United States Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1999
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period from ________ to ________
Commission File Number 0-14354
FIRST INDIANA CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-1692825
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
135 North Pennsylvania Street, Indianapolis, IN 46204
(Address of principal executive office) (Zip Code)
(317) 269-1200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes (X) No ( )
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date:
Common Stock, par value $0.01 per share 12,627,761 Shares
Class Outstanding at 4/30/99
<PAGE> 1
FIRST INDIANA CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX
Page
Part I Financial Information 3
Item 1. Financial Highlights
Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as
of March 31, 1999 and December 31, 1998 4
Condensed Consolidated Statements of
Earnings for the Three Months
Ended March 31, 1999 and 1998 5
Condensed Consolidated Statements of
Shareholders' Equity for the Three Months
Ended March 31, 1999 6
Condensed Consolidated Statements of Cash
Flows for the Three Months Ended
March 31, 1999 and 1998 7
Notes to Condensed Consolidated Financial
Statements 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 11
Item 3. Disclosures About Market Risk 19
Part II Other Information 20
Signatures 21
<PAGE> 2
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
First Indiana Corporation and Subsidiaries
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
For the Three Months Ended
March 31,
1999 1998
<S> <C> <C>
Total Interest Income $ 34,287 $ 33,130
Total Interest Expense 17,799 17,437
Net Earnings 4,630 4,418
Basic Earnings Per Share 0.37 0.35
Diluted Earnings Per Share 0.36 0.33
Dividends Per Share 0.13 0.12
Net Interest Margin 3.82 % 3.99 %
Net Interest Spread 3.18 3.27
Return on Average Equity 11.10 11.39
Return on Average Assets 1.03 1.08
Average Shares Outstanding 12,679,940 12,717,703
Average Diluted Shares Outstanding 12,925,995 13,311,207
<CAPTION>
At March 31,
1999 1998
<S> <C> <C>
Assets $ 1,826,565 $ 1,687,938
Loans-Net 1,547,263 1,394,604
Deposits 1,305,728 1,192,424
Shareholders' Equity 167,301 156,317
Shareholders' Equity/Assets 9.16 % 9.26 %
Shareholders' Equity Per Share $ 13.21 $ 12.27
Market Closing Price 19.00 26.88
Price/Earnings Multiple 13.19 x 20.36 x
<CAPTION>
At March 31, 1999
Actual Required
<S> <C> <C>
Capital Adequacy Ratios
Tangible Capital/Total Assets 7.84 % 1.50 %
Core (Tier One) Capital/Total Assets 7.84 % 3.00 %
Risk-Based Capital/Risk-Weighted Assets 11.12 % 8.00 %
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS
First Indiana Corporation and Subsidiaries
(Dollars in Thousands, Except Share Data)
(Unaudited) March 31, December 31,
1999 1998
<S> <C> <C>
Assets
Cash $ 39,298 $ 45,153
Federal Funds Sold 5,000 12,500
Total Cash and Cash Equivalents 44,298 57,653
Investments Available for Sale 98,627 113,291
Mortgage-Backed Securities Available for Sale 59,527 29,680
Loans Held for Sale 171,208 112,398
Loans Receivable 1,402,463 1,431,845
Less Allowance for Loan Losses (26,408) (25,700)
Loans Receivable - Net 1,547,263 1,518,543
Premises and Equipment 19,383 18,546
Accrued Interest Receivable 11,648 11,680
Real Estate Owned - Net 2,032 2,204
Prepaid Expenses and Other Assets 43,787 44,393
Total Assets $ 1,826,565 $ 1,795,990
Liabilities and Shareholders' Equity
Liabilities
Non-Interest-Bearing Deposits $ 126,799 $ 129,043
Interest-Bearing Deposits 1,178,929 1,098,875
Total Deposits 1,305,728 1,227,918
Federal Home Loan Bank Advances 270,216 327,247
Short-Term Borrowings 60,746 54,219
Accrued Interest Payable 3,841 2,646
Advances by Borrowers for Taxes and Insurance 3,667 1,958
Other Liabilities 11,513 12,242
Total Liabilities 1,655,711 1,626,230
Negative Goodwill 3,553 3,790
Shareholders' Equity
Preferred Stock, $.01 Par Value: 2,000,000 Shares
Authorized; None Issued -
Common Stock, $.01 Par Value: 33,000,000 Shares
Authorized; 13,559,827 and 13,512,902 Shares Issued and
Outstanding, Including Shares in Treasury 136 135
Paid-In Capital in Excess of Par 37,394 37,029
Retained Earnings 140,159 137,063
Accumulated Other Comprehensive Income (87) 425
Treasury Stock-at Cost, 894,813 and 809,608 Shares (10,301) (8,682)
Total Shareholders' Equity 167,301 165,970
Total Liabilities and Shareholders' Equity $ 1,826,565 $ 1,795,990
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE> 4
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
First Indiana Corporation and Subsidiaries
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended
March 31,
1999 1998
<S> <C> <C>
Interest Income
Loans $ 31,717 $ 30,208
Investments 1,543 1,860
Mortgage-Backed Securities 541 634
Federal Home Loan Bank Stock 366 262
Federal Funds Sold and
Interest-Bearing Deposits 120 166
Total Interest Income 34,287 33,130
Interest Expense
Deposits 13,174 13,171
Federal Home Loan Bank Advances 4,146 3,521
Short-Term Borrowings 479 745
Total Interest Expense 17,799 17,437
Net Interest Income 16,488 15,693
Provision for Loan Losses 2,460 2,820
Net Interest Income After
Provision for Loan Losses 14,028 12,873
Non-Interest Income
Gain on Sale of Investments Held For Sale 218 19
Gain on Sale of Loans 2,120 2,168
Loan Servicing Income 347 517
Loan Fees 846 772
Deposit Product Fee Income 840 644
Insurance Commissions 19 18
Accretion of Negative Goodwill 237 237
