Available
for Sale, Net of Income Taxes of $68
and Reclassification Adjustment (Note 2) - - - - 100 - 100
Total Comprehensive Income 19,247
Tax Benefit of Stock Options Exercised - - 870 - - - 870
Common Stock Issued Under Restricted
Stock Plans-Net of Amortization (Note 13) 6,000 - 150 277 - - 427
Common Stock Issued Under Deferred
Compensation Plan - - - 65 - - 65
Exercise of Stock Options 139,147 1 885 - - - 886
Dividends -- $.48 Per Share - - - (6,125) - - (6,125)
Redemption of Common Stock (6,695) (184) - - - (184)
Purchase of Treasury Stock (103,000) - - - (2,242) (2,242)
Payment for Fractional Shares (349) - (10) - - - (10)
----------------------------------------------------------------------------------
Balance at December 31, 1998 12,703,294 $135 $37,029 $137,063 $425 $(8,682) $165,970
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 26
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
First Indiana Corporation and Subsidiaries
(Dollars in Thousands)
Years Ended December 31,
-----------------------------------
1998 1997 1996
------------ ------------ --------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Earnings $ 19,147 $ 17,744 $ 13,704
Adjustments to Reconcile Net Earnings to Net Cash Provided
(Used) by Operating Activities
Loss (Gain) on Sale of Assets (10,181) (5,149) (4,521)
Amortization 1,941 864 1,325
Amortization of Restricted Stock Plan 427 363 473
Depreciation 2,211 2,022 1,958
Loan and Mortgage-Backed Securities Net Accretion 490 668 (51)
Provision for Loan Losses,Net 9,780 10,700 10,794
Origination of Loans Held for Sale
Net of Principal Collected (630,620) (240,558) (263,197)
Proceeds from Sale of Loans Held for Sale 598,676 211,858 295,764
Change In:
Accrued Interest Receivable (358) (626) 949
Other Assets (19,337) (10,180) (1,169)
Accrued Interest Payable (69) 697 (697)
Other Liabilities 1,509 2,882 (2,755)
--------------------------------------
Net Cash Provided (Used) by Operating Activities (26,384) (8,715) 52,577
--------------------------------------
Cash Flows From Investing Activities
Proceeds From Sales of Investments Available for Sale 20,399 14,991 35,703
Proceeds from Sales of Mortgage-Backed Securities
Available for Sale 23,483 -- --
Proceeds from Maturities of Investment Securities
Held to Maturity 99 237 306
Proceed From Sale of Mortgage-Backed Securities -- 7,528 --
Proceeds From Maturities of Investment Securities
Available for Sale 25,756 20,695 27,305
Purchase of Investment Securities Available for Sale (47,375) (39,912) (68,225)
Purchase of Mortgage-Backed Securities Available for Sale (30,261) (17,568) --
Principal Collected on Mortgage-Backed Securities 1,928 7,903 13,086
Originations of Loans Net of Principal Collected (125,399) (107,404) (41,050)
Proceeds From Sale of Indirect Installment Portfolio -- -- 32,756
Proceeds From Sale of Loans 9,567 5,274 3,501
Purchase of Premises and Equipment (6,810) (2,291) (2,653)
Proceeds From Sale of Premises and Equipment -- 27 150
--------------------------------------
Net Cash Provided (Used) by Investing Activities (128,613) (110,520) 879
--------------------------------------
Cash Flows From Financing Activities
Net Change in Deposits 120,363 12,069 (41,494)
Repayments of Federal Home Loan Bank Advances (344,048) (174,028) (288,025)
Borrowings of Federal Home Loan Bank Advances 413,837 216,020 288,710
Net Change in Short-Term Borrowings (21,532) 45,696 (8,587)
Net Change in Advances by Borrowers for Taxes and Insurance 539 299 (987)
Stock Option Proceeds 702 367 331
Tax Benefit of Option Compensation 870 656 --
Common Stock Issued Under Deferred Compensation Plan 65 (24) (20)
Payment for Fractional Shares (10) (12) (16)
Purchase of Treasury Stock (2,242) (132) --
Dividends Paid (6,125) (5,063) (4,644)
--------------------------------------
Net Cash Provided (Used) By Financing Activities 162,419 95,848 (54,732)
--------------------------------------
Net Change in Cash and Cash Equivalents 7,422 (23,387) (1,276)
Cash and Cash Equivalents at Beginning of Year 50,231 73,618 74,894
--------------------------------------
Cash and Cash Equivalents at End of Year $ 57,653 $ 50,231 $ 73,618
======================================
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Indiana Corporation and Subsidiaries
Years Ended December 31, 1998, 1997, and 1996
(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 27 banking offices located throughout
Metropolitan Indianapolis, Evansville, Franklin, Mooresville,
Pendleton, Rushville, and Westfield, Indiana. 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.
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. In preparing the Consolidated
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
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
<PAGE> 28
and losses for securities classified as available for sale 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 originated
primarily for investment purposes, with the intention of holding them
to maturity. In certain instances, adjustable-rate mortgage loans
originated are identified as held for sale. This action is taken
primarily to manage effectively the total interest-rate risk levels of the
Bank's asset/liability structure.
Loans held for sale are carried at the lower of cost or estimated
market value in the aggregate. The Bank continuously monitors its
loan pipeline and conservatively manages it 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.
The total cost of mortgage loans originated with the intent to sell is
allocated between the loan servicing right and the mortgage loan
without servicing based on their relative fair values at the date of
sale. The capitalized cost of loan servicing rights is amortized in
proportion to, and over the period of, estimated net servicing
revenue. For this purpose, estimated servicing revenues include late
charges and other ancillary income. Estimated servicing costs include
direct costs associated with performing the servicing function and
appropriate allocations of other costs.
Mortgage servicing rights are periodically evaluated for impairment
by stratifying them based on predominant risk characteristics of the
underlying serviced loans. These risk characteristics include loan type
(fixed or adjustable rate), investor type (FHLMC, GNMA, private),
term, and note rate. Impairment represents the excess of cost of an
individual mortgage servicing rights stratum over its estimated fair
value, and is recognized through a valuation allowance.
Fair values for individual strata are based on the present value of
estimated future cash flows using a discount rate commensurate with
the risks involved. Estimates of fair value include assumptions about
prepayment, default and interest rates, and other factors which are
subject to change over time. Changes in these underlying
assumptions could cause the fair value of loan servicing rights, and
the related valuation allowance, to change significantly in the future.
As of December 31, 1998 and 1997, the balance of capitalized loan
servicing rights included in other assets was $5,815,000 and
$4,522,000, with a fair market value of $6,865,000 and $5,867,000.
The amounts capitalized in 1998, 1997, and 1996 were $3,891,000,
$893,000, and $986,000 and the amounts amortized to loan servicing
income were $1,823,000, $819,000, and $92,000. There was a
valuation allowance of $45,000 at December 31, 1998, all of which
was provided during 1998.
(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 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 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 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.
<PAGE> 29
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. Allocations on
impaired loans are considered in relation to the overall adequacy of
the allowance for loan losses and adjustments are made to the
provision for loan losses as deemed necessary.
The recorded investment in impaired loans is periodically adjusted to
reflect cash payments, revised estimates of future cash flows, and
increases in the present value of expected cash flows due to the
passage of time. Cash payments representing interest income are reported as
such. Other cash payments are reported as reductions in recorded investment.
Increases or decreases due to changes in estimates of future
payments and the passage of time are considered in relation to the
overall adequacy of 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. Basic earnings per share for 1998, 1997, and
1996 were computed by dividing net earnings by the weighted
average shares of common stock outstanding (12,735,570,
12,643,615 and 12,433,282, in 1998, 1997, and 1996, respectively).
Diluted earnings per share for 1998, 1997, and 1996 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
(13,256,972, 13,050,746, and 12,920,510 in 1998, 1997 and 1996,
respectively). Dilution of the per-share calculation relates to stock
options.
(K) Premises and Equipment. Premises and equipment are carried at
cost, less accumulated depreciation and amortization. Depreciation
and amortization are provided on a straight-line basis over the
estimated useful lives of the various classes of assets.
(L) Cash and Cash Equivalents. For purposes of reporting cash
flows, cash and cash equivalents include cash on hand, amounts due
from banks, interest-bearing deposits with banks, and federal funds
sold. Generally, federal funds are sold for one-day periods. All cash
and cash equivalents mature within 90 days.
(M) Reclassification. Certain amounts in the 1997 and 1996
Consolidated 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 Federal 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. Comprehensive income is the total of
net income and all nonowner changes in equity as required by FAS
130 which was adopted as of December 31, 1997.
