UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1 to:
(Mark One)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 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 of Incorporation) (I.R.S. Employer Identification No.)
135 N. Pennsylvania St.
Indianapolis, Indiana 46204
- ----------------------------------- ------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(317) 269-1200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
- ----------------------------------- ------------------------------------------
Common Stock, $.01 par value NASDAQ
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___.
State the aggregate market value of the voting stock held by non-affiliates
of the registrant: $176,419,000 as of February 18, 2000.
On February 18, 2000, the registrant had 12,577,512 shares of common stock
outstanding, $.01 par value.
Documents Incorporated by Reference: Portions of the Annual Report to
Shareholders for the Year Ended December 31, 1999 (Part II) and portions of the
definitive proxy statement for the 2000 Annual Meeting of Shareholders
(Part III).
<PAGE> 2
FIRST INDIANA CORPORATION
FORM 10-K
Table of Contents
<TABLE>
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Page
PART I 3
Item 1. Business 3
Item 2. Properties 31
Item 3. Legal Proceedings 31
Item 4. Submission of Matters to a Vote of Security Holders 31
PART II 32
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters 32
Item 6. Selected Financial Data 32
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation 32
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 32
Item 8. Financial Statements and Supplementary Data 32
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 33
PART III 33
Item 10. Directors and Executive Officers of the Registrant 33
Item 11. Executive Compensation 34
Item 12. Security Ownership of Certain Beneficial Owners and Management 34
Item 13. Certain Relationships and Related Transactions 35
PART IV 35
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K 35
SIGNATURES 36
EXHIBIT INDEX 37
</TABLE>
<PAGE> 3
This Annual Report on Form 10-K ("Form 10-K") contains statements which
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number
of places in this Form 10-K and include statements regarding the intent,
belief, outlook, estimate or expectations of the Corporation (as defined
below), its directors or its officers primarily with respect to future events
and the future financial performance of the Corporation. Readers of this Form
10-K are cautioned that any such forward looking statements are not guarantees
of future events or performance and involve risks and uncertainties, and that
actual results may differ materially from those in the forward looking
statements as a result of various factors. The accompanying information
contained in this Form 10-K identifies important factors that could cause such
differences. These factors include changes in interest rates, loss of deposits
and loan demand to other savings and financial institutions, substantial
changes in financial markets; changes in real estate values and the real estate
market; regulatory changes, or unanticipated results in pending legal
proceedings.
PART I
Item I. Business
First Indiana Corporation
First Indiana Corporation, an Indiana corporation formed in 1986
("Corporation"), is a nondiversified, unitary savings and loan holding company.
The principal asset of the Corporation is the outstanding stock of First
Indiana Bank ("First Indiana" or "Bank"), its wholly owned subsidiary. The
Corporation has no separate operations, and its business consists only of First
Indiana and its subsidiaries. First Indiana's subsidiaries include One
Mortgage Corporation, a mortgage origination subsidiary; One Investment
Corporation, an operating subsidiary; Pioneer Service Corporation, a limited
partnership; and One Property Corporation, a real estate investment subsidiary.
First Indiana Bank
First Indiana is a federally chartered stock savings bank whose depository
accounts are insured by the Savings Association Insurance Fund ("SAIF") of
the Federal Deposit Insurance Corporation ("FDIC"). Established in 1934,
First Indiana was operated as a federally chartered, mutual savings and loan
institution until August 1983, when it converted to a federal stock savings
bank. First Indiana has $2.0 billion in assets and is the largest publicly
held bank based in Indianapolis.
<PAGE> 4
First Indiana is engaged primarily in the business of attracting deposits
from the general public and originating home equity loans, residential
construction loans, and business loans. First Indiana offers a full range of
banking services through 23 banking offices located throughout metropolitan
Indianapolis, Franklin, Pendleton, Westfield, Mooresville, and Rushville,
Indiana. The Bank also originates home equity loans indirectly through a
network of loan originators and loan agents throughout the United States.
During the third quarter of 1999, First Indiana completed two significant
events, both of which are discussed more fully in Item 7. These were the sale
of $120 million of deposits of the Bank's five Evansville, Indiana-area
branches and changes in the Bank's mortgage banking strategy.
In August, First Indiana sold its Evansville Division to another bank.
This action reflects the Bank's relationship-based strategy as it allowed the
Bank to focus resources in Central Indiana, the fastest-growing region of the
state.
Also in the third quarter, the Bank exited the traditional mortgage banking
business in favor of originating mortgages for relationship customers.
Mortgage lending has become a commodity business, where the only
differentiating factor for most customers is a low rate of interest;
consequently, First Indiana shifted its emphasis to products and services where
the Bank can add value in other ways. First Indiana continues to offer
consumer loan products, which allows the Bank to capitalize on prosperous
markets throughout the United States and diversify geographic risk, without the
overhead of fixed offices.
First Indiana has construction and consumer loan service offices throughout
Indiana and in Arizona, Florida, Illinois, North Carolina, Ohio, and Oregon.
In early 1999, First Indiana established a new operating subsidiary, One
Investment Corporation. One Investment Corporation purchases and sells loan
participations originated by First Indiana and by others in the secondary
market.
FirstTrust Indiana, the Bank's trust and investment advisory division,
completed its first year of operation since receiving trust powers on December
31, 1998. Account relationships have been accepted in three product lines:
personal trust, institutional investment management, and estate and
guardianship administration. FirstTrust enables First Indiana to diversify
sources of non-interest income while providing a broader spectrum of products
to retail and commercial customers.
The metropolitan area served by First Indiana consists of Indianapolis, the
State's capital and largest city, and the surrounding six-county suburban and
agricultural areas in the central part of the State. The population of the
metropolitan Indianapolis area in 1990 was approximately 1,200,000.
Indianapolis' diversified economy includes manufacturing and service
industries, such as Eli Lilly & Company (pharmaceuticals), the federal and
state governments, General Motors (automotive), and Ameritech (communications).
<PAGE> 5
First Indiana experiences substantial competition in attracting and
retaining deposits and in lending funds. The primary factors in competing for
deposits are the ability to offer attractive interest rates and products, and
meeting and exceeding customer expectations regarding office locations and
flexible hours. Direct competition for deposits comes from other depository
institutions, money market mutual funds, and other investment products. The
primary factors in competing for loans are interest rates, loan origination
fees, and loan product variety. Competition for origination of loans normally
comes from other depository institutions, lending brokers, and insurance
companies.
Lending Activities
General. First Indiana has a substantial market presence in residential
construction lending, commercial real estate lending, business loans, and
consumer loans, primarily home equity loans originated both on a direct and
indirect basis.
To minimize the mismatch between the duration of its interest-rate-sensitive
assets and liabilities, First Indiana has a policy of (i) increasing its
portfolio of adjustable-rate and shorter-term mortgage, consumer, and business
loans; (ii) selling most fixed-rate, longer-term loans into the secondary
market unless those loans can be funded by liabilities of a similar maturity;
and (iii) increasing transaction accounts, which are less volatile than
certificates of deposit.
Loan Portfolio Composition. The following tables set forth information
concerning the composition of First Indiana's loan portfolio in dollar amounts
and in percentages, by type of security, and by type of loan. Also presented
is a reconciliation of total loans receivable and mortgage-backed securities
("loans") before net items to loans receivable after net items. Net items
consist of loans in process (undisbursed portion of loan balances), deferred
income, unearned discounts and unamortized premiums, and allowances for loan
losses.
<PAGE> 6
<TABLE>
<CAPTION>
Loan Portfolio Composition
(Dollars in Thousands)
At December 31,
-------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
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Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans by Type of Security
First Mortgage Loans
Secured by:
Single-Family Units $ 930,204 47.6% $ 937,321 52.9% $ 750,619 49.5% $ 640,743 47.4% $ 625,133 45.1%
2-4 Family Units 1,398 0.1% 1,489 0.1% 1,093 0.1% 1,643 0.1% 1,885 0.1%
Over 4 Family Units 8,645 0.4% 7,365 0.4% 9,844 0.6% 9,586 0.7% 18,946 1.4%
Mortgage-Backed
Securities 54,734 2.8% 29,680 1.7% 38,081 2.5% 36,152 2.7% 49,089 3.5%
Commercial Real Estate
and Other Mortgage
Loans 25,654 1.4% 25,411 1.4% 32,269 2.1% 37,735 2.8% 46,137 3.3%
Consumer Loans 675,763 34.6% 580,525 32.8% 548,016 36.1% 526,769 38.9% 575,009 41.4%
Business Loans 255,199 13.1% 189,074 10.7% 137,517 9.1% 100,513 7.4% 72,146 5.2%
-------------------------------------------------------------------------------------------------------
Total Mortgage-Backed
Securities and Loans
Receivable (Before Net
Items) $1,951,597 100.0% $1,770,865 100.0% $1,517,439 100.0% $1,353,141 100.0% $1,388,345 100.0%
=======================================================================================================
Loans by Type of Loan
Real Estate:
Conventional:
Loans on Existing
Property $ 509,214 26.1% $ 551,641 31.2% $ 530,603 35.0% $ 463,211 34.2% $ 464,604 33.5%
Construction Loans:
Commercial Real
Estate Loans - 0.0% - 0.0% - 0.0% 11 0.0% 6,835 0.5%
Residential Loans 453,384 23.2% 406,650 23.0% 253,259 16.7% 214,433 15.8% 207,957 15.0%
Insured or Guaranteed:
Mortgage-Backed
Securities 54,734 2.8% 29,680 1.7% 38,081 2.5% 36,152 2.7% 49,089 3.5%
FHA and VA Loans 3,303 0.2% 13,295 0.8% 9,963 0.7% 12,052 0.9% 12,705 0.9%
-------------------------------------------------------------------------------------------------------
Total Real Estate Loans 1,020,635 52.3% 1,001,266 56.5% 831,906 54.8% 725,859 53.6% 741,190 53.4%
Consumer Loans 675,763 34.6% 580,525 32.8% 548,016 36.1% 526,769 38.9% 575,009 41.4%
Business Loans 255,199 13.1% 189,074 10.7% 137,517 9.1% 100,513 7.4% 72,146 5.2%
-------------------------------------------------------------------------------------------------------
Total Mortgage-Backed
Securities and Loans
Receivable (Before Net
Items) $1,951,597 100.0% $1,770,865 100.0% $1,517,439 100.0% $1,353,141 100.0% $1,388,345 100.0%
=======================================================================================================
</TABLE>
<PAGE> 7
<TABLE>
<CAPTION>
Loan Portfolio Composition - Continued At December 31,
--------------------------------------------------------------
(Dollars in Thousands) 1999 1998 1997 1996 1995
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<S> <C> <C> <C> <C> <C>
Total Loans Receivable (Before Net Items) $1,896,863 $1,741,185 $1,479,358 $1,316,989 $1,339,256
Less:
Undisbursed Portion of Loans 198,632 200,732 110,629 84,173 72,511
Deferred Income, Unearned Discounts,
and Unamortized Premiums (3,950) (3,790) (2,412) (1,762) (624)
Allowance for Loan Losses 28,759 25,700 22,414 18,768 16,234
--------------------------------------------------------------
Total Loans Receivable Before Mortgage Backed
Securities 1,673,422 1,518,543 1,348,727 1,215,810 1,251,135
Plus:
Mortgage Backed Securities 54,734 29,680 38,081 36,152 49,089
--------------------------------------------------------------
Mortgage Backed Securities and Loans
Receivable - Net $1,728,156 $1,548,223 $1,386,808 $1,251,962 $1,300,224
==============================================================
</TABLE>
<PAGE> 8
Adjustable- and Fixed-Rate Loans. The following table sets forth the
balances at the dates indicated of all loans receivable and mortgage-backed
securities before net items which have fixed interest rates and adjustable
interest rates. Adjustable-rate loans include all loans with original
maturities of five years or less.
<TABLE>
<CAPTION>
(Dollars in Thousands) At December 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Residential Mortgage Loans
Fixed Rates $ 183,341 $ 230,955 $ 189,323 $ 166,968 $ 186,885
Adjustable Rates 801,597 737,500 602,835 512,965 491,681
--------------------------------------------------------------
Total $ 984,938 $ 968,455 $ 792,158 $ 679,933 $ 678,566
==============================================================
Commercial Real Estate Loans
Fixed Rates $ 9,134 $ 6,855 $ 6,099 $ 17,213 $ 11,948
Adjustable Rates 26,563 25,956 33,649 28,713 50,676
--------------------------------------------------------------
Total $ 35,697 $ 32,811 $ 39,748 $ 45,926 $ 62,624
==============================================================
Total Residential Mortgage and
Commercial Real Estate Loans
Fixed Rates $ 192,475 $ 237,810 $ 195,422 $ 184,181 $ 198,833
Adjustable Rates 828,160 763,456 636,484 541,678 542,357
--------------------------------------------------------------
Total $1,020,635 $1,001,266 $ 831,906 $ 725,859 $ 741,190
==============================================================
Consumer Loans
Fixed Rates $ 480,489 $ 437,267 $ 395,423 $ 368,697 $ 411,030
Adjustable Rates 195,274 143,258 152,593 158,072 163,979
--------------------------------------------------------------
Total $ 675,763 $ 580,525 $ 548,016 $ 526,769 $ 575,009
==============================================================
Business Loans
Fixed Rates $ 70,923 $ 61,272 $ 47,577 $ - $ 5,699
Adjustable Rates 184,276 127,802 89,940 100,513 66,447
--------------------------------------------------------------
Total $ 255,199 $ 189,074 $ 137,517 $ 100,513 $ 72,146
==============================================================
Total Mortgage Backed Securities
and Loans Receivable
Fixed Rates $ 743,888 $ 736,349 $ 638,422 $ 552,878 $ 615,562
Adjustable Rates 1,207,710 1,034,516 879,017 800,263 772,783
--------------------------------------------------------------
Total $1,951,597 $1,770,865 $1,517,439 $1,353,141 $1,388,345
==============================================================
</TABLE>
Residential Mortgage Loans. The original contractual loan payment period
for residential loans originated by First Indiana normally ranges from 10 to 30
years. Because borrowers may refinance or prepay their loans, however, such
loans normally remain outstanding for a substantially shorter period. First
Indiana sells most fixed-rate residential loans to secondary market investors,
including the Federal Home Loan Mortgage Corporation ("FHLMC") and the Federal
National Mortgage Association ("FNMA").
<PAGE> 9
During the third quarter of 1999, the Bank exited the traditional mortgage
banking business in favor of originating mortgages for relationship customers.
Mortgage lending has become a commodity business, where the only
differentiating factor for most customers is a low rate; consequently, First
Indiana shifted its emphasis onto products and services where the Bank can add
value in other ways. The initial result of this change in strategy was a
decrease in residential loan originations. Residential mortgage loan
originations amounted to $494 million in 1999, compared with $744 million in
1998. Another result was a reduction in the sales of residential mortgage
loans into the secondary market as part of the Bank's normal mortgage banking
activity. This resulted in pre-tax gains of $1.3 million during 1999, compared
with gains of $3.0 million in 1998.
First Indiana's fixed-rate mortgage loans include a due-on-sale clause,
which gives the Bank the right to declare a loan immediately due and payable
if, among other things, the borrower sells or otherwise disposes of the real
property subject to the mortgage and the loan is not repaid. Due-on-sale
clauses are generally considered important tools to prevent both the
unrestricted transfer of low interest-rate loans in high interest-rate
environments and the corresponding increase in the average life of such loans.
First Indiana's policy is to enforce these clauses in its loan contracts.
First Indiana's construction loans are made both to individuals and
builders. These loans have terms ranging from six months to one year and
include options for the homebuyer to convert the loan to fixed- or
adjustable-rate permanent financing. The interest rate on construction loans
is generally one percent over the Bank's prime rate and adjusts upon changes
in the prime rate. At December 31, 1999 and 1998, the Bank's gross
construction loans outstanding equaled $453 million and $407 million,
respectively.
Commercial Loans. First Indiana offers a variety of commercial loans,
primarily business loans and commercial real estate loans (including land
development loans).
Included in business loans at December 31, 1999 are $25 million in land
development loans, which are exclusively for the acquisition and development
of land into individual single-family building lots. The interest rate on
land development loans is generally one and one-quarter percent over the
Bank's prime rate, which adjusts upon changes in the prime rate, and the term
of these loans is generally 36 months.
<PAGE> 10
The following table presents the remaining maturities and rate sensitivity
of residential construction and business loans.