Other 1,466 596
Total Non-Interest Income 6,093 4,971
Non-Interest Expense
Salaries and Benefits 7,006 5,110
Net Occupancy 790 663
Equipment 1,123 1,174
Real Estate Owned Operations - Net 120 200
Deposit Insurance 182 167
Office Supplies and Postage 549 492
Other 2,732 2,760
Total Non-Interest Expense 12,502 10,566
Earnings Before Income Taxes 7,619 7,278
Income Taxes 2,989 2,860
Net Earnings $ 4,630 $ 4,418
Basic Earnings Per Share $ 0.37 $ 0.35
Diluted Earnings Per Share $ 0.36 $ 0.33
Dividends Per Common Share $ 0.13 $ 0.12
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE> 5
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
First Indiana Corporation and Subsidiaries Accumulated
(Dollars in Thousands, Except Share Data) Paid-In Other
(Unaudited) Capital Compre- Total
Common Stock in Excess Retained hensive Treasury Shareholders'
Shares Amount of Par Earnings Income Stock Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 12,703,294 $135 $37,029 $137,063 $425 $ (8,682) $165,970
Comprehensive Income:
Net Earnings For The Three Months
Ended March 31, 1999 4,630 4,630
Unrealized Loss on Securities Available
for Sale, Net of Income Taxes of $(349)
and Reclassification Adjustment of $218 (512) (512)
Total Comprehensive Income 4,118
Common Stock Issued Under Restricted
Stock Plans-Net of Amortization 111 111
Tax Benefit of Stock Options Exercised 212 212
Exercise of Stock Options 50,009 1 210 211
Dividends on Common Stock ($.13 per share) (1,645) (1,645)
Redemption of Common Stock (3,084) (57) (57)
Purchase of Treasury Stock (85,205) (1,619) (1,619)
Balance at March 31, 1999 12,665,014 $136 $37,394 $140,159 $ (87) $(10,301) $167,301
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE> 6
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
First Indiana Corporation and Subsidiaries
(Dollars in Thousands)
(Unaudited)
Three Months Ended March 31,
1999 1998
<S> <C> <C>
Cash Flows from Operating Activities
Net Earnings $ 4,630 $ 4,418
Adjustments to Reconcile Net Earnings to
Net Cash Provided (Used) by Operating Activities:
Gain on Sale of Assets (2,338) (2,187)
Amortization 586 346
Amortization of Restricted Stock Plan 111 100
Net Amortization of Loans
and Mortgage-Backed Securities (153) 103
Depreciation 495 540
Provision for Loan Losses 2,460 2,820
Origination of Loans Held For Sale
Net of Principal Collected (278,820) (103,056)
Proceeds from Sale of Loans Held for Sale 222,130 106,819
Change In:
Accrued Interest Receivable 32 (176)
Other Assets (894) (1,942)
Accrued Interest Payable 1,195 641
Other Liabilities (729) 350
Net Cash Provided (Used) by Operating Activities (51,295) 8,776
Cash Flows from Investing Activities
Proceeds from Maturities of
Investment Securities Held to Maturity 13,663 10,311
Proceeds from Sale of Investments Available for Sale 30,211 10,023
Purchase of Investment Securities Available for Sale (29,701) (37,384)
Purchase of Mortgage-Backed Securities Available for Sale (30,284) --
Principal Collected on Mortgage-Backed Securities 251 1,061
Originations of Loans Net of Principal Collected 29,015 (51,731)
Proceeds from Sale of Loans -- 4,516
Proceeds from Sale of Premises and Equipment 25 --
Purchase of Premises and Equipment (1,357) (726)
Net Cash Provided (Used) by Investing Activities 11,823 (63,930)
Cash Flows from Financing Activities
Net Change in Deposits 77,810 84,869
Repayment of Federal Home Loan Bank Advances (397,031) (83,029)
Borrowings of Federal Home Loan Bank Advances 340,000 85,000
Net Change in Short-Term Borrowings 6,527 (18,449)
Net Change in Advances by Borrowers
for Taxes and Insurance 1,709 2,107
Stock Option Proceeds 211 468
Redemption of Common Stock (57) (132)
Tax Benefit of Stock Options Exercised 212 545
Common Stock Issued Under Deferred Compensation Plan -- (2)
Payment for Fractional Shares -- (10)
Dividends Paid (1,645) (1,528)
Purchase of Treasury Stock (1,619) (442)
Net Cash Provided by Financing Activities 26,117 69,397
Net Change in Cash and Cash Equivalents (13,355) 14,243
Cash and Cash Equivalents at Beginning of Period 57,653 50,231
Cash and Cash Equivalents at End of Period $ 44,298 $ 64,474
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Period For:
Interest on Deposits, Federal Home Loan Bank Advances, and
Other Borrowed Money $ 16,604 $ 16,796
Income Taxes 3,836 737
Transfer of Loans to Real Estate Owned 1,232 2,532
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE> 7
FIRST INDIANA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Three Months Ended March 31, 1999
(Unaudited)
Note 1 - Basis of Presentation
The foregoing condensed consolidated financial statements are
unaudited. However, in the opinion of management, all adjustments
(comprising only normal recurring accruals) necessary for a fair
presentation of the condensed consolidated financial statements have been
included. Results for any interim period are not necessarily indicative of
results to be expected for the year. The condensed consolidated financial
statements include the accounts of First Indiana Corporation and its
subsidiaries (the "Corporation"). The principal subsidiary of the
Corporation is First Indiana Bank and its subsidiaries (the "Bank"). A
summary of the Corporation's significant accounting policies is set forth
in Note 1 of the Notes to Consolidated Financial Statements in the
Corporation's Annual Report on Form 10-K for the year ended December
31, 1998.