<PAGE> 30
(2) Investments and Their Scheduled Maturities
<TABLE>
<CAPTION>
Investments Available for Sale:
December 31,
----------------------------------------------------------------------
1998 1997
------------------------------------ ----------------------------------
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 $73,497 $632 $ - $74,129 $83,355 $222 $ (42) $83,535
Corporate Debt Securities 22,416 259 - 22,675 10,281 149 - 10,430
Asset-Backed Securities 16,392 - (57) 16,335 11,884 37 - 11,921
Other 145 7 - 152 200 9 - 209
------------------------------------ ----------------------------------
$112,450 $898 $ (57)$113,291 $105,720 $417 $ (42)$106,095
==================================== ==================================
</TABLE>
<TABLE>
<CAPTION>
Scheduled Maturities:
December 31, 1998
------------------------------------------------------------------------------
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 $28,485 $28,607 5.89% $ 2,534 $ 2,552 9.88% $ - $ - -%
After One Year to
Five Years 45,012 45,522 5.72 19,882 20,123 6.74 - - -
After Five Years to
Ten Years - - - - - - 11,452 11,452 6.57
After Ten Years - - - - - - 4,940 4,883 6.63
---------------- ---------------- ----------------
$73,497 $74,129 $22,416 $22,675 $16,392 $16,335
================ ================ ================
As required by SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities, First Indiana continually reassesses the
classification of securities as either available-for-sale or
held-to-maturity. During the third quarter of 1998, management
changed its positive intent to hold held-to-maturity investments and
mortgage-backed securities. Accordingly, the entire portfolios of
mortgage-backed securities with an amortized cost of $19,274,000
and investment securities with an amortized cost of $5,243,000 were
transferred from held-to-maturity to available-for-sale. At the time of
the transfer, these mortgage-backed securities and investment
securities had unrecognized gains of $374,000 and $86,000,
respectively, which were recognized as a separate component of
accumulated other comprehensive income. Management elected to
transfer these securities which had been previously designated as
held-to-maturity.
<PAGE> 31
<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 $ - $ - -% $31,019 $31,159 6.22%
After One Year to
Five Years 145 152 6.50 65,039 65,797 6.04
After Five Years to
Ten Years - - - 11,452 11,452 6.57
After Ten Years - - - 4,940 4,883 6.63
------------- ----------------
$145 $152 $112,450 $113,291
============= ================
</TABLE>
The weighted average yield on investments available for sale was 6.17
percent at December 31, 1998 and 6.05 percent at December 31, 1997.
At December 31, 1998, 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. 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.
In 1998, realized gains (losses) from the sale of investment securities
available for sale were $401,000 and $(6,000). 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).
The following table discloses the reclassification adjustments, net of
tax, for Comprehensive Income:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
-----------------------------
<S> <C> <C> <C>
Unrealized Holding Gains (Losses)
Arising During the Period $335 $ 526 $(300)
Reclassification Adjustment for
Gains Included in Net Earnings (235) (129) (167)
------------------------------
Net Unrealized Gain (Loss) on
Securities Available for Sale $100 $ 397 $(467)
==============================
</TABLE>
<TABLE>
<CAPTION>
Investments Held to Maturity:
December 31,
----------------------------------------
1997
----------------------------------------
Unreal- Unreal-
Book ized ized Market
(Dollars in Thousands) Value Gains Losses Value
----------------------------------------
<S> <C> <C> <C> <C>
Asset-Backed Securities $5,305 $114 $ - $ 5,419
-----------------------------------------
$ 5,305 $ 114 $ - $ 5,419
=========================================
</TABLE>
There were no held-to-maturity investment securities at December 31, 1998.
The average yield on investments held to maturity was 7.56 percent
at December 31, 1997. In 1997 and 1996, there were no realized gains
or losses from the sale of held-to-maturity investment securities.
<PAGE> 32
(3) Mortgage-Backed Securities
<TABLE>
<CAPTION>
Available for Sale:
December 31, 1998
------------------------------------------------
Unreal- Unreal-
Book ized ized Market
Value Gains Losses Value
(Dollars in Thousands) ------------------------------------------------
<S> <C> <C> <C> <C>
FHLMC $ 8,085 $ 132 $ - $ 8,217
FNMA 6,501 132 - 6,633
Participation Certificates 14,789 105 (64) 14,830
Deferred Income and Net Unearned Discounts 432 - (432) -
------------------------------------------------
$ 29,807 $ 369 $ (496) $ 29,680
================================================
<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
Deferred Income and Net Unearned Discounts 87 - (87) -
------------------------------------------------
$ 16,906 $ 258 $ (87) $ 17,077
================================================
</TABLE>
The weighted average yield on mortgage-backed securities available
for sale was 4.95 and 6.96 percent at December 31, 1998 and 1997,
and the majority of the securities have maturities in excess of 10
years. Realized gains on the sale of mortgage-backed securities
available for sale in 1998 were $368,000.
<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
================================================
</TABLE>
There were no held-to-maturity mortgage-backed securities at
December 31, 1998. The weighted average yield on
mortgage-backed securities held to maturity was 7.19 percent at
December 31, 1997. 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 the sale of mortgage-backed securities near maturity were
$221,000.
(4) Loans Receivable
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
(Dollars in Thousands) ----------------------------
<S> <C> <C>
Residential Mortgage Loans
Loans Held for Sale $ 66,469 $ 32,690
Loans Held in Portfolio 465,654 468,128
Residential Construction Loans 406,650 253,259
Commercial Real Estate Loans 32,813 39,748
Business Loans 189,074 137,517
Consumer Loans
Home Equity Loans Held for Sale 45,929 24,828
Home Equity Loans Held in Portfolio 520,003 503,357
Installment Loans 10,334 14,994
Other Consumer Loans 4,259 4,837
Undisbursed Portion of Loans
Residential Construction Loans (190,591) (97,579)
Business Loans (10,141) (13,050)
Deferred Income and Net Unearned Discounts 3,790 2,214
Allowance for Loan Losses (25,700) (22,414)
----------------------------
$1,518,543 $1,348,529
===========================
</TABLE>
<PAGE> 33
(4) Loans Receivable (continued)
The weighted average yield on loans was 8.48 percent and 9.06 percent
at December 31, 1998 and 1997. Loans serviced for others amounted
to $908,582,000 and $969,089,000 at December 31, 1998 and 1997.
Over 70 percent of First Indiana's residential construction and
permanent mortgage loans are secured by collateral located in
Indiana, with another 12 percent and 10 percent located in North Carolina
and Florida. Over 58 percent of the Bank's consumer loans are secured by
collateral located in Indiana and its contiguous states, with 36 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 $168 million, $72 million,
and $63 million in fixed-rate loans were sold in 1998, 1997, and
1996. In addition, at December 31, 1998 and 1997, the Bank had
classified $45,929,000 and $24,828,000 of home equity loans as held
for sale.
During 1998, 1997, and 1996, the Bank transferred $9,572,000,
$7,922,000 and $7,216,000 from loans to real estate owned.
(5) Allowance for Loan and REO Losses
A summary of activity in the allowance for loan and REO losses for
the years ended December 31, 1998, 1997, and 1996 follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1998 1997 1996
(Dollars in Thousands) -------------------------------------
<S> <C> <C> <C>
Balance of Allowance for Loan Losses at Beginning of Year $22,414 $18,768 $16,234
Charge-Offs
Residential Mortgage (91) (83) (9)
Residential Construction (658) (1,190) (360)
Commercial Real Estate (93) (75) -
Consumer (6,934) (7,210) (9,592)
Business (15) (528) -
------------- ------------- -------
Total Charge-Offs (7,791) (9,086) (9,961)
------------- ------------- -------
Recoveries
Residential Mortgage 2 - 26
Residential Construction 270 40 69
Commercial Real Estate - 727 135
Consumer 986 1,261 1,429
Business 39 4 42
------------- ------------- -------
Total Recoveries 1,297 2,032 1,701
------------- ------------- -------
Net Charge-Offs (6,494) (7,054) (8,260)
------------- ------------- -------
Provision for Loan Losses 9,780 10,700 11,815
Recapture of Loan Loss Provision
Due to Auto Portfolio Sale - - (1,021)
------------- ------------- -------
Balance of Allowance for Loan Losses at End of Year 25,700 22,414 18,768
Balance of REO Loss Allowance at End of Year 500 483 543
------------------------------------
Balance of Loan and REO Loss Allowance at End of Year $26,200 $22,897 $19,311
====================================
</TABLE>
A summary of activity in the allowance for REO losses for the years
ended December 31, 1998, 1997, and 1996 follows.