<TABLE>
<CAPTION>
Remaining Maturities
-------------------------------------
(Dollars in Thousands) One Year Over One Year Over
or Less to Five Years Five Years Total Percent
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Type of Loan:
Residential Construction - Net $260,417 $13,593 $ - $274,010 53.7%
Business - Net 180,276 46,463 9,202 235,941 46.3%
----------------------------------------------------------
Total $440,693 $60,056 $9,202 $509,951 100.0%
==========================================================
Rate Sensitivity:
Fixed Rate $ 19,979 $42,547 $8,397 $ 70,923 13.9%
Adjustable Rate 420,714 17,509 805 439,028 86.1%
----------------------------------------------------------
Total $440,693 $60,056 $9,202 $509,951 100.0%
==========================================================
</TABLE>
Multi-family and commercial real estate lending was a substantial part of
First Indiana's business activities from the early 1970s until 1991, when such
activity was largely curtailed because of the economic environment. With the
changing economic environment and improved market for commercial real estate
lending, the Bank intends to increase somewhat its volume of these loans to
include permanent financing for selected apartments, office buildings, and
warehouses, though much of this additional volume will be sold. The Bank's
management continues to monitor the credit quality of these loans aggressively,
both with respect to new originations and loans already in the portfolio.
The following table shows, as of December 31, 1999 and 1998, outstanding
multi-family and commercial real estate loans originated and purchased by
First Indiana.
<TABLE>
<CAPTION>
1999 1998
---------------------------------------
(Dollars in Thousands) Amount Percent Amount Percent
---------------------------------------
<S> <C> <C> <C> <C>
Loans Originated $35,225 98.7% $32,036 97.6%
Loans Purchased 472 1.3% 778 2.4%
---------------------------------------
$35,697 100.0% $32,814 100.0%
=======================================
</TABLE>
Consumer Lending. As part of its strategy for growth, First Indiana has
increased its origination and purchase of consumer loans, primarily home equity
loans and home equity lines of credit. At December 31, 1999, such loans
totaled $675.8 million, of which $26.6 million were held for sale, compared
with $580.5 million, of which $45.9 million were held for sale, at December
31, 1998. Much of the increase in 1999 occurred as First Indiana capitalized
on alternative delivery channels for originations by utilizing a national
network of originators and a telemarketing call center.
<PAGE> 11
Consumer loans generally have shorter terms and higher interest rates than
residential loans but involve somewhat higher credit risks, particularly for
unsecured lending. Of the $675.8 million of consumer loans outstanding at
December 31, 1999, 98.4 percent were secured by first or second mortgages on
real property, 0.2 percent was secured by deposits, and 1.4 percent were
secured by personal property or were unsecured.
First Indiana offers revolving lines of credit and loans secured by a lien
on the equity in the borrower's home in amounts up to 100 percent of the
appraised value of the real estate. For lines of credit at or below an 80
percent loan-to-value ("LTV") ratio, the interest rate is typically the Wall
Street Journal prime rate plus one or two percent, depending on the amount of
the loan. The interest rate rises in various increments as the LTV ratio
increases. The highest rate charged is the Wall Street Journal prime rate plus
4.5 percent for lines of credit at a 100 percent LTV. At December 31, 1999,
the Bank had approximately $364.2 million in home equity loans above 80 percent
LTV. Holders of revolving lines of credit with up to an 80 percent LTV ratio
are billed monthly for interest at the daily periodic rate due on the daily
loan balances for the billing cycle. Generally, holders of revolving lines of
credit above 85 percent LTV are required to pay all interest due, with a
minimum payment of $50. At December 31, 1999, First Indiana had approved $286
million of 80 percent LTV lines of credit, of which $133 million were
outstanding, compared with $252 million of such lines which had been approved
at December 31, 1998, $110 million of which were outstanding.
First Indiana also offers variable- and fixed-rate term home equity loans
with up to a 100 percent LTV ratio. Borrowers of fixed-rate term loans make
fixed payments over a term ranging from one to 15 years. Variable-rate term
loans in excess of 80 percent LTV feature monthly payments equal to two percent
of the outstanding loan balance.
First Indiana makes loans secured by deposits and overdraft loans in
connection with its checking accounts. First Indiana also offers auto loans;
fixed-rate, fixed-term unsecured loans; and Visa credit cards through an agent.
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
rapidly depreciating assets such as automobiles. First Indiana has endeavored
to reduce certain of these risks by, among other things, employing individuals
experienced in this type of lending and emphasizing prompt collection efforts.
In addition, First Indiana adds general provisions to its loan loss allowance,
in amounts determined to be adequate to cover loan losses inherent in the
portfolio, at the time the loans are originated.
Federal regulations limit the amount of consumer loans that savings
institutions are able to originate and hold in their loan portfolios. First
Indiana complies with such regulations, and the amount of its consumer loan
portfolio is approximately $514 million below the maximum permitted at
December 31, 1999.
<PAGE> 12
Origination, Purchase, and Sale of Loans. As a federally chartered
savings bank, First Indiana has general authority to make real estate
loans throughout the United States. At December 31, 1999, however, over
45% of First Indiana's real estate loans receivable were secured by real
estate located in Indiana. The Bank originates home equity loans through
a national network of consumer lending offices, which has expanded to
include 45 states.
Interest rates charged by First Indiana on its loans are affected
primarily by the demand for such loans and the supply of money available for
lending purposes. These factors are in turn affected by general economic
conditions and such other factors as monetary policies of the federal
government, including the Federal Reserve Board, the general supply of money
in the economy, legislative tax policies, and governmental budgetary matters.
Loan originations come from a number of sources. Residential loan
originations are attributable primarily to referrals from real estate brokers,
builders, and walk-in customers. Construction loan originations are obtained
primarily by direct solicitation of builders and repeat business from builders.
Multi-family and commercial real estate loan originations are obtained from
previous borrowers and direct contacts with First Indiana. Consumer loans come
from walk-in customers, loan brokers, agents, and originators.
First Indiana obtains title insurance on secured properties and requires
borrowers to obtain hazard insurance and, if applicable, flood insurance.
First Indiana's appraisers note any obvious environmental problems, and the
title companies used to close loans give First Indiana an endorsement insuring
over any existing environmental liens.
Income from Lending Activities. In making long-term one- to four-family
home mortgage loans, First Indiana generally charges an origination fee of one
percent of the loan amount. As part of the loan application, the applicant
also reimburses First Indiana for its out-of-pocket costs in reviewing the
application, such as the appraisal fee, whether or not the loan is closed.
The interest rate charged is normally the prevailing market rate at the time
the loan application is received. Commitments to home purchasers generally
have a term of 60 days or less from the date First Indiana issues the loan
commitment.
In the case of one-to-four-family residential construction loans, First
Indiana charges a one to three percent non-refundable commitment fee. Interest
rates on construction loans are based on the prevailing market rate at the time
the commitment is extended. Commitment fees and other terms of commercial real
estate and business loans are individually negotiated.
First Indiana earns fees on existing loans, including prepayment charges,
late charges, and assumption fees.
<PAGE> 13
Servicing Activity. First Indiana's sale of whole loans and loan
participations in the secondary market generates income and provides
additional funds for loan originations. During 1999, the Bank identified
and sold $148 million in out-of-market loan servicing at a gain of $905,000.
At December 31, 1999, First Indiana serviced approximately $1,104 million
in loans and loan participations which it had sold. As of December 31, 1999,
approximately $7.5 million in loans, or about 0.4 percent of First Indiana's
mortgage-backed securities and loans receivable after net items, were serviced
by others.
The total cost of mortgage loans originated with the intent to sell is
allocated between the loan servicing right and the mortgage loan without
servicing based on their relative fair values at the date of sale. The
capitalized cost of loan servicing rights is amortized in proportion to, and
over the period of, estimated net servicing revenue. For this purpose,
estimated servicing revenues include late charges and other ancillary income.
Estimated servicing costs include direct costs associated with performing the
servicing function and appropriate allocations of other costs.
Mortgage servicing rights are periodically evaluated for impairment by
stratifying them based on predominant risk characteristics of the underlying
serviced loans. These risk characteristics include loan type (fixed or
adjustable rate), investor type (FHLMC, GNMA, private), term, and note rate.
Impairment represents the excess of carrying value of an individual mortgage
servicing rights stratum over its estimated fair value, and is recognized
through a valuation allowance.
Fair values for individual strata are based on the present value of
estimated future cash flows using a discount rate commensurate with the risks
involved. Estimates of fair value include assumptions about prepayment,
default and interest rates, and other factors which are subject to change over
time. Changes in these underlying assumptions could cause the fair value of
loan servicing rights, and the related valuation allowance, to change
significantly in the future. At December 31, 1999 and 1998, the balance of
capitalized loan servicing rights included in other assets was $8,759,000 and
$5,770,000, with a fair market value of $11,405,000 and $6,865,000. The
amounts capitalized in 1999, 1998, and 1997 were $6,040,000, $3,891,00 and
$893,000, and the amounts amortized to loan servicing income were $1,919,000,
$1,823,000 and $819,000.
Asset Quality
General. First Indiana's asset quality is directly affected by the credit
risk of the assets on its balance sheet. Most of First Indiana's credit risk
is concentrated in its loan portfolios and, to a lesser extent, its real estate
owned ("REO") portfolio. Consequently, First Indiana has established policies
and procedures to ensure accurate and timely assessment of credit risk from the
date the loan is originated or purchased.
<PAGE> 14
The procedures for reviewing the quality of First Indiana's loans, the
appropriateness of loan and REO classifications, and the adequacy of loan and
REO loss allowances fall within the purview of First Indiana's Board of
Directors. To manage these tasks, the Board of Directors has established a
two-tiered asset review system. Under this system, standing management
committees regularly discuss and review potential losses on all loans and REO
and the adequacy of First Indiana's loan and REO loss allowances.
Recommendations on the allowances are forwarded to the Investment Committee of
First Indiana's Board of Directors for approval each quarter, then presented to
the full Board of Directors for approval and ratification. Management
committees also recommend loan and REO classifications which, if approved by
the Investment Committee of the Board of Directors, are referred to the full
Board for final approval and ratification.
The second part of First Indiana's asset review system is managed by an
independent chief credit officer appointed by the Board of Directors. The
chief credit officer makes an independent evaluation of First Indiana's
portfolio and management's recommendations on allowances for loan and REO
losses. He regularly reviews these recommendations with the Corporation's
Chairman and the Chairman of the Executive Committee of the Board of Directors.
These meetings give the chief credit officer a forum for discussing asset
quality issues with members of the Board of Directors. This system provides an
independent review and assessment of management's recommendations about loan
and REO classifications and loss allowances. This entire process is subject to
the continual review and approval by the Board of Directors.
An allowance for loan and lease losses ("ALLL") is established for each
significant loan portfolio of the Bank in an amount adequate to absorb the
losses inherent within each loan portfolio. The ALLL is segmented into three
major components based on the credit characteristics of the underlying loans
within each loan portfolio: Special Mention Loans, Classified Loans and Pass
Loans (loans not rated Special Mention or Classified).
A Risk Rating Analysis (loan grade) is completed on all loans that exceed a
minimum loan amount threshold for the asset specific loan portfolios, namely,
construction, business, commercial real estate and land development lending.
The Risk Rating Analysis is an eight grade system with five pass grades. The
final three grades, Special Mention, Substandard and Doubtful correlate to the
Office of Thrift Supervision's criticized assets. The loans with a grade of
Special Mention or worse exhibit or may exhibit certain defined weaknesses
which, if left uncorrected, may jeopardize the full repayment of the loan.
These loans pose a higher level of risk to the Bank than the loans in a Pass
grade. Therefore, loans with a grade of Special Mention, Substandard or
Doubtful are assigned a Target Reserve within the ranges established by the
Office of Thrift Supervision ("OTS").
<PAGE> 15
For the homogeneous loan portfolios and the asset specific loan portfolios
where the loan amount is less than the minimum threshold established for that
portfolio, when a loan becomes contractually delinquent 90 days in either
interest or principal, the loan is considered non-accrual and is classified as
Substandard. All other loans within these portfolio segments are considered
pass loans. For the asset specific loan portfolios, a loan is considered
non-accrual based on the specific circumstances but in no event later than a
contractual delinquency of 90 days in either interest or principal.
The determination of the required ALLL ("Target Reserve") for Pass Loans is
based on two different analyses of the empirical data for each loan portfolio
over the preceding 36 months. The first analysis, the Trend Forecast, consists
of linear and non-linear regression analysis of the loans outstanding, the
level and trend of delinquencies and the level and trend of net charge-offs for
the portfolio. The second analysis, the Formula Calculation, is completed for
each loan portfolio and is based on the correlation of the level of loans
delinquent 60 days or more to the level of net charge-offs. The result of each
analysis is the projected level of net charge-offs for the next twelve months
for the individual loan portfolio.
Due to the potentially positive impact to net charge-offs of other factors
specific to a loan portfolio's performance and for new loan products within a
loan portfolio, a Policy Limit is established for each loan portfolio. The
Policy Limit represents the minimum level of loss established for each
portfolio and is based on historical losses for the Bank's loan portfolios in
conjunction with expected losses for similar loan types within the Bank's
loan portfolio.
The greater of the Policy Limit, Trend Forecast or Formula Ratio for each
loan portfolio is set as the Base Reserve for that portfolio. The Base
Reserve is then adjusted for factors that may influence the loan portfolio's
actual net charge-offs. The final adjusted Base Reserve is equal to the Target
Reserve for the Pass Loans for an individual loan portfolio.
The regulatory classification of loans and determination of non-accrual
status is completed each month. The determination of the Target Reserve for
the pass portfolio using the analyses discussed above is completed on a
quarterly basis and the Target Reserve adjusted accordingly.
In addition to the ALLL established for each loan portfolio, the Bank
maintains an unallocated ALLL to cover the residual losses inherent in the loan
portfolio. As discussed above, the Target Reserve for the Pass Loans is
established for a 12-month period. A residual loss is the inherent loss within
the loan portfolio over the life of the loans in the portfolio.
<PAGE> 16
Management believes that First Indiana's current loan and REO loss
allowances are sufficient to absorb potential losses which are inherent in the
loan portfolio; however, there can be no assurance that additional allowances
will not be required or that the amount of any such allowances will not be
significant. In addition, various regulatory agencies, as an integral part of
their examinations, periodically review these allowances and may require First
Indiana to recognize additions to the allowances based on their judgment about
information available at the time of their examination. No such additions were
required by the OTS in their most recent examinations of First Indiana.
The Investment Committee of First Indiana's Board of Directors is
responsible for monitoring and reviewing First Indiana's liquidity and
investments. The Investment Committee approves investment policies and meets
quarterly to review transactions. Credit risk is controlled by limiting the
number and size of investments and by approving the brokers and agents through
which investments are made.
Regulatory Classification of Assets. Federal regulations require that each
savings institution regularly classify its own assets. In addition, in
connection with examinations of savings institutions, the OTS and the FDIC
examiners have authority to identify problem assets and, if appropriate, to
require them to be classified.
There are three classifications for problem assets: Substandard, Doubtful
and Loss. Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the institution will sustain
some loss if the deficiencies are not corrected. Doubtful assets have the
weaknesses of Substandard assets, with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a significant
possibility of loss. An asset classified as Loss is considered uncollectible
and of such little value that continuation as an asset of the savings
institution is not warranted.
Assets classified as Substandard or Doubtful require the savings institution
to establish prudent general allowances for loan losses. If an asset or
portion thereof is classified as Loss, the savings institution must either
establish specific allowances for loan losses in the amount of 100 percent of
the portion of the asset classified Loss or charge off such amount. If a
savings institution does not agree with an examiner's classification of an
asset, it may appeal this determination to the District Director of the OTS.
On the basis of management's review of its assets as of December 31, 1999 on
a net basis, First Indiana had classified $40.3 million as Substandard,
compared with $31.8 million and $33.4 million at December 31, 1998 and 1997,
respectively. The amount of First Indiana's Doubtful and Loss loans at each
such date was immaterial.
Non-Performing Assets. First Indiana categorizes its non-performing assets
into four categories: Non-Accrual Loans, Impaired Loans, Restructured Loans,
and Real Estate Owned.
<PAGE> 17
First Indiana places loans on non-accrual status when payments of principal
or interest become 90 days or more past due, or earlier when an analysis of a
borrower's creditworthiness indicates that payments could become past due.
Total non-accrual loans were $16.0 million at December 31, 1999, compared with
$17.2 and $18.4 million at December 31, 1998 and 1997, respectively.
Loans are classified as impaired when an analysis of a borrower's
creditworthiness indicates it is unlikely that the borrower can meet
contractual obligations for principal and interest repayments. At December
31, 1999, First Indiana had identified one impaired loan, totaling $1.72
million, which had an allocated reserve of $0.71 million.
REO is generally acquired by foreclosure or deed in lieu of foreclosure
and is carried at the lower of cost (the unpaid balance at the date of
acquisition plus foreclosure and other related costs) or fair market value
less reasonable disposal costs to sell. A review of REO properties,
including the adequacy of the loss allowance and decisions whether to charge
off REO, occurs in conjunction with the review of the loan portfolios.
First Indiana has carefully managed its loan portfolio, including its
non-performing assets, to reduce exposure to the commercial real estate loan
sector and to diversify its assets geographically and by type of loan.
Accordingly, First Indiana has not experienced the difficulties faced by
savings institutions which have had concentrations in areas of the country
most adversely affected by economic cycles. First Indiana's non-performing
assets fell in 1999 to $19.4 million at December 31, 1999 from $19.9 million
one year earlier.