Note 2 - Earnings Per Share
Basic earnings per share for 1999 and 1998 were computed by
dividing net earnings by the weighted averages shares of common stock
outstanding (12,679,940 and 12,717,703 for the three months ended
March 31, 1999 and 1998, respectively). Diluted earnings per share for
1999 and 1998 were computed by dividing net earnings by the weighted
average shares of common stock and common stock that would have been
outstanding assuming the issuance of all dilutive potential common shares
outstanding (12,925,995 and 13,311,207 for the three months ended
March 31, 1999 and 1998, respectively) after giving retroactive effect to
a six-for-five stock dividend in March 1998. Dilution of the per-share
calculation relates to stock options.
Note 3 - Allowance for Loan Loss Reserve
Allowances have been established for possible losses on loans and
real estate owned ("REO"). The provisions for losses charged to
operations are based on management's judgment of current circumstances
and the credit risk of the loan portfolio and REO. Management believes
that these allowances are adequate for loan losses inherent in the loan
portfolio. While management uses available information to recognize
losses on loans and REO, future additions to the allowances may be
necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examinations, periodically
review these allowances and may require the Corporation to recognize
additions to the allowances based on their judgments about information
available to them at the time of their examination.
Note 4 - 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
<PAGE> 8
loans, and provides traditional cash management services to business
customers. Investment portfolio management is included in the treasury
segment. Mortgage banking activities include the origination, sale
and servicing of residential loans. The retail segment includes the Bank's
26-branch network, as well as the relatively newer virtual banking services.
FirstTrust provides trust and advisory services to the Bank's customers.
Revenues in the Corporation's segments are generated from loans, deposits,
investments,servicing fees and loan sales. There are no foreign operations.
<TABLE>
<CAPTION>
March 31, 1999
Resi- Mortgage First Segment Intersegment Consolidated
(dollars in thousands) Consumer dential Business Treasury Banking Retail Trust Totals Eliminations Totals
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average Segment Assets $600,502 $407,674 $432,414 $170,695 $126,454 $49,812 $842 $1,788,393 $17,105 (1) $1,805,498
Net Interest Income 5,219 1,283 2,814 456 643 3,445 0 13,859 2,629 (2) 16,488
Revenue from
External Customers 1,041 31 571 193 2,523 937 27 5,324 769 (3) 6,093
Intersegment Revenues
(Expenses) 1,818 (332) (540) 0 1,932 146 0 3,024 (3,024) (4) 0
Significant noncash items:
Provision for Loan Losses 1,792 12 656 0 0 0 0 2,460 0 2,460
Pretax Segment
Direct Profit (Loss) 4,983 (97) 1,771 436 4,259 832 (381) 11,804 (4,185) (3) 7,619
<CAPTION>
March 31, 1998
Resi- Mortgage Segment Intersegment Consolidated
(dollars in thousands) Consumer dential Business Treasury Banking Retail Totals Eliminations Totals
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average Segment Assets $532,381 $493,692 $316,576 $189,310 $ 62,259 $42,809 $1,637,027 $ 1,296 (1) $1,638,323
Net Interest Income 4,500 951 2,861 529 366 3,096 12,303 3,390 (2) 15,693
Revenue from
External Customers 1,568 23 862 18 1,209 622 4,301 670 (3) 4,971
Intersegment Revenues
(Expenses) 890 (586) (298) 0 1,956 433 2,394 (2,394) (4) 0
Significant noncash items:
Provision for Loan Losses 654 73 2,093 0 0 0 2,820 0 2,820
Pretax Segment
Direct Profit (Loss) 4,171 (416) 1,651 484 4,547 1,065 11,501 (4,223) (3) 7,278
(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> 9
Note 5 - Current Accounting Pronouncements
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 allowed. This
Statement had no impact on the financial condition and results of
operations of the Corporation upon adoption.