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997 1996
-------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at Beginning of Year $ 483 $ 543 $1,066
REO Recoveries (Charge-Offs) 179 (60) (123)
Recapture of REO Loss Provision (162) - (400)
-------------------------
Balance at End of Year $ 500 $ 483 $ 543
=========================
</TABLE>
(6) Premises and Equipment
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
(Dollars in Thousands) ---------------------------
<S> <C> <C>
Land $ 2,710 $ 2,313
Buildings 8,800 8,769
Leasehold Improvements 1,373 1,343
Furniture, Fixtures, and Equipment 22,822 16,679
Accumulated Depreciation and Amortization (17,159) (15,157)
---------------------------
$18,546 $13,947
==========================
</TABLE>
<PAGE> 34
(7) Deposits
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------
1998 1997
------------------------------- --------------------------------
Weighted Weighted
(Dollars in Thousands) Average Average
Amount Percent Rate Amount Percent Rate
Type ------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-Interest Bearing Checking $ 129,043 10.51% - % $ 90,612 8.18% - %
NOW Checking 102,068 8.31 1.87 99,289 8.97 2.53
Money Market Checking 237 0.02 1.30 2,095 0.19 2.39
Passbook and Statement Savings 365,641 29.78 4.48 302,589 27.32 4.63
Money Market Savings 11,087 0.90 2.61 11,748 1.06 3.27
Jumbo Certificates of Deposit
of $100 or Greater 169,988 13.84 5.49 120,756 10.90 5.85
Fixed-Rate Certificates of Deposit 449,854 36.64 5.40 480,466 43.38 5.70
----------------- -----------------
$1,227,918 100.00% 4.25 $1,107,555 100.00% 4.64
========= =========
<CAPTION>
Maturity Amount Percent Amount Percent
------------------ ------------------
<S> <C> <C> <C> <C>
Checking $ 231,348 18.85% $ 191,996 17.34%
Passbook and Statement Savings 365,641 29.78 302,589 27.32
Money Market Savings 11,087 0.90 11,748 1.06
Certificates of Deposit Maturing in
One Year 377,656 30.76 390,051 35.22
Two Years 183,256 14.92 123,231 11.13
Three Years 33,264 2.71 80,450 7.26
Four Years 21,771 1.77 4,553 0.41
Five Years 3,895 0.31 2,937 0.26
------------------ ------------------
$1,227,918 100.00% $1,107,555 100.00%
================== ==================
</TABLE>
Interest expense for the years ended December 31, 1998, 1997, and
1996 was as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31,
-----------------------------------
1998 1997 1996
-----------------------------------
<S> <C> <C> <C>
NOW and Money Market Checking $ 2,570 $ 2,473 $ 2,531
Passbook, Statement, and
Money Market Savings 15,596 14,317 13,529
Certificates of Deposit 36,769 33,146 36,017
-----------------------------------
$54,935 $49,936 $52,077
===================================
</TABLE>
Official checking accounts at December 31, 1998 and 1997 were
$51,293,000 and $32,517,000, respectively. Included in official
checking accounts at December 31, 1998 and 1997 were $4,285,000
and $4,624,000 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
the Bank's customers' deposits. As a result of this one-time
assessment, the Corporation's deposit insurance premiums were
reduced for years after 1996. Cash paid during the year for interest
on deposits, advances, and other borrowed money was $73,149,000,
$63,654,000 and $64,482,000 for 1998, 1997, and 1996.
<PAGE> 35
(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) 1998 1997
--------------------------------- -------------------------
Interest Interest
Rates Amount Rates Amount
--------------------------------- -------------------------
<S> <C> <C> <C> <C>
Maturity
1998 -% $ - 4.98 to 5.95% $ 87,000
1999 5.00 to 6.29 152,000 5.13 to 6.29 92,000
2000 5.52 to 6.01 100,000 5.52 to 6.01 75,000
2001 4.99 to 5.61 35,000 - -
2002 - - - -
2003 5.24 to 5.74 25,000 - -
Thereafter 2.75 to 8.57 15,247 3.50 to 8.57 3,458
-------- ---------
$327,247 $257,458
======== ========
</TABLE>
The weighted average interest rate on advances was 5.44 and 5.62
percent at December 31, 1998 and 1997. 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. Additionally, First Indiana maintains a $5,000,000 line of
credit with the FHLB. As of December 31, 1998 and 1997, First
Indiana had sufficient collateral under this agreement.
(9) Other Borrowings
Short-term borrowings represent federal funds purchased and
repurchase agreements. At December 31, 1998 and 1997, short-term
borrowings had balances of $54,219,000 and $75,751,000 with
weighted average interest rates of 4.81 and 5.48 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 $51,166,000 and $38,899,000 during 1998 and 1997, and
the maximum amounts outstanding at the end of any month during
1998 and 1997 were $62,620,000 and $84,896,000. The carrying
value of the underlying securities at December 31, 1998 and 1997
was $53,866,000 and $76,296,000 with market values of
$53,866,000 and $76,741,000. These securities are under the Bank's
control.
First Indiana had $38,000,000 and $48,000,000 in unused lines of
credit available from local financial institutions, the Federal Reserve
Bank, and the FHLB of Indianapolis at December 31, 1998 and
1997. 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, 1998:
Federal $ 9,611 $ (374) $ 9,237
State and Local 2,706 (99) 2,607
----------------------------------------
$12,317 $ (473) $11,844
========================================
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
========================================
</TABLE>
The effective income tax rate differs from the statutory federal
corporate tax rate as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Statutory Rate 35.0% 35.0% 35.0%
State Income Taxes 5.5 5.5 5.1
Negative Goodwill (0.9) (1.0) (1.4)
Non-Taxable Interest Income (0.1) (0.1) (0.3)
Other (0.1) (0.2) (0.7)
-------------------------------------
Effective Rate 39.4% 39.2% 37.7%
=====================================
</TABLE>
<PAGE> 36
Deferred income tax assets and liabilities 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 net
deferred tax assets included in other assets are presented below:
<TABLE>
<CAPTION>
(Dollars in Thousands)
Deferred Tax Assets 1998 1997
--------------------------
<S> <C> <C>
Allowance for Loan and REO Losses $10,738 $ 9,400
Pension and Retirement Benefits 3,012 2,750
Interest Credited 205 194
Premises and Equipment 273 275
Excess Servicing 11 29
Accrued Compensation 679 328
Other 577 328
-------------------------
15,495 13,304
-------------------------
Deferred Tax Liabilities
Loan Servicing Rights 1,589 641
FHLB Stock Dividends 574 574
Interest on Proposed Tax Deficiency - 79
Net Deferred Loan Fees 4,487 3,388
Excess Tax Reserves 243 324
Unrealized Gain on Investments 289 221
Other 51 220
-------------------------
7,233 5,447
-------------------------
Net Deferred Tax Assets $ 8,262 $ 7,857
=========================
</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 $11,187,000,
$11,360,000 and $8,013,000 for 1998, 1997, and 1996.
(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, 1998, the Bank's risk-based capital
exceeded the minimum requirement.
Savings institutions are also required to maintain a minimum leverage
ratio, under which core (Tier One) capital must equal at least three
percent of total assets. The components of core capital consist of
common equity plus non-cumulative preferred stock and minority
interests in consolidated subsidiaries, minus certain intangible assets,
including purchased loan servicing. Savings institutions must also
maintain minimum tangible capital of one and one-half percent of
total assets. At December 31, 1998, 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
<PAGE> 37
"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, 1998 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, 1998, First Indiana does not expect
to be required to add to its risk-based capital under the proposed
regulations.
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, 1998 and 1997. First Indiana is
classified as "well-capitalized" under the OTS regulatory framework
for prompt corrective action, its highest classification. To be
categorized as "well-capitalized," the Bank must maintain minimum
total risk-based, tier one risk-based and tier one leverage ratios as set
forth in the table.The table reflects categories of assets includable
under OTS regulations. There are no conditions or events since the
date of classification that management believes have changed the
Bank's category.
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, 1998, the liquidation accounts relating to all prior transactions
aggregated $12,907,000, which amount satisfies the minimum
required of each. The Bank is not permitted to pay dividends on its
common stock if its shareholders' equity would be reduced below the
aggregate amount then required for the liquidation accounts.
The Corporation is not subject to any regulatory restrictions on the
payment of dividends to its shareholders. However, the Bank may
not declare or pay a cash dividend on its stock if, as a result, the
Bank's capital would be reduced below the minimum requirements.
The Bank is required to give OTS 30 days' advance notice before
declaring a dividend. Under OTS regulations, the Bank may, without
prior OTS approval, make capital distributions to the Corporation of
up to all of the Bank's net earnings over the most recent four-quarter
period, less capital distributions made during such four-quarter
period.
In November 1997, the Corporation's Board of Directors established a share-
<TABLE>
<CAPTION>
December 31, 1998
(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) $139,992 7.80% $26,915 1.50% $ N/A N/A
Core (Tier One)
Capital 139,992 7.80 53,831 3.00 89,718 5.00%
Tier One Risk-
Based Capital 139,992 10.10 N/A N/A 83,190 6.00
Total Risk-
Based Capital (2) 155,839 11.24 110,919 8.00 138,649 10.00
First Indiana Bank
Capital 140,417 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 $425.
(2) Risk-based capital includes a $17,434 addition for general loan loss
reserves and a $1,587 deduction for land loans with loan-to-value
ratios in excess of 80 percent.
</TABLE>
<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>
<PAGE> 38
holder 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 March 1998, the Corporation paid a six-for-five stock dividend. In
March 1997, the Corporation effected a five-for-four stock split. All
per-share amounts in this Annual Report have been adjusted to
reflect the stock dividend and split.
