United States Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 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 12,510,944 Shares
Class Outstanding at 7/31/99
<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 June 30, 1999 and December 31, 1998 4
Condensed Consolidated Statements of
Earnings for the Three and Six Months
Ended June 30, 1999 and 1998 5
Condensed Consolidated Statements of
Shareholders' Equity for the Six Months
Ended June 30, 1999 6
Condensed Consolidated Statements of Cash
Flows for the Six Months Ended
June 30, 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 13
Item 3. Disclosures About Market Risk 23
Part II Other Information 24
Signatures 25
<PAGE> 2
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
First Indiana Corporation and Subsidiaries
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
For the Three Months Ended
June 30,
1999 1998
<S> <C> <C>
Total Interest Income $ 35,917 $ 34,255
Total Interest Expense 18,427 18,429
Net Earnings 5,021 4,617
Basic Earnings Per Share 0.40 0.36
Diluted Earnings Per Share 0.39 0.35
Dividends Per Share 0.13 0.12
Net Interest Margin 3.89 % 3.86 %
Net Interest Spread 3.27 3.15
Return on Average Equity 11.97 11.64
Return on Average Assets 1.07 1.08
Average Shares Outstanding 12,606,654 12,770,240
Average Diluted Shares Outstanding 12,831,456 13,303,957
<CAPTION>
For the Six Months Ended
June 30,
1999 1998
<S> <C> <C>
Total Interest Income $ 70,300 $ 67,385
Total Interest Expense 36,226 35,866
Net Earnings 9,651 9,035
Basic Earnings Per Share 0.76 0.71
Diluted Earnings Per Share 0.75 0.68
Dividends Per Share 0.26 0.24
Net Interest Margin 3.87 % 3.92 %
Net Interest Spread 3.23 3.21
Return on Average Equity 11.54 11.51
Return on Average Assets 1.05 1.08
Average Shares Outstanding 12,643,297 12,744,117
Average Diluted Shares Outstanding 12,876,487 13,301,737
<CAPTION>
At June 30,
1999 1998
<S> <C> <C>
Assets $ 1,916,745 $ 1,750,819
Loans-Net 1,604,192 1,453,826
Deposits 1,347,515 1,220,295
Shareholders' Equity 166,716 160,223
Shareholders' Equity/Assets 8.70 % 9.15 %
Shareholders' Equity Per Share $ 13.30 $ 12.54
Market Closing Price 21.38 26.13
Price/Earnings Multiple 13.70 x 18.66 x
<CAPTION>
At June 30, 1999
Actual Required
<S> <C> <C>
Capital Ratios
Tangible Capital/Total Assets 7.68 % 1.50 %
Core (Tier One) Capital/Total Assets 7.68 % 3.00 %
Risk-Based Capital/Risk-Weighted Assets 10.42 % 8.00 %
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS
First Indiana Corporation and Subsidiaries
(Dollars in Thousands, Except Share Data)
June 30, December 31,
1999 1998
(Unaudited)
<S> <C> <C>
Assets
Cash $ 45,119 $ 45,153
Federal Funds Sold 13,000 12,500
Total Cash and Cash Equivalents 58,119 57,653
Investments Available for Sale 112,278 113,291
Mortgage-Backed Securities Available for Sale 56,258 29,680
Loans Held for Sale 105,399 112,398
Loans Receivable 1,526,670 1,431,845
Less Allowance for Loan Losses (27,877) (25,700)
Loans Receivable - Net 1,604,192 1,518,543
Premises and Equipment 19,594 18,546
Accrued Interest Receivable 12,810 11,680
Real Estate Owned - Net 2,557 2,204
Prepaid Expenses and Other Assets 50,937 44,393
Total Assets $ 1,916,745 $ 1,795,990
Liabilities and Shareholders' Equity
Liabilities
Non-Interest-Bearing Deposits $ 129,612 $ 129,043
Interest-Bearing Deposits 1,217,903 1,098,875
Total Deposits 1,347,515 1,227,918
Federal Home Loan Bank Advances 311,859 327,247
Short-Term Borrowings 67,428 54,219
Accrued Interest Payable 3,316 2,646
Advances by Borrowers for Taxes and Insurance 2,736 1,958
Other Liabilities 17,175 16,032
Total Liabilities 1,750,029 1,630,020
Shareholders' Equity
Preferred Stock, $.01 Par Value: 2,000,000 Shares
Authorized; None Issued - -
Common Stock, $.01 Par Value: 33,000,000 Shares
Authorized; 13,578,574 and 13,512,902 Shares Issued and
Outstanding, Including Shares in Treasury 136 135
Paid-In Capital in Excess of Par 37,567 37,029
Retained Earnings 143,659 137,063
Accumulated Other Comprehensive Income (Loss) (1,520) 425
Treasury Stock-at Cost, 1,043,813 and 809,608 Shares (13,126) (8,682)
Total Shareholders' Equity 166,716 165,970
Total Liabilities and Shareholders' Equity $ 1,916,745 $ 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 Six Months Ended
June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Interest Income
Loans $ 33,141 $ 31,345 $ 64,954 $ 61,553
Investments 1,445 1,887 2,988 3,747