Note 6 - Reclassifications
Certain amounts in the 1998 Condensed Consolidated Financial
Statements have been reclassified to conform to the 1999 presentation.
<PAGE> 10
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Summary of Corporation's Results
First Indiana Corporation and subsidiaries had net earnings of
$4,630,000 for the first quarter of 1999, compared with net earnings of
$4,418,000 in the first quarter of 1998. Diluted earnings per share for the
three months ended March 31, 1999 were $.36, compared with $.33 per
share for the same period one year ago. Cash dividends per share for the
first three months of 1999 and 1998 were $.13 and $.12 per share,
respectively.
Net Interest Income
Net interest income was $16,488,000 for the three months ended
March 31, 1999, compared with $15,693,000 for the three months ended
March 31, 1998.
Total net loans outstanding increased to $1,547,263,000 at March
31, 1999, compared with $1,394,604,000 one year earlier. Residential
loans outstanding at March 31, 1999 were $498,200,000, down eight
percent from one year ago. The decrease results from the Bank's
increased activity in the secondary market. Residential loan sales for the
first quarter of 1999 were $151,703,000, compared with $73,001,000 for
the same period in 1998. At March 31, 1999, home equity loans
outstanding were $583,492,000, compared with $522,965,000 at March
31, 1998, a 12 percent increase. Business loans were $200,568,000 at
March 31, 1999, compared with $136,606,000 one year earlier, a 47
percent increase.
Interest income for the first quarter of 1999 was $34,287,000,
compared with $33,130,000 for the three months ended March 31, 1998.
Interest expense for the first quarter of 1999 was $17,799,000, compared
with $17,437,000 for the three months ended March 31, 1998.
During the first quarter of 1999, the Corporation's cost of funds
was 4.76 percent, compared with 5.14 percent one year ago. The yield on
earning assets was 7.94 percent for the first quarter of 1999, compared
with 8.41 percent one year ago.
Annualized return on total average assets was 1.03 percent for the
three months ended March 31, 1999, compared with 1.08 percent for the
same period in 1998.
Net Interest Margin
Net interest margin consists of two components: interest-rate
spread and the contribution of interest-free funds (primarily capital and
other non-interest-bearing liabilities). The following analysis of net interest
margin reflects the Corporation's ability to generate strong net interest
income resulting from a prudent combination of assets and liabilities.
<PAGE> 11
<TABLE>
<CAPTION>
Three Months Ended March 31,
(Dollars in Thousands) 1999 1998
<S> <C> <C>
Net Interest Income $ 16,488 $ 15,693
Average Interest-Earning Assets $ 1,727,871 $ 1,575,078
Average Interest-Bearing Liabilities 1,494,253 1,356,940
Average Interest-Free Funds $ 233,618 $ 218,138
Yield on Interest-Earning Assets 7.94% 8.41%
Yield on Interest-Bearing Liabilities 4.76% 5.14%
Interest-Rate Spread 3.18% 3.27%
Impact of Interest-Free Funds 0.64% 0.72%
Net Interest Margin 3.82% 3.99%
</TABLE>
All non-accruing delinquent loans have been included in average interest-
earning assets.
The current declining interest-rate environment encourages
borrowers to replace their higher yielding mortgage loans with those loans
offering a lower rate. This environment of heavy refinancing activity has
been offset to some extent with lower yields on deposit products, but still
resulted in a negative impact on the Corporation's interest-rate margin
when compared with last year. Management has allowed the contraction
of the residential portfolio, and has redirected its investment to the
consumer and business portfolios. Management believes the Corporation
is strategically positioned for long-term growth by developing a customer
base that has the potential of utilizing other First Indiana Bank products
and services.
Non-Performing Assets and Summary of Loan Loss Experience
The following table analyzes the allowance for losses on loans and
REO for the three months ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
Loan Loss REO Loss Loan and REO
Allowance Allowance Loss Allowance
1999 1998 1999 1998 1999 1998
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance of Loss Allowance
at Beginning of Year $25,700 $22,414 $500 $483 $26,200 $22,897
Provision for Losses 2,460 2,820 (6) 39 2,454 2,859
Charge-Offs -- Residential -- (36) (14) -- (14) (36)
-- Consumer (1,678) (1,544) (17) (95) (1,695) (1,639)
-- Construction (34) (9) -- -- (34) (9)
-- Business (277) -- -- -- (277) --
-- Commercial Real
Estate -- -- (79) -- (79) --
Recoveries -- Residential -- 1 8 50 8 51
-- Consumer 207 346 80 23 287 369
-- Construction 28 52 28 -- 56 52
-- Business 2 3 -- -- 2 3
-- Commercial Real
Estate -- -- -- -- -- --
Balance at March 31, $26,408 $24,047 $500 $500 $26,908 $24,547
Ratio of Allowance for Loan Losses to Loans
Receivable 1.68% 1.70%
Ratio of REO Loss Allowance to Real Estate Owned 19.75% 11.39%
Ratio of Total Loan and REO Loss Allowance to
Non-Performing Assets 153.73% 105.30%
</TABLE>
<PAGE> 12
Non-performing assets were $17,503,000, or 0.96 percent of
assets, at March 31, 1999. This compares with $19,880,000, or 1.11
percent of assets, at December 31, 1998 and $23,312,000, or 1.38 percent
of assets, at March 31, 1998. This category includes not only non-accrual
loans and real estate owned, but also restructured loans on which the Bank
continues to accrue interest.