Summary of Loan Loss Experience. First Indiana regularly reviews the
status of all non-performing assets to evaluate the adequacy of the allowances
for losses on loans and REO. For additional information relating to the
Corporation's loan and REO loss allowances, see the Corporation's Consolidated
Financial Statements, including Note 5 thereto.
Investment Activities
Federally chartered savings institutions have authority to invest in various
types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposits of
insured banks and savings institutions, certain bankers' acceptances, and
federal funds. Subject to various restrictions, federally chartered savings
institutions may also invest a portion of their assets in commercial paper and
corporate debt securities and in mutual funds whose assets conform to the
investments a federally chartered savings institution is otherwise authorized
to make directly.
As an Indiana corporation, the Corporation has authority to invest in any
type of investment permitted under Indiana law. As a savings and loan holding
company, however, its investments are subject to certain regulatory
restrictions described under "Savings Institution Regulation."
<PAGE> 18
The relative mix of investment securities and loans in First Indiana's
portfolio is dependent upon management's evaluation of the yields available on
loans compared to investment securities. The Board of Directors has
established an investment policy, and the Investment Committee of the Board
meets quarterly with management to establish more specific investment
guidelines about types of investments, relative amounts, and maturities. First
Indiana's current investment guidelines limit purchases of corporate bonds to
an investment rating of A- or greater. Liquid investments are managed to
ensure that regulatory liquidity requirements are satisfied.
As required by SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities, First Indiana continually reassesses the classification of
securities as either available-for-sale or held-to-maturity. During the third
quarter of 1998, management changed its positive intent to hold
held-to-maturity investments and mortgage-backed securities. Accordingly, the
entire portfolios of mortgage-backed securities with an amortized cost of
$19,274,000 and investment securities with an amortized cost of $5,243,000 were
transferred from held-to-maturity to available-for-sale. At the time of the
transfer, these mortgage-backed securities and investment securities had
unrecognized gains of $374,000 and $86,000, respectively, which were recognized
as a separate component of accumulated other comprehensive income. Management
elected to transfer these securities which had been previously designated as
held-to-maturity.
At December 31, 1999, First Indiana's investments totaled $103.2 million, or
5.21 percent of total assets, and consisted primarily of U.S. Treasury and
agency obligations, corporate debt securities and asset-backed securities. For
additional information concerning investments held by the Corporation at
certain dates, see the Corporation's Consolidated Financial Statements,
including Note 2 thereto.
At December 31, 1999, First Indiana also had mortgage-backed securities
classified as available for sale. At December 31, 1999, these mortgage-backed
securities totaled $54.7 million, or 2.76 percent of total assets. For
additional information concerning mortgage-backed securities held by the
Corporation, see the Corporation's Consolidated Financial Statements, including
Notes 2 and 3 thereto.
<PAGE> 19
Sources of Funds
General. Deposits are an important source of the Corporation's funds for
use in lending and for other general business purposes. In addition to
deposits, First Indiana derives funds from repayments of loans and
mortgage-backed securities, Federal Home Loan Bank of Indianapolis ("FHLB")
advances, repurchase agreements, short-term borrowings, and sales of loans.
Repayments of loans and mortgage-backed securities are a relatively stable
source of funds, while deposit inflows and outflows are significantly
influenced by general interest rates and money market conditions. Borrowings
may be used to compensate for reductions in normal sources of funds, such as
deposit inflows at less than projected levels, or to support expanded
activities. Historically, First Indiana's borrowings have been primarily from
the FHLB and through repurchase agreements.
Deposits. First Indiana has a wide variety of deposit programs designed to
attract both short-term and long-term deposits from the general public. These
deposit accounts include passbook accounts, non-interest-bearing consumer and
commercial demand accounts, NOW accounts, and money market checking accounts,
as well as fixed-rate certificates and money market accounts. In 2000, First
Indiana plans to continue to increase consumer and commercial checking
accounts and certificates of deposit in an effort to reduce funding costs and
strengthen core deposits.
The following table shows the distribution of First Indiana's deposits by
interest-rate categories at each of the dates indicated:
<TABLE>
<CAPTION>
At December 31,
------------------------------------
(Dollars in Thousands) 1999 1998 1997
------------------------------------
Rate:
<S> <C> <C> <C>
Under 3.00% $ 278,429 $ 551,421 $ 205,265
3.00 - 5.00 509,556 217,244 385,859
5.01 - 7.00 524,079 457,988 493,012
7.01 - 9.00 51 756 23,032
9.01 - 11.00 - 509 387
------------------------------------
$1,312,115 $1,227,918 $1,107,555
====================================
</TABLE>
The following table reflects the increase (decrease) in deposits for
various types of deposit programs offered by First Indiana for each of the
periods indicated:
<TABLE>
<CAPTION>
At December 31,
--------------------------------
1999 1998 1997
(Dollars in Thousands) --------------------------------
<S> <C> <C> <C>
NOW Checking and Non-Interest-Bearing Deposits $ (8,714) $ 41,210 $ 13,342
Money Market Checking (49) (1,858) (9,106)
Passbook and Statement Savings (21,793) 63,052 (1,056)
Money Market Savings 15,113 (661) (2,914)
Jumbo Certificates of $100 or More 136,926 49,232 23,358
Fixed-Rate Certificates (37,286) (30,612) (11,555)
(Dollars in Thousands) --------------------------------
Net Increase (Decrease) $ 84,197 $120,363 $ 12,069
================================
</TABLE>
<PAGE> 20
First Indiana's jumbo certificates of $100,000 or more at December 31, 1999,
the maturities of such deposits, and the percentage of total deposits
represented by these certificates are set forth in the table below:
<TABLE>
<CAPTION>
Three Over Three Over Six
Months or Months to Months to Over One Percent of
Less Six Months One Year Year Total Deposits
(Dollars in Thousands) ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Jumbo Certificates of
$100 or More $104,527 $34,849 $40,291 $127,247 $306,914 23.39%
=====================================================================
</TABLE>
Borrowings. The FHLB of Indianapolis functions as a central reserve bank
providing credit for depository institutions in Indiana and Michigan. As a
member of the FHLB, First Indiana is required to own capital stock in the FHLB
and is authorized to apply for advances on the security of such stock and
certain of First Indiana's residential mortgage loans and other assets, subject
to credit standards. The FHLB advances are made pursuant to several different
credit programs, each with its own interest rate and range of maturities.
The FHLB prescribes the acceptable uses for advances and imposes size limits
on them. Acceptable uses have included expansion of residential mortgage
lending and short-term liquidity needs. Depending on the program, limitations
on the amount of advances are generally based on the FHLB's assessment of the
institution's creditworthiness. At December 31, 1999, First Indiana had $366.9
million in FHLB advances (18.53 percent of total assets), with a weighted
average interest rate of 5.75 percent.
First Indiana also enters into repurchase agreements as a short-term source
of borrowing, but only with registered government securities dealers.
The following table sets forth certain information regarding repurchase
agreements and federal funds purchased (short-term borrowings) at and for the
years ended on the dates indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------
1999 1998 1997
----------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Highest Month-End Balance of Short-Term
Borrowings During the Year $98,754 $62,620 $84,896
Average Month-End Balance of Short-Term
Borrowings During The Year 54,578 51,166 38,899
Weighted Average Interest Rate of Short-Term
Borrowings During the Year 5.0% 5.3% 5.5%
Weighted Average Interest Rate of Short-Term
Borrowings at End of the Year 5.4% 4.8% 5.5%
</TABLE>
<PAGE> 21
Regulatory Capital
Risk-Based Capital. Savings institutions are required to have risk-based
capital of eight percent of risk-weighted assets. At December 31, 1999, First
Indiana's risk-based capital was $176.1 million, or 11.10 percent of
risk-weighted assets. Risk-based capital is defined as common equity, less
goodwill, the excess portion of land loans with a loan-to-value ratio of
greater than 80 percent, and investments in non-mortgage-lending-related
subsidiaries, plus general allowances for loan losses. Risk-weighting of
assets is derived from assigning one of four risk-weighted categories to an
institution's assets, based on the degree of credit risk associated with the
asset. The categories range from zero percent for low-risk assets (such as
United States Treasury securities) to 100 percent for high-risk assets (such
as real estate owned). The carrying value of each asset is then multiplied by
the risk-weighting applicable to the asset category. The sum of the products
of the calculation equals total risk-weighted assets.
Core Capital. Savings institutions are also required to maintain a minimum
leverage ratio, under which core (Tier One) capital must equal at least 4
percent of total assets, but not less than the minimum required by the Office
of the Comptroller of the Currency ("OCC") for national banks, which minimum
currently stands at 4 percent. First Indiana's primary regulator, the OTS, is
expected to adopt the OCC minimum. The components of core capital are the same
as those set by the OCC for national banks, and consist of common equity, plus
non-cumulative preferred stock and minority interest in consolidated
subsidiaries, minus certain intangible assets, including purchased loan
servicing. At December 31, 1999, First Indiana's core capital and leverage
ratio were $157.7 million and 7.98 percent.
Tangible Capital. Savings institutions must also maintain minimum tangible
capital of 1.5 percent of total assets. First Indiana's tangible capital and
tangible capital ratio at December 31, 1999, were $157.7 million and 7.98
percent, respectively.
Capital Regulations. The OTS has minimum capital standards that place
savings institutions into one of five categories, from "critically
undercapitalized" to "well-capitalized," depending on levels of three measures
of capital. A well-capitalized institution as defined by the regulations has a
total risk-based capital ratio of at least ten percent, a Tier One (core)
risk-based capital ratio of at least six percent, and a leverage (core)
risk-based capital ratio of at least five percent. At December 31, 1999 First
Indiana was classified as "well-capitalized."
The OTS adopted regulations adding an interest-rate risk component to the
proposed capital regulations. Under this component, an institution with an
"above normal" level of interest-rate risk exposure is subject to an "add-on"
to its risk-based capital requirement. "Above normal" interest-rate risk is
defined as a reduction in "market value portfolio equity" (as defined)
resulting from a 200 basis point increase or decrease in interest rates, if
the decline in value exceeds two percent of the institution's assets.
Institutions failing to meet this test will be required to add to their
risk-based capital.
<PAGE> 22
The OTS issued this final rule to implement the portions of Section 305 of
the Federal Deposit Insurance Corporation Improvement Act of 1991, which
requires the agencies to revise their risk-based capital standards for insured
depository institutions to ensure that those standards take adequate account
of concentration of credit risk and the risks of nontraditional activities.
The final rule amends the risk-based capital standards by explicitly
identifying concentration of credit risk and certain risks arising from
nontraditional activities, as well as an institution's ability to manage
these risks, as important factors in assessing an institution's overall
capital adequacy. Based on its interest-rate risk at December 31, 1999,
First Indiana was not required to add to its risk-based capital under this
regulation.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented herein have
been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering changes in the relative
purchasing power of money over time due to inflation.
Almost all of the assets and liabilities of a savings institution are
monetary, which limits the usefulness of data derived by adjusting a savings
institution's financial statements for the effects of changing prices.
Regulation
Federal Deposit Insurance Corporation Improvement Act of 1991
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), contains various provisions intended to recapitalize the Bank
Insurance Fund and enacts a number of regulatory reforms that affect all
insured depository institutions, regardless of the insurance fund in which
they participate. Among other things, FDICIA grants the OTS broader
regulatory authority to take prompt corrective action against insured
institutions that do not meet capital requirements, including placing severely
under-capitalized institutions into conservatorship or receivership. Since
First Indiana exceeded all capital requirements at December 31, 1999, these
provisions are not expected to have an impact on its operations.
<PAGE> 23
Gramm-Leach-Bliley Act of 1999
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act ("GLB Act"). The general effect of the law is to
establish a comprehensive framework to permit affiliations among commercial
banks, insurance companies, securities firms and other financial service
providers by repealing certain provisions of the Glass-Steagall Act and
revising and expanding the Bank Holding Company Act framework to permit a
holding company system to engage in a full range of financial activities
through a new entity known as a "Financial Holding Company." "Financial
activities" is broadly defined to include not only banking, insurance and
securities activities, but also merchant banking and additional activities
approved by order or regulation of the Federal Reserve Board. The GLB Act also
permits national banks to engage in certain expanded activities through the
formation of financial subsidiaries and restricts financial institutions from
sharing customer nonpublic personal information with non-affiliated parties
unless the customer has had an opportunity to opt out of the disclosure.
In addition, the GLB Act provides that no company may acquire control of an
insured savings association after May 4, 1999, unless that company either (i)
engages only in the financial activities permissible for a Financial Holding
Company or (ii) is a grandfathered, unitary savings and loan holding company.
The GLB Act generally grandfathers any company that was a unitary savings and
loan holding company on May 4, 1999. Such a company may continue to operate
under present law as long as (i) the company continues to control only one
savings institution or its successor (excluding supervisory acquisitions) that
it controlled on May 4, 1999 and (ii) each controlled institution meets the
qualified thrift lender test. The Corporation is a grandfathered unitary
savings and loan holding company.
The Corporation does not believe that the GLB Act will have any immediate,
material impact on its operations. However, to the extent that the GLB Act
permits commercial banks, securities firms and insurance companies to
affiliate, the Act may have the effect of increasing the amount of competition
that the Corporation faces from other companies offering financial products,
many of which may have substantially more financial resources.
Savings and Loan Holding Company Regulations
General. Under the Home Owner's Loan Act ("HOLA"), as amended, the Director
of the OTS has regulatory jurisdiction over savings and loan holding companies.
The Corporation, as a savings and loan holding company within the meaning of
HOLA, is subject to regulation, supervision and examination by and the
reporting requirements of the Director of OTS.
<PAGE> 24
Savings Institution Regulation
General. As a SAIF-insured savings institution, First Indiana is subject
to supervision and regulation by the OTS. Under OTS regulations, First
Indiana is required to obtain audits by independent auditors and to be
examined periodically by the Director of OTS. First Indiana is subject to
assessments by OTS and the FDIC to cover the costs of such examinations. The
OTS may revalue assets of First Indiana based upon appraisals and require the
establishment of specified reserves in amounts equal to the difference between
such revaluation and the book value of the assets. The Director of the OTS
also is authorized to promulgate regulations to ensure the safe and sound
operations of savings institutions and may impose various requirements and
restrictions on the activities of savings institutions.
The regulations and policies of the OTS for the safe and sound operations
of savings institutions can be no less stringent than those established by the
OCC for national banks. Additionally, under the FDICIA, the OTS prescribed
safety and soundness regulations in 1995 relating to (i) internal controls,
information systems, and internal audit systems; (ii) loan documentation; (iii)
credit underwriting; (iv) interest-rate exposure; (v) asset growth; and (vi)
compensation and benefit standards for officers, directors, employees and
principal shareholders. These regulations did not have a material effect on
First Indiana.
As a member of SAIF, First Indiana is also subject to regulation and
supervision by the FDIC, in its capacity as administrator of SAIF, to ensure
the safety and soundness of SAIF.
During the most recent trust examination, the OTS examiners verbally
informed the Bank that a federal savings bank rendering investment advice for
a fee may be required to file Form ADV with the Securities and Exchange
Commission ("SEC") as a "registered investment advisor" under the Investment
Advisors Act of 1940. While national and state "banks" are specifically
exempted from this requirement, it is unclear whether federal savings banks
are included in the definition for this purpose.
First Indiana Bank is currently compiling the data necessary to complete
the SEC filing and take any other actions that may be required for full
compliance with the Investment Advisors Act, if necessary, but is concurrently
seeking advice of legal counsel for clarification of the responsibilities of a
federal savings bank under the Act.
<PAGE> 25
Qualified Thrift Lender Requirement. In order for First Indiana to exercise
the powers granted to federally chartered savings institutions and maintain
full access to FHLB advances, it must be a "qualified thrift lender" ("QTL").
A savings institution is a QTL if its qualified thrift investments equal or
exceed 65 percent of the savings institution's portfolio assets on a monthly
average basis in nine out of 12 months. As amended by the FDICIA, qualified
thrift investments generally consist of (i) various housing related loans and
investments (such as residential construction and mortgage loans, home
improvement loans, mobile home loans, home equity loans, and mortgage-backed
securities); (ii) certain obligations of the FDIC, the Federal Savings and Loan
Insurance Corporation Resolution Fund and the Resolution Trust Corporation (for
limited periods); and (iii) shares of stock issued by any Federal Home Loan
Bank, the Federal Home Loan Mortgage Corporation, or the Federal National
Mortgage Association.
At December 31, 1999, the qualified thrift investment percentage test for
First Indiana was near 83 percent. First Indiana complies with the new QTL
test as revised upon enactment of FDICIA.