Mortgage-Backed Securities 910 558 1,451 1,192
Dividends on Federal Home
Loan Bank Stock 331 264 697 526
Federal Funds Sold and
Interest-Bearing Deposits 90 201 210 367
Total Interest Income 35,917 34,255 70,300 67,385
Interest Expense
Deposits 14,007 13,968 27,181 27,139
Federal Home Loan Bank Advances 3,801 3,768 7,947 7,289
Short-Term Borrowings 619 693 1,098 1,438
Total Interest Expense 18,427 18,429 36,226 35,866
Net Interest Income 17,490 15,826 34,074 31,519
Provision for Loan Losses 2,460 2,320 4,920 5,140
Net Interest Income After
Provision for Loan Losses 15,030 13,506 29,154 26,379
Non-Interest Income
Gain on Sale of Investments
Available for Sale - - 218 19
Gain on Sale of Loans 2,448 2,566 4,568 4,734
Loan Servicing Income 262 428 513 945
Loan Fees 1,106 668 1,952 1,440
Insurance Commissions 22 48 41 66
Deposit Product Fee Income 639 711 1,167 1,353
Other 1,835 839 3,850 1,674
Total Non-Interest Income 6,312 5,260 12,309 10,231
Non-Interest Expense
Salaries and Benefits 7,285 5,474 14,291 10,584
Net Occupancy 773 718 1,563 1,381
Equipment 1,439 1,293 2,561 2,467
Office Supplies and Postage 527 482 1,073 974
Real Estate Owned Operations - Net 169 216 289 416
Deposit Insurance 176 169 358 336
Other 2,877 2,890 5,613 5,650
Total Non-Interest Expense 13,246 11,242 25,748 21,808
Earnings Before Income Taxes 8,096 7,524 15,715 14,802
Income Taxes 3,075 2,907 6,064 5,767
Net Earnings $ 5,021 $ 4,617 $ 9,651 $ 9,035
Basic Earnings Per Share $ 0.40 $ 0.36 $ 0.76 $ 0.71
Diluted Earnings Per Share $ 0.39 $ 0.35 $ 0.75 $ 0.68
Dividends Per Common Share $ 0.13 $ 0.12 $ 0.26 $ 0.24
</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 Per 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 Six Months
Ended June 30, 1999 9,651 9,651
Unrealized Loss on Securities Available
for Sale, Net of Income Taxes of $(1,324)
and Reclassification Adjustment of $218 (1,945) (1,945)
Total Comprehensive Income 7,706
Common Stock Issued Under Restricted
Stock Plans-Net of Amortization 223 223
Tax Benefit of Stock Options Exercised 323 323
Exercise of Stock Options 68,756 1 272 273
Dividends on Common Stock ($.26 per share) (3,278) (3,278)
Redemption of Common Stock (3,084) ( 57) (57)
Purchase of Treasury Stock (234,205) (4,444) (4,444)
Balance at June 30, 1999 12,534,761 $136 $37,567 $143,659 $(1,520) $(13,126) $166,716
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE> 6
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
First Indiana Corporation and Subsidiaries
(Dollars in Thousands)
(Unaudited)
Six Months Ended June 30,
1999 1998
<S> <C> <C>
Cash Flows from Operating Activities
Net Earnings $ 9,651 $ 9,035
Adjustments to Reconcile Net Earnings to:
Net Cash Provided (Used) by Operating Activities
(Gain) Loss on Sale of Assets (4,786) (4,493)
Amortization 1,425 901
Amortization of Restricted Stock Plan 223 203
Common Stock Issued Under Deferred Compensation Plan -- 65
Net (Accretion) Amortization of Loans
and Mortgage-Backed Securities (151) 279
Depreciation 1,088 1,012
Provision for Loan Losses 4,920 5,140
Origination of Loans Held For Sale
Net of Principal Collected (391,216) (303,922)
Proceeds from Sale of Loans Held for Sale 402,783 232,030
Change In:
Accrued Interest Receivable (1,130) (576)
Prepaid Expenses and Other Assets (30,819) (8,849)
Accrued Interest Payable 670 620
Other Liabilities 1,143 (102)
Net Cash Provided (Used) by Operating Activities (6,199) (68,657)
Cash Flows from Investing Activities
Proceeds from Maturities of
Investment Securities Held to Maturity -- 20,487
Proceeds from Maturities of Investment Securities
Available for Sale 18,957 --
Proceeds from Sale of Investments Available for Sale 30,211 10,023
Purchase of Investment Securities Available for Sale (49,806) (37,384)
Purchase of Mortgage-Backed Securities Available for Sale (30,284) --
Principal Collected on Mortgage-Backed Securities 2,271 3,617
Originations of Loans Net of Principal Collected (73,562) (32,460)
Proceeds from Sale of Loans -- 5,294
Proceeds from Sale of Premises and Equipment 31 --
Purchase of Premises and Equipment (2,167) (1,780)
Net Cash Provided (Used) by Investing Activities (104,349) (32,203)
Cash Flows from Financing Activities
Net Change in Deposits 119,597 112,740
Repayment of Federal Home Loan Bank Advances (472,071) (209,048)
Borrowings of Federal Home Loan Bank Advances 456,684 238,387
Net Change in Short-Term Borrowings (13,209) (13,131)