The Bank regularly reviews all non-performing assets to evaluate
the adequacy of the allowances for losses on loans and REO inherent in the
loan portfolio. The allowance for loan losses is maintained through a
provision for loan losses, which is charged to earnings. The provisions are
determined in conjunction with management's review and evaluation of
current economic conditions, changes in the character and size of the loan
portfolio, estimated charge-offs, and other pertinent information derived
from a quarterly review of the loan portfolio and REO properties.
The provision for loan losses in the first quarter of 1999 and 1998
was $2,460,000 and $2,820,000.
The Bank writes down consumer loans at the date of foreclosure
and charges off the entire balance of home equity loans greater than 120
days delinquent with loan-to-value ratios above 90 percent. If the loan has
a loan-to-value ratio of less than 90 percent, the loan is written down to its
estimated disposition value after considering any first mortgage position
and 15 percent disposition costs. Indirect automobile loans greater than
120 days delinquent are charged off in full. If collection efforts result in a
subsequent recovery of all or a portion of the loan amount, the Bank
recognizes the recovery at the time of receipt.
The amount of the provision in 1999 is the result of management's
ongoing evaluation of the adequacy of its loan and real estate owned loss
allowances and the changing composition of the Corporation's loan
portfolio and REO. Management will continue to evaluate the adequacy
of the provision and will adjust it if necessary to reflect changes in the
amount or category of loans originated, changes in current economic
conditions and the credit risk of the loan portfolio and REO.
Non-Interest Income
Total non-interest income was $6,093,000 for the three months
ended March 31, 1999, compared with $4,971,000 for the same period in
1998.
The 1999 gain on sale of loans of $2,120,000 is comprised of both
a $1,258,000 gain on the sale of fixed-rate home equity loans and a
$862,000 gain on residential mortgage loans. The Bank realized $643,000
on the sale of residential mortgage loans in the normal course of the
Bank's mortgage banking operations during the first quarter of 1998.
Home equity loan sale gains for the first quarter of 1998 were $1,525,000.
A national network of agents coupled with a call center, has allowed the
Bank to aggressively pursue originations of home equity products with
loan-to-value ratios of greater than 80 percent. The Bank processes and
underwrites these loans and subsequently sells them into the secondary
market. In some cases, the Bank retains the servicing rights on the home
equity loan sales.
<PAGE> 13
Loan servicing income for the three months ended March 31, 1999
decreased to $347,000 from $517,000 from the comparable period in
1998. This decrease primarily occurred as a result of the Bank's
amortization of mortgage servicing rights and prepayments. The
Corporation's residential loan servicing portfolio amounted to
$971,059,000 at March 31, 1999, compared with $954,107,000 at March
31, 1998.
First Indiana's trust subsidiary, FirstTrust Indiana, managed
$200,000,000 in trust assets at March 31, 1999. Trust fees generated from
these assets during the first quarter of 1999 were $27,000. In April 1999,
FirstTrust acquired Prime Capital Management, which has approximately
$700,000,000 in trust assets.
Loan fees increased $74,000 for the first quarter of 1999 compared
with last year due to the increased activity in the business lending
portfolio.
Deposit product fees increased $196,000 for the three months
ended March 31, 1999 compared with last year as a result of the Bank's
successful promotional campaigns to acquire new checking accounts, and
the introduction of nine new checking products in the latter half of 1998.
During the first quarter of 1999, the Bank recognized $905,000 on
the sale of $148 million in loan servicing rights, which is included as a
component of other non-interest income..
Non-Interest Expense
Total non-interest expense was $12,502,000 for the three months
ended March 31, 1999, compared with $10,566,000 for the same period
in 1998. Salaries and benefits increased $1,896,000 during the three
months ended March 31, 1999 from the first quarter of 1998 in order to
provide processing and sales support to the increased loan origination
volume efforts in the targeted business, construction and consumer lending
portfolios and as a result of the addition of FirstTrust. Occupancy
expenses increased $127,000 in 1999 when compared with 1998 due to the
Bank's expansion into new markets. Other operating expenses, such as
temporary help and home equity lending expenses, decreased
approximately $28,000 over 1998 levels as a result of the Bank's
continued efforts to control operating expenses.
Included in real estate owned operations-net are all of the operating
revenues and expenses associated with the Corporation's real estate
owned. Such net results improved by $80,000 for the three months ended
March 31, 1999 from one year ago due to the decreased asset balance of
real estate owned.
Capital Resources and Liquidity
At March 31, 1999, shareholders' equity was $167,301,000, or
9.16 percent of total assets, compared with $165,970,000, or 9.24 percent,
at December 31, 1998 and $156,317,000, or 9.26 percent, at March 31,
1998.