Liquidity. Under applicable federal regulations, savings institutions are
required to maintain an average daily balance of liquid assets (including cash,
certain time deposits, certain banker's acceptances, certain corporate debt
securities and highly rated commercial paper, securities of certain mutual
funds and specified United States government, state or federal agency
obligations) equal to a monthly average of not less than a specified percentage
of withdrawable deposits plus short-term borrowings. Under HOLA, this
liquidity requirement may be changed from time to time by the Director of the
OTS to any amount within the range of four percent to ten percent, depending
upon economic conditions and the deposit flows of member institutions. The
Bank's liquidity ratio at December 31, 1999 was 6.80 percent. In 1997, the
OTS lowered the liquidity requirement to four percent of net withdrawable
assets, simplified the definition of net withdrawable assets, and eliminated
a separate requirement for short-term liquidity. At December 31, 1999, First
Indiana was in compliance with these liquidity requirements.
Loans-to-One-Borrower Limitations. HOLA generally requires savings
institutions to comply with the loans-to-one-borrower limitations applicable
to national banks. In general, national banks may make loans to one borrower
in amounts up to 15 percent of the bank's unimpaired capital and surplus, plus
an additional 10 percent of capital and surplus for loans secured by readily
marketable collateral. At December 31, 1999, First Indiana's loan-to-one
borrower limitation was approximately $27.7 million, and no loans to a single
borrower exceeded that amount.
Commercial Real Property Loans. HOLA limits the aggregate amount of
commercial real estate loans that a federal savings institution may make to
an amount not in excess of 400 percent of the savings institution's capital.
First Indiana was in compliance with the commercial real property loan
limitation at December 31, 1999.
<PAGE> 26
Limitation on Capital Distributions. Under OTS regulations, a savings
institution has no restrictions on capital distributions as long as, after the
distribution, it is still classified as "adequately capitalized." An
adequately capitalized savings association is one with a total risk-based
capital ratio of 8 percent or greater, a Tier 1 risk-based capital ratio of 4
percent or greater, and a leverage ratio of 4 percent or greater. No
regulatory approval of the capital distribution is required, but prior notice
must be given to the OTS.
Limitation of Equity Risk Investments. Under applicable regulations, First
Indiana is generally prohibited from investing directly in equity securities
and real estate (other than that used for offices and related facilities or
acquired through, or in lieu of, foreclosure or on which a contract purchaser
has defaulted). In addition, OTS regulations limit the aggregate investment by
savings institutions in certain equity risk investments including equity
securities, real estate, service corporations and operating subsidiaries and
loans for the purchase of land and construction loans made after February 27,
1987 on non-residential properties with loan-to-value ratios exceeding 80
percent. At December 31, 1999, First Indiana was in compliance with the equity
risk investment limitations.
Insurance of Deposits. FDIC-insured institutions pay deposit insurance
premiums depending on their placement within one of nine categories. The
categories are determined by (i) the insured institution's placement in capital
group 1, 2, or 3, depending on its classification as "well-capitalized,"
"adequately capitalized," or "undercapitalized," and (ii) its supervisory
rating of A, B, or C. Prior to October 1, 1996, well-capitalized
institutions with a supervisory rating of A paid $.23 per $100 of deposits,
while undercapitalized institutions with a rating of C paid $.31 per $100 of
deposits.
In the third quarter of 1996, the FDIC levied an industry-wide special
assessment to recapitalize the Savings Association Insurance Fund ("SAIF"),
which insures First Indiana's customers' deposits. The Bank incurred a
one-time pre-tax charge to earnings of $6,749,000 to comply with this
assessment. Beginning January 1, 1997, deposit insurance premiums between $.00
and $.27 per $100 of deposits are in effect, based on the same nine-category
rating system discussed in the previous paragraph. The Deposit Insurance Funds
Act of 1996 ("Funds Act") also separated, effective January 1, 1997, the
Financing Corporation ("FICO") assessment to service the interest on its bond
obligations from the SAIF assessment. As part of the deposit insurance
assessments, institutions pay a FICO assessment for debt service requirements.
The FICO assessment rate is subject to change on a quarterly basis, depending
on the debt service requirements. In January 2000, First Indiana paid $.0212
per $100 of deposits to comply with this assessment. The total deposit
insurance expense paid was $712,000, $691,000, and $693,000 for 1999, 1998, and
1997, respectively.
<PAGE> 27
First Indiana was a well-capitalized institution throughout 1999, and paid
no deposit insurance premiums other than the FICO assessment. Because it is
well-capitalized, First Indiana will continue to pay no deposit insurance
premiums in 1999, but these premiums could increase in the future if the
aggregate SAIF premiums paid by all SAIF-insured institutions do not equal or
exceed 1.25% of insurable deposits.
Community Reinvestment Act. Ratings of savings institutions under the
Community Reinvestment Act of 1977 ("CRA") must be disclosed. The disclosure
includes both a four-tier descriptive rating using terms such as satisfactory
and unsatisfactory and a written evaluation of each institution's performance.
Also, the FHLB is required to adopt regulations establishing standards of
community investment and service for members of the FHLB System to meet to be
eligible for long-term advances. Those regulations are required to take into
account a savings institution's CRA record and the member's record of lending
to first-time home buyers. At December 31, 1999, the Bank's rating was
"satisfactory." The Bank intends to maintain its long-standing record of
community lending and to meet or exceed the CRA standards under FIRREA.
Transactions with Affiliates
Pursuant to HOLA, transactions engaged in by a savings institution or one of
its subsidiaries with affiliates of the savings institution generally are
subject to the affiliate transaction restrictions contained in Sections
371c (23) and 371c-1 (23B) of the Federal Reserve Act. Section 371c (23) of
the Federal Reserve Act imposes both quantitative and qualitative restrictions
on transactions engaged in by a member depository institution or one of its
subsidiaries with an affiliate, while Section 371c-1 (23B) of the Federal
Reserve Act requires, among other things, that all transactions with affiliates
be on terms substantially the same as and at least as favorable to the member
bank or its subsidiary as the terms that would apply to or would be offered in
a comparable transaction with an unaffiliated party.
Section 375b (22(h)) of the Federal Reserve Act imposes restrictions on
loans to executive officers, directors, and principal shareholders. Under
Section 375b (22(h)), loans to an executive officer or to a greater than 10
percent shareholder of a savings institution, or certain affiliated entities
of either, may not exceed the institution's loan-to-one-borrower limit when
considered with all other outstanding loans to such person and affiliated
entities. Section 375b (22(h)) also prohibits loans above amounts prescribed
by the appropriate federal banking agency to directors, executive officers, and
greater than 10 percent shareholders of a savings institution and their
respective affiliates, unless the loan is approved in advance by a majority of
the board of directors of the institution, with any interested director not
participating in the voting. The Federal Reserve Board has prescribed the loan
amount (which includes all other outstanding loans to such person) for which
such prior board of director approval is required, as the greater of $25,000 or
5 percent of capital and surplus. Prior board of director approval is also
required if an amount is requested that, when aggregated with all other
extensions of credit to that person, and all related interests of that person,
exceeds $500,000. First Indiana is in compliance with these regulations.
<PAGE> 28
Federal Home Loan Bank System
The Federal Home Loan Bank System ("FHLB") consists of 12 regional Banks,
each subject to supervision and regulation by the Federal Housing Finance
Board. The FHLB provides a central credit facility for member savings
institutions. As a member of the FHLB, First Indiana is required to own
shares of capital stock in the FHLB. The calculation of the required stock
amount is the greater of one percent of the aggregate unpaid mortgage loan,
.3 percent of total assets, or 1/20 of its advances from the FHLB. As of
December 31, 1999, First Indiana was in compliance with this requirement.
Federal Reserve System
The Federal Reserve Board has adopted regulations that require savings
institutions to maintain non-earning reserves against their transaction
accounts (primarily NOW and regular checking accounts) and non-personal time
deposits (those which are transferable or held by a person other than a
natural person) with an original maturity of less than one and one-half
years. At December 31, 1999, First Indiana was in compliance with these
requirements. These reserves may be used to satisfy liquidity requirements
imposed by the Director of the OTS. Because required reserves must be
maintained in the form of vault cash or non-interest-bearing account at a
Federal Reserve Bank, the effect of this reserve requirement is to reduce the
amount of the institution's interest-earning assets.
Savings institutions also have the authority to borrow from the Federal
Reserve discount window. Federal Reserve Board regulations, however, require
savings institutions to exhaust all the FHLB sources before borrowing from a
Federal Reserve Bank. The FDICIA places limitations upon a Federal Reserve
Bank's ability to extend advances to under-capitalized and critically
under-capitalized depository institutions. The FDICIA provides that a Federal
Reserve bank generally may not have advances outstanding to an
under-capitalized institution for more than 60 days in any 120-day period.
Federal Securities Law
The stock of the Corporation is registered with the SEC under the Securities
Exchange Act of 1934 ("Exchange Act"). The Corporation will be subject to the
information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Exchange Act.
Corporation stock held by persons who are affiliates (generally officers,
directors, and principal stockholders) of the Corporation may not be resold
without registration or unless sold in accordance with certain resale
restrictions. If the Corporation meets specified current public information
requirements, each affiliate of the Corporation is able to sell in the public
market, without registration, a limited number of shares in any three-month
period.
<PAGE> 29
Taxation
Federal. The Corporation, on behalf of itself, First Indiana and its
subsidiaries, files a calendar tax year consolidated federal income tax return
and reports items of income and expense using the accrual method of accounting.
In accordance with Statement of Financial Accounting Standard No. 109,
"Accounting for Income Taxes" ("SFAS 109"), a deferred liability has not been
established for the Bank's tax bad debt base year reserves of $16,586,000.
The base year reserves are generally the balance of reserves as of December
31, 1987, reduced proportionally for reductions in the Bank's loan portfolio
since that date. The base year reserves will continue to be subject to
recapture and the Bank could be required to recognize a tax liability if: (i)
the Bank fails to qualify as a "bank" for federal income tax purposes; (ii)
certain distributions are made with respect to the stock of the Bank; (iii)
the bad debt reserves are used for any purpose other than to absorb bad debt
losses; or (iv) there is a change in tax law. The enactment of this
legislation had no material impact on the Corporation's operations or financial
position.
Under SFAS 109, the Corporation may recognize deferred tax assets for
deductible temporary differences based on an evaluation of the likelihood of
realizing the underlying tax benefits. The realization of these benefits
principally depends upon the following sources of taxable income: (i) taxable
income in the current year or prior years that is available through carryback
(potential recovery of taxes paid for the current year or prior years); (ii)
future taxable income that will result from the reversal of existing taxable
temporary differences (potential offsetting of deferred tax liabilities); or
(iii) future taxable income, exclusive of the reversal of existing temporary
differences, that is generated by future operations.
In addition, tax-planning strategies may be available to accelerate taxable
income or deductions, change the character of taxable income or deductions, or
switch from tax-exempt to taxable investments so that there would be sufficient
taxable income of the appropriate character and in the appropriate periods to
allow for realization of the tax benefits.
The Federal Financial Institutions Examination Council (the "FFIEC") has
adopted all provisions of SFAS 109 for regulatory reporting purposes, including
those provisions related to deferred tax assets. However, the FFIEC agencies
have imposed a limitation on the amount of net deferred tax assets that may be
included in the calculation of regulatory capital. The limitation requires an
institution to deduct from capital, when computing its regulatory capital
ratios, any amount of net deferred tax asset that is not supported by the sum
of the carryback potential of the institution plus the lower of the next twelve
months' estimated earnings or ten percent of Tier 1 capital. At December 31,
1999, First Indiana met all the above requirements and had no adjustments to
regulatory capital.
The Internal Revenue Service has examined the tax returns of First Indiana
through 1996.
<PAGE> 30
State. Effective January 1, 1999, the State of Indiana imposes a franchise
tax on the "apportioned income" of depository institutions at a fixed rate of
8.5 percent per year. This franchise tax is imposed in lieu of the gross
income tax, adjusted gross income tax, savings and loan excise tax and
supplemental net income tax otherwise imposed on certain corporate entities
and depository institutions. "Apportioned income" consists of the taxpayer's
"adjusted gross income" multiplied by the depository institution's total
receipts attributable to transacting business in Indiana divided by total
receipts attributable to transacting business everywhere. For example,
tax-exempt interest is included in the depository institution's adjusted gross
income for state franchise tax purposes. The Indiana Department of Revenue has
examined the state income tax returns of First Indiana through 1994.
Service Corporation Subsidiaries
OTS regulations permit federal savings institutions to invest in the capital
stock, obligations, or specified types of securities of subsidiaries (referred
to as "service corporations") and to make loans to such subsidiaries and joint
ventures in which such subsidiaries are participants in an aggregate amount not
exceeding 2 percent of an institution's assets, plus an additional one percent
of assets if the amount over 2 percent is used for specified community or
inner-city development purposes. In addition, federal regulations permit
institutions to make specified types of loans to such subsidiaries (other than
special-purpose finance subsidiaries), in which the institution owns more than
10 percent of the stock, in an aggregate amount not exceeding 50 percent of the
institution's regulatory capital if the institution's regulatory capital is in
compliance with applicable regulations. FIRREA requires a savings institution
which acquires a non-savings institution subsidiary, or which elects to conduct
a new activity within a subsidiary, to give the FDIC and the OTS at least 30
days' advance written notice. The FDIC may, after consultation with the OTS,
prohibit specific activities if it determines such activities pose a serious
threat to the SAIF. Moreover, savings institutions must deduct from capital,
for purposes of meeting the leverage limit, tangible capital, and risk-based
capital requirements, their entire investment in and loans to a subsidiary
engaged in activities permissible for a national bank (other than exclusively
agency activities for its customers or mortgage banking subsidiaries).
One Investment Corporation. One Investment Corporation is a wholly owned
subsidiary formed in January 1999 to engage in the purchase and sale of loan
participations originated both by First Indiana and by others in the secondary
market.
One Mortgage Corporation. One Mortgage Corporation is a wholly owned
subsidiary formed in 1983 to originate single-family residential mortgage loans
outside of Indiana for sale to First Indiana or for sale into the secondary
market. Since the third quarter of 1999, when the Bank exited the traditional
mortgage banking business in favor of originating mortgages for our
relationship customers, One Mortgage Corporation has not engaged in any such
activities.
<PAGE> 31
One Property Corporation. One Property Corporation is a wholly owned
subsidiary formed in 1985 to engage in commercial real estate investment
activities. To date, One Property Corporation has not engaged in any such
activities.
Pioneer Service Corporation. Pioneer Service Corporation is a wholly owned
subsidiary of the Bank. In April 1990, Pioneer Service Corporation invested in
a limited partnership which was formed to develop and own a 112-unit apartment
complex in Greencastle, Indiana.
Employees
At December 31, 1999, the Corporation and its subsidiaries employed 577
persons, including part-time employees. Management considers its relations
with its employees to be excellent. None of these employees is represented by
any collective bargaining group.
The Corporation and its subsidiaries currently maintain a comprehensive
employee benefit program providing, among other benefits, a qualified pension
plan, a 401(k) plan, medical reimbursement accounts, hospitalization and major
medical insurance, paid sick leave, short-term and long-term disability
insurance, life insurance, an employees' stock purchase plan, tuition
reimbursement, and reduced loan rates for employees who qualify.
Item 2. Properties
At December 31, 1999, the Corporation operated through 23 full-service
banking centers and 15 loan origination offices in addition to its headquarters
and operations locations. The Corporation leases its headquarters location,
11 of the branches and 14 of the origination offices, and owns the remaining
locations. The aggregate carrying value at December 31, 1999 of the properties
owned or leased, including headquarters properties and leasehold improvements
at the leased offices, was $17.1 million. See Notes 6 and 12 to the
Corporation's Consolidated Financial Statements. The carrying value of First
Indiana's data processing equipment at December 31, 1999 was $1.8 million.
Item 3. Legal Proceedings
There are no pending legal proceedings to which the Corporation or any
subsidiary was a party or to which any of their property is subject other than
litigation which, in the opinion of management, is not material to the
Corporation's business, operations, or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Corporation's security holders
during the three months ended December 31, 1999.
<PAGE> 32
Part II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
The information required by this item is incorporated by reference from
page 46 of the Corporation's 1999 Annual Report under the heading, "Corporate
Information."
For restrictions on the Corporation's present or future ability to pay
dividends, see Note 11 of "Notes to Consolidated Financial Statements" on page
36 - 37 of the Corporation's 1999 Annual Report, which is incorporated herein
by reference.
The Corporation paid a cash dividend of $.13 per share outstanding in each
quarter of 1999 and $.12 per share outstanding in each quarter of 1998, as
adjusted for a six-for-five stock dividend on March 6, 1998.
Item 6. Selected Financial Data
The information required by this item is incorporated by reference to page
23 of the Corporation's 1999 Annual Report from the material under the heading
"Five-Year Summary of Selected Financial Data."
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required by this item is incorporated by reference to pages
12 - 22 of the Corporation's 1999 Annual Report from the material under the
heading "Financial Review."
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is incorporated by reference to page
22 of the Corporation's 1999 Annual Report from the material under the heading
"Asset/Liability Management and Market Risk."