Net Change in Advances by Borrowers
for Taxes and Insurance 778 1,235
Stock Option Proceeds 216 605
Payment for Fractional Shares -- (10)
Dividends Paid (3,278) (3,062)
Purchase of Treasury Stock (4,444) (442)
Tax Benefit of Stock Options Exercised 323 844
Net Cash Provided by Financing Activities 111,014 128,118
Net Change in Cash and Cash Equivalents 466 27,258
Cash and Cash Equivalents at Beginning of Period 57,653 50,231
Cash and Cash Equivalents at End of Period $ 58,119 $ 77,489
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Period For:
Interest on Deposits, Advances, and
Other Borrowed Money $ 35,556 $ 35,246
Income Taxes 8,636 6,014
Transfer of Loans to Real Estate Owned 23,855 5,291
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE> 7
FIRST INDIANA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Six Months Ended June 30, 1999
(Unaudited)
Note 1 - Basis of Presentation
The accompanying financial statements have been
prepared with generally accepted accounting principles
for interim financial information and with the
instruction to Form 10-Q and Rule 10-01 or Regulation S-
X. Accordingly, they do not include all of the
information and footnotes required by generally
accepted accounting principles for complete financial
statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been
included. 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 (12,606,654
and 12,770,240 for the three months ended June 30, 1999
and 1998 and 12,643,297 and 12,744,117 for the six
months ended June 30, 1999 and 1998). 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 (12,831,456 and 13,303,957 for the
three months ended June 30, 1999 and 1998 and
12,876,487 and 13,301,737 for the six months ended June
30, 1999 and 1998) 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 Losses
Allowances have been established for possible
losses on loans and real estate owned ("REO"). The
provisions for losses charged to operations are based
on management's judgment of current circumstances and
the credit risk of the loan portfolio and REO.
Management believes that these allowances are adequate.
While management uses available information to
recognize losses on loans and REO, future additions to
the allowances may be necessary based on changes in
economic conditions. In addition, various regulatory
agencies, as an integral part of their examinations,
periodically review these allowances and may require
the Corporation to recognize additions to the allowance
based on their judgment about information available to
them at the time of their examination.
<PAGE> 8
Note 4 - 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 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. All
dollar amounts are in thousands.
<PAGE> 9
<TABLE>
<CAPTION>
Second
Quarter
Inter- 1999
Mortgage Segment segment Consolidated
Consumer Residential Business Treasury Banking Retail FirstTrust Totals Eliminations Totals
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average Segment Assets $612,662 $425,631 $478,128 $186,500 $109,146 $55,241 $1,016 $1,868,324 $16,247 (1) $1,884,571
Net Interest Income 5,480 1,380 4,374 281 559 3,907 0 15,981 1,509 (2) 17,490
Revenue from External
Customers 1,398 33 1,316 25 954 1,201 262 5,189 1,123 (3) 6,312
Intersegment Revenues 1,120 (325) (620) 0 1,864 310 0 2,349 (2,349)(4) 0
Significant noncash items:
Provision for Loan
Losses 1,880 30 550 0 0 0 0 2,460 0 2,460
Segment Direct Profit
(Loss) Before Income Tax 4,954 (29) 3,101 53 2,728 1,537 (210) 12,134 (4,038)(3) 8,096
<CAPTION>
Second
Quarter
Inter- 1998
Mortgage Segment segment Consolidated
Consumer Residential Business Treasury Banking Retail Totals Eliminations Totals
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average Segment Assets $550,413 $479,462 $327,108 $191,490 $106,913 $45,589 $1,700,975 $6,159 (1) $1,707,134
Net Interest Income 4,255 1,013 3,279 696 447 2,851 12,541 3,285 (2) 15,826
Revenue from External
Customers 1,482 13 769 49 1,434 804 4,551 709 (3) 5,260
Intersegment Revenues 341 (624) (434) 0 2,134 964 2,381 (2,381)(4) 0
Significant noncash items:
Provision for Loan
Losses 1,945 60 315 0 0 0 2,320 0 2,320
Segment Direct Profit
(Loss) Before Income Tax 2,043 (404) 1,957 547 4,654 1,469 10,266 (2,742)(3) 7,524
<CAPTION>
(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 management 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.