The Corporation paid a quarterly dividend of $.13 per common
share on March 16, 1999 to shareholders of record as of March 5, 1999.
This reflects an increase from $.12 per share in 1998. On March 6, 1998,
the Corporation effected a six-for-five stock dividend. All per-share
amounts have been adjusted to reflect the stock dividend.
<PAGE> 14
The following table shows First Indiana's strong capital levels and
compliance with all capital requirements at March 31, 1999. First Indiana
Bank is classified as "well-capitalized" under the OTS regulatory
framework for prompt corrective action, its highest classification. To be
categorized as "well-capitalized," the Bank must maintain minimum total
risk-based, tier one risk-based and tier one leverage ratios as set forth in
the table. The table reflects categories of assets includable under OTS
regulations. There are no conditions or events since the date of
classification that management believes have changed the Bank's category.
<TABLE>
<CAPTION>
To Be Well
For FDICIA Capitalized Under OTS
(Dollars in Thousands) Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
First Indiana Bank Capital $143,304
Tangible Capital (1) $143,391 7.84% $27,423 1.50% N/A N/A
Core (Tier One) Capital 143,391 7.84% 54,845 3.00% 91,409 5.00%
Tier One Risk-Based Capital 143,391 9.98% N/A N/A 86,234 6.00%
Total Risk-Based Capital (2) 159,812 11.12% 114,979 8.00% 143,724 10.00%
(1) First Indiana Bank capital differs from tangible capital by the FAS115 equity
securities adjustment of $(87).
(2) Risk-based capital includes a $18,070 addition for general loan loss reserves and
a $1,649 deduction for land loans with loan-to-value ratios in excess of 80 percent.
</TABLE>
The Corporation conducts its business through its subsidiaries.
The main source of funds for the Corporation is dividends from the
Bank. The Corporation has no significant assets other than its
investment in the Bank.
Regulations require the director of the OTS to set minimum
liquidity levels between four and 10 percent of assets. Current regulations
set the liquidity requirement to four percent of net withdrawable assets.
The Bank's liquidity ratio at March 31, 1999, was 8.70 percent.
Financial Condition
Total assets at March 31, 1999, were $1,826,565,000, an
increase from $1,795,990,000 at December 31, 1998.
Net loans receivable at March 31, 1999, were $1,547,263,000,
compared with $1,518,543,000 at December 31, 1998. The predominant
growth in loans occurred in the targeted portfolios of construction,
business and consumer, all of which increased from year end 1998.
Mortgage-backed securities available for sale increased $29,847,000 to
$59,527,000 at March 31, 1999 from year-end as a result of purchases.
This increase was partially offset by a decrease in the portfolio of
investments available for sale of $14,664,000.
<PAGE> 15
In April 1999, the Bank announced a restructuring of the out-of-state
residential mortgage lending business of its subsidiary. Heritage
Financial Group LLC will become an alliance partner with First Indiana
and provide permanent mortgage financing for First Indiana's customers
in Florida, North Carolina, and Oregon. First Indiana will continue to
originate construction loans outside Indiana, but permanent loans will be
referred to Heritage Financial Group.
Total deposits were $1,305,728,000 at March 31, 1999, compared
with $1,227,918,000 at December 31, 1998. Non-interest-bearing deposits
consist of retail and commercial checking accounts, as well as official
checking accounts. Commercial checking accounts are expected to
become a more significant source of funds. Included in commercial
checking accounts at March 31, 1999 and December 31, 1998 were
approximately $7,958,000 and $4,285,000 of escrow balances maintained
for loans serviced for others. These balances represent principal, interest,
taxes and insurance that require separate maintenance at the request of the
investor. Official checking accounts at March 31,1999 and December 31,
1998 were $39,694,000 and $51,293,000, respectively.
In the first quarter of 1999, the Bank announced the divestiture of
its five Evansville branches. Citizens Bank, which is based in Evansville,
will acquire the deposits and offices of the five branches. This transaction,
which includes approximately $120 million of First Indiana's current
deposit base, is expected to be completed in the third quarter.
Federal Home Loan Bank advances totaled $270,216,000 at March
31, 1999, compared with $327,247,000 at December 31, 1998.
The Corporation also uses short-term repurchase agreements as
sources of funds. Borrowings will continue to be used in the short run to
compensate for periodic or other reductions in deposits or inflows at less
than projected levels, and long-term to support mortgage lending activities.
Year 2000 Readiness
The Bank is required by the Federal Financial Institutions
Examination Council ("FFIEC") to assess both the Bank's and its vendors'
ability to be Year 2000 ready by June 30, 1999. The Year 2000 issue
refers to shortcomings which exist in some current computer hardware and
software that preclude the correct calculation of date-sensitive information
from, into, and between the twentieth and twenty-first centuries, including
leap year calculations. 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 has also tested embedded systems in elevators, alarm
systems, and HVAC units.
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 1999, the Bank is completing integrated testing on
interdependent systems, testing data interfaces with third parties, and is
developing bank-wide contingency plans, with testing of the contingency
plans to occur during the second quarter. 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 impact the
Bank's own ability to conduct business beyond the century change.
