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 September 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 12,513,344 Shares
Class Outstanding at 10/31/99
<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 September 30, 1999 and December 31, 1998 4
Condensed Consolidated Statements of
Earnings for the Three and Nine Months
Ended September 30, 1999 and 1998 5
Condensed Consolidated Statements of
Shareholders' Equity for the Nine Months
Ended September 30, 1999 6
Condensed Consolidated Statements of Cash
Flows for the Nine Months Ended
September 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 12
Item 3. Disclosures About Market Risk 24
Part II Other Information 25
Signatures 26
<PAGE> 2
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
First Indiana Corporation and Subsidiaries
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
For the Three Months Ended
September 30,
1999 1998
<S> <C> <C>
Total Interest Income $ 37,545 $ 34,857
Total Interest Expense 19,301 18,905
Net Earnings 6,622 5,003
Basic Earnings Per Share 0.53 0.39
Diluted Earnings Per Share 0.52 0.38
Dividends Per Share 0.13 0.12
Net Interest Margin 3.98 % 3.81 %
Net Interest Spread 3.36 3.08
Return on Average Equity 15.60 12.36
Return on Average Assets 1.38 1.15
Average Shares Outstanding 12,509,044 12,750,527
Average Diluted Shares Outstanding 12,788,964 13,255,871
<CAPTION>
For the Nine Months Ended
September 30,
1999 1998
<S> <C> <C>
Total Interest Income $ 107,845 $ 102,242
Total Interest Expense 55,527 54,771
Net Earnings 16,273 14,038
Basic Earnings Per Share 1.29 1.10
Diluted Earnings Per Share 1.27 1.06
Dividends Per Share 0.39 0.36
Net Interest Margin 3.90 % 3.88 %
Net Interest Spread 3.28 3.16
Return on Average Equity 12.90 11.80
Return on Average Assets 1.16 1.10
Average Shares Outstanding 12,598,219 12,746,277
Average Diluted Shares Outstanding 12,853,797 13,286,412
<CAPTION>
At September 30,
1999 1998
<S> <C> <C>
Assets $ 1,878,586 $ 1,738,652
Loans-Net 1,614,055 1,462,763
Deposits 1,272,985 1,211,714
Shareholders' Equity 172,898 163,061
Shareholders' Equity/Assets 9.20 % 9.38 %
Shareholders' Equity Per Share $ 13.82 $ 12.83
Market Closing Price 21.00 21.00
Price/Earnings Multiple 10.10 x 13.82 x
<CAPTION>
At September 30, 1999
Actual Required
<S> <C> <C>
Capital Ratios
Tangible Capital/Total Assets 8.14 % 1.50 %
Core (Tier One) Capital/Total Assets 8.14 % 3.00 %
Risk-Based Capital/Risk-Weighted Assets 10.62 % 8.00 %
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS
First Indiana Corporation and Subsidiaries
(Dollars in Thousands, Except Share Data)
September 30, December 31,
1999 1998
(Unaudited)
<S> <C> <C>
Assets
Cash $ 32,547 $ 45,153
Federal Funds Sold 42,000 12,500
Total Cash and Cash Equivalents 74,547 57,653
Investments Available for Sale 45,364 113,291
Mortgage-Backed Securities Available for Sale 58,457 29,680
Loans Held for Sale 81,319 112,398
Loans Receivable 1,561,501 1,431,845
Less Allowance for Loan Losses (28,765) (25,700)
Loans Receivable - Net 1,614,055 1,518,543
Premises and Equipment 16,553 18,546
Accrued Interest Receivable 12,056 11,680
Real Estate Owned - Net 2,121 2,204
Prepaid Expenses and Other Assets 55,433 44,393
Total Assets $ 1,878,586 $ 1,795,990
Liabilities and Shareholders' Equity
Liabilities
Non-Interest-Bearing Deposits $ 148,752 $ 129,043
Interest-Bearing Deposits 1,124,233 1,098,875
Total Deposits 1,272,985 1,227,918
Federal Home Loan Bank Advances 371,854 327,247
Short-Term Borrowings 33,222 54,219
Accrued Interest Payable 4,825 2,646
Advances by Borrowers for Taxes and Insurance 4,503 1,958
Other Liabilities 18,299 16,032
Total Liabilities 1,705,688 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; 13,602,157 and 13,512,902 Shares Issued and