(12) Commitments and Contingencies
At December 31, 1998 and 1997, First Indiana had the following
outstanding commitments to fund loans:
<TABLE>
<CAPTION>
(Dollars in Thousands)
December 31,
-------------------------
1998 1997
-------------------------
<S> <C> <C>
Commitments to Fund:
Residential Mortgage Loans $252,576 $ 83,109
Commercial Real Estate Loans 16,422 8,796
Consumer Loans:
Home Equity Loans 155,447 133,470
Other 7,226 5,492
-------------------------
$431,671 $230,867
=========================
</TABLE>
Of the commitments to fund loans at December 31, 1998, nearly 90
percent are commitments to fund variable-rate products, while the
remaining 10 percent are commitments to fund fixed-rate products.
Commitments to sell loans at December 31, 1998 and 1997 were
$134,198,000 and $45,379,000.
At December 31, 1998, the Corporation had approximately
$5,822,000 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 the loan. 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 speculative homes. The Bank receives a fee
upon issuing the lines of credit. At December 31, 1998, First Indiana
had outstanding lines of credit totaling $152,730,000, with
$87,552,000 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, 1998, First Indiana had a letter of credit
outstanding totaling $5,762,000. 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, 1998 require minimum future
payments of $1,671,000 in 1999, $1,565,000 in 2000, $1,474,000 in
2001, $1,363,000 in 2002, $1,126,000 in 2003, and $4,330,000
thereafter. Minimum future payments have not been reduced by
minimum sublease rental income of $348,000 receivable in the future
under non-cancelable subleases. Rental expense on office buildings
was $1,637,000, $1,616,000 and $1,956,000, for 1998, 1997, and
1996.
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.
(13) Employee Benefit Plans
Retirement Plans. 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.
<PAGE> 39
Net periodic pension expense for the plan consists of the following:
<TABLE>
<CAPTION>
(Dollars in Thousands) Years Ended December 31,
-------------------------
1998 1997 1996
------------------------
<S> <C> <C> <C>
Service Cost-Benefits Earned During the Year $198 $150 $156
Interest Cost on Projected Benefit Obligation 486 440 359
Net Amortization and Deferral 60 29 13
------------------------
Net Pension Costs $744 $619 $528
========================
</TABLE>
The funded status of the plan and the amounts reflected in the accompanying
consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31,
-----------------------
1998 1997
-----------------------
<S> <C> <C>
Projected Benefit Obligation $7,861 $6,849
Fair Value of Plan Assets - -
-----------------------
Excess of Projected Benefit Obligation Over
Fair Value of Plan Assets 7,861 6,849
Unrecognized Net Transition Obligation (182) (182)
Unrecognized Loss (1,403) (1,097)
-----------------------
Accrued Pension Cost $6,276 $5,570
=======================
</TABLE>
The unrecognized net transition obligation is being amortized over 15
years. The projected benefit obligations were determined using an
assumed discount rate of 6.75 percent and 7.00 percent at December
31, 1998 and 1997. The assumed long-term salary increases were 5
percent at December 31, 1998 and December 31, 1997, compounded
annually.
Additionally, 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, 1998, the date
of the latest actuarial valuation. Pension expense was $12,000,
$59,000 and $30,000 for 1998, 1997, and 1996.
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 $172,000, $129,000 and $80,000 in 1998,
1997, and 1996.
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
$752,000 and $714,000, and the accrued liability was $1,094,000
and $1,056,000 at December 31, 1998 and 1997. Expense under the
programs was $38,000 in 1998, $35,000 in 1997 and $28,000 in
1996.
The accumulated post-retirement benefit obligation was determined
using an assumed discount rate of 7.00 percent and 7.50 percent at
December 31, 1998 and 1997. The assumed long-term salary
increase was 5.00 percent for 1998 and 1997. The assumed health
care cost trend rates used were 7 percent for 1998, 6 percent for
1999 and 5.50 percent for 2000 and later years. 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 $777,000,
$660,000, and $860,000 in 1998, 1997, and 1996. The compensation
cost that has been charged against income for the Employees' Stock
Purchase Plan was $184,000, $153,000 and $141,000 in 1998, 1997,
and 1996. 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 earnings and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
----------- -------------- ----------
<S> <C> <C> <C>
Net Earnings
As Reported $19,147 $17,744 $13,704
Pro Forma 18,704 17,675 13,360
Basic Earnings Per Share
As Reported $ 1.50 $ 1.40 $ 1.10
Pro Forma 1.46 1.40 1.07
Diluted Earnings Per Share
As Reported $ 1.44 $ 1.36 $ 1.06
Pro Forma 1.41 1.35 1.03
</TABLE>
The effects of applying FAS No. 123 in this pro forma disclosure are
not indicative of future amounts.
<PAGE> 40
A summary of the status of First Indiana's fixed stock option plans as of
December 31, 1998, 1997, and 1996, and changes during the years ended on
those dates is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------- -------------------
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 688,076 $ 8.33 863,903 $ 7.16 754,723 $ 5.64
Granted 119,316 23.52 25,479 16.30 156,881 14.43
Exercised (139,147) 6.37 (201,306) 4.32 (47,701) 6.95
Surrendered (6,347) 24.67 -- -- -- --
------- ------- -------
Outstanding at End of
Year 661,898 11.32 688,076 8.33 863,903 7.16
======= ======= =======
Options Exercisable
at Year End 548,902 662,597 707,022
======= ======= =======
Weighted Average Fair
Value of Options
Granted During the
Year $ 6.25 $ 4.54 $ 3.68
======= ======= =======
</TABLE>
Fixed Stock Option Plans. First Indiana has three fixed stock option
plans: the 1991 Stock Option and Incentive Plan, the 1992 Directors'
Stock Option Plan, and the 1998 Stock Option and Incentive Plan.
Under the 1991 and 1998 Plans, First Indiana is authorized to grant
options to its employees for up to 562,500 and 630,000 shares of
common stock, respectively. 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 all 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 1998, 1997, and
1996: dividend yield of 3.0 percent for all years; expected volatility
of 23 percent for all years; weighted average risk-free interest rates
of 5.66 percent, 6.89 percent, and 5.75 percent respectively; and
expected lives of seven years for all years.
The following table summarizes information about fixed stock
options outstanding at December 31, 1998:
<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 12/31/98 Life Price At 12/31/98 Price
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 3 -$7 276,290 2.84 $ 5.87 276,290 $5.87
$7.01-$15 229,152 5.81 10.93 229,152 10.93
$ 15 -$28 156,456 8.76 22.49 43,460 16.26
----------------------------------------------------------------------------------
$ 3-$28 661,898 4.97 11.32 548,902 8.80
</TABLE>
In addition to the options outstanding at December 31, 1998,
759,545 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
<PAGE> 41
met on December 31, 1996, and the restrictions on the shares lapsed. In
connection with these awards, First Indiana expensed $860,000 in
1996.
On January 23, 1997, First Indiana awarded 43,500 shares of stock
among three executive officers. On April 15, 1998, First Indiana
awarded 6,000 shares of stock to an executive officer. All of 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 $777,000 and $660,000 in 1998
and 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 38 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 1998, 1997 and
1996 plan years. First Indiana's matching contributions for the years
ended 1998, 1997, and 1996 were $184,000, $153,000 and
$141,000.
(14) Parent Company Statements
<TABLE>
<CAPTION>
Condensed Balance Sheets
December 31,
--------------------------
1998 1997
(Dollars in Thousands) ------------------ -------
<S> <C> <C>
Assets
Certificate of Deposit and Interest-Bearing
Checking Account with the Bank $ 501 $ 501
Due from Bank 23,575 16,595
Investment in the Bank 140,418 135,315
Other Assets 1,476 689
---------------------------
Total Assets $165,970 $153,100
===========================
Liabilities $ - $ 64
Shareholders' Equity 165,970 153,036
---------------------------
Total Liabilities and Shareholders' Equity $165,970 $153,100
===========================
<CAPTION>
Condensed Statements of Earnings
Years Ended December 31,
--------------------------------
1998 1997 1996
(Dollars in Thousands) ----------------------------------
<S> <C> <C> <C>
Cash Dividends from the Bank $15,295 $14,241 $ 9,951
Interest Income on Certificate of Deposit and Checking Account 28 27 26
Expenses (1,965) (240) (216)
Income Tax Credit 786 81 73
------------ ------------ -------
Earnings Before Equity in Undistributed Net Earnings
of the Bank 14,144 14,109 9,834
Equity in Undistributed Net Earnings of the Bank 5,003 3,635 3,870
----------------------------------
Net Earnings $19,147 $17,744 $13,704
==================================
<PAGE> 42
<CAPTION>
Condensed Statements of Cash Flows
Years Ended December 31,
----------------------------------
1998 1997 1996
(Dollars in Thousands) ----------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Earnings $19,147 $17,744 $13,704
Adjustments to Reconcile Net Earnings to Net Cash Provided
by Operating Activities
Equity in Undistributed Earnings of the Bank (5,003) (3,635) (3,870)
Amortization of Restricted Stock Plan 427 363 473
Change in Other Liabilities (64) 127 22
Change in Due from the Bank and Other Assets (7,767) (10,391) (5,980)
---------------------------------
Net Cash Provided by Operating Activities 6,740 4,208 4,349
---------------------------------
Cash Flows from Financing Activities
Stock Option Proceeds 702 367 331
Common Stock Issued Under Deferred Compensation Plan 65 (24) (20)
Purchase of Treasury Stock (2,242) (132) -
Payment for Fractional Shares (10) (12) (16)
Tax Benefit of Option Compensation 870 656 -
Dividends Paid (6,125) (5,063) (4,644)
--------------------------------
Net Cash Used by Financing Activities (6,740) (4,208) (4,349)
--------------------------------
Net Change 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>
(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>
1998
Total Interest Income $32,868 $33,991 $34,551 $34,424
Net Interest Income 15,431 15,562 15,646 16,115
Provision for Loan Loss 2,820 2,320 2,320 2,320
Earnings Before Income Taxes 7,278 7,524 8,174 8,015
Net Earnings 4,418 4,617 5,003 5,109
Basic Earnings Per Share 0.35 0.36 0.39 0.40
Diluted Earnings Per Share 0.33 0.35 0.38 0.39
<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
</TABLE>
(16) Estimated Fair Value of Financial Instruments
The table on the next page 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. For securities held for trading purposes and
securities held for investment purposes, fair values are based on
quoted market prices or dealer quotes.