<PAGE> 10
<CAPTION>
YTD
Inter- 6/30/99
Mortgage Segment segment Consolidated
Consumer Residential Business Treasury Banking Retail FirstTrust Totals Eliminations Totals
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average Segment Assets $606,581 $416,652 $455,271 $178,598 $117,800 $52,527 $ 929 $1,828,358 $16,677 (1) $1,845,035
Net Interest Income 10,697 2,707 8,041 737 1,202 7,353 0 30,737 3,337 (2) 34,074
Revenue from External
Customers 2,440 64 2,267 218 3,098 2,138 289 10,514 1,795 (3) 12,309
Intersegment Revenues 2,938 (662) (1,157) 0 3,797 456 0 5,373 (5,373)(4) 0
Significant noncash items:
Provision for Loan
Losses 3,671 43 1,206 0 0 0 0 4,920 0 4,920
Segment Direct Profit
(Loss) Before Income Tax 9,939 1,868 5,453 488 4,623 2,370 (591) 24,150 (8,435)(3) 15,715
<CAPTION>
YTD
Inter- 6/30/98
Mortgage Segment segment Consolidated
Consumer Residential Business Treasury Banking Retail Totals Eliminations Totals
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average Segment Assets 541,396 486,577 321,842 190,400 84,586 44,199 1,669,001 3,726 (1) 1,672,727
Net Interest Income 8,755 1,963 6,140 1,224 814 5,948 24,844 6,675 (2) 31,519
Revenue from External
Customers 3,051 35 1,630 67 2,643 1,426 8,852 1,379 (3) 10,231
Intersegment Revenues 1,231 (1,210) (733) 0 4,091 1,397 4,776 (4,776)(4) 0
Significant noncash items:
Provision for Loan
Losses 2,599 133 2,408 0 0 0 5,140 0 5,140
Segment Direct Profit
(Loss) Before Income Tax 5,959 1,266 5,554 1,031 7,169 2,534 23,513 (8,711)(3) 14,802
<CAPTION>
(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 management 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> 11
Note 5 - Current Accounting Pronouncements
FASB Statement No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133, an Amendment
of FASB Statement No. 133" was issued in June 1999.
Statement No. 137 defers the effective date of
Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" for one year.
Statement No. 133, as amended, is now effective for all
fiscal quarters of all fiscal years beginning after
June 15, 2000.
FASB Statement No. 133 generally requires that
derivatives embedded in hybrid instruments be separated
from their host contracts and be accounted for
separately as derivative contracts. For instruments
existing at the date of adoption, Statement No. 133
provides an entity the option of not applying this
provision to such hybrid instruments entered into
before January 1, 1998 and not substantially modified
thereafter. Consistent with the deferral of the
effective date for one year, Statement No. 137 also
provides an entity the option of not applying this
provision to hybrid instruments entered into before
January 1, 1998 or 1999 and not substantially modified
thereafter. Management is currently assessing the
impact of this Statement on the financial condition and
results of operations of the Corporation in the year of
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> 12
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 $5,021,000 for the second quarter of 1999,
compared with net earnings of $4,617,000 in the second
quarter of 1998. Diluted earnings per share for the
three months ended June 30, 1999 were $.39, compared
with $.35 per share for the same period one year ago.
Cash dividends for the second quarter of 1999 and 1998
were $.13 and $.12 per share of common stock
outstanding, respectively.
For the first six months of 1999, net earnings
were $9,651,000, compared with $9,035,000 one year ago.
For the six months ended June 30, 1999, diluted
earnings per share were $.75, compared with $0.68 for
the same period one year ago. Cash dividends through
the first six months of 1999 and 1998 were $.26 and
$.24 per share of common stock outstanding,
respectively.
Net Interest Income
Net interest income was $17,490,000 for the three
months ended June 30, 1999, compared with $15,826,000
for the three months ended June 30, 1998. For the six
months ended June 30, 1999, net interest income was
$34,074,000, compared with $31,519,000 for the six
months ended June 30, 1998.
Net loans outstanding grew to $1,604,192,000 at
June 30, 1999, compared with $1,453,826,000 one year
earlier. Residential loans outstanding at June 30,
1999, were $503,979,000, down ten percent from one year
ago. The decrease results from the Bank's increased
activity in the secondary market. Residential loan
sales for the six months ending June 30, 1999 were
$259,002,000, compared with $165,031,000 for the same
period in 1998. At June 30, 1999, home equity
outstandings were $603,507,000, compared with
$547,338,000 at June 30, 1998, a 10 percent increase.
Business loans were $196,715,000 at June 30, 1999,
compared with $150,759,000 one year earlier, a 30
percent increase. Construction loans increased 65
percent to $281,623,000 at June 30, 1999, compared to
$170,568,000 one year ago.
Interest income for the second quarter of 1999 was
$35,917,000, compared with $34,255,000 for the three
months ended June 30, 1998. Interest income for the six
months ended June 30, 1999 was $70,300,000, compared
with $67,385,000 for the same period in 1998. Interest
expense for the second quarter of 1999 was $18,427,000,
compared with $18,429,000 for the three months ended
June 30, 1998. Interest expense for the six months
ended June 30, 1999 and 1998 was $36,226,000 and
$35,866,000, respectively.
During the second quarter of 1999, the
Corporation's cost of funds was 4.72 percent, compared
with 5.21 percent one year ago. For the six months
ended June 30, 1999, the cost of funds was 4.74
percent, compared with 5.18 percent for the same period
in 1998. The yield on earning assets was 7.99 percent
for the second quarter of 1999, compared with 8.36
percent one year ago. For the six months ended June
30, 1999, the yield on earning assets was 7.97 percent,
compared with 8.39 percent for the same period in 1998.