Outstanding, Including Shares in Treasury 136 135
Paid-In Capital in Excess of Par 37,986 37,029
Retained Earnings 148,767 137,063
Accumulated Other Comprehensive Income (Loss) (10) 425
Treasury Stock-at Cost, 1,088,813 and 809,608 Shares (13,981) (8,682)
Total Shareholders' Equity 172,898 165,970
Total Liabilities and Shareholders' Equity $ 1,878,586 $ 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 Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Interest Income
Loans $ 34,658 $ 32,117 $ 99,612 $ 93,670
Investments 1,614 1,879 4,602 5,626
Mortgage-Backed Securities 832 456 2,283 1,648
Dividends on Federal Home
Loan Bank Stock 370 306 1,067 832
Federal Funds Sold and
Interest-Bearing Deposits 71 99 281 466
Total Interest Income 37,545 34,857 107,845 102,242
Interest Expense
Deposits 13,812 14,227 40,993 41,366
Federal Home Loan Bank Advances 4,851 3,929 12,798 11,218
Short-Term Borrowings 638 749 1,736 2,187
Total Interest Expense 19,301 18,905 55,527 54,771
Net Interest Income 18,244 15,952 52,318 47,471
Provision for Loan Losses 1,950 2,320 6,870 7,460
Net Interest Income After
Provision for Loan Losses 16,294 13,632 45,448 40,011
Non-Interest Income
Gain (Loss) on Sale of Investments
Available for Sale (1,690) - (1,472) 19
Gain (Loss) on Sale of Mortgage
Backed Securities Available for Sale (1,543) 368 (1,543) 368
Gain (Loss) on Sale of Loans 441 2,712 5,009 7,554
Loan Servicing Income 326 385 839 1,330
Loan Fees 795 906 2,747 2,346
Insurance Commissions 21 20 62 85
Customer Fee Income 1,400 1,000 3,782 2,882
Sale of Deposits 7,590 - 7,590 -
Other 703 900 3,338 1,938
Total Non-Interest Income 8,043 6,291 20,352 16,522
Non-Interest Expense
Salaries and Benefits 7,390 5,888 21,681 16,472
Net Occupancy 725 776 2,288 2,157
Deposit Insurance 186 178 544 514
Real Estate Owned Operations - Net 116 226 405 642
Equipment 1,798 1,349 4,359 3,816
Office Supplies and Postage 526 516 1,602 1,490
Other 3,065 2,816 8,675 8,466
Total Non-Interest Expense 13,806 11,749 39,554 33,557
Earnings Before Income Taxes 10,531 8,174 26,246 22,976
Income Taxes 3,909 3,171 9,973 8,938
Net Earnings $ 6,622 $ 5,003 $ 16,273 $ 14,038
Basic Earnings Per Share $ 0.53 $ 0.39 $ 1.29 $ 1.10
Diluted Earnings Per Share $ 0.52 $ 0.38 $ 1.27 $ 1.06
Dividends Per Common Share $ 0.13 $ 0.12 $ 0.39 $ 0.36
</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 Nine Months
Ended September 30, 1999 16,273 16,273
Unrealized Loss on Securities
Available for Sale, Net of
Income Taxes of $163 and
Reclassification Adjustment
of $(1,472) (435) (435)
Total Comprehensive Income 15,838
Common Stock Issued Under Restricted
Stock Plans-Net of Amortization 335 335
Tax Benefit of Stock Options
Exercised 427 427
Exercise of Stock Options 92,339 1 587 588
Dividends on Common Stock
($.39 per share) (4,904) (4,904)
Redemption of Common Stock (3,084) (57) (57)
Purchase of Treasury Stock (279,205) (5,299) (5,299)
Balance at September 30, 1999 12,513,344 $136 $37,986 $148,767 $(10) $(13,981) $172,898
</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)
Nine Six Months Ended September 30,
1999 1998
<S> <C> <C>
Cash Flows from Operating Activities
Net Earnings $ 16,273 $ 14,038
Adjustments to Reconcile Net Earnings to:
Net Cash Provided (Used) by Operating Activities
(Gain) Loss on Sale of Assets and Liabilities (8,863) (7,941)
Amortization of Investment Premium and Prepaid Assets 1,519 1,372
Amortization of Restricted Stock Plan 335 314
Net (Accretion) Amortization of Loans
and Mortgage-Backed Securities (685) 345
Depreciation 1,820 1,710
Provision for Loan Losses 6,870 7,460
Origination of Loans Held For Sale
Net of Principal Collected (526,496) (447,964)