Item 8. Financial Statements and Supplementary Data
The Corporation's Consolidated Financial Statements and Notes to
Consolidated Financial Statements at December 31, 1999 and 1998 and for each of
the years in the three-year period ended December 31, 1999 are incorporated by
reference to pages 24 - 44 of the Corporation's 1999 Annual Report. The
Corporation's unaudited quarterly financial data for each of the years in the
two-year period ended December 31, 1999 is incorporated by reference to Note 15
of "Notes to Consolidated Financial Statements" on page 43 of the Corporation's
1999 Annual Report.
<PAGE> 33
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item with respect to the directors is
incorporated by reference to pages 5-7 and page 19 of the Corporation's Proxy
Statement dated March 14, 2000 under the heading "Election of Directors," and
"Section 16(a) Beneficial Ownership Reporting Compliance."
The following table sets forth information about the executive officers of
the Corporation and the Bank who are not directors of the Corporation or the
Bank. All executive officers are appointed by the Board of Directors and
serve at the discretion of the Board of Directors.
<TABLE>
<CAPTION>
Year First
Name Position Age Elected Officer
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
David L. Gray Vice President and Treasurer of the 56 1981
Corporation; Chief Financial Officer and
Senior Vice President, Financial
Management Division of the Bank
David A. Lindsey Senior Vice President, Consumer Finance 49 1983
Division of the Bank
Merrill E. Matlock Senior Vice President, Commercial and 50 1984
Mortgage Banking Division of the Bank
Timothy J. O'Neill Senior Vice President, Correspondent 52 1972
Banking Services Division of the Bank
Edward E. Pollack Senior Vice President, Technology and 51 1998
Operations Division of the Bank
Kenneth L. Turchi Senior Vice President, Retail Banking, 41 1987
Marketing, and Strategic Planning Division
of the Bank
</TABLE>
<PAGE> 34
David L. Gray has been with the Bank since July 1981, and currently serves
as the Corporation's vice president and treasurer, and the Bank's chief
financial officer and senior vice president, Financial Management Division.
He also serves as the chairman of the Bank's Asset/Liability Committee.
David A. Lindsey has been with the Bank since January 1983, serving as the
Bank's senior vice president, Consumer Finance Division. He oversees the
Bank's national consumer sales force.
Merrill E. Matlock is senior vice president of the Bank's Commercial and
Mortgage Banking Division. He is responsible for the Bank's residential,
construction, business, and commercial real estate lending. Mr. Matlock has
worked for First Indiana since 1984 and was most recently first vice president
of the construction lending department.
Timothy J. O'Neill has been with the Bank since 1970. He currently serves
as the Bank's senior vice president, Correspondent Banking Services Division.
As part of his current responsibilities, he develops relationships with smaller
community banks to provide private label products and services to their
customers.
Edward E. Pollack joined the Bank in 1998, and offers many years of
experience in operations and technology at the nation's largest guarantor of
student loans. He is serving as senior vice president, Technology and
Operations Division.
Kenneth L. Turchi joined First Indiana in September 1985 and currently
serves as senior vice president, Retail Banking, Marketing, and Strategic
Planning Division. His duties include strategic planning, marketing,
advertising, market research, investor and public relations, telemarketing, and
supervision of retail banking center sales and operations.
Item 11. Executive Compensation.
The information required by this item with respect to executive compensation
is incorporated by reference to pages 9-18 of the material under the heading
"Executive Compensation" in the Corporation's Proxy Statement.
During 1997, the Corporation effected change-of-control arrangements with
its key officers. The full text of these arrangements can be found in Exhibits
10(j) and 10(k) of the 1997 Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to pages
1-8 of the material under the heading "Proxy Statement" and "Proposal No 1:
Election of Directors" in the Corporation's Proxy Statement.
<PAGE> 35
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to pages
8-9 of the material under the heading "Certain Transactions" in the
Corporation's Proxy Statement.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
a. The following documents are filed as part of this report:
<TABLE>
<CAPTION>
1999 Annual Report
(Exhibit 13)
Financial Statements Page(s)
<S> <C>
Consolidated Balance Sheets as of December 31, 1999 and 1998 24
Consolidated Statements of Earnings for the Years Ended December 31,
1999, 1998, and 1997 25
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1999, 1998, and 1997 26
Consolidated Statements of Cash Flows for the Years Ended December
31, 1999, 1998, and 1997 27
Notes to Consolidated Financial Statements 28-43
Independent Auditors' Report 44
Exhibits
Refer to list of exhibits on pages 38-39
b. Reports on Form 8-K
No Reports on Form 8-K were filed during the three months
ended December 31, 1999.
c. The exhibits filed herewith or incorporated by reference
herein are set forth on the Exhibit index on pages 38-39.
d. Financial Statement Schedules required by Regulation S-X.
None
</TABLE>
<PAGE> 36
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of
1934, the Registrant has duly caused this amendment to be signed on its behalf
by the undersigned, thereunto duly authorized.
FIRST INDIANA CORPORATION
By:/s/ David L. Gray
David L. Gray
Vice President and Treasurer
Date: April 5, 2000
<PAGE> 37
<TABLE>
<CAPTION>
Exhibit Index
Page(s) (by
Exhibit Sequential
Number Numbering
System)
<S> <C> <C>
3(a) Articles of Incorporation and Bylaws of First Indiana Corporation 10-K 39
4(a) Form of Certificate of Common Stock of Registrant, incorporated by
reference to Exhibit 4(c) of the Registrant's registration statement on
Form S-1, filed as No. 33-46547 on March 20, 1992.
4(b) Shareholder Rights Agreement between First Indiana Corporation and
Harris Trust and Savings Bank dated November 14, 1997, incorporated
by reference to the Registrant's Form 8-A filed on December 2, 1997.
10(a) First Indiana Bank 1997 Long-Term Management Performance
Incentive Plan, incorporated by reference to Exhibit 10(a) of the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1997.
10(b) First Indiana Corporation 1991 Stock Option and Incentive Plan,
incorporated by reference to Exhibit A of the Registrant's March 20,
1991 Proxy Statement, Pages A-1 to A-8.
10(c) First Indiana Corporation 1998 Stock Incentive Plan, incorporated by
reference to Exhibit 10(c) of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1997
10(d) First Indiana Corporation 1992 Director Stock Option Plan,
incorporated by reference to Exhibit A of the Registrant's March 13,
1992 Proxy Statement, Pages A-1 to A-3.
10(e) First Indiana Corporation 1992 Stock Option Plan, incorporated by
reference to Exhibit A of the Registrant's March 12, 1993 Proxy
Statement, pages 15 to 19.
10(f) First Indiana Corporation Supplemental Benefit Plan effective May 1,
1997, incorporated by reference to Exhibit 10(f) of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997.
</TABLE>
<PAGE> 38
<TABLE>
<S> <C> <C>
10(g) First Indiana Corporation Supplemental Benefit Plan Agreement
effective May 1, 1997 between Registrant and Robert H. McKinney,
incorporated by reference to Exhibit 10(g) of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.
10(h) First Indiana Corporation Supplemental Benefit Plan Agreement
effective May 1, 1997 between Registrant and each of Owen B. Melton,
Jr. and Marni McKinney, incorporated by reference to Exhibit 10(h) of
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997.
10(i) Supplemental Benefit Plan Agreement effective May 1, 1997 between
First Indiana and each of David L. Gray, David A. Lindsey, Merrill E.
Matlock, Timothy J. O'Neill, and Kenneth L. Turchi, and effective
January 4, 1999 between First Indiana and Edward E. Pollack,
incorporated by reference to Exhibit 10(i) of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.
10(j) Form of Employment Agreement between Registrant and each of
Robert H. McKinney, Owen B. Melton, Jr. and Marni McKinney,
incorporated by reference to Exhibit 10(j) of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.
10(k) Form of Employment Agreement between First Indiana and each of
David L. Gray, David A. Lindsey, Merrill E. Matlock, Timothy J.
O'Neill, Kenneth L. Turchi, and Edward E. Pollack, incorporated by
reference to Exhibit 10(k) of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1997.
13 1999 Annual Report. 10-K 60
21 Subsidiaries of First Indiana Corporation and First Indiana Bank. 10-K 116
22 Definitive Proxy Statement relating to the 2000 Annual Meeting of
Shareholders, incorporated by reference to Exhibit 22 of the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1999.
23 Consent of KPMG LLP. 10-K 117
27 Financial Data Schedule. 10-K 119
</TABLE>
<PAGE>
FIRST INDIANA CORPORATION
Articles of Incorporation and Bylaws
<PAGE>
ARTICLES OF INCORPORATION
OF
FIRST INDIANA CORPORATION
ARTICLE I
IDENTIFICATION
Section 1.01. Name. The name of this corporation is First Indiana
Corporation.
Section 1.02. Registered Agent. The address of this corporation's
principal office in the State of Indiana is First Indiana Plaza, 135 North
Pennsylvania Street, in the City of Indianapolis, County of Marion, 46204.
The name of its registered agent at such address is Robert H. McKinney.
ARTICLE II
PURPOSE
The purpose of this corporation is the transaction of any and all lawful
business for which corporations may be incorporated under the General
Corporation Act of the State of Indiana.
ARTICLE III
CAPITAL STOCK
Section 3.01. Amount. The total number of shares of all classes of stock
which this corporation shall have authority to issue is six million
(6,000,000), of which four million (4,000,000) shall be common stock, par
value $.01 per share, and two million (2,000,000) shall be serial preferred
stock, par value $.01 per share.
Section 3.02. Terms of Preferred Stock. The shares of preferred stock may
be issued from time to time in one or more series. The board of directors of
this corporation shall have authority to fix by resolution or resolutions in
the designations and the powers, preferences and relative, participating,
optional or other special rights and qualifications, limitations or
restrictions thereof, including, without limitation, the voting rights,
the dividend rate, conversion rights, redemption price and liquidation
preference, of any series of shares of preferred stock, to fix the number of
shares constituting any such series, and to increase or decrease the number
of shares of any such series (but not below the number of shares thereof then
outstanding). In case the number of shares of any such series shall be so
decreased, the shares constituting such decrease shall resume the status
which they had prior to the adoption of the resolution or resolutions
originally fixing the number of shares of such series.
<PAGE>
Section 3.03. Terms of Common Stock. The shares of common stock may be
issued from time to time. Each share of common stock shall have the same
relative rights as and be identical in all respects with all the other shares
of common stock. Except as provided in Article VIII, every holder of common
stock shall have the right, at every stockholders' meeting, to one vote for
each share standing in his name on the books of the corporation.
Whenever there shall have been paid, or declared and set aside for payment,
to the holders of the outstanding shares of any class of stock having
preference over the common stock as to the payment of dividends, the full
amount of dividends and of sinking fund or retirement fund or other retirement
payments, if any, to which such holders are respectively entitled in
preference to the common stock, then dividends may be paid on the common stock
and on any class or series stock entitled to participate therewith as to
dividends, out of any assets legally available for the payment of dividends;
but only when and as declared by the board of directors.
In the event of any liquidation, dissolution or winding up of this
corporation, after there shall have been paid to or set aside for the holders
of any class having preferences over the common stock in the event of
liquidation, dissolution or winding up the full preferential amounts to which
they are respectively entitled, the holders of the common stock, and any class
or series of stock entitled to participate therewith, in whole or in part, as
to the distribution of assets, shall be entitled after payment or provision
for payment of all debts and liabilities of this corporation, to receive the
remaining assets of this corporation available for distribution, in cash or
in kind.
ARTICLE IV
BOARD OF DIRECTORS
Section 4.01. General. All corporate powers shall be exercised by or under
the authority of, and the business and affairs of the corporation shall be
managed under the direction of, a board of directors except as may otherwise
provided by law or these Articles of Incorporation. The authorized number of
directors shall in no case be fewer than five (5). The exact number of
directors shall be fixed in the Bylaws.
Section 4.02. Election of Directors. When the board of directors consists
of nine (9) or more members, there shall be three (3) classes of directors,
each class to be as nearly equal in number as possible. The directors of the
first class shall hold office for a term expiring at the annual meeting in
1987; directors of the second class shall hold office for a term expiring at
the annual meeting in 1988; and directors of the third class shall hold office
for a term expiring at the annual meeting in 1989.
<PAGE>
At each annual election beginning at the annual meeting of stockholders in
1987, the successors to the class of directors whose term then expires shall
be elected to hold office for a term of three (3) years, to succeed those
directors whose term expires, so that the term of one (1) class of directors
shall expire each year, unless, by reason of any intervening changes in the
authorized number of directors, the board of directors shall have designated
one (1) or more directorships whose term then expires as directorships of
another class in order more nearly to achieve equality of number of directors
among the classes of directors. Not withstanding the requirement that the
three (3) classes of directors shall be as nearly equal in number of directors
as possible, in the event of any change in the authorized number of directors,
each director then continuing to serve as such shall nevertheless continue as
a director of the class of which he is a member until the expiration of his
current term, or his prior resignation, disqualification, disability or
removal. There shall be no cumulative voting in the election of directors.
Section 4.03. Newly Created Directorships and Vacancies. Any vacancies on
the board of directors resulting from death, resignation, retirement,
disqualification, removal from office or other cause shall be filled by the
affirmative vote of a majority of directors then in office, although less than
a quorum, or by the sole remaining director, or, in the event of the failure
of the directors or sole remaining director so to act, by the stockholders at
the next election of directors. Directors so chosen shall hold office for a
term expiring at the annual meeting of stockholders at which the term of the
class to which they have been elected expires. A director elected to fill a
vacancy by reason of an increase in the number of directorships shall be
elected by a majority vote of the directors then in office, although less than
a quorum of the board of directors, to serve until the next election of the
class for which such director shall have been chosen. If the number of
directors is changed, any increase or decrease shall be apportioned among
the three (3) classes so as to make all classes as nearly equal in number
as possible. If, consistent with the preceding requirement, the increase
or decrease may be allocated to more than one (1) class, the increase or
decrease may be allocated to any such class the board of directors selects
in its discretion. No decrease in the number of directors constituting the
board of directors shall shorten the term of any incumbent director.
Section 4.04. Removal. A director may be removed only for cause as
determined by the affirmative vote of the holders of at least a two-thirds
(2/3) majority of the shares then entitled to vote in an election of
directors, which vote may only be taken at a meeting of stockholders
called expressly for that purpose, or by a two-thirds (2/3) majority vote
of the entire board of directors. Cause for removal shall be deemed to
exist only if the director whose removal is proposed has been convicted
of a felony by a court of competent jurisdiction or has been adjudged by
a court of competent jurisdiction to be liable for gross negligence or
misconduct in the performance of such director's duty to the corporation,
in a matter of substantial importance to the corporation and such conviction
or adjudication is no longer subject to direct appeal. At least twenty (20)
days prior to such meeting of stockholders, written notice shall be sent to
the director or directors whose removal will be considered at such meeting.
<PAGE>
ARTICLE V
BUSINESS COMBINATIONS
Section 5.01. Rights of Stockholders. Except as otherwise expressly
provided in Section 5.02 of this Article V, a Business Combination (as
hereinafter defined) shall be approved only upon the affirmative vote of the
holders of at least two-thirds (2/3) of the Voting Stock (as hereinafter
defined) of this corporation voting together as a single class. Such
affirmative vote shall be required notwithstanding the fact that no vote may
be required, or that a lesser percentage may be provided, by law or regulation.
Section 5.02. Exceptions. The provisions of Section 5.01 of this Article V
shall not be applicable to any particular Business Combination and such
Business Combination shall require only such affirmative vote of a majority
of the Voting Stock except otherwise as required by law, regulation or any
other provision of these Articles of Incorporation, if all of the conditions
in either of the following Subsections (1) or (2) are met:
(1) Approval by directors. The Business Combination has been approved by
a two- thirds (2/3) vote of all the Continuing Directors (as hereinafter
defined); or
(2) Combination with subsidiary. The Business Combination is solely
between this corporation and a subsidiary of this corporation and such
Business Combination does not have the direct or indirect effect set forth
in Subsection 5.03(2)(e) of this Article V.
Section 5.03. Certain Definitions. For purposes of this Article V and of
Article VI:
(1) The term "person" means any individual, corporation, partnership,
bank, association, joint stock company, trust, syndicate, unincorporated
organization or similar company, or a group of two or more of the foregoing
who act or agree to act together for the purpose of acquiring, holding,
voting or disposing of securities of the corporation, or who seek to combine
or pool their voting or other interests in the equity securities of the
corporation for a common purpose, pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise.
(2) "Business Combination" means any of the following transactions,
when entered into by this corporation or subsidiary of this corporation
with, or upon a proposal by, a Related Person:
(a) the acquisition, merger or consolidation of this corporation
or any subsidiary of this corporation; or
(b) the sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one or a series of transactions) of any assets of this
corporation or any subsidiary of this corporation having an aggregate fair
market value of equal to at least five percent (5%) of the consolidated assets
of this corporation and its subsidiaries; or
<PAGE>
(c) the issuance or transfer by this corporation or any subsidiary
of this corporation (in one or a series of transactions) of securities of
this corporation or that subsidiary having an aggregate fair market value
equal to at least five percent (5%) of the consolidated assets of this
corporation and its subsidiaries; or
(d) the adoption of a plan or proposal for the liquidation or
dissolution of this corporation; or
(e) the reclassification of securities (including a reverse stock
split), recapitalization, consolidation or any other transaction (whether
or not involving a Related Person) which has the direct or indirect effect
of increasing the voting power, whether or not then exercisable, of a Related
Person in any class or series of capital stock of this corporation or any
subsidiary of this corporation.