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-gov-
<PAGE> 43
ernmental agencies is estimated based on similar securities with quoted
market prices and adjusted for any differences in credit ratings or
maturities.
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. Interest
rates on such loans approximate current lending rates.
Deposits. The fair value of demand deposits, savings accounts, and
certain money market deposits is the amount payable on demand at
the reporting date. The fair value of fixed-maturity certificates of
deposit is estimated using the rates currently offered for deposits of
similar remaining maturities.
Borrowings. Rates currently available to the Corporation for debt
with similar terms and remaining maturities are used to estimate fair
value of existing debt.
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 rights 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) Segment Reporting
The Corporation's business units are primarily organized to operate
in the banking industry, and are determined by the products and
services offered. The consumer segment includes the origination, sale
and portfolio activities of both home equity and installment loans,
and the residential segment encompasses the portfolio of both
residential first mortgage and Community Reinvestment Act loans.
The business segment originates construction, commercial and
commercial real estate loans, and provides traditional cash
management services to business customers. Investment portfolio
management is included in the treasury segment. Mortgage banking
activities include the orig-
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
-------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
(Dollars in Thousands) Amount Value Amount Value
-------------------------------------
<S> <C> <C> <C> <C>
Assets
Cash and Cash Equivalents $57,653 $57,653 $50,231 $50,231
Investment Securities 113,291 113,291 111,400 111,514
Mortgage-Backed Securities 29,680 29,680 38,279 38,626
Loans Receivable
Residential Mortgage Loans 535,515 542,035 502,624 516,416
Residential Construction Loans 211,446 211,012 152,017 151,935
Commercial Real Estate Loans 32,304 33,402 39,238 39,413
Business Loans 176,206 177,522 122,459 122,117
Consumer Loans 571,017 585,212 538,310 543,490
Accrued Interest Receivable 11,680 11,680 11,322 11,322
Liabilities
Deposits
Demand Deposits 215,457 215,457 191,996 191,996
Passbook Deposits 41,233 41,233 42,004 42,004
Money Market Savings 351,387 351,387 272,333 272,333
Jumbo Certificates 171,171 171,579 122,825 123,093
Fixed-Rate Certificates 448,670 454,845 478,397 482,603
Borrowings
FHLB Advances 327,247 328,936 257,458 256,657
Short-Term Borrowings 54,219 54,228 75,751 75,743
Accrued Interest Payable 2,646 2,646 2,715 2,715
Advances by Borrowers for
Taxes and Insurance 1,958 1,958 1,419 1,419
Off-Balance-Sheet Instruments
(Unrealized Gains (Losses))
Commitments to Extend Credit - 137 - 129
Letters of Credit - (2) - (279)
Loan Servicing Rights (Unaudited) - 2,589 - 5,075
</TABLE>
<PAGE> 44
ination, sale and servicing of residential loans. The retail segment includes
the Bank's 27-branch network, as well as the relatively newer virtual
banking services. One Insurance Agency offered insurance products
and services to the Bank's customers until it was sold in 1996.
Revenues in the Corporation's segments are generated from loans, deposits,
investments, servicing fees and loan sales. There are no foreign operations.
The segment financial information provided below is based on the
internal management reporting software used by the Corporation's
Executive Committee to monitor and manage the financial
performance of the Corporation. The Corporation evaluates segment
performance based on average assets and profit or loss before income
taxes and indirect expenses. Indirect expenses include the
Corporation's overhead and support expenses. The Corporation
attempts to match fund each business unit by reviewing the earning assets
and costing liabilities held by each unit and assigning an appropriate
expense or income offset based on the Treasury yield curve. The Corporation
accounts for intersegment revenues, expenses and transfers based
on estimates of the actual costs to perform the intersegment services.
<TABLE>
<CAPTION>
1998
Resi- Mortgage Segment Intersegment Consolidated
Consumer dential Business Treasury Banking Retail Totals Eliminations Totals
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average Segment Assets $557,676 $464,118 $352,883 $183,107 $120,109 $46,939 $1,724,832 $(9,817) (1) $1,715,015
Net Interest Income 14,663 3,051 13,486 1,003 2,233 9,927 44,364 18,390 (2) 62,753
Other Revenue from
External Customers 6,399 113 3,661 1,917 4,955 3,259 20,305 3,468 (3) 23,773
Intersegment Revenues 5,369 (1,678) (1,551) 0 8,662 2,666 13,468 (13,468) (4) 0
Significant noncash items:
Provision for Loan Losses 7,076 136 2,568 0 0 0 9,780 0 9,780
Segment Direct Profit (Loss) 16,384 1,350 10,697 2,576 10,569 2,871 44,448 (13,456) (3) 30,991
<CAPTION>
1997
Resi- Mortgage Segment Intersegment Consolidated
Consumer dential Business Treasury Banking Retail Totals Eliminations Totals
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average Segment Assets $542,438 $433,857 $296,966 $177,659 $ 27,673 $38,404 $1,516,997 $(6,504) (1) $1,510,493
Net Interest Income 18,399 4,153 11,056 365 270 18,375 52,618 10,361 (2) 62,979
Other Revenue from
External Customers 3,109 118 2,783 1,418 4,883 2,664 14,975 3,030 (3) 18,005
Intersegment Revenues (312) (1,061) 76 0 5,222 475 4,400 (4,400) (4) 0
Significant noncash items:
Provision for Loan Losses 9,281 152 1,267 0 0 0 10,700 0 10,700
Segment Direct Profit (Loss) 9,444 3,058 9,867 1,590 5,735 9,796 39,490 (10,310) (3) 29,180
<CAPTION>
One 1996
Resi- Mortgage Insur- Segment Intersegment Consolidated
Consumer dential Business Treasury Banking Retail ance Totals Eliminations Totals
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average Segment Assets $550,136 $411,591 $264,945 $189,672 $ 23,852 $43,522 $ 248 $1,483,966 $ 1,550 (1) $1,485,516
Net Interest Income 20,417 4,456 10,477 (400) 206 17,886 0 53,040 8,643 (2) 61,683
Other Revenue from
External Customers 1,249 101 2,943 1,333 5,194 2,477 1,770 15,068 2,780 (3) 17,848
Intersegment Revenues (281) (997) 94 0 5,193 274 (35) 4,248 (4,248) (4) 0
Significant noncash items:
Provision for Loan Losses 10,559 112 123 0 0 0 0 10,794 0 10,794
Segment Direct Profit (Loss) 8,261 3,448 12,020 759 6,066 7,325 1,455 39,334 (17,850) (3) 21,484
(1) Segment assets differ from consolidated assets due to reclassification adjustments (primarily related to income tax assets)
that are not reflected in the management reporting system.
(2) The net interest income amounts in the segment results reflect not only the actual interest income and expense from
segment activities, but also amounts for transfer income and expense to match fund each segment. Transfer income
and expense is assigned to each asset and liability based on the treasury yield curve. These match funding entries are not
made to the Corporation's actual results.
(3) Represents income and expense items which are allocated to Corporate overhead departments. These amounts are included in
the Corporation's overall results, but are not part of the managment reporting system.
(4) Intersegment revenues are received by one segment for performing a service for another segment. In the case of residential
and consumer portfolios, an amount is paid to the origination office which is capitalized in the portfolio and amortized
over a four-year period. These charges are similar to premiums paid for the purchase of loans, and are treated as such
for management reporting. These entries are not made to the Corporation's actual results.
</TABLE>
<PAGE> 45
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, 1998 and 1997 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, 1998. 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, 1998
and 1997 and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1998
in conformity with generally accepted accounting principles.