Proceeds from Sale of Loans Held for Sale 563,492 430,117
Change In:
Accrued Interest Receivable (376) (458)
Prepaid Expenses and Other Assets (21,622) (12,261)
Accrued Interest Payable 2,179 1,386
Other Liabilities 2,267 1,081
Net Cash Provided (Used) by Operating Activities 36,713 (10,801)
Cash Flows from Investing Activities
Proceeds from Maturities of
Investment Securities Held to Maturity -- 20,679
Proceeds from Maturities of Investment Securities
Available for Sale 4,775 --
Proceeds from Sale of Investments Available for Sale 142,500 10,023
Proceeds from Sale of Mortgage-Backed Securities
Available for Sale 55,752 23,483
Purchase of Investment Securities Available for Sale (80,000) (47,375)
Purchase of Mortgage-Backed Securities Available for Sale (86,126) (9,967)
Principal Collected on Mortgage-Backed Securities 769 1,928
Originations of Loans Net of Principal Collected (166,563) (89,781)
Proceeds from Sale of Loans 40,055 7,391
Proceeds from Sale of Premises and Equipment 1,621 --
Purchase of Premises and Equipment (2,169) (4,441)
Net Cash Provided (Used) by Investing Activities (89,386) (88,060)
Cash Flows from Financing Activities
Net Change in Deposits 165,007 104,159
Sale of Deposits (112,350) --
Repayment of Federal Home Loan Bank Advances (552,087) (259,048)
Borrowings of Federal Home Loan Bank Advances 596,694 288,837
Net Change in Short-Term Borrowings (20,997) (23,293)
Net Change in Advances by Borrowers
for Taxes and Insurance 2,545 2,811
Stock Option Proceeds and Redemption of Common Stock 531 604
Tax Benefit of Stock Options Exercised 427 844
Common Stock Issued Under Deferred Compensation Plan -- 65
Payment for Fractional Shares -- (10)
Dividends Paid (4,904) (4,590)
Purchase of Treasury Stock (5,299) (1,999)
Net Cash Provided by Financing Activities 69,567 108,380
Net Change in Cash and Cash Equivalents 16,894 9,519
Cash and Cash Equivalents at Beginning of Period 57,653 50,231
Cash and Cash Equivalents at End of Period $ 74,547 $ 59,750
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Period For:
Interest on Deposits, Advances, and
Other Borrowed Money $ 53,348 $ 53,385
Income Taxes 12,933 8,873
Transfer of Mortgage-Backed Securities to
Available for Sale -- 19,274
Transfer of Investment Securities to Available for Sale -- 5,423
Transfer of Loans to Real Estate Owned 7,620 7,757
See Notes to Condensed Consolited Financial Statements
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE> 7
FIRST INDIANA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Three and Nine Months Ended September 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 of 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 (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,
12,509,044 and 12,750,527 for the three months ended September 30, 1999
and 1998, and 12,598,219 and 12,746,277 for the nine months ended September
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 (12,788,964 and
13,255,871 for the three months ended September 30, 1999 and 1998, and
12,853,797 and 13,286,412 for the nine months ended September 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 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 and REO portfolios. 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.
<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 21-branch network, as well
as the relatively newer virtual banking services. FirstTrust, which
commenced operations in the first quarter of 1999, provides trust and
advisory services to the Bank's customers. Revenues in the Corporation's
segments are generated from loans, deposits, investments, servicing fees,
loan sales and trust and advisory services. There are no foreign operations.