(3) "Related Person" means any person (other than this corporation, a
subsidiary of this corporation, or any profit sharing, employee stock
ownership or other employee benefit plan of this corporation or a subsidiary
of this corporation or any trustee of or fiduciary with respect to any such
plan acting in such capacity) that is the direct or indirect beneficial owner
(as defined in Rule 13d-3 and Rule 13d-5 under the Securities Exchange Act of
1934, as in effect on January 1, 1986) of more than ten percent (10%) of the
outstanding Voting Stock of this corporation, and any Affiliate or Associate
of any such person.
(4) "Continuing Director" means with respect to a particular Related
Person or a proposal by such a Related Person, any member of the board of
directors of this Corporation who was a member of the board of directors of
this corporation immediately prior to the time that the Related Person became
a Related Person, and any director who is recommended or nominated to succeed
a Continuing Director, or to fill a vacancy on the board of directors, by a
majority of the Continuing Directors.
(5) "Affiliate" and "Associate" have the respective meanings ascribed
to such terms in Rule 12b-2 under the Securities Exchange Act of 1934, as
in effect on January 1, 1986.
(6) "Voting Stock" means all outstanding shares of the common or preferred
stock of this corporation entitled to vote generally in the election of
directors and each reference to a proportion of Voting Stock shall refer to
shares having such proportion of the number of shares entitled to be cast.
Section 5.04. Determinations by Continuing Directors. A two-thirds (2/3)
majority of all Continuing Directors shall have the power to make all
determinations with respect to this Article V, including, without limitation,
the transactions that are Business Combinations, the persons who are Related
Persons, and the time at which a Related Person became a Related Person, and
any such determinations of such Continuing Directors shall be conclusive and
binding.
<PAGE>
Section 5.05. Fiduciary Obligations. Nothing contained in this Article V
shall be construed to relieve any Related Person from any fiduciary
obligation imposed by law.
Section 5.06. Amendment. The affirmative vote of at least two-thirds (2/3)
of the total votes eligible to be cast at a legal meting of stockholders shall
be required to amend, repeal or adopt any provisions inconsistent with this
Article V. Notwithstanding the foregoing, this section shall be inapplicable
and the provisions of Article IX shall control in the event such action to
amend, repeal or adopt provisions inconsistent with this Article V is approved
by a two-thirds (2/3) majority of the Continuing Directors.
ARTICLE VI
NON-MONETARY FACTORS
The board of directors of this corporation, when evaluating any offer of
another person, (1) to make a tender or exchange offer for any equity security
of the corporation or (2) to effect a Business Combination, shall, in
connection with the exercise of its judgment in determining what is in the
best interests of the corporation as a whole, be authorized to give due
consideration to such factors as the board of directors determines to be
relevant, including, without limitation: (a) the interests of the
corporation's stockholders; (b) whether the proposed transaction might violate
federal or state laws; (c) not only the consideration being offered in the
proposed transaction, in relation to the then current market price for the
outstanding capital stock of the corporation, but also to the market price
for the capital stock of the corporation over a period of years, the estimated
price that might be achieved in a negotiated sale of the corporation as a whole
or in part or through orderly liquidation, the premiums over market price for
the securities of other corporations in similar transactions, current
political, economic and other factors bearing on securities prices and the
corporation's financial condition and future prospects; and (d) the social,
legal and economic effects upon employees, customers and others having
relationships with the corporation, and the communities in which the
corporation conducts business.
In connection with any such evaluation, the board of directors is authorized
to conduct such investigations and to engage in such legal proceedings as the
board of directors may determine.
<PAGE>
ARTICLE VII
STOCKHOLDER NOMINATIONS AND PROPOSALS
Stockholder nominations of persons for election as directors of this
corporation and stockholder proposals must, in order to be voted upon, be made
in writing and delivered to the secretary of this corporation at least sixty
(60) days prior to the date of the annual meeting at which such nominations or
proposals are proposed to be voted upon; provided, however, that in the event
that the date of the annual meeting is advanced by more than thirty (30) days
from that of the prior year's annual meeting, such nominations or proposals
must be so delivered no later than the close of business on the tenth day
following the day on which notice of the date of the annual meeting was mailed
to stockholders. Stockholder nominations of persons for election as directors
of this corporation and stockholder proposals must be in such form and contain
such information as prescribed in the Bylaws.
ARTICLE VIII
COMPLIANCE WITH FEDERAL LAWS AND REGULATIONS
To promote compliance with the National Housing Act, as now or hereafter
amended, including the Change in Savings and Loan Control Act, and the Savings
and Loan Holding Company Act (collectively, the "Acts"), and regulations of
the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance
Corporation (the "FHLBB Regulations"), the board of directors may (i) prohibit
the ownership, voting or transfer of any portion of the corporation's
outstanding capital stock to the extent the ownership, voting or transfer of
such portion would violate or reasonably appear to violate any provision of
the Acts or the FHLBB Regulations; or (ii) place such restrictions on the
ownership, voting or transfer of any such portion of the corporation's capital
stock as the board of directors in its reasonable judgment deems necessary to
protect the corporation or the corporation's other stockholders from the
effects of an apparent violation of the Acts or the FHLBB Regulations.
ARTICLE IX
AMENDMENT AND REPEAL OF ARTICLES OF INCORPORATION
This corporation reserves the right to amend, alter, change or repeal any
provision contained in these Articles of Incorporation in the manner now or
hereafter prescribed by statute. Notwithstanding the foregoing, the approval
of at least a two-thirds (2/3) majority of the directors then in office (or
such greater proportion of directors and stockholders as may otherwise be
required pursuant to any specific provision of these Articles of
Incorporation) shall be required to amend, alter, repeal or change any
provision of the Articles of Incorporation.
<PAGE>
ARTICLE X
AMENDMENT AND REPEAL OF BYLAWS
Bylaws may be adopted, amended or repealed by a resolution adopted by a
two-thirds (2/3) majority of the directors then in office.
<PAGE>
BYLAWS
OF
FIRST INDIANA CORPORATION
ARTICLE I
OFFICES
Section 1. Principal Office. First Indiana Corporation (hereinafter
referred to as the "Corporation") shall at all times maintain a principal
office in the State of Indiana, which, except as otherwise determined by
the Board of Directors of the Corporation (hereinafter referred to as the
"Board"), shall be in the City of Indianapolis, County of Marion.
Section 2. Other Offices. The Corporation may also have offices at such
other places within or without the State of Indiana as the Board shall from
time to time designate or the business of the Corporation shall require.
ARTICLE II
STOCKHOLDERS
Section 1. Place of Meetings. All annual and special meetings of
stockholders shall be held at such places within or without the State of
Indiana as may from time to time be designated by the board and specified
in the notice of meeting.
Section 2. Annual Meeting. A meeting of the stockholders of the
Corporation for the election of directors and for the transaction of any
other business of the Corporation shall be held annually at 10:00 a.m. on
the fourth Thursday of March, if not a legal holiday, and if a legal holiday,
then on the next day following such day which is not a legal holiday, or at
such other date and time as the Board may determine and specify in the notice
of the meeting. Failure to hold the annual meeting at the designated time
shall not work any forfeiture or dissolution of the Corporation.
Section 3. Special Meetings. A special meeting of the stockholders may
only be called (1) by the Chairman, (2) by the President, (3) by a majority of
the entire Board, (4) or by stockholders holding not less than twenty-five
percent (25%) of all shares outstanding and entitled by the Articles of
Incorporation of the Corporation to vote on the business proposed to be
transacted thereat, upon delivery to the corporation's Secretary of one (1) or
more signed and dated written demands for the meeting describing the purpose
or purposes for which it is to be held. Business transacted at any special
meeting of the stockholders shall be confined to the purpose or purposes stated
in the notice of such meeting.
<PAGE>
Section 4. Conduct of Meetings. Annual and special meetings of the
stockholders shall be conducted in accordance with Indiana law unless
otherwise prescribed by these Bylaws. The Chairman, or in the absence of the
Chairman, the highest ranking officer of the Corporation who is present, or
such other person as the Board shall have designated, shall call to order
any meeting of the stockholders and act as chairman of the meeting. The
Secretary of the Corporation, if present at the meeting, shall be the
secretary of the meeting. In the absence of the Secretary of the
Corporation, the secretary of the meeting shall be such person as the chairman
of the meeting shall appoint. The chairman of any meeting of the
stockholders, unless otherwise prescribed by law or regulation or unless the
Chairman has otherwise determined, shall determine the order of business and
the procedure at the meeting.
Section 5. Notice of Meetings. Written notice stating the place, day and
hour of the meeting and the purpose or purposes for which the meeting of the
stockholders is called shall be delivered not less than ten (10) nor more than
sixty (60) days before the date of the meeting, either personally or by mail,
by or at the direction of the Chairman, the Secretary or the directors
requesting the meeting, to each stockholder of record entitled to vote at
such meeting. If mailed, such notice shall be deemed given when deposited in
the United States mail, postage prepaid, addressed to the stockholder at his
address as it appears on the stock transfer books or records of the
Corporation as of the record date prescribed in Section 6 of this Article II.
When any meeting of the stockholders, either annual or special, is adjourned
for more than thirty (30) days or if, after adjournment, a new record date is
fixed for the adjourned meeting, notice of the adjourned meeting shall be
given as in the case of an original meeting. It shall not be necessary to
give any notice of the time and place of any other adjourned meeting of the
stockholders, other than an announcement at the meeting at which such
adjournment is taken.
Section 6. Fixing of Record Date. For the purpose of determining
stockholders entitled to notice of or to vote at any meeting of the
stockholders or any adjournment thereof, or stockholders entitled to receive
payment of any dividend, or in order to make a determination of stockholders
for any other proper purpose under Indiana law, the Board may fix, in advance,
a date as the record date for any such determination of stockholders. Such
date shall not be less than ten (10) days and not more than the maximum number
of days before the date of such meeting allowed by law, nor more than the
maximum number of days prior to any other action allowed by law.
<PAGE>
Section 7. Voting Lists. The Secretary of the Corporation, or other
officer or agent of the Corporation having charge of the stock transfer books
for shares of the capital stock of the Corporation, shall prepare and make, at
least five (5) days before each meeting of the stockholders, a complete list
of the stockholders entitled to vote at such meeting, or any adjournment
thereof, arranged in alphabetical order, with the address of and the number
of shares held by each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least five (5) days prior
to the meeting, either at a place within the city where the meeting is to be
held, which place shall be specified in the notice of the meeting, or at the
Corporation's principal office. Such list shall also be produced and kept
open at the time and place of the meeting during the whole time thereof and
shall be subject to the inspection of any stockholder present at the meeting.
The stock transfer books shall be the only evidence as to who are the
stockholders entitled to examine the stock transfer books, or to vote in
person or by proxy at any meeting of stockholders.
Section 8. Quorum. A majority of the outstanding shares of the Corporation
entitled to vote at a meeting of the stockholders, represented in person or
by proxy, shall constitute a quorum at a meeting. If less than a majority of
the outstanding shares are represented at a meeting, a majority of the shares
so represented may adjourn the meeting from time to time without further
notice except as otherwise provided in Section 5 of this Article II. At such
adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting
as originally called. The stockholders present at a duly organized meeting
may continue to transact business until adjournment, notwithstanding the
withdrawal of enough stockholders to leave less than a quorum.
Section 9. Proxies. At any meeting of the stockholders, every stockholder
having the right to vote shall be entitled to vote in person, or by proxy
appointed by an instrument in writing and complying with the requirements
of Indiana law.
Section 10. Voting by the Corporation. Neither treasury shares of its
own capital stock held by the Corporation, nor shares held by another
corporation, a majority of the shares of which entitled to vote for the
election of directors are held by the Corporation, shall be entitled to
vote or be counted for quorum purposes at any meeting of the stockholders;
provided, however, that the Corporation may vote shares of its capital stock
held by it, or by any such other corporation, if such shares of capital stock
are held by the Corporation or such other corporation in a fiduciary capacity.
<PAGE>
Section 11. Nominating Committee. The Board shall act as a nominating
committee for selecting the management nominees for election as directors.
In accordance with the Articles of Incorporation, no nominations for
directors except those made by the nominating committee shall be voted upon at
the annual meeting unless other nominations by stockholders are made in
writing and delivered to the Secretary of the Corporation at least sixty
(60) days prior to the date of the annual meeting; provided, however, that
in the event that the date of the annual meeting is advanced by more that
thirty (30) days from that of the prior year's annual meeting, such
stockholder nominations must be so delivered not later than the close of
business on the tenth day following the day on which such notice of the date
of the meeting was mailed. Such stockholder nominations shall set forth (a)
as to each person whom the stockholder proposes to nominate for election or
re-election as a director, (i) the name, age, business address and residence
address of such person, (ii) the principal occupation or employment of such
person, and (iii) such person's written consent to serve as a director, if
elected; and (b) as to the stockholder giving the notice (i) the name and
address of such stockholder and (ii) the class and the number of shares of the
Corporation which are owned of record by such stockholder. At the request of
the Board, any person nominated by the Board for election as a director shall
furnish to the Secretary of the Corporation, that information required to be
set forth in a stockholder's notice of nomination which pertains to the
nominee together with the required written consent. Ballots bearing the
names of all the persons duly nominated by the nominating committee and by
stockholders shall be provided for use at the annual meeting.
Section 12. New Business. Any new business to be taken up at the annual
meeting of the stockholders shall be stated in writing and filed with the
Secretary of the Corporation at lease sixty (60) days before the date of
the annual meeting; provided, however, the in the event that the date of
the annual meeting is advanced more than thirty (30) days from that of the
prior year's annual meeting such stockholder proposals must be so stated and
filed not later than the close of business on the tenth day following the
day on which such notice of the date of the meeting was mailed. All business
so stated, proposed and filed shall be considered at the annual meeting, but
no other proposal shall be considered at the annual meeting. This provision
shall not prevent the consideration and approval or disapproval at the annual
meeting of the stockholders of reports of officers, directors, and committees,
but, in connection with such reports, no new business shall be acted upon at
such annual meeting unless stated and filed as herein provided.
ARTICLE III
BOARD OF DIRECTORS
Section 1. General Powers. All corporate powers shall be exercised by or
under the authority of, and the business affairs of the Corporation shall be
managed under the direction of, the Board except as may be otherwise provided
by law or the Articles of Incorporation. The Board shall annually elect from
among its members a Chairman, a President and may elect one (1) or more Vice
Chairmen of the Board. The Chairman shall preside at all meetings of the Board.
<PAGE>
Section 2. Number. The Board shall consist of nine (9) members.
Section 3. Election of Directors. There shall be three (3) classes of
directors, each class to be as nearly equal in number as possible. The
directors of the first class shall hold office for a term expiring at the
annual meeting in 1987; directors of the second class shall hold office for
a term expiring at the annual meeting in 1988; and directors of the third
class shall hold office for a term expiring at the annual meeting in 1989.
At each annual election beginning at the annual meeting of stockholders in
1987, the successors to the class of directors whose term then expires shall
be elected to hold office for a term of three (3) years, to succeeded those
directors whose term expires, so that the term of one class of directors shall
expire each year, unless, by reason of any intervening changes in the
authorized number of directors, the Board shall have designated one (1) or
more directorships whose term then expires as directorships of another class
in order more nearly to achieve equality of number of directors among the
classes.
Notwithstanding the requirement that the three (3) classes shall be as
nearly equal in number of directors as possible, in the event of any change in
the authorized number of directors, each director then continuing to serve as
such shall nevertheless continue as a director of the class of which he is a
member until the expiration of his current term, or his prior resignation,
disqualification, disability or removal. There shall be no cumulative voting
in the election of directors.
Section 4. Regular Meetings. A regular meeting of the Board shall be held
without other notice than this Bylaw immediately after, and at the same place
as, the annual meeting of the stockholders or at such other place as may be
designated by the Board. Additional meetings shall be held at such time as
the Board shall fix at such places within or without the State of Indiana as
shall be fixed by the Board. No call shall be required for regular meetings
for which the time and place has been fixed.
Section 5. Special Meetings. Special meetings of the Board may be called
by or at the request of the Chairman, or in his absence or disability, the
President, or in the absence or disability of both of them, a majority of
the remaining directors. The persons authorized to call special meetings
of the Board may fix any place as the place for holding any special meeting
of the Board called by such persons.
Section 6. Participation in Meetings. Members of the Board may participate
in regular or special meetings by means of conference telephone or similar
communications equipment by which all persons participating in the meeting
can communicate with each other.