/s/KPMG LLP
Indianapolis, Indiana
January 19, 1999
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> 46
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 27 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 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 15, 1999, 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>
1998 1997
------------------------ --------------------------
Book Book
High Low Value High Low Value
------ ------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $30.00 $22.92 $12.27 $20.17 $15.31 $11.26
Second Quarter 27.38 23.75 12.54 18.75 14.48 11.48
Third Quarter 27.75 19.13 12.83 20.83 17.08 11.77
Fourth Quarter 22.13 17.38 13.07 26.46 19.58 12.08
</TABLE>
At December 31, 1998, there were approximately 1,600 shareholders of record
and 12,703,294 shares of common stock outstanding.
<PAGE> 47
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 LLP, 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 LLP 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 LLP 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 19, 1999
/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> 48
[inside back cover of annual report]
<PAGE>
[back cover of annual report]
First Indiana Corporation [logo]
First Indiana Bank
One Mortgage Corporation
FirstTrust Indiana
First Indiana Plaza
135 North Pennsylvania Street
Indianapolis, IN 46204
(317)269-1200
www.FirstIndiana.com
<PAGE>
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 Investment Corporation Delaware
One Property Corporation Indiana
Pioneer Service Corporation Indiana
<PAGE>
[FIC LETTERHEAD]
March 11, 1999
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 15, 1999 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 1998 as a comprehensive
provider of financial services emphasizing local decision-making,
customer relationships and personalized service. At the annual meeting,
we will review our achievements in 1998 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 15.
Sincerely,
/s/Robert H. McKinney
Robert H. McKinney,
Chairman and Chief
Executive Officer
<PAGE>
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 15, 1999, 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;
and
2. The transaction of such other business as may properly
come before the meeting and any adjournments
thereof.
Only shareholders of record at the close of business on February 16,
1999 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 11, 1999
<PAGE>
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" or "we") of proxies to be voted at the Annual Meeting
of Shareholders to be held on Thursday, April 15, 1999, and at any
adjournment thereof. The approximate date of mailing this proxy
statement is March 11, 1999. The following is important information
in a question-and-answer format regarding the Corporation, its wholly
owned subsidiary First Indiana Bank (the "Bank"), the Annual Meeting
and this Proxy Statement.
Q: What am I voting on?
You are voting on the election of three directors (Robert J.
Laikin, Marni McKinney and Phyllis W. Minott).
Q: Who is entitled to vote?
Shareholders as of the close of business on February 16, 1999
(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, 12,703,294 shares of the
Corporation's common stock were issued and outstanding.
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 on your behalf FOR the
three management nominees. 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
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?
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. Any other matter to come before the Annual Meeting will be
approved if the votes cast at the Annual Meeting (in person or
represented by proxy) in favor of such proposal exceed the votes
opposing such proposal. An abstention, non-vote, or broker non-vote
will not change the number of votes cast for or against the election of
any director or for or against any other matter to come before the
Annual Meeting.
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 executive
officers own?
Together, they own approximately 33.4% of the 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 2,758,467 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 3,416,379 shares (26.6%) 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 2000
meeting due?
The Corporation's 2000 Annual Meeting is currently
scheduled for April 13, 2000. To be considered for inclusion in next
year's Proxy Statement, shareholder proposals must be submitted in
writing by November 12, 1999 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
STOCK OWNERSHIP BY DIRECTORS, OFFICERS
AND CERTAIN SHAREHOLDERS
The following table shows, as of February 16, 1999, 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 51,644 1 2
Gerald L. Bepko 31,290 3 2
David L. Gray 72,714 4 2
Andrew Jacobs, Jr. 4,200 5 2
David A. Lindsey 112,619 6 2
Marni McKinney 3,416,379 7 26.6%
Robert H. McKinney 3,416,379 7 26.6%
Owen B. Melton, Jr. 302,804 8 2.4%
Phyllis W. Minott 33,430 9 2
Merrill E. Matlock 37,317 10 2
Michael L. Smith 42,172 11 2
The Somerset Group, Inc. 3,416,379 7, 12 26.6%
John W. Wynne 34,532 13 2
All Executive Officers and
Directors as a Group (15 Persons) 4,280,425 14 33.4%
</TABLE>
1 Includes 18,730 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").
<PAGE> 3
2 The number of shares represents less than one percent of the
Corporation's common stock outstanding.
3 Includes 1,354 shares held in trust under the First Indiana Bank
Directors' Stock Purchase Plan (the "Directors' Stock Purchase
Plan"), 3,241 shares held in trust under the Bank's Employees'
Stock Purchase Plan (the "Stock Purchase Plan"), and 26,222
shares as to which the director has the right to acquire beneficial
ownership as specified in Rule 13d-3(d)(1) under the Exchange
Act.
4 Includes 799 shares held in trust under the Stock Purchase Plan,
40,870 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 2,400 shares owned of record by Mr. Gray's spouse.
5 Includes 41 shares held in trust under the Stock Purchase Plan,
3,746 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 413 shares held in trust under the Directors' Stock
Purchase Plan.
6 Includes 1,125 shares held in trust under the Stock Purchase Plan
and 30,447 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 516,903 shares of
the Corporation, including 725 shares held in trust under the
Stock Purchase Plan, 76,119 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 18,000 shares of restricted stock under the Corporation'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 42% of the outstanding capital stock of Somerset,
which owns of record 2,758,467 shares of the Corporation. The
total held by the group also includes 64,890 shares of the
Corporation owned by Mr. McKinney's daughter, Marni
McKinney, including 3,876 shares held in trust under the Stock
Purchase Plan, 40,301 shares as to which she has the right to
acquire beneficial ownership as specified in Rule 13d-3(d)(1)
under the Exchange Act, 1,837 shares held on her behalf under
the Bank's 401(k) Plan, 7,500 shares of restricted stock under the
Corporation's 1997-1999 Long-Term Incentive Plan, and 6,000
shares of restricted stock under the 1991 Stock Option and
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 59,244 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, 10,187 shares held in trust under the
Stock Purchase Plan, 637 shares held on his behalf under the
Bank's 401(k) Plan, 107,996 shares owned of record jointly with
Mr. Melton's spouse, 61,874 owned of record by Mr. Melton's
spouse and 18,000 shares of restricted stock under the
Corporation's 1997-1999 Long-Term Incentive Plan.
9 Includes 4,603 shares held in trust under the Stock Purchase Plan,
201 shares held under the Corporation's Dividend Reinvestment
and Stock Purchase Plan (the "DR Plan"), 1,354 shares held
under the Directors' Stock Purchase Plan, 26,222 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 413 shares held
in trust under the Directors' Stock Purchase Plan.
10 Includes 618 shares held in trust under the Stock Purchase Plan,
26,022 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 283 shares held under the DR Plan.
11 Includes 26,222 shares as to which there is a right to acquire
beneficial ownership as specified in Rule 13d-3(d)(1) under the
Exchange Act.
12 The address of The Somerset Group, Inc. is 135 North
Pennsylvania Street, Suite 2800, Indianapolis, Indiana 46204.
This number includes 2,758,467 shares owned of record by The
Somerset Group, Inc. (see note 7).
<PAGE> 4
13 Includes 2,280 shares held in trust under the Stock Purchase Plan,
1,076 shares held under the DR Plan, 4,014 shares held under the
Directors' Stock Purchase Plan and 11,238 shares as to which there
is a right to acquire beneficial ownership as specified in Rule
13d-3(d)(l) under the Exchange Act.
14 31,951 shares held in trust under the Stock Purchase Plan, 1,769
shares held under the DR Plan, includes 7,135 shares held under
the Directors' Stock Purchase Plan, 4,392 shares held under the
Bank's 401(k) Plan, and 444,660 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 J. Laikin, Marni
McKinney and Phyllis W. Minott have been nominated for a term of
three years and until their successors are elected and qualified. Mr.
Laikin has been nominated to the Board of Directors for the first time.
If elected, Mr. Laikin will assume the position left vacant by H. J.
Baker. Mr. Baker's term will expire at the Annual Meeting. Having
reached the age of mandatory retirement from the Board of Directors,
Mr. Baker will not stand for re-election. The Board of Directors thanks
Mr. Baker for his years of dedicated service to the Corporation and the
Bank. Ms. McKinney and Ms. Minott 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. With the exception of Mr. Laikin, all of
the nominees and the other directors listed in the table below also are
members of the Board of Directors of the Bank. Mr. Laikin will be
elected to the Board of Directors of the Bank upon his election to the
Board of Directors of the Corporation at the Annual Meeting. 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.
[The remainder of this page is intentionally left blank]
<PAGE> 5
The Board of Directors unanimously recommends the election of
the following nominees.
<TABLE>
<CAPTION>
NOMINEES FOR TERMS EXPIRING IN 2002
Name, Age, Principal
Occupation(s) and
Business Experience Director
During Past 5 Years Since
- ----------------------------------------------------------------------------
<S> <C>
Robert J. Laikin, Age 35 --
Chairman and Chief Executive Office of Brightpoint, Inc., provider of
distribution and value-added logistics services to the wireless
communications industry; previously President of Brightpoint, Inc.
Marni McKinney, Age 42 1992
Vice Chairman of the Corporation and Chairman of the Bank; Director,
President, and Chief Executive Officer, The Somerset Group, Inc.,
an affiliate of the Corporation, financial services provider;
previously Executive Vice President of The Somerset Group, Inc.,
and Vice President of the Corporation and the Bank.