<PAGE> 9
<TABLE>
<CAPTION>
Segment Reporting Third
Quarter
1999
Mortgage Segment Intersegment 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 $656,116 $462,910 $501,756 $183,500 $47,673 $54,348 $1,103 $1,902,803 $16,692 (1) $1,919,195
Net Interest Income 5,888 1,527 4,637 238 189 4,034 0 16,513 1,731 (2) 18,244
Non-Interest Income
(Expense) 551 (455) 897 4,320 237 1,271 407 7,228 815 (3) 8,043
Intersegment Income
(Expense) 3,224 (819) (493) 0 2,403 276 0 2,196 (2,196) (4) 0
Significant noncash items:
Provision for Loan
Losses 1,809 7 135 0 0 0 0 1,950 0 1,950
Earnings (Loss) Before
Income Tax 6,871 163 3,724 4,286 891 1,099 (148) 14,490 (3,959) (3) 10,531
<CAPTION>
Third
Quarter
1998
Mortgage Segment Intersegment Consolidated
Consumer Residential Business Treasury Banking Retail Totals Eliminations Totals
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average Segment Assets $529,253 $466,834 $365,195 $175,364 $92,629 $43,775 $1,673,050 $70,828 (1) $1,743,878
Net Interest Income 4,411 967 3,439 390 671 2,286 12,163 3,789 (2) 15,952
Non-Interest Income
(Expense) (41) 39 1,037 368 3,477 856 5,736 555 (3) 6,291
Intersegment Income
(Expense) 399 (513) (421) 0 2,003 940 2,407 (2,407) (4) 0
Significant noncash items:
Provision for Loan
Losses 1,854 11 455 0 0 0 2,320 0 2,320
Earnings (Loss) Before
Income Tax 2,284 (372) 2,935 840 4,713 664 11,064 (2,890) (3) 8,174
<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 other 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 income and expenses 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 eliminated from the Corporation's actual results.
<PAGE> 10
<CAPTION>
Segment Reporting YTD
9/30/99
Mortgage Segment Intersegment 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 $625,670 $431,998 $470,766 $180,232 $94,989 $53,134 $987 $1,853,173 $17,396 (1) $1,870,569
Net Interest Income 16,586 4,234 12,678 975 1,391 11,387 0 47,251 5,067 (2) 52,318
Non-Interest Income
(Expense) 2,991 (390) 3,163 4,538 3,336 3,408 696 17,742 2,610 (3) 20,352
Intersegment Income
(Expense) 6,163 (1,481) (1,650) 0 6,201 733 0 7,570 (7,570) (4) 0
Significant noncash items:
Provision for Loan
Losses 5,480 50 1,341 0 0 0 0 6,870 0 6,870
Earnings (Loss) Before
Income Tax 17,616 2,043 9,208 4,774 5,514 3,469 (739) 39,489 (13,243) (3) 26,246
<CAPTION>
YTD
9/30/98
Mortgage Segment Intersegment Consolidated
Consumer Residential Business Treasury Banking Retail Totals Eliminations Totals
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average Segment Assets $543,359 $475,671 $339,803 $186,115 $101,734 $44,985 $1,691,666 $ 4,780 (1) $1,696,446
Net Interest Income 13,166 2,906 9,579 1,615 1,508 8,233 37,007 10,464 (2) 47,471
Non-Interest Income
(Expense) 3,010 76 2,667 435 6,119 2,282 14,589 1,933 (3) 16,522
Intersegment Income
(Expense) 1,630 (1,630) (1,154) 0 6,000 2,336 7,183 (7,183) (4) 0
Significant noncash items:
Provision for Loan
Losses 5,320 32 1,304 0 0 0 6,656 804 7,460
Earnings (Loss) Before
Income Tax 7,631 (50) 8,101 1,871 12,317 3,197 33,068 (10,092) (3) 22,976
<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 other 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 income and expenses 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 eliminated from 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.
Note 6 - Reclassifications
Certain amounts in the 1998 Condensed Consolidated
Financial Statements have been reclassified to conform
to the 1999 presentation.
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 $6,622,000
for the third quarter of 1999, including two significant events and related
transactions explained below, compared with net earnings of $5,003,000 in the
third quarter of 1998. Diluted earnings per share for the three months ended
September 30, 1999 were $.52, compared with $.38 per share for the same period
one year ago. Prior to these two events and related transactions (see next
paragraph), third quarter operating earnings were $5,600,000, or $.44 per
diluted share, for the quarter ended September 30, 1999. Cash dividends for
the third quarter of 1999 and 1998 were $.13 and $.12 per share of common
stock outstanding, respectively.
In April 1999, the Bank announced a divestiture of the out-of-state
residential mortgage lending business of its subsidiary. An alliance partner
will provide permanent mortgage financing for First Indiana's customers in
Florida, North Carolina, and Oregon. During the third quarter of 1999, the
Bank sold the deposits at the Evansville, Indiana-area branches. Both of these
events are discussed more fully in subsequent paragraphs.
<PAGE> 12
For the first nine months of 1999, net earnings were $16,273,000,
compared with $14,038,000 one year ago. For the nine months ended September
30, 1999, diluted earnings per share were $1.27, compared with $1.06 for the
same period one year ago. Operating earnings, excluding the two significant
events and related transactions, were $15,300,000, or $1.20 per diluted share,
for the nine months ended September 30, 1999. Cash dividends through the
first nine months of 1999 and 1998 were $.39 and $.36 per share of common
stock outstanding, respectively.