<PAGE> 16
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. The
service bureau is also being examined by the OTS.
The Bank's costs associated with the Year 2000 as of March 31,
1999 totaled $3,400,000. These costs include major system renovations,
an upgrade of all desktop personal computers throughout the Bank,
implementation of an independent location for Year 2000 testing, and fees
related to third-party vendor testing. The third-party vendor testing fees
resulted in a $19,000 charge to expense as incurred. The remaining
expenditures relating to system and equipment purchases have been
capitalized in accordance with generally accepted accounting principles.
Although management sees no internal impact or risk to the Bank's ability
to operate in the 21st century, it is not possible to assess the financial
impact of lost revenue due to Year 2000 issues or future expenditures due
to external factors at this time.
Interest-Rate Sensitivity
First Indiana engages in rigorous, formal asset/liability
management, the objectives of which are to manage interest-rate risk,
ensure adequate liquidity, and coordinate sources and uses of funds. At
March 31, 1999, the Corporation's cumulative one-year interest-rate
gap stood at 3.79 percent. This means that 3.79 percent of First
Indiana's assets will reprice within one year without a corresponding
repricing of the liabilities funding them.
<PAGE> 17
The following schedule analyzes the difference in rate-sensitive
assets and liabilities or gap at March 31, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
Rate Sensitivity by Period of Maturity or Rate Change
March 31, 1999
Over 180 Over
% of Within Days to 1 Year to Over
(Dollars in Thousands) Rate Balance Total 180 Days 1 Year 5 Years 5 Years
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Investment Securities & Other 6.13%$ 120,239 6.86%$ 28,707 2,186 72,734 16,612
Loans Receivable (1)
Mortgage-Backed Securities 6.42% 59,527 3.39% 6,356 5,858 31,252 16,061
Residential Mortgage Loans 7.08% 498,200 28.41% 252,009 74,845 155,614 15,732
Commercial Real Estate Loans 9.73% 32,039 1.83% 9,363 4,717 14,208 3,751
Business Loans 8.76% 200,568 11.44% 125,889 4,183 35,921 34,575
Consumer Loans 9.39% 597,311 34.07% 260,004 53,966 231,482 51,859
Residential Construction Loans 8.26% 245,553 14.00% 221,460 12,303 11,790 -
Total 8.19%$ 1,753,437 100.00% 903,788 158,058 553,001 138,590
Interest-Bearing Liabilities
Deposits:
Demand Deposits (2) 1.61%$ 93,416 6.19%$ - - - 93,416
Passbook Deposits (3) 2.86% 45,079 2.99% 6,087 1,008 8,064 29,920
Money Market Savings 4.27% 371,804 24.62% 371,804 - - -
Jumbo Certificates 5.29% 199,307 13.20% 116,147 44,994 38,166 -
Fixed-Rate Certificates 5.33% 469,323 31.08% 191,428 108,128 169,767 -
Total 4.60% 1,178,929 78.08% 685,466 154,130 215,997 123,336
Borrowings:
FHLB Advances 5.44% 270,216 17.90%$ 60,000 35,000 160,000 15,216
Short-Term Borrowings 4.61% 60,746 4.02% 60,746 - - -
Total 4.75% 1,509,891 100.00% 806,212 189,130 375,997 138,552
Net - Other (4) 243,546 243,546
Total $ 1,753,437 806,212 189,130 375,997 382,098
Rate Sensitivity Gap $ 97,576 $ (31,072)$ 177,004 $ (243,508)
March 31, 1999
Cumulative Rate-Sensitivity Gap $ 97,576 $ 66,504 $ 243,508
Percent of Total Interest-Earning Assets 5.56 % 3.79 % 13.89%
December 31, 1998
Cumulative Rate-Sensitivity Gap $ 132,868 $ 118,070 $ 248,681
Percent of Total Interest-Earning Assets 7.74 % 6.88 % 14.49%
(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
$118,286,000 of Loans Held for Sale. Included in Consumer Loans are $52,921,000 of Home
Equity Loans Held for Sale.
(2) These deposits have been included in the Over 5 Years category to reflect management's
assumption that these accounts are not rate-sensitive. This assumption is based upon historic
trends of these deposits through periods of significant increases and decreases in interest rates
without changes in rates paid on these deposits. Included in this category are NOW, money
market checking and non-interest bearing deposits. The rate represents a blended rate on all
deposit types in the category.
(3) A portion of these deposits has been included in the Over 5 Years category to reflect
management's assumption that these accounts are not rate-sensitive. This assumption is based
upon the historic minimal decay rates on these types of deposits experienced through periods of
significant increases and decreases in interest rates without changes in rates paid on these
deposits.
(4) Net Other is the excess of other non-interest-bearing liabilities and capital over other non-interest-bearing assets.
</TABLE>
<PAGE> 18
Disclosures About Market Risk
The Corporation's success is largely dependent upon its ability to
manage interest-rate risk, which is defined as the exposure of the
Corporation's net interest income and net earnings to changes in interest
rates. The Bank's Asset/Liability Committee ("ALCO") is responsible for
managing interest-rate risk and the Corporation has established acceptable
limits for interest-rate exposure, which are reviewed on a monthly basis.