Phyllis W. Minott, Age 60 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.
<CAPTION>
DIRECTORS WHOSE TERMS EXPIRE IN 2001
Name, Age, Principal
Occupation(s) and
Business Experience Director
During Past 5 Years Since
- ------------------------------------------------------------------------------
<S> <C>
Robert H. McKinney, Age 73 1954
Chairman and Chief Executive Officer of the Corporation;
Chairman and Director, The Somerset Group, Inc., an
affiliate of the Corporation, financial services;
retired partner, Bose McKinney & Evans,
attorneys; Chairman, Federal Home Loan Bank Board, 1977-1979.
Owen B. Melton, Jr., Age 52 1983
President and Chief Operating Officer of the Corporation and
President and Chief Executive Officer of the Bank.
Michael L. Smith, Age 50 1985
Senior Vice President, Finance, Anthem, Inc. and Chief Financial
Officer, Anthem Midwest and Anthem Blue Cross and Blue Shield of
Connecticut, health care organization; formerly
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., an affiliate of the Corporation, and Finishmaster, Incorporated.
<PAGE> 6
<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 58 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 67 1997
Adjunct Professor, Indiana University-Purdue University at
Indianapolis; Attorney; Retired Member, United States Congress.
John W. Wynne, Age 66 1991
Director of Duke Realty Investments, Inc., a real estate investment
trust; previously Chairman, Duke Realty Investments, Inc. and partner,
Duke Associates, real estate development; retired as counsel
(previously partner), Bose McKinney & Evans, attorneys.
</TABLE>
During 1998, 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 Board 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 1998 were Phyllis W. Minott (Chairperson), H.J. Baker,
Andrew Jacobs, Jr., and John W. Wynne. The Audit Committee met
three times during 1998.
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 members
of the Compensation Committee during 1998 were Gerald L. Bepko
(Chairman), H.J. Baker, and Phyllis W. Minott. The Compensation
Committee met three times during 1998.
<PAGE> 7
Compensation of Directors
Directors of the Corporation and the Bank, other than Robert
H. McKinney, Marni McKinney and Owen B. Melton, Jr., received in
1998 a quarterly retainer of $2,150 for the first quarter of 1998 and
$2,500 for the second, third and fourth quarters of 1998, plus $600 per
meeting of the full Board of Directors and per committee meeting
attended prior to April 1, 1998, and $900 per meeting of the full Board
of Directors and per committee meeting attended on or after April 1,
1998.
Under the First Indiana 1992 Director Stock Option Plan, the
Corporation reserved approximately 221,291 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 3,746 shares to each outside director of the Corporation on
the date of each annual meeting of shareholders. The Corporation
granted 3,746 shares to each outside director on April 16, 1998, 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 also may 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
<PAGE> 8
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, 1998,
Somerset paid to the Bank $81,947 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 and Michael L. Smith are directors of
Somerset.
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 1998 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 executive officers of
other financial institutions and utilized a regression analysis to conform
the compensation survey data to the Corporation's asset size. The
consultant derived the weighted average salaries of the executive
officers of the institutions contained in the survey, and then calculated
average (mean) salaries. The Compensation Committee relied on this
independent 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.
<PAGE> 9
Under the Long-Term Management Performance Incentive Plan
(the "Long-Term Plan"), performance-based compensation will be
awarded at the end of fiscal year 1999 if certain performance targets are
achieved. Two groups of Corporation and Bank officers have been
selected to participate in the Long-Term Plan for the 1997-1999
performance period. Group A consists of Robert H. McKinney, Marni
McKinney and Owen B. Melton, Jr. Group B consists of David L.
Gray, Vice President and Treasurer of the Corporation, Senior Vice
President in charge of the Bank's Financial Management 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. If interim performance goals for each of 1997, 1998 and 1999
are attained, as well as overall goals for the entire performance period,
Mr. McKinney and Mr. Melton each will be eligible to receive 18,000
shares of the Corporation's common stock, Ms. McKinney will be
eligible to receive 7,500 shares (as well as 6,000 shares granted under
the 1991 Stock Option and Incentive Plan, which carry the same
restrictions as those shares granted under the Long-Term Plan), and
Group B participants will be eligible to receive an amount equal to 50%
of the participant's average annual rate of base salary in effect during
the performance period. The Compensation Committee of the Board
of Directors has determined that the interim performance goals for 1997
and 1998 were satisfied. Accordingly, the incentive amounts for 1997-1999
still may be earned, provided the 1999 performance goals and the
overall goals for the entire period are met.
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 shareholder value. Accordingly, the Bank has
adopted management stock ownership objectives to be attained by
December 31, 2000. By that time, 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. (Such multiples already
have been attained by Mr. McKinney, Ms. McKinney and Mr. Melton.)
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, and awarded such stock options in 1998. 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
<PAGE> 10
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 generally 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, 1997, participant contributions for the Plan Year
beginning April 1, 1998 were 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 (see page 14) during the
calendar year ended December 31, 1998 are set forth in the column
titled "All Other Compensation." The Corporation also achieved the
performance objectives specified in the Stock Purchase Plan for the year
ended December 31, 1998. As an additional inducement to the Bank's
employees to increase their ownership of Corporation stock, the
Compensation Committee has elected to match participant contributions
at a ratio of one to two for the 1999 Plan Year only.
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 historically have 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 Long-Term 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 also are 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.
<PAGE> 11
Because Mr. Melton is the chief executive officer of the
Corporation's sole operating unit and responsible for its day-to-day
activities, the Compensation Committee gives special weight to Mr.
Melton's achievement of these objectives when determining his salary
for the coming year. In addition, the Compensation Committee meets
separately with Mr. McKinney for his candid evaluation of Mr.
Melton's performance during the preceding year and his achievement
of the objectives described above. The Corporation's attainment of the
1997 performance goals resulted in an increase in both Mr. McKinney's
and Mr. Melton's salaries for 1998.
Compensation Committee
Gerald L. Bepko, Chairman
H.J. Baker
Phyllis W. Minott
[The remainder of this page is intentionally left blank]
<PAGE> 12
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 Index
- ------ ------------- ------------ -----------
<S> <C> <C> <C>
Dec-93 $100 $100 $100
Jun-94 $101 $91 $107
Dec-94 $102 $98 $100
Jun-95 $134 $122 $120
Dec-95 $180 $138 $148
Jun-96 $207 $157 $157
Dec-96 $238 $170 $196
Jun-97 $258 $190 $245
Dec-97 $355 $209 $328
Jun-98 $377 $251 $340
Dec-98 $283 $293 $325
* Assumes that the value of the investment in the Corporation's stock and each
index was $100 on December 31, 1993 and that all dividends were reinvested.
** The NASDAQ Bank Index contains performance data for banks, savings
institutions and holding companies.
</TABLE>
% Change for 6 Months Ended 12/31/98:
First Indiana Corporation -24.8%
Nasdaq Stock Market Index +16.8%
Nasdaq Bank Index -4.5%
% Change for 12 Months Ended 12/31/98:
First Indiana Corporation -20.2%
Nasdaq Stock Market Index +40.6%
Nasdaq Bank Index -0.9%
<PAGE> 13
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.
Summary Compensation Table
<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 1998 $199,231 $ 40,520 $ -- $ -- 12,000 $ -- $5,944(2)
Chairman and Chief 1997 210,000 37,800 -- 357,000 -- -- 6,404
Executive Officer 1996 200,000 -- 395,910 -- 18,000 -- 6,055
of the Corporation;
- ---------------------------------------------------------------- ----------------------------------------------------
Owen B. Melton, Jr. 1998 295,000 61,395 375,213 -- 7,920 -- 3,356 (3)
President and Chief 1997 280,000 50,400 -- 357,000 -- -- 4,550
Operating Officer of 1996 265,000 -- 398,818 -- 18,000 -- 3,905
the Corporation;
President and Chief
Executive Officer of
the Bank
- ---------------------------------------------------------------- ----------------------------------------------------
David L. Gray 1998 160,000 31,218 -- -- 6,000 -- 8,863 (4)
Vice President and 1997 152,500 25,940 -- -- -- -- 9,065
Treasurer of the Corpor- 1996 145,000 -- -- -- 9,000 69,167 8,131
ation; Senior Vice
President-Financial
Management Group,
and Chief Financial Officer
of the Bank
- ---------------------------------------------------------------- ----------------------------------------------------
Merrill E. Matlock 1998 150,000 31,573 -- -- 6,000 -- 2,959 (5)
Senior Vice President 1997 119,616 24,349 -- -- -- -- 2,325
Commercial and Mortgage 1996 108,000 -- -- -- 9,000 49,800 2,065
Banking Group of the Bank
- ---------------------------------------------------------------- ----------------------------------------------------
David A. Lindsey 1998 145,000 29,789 -- -- 6,000 -- 8,192 (6)
Senior Vice President- 1997 140,000 23,349 -- -- -- -- 8,309
Consumer Finance Group 1996 132,000 -- -- -- 9,000 60,417 7,424
of the Bank
1 Adjusted for all stock splits through December 31, 1998.
<PAGE> 14
2 Consists of a $4,261 contribution by the Bank to the Stock Purchase Plan, and a $1,683
contribution by the Bank to Mr. McKinney's account in the Bank's 401(k) Plan.