Net Interest Income
Net interest income was $18,244,000 for the three months ended September
30, 1999, compared with $15,952,000 for the three months ended September 30,
1998. For the nine months ended September 30, 1999, net interest income was
$52,318,000 compared with $47,471,000 for the nine months ended September 30,
1998.
Net loans outstanding increased to $1,614,055,000 at September 30, 1999,
compared with $1,518,543,000 one year earlier. Residential loans outstanding
at September 30, 1999 were $445,287,000, down 14 percent from one year ago.
The decrease results from the Bank's increased activity in the secondary
market. Residential loan sales for the third quarter of 1999 were
$135,978,000, compared with $132,612,000 for the same period in 1998.
Consumer loans sales for the third quarter of 1999 were $63,437,000, compared
with $64,753,000 for the same period in 1998. At September 30, 1999, home
equity loans outstanding were $650,865,000, compared with $554,962,000 at
September 30, 1998, a 17 percent increase. Business loans were $208,129,000
at September 30, 1999, compared with $162,969,000 one year earlier, a 28
percent increase. Construction loans outstanding increased 47 percent to
$292,524,000 at September 30, 1999 compared with $198,563,000 at September
30, 1998. In order to enhance net interest income, First Indiana has targeted
the consumer, business and construction loan portfolios for growth in 1999
while de-emphasizing residential loan portfolio growth.
Interest income for the third quarter of 1999 was $37,545,000, compared
with $34,857,000 for the three months ended September 30, 1998. Interest
income for the nine months ended September 30, 1999 was $107,845,000, compared
with $102,242,000 for the same period in 1998. Interest expense for the third
quarter of 1999 was $19,301,000, compared with $18,905,000 for the three months
ended September 30, 1998. Interest expense for the nine months ended September
30, 1999 and 1998 was $55,527,000 and $54,771,000, respectively.
During the third quarter of 1999, the Corporation's cost of funds was 4.83
percent, compared with 5.24 percent one year ago. For the nine months ended
September 30, 1999, the cost of funds was 4.77 percent, compared with 5.20
percent for the same period in 1998. The yield on earning assets was 8.19
percent for the third quarter of 1999, compared with 8.32 percent one year ago.
For the nine months ended September 30, 1999, the yield on earning assets was
8.05 percent, compared with 8.36 percent for the same period in 1998.
<PAGE> 13
Annualized return on total average assets was 1.38 percent for the three
months ended September 30, 1999, compared with 1.15 percent for the same period
in 1998. For the nine months ended September 30, 1999, the Corporation's
annualized return on total average assets was 1.16 percent, compared with 1.10
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 September 30,
(Dollars in Thousands) 1999 1998
<S> <C> <C>
Net Interest Income $ 18,244 $ 15,952
Average Interest-Earning Assets $ 1,834,643 $ 1,675,392
Average Interest-Bearing Liabilities 1,597,344 1,442,733
Average Interest-Free Funds $ 237,299 $ 232,659
Yield on Interest-Earning Assets 8.19% 8.32%
Yield on Interest-Bearing Liabilities 4.83% 5.24%
Interest-Rate Spread 3.36% 3.08%
Impact of Interest-Free Funds 0.62% 0.73%
Net Interest Margin 3.98% 3.81%
<CAPTION>
All non-accruing delinquent loans have been included in average
interest-earning assets.
<CAPTION>
Nine Months Ended September 30,
(Dollars in Thousands) 1999 1998
<S> <C> <C>
Net Interest Income $ 52,318 $ 47,471
Average Interest-Earning Assets $ 1,786,942 $ 1,630,679
Average Interest-Bearing Liabilities 1,550,933 1,404,887
Average Interest-Free Funds $ 236,009 $ 225,792
Yield on Interest-Earning Assets 8.05% 8.36%
Yield on Interest-Bearing Liabilities 4.77% 5.20%
Interest-Rate Spread 3.28% 3.16%
Impact of Interest-Free Funds 0.62% 0.72%
Net Interest Margin 3.90% 3.88%
<CAPTION>
All non-accruing delinquent loans have been included in average
interest-earning assets.