<PAGE> 13
Annualized return on total average assets was 1.07
percent for the three months ended June 30, 1999,
compared with 1.08 percent one year ago. For the six
months ended June 30, 1999, the Corporation's
annualized return on total average assets was 1.05
percent, 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.
<TABLE>
<CAPTION>
Three Months Ended June 30,
(Dollars in Thousands) 1999 1998
<S> <C> <C>
Net Interest Income $ 17,490 $ 15,826
Average Interest-Earning Assets $ 1,798,308 $ 1,639,420
Average Interest-Bearing Liabilities 1,561,204 1,414,995
Average Interest-Free Funds $ 237,104 $ 224,425
Yield on Interest-Earning Assets 7.99% 8.36%
Yield on Interest-Bearing Liabilities 4.72% 5.21%
Interest-Rate Spread 3.27% 3.15%
Impact of Interest-Free Funds 0.62% 0.71%
Net Interest Margin 3.89% 3.86%
<CAPTION>
All non-accruing delinquent loans have been included in average
interest-earning assets.
<CAPTION>
Six Months Ended June 30,
(Dollars in Thousands) 1999 1998
<S> <C> <C>
Net Interest Income $ 34,074 $ 31,519
Average Interest-Earning Assets $ 1,763,091 $ 1,607,247
Average Interest-Bearing Liabilities 1,527,727 1,385,965
Average Interest-Free Funds $ 235,364 $ 221,282
Yield on Interest-Earning Assets 7.97% 8.39%
Yield on Interest-Bearing Liabilities 4.74% 5.18%
Interest-Rate Spread 3.23% 3.21%
Impact of Interest-Free Funds 0.64% 0.71%
Net Interest Margin 3.87% 3.92%
<CAPTION>
All non-accruing delinquent loans have been included in average
interest-earning assets.
</TABLE>
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 rates on deposit
products, but still resulted in a negative impact on
the Corporation's interest-rate margin for the first
six months of 1999 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.
<PAGE> 14
Non-Performing Assets and Summary of Loan Loss
Experience
The following table analyzes the allowance
for losses on loans and REO for the six months
ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
Allowance for REO Loss Loan & REO
Loan Losses Allowance Loss Allowance
1999 1998 1999 1998 1999 1998
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance of Allowance
at Beginning of Year $25,700 $22,414 $500 $483 $26,200 $22,897
Provision for Losses 4,920 5,140 (211) 45 4,709 5,185
Charge-Offs -- Residential -- (51) (14) (7) (14) (58)
-- Consumer (2,983) (3,686) (19) (193) (3,002) (3,879)
-- Construction (208) (9) (4) -- (212) (9)
-- Business (278) -- -- -- (278) --
-- Commercial Real
Estate -- -- (79) -- (79) --
Recoveries -- Residential 20 1 16 75 36 76
-- Consumer 500 552 254 89 754 641
-- Construction 202 69 33 8 235 77
-- Business 4 17 -- -- 4 17
-- Commercial Real
Estate -- -- 24 -- 24 --
Balance at June 30, $27,877 $24,447 $500 $500 $28,377 $24,947
Ratio of Allowance for Loan Losses to Loans
Receivable 1.71% 1.65%
Ratio of REO Loss Allowance to Real Estate Owned 16.36% 12.60%
Ratio of Total Loan and REO Loss Allowance to
Non-Performing Assets 167.08% 128.49%
</TABLE>
Non-Performing Assets
Non-performing assets were $16,984,000 or
.89 percent of assets, at June 30, 1999. This
compares with $19,880,000, or 1.11 percent of
assets, at December 31, 1998 and $19,415,000, or
1.11 percent of assets, at June 30, 1998. This
category includes non-accrual loans, REO, and
restructured loans on which the Bank continues
to accrue interest.
The Bank regularly reviews all non-
performing assets to evaluate the adequacy of
the allowances for losses on loans and REO. The
allowance for loan losses is maintained through
a provision for loan losses, which is charged to
earnings. The provisions are determined in
conjunction with management's review and
evaluation of current economic conditions,
changes in the character and size of the loan
portfolio, estimated charge-offs, and other
pertinent information derived from a quarterly
review of the loan portfolio and REO properties.
The provision for losses on loans in the
second quarter of 1999 was $2,460,000, compared
with $2,320,000 in the second quarter of 1998.
For the six months ended June 30, 1999, the
total provision for loan losses was $4,920,000,
compared with $5,140,000 for the same period in
1998.
<PAGE> 15
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, non-performing loans, 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 $6,312,000 for the
three months ended June 30, 1999, compared with
$5,260,000 for the same period in 1998. For the six
months ended June 30, 1999 and 1998, total non-interest
income was $12,309,000 and $10,231,000, respectively.
The gain on sale of loans of $4,568,000 and
$2,448,000 for the three and six month periods ended
June 30, 1999 consists of gains on the sale of fixed-
rate home equity loans and residential mortgage loans.