The Bank uses a model which measures interest-rate sensitivity to
determine the impact on net earnings of immediate and sustained upward
and downward movements in interest rates. Incorporated into the model
are assumptions regarding the current and anticipated interest rate
environment, estimated prepayment rates of certain assets and liabilities,
forecasted loan and deposit originations, contractual maturities and
renewal rates on certificates of deposits, estimated borrowing needs,
anticipated loan loss provision, projected secondary marketing gains and
losses, expected repricing spreads on variable-rate products, and
contractual maturities and repayments on lending and investment products.
The model incorporates interest-rate sensitive instruments which are held
to maturity or available for sale. The Bank has no trading assets. Based
on the information and assumptions in effect at March 31, 1999,
management believes that a 100 basis point increase or decrease in interest
rates over a 12 month period would result in a 10.0 percent increase and
a 5.3 percent decrease in net earnings, respectively, because of the change
in net interest income. Because of the numerous assumptions used in the
computation of interest-rate sensitivity, and the fact that the model does
not assume any actions the ALCO could take in response to the change in
interest rates, the results should not be relied upon as indicative of actual
results.
The Bank enters into forward sales contracts for future delivery of
residential fixed-rate mortgage loans at a specified yield in order to limit
market risk associated with its pipeline of residential mortgage loans held
for sale and commitments to fund residential mortgage loans. Market risk
arises from the possible inability of either party to comply with the contract
terms.
The Bank designates these forward sales contracts as hedges. To
qualify as a hedge, the forward sales contract must be effective in reducing
the market risk of the identified anticipated residential mortgage loan sale
which is probable to occur. Effectiveness is evaluated on an ongoing basis
through analysis of the residential mortgage loan pipeline position.
Commitments under these forward sales contracts and the underlying
residential mortgage loans are valued, and the net position is carried at the
lower of cost or market. Unrecognized gains and losses on these forward
sales contracts are generally immaterial and are charged to current earnings
as an adjustment to the gain or loss on residential mortgage loan sales
when realized, when the contract matures, or is terminated.
<PAGE> 19
Other Information
Items 1, 2 and 3 are not applicable.
Item 4. Submission of Matters to Vote of Security Holders.
An annual meeting of shareholders was held April 15,
1999. The following directors were elected at this
meeting.
Votes For Votes Withheld
Robert J. Laikin 10,872,239 37,046
Marni McKinney 10,874,133 35,152
Phyllis W. Minott 10,872,961 36,324
The following directors' terms of office continued after
the meeting.
Gerald L. Bepko
Andrew Jacobs, Jr.
John W. Wynne
Robert H. McKinney
Owen B. Melton, Jr.
Michael L. Smith
Item 5. When used in this Form 10-Q, the words "believes,"
"expects," "estimates," "will likely result," or "will continue"
and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and
uncertainties which could cause actual results to differ
materially. In particular, among the factors that could
cause actual results to differ materially are general business and
economic conditions, competitive and regulatory factors, credit
risks of lending activities, and interest rates. Readers are
cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The
Corporation undertakes no obligation to publicly release the
results of any revisions to these forward-looking
statements which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of
unanticipated events.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits - Financial Data Schedule
(b) Reports on Form 8-K - There were no reports
on Form 8-K filed during the three months
ended March 31, 1999.
<PAGE> 20
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
First Indiana Corporation
May 12, 1999 /s/Owen B. Melton, Jr.
Owen B. Melton, Jr.
President
May 12, 1999 /s/David L. Gray
David L. Gray
Vice President and
Treasurer
<PAGE> 21
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for the three months ended March 31, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1999
<CASH> 39,298
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 5,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 158,154
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,573,671
<ALLOWANCE> 26,408
<TOTAL-ASSETS> 1,826,565
<DEPOSITS> 1,305,728
<SHORT-TERM> 95,746
<LIABILITIES-OTHER> 22,574
<LONG-TERM> 235,216
0
0
<COMMON> 136
<OTHER-SE> 167,165
<TOTAL-LIABILITIES-AND-EQUITY> 1,826,565
<INTEREST-LOAN> 32,258
<INTEREST-INVEST> 1,543
<INTEREST-OTHER> 486
<INTEREST-TOTAL> 34,287
<INTEREST-DEPOSIT> 13,174
<INTEREST-EXPENSE> 17,799
<INTEREST-INCOME-NET> 16,488
<LOAN-LOSSES> 2,460
<SECURITIES-GAINS> 218
<EXPENSE-OTHER> 12,502
<INCOME-PRETAX> 7,619
<INCOME-PRE-EXTRAORDINARY> 7,619
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,630
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.36
<YIELD-ACTUAL> 3.82
<LOANS-NON> 15,066
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,889
<ALLOWANCE-OPEN> 25,700
<CHARGE-OFFS> 1,989
<RECOVERIES> 237
<ALLOWANCE-CLOSE> 26,408
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 9,067
</TABLE>