</TABLE>
<PAGE> 14
The environment of heavy refinancing activity due to declining interest
rates earlier in the year has slowed now that rates are on the rise. This,
the contraction of the residential portfolio, and the redirection of
investments to the consumer and business portfolios, has resulted in an
improved interest-rate margin for the Bank when compared with last year.
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 nine months ended September 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 6,870 7,460 (481) (77) 6,389 7,383
Charge-Offs -- Residential (22) (51) (14) (7) (36) (58)
-- Consumer (4,254) (5,564) (40) (240) (4,295) (5,804)
-- Construction (208) (576) (10) -- (217) (576)
-- Business (348) (15) -- -- (348) (15)
-- Commercial Real Estate -- -- (79) -- (79) --
Recoveries -- Residential -- 2 72 100 72 102
-- Consumer 805 738 335 233 1,141 971
-- Construction 215 79 141 8 355 87
-- Business 8 36 -- -- 8 36
-- Commercial Real Estate -- -- 76 -- 76 --
Balance at September 30, $28,765 $24,523 $500 $500 $29,265 $25,023
Ratio of Allowance for Loan Losses
to Loans Receivable 1.75% 1.65%
Ratio of REO Loss Allowance to Real
Estate Owned 19.08% 12.60%
Ratio of Total Loan and REO Loss
Allowance to Non-Performing Assets 190.87% 130.17%
</TABLE>
Non-performing assets were $15,333,000, or 0.82 percent of assets, at
September 30, 1999. This compares with $19,880,000, or 1.11 percent of assets,
at December 31, 1998 and $19,224,000, or 1.11 percent of assets, at September
30, 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.
<PAGE> 15
Due to favorable trends in delinquencies, non-performing loans and net
charge-offs, management has decided to lower the loan loss provision for the
quarter. The provision for loan losses in the third quarter of 1999 and 1998
was $1,950,000 and $2,320,000. For the nine months ended September 30, 1999,
the total provision for loan losses was $6,870,000, compared with $7,460,000
for the same period in 1998.
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, based on the estimate of losses inherent in the
portfolio.
Non-Interest Income
Total non-interest income was $8,043,000 for the three months ended
September 30, 1999, compared with $6,291,000 for the same period in 1998.
For the nine months ended September 30, 1999 and 1998, total non-interest
income was $20,352,000 and $16,522,000, respectively.
The 1999 gain on sale of loans of $5,009,000 is comprised of both a
$4,031,000 gain on the sale of fixed-rate home equity loans and a $1,102,000
gain on residential mortgage loans. 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 nine months ended September 30,
1999 decreased by $59,000 and $491,000 from the comparable periods in 1998.
This decrease primarily occurred as a result of the Bank's amortization of
mortgage servicing rights and loan prepayments. The Corporation's residential
loan servicing portfolio amounted to $853,139,000 at September 30, 1999,
compared with $954,1342,000 at September 30, 1998. The consumer loan servicing
portfolio was $209,089,000 at September 30, 1999, compared with $90,507,000 at
September 30, 1998.
Loan fees increased $401,000 for the nine months ended September 30, 1999
compared with the same period last year due to the increased business lending
activity.
Customer fee income increased $400,000 for the three months and $900,000
for the nine months ended September 30, 1999 compared with the same periods
last year, primarily as a result of the Bank's successful promotional campaigns
to acquire new checking accounts.
First Indiana's trust subsidiary, FirstTrust Indiana, had $934,000,000 in
trust assets under management or in the process of transfer at September 30,
1999. Trust fees generated from these assets are also included in other
non-interest income.
<PAGE> 16
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.
During the third quarter of 1999, the Bank recognized a $7,590,000 gain on
the sale of deposits at the Evansville, Indiana-area branches. The Bank also
elected to sell certain loans and investment securities available for sale,
which resulted in a $4,400,000 loss. In addition, approximately $1,600,000 in
various non-interest expense categories related to the Evansville and mortgage
divestiture was recognized during the quarter. These transactions are part of
First Indiana' strategy of concentrating on Central Indiana, the fastest
growing region of the state.
Non-Interest Expense
Total non-interest expense was $13,806,000 for the three months ended
September 30, 1999, compared with $11,749,000 for the same period in 1998.
Non-interest expense for the nine months ended September 30, 1999 and 1998
was $39,554,000 and $33,557,000, respectively. Salaries and benefits
increased $1,502,000 during the three months ended September 30, 1999 compared
to the third 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 and as a result of the addition of
FirstTrust. Occupancy expenses increased $131,000 in 1999 when compared
with 1998 due to the Bank's expansion into new markets. Equipment, a
component of other operating expenses, increased $543,000 in 1999 compared
with 1998, primarily due to an enhancement of the Branch Banks teller systems.