Through the first six months of 1998, the Bank
recognized $4,474,000 in gains on fixed-rate home
equity and residential mortgage loan sales. A national
network of agents coupled with a call center, has
allowed the Bank to aggressively pursue originations of
home equity products with loan-to-value ratios of
greater than 80 percent. The Bank processes and
underwrites these loans and subsequently sells them
into the secondary market. In some cases, the Bank
retains the servicing rights on the home equity loan
sales.
Loan servicing income for the three and six months
ended June 30, 1999 decreased $166,000 and $432,000
from the comparable periods in 1998. This decrease
primarily occurred as a result of the Bank's
amortization of mortgage servicing rights, coupled with
servicing sales and a general decline in the servicing
portfolio. During the second quarter of 1998, the Bank
recognized a gain of $260,000 on the sale of loan
servicing rights. The Corporation's residential loan
servicing portfolio amounted to $768,100,000 at June
30, 1999, compared with $956,017,000 at June 30, 1998.
Loan fees increased $438,000 and $512,000 for the
three and six months ending June 30, 1999 when compared
with last year due to the increased activity in the
business lending portfolio.
Deposit product fees increased $376,000 and
$574,000 for the three and six months ending June 30,
1999, when compared to the 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.
<PAGE> 16
During the first quarter of 1999, the Bank
recognized $905,000 on the sale of loan servicing
rights, which is included as a component of other non-
interest income. First Indiana's trust subsidiary,
FirstTrust Indiana, had $929,000,000 in trust assets
under management or in the process of transfer at June
30, 1999. Trust fees generated from these assets
during the second quarter for the three and six month
periods ended June 30, 1999 are also included in other
non-interest income.
Non-Interest Expense
Non-interest expense was $13,246,000 for the three
months ended June 30, 1999, compared with $11,242,000
for the same period in 1998. Non-interest expense for
the six months ended June 30, 1999 and 1998 was
$25,748,000 and $21,808,000, respectively. Salaries
and benefits increased $1,811,000 and $3,707,000 during
the three and six months ended June 30, 1999 from the
comparable period in 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.
Included in real estate owned operations-net are
all of the operating revenues and expenses associated
with the Corporation's real estate owned. Such net
results declined by $47,000 and $127,000 for the three
and six months ended June 30, 1999 from one year ago
due to the increased asset balance of the consumer
portion of real estate owned.
Capital Resources and Liquidity
At June 30, 1999, shareholders' equity was
$166,716,000, or 8.70 percent of total assets, compared
with $165,970,000, or 9.24 percent, at December 31,
1998 and $160,223,000, or 9.15 percent, at June 30,
1998.
The Corporation paid a quarterly dividend of $.13
per common share June 15, 1999 to shareholders of
record as of June 4, 1999. This reflects an increase
from $.12 per share in 1998. For the six months ended
June 30, 1999 the Corporation has paid $.26 per share
in dividends, compared to $.24 for the same period in
1998. On March 6, 1998, the Corporation effected a six-
for-five stock dividend.
<PAGE> 17
The following table shows First Indiana's strong
capital levels and compliance with all capital
requirements at June 30, 1999. 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.
<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 $145,671
Tangible Capital (1) $147,191 7.68% $28,737 1.50% N/A N/A
Core (Tier One) Capital 147,191 7.68% 57,474 3.00% 95,790 5.00%
Tier One Risk-Based Capital 147,191 9.25% N/A N/A 95,465 6.00%
Total Risk-Based Capital (2) 165,816 10.42% 127,287 8.00% 159,109 10.00%
(1) First Indiana Bank capital differs from tangible capital by the FAS115 equity
securities adjustment of $1,520.
(2) Risk-based capital includes a $19,987 addition for general loan loss reserves and
a $1,362 deduction for land loans with loan-to-value ratios in excess of 80 percent.
</TABLE>
The Corporation conducts its business through its
subsidiaries. The main source of funds for the
Corporation is dividends from the Bank. The
Corporation has no significant assets other than its
investment in the Bank.
Regulations require the director of the OTS to set
minimum liquidity levels between four and 10 percent of
assets. In the fourth quarter of 1997, the regulations
were altered to lower the liquidity requirement to four
percent of net withdrawable assets, and the definition
of net withdrawable assets was simplified. This change
did not have a significant impact on the Corporation's
liquidity position. The Corporation's liquidity ratio
at June 30, 1999, was 8.90 percent.
Interest-Rate Sensitivity
First Indiana engages in rigorous, formal
asset/liability management, the objectives of which are
to manage interest-rate risk, ensure adequate
liquidity, and coordinate sources and uses of funds.
At June 30, 1999, the Corporation's cumulative one-year
interest-rate gap stood at (2.16) percent. This means
that 2.16 percent of First Indiana's liailities will
reprice within one year without a corresponding
repricing of the assets funding them.
The following schedule analyzes the difference in
rate-sensitive assets and liabilities or gap at June
30, 1999 and December 31, 1998.