<PAGE>
Section 7. Notice. The persons authorized to call special meetings of the
Board shall cause the Secretary of the Corporation to give written or oral
notice of the meeting, specifying the time and place of the meeting, to each
director, either personally, by mailing, or by telegram, at least twenty-four
(24) hours in advance of the meeting. Any director may waive notice of any
meeting by a writing filed with the Secretary. The attendance of a director
at a meeting shall constitute a waiver of notice of such meeting, except in
the event a director attends a meeting for the express purpose of objecting
to the transaction of any business because the meeting is not lawfully called
or convened. Neither the business to be transacted at, nor the purpose of,
any meeting of the Board need be specified in the notice or waiver of notice
of such meeting.
Section 8. Quorum. A majority of the number of directors fixed pursuant to
Section 2 of this Article III shall constitute a quorum for the transaction
of business at any meeting of the Board, but if less than such majority is
present at a meeting, a majority of the directors present may adjourn the
meeting from time to time. Notice of any adjourned meeting shall be given in
the same manner as prescribed by Section 7 of this Article III.
Section 9. Manner of Acting. Unless otherwise prescribed in the Articles
of Incorporation or these Bylaws, the act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the
Board.
Section 10. Action Without a Meeting. Any action required or permitted to
be taken by the Board at a meeting may be taken without a meeting if a consent
in writing, setting forth the action so taken, shall be signed by al of the
directors.
Section 11. Resignation. Any director may resign at any time by sending a
written notice of such resignation to the Corporation addressed to the
Chairman or the President. Unless otherwise specified therein, such
resignation shall take effect upon receipt thereof. More than three (3)
consecutive absences from regular meetings of the Board, unless excused by
resolution of the Board, shall automatically constitute a resignation,
effective when such resignation is accepted by the Board.
Section 12. Vacancies. Any vacancy occurring in the Board may be filled
in accordance with the Articles of Incorporation.
Section 13. Compensation. By resolution of the Board, a reasonable fixed
sum, and reasonable expenses of attendance, if any, for actual attendance at
each regular or special meeting of the Board may be paid to directors.
Members of either standing or special committees may be allowed such
compensation for actual attendance at committee meetings as the Board may
determine.
<PAGE>
Section 14. Presumption of Assent. A director of the Corporation who is
present at a meeting of the Board at which action is taken shall be
presumed to have assented to the action taken unless his dissent or
abstention shall be entered in the minutes of the meeting or unless he
shall file a written dissent to such action with the person acting as the
Secretary of the meeting before the adjournment thereof or shall forward
such dissent by registered mail to the Secretary of the Corporation within
five (5) days after the date a copy of the minutes of the meeting is received.
Such right to dissent shall not apply to a director who voted in favor of
such action.
Section 15. Removal. A director may be removed only for cause as
determined by the affirmative vote of the holders of at least a two-thirds
(2/3) majority of the shares then entitled to vote in an election of directors,
which vote may only be taken at a meeting of stockholders called expressly for
that purpose, or by a two-thirds (2/3) majority vote of the entire Board.
Cause for removal of a director shall be deemed to exist only if the director
whose removal is proposed has been convicted of a felony by a court of
competent jurisdiction or has been adjudged by a court of competent
jurisdiction to be liable for gross negligence or misconduct in the
performance of such director's duty to the Corporation and such conviction or
adjudication is no longer subject to direct appeal.
ARTICLE IV
EXECUTIVE AND OTHER COMMITTEES
Section 1. Appointment. The Board, by resolution adopted by a majority of
the board, may designate the Chairman, the President and one (1) or more of
the other directors to constitute an Executive Committee. The designation of
any committee pursuant to this Article IV and the delegation of authority
thereto shall not operate to relieve the Board, or any director, of any
responsibility imposed by law or regulation.
Section 2. Authority. The Executive Committee, when the Board is not in
session, shall have and may exercise all of the authority of the Board except
to the extent, if any, that such authority shall be limited by the resolution
appointing the Executive Committee, or as otherwise expressly provided by law,
the Articles of Incorporation or these Bylaws.
Section 3. Tenure. Subject to the provisions of Section 8 of this Article
IV, each member of the Executive Committee shall hold office until the next
regular annual meeting of the Board following his designation and until a
successor is designated as a member of the Executive Committee.
<PAGE>
Section 4. Meetings. Regular meetings of the Executive Committee may be
held without notice at such times and paces as the Executive Committee may fix
from time to time. Special meetings of the Executive Committee may be called
by the Chairman, or in his absence or disability, by the President, or in the
absence or disability of both of them, by a majority of the remaining members
of the Executive Committee upon not less than one (1) day's notice stating the
place, date and hour of the meeting, which notice may be written or oral. Any
member of the Executive Committee may waive notice of any meeting and no
notice of any meeting need be given to any member thereof who attends in
person. The notice of a meeting of the Executive Committee need not state the
business proposed to be transacted at the meeting.
Regular or special meetings may be held my means of conference telephone or
similar communications equipment by which all persons participating in the
meeting can communicate with each other.
Section 5. Quorum. A majority of the members of the Executive Committee
shall constitute a quorum for the transaction of business at any meeting
thereof, and action of the Executive Committee must be authorized by the
affirmative vote of a majority of the members present at a meeting at which
a quorum is present.
Section 6. Action. Without a Meeting. Any action required or permitted to
be taken by the Executive Committee at a meeting may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall be
signed by all of the members of the Executive Committee.
Section 7. Vacancies. Any vacancy in the Executive Committee may be filled
by a resolution adopted by a majority of the Board.
Section 8. Resignations and Removal. Any member of the Executive Committee
may be removed at any time with or without cause by resolution adopted by a
majority of the Board. Any member of the Executive Committee may resign from
the Executive Committee at any time by giving written notice to the Chairman
or the President. Unless otherwise specified thereon, such resignation shall
take effect upon receipt. The acceptance of such resignation shall not be
necessary to make it effective.
Section 9. Procedure. The Chairman shall be presiding officer of the
Executive Committee, or, in his absence or disability, the Vice Chairman, or
in the absence or disability of both of them, such other person as may be
elected by a majority of the members present. The Executive Committee may
fix its own rules of procedure which shall not be inconsistent with these
Bylaws. It shall keep regular minutes of its proceedings and report the same
to the Board for its information at the meeting thereof held next after its
proceedings shall have been taken.
<PAGE>
Section 10. Other Committees. The Board may by resolution establish an
audit committee or other committees composed of directors as they may determine
to be necessary or appropriate for the conduct of the business of the
Corporation and may prescribe the duties, constitution and procedures thereof.
ARTICLE V
OFFICERS
Section 1. Positions. The officers of the Corporation shall be a Chairman,
a Vice Chairman, a President, one (1) or more Vice Presidents, a Secretary
and a Treasurer, each of whom shall be elected by the Board. The Chairman
shall be the Chief Executive Officer, and the President shall be the Chief
Operating Officer. The Vice Chairman shall perform the duties of the Chairman
in the absence or disability of the Chairman. The offices of the Secretary
and Treasurer may be held by the same person and a Vice President may also be
either the Secretary or the Treasurer. The board may designate one (1) or
more Vice Presidents as Executive Vice President or Senior Vice President.
The Board may also elect or authorize the appointment of such other officers
as the business of the Corporation may require. The officers shall have such
authority and perform such duties as the Board may from time to time
authorize or determine. In the absence of action by the Board, the officers
shall have such powers and duties as
generally pertain to their respective offices.
Section 2. Election and Term of Office. The officers of the Corporation
shall be elected annually at the first meeting of the Board held after each
annual meeting of the stockholders. If the election of officers is not held
at such meeting, such election shall be held as soon thereafter as possible.
Each officer shall hold office until his successor shall have been duly
elected and qualified or until his death, resignation, or removal in the
manner hereinafter provided. Election or appointment of an officer,
employee or agent shall not by itself create any contractual rights. The
Board may authorize the Corporation to enter into an employment contract
with any officer, but no contract shall impair the right of the Board to
remove any officer at any time in accordance with Section 3 of this Article V.
Section 3. Removal. Any officer may be removed by the Board whenever in
its judgment the best interests of the Corporation will be served thereby.
Section 4. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise, may be filled by a
majority vote of the Board for the unexpired portion of the term.
Section 5. Remuneration. The remuneration of the officers shall be fixed
from time to time by the Board.
<PAGE>
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. Contracts. To the extent permitted by applicable law, the
Articles of Incorporation or these Bylaws, the Board may authorize any
officer, employee or agent of the Corporation to enter into any contract
or execute and deliver any instrument in the name of and on behalf of the
Corporation. Such authority may be general or confined to specific instances.
Section 2. Loans. No loans shall be contracted on behalf of the
Corporation and no evidence of indebtedness shall be issued in its name unless
authorized by the Board. Such authority may be general or confined to specific
instances.
Section 3. Checks, Drafts, Etc. All checks drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name
of the Corporation shall be signed by one (1) or more officers, employees or
agents of the Corporation in such manner as shall from time to time be
determined by the Board.
Section 4. Deposits. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in any
duly authorized depositories as the Board may select.
ARTICLE VII
INDEMNIFICATION
The Corporation shall indemnify any person made a party to any action, suit
or proceeding by reason of the fact that he is or was a director, officer,
employee or agent of the Corporation against all liability and reasonable
expense incurred or suffered by such person in connection therewith, if:
(a) the individual's conduct was in good faith, and
(b) the individual reasonably believed:
(i) in the case of conduct in the individual's official capacity with
the Corporation, that the individual's conduct was in its best interest; and
(ii) in all other cases, that the individual's conduct was at least
not opposed to the Corporation's best interests; and
(c) in the case of any criminal proceeding, the individual either:
(i) had reasonable cause to believe the individual's conduct was
lawful; or
(ii) had no reasonable cause to believe the individual's conduct was
unlawful.
<PAGE>
The terms used in this Article VII shall have the same meaning as set forth
in Indiana Code 23-1-37. Nothing contained in this Article VII shall limit or
preclude the ability of the Corporation to otherwise indemnify or to advance
expenses to any director, officer, employee or agent.
ARTICLE VIII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
Section 1. Certificates for Shares. Certificates representing shares of
capital stock of the Corporation shall be in such form as shall be determined
by the Board. Such certificates shall be signed by the Chairman or any other
officer of the Corporation authorized by the Board, attested by the Secretary
or an Assistant Secretary, and sealed with the corporate seal or a facsimile
thereof. The signatures of such officers upon a certificate may be facsimiles
if the certificate is manually signed on behalf of a transfer agent or a
registrar other than the Corporation itself or one of its employees. Each
certificate for shares of capital stock shall be consecutively numbered or
otherwise identified. The name and address of the person to whom the shares
are issued, with the number of shares issued and date of issue, shall be
entered on the stock transfer books of the Corporation. All certificates
surrendered to the Corporation for transfer shall be cancelled and no new
certificate shall be issued until the former certificate for a like number
of shares shall have been surrendered and cancelled, except that in the case
of a lost, stolen or destroyed certificate, a new certificate may be issued
therefore upon such terms and indemnity to the Corporation as the Board may
prescribe as sufficient to indemnify the Corporation against any claim that
may be made against it on account of such loss, theft or destruction.
Section 2. Transfer of Shares. Transfer of shares of capital stock of the
Corporation shall be made only on its stock transfers books. Authority for
such transfer shall be given only by the holder of record thereof or by his
legal representative, who shall furnish proper evidence of such authority,
or by his attorney thereunto duly authorized by power of attorney duly
executed and filed with the Corporation. Such transfer shall be made only
on surrender for cancellation of the certificate for such shares. The person
in whose name shares of capital stock stand on the books of the Corporation
shall be deemed by the Corporation to be the owner thereof for all purposes.
ARTICLE IX
DIVIDENDS
Subject to applicable law, the Articles of Incorporation or these Bylaws,
the Board may, from time to time, declare, and the Corporation may pay,
dividends on the outstanding shares of capital stock of the Corporation.
<PAGE>
ARTICLE X
SECURITIES OF OTHER CORPORATIONS
Unless otherwise ordered by the Board, the Chairman shall have full power
and authority on behalf of the Corporation to purchase, sell, transfer,
encumber or vote any and all securities of any other corporation owned by
the Corporation, and may execute and deliver such documents as may be
necessary to effectuate such purchase, sale, transfer, encumbrance or vote.
The Board may, from time to time, confer like powers upon any other person
or persons.
ARTICLE XI
FISCAL YEAR, ANNUAL AUDIT
The fiscal year of the Corporation shall end on the 31st day of December of
each year. The Corporation shall be subject to an annual audit as of the end
of its fiscal year by independent public accountants appointed by and
responsible to the Board.
ARTICLE XII
CORPORATE SEAL
The corporate seal of the Corporation, if any, shall be in such form as the
Board shall prescribe.
ARTICLE XIII
AMENDMENTS
These Bylaws may be adopted, amended or repealed by a resolution adopted by
a two-thirds (2/3) majority of the directors then in office.
ARTICLE XIV
NONAPPLICABILITY OF CERTAIN PROVISIONS
OF THE INDIANA BUSINESS CORPORATION LAW
Notwithstanding any election by the Board of Directors to have the
Corporation governed by the provisions of the Indiana Business Corporation Law,
IC 23-1-42 of the Indiana Business Corporation Law shall not apply to "control
share acquisitions" (as that term is defined in IC 23-1-42-2) of shares of
capital stock of the Corporation.
[front cover of 1999 annual report]
[First Indiana Logo]
FIRST INDIANA CORPORATION
<PAGE>
[inside front cover]
<PAGE>
[First Indiana Logo]
FIRST INDIANA CORPORATION
1999 ANNUAL REPORT
<PAGE>
[blank page]
<PAGE>
[First Indiana Logo]
FIRST INDIANA CORPORATION
First Indiana Plaza 135 North Pennsylvania Street
Indianapolis, IN 46204 (317) 269-1200 www.firstindiana.com
<PAGE>
ANOTHER YEAR OF SERVING THE COMMUNITY AND BUILDING RELATIONSHIPS.
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Financial Highlights 3
Letter to Shareholders 4
Mission Statement 7
Board of Directors and Management 8
Financial Review 11
Five-Year Summary of Selected Financial Data 23
Consolidated Balance Sheets 24
Consolidated Statements of Earnings 25
Consolidated Statements of Shareholders' Equity 26
Consolidated Statements of Cash Flows 27
Notes to Consolidated Financial Statements 28
Independent Auditors' Report 44
Affirmative Action Policy 44
Statement of Management Responsibility 45
Corporate Information 46
</TABLE>
<PAGE>
1999 Annual Report Page Three
[This page contains bar graphs showing the following information]
* 1996 earnings include a one-time SAIF special assessment of $4,016 or
$0.31 per share after taxes
<TABLE>
<CAPTION>
NET EARNINGS (Dollars in Thousands) DILUTED EARNINGS PER SHARE
- ----------------------------------- --------------------------
<S> <C> <S> <C>
1995 17,267 1995 1.34
1996 13,704 1996 1.06
1996 17,720* 1996 1.37*
1997 17,744 1997 1.36
1998 19,147 1998 1.44
1999 22,733 1999 1.77
<CAPTION>
SHAREHOLDERS' EQUITY
NET INTEREST MARGIN (Dollars in Thousands)
- ------------------- --------------------
<S> <C> <S> <C>
1995 4.15 1995 129,297
1996 4.40 1996 138,658
1997 4.39 1997 153,036
1998 3.88 1998 165,970
1999 3.92 1999 177,103
</TABLE>
FINANCIAL HIGHLIGHTS
First Indiana Corporation and Subsidiaries
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
(Dollars in Thousands, Except Per Share Data) 1999 1998
------------------------
<S> <C> <C>
Net Earnings $22,733 $19,147
Basic Earnings Per Share 1.81 1.50
Diluted Earnings Per Share 1.77 1.44
Dividends Per Common Share 0.52 0.48
Return on Average Total Assets 1.20% 1.12%
Return on Average Shareholders' Equity 13.37 11.96
Yield on Interest-Earning Assets 8.11% 8.32%
Cost of Interest-Bearing Liabilities 4.83 5.16
Net Interest Margin 3.92 3.88
Net Interest Spread 3.28 3.16
<CAPTION>
AT DECEMBER 31,
-------------------------
(Dollars in Thousands, Except Per Share Data) 1999 1998
-------------------------
<S> <C> <C>
Assets $1,979,774 $1,795,990
Loans Receivable, Net 1,673,422 1,518,543
Deposits 1,312,115 1,227,918
Shareholders' Equity $ 177,103 $ 165,970
Shareholders' Equity/Assets 8.95% 9.24%
Book Value Per Share $ 14.14 $ 13.07
Market Closing Price 21.75 20.00
Price/Earnings Multiple 12.29x 13.89x
<CAPTION>
DECEMBER 31, 1999
--------------------------
Actual Required
--------------------------
<S> <C> <C>
Tangible Capital/Total Assets 7.98% 1.50%
Core Capital/Total Assets 7.98 4.00
Risk-Based Capital/Risk-Weighted Assets 11.10 8.00
</TABLE>
<PAGE>
Page Four First Indiana Corporation
[This page contains bar graphs showing the following information]
<TABLE>
<CAPTION>
TOTAL LOANS ORIGINATED (Dollars in Thousands)
- ---------------------------------------------
<S> <C>
1995 1,021,753
1996 985,165
1997 1,107,331
1998 1,790,722
1999 1,714,123
<CAPTION>
NON-PERFORMING ASSETS (Dollars in Thousands)
- --------------------------------------------
<S> <C>
1995 27,165
1996 27,121
1997 22,822
1998 19,880
1999 19,399
</TABLE>
LETTER TO SHAREHOLDERS
To our Shareholders:
First Indiana Corporation completed another year of record earnings in
1999, while we continued to develop our niche as a relationship-based
provider of comprehensive financial services. For the year ended December 31,
1999, First Indiana's net earnings were $22.7 million, or $1.81 per basic
share, a 19 percent increase over net earnings of $19.1 million, or $1.50 per
basic share, for the year ended December 31, 1998.