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 $110,000 and $237,000 for the three and nine
months ended September 30, 1999 from one year ago due to the decreased asset
balance of real estate owned.
Capital Resources and Liquidity
At September 30, 1999, shareholders' equity was $172,898,000, or 9.20
percent of total assets, compared with $165,970,000, or 9.24 percent, at
December 31, 1998 and $163,061,000, or 9.38 percent, at September 30, 1998.
The Corporation paid a quarterly dividend of $.13 per common share on
September 15, 1999 to shareholders of record as of September 3, 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> 17
The following table shows First Indiana's strong capital levels and
compliance with all capital requirements at September 30, 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 $152,593
Tangible Capital (1) $152,603 8.14% $ 28,104 1.50% N/A N/A
Core (Tier One) Capital 152,603 8.14% 56,208 3.00% $ 93,680 5.00%
Tier One Risk-Based Capital 152,603 9.46% N/A N/A 96,794 6.00%
Total Risk-Based Capital (2) 171,292 10.62% 129,058 8.00% 161,323 10.00%
(1) First Indiana Bank capital differs from tangible capital by the FAS115 equity securities
adjustment of $10.
(2) Risk-based capital includes a $20,272 addition for general loan loss reserves and a
$1,583 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 September 30, 1999,
was 8.00 percent.
Financial Condition
Total assets at September 30, 1999, were $1,878,586,000, an increase
from $1,795,990,000 at December 31, 1998.
Net loans receivable at September 30, 1999, were $1,614,055,000, 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 $28,777,000 to $58,457,000 at September 30, 1999
from year-end as a result of purchases. This increase was offset by a decrease
in the portfolio of investments available for sale of $67,927,000.
<PAGE> 18
In April 1999, the Bank announced a divestiture of the out-of-state
residential mortgage lending business of its subsidiary. An alliance partner
will provide permanent mortgage financing for First Indiana's customers in
Florida, North Carolina, and Oregon. This alliance was consummated in the
third quarter of 1999. First Indiana will continue to originate construction
loans outside Indiana, but permanent loans are now referred to Heritage
Financial Group.
Total deposits were $1,272,985,000 at September 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 September 30, 1999 and
December 31, 1998 were approximately $5,895,000 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 September 30,1999
and December 31, 1998 were $44,397,000 and $51,293,000, respectively.
In the first quarter of 1999, the Bank announced the divestiture of its
five Evansville branches. Civitas Bank, which is based in Evansville, acquired
the deposits and offices of the five branches. This transaction, which
included approximately $120 million of First Indiana's current deposit base,
was completed in the third quarter.
Federal Home Loan Bank advances totaled $371,854,000 at September 30,
1999, compared with $327,247,000 at December 31, 1998. These additional funds
were used for loan originations and the divestiture of the Evansville branches.
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 was 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.
<PAGE> 19
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, third, and fourth 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 examinations 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 examined by
the OTS. The Bank's Year 2000 Team will continuously monitor this service
bureau's Year 2000 readiness efforts throughout the remainder of the year.
<PAGE> 20
Costs to Address Year 2000 Issues
The Bank's expenditures associated with the Year 2000 as of September 30,
1999 totaled $4.7 million, all of which related to 1999. 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 Bank expensed
$761,000 of these expenditures in 1999. The remaining expenditures relating
to system and equipment purchases have been capitalized in accordance with
generally accepted accounting principles. Management does not anticipate
additional significant Year 2000 related expenditures for the remainder of the
year. 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 toYear 2000 issues attributable to
external factors.
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 October 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> 21
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 September 30, 1999,
the Corporation's cumulative one-year interest-rate gap stood at a negative
1.82 percent. This means that 1.82 percent of First Indiana's assets
liabilities will reprice within one year without a corresponding repricing of
the assets they fund. This liability sensitive position is a significant
change when compared to the cumulative one-year interest-rate gap at December
31, 1998. The near-term maturity of fixed rate certificates of deposits is the
most significant component of this change.