3 Consists of a $1,733 contribution by the Bank to the Stock Purchase Plan, and a $1,623
contribution by the Bank to Mr. Melton's account in the Bank's 401(k) Plan.
4 Consists of a $5,333 contribution by the Bank to the Stock Purchase Plan, the payment by
the Bank of $1,786 for term life insurance premiums, and a $1,744 contribution by the
Bank to Mr. Gray's account in the Bank's 401(k) Plan.
5 Consists of a $520 contribution by the Bank to the Stock Purchase Plan, the payment by
the Bank of $1,681 for term life insurance premiums, and a $758 contribution by the Bank
to Mr. Matlock's account in the Bank's 401(k) Plan.
6 Consists of a $4,833 contribution by the Bank to the Stock Purchase Plan, the payment by
the Bank of $1,674 for term life insurance premiums, and a $1,685 contribution by the
Bank to Mr. Lindsey's account in the Bank's 401(k) Plan.
</TABLE>
Stock Options
The following table sets forth certain information with respect
to stock options granted to the Named Executive Officers during the
last fiscal year. The Potential Realizable Value columns on the right of
this table assume that the value of the underlying stock will appreciate
each year at the specified percentages.
<TABLE>
<CAPTION>
OPTION GRANTS IN THE LAST FISCAL YEAR
Potential Realizable Value at
Assumed Annual Rates of Stock
Individual Grants Price Appreciation for Option
Term
% of Total
Options/
Number of SARs
Securities Granted to
Underlying Employees
Options/SARs Fiscal Exercise or Base
Name Granted Year Price ($/Share) Expiration Date 0% 5% 10%
- ----------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C>
Robert H. McKinney 12,000 9.7% $24.38 01-22-08 $00.00 $183,960 $466,320
Owen B. Melton, Jr. 12,000 9.7% 24.38 01-22-08 00.00 183,960 466,320
David L. Gray 6,000 4.8% 24.38 01-22-08 00.00 91,980 233,160
Merrill E. Matlock 6,000 4.8% 24.38 01-22-08 00.00 91,980 233,160
David A. Lindsey 6,000 4.8% 24.38 01-22-08 00.00 91,980 233,160
</TABLE>
<PAGE> 15
The following table sets forth on an aggregate basis each
exercise of stock options during fiscal year 1998 by each of the Named
Executive Officers and the 1998 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 -- $ -- 64,119 12,000 $749,165 $ -- (1)
Owen B. Melton, Jr. 15,000 375,213 47,244 12,000 485,943 -- (1)
David L. Gray -- -- 34,870 6,000 420,314 -- (1)
Merrill E. Matlock -- -- 20,022 6,000 215,733 -- (1)
David A. Lindsey 12,223 245,942 24,447 6,000 295,599 -- (1)
</TABLE>
1 On December 31, 1998, the exercise price of the unexercisable options
exceeded the market price.
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.
[The Pension Plan Table is set forth on page 17.]
<PAGE> 16
<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>
$100,000 $ 18,347 $ 36,694 $ 55,041 $ 54,215
120,000 22,347 44,694 67,041 66,215
140,000 26,347 52,694 79,041 78,215
160,000 30,347 60,694 91,041 90,215
180,000 34,347 68,694 103,041 102,215
200,000 38,347 76,694 115,041 114,215
220,000 42,347 84,694 127,041 126,215
240,000 46,347 92,694 139,041 138,215
260,000 50,347 100,694 151,041 150,215
280,000 54,347 108,694 163,041 162,215
300,000 58,347 116,694 175,041 174,215
320,000 62,347 124,694 187,041 186,215
340,000 66,347 132,694 199,041 198,215
360,000 70,347 140,694 211,041 210,215
380,000 74,347 148,694 223,041 222,215
400,000 78,347 156,694 235,041 234,215
500,000 98,347 196,694 295,041 294,215
600,000 118,347 236,694 355,041 354,215
700,000 138,347 276,694 415,041 414,215
800,000 158,347 316,694 475,041 474,215
- ------------------------------------------------------------------------------------------
</TABLE>
1 Amounts shown are based on an assumed Social Security integration base of
$33,060 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, 1999, the number of years of credited benefit
service and the compensation covered by the Plans (based on average
annual salaries for 1994-1998 and average annual bonuses for
1996-1998) for each of the Named Executive Officers were as follows:
Robert H. McKinney, 46 years - $420,954; Owen B. Melton, Jr., 20
years - $510,100; David L. Gray, 17 years - $224,319; Merrill E.
Matlock, 14 years - $141,174; and David A. Lindsey, 16 years -
$196,158.
<PAGE> 17
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 $134,892 in
payments under the Qualified Plan.
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.
Messrs. McKinney and Melton are parties to agreements with
the Corporation, and Messrs. Gray, Lindsey and Matlock are parties to
agreements with the Bank, which agreements provide for certain
benefits if the executive officer's employment is terminated following
a change in control of the Corporation (as defined in the applicable
agreement), other than a termination with cause (as defined in the
applicable agreement) or a termination by the officer without good
reason (as defined in the applicable agreement). In such case, the
executive officer would be entitled to a severance payment equal to that
portion of his annual base salary (calculated as 12 times the highest
monthly base salary paid to the executive officer during the 12 months
prior to the change in control) not already paid, plus any compensation
previously deferred by the executive officer, accrued vacation pay and
a lump-sum pension supplement. Certain adjustments may be made to
the severance payments made in connection with the change in control
if such payments would be subject to the excise tax imposed on "excess
parachute payments" under Section 4999 of the Internal Revenue Code
of 1986, as amended.
<PAGE> 18
APPOINTMENT OF AUDITORS
The Corporation's financial statements for the year ended
December 31, 1998 were audited by KPMG Peat Marwick LLP ("Peat
Marwick"). The Corporation has selected Peat Marwick as its
independent auditors for the fiscal year ending December 31, 1999.
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 a review of the copies of such forms furnished
to the Corporation, the Corporation believes that during 1998 all
Reporting Persons complied with the filing requirements of Section
16(a), except that purchases of the Corporation's Common Stock by
The Somerset Group, Inc., of which Mr. McKinney and Ms. McKinney
are beneficial owners (see Note 7 to the Stock Ownership Table on
page 3), were not timely reported by Mr. McKinney and Ms.
McKinney, but the same were reported in the year-end report.
ANNUAL REPORT
A copy of the Corporation's Annual Report for the year ended
December 31, 1998 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 the 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
<PAGE> 19
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 11, 1999
<PAGE> 20
[CAMERA-READY LOGO OF THE BANK]
Principal Subsidiary of First Indiana Corporation
<PAGE>
[KPMG LETTERHEAD]
KPMG 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. 333-68297) on Form S-8 of First Indiana
Corporation of our report dated January 19, 1999 relating
to the consolidated balance sheets of First Indiana Corporation
as of December 31, 1998 and 1997, 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, 1998, which report
appears in the December 31, 1998 annual report on Form 10-K of First
Indiana Corporation.
/s/KPMG LLP
March 22, 1999
<PAGE> (10k page 233)
[KPMG LETTERHEAD]
KPMG 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 19, 1999 relating
to the consolidated balance sheets of First Indiana Corporation
as of December 31, 1998 and 1997, 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, 1998, which report
appears in the December 31, 1998 annual report on Form 10-K of First
Indiana Corporation.
/s/KPMG LLP
March 22, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for the twelve months ended December 31, 1998 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-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 45,153
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 12,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 142,971
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,544,243
<ALLOWANCE> 25,700
<TOTAL-ASSETS> 1,795,990
<DEPOSITS> 1,227,918
<SHORT-TERM> 206,219
<LIABILITIES-OTHER> 20,636
<LONG-TERM> 175,247
0
0
<COMMON> 135
<OTHER-SE> 165,835
<TOTAL-LIABILITIES-AND-EQUITY> 1,795,990
<INTEREST-LOAN> 125,783
<INTEREST-INVEST> 9,530
<INTEREST-OTHER> 521
<INTEREST-TOTAL> 135,834
<INTEREST-DEPOSIT> 54,935
<INTEREST-EXPENSE> 73,080
<INTEREST-INCOME-NET> 62,754
<LOAN-LOSSES> 9,780
<SECURITIES-GAINS> 763
<EXPENSE-OTHER> 45,756
<INCOME-PRETAX> 30,991
<INCOME-PRE-EXTRAORDINARY> 30,991
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,147
<EPS-PRIMARY> 1.50
<EPS-DILUTED> 1.44
<YIELD-ACTUAL> 3.85
<LOANS-NON> 17,176
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 10,470
<ALLOWANCE-OPEN> 22,414
<CHARGE-OFFS> 7,791
<RECOVERIES> 1,297
<ALLOWANCE-CLOSE> 25,700
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 7,945
</TABLE>