<PAGE> 18
<TABLE>
<CAPTION>
Rate Sensitivity by Period of Maturity or Rate Change
June 30, 1999
Over 180 Over
% of Within Days to 1 Year to Over
(Dollars in Thousands) Rate Balance Total 180 Days 1 Year 5 Years 5 Years
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Investment Securities & Other 5.80%$ 141,890 7.75%$ 31,604 7,174 86,500 16,612
Loans Receivable (1)
Mortgage-Backed Securities 6.40% 56,258 3.07% 8,530 8,677 39,051 -
Residential Mortgage Loans 7.25% 503,979 27.54% 200,637 70,586 192,836 39,920
Commercial Real Estate Loans 9.36% 32,990 1.80% 9,188 4,603 14,433 4,766
Business Loans 8.35% 196,715 10.75% 128,760 7,402 57,802 2,751
Consumer Loans 9.17% 616,762 33.70% 260,385 36,981 171,476 147,920
Residential Construction Loans 7.83% 281,623 15.39% 253,820 14,101 13,702 -
Total 8.00%$ 1,830,217 100.00% 892,924 149,524 575,800 211,969
Interest-Bearing Liabilities
Deposits:
Demand Deposits (2) 1.58%$ 94,897 5.94%$ - - - 94,897
Passbook Deposits (3) 2.85% 45,441 2.85% 6,449 1,008 8,064 29,920
Money Market Savings 4.10% 383,392 24.00% 383,392 - - -
Jumbo Certificates 5.22% 209,150 13.09% 109,073 35,906 64,171 -
Fixed-Rate Certificates 5.23% 485,023 30.37% 182,156 126,595 176,272 -
Total 4.50% 1,217,903 76.25% 681,070 163,509 248,507 124,817
Borrowings:
FHLB Advances 5.42% 311,859 19.53%$ 135,000 35,000 125,000 16,859
Short-Term Borrowings 4.60% 67,428 4.22% 67,428 - - -
Total 4.68% 1,597,190 100.00% 883,498 198,509 373,507 141,676
Net - Other (4) 233,027 233,027
Total $ 1,830,217 883,498 198,509 373,507 374,703
Rate Sensitivity Gap $ 9,426 $ (48,985)$ 202,293 $ (162,734)
June 30, 1999
Cumulative Rate-Sensitivity Gap $ 9,426 $ (39,559)$ 162,734
Percent of Total Interest-Earning Assets 0.52 % (2.16)% 8.89%
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
$62,869,000 of Loans Held for Sale. Included in Consumer Loans are $42,530,000 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> 19
Financial Condition
Total assets at June 30, 1999, were $1,916,745,000
an increase from $1,795,990,000 at December 31, 1998.
Net loans receivable at June 30, 1999, were
$1,604,192,000, 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 $26,578,000 to $56,258,000 at June 30,
1999 from year-end as a result of purchases.
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. This alliance is expected to be consummated in
the third quarter of 1999. First Indiana will continue
to originate construction loans outside Indiana, but
permanent loans will be referred to Heritage Financial
Group.
Total deposits were $1,347,515,000 at June 30,
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 June 30,
1999 and December 31, 1998 were approximately
$3,554,000 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 June 30, 1999
and December 31, 1998 were $50,605,000 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
$311,859,000 at June 30, 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.
<PAGE> 20
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 is also
making plans to ensure the availability of funds in
order to meet potentially high liquidity needs during
December, 1999.
Risks of Year 2000 Issues
The Bank faces two primary risks in regard to Year
2000 issues: technical risk and liquidity risk.
"Technical risk" refers to possible disruption of the
Bank's operations because of computer failure by the
Bank or third parties. The impact or the severity on
Bank operations would depend on the nature and duration
of the failure. The most serious effect on the
operations of the Bank could result if basic services
provided by the Bank's external service bureau were
disrupted. Disruptions in other services such as
telecommunications and electric power could also have a
serious effect. The Bank cannot make any assurance that
significant disruptions attributable to such parties
will not occur. Failure of a third party fully to
address its Year 2000 issues could have an adverse
effect on the business, operations, and/or financial
condition of the Bank.
"Liquidity risk" refers to the fact that Bank
customers might withdraw substantial amounts of
currency to cover fears that Year 2000 computer
glitches will shut down the Bank's computer systems and
automated teller machines and render withdrawals from
financial institutions difficult. The Bank has taken
proactive steps to address this possibility and is
considering what additional steps, if any, may be
needed.
State of 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 contacted. 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 of 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 and third quarters.
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.
The OTS is conducting regular 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 Bank's external service bureau has
reported that it expects its systems to be year 2000
compliant in all material respects. The service bureau
is also being examined by the OTS.
Costs to Address Year 2000 Issues
The Bank's costs associated with the Year 2000 as
of June 30, 1999, totaled $4.6 million. 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 $21,000 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
<PAGE> 21
assess the financial impact of lost
revenue due to Year 2000 issues or future expenditures
due to external factors at this time.
Contingency Plans
While the Bank has undertaken significant efforts
to assess, remediate and test their technical systems
to address Year 2000 processing issues, it is also
developing contingency plans. These contingency plans
are intended to provide alternative processes and
actions in the event of systems malfunction or failures
due to Year 2000 issues. The Bank is required to
follow FFIEC guidance advising two levels of
contingency planning - remediation and business-
resumption. Remediation contingency plans address the
actions to be taken if the remediation efforts fall
behind schedule or appear in jeopardy of not delivering
a Year 2000 ready system when required. Business-
resumption contingency plans address the actions that
would be taken if key business processes could not be
performed in the normal manner upon entering the next
century due to system or third party failures.