<PAGE> 22
The following schedule analyzes the difference in rate-sensitive assets
and liabilities or gap at September 30, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
Rate Sensitivity by Period of Maturity or Rate Change
September 30, 1999
Over 180 Over 1
% of Within Days to 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 6.32% $ 107,457 5.94% $ 59,919 $ - $ 27,445 $ 20,093
Loans Receivable (1)
Mortgage-Backed Securities 7.01% 58,457 3.23% 8,706 8,290 41,461 -
Residential Mortgage Loans 7.71% 445,287 24.62% 131,947 68,796 203,641 40,903
Commercial Real Estate Loans 8.39% 33,225 1.84% 8,392 1,909 16,732 6,193
Business Loans 8.90% 208,129 11.51% 137,138 11,331 51,134 8,526
Consumer Loans 8.84% 663,655 36.69% 286,108 47,290 236,899 93,357
Residential Construction Loans 7.91% 292,527 16.17% 263,380 14,632 14,512 -
Total 8.20% $1,808,737 100.00% 895,590 152,248 591,824 169,072
Interest-Bearing Liabilities
Deposits:
Demand Deposits (2) 1.25% $ 73,711 4.82% $ - - - 73,711
Passbook Deposits (3) 2.57% 38,266 2.50% 3,173 907 7,258 26,928
Money Market Savings 4.23% 346,321 22.65% 346,321 - - -
Jumbo Certificates 5.45% 258,059 16.87% 126,990 38,812 92,257 -
Fixed-Rate Certificates 5.23% 407,863 26.67% 141,105 135,202 131,556 -
Total 4.62% 1,124,202 73.51% 617,589 174,921 231,071 100,639
Borrowings:
FHLB Advances 5.55% 371,854 24.32% $220,000 35,000 110,000 6,854
Short-Term Borrowings 4.38% 33,222 2.17% 33,222 - - -
Total 4.84% 1,529,278 100.00% 870,811 209,921 341,053 107,493
Net - Other (4) 279,456 279,456
Total $1,808,734 870,811 209,921 341,053 386,994
Rate Sensitivity Gap $ 24,779 $ (57,673) $250,757 $(217,862)
September 30, 1999
Cumulative Rate-Sensitivity Gap $ 24,779 $ (32,894) $217,877
Percent of Total Interest-Earning Assets 1.37% (1.82)% 12.05%
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
repayment adjusted for estimated prepayments. For adjustable-rate loans, interest rates adjust at
intervals of six months to five years. Included in Residential Mortgage Loans is $17,860 of Loans
Held for Sale. Included in Consumer Loans is $63,459 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 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 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> 23
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 September 30, 1999, management believes that a 100
basis point increase or decrease in interest rates over a 12 month period would
result in a 1.2 percent increase and a 8.9 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.
Historically 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, or when the contract
matures or is terminated.
<PAGE> 24
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 three months ended September 30, 1999.
<PAGE> 25
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
November 9, 1999 /s/Owen B. Melton, Jr.
Owen B. Melton, Jr.
President
November 9, 1999 /s/David L. Gray
David L. Gray
Vice President and Treasurer
<PAGE> 26
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for the nine months ended September 30, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1999
<CASH> 32,547
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 42,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 103,821
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,642,820
<ALLOWANCE> 28,765
<TOTAL-ASSETS> 1,878,586
<DEPOSITS> 1,272,985
<SHORT-TERM> 218,222
<LIABILITIES-OTHER> 27,627
<LONG-TERM> 186,854
0
0
<COMMON> 136
<OTHER-SE> 172,762
<TOTAL-LIABILITIES-AND-EQUITY> 1,878,586
<INTEREST-LOAN> 99,612
<INTEREST-INVEST> 6,885
<INTEREST-OTHER> 1,348
<INTEREST-TOTAL> 107,845
<INTEREST-DEPOSIT> 40,993
<INTEREST-EXPENSE> 55,527
<INTEREST-INCOME-NET> 52,318
<LOAN-LOSSES> 6,870
<SECURITIES-GAINS> (3,015)
<EXPENSE-OTHER> 39,554
<INCOME-PRETAX> 26,246
<INCOME-PRE-EXTRAORDINARY> 26,246
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,273
<EPS-BASIC> 1.29
<EPS-DILUTED> 1.27
<YIELD-ACTUAL> 3.90
<LOANS-NON> 13,168
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 13,971
<ALLOWANCE-OPEN> 25,700
<CHARGE-OFFS> 4,831
<RECOVERIES> 1,027
<ALLOWANCE-CLOSE> 28,765
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 8,884
</TABLE>