The Bank has defined remediation contingency plan
requirements that are intended to provide alternative
processes and actions to address failed or unsuccessful
remediation efforts. The first priority is their core
processes and mission-critical systems. The Bank has
developed business resumption contingency plans for
each of its key business processes and is required to
have them tested by September 30, 1999. The business-
resumption plans of the Bank include the four phases
cited in the FFIEC contingency planning process. These
four phases are: (i) establishment of organization
planning guidelines, (ii) completion of a business
impact analysis including the definition of Year 2000
failure scenarios, (iii) development of a contingency
plan for core systems including contingency trigger
dates, and (iv) review and periodic testing of plan
viability.
The management of the Bank believes it is
taking reasonable steps to address and remediate Year
2000 issues, especially with respect to mission-
critical systems and liquidity. However, the Bank can
make no representation that all of its systems and,
especially, those of significant third parties, will be
Year 2000 ready or that it will not be adversely
affected by Year 2000 issues.
<PAGE> 22
Disclosures About Market Risk
The Corporation's success is largely dependent
upon its ability to manage interest-rate risk, which is
defined as the exposure of the Corporation's net
interest income and net earnings to changes in interest
rates. The Bank's Asset/Liability Committee ("ALCO")
is responsible for managing interest-rate risk and the
Corporation has established acceptable limits for
interest-rate exposure, which are reviewed on a monthly
basis. The Bank uses a model which measures interest-
rate sensitivity to determine the impact on net
earnings of immediate and sustained upward and downward
movements in interest rates. Incorporated into the
model are assumptions regarding the current and
anticipated interest rate environment, estimated
prepayment rates of certain assets and liabilities,
forecasted loan and deposit originations, contractual
maturities and renewal rates on certificates of
deposits, estimated borrowing needs, anticipated loan
loss provision, projected secondary marketing gains and
losses, expected repricing spreads on variable-rate
products, and contractual maturities and repayments on
lending and investment products. The model
incorporates interest-rate sensitive instruments which
are held to maturity or available for sale. The Bank
has no trading assets. Based on the information and
assumptions in effect at June 30, 1999, management
believes that a 100 basis point increase or decrease in
interest rates over a 12 month period would result in a
3.2 percent increase and a 4.0 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> 23
Other Information
Items 1, 2, 3 and 4 are not applicable.
Item 5. When used in this Form 10-Q, the words "believes,"
"expects," "estimates," "will likely result," or "will continue"
and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and
uncertainties which could cause actual results to differ
materially. In particular, among the factors that could
cause actual results to differ materially are general business and
economic conditions, competitive and regulatory factors, credit
risks of lending activities, and interest rates. Readers are
cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The
Corporation undertakes no obligation to publicly release the
results of any revisions to these forward-looking
statements which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of
unanticipated events.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits Financial Data Schedule
(b) Reports on Form 8-K There were no reports on
Form 8-K filed during the six months ended June 30,
1999.
<PAGE> 24
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
First Indiana Corporation
August 12, 1999 /s/Owen B. Melton, Jr.
Owen B. Melton, Jr.
President
August 12, 1999 /s/David L. Gray
David L. Gray
Vice President and
Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for the six months ended June 30, 1999 and is
qualified in its entirety by reference to such financial statements
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1999
<CASH> 45,119
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 13,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 168,536
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,632,069
<ALLOWANCE> 27,877
<TOTAL-ASSETS> 1,916,745
<DEPOSITS> 1,347,515
<SHORT-TERM> 167,428
<LIABILITIES-OTHER> 23,227
<LONG-TERM> 211,859
0
0
<COMMON> 136
<OTHER-SE> 166,580
<TOTAL-LIABILITIES-AND-EQUITY> 1,916,745
<INTEREST-LOAN> 64,954
<INTEREST-INVEST> 4,439
<INTEREST-OTHER> 907
<INTEREST-TOTAL> 70,300
<INTEREST-DEPOSIT> 27,181
<INTEREST-EXPENSE> 36,226
<INTEREST-INCOME-NET> 34,074
<LOAN-LOSSES> 4,920
<SECURITIES-GAINS> 218
<EXPENSE-OTHER> 25,748
<INCOME-PRETAX> 15,715
<INCOME-PRE-EXTRAORDINARY> 15,715
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,651
<EPS-BASIC> 0.76
<EPS-DILUTED> 0.75
<YIELD-ACTUAL> 3.87
<LOANS-NON> 14,420
<LOANS-PAST> 0
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<LOANS-PROBLEM> 8,441
<ALLOWANCE-OPEN> 25,700
<CHARGE-OFFS> 3,469
<RECOVERIES> 726
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<ALLOWANCE-DOMESTIC> 0
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<ALLOWANCE-UNALLOCATED> 9,403
</TABLE>