Net earnings for 1999 reflect a net after-tax gain of $995,000, or $.08 per
share, from the sale of First Indiana's Evansville Division and related
transactions in August. Excluding this one-time event, our 1999 earnings of
$21.7 million, or $1.73 per basic share, a 14 percent increase, were also a
record. Diluted earnings per share were $1.77, compared with $1.44 in 1998,
and $1.69 excluding the gain from the Evansville sale.
Our 1999 earnings reflect the culmination of a ten-year upward trend. Net
earnings have grown 352 percent since 1990, from $5.0 million in 1990, to
$22.7 million in 1999.
As a vote of confidence in the ongoing earnings potential of the
Corporation, the Board of Directors has authorized an eight percent increase
in First Indiana's annual cash dividend, to $.56 per share from $.52 per
share, beginning with the first quarterly dividend payment on March 15, 2000.
This dividend increase is the ninth in as many years.
Competitive conditions in Central Indiana continued to provide opportunities
for First Indiana throughout 1999. Two superregional banks with a significant
presence in Indianapolis completed their merger, with the sale of some of the
merged entity's branches to a Tennessee-based bank. In November 1999, the
largest remaining locally owned bank was sold to an Ohio-based competitor.
These events highlighted First Indiana's local ownership and decision making,
enabling us to form additional partnerships with customers who value responsive
service and relationship banking that offers comprehensive solutions.
These mergers created opportunities, but the real challenge is just
beginning. We must continually strive to bring a different experience to the
many thousands of Central Indiana businesses and families who have chosen First
Indiana Bank. We recognize that unless we provide a value-added service, these
customers will move to another bank if we fail to meet their expectations. If
we can't create a unique experience for our customers, we don't deserve to
exist as an independent entity.
Accordingly, much of our current effort centers on creating a value-added
experience for First Indiana's customers by building relationships that
provide comprehensive financial solutions. Our strategy for achieving this
goal comes from our three-part mission:
- Discovery of our customers' needs by seeking information and
forming partnerships;
- Delivery of products that lets our customers choose the banking
channel they want (whether it's a branch or the Internet); and
- An ongoing dialogue with our customers, so that we can continually
improve the experience based on ever-increasing knowledge of their
needs.
By delivering on this mission, we seek to attain our vision for First
Indiana as a community bank:
- We want to be the bank of choice for customers who value the services
of a financial consultant.
- We want to be the bank that not only transacts today's business, but
that also learns its customers' needs for tomorrow.
- We want to be experts at offering our customers the right products at
the right time in their business and personal lives.
- We want to earn 100 percent of every customer's business across all
product lines, if doing so is in the best interest of the Bank and
the customer.
This vision guided First Indiana as we worked to differentiate ourselves
from our competitors and create a meaningful experience through discovery,
delivery, and dialogue.
In furtherance of our goal to provide a holistic, relationship-based
experience for our customers, First Indiana announced two significant strategic
changes in 1999. As previously reported, we sold our Evansville Division to
another bank in August. While our ten-year presence in the Evansville market
reaped many rewards, we determined that our resources would be more effectively
deployed in Central Indiana, the fastest-growing region of the state.
<PAGE>
1999 Annual Report Page Five
An even more fundamental change took shape at First Indiana in the third
quarter of 1999, when we exited the traditional mortgage banking business in
favor of originating mortgages for our relationship customers. As part of our
quest to provide only products and services where we can add value for the
customer, we recognized that mortgage lending has become a commodity business,
where the only differentiating factor for most customers is a low rate. Rather
than trying to compete with the giants of the industry, we decided to focus on
products and services where we can add value in ways other than the lowest
price.
At the same time, to accommodate the needs of our relationship-oriented
customers, we still offer mortgage loans through a team of sales consultants
who place the loan with a variety of investors. This strategy gives our
customers an even wider array of loan products than when we were the sole
supplier. This shift away from the traditional mortgage banking business
completes our transition to a community bank in all respects except our
legal charter.
FirstTrust Indiana, the Bank's investment advisory and trust division,
continued to provide relationship opportunities for customers throughout
1999. With its local decision-making and experienced team of veteran trust
officers, FirstTrust offers our customers yet another way to deepen their
relationship with First Indiana.
At December 31, FirstTrust's assets under management were $450 million,
representing account relationships in three principal lines of business:
institutional investment management, personal trust administration, and
estate and guardianship administration. During the year, assets under
management approached $1 billion, including the temporary investment management
assignment of a state retirement plan that was reassigned to out-of-state
investment managers.
Our holistic strategies yielded positive financial results in 1999. Loans
outstanding grew $155 million, or 10 percent, during the year, bringing total
loans outstanding to $1.7 billion, compared with $1.5 billion at the end of
1998. Business loans grew 32 percent, to $236 million, from $179 million one
year earlier. This growth reflects significant investments in people and
technology that have helped us capitalize on our relationship-based, local
approach. Our business banking strategies extend not only to small- and
medium-sized businesses themselves, but also to the needs of the businesses'
owners and their employees.
Our national network of consumer lending offices expanded to 45 states and
produced $526 million in home equity loans in 1999, a 21 percent increase over
1998 production of $433 million. Consumer loans outstanding at December 31,
1999 were $676 million, compared with $581 million one year earlier, a 16
percent increase. First Indiana's consumer lending network is unique: Our
agents offer a wide variety of consumer loan products to loan brokers without
the overhead of fixed offices, while capitalizing on prosperous markets
throughout the United States and diversifying geographic risk.
First Indiana remains involved in construction lending in the Southeast and
Northwest, where our relationships with builders, quick responses, and market
insights give us a competitive edge. In addition, in Central Indiana,
superregional bank mergers provided opportunities for expanded relationships
with the top residential builders in the market. Residential construction
loans outstanding at December 31, 1999 stood at $274 million, a 27 percent
increase from $216 million at the end of 1998. First Indiana operates
construction lending offices in several growing markets in North Carolina,
Florida, and Oregon.
We took major steps toward the restructuring of our funding sources in 1999.
We expanded our base of checking accounts in an effort to reduce long-term
dependency on costly borrowed funds and volatile certificates of deposit.
Adjusted for the sale of the Evansville Division's deposits, checking accounts
grew 15 percent, to $239 million from $208 million at December 31, 1998. This
was accomplished through a combination of marketing strategies aimed at
businesses and consumers, fallout from the superregional bank mergers, and
an advertising campaign to build brand awareness.
Excluding Evansville and jumbo deposits, total deposits grew 12 percent
during 1999 to $1.0 billion from $904 million. This growth gives us
opportunities for expanding relationships through lending and investment
products, as well as through the wealth management services of our affiliate,
Somerset
[This page contains a pie chart showing the following information]
<TABLE>
<CAPTION>
- -----------------------------
COMPOSITION OF LOAN PORTFOLIO
- -----------------------------
1990 1999
==== ====
<S> <C> <C>
Residential Mortgage 58% 27%
Residential Construction 6 16
Commercial Real Estate 13 2
Consumer 23 41
Business 0 14
</TABLE>
<PAGE>
Page Six First Indiana Corporation
Financial Services, and FirstTrust Indiana, our investment advisory
and trust division.
Expansion of the Bank's checking account base also led to dramatic growth
in deposit fees, which helped boost overall fee income. Total fee income in
1999 was $5.3 million, compared with $4.1 million in 1998, an increase of 29
percent.
Loan sales further contributed to First Indiana's non-interest income in
1999. The sale of home equity loans originated through our national network
contributed to gain-on-sale income of $7.4 million. Total non-interest income
increased 19 percent in 1999, to $27.0 million from $22.7 million in 1998.
Growth in loans and lower-cost deposits helped improve First Indiana's net
interest margin, which increased to 3.92 percent for 1999, compared with 3.88
percent in 1998. Our goal of returning to our net interest margin above four
percent appears attainable for the year 2000.
Non-interest expense grew in 1999 to $52.3 million from $45.8 million.
Although we are concerned by this increase, approximately 45% of it arose from
record loan originations. Other factors that led to the increase were Year
2000 preparedness planning; one-time expenses in connection with the
Evansville Division sale and our departure from the mortgage banking business;
and start-up expenses of FirstTrust. Salaries and benefits for the fourth
quarter of 1999 were below those of the same quarter in 1998, reflecting our
restructuring and indicating a positive trend. The management team at First
Indiana remains committed to controlling operating expenses in 2000.
Shareholders' equity at December 31, 1999 was $177 million, compared with
$166 million at the end of 1998. Total assets were $2.0 billion, compared
with $1.8 billion one year ago.
First Indiana is making significant changes in technology and delivery
systems for our customers in the coming year. Under the direction of a
special committee of our Board of Directors, the Bank's Technology and
Operations Division is implementing several changes in First Indiana's
infrastructure that will make delivery of customer and product information
easier and more efficient. This will be especially helpful in the recently
restructured consumer lending department, as technology becomes more and
more crucial to the immediate delivery of product information, closing
packages, and funding for our broker customers.
Much has been said and written about the role of technology in banking:
Should banks expand their Internet presence, build new branches, or both?
Our philosophy is simple: Let the customer choose the channel. And no matter
what channel the customer chooses, our mission of discovery, delivery, and
dialogue should be delivered, whether electronically or in person.
Toward that end, we are upgrading both the electronic and physical
delivery systems of the Bank in 2000. Several enhancements to First
Indiana's website are under way. Customers can already obtain account
information and pay bills over the Internet. Enhancements in 2000 will
include Internet account opening and an improved look and feel.
To expand our physical presence in the rapidly growing Central Indiana
market, First Indiana is building or relocating seven branches in 2000.
Three of these branches will take the Bank into new markets on the west,
northwest, and south sides of Metropolitan Indianapolis. They will offer a
full range of high-tech services that today's customers have come to expect,
along with the traditional, in-person consultation that is central to our
mission.
Our commitment to Central Indiana as a community bank is illustrated by
our ongoing support of charitable organizations. In 1999, First Indiana
donated one percent of its net earnings to a variety of not-for-profit
entities, with special emphasis on education through grants to the Kelley
School of Business Indianapolis at Indiana University and the Butler
University College of Business Administration. We believe that higher
education in business is absolutely essential to attracting and retaining
talent in Central Indiana in the years to come. In addition, First Indiana
lent over $14 million to individuals, community development corporations,
and businesses in emerging neighborhoods in Indianapolis.
We honor H. J. Baker, who retired from First Indiana's Board of Directors
in 1999 after 33 years of service. Jack was instrumental in First Indiana's
transformation from a small savings and loan association to a dynamic
community bank. We thank Jack for his four decades of wise counsel and wish
him well in his retirement.
In January 2000, the Board of Directors elected Marni McKinney Chief
Executive Officer of First Indiana Corporation, in addition to her existing
duties as Vice Chairman of the Corporation and Chairman of First Indiana Bank.
Robert H. McKinney, the Corporation's previous CEO, will remain Chairman of
First Indiana Corporation and Chairman of the Executive Committee of the
Bank's Board of Directors. Marni represents the third generation of McKinney
family involvement in First Indiana and its predecessors.
First Indiana remains committed to Central Indiana as a community bank, but
not for the sake of the status quo. Our mission centers on the belief that we
can and do offer something different to the communities that we serve by
taking a holistic approach and being a locally based provider interested in
growing with our customers and helping them craft long-term financial
solutions. Our success in 1999 illustrates the community's acceptance of our
strategies, as we work to earn the support of you, our loyal shareholders. We
appreciate your support and look forward to reporting to you about another
successful year in 2000.
Sincerely,
/s/ Robert H. McKinney
Robert H. McKinney
Chairman
/s/ Marni McKinney
Marni McKinney
Vice Chairman and
Chief Executive Officer
/s/ Owen B. Melton, Jr.
Owen B. Melton, Jr.
President and
Chief Operating Officer
<PAGE>
1999 Annual Report Page Seven
[This page contains a bar graph showing the following information]
<TABLE>
<CAPTION>
NET EARNINGS (Dollars in Thousands)
- -----------------------------------
<S> <C>
1990 $ 5,029
1991 8,970
1992 9,484
1993 15,101
1994 10,636
1995 17,267
1996 13,704
1996 17,720*
1997 17,744
1998 19,147
1999 22,733
* 1996 earnings include a one-time SAIF special assessment of $4,016 after taxes
</TABLE>
MISSION STATEMENT
First Indiana Bank's mission is to deliver high-quality, relationship-based
products and services to the individuals and businesses in our communities.
This is the First Indiana brand, and it centers on:
Discovery of our customers' needs, by seeking information, forming
partnerships, and helping our customers attain their financial goals.
Delivery of innovative products designed around our customers' needs and
brought to them efficiently and responsively through superior service.
Dialogue with our customers, so that we can meet or exceed their
expectations and continuously improve the products and services we have
designed for them.
We build and preserve the First Indiana brand and enhance shareholder
value through five guiding principles:
People. A company is its people. Our goal is to create an environment
that fosters entrepreneurial creativity and maximizes our associates'
potential. We emphasize leadership at all levels in the organization and
give our associates the tools to provide customer-focused solutions in all
situations. To encourage our associates' ownership of First Indiana's
success, we promote their ownership of First Indiana stock.
Community-Based, Hands-on Involvement. Customers want quick answers and
responsive service from people they know. As a locally owned bank with a
vested interest in the community, we are dedicated to building strong
partnerships with our customers and earning their trust.
Knowledge-Based Marketing. First Indiana is customer-driven, not
product-driven. Knowing the customer is the key to success in a customer-driven
company. By finding out as much as we can about our customers, we can
anticipate their needs, add value, and win their loyalty. By seeking feedback
from our customers every time we interact with them, we can improve and deepen
our relationship.
Focus. We keep our eye on the long term by choosing a course that
concentrates our efforts in those areas where we bring special value to the
marketplace. We avoid today's fads in favor of tomorrow's long-lasting
solutions.
Efficiency. We use data to implement customer-driven change. We structure
our business units around similar customer groups to maximize responsiveness.
We move quickly and with discipline to improve delivery of products
continuously. We aim for share of customer, not share of market. And we strive
to deliver the right product to our customers at the right time, at the lowest
possible cost.
These principles serve as our compass for the future of First Indiana Bank.
They ensure growth. They ensure the Bank's independence. And they ensure that
First Indiana Bank can give back to the communities we serve.
<PAGE>
Page Eight First Indiana Corporation
BOARD OF DIRECTORS AND MANAGEMENT
BOARD OF DIRECTORS
Robert H. McKinney (47 years' service)
Chairman, First Indiana Corporation
Marni McKinney (16 years)
Vice Chairman and Chief Executive Officer, First Indiana Corporation;
Vice Chairman and Chief Executive Officer, The Somerset Group, Inc.
Owen B. Melton, Jr. (22 years)
President and Chief Operating Officer, First Indiana Corporation
Gerald L. Bepco (13 years)
Vice President for Long-Range Planning, Indiana University;
Chancellor, IUPUI
Andrew Jacobs, Jr. (3 years)
United States Congressional Representative (retired);
Adjunct Professor, IUPUI
Robert J. Laikin (one year)
Chairman and Chief Executive Officer, Brightpoint, Inc.
Phyllis W. Minott (24 years)
Chairman and Chief Executive Officer, Minott Motion Pictures, Inc.
Michael L. Smith (15 years)
Executive Vice President and Chief Financial Officer, Anthem, Inc.
John W. Wynne (10 years)
Director Emeritus, Duke Realty Investments, Inc.
FIRST INDIANA BANK
Robert H. McKinney* (47 years' service)
Chairman, Executive Committee of the Board of Directors
Marni McKinney* (16 years)
Chairman
Owen B. Melton, Jr.* (22 years)
President and Chief Executive Officer
David J. Gunderson (17 years)
Vice President and Credit Review Officer
Richard E. Walke (14 years)
Vice President and Director of Internal Audit
David A. Butcher* (17 years)
Secretary
RETAIL BANKING, MARKETING & STRATEGIC PLANNING GROUP
Kenneth L. Turchi (15 years)
Senior Vice President
First Vice President
Scott E. Baker (2 years)
Vice Presidents
Timothy J. Dell (7 years)
Toni K. Dickover (5 years)
Paul R. Wainman, Jr. (2 years)
Freda F. Wampner (20 years)
CONSUMER FINANCE GROUP
David A. Lindsey (17 years)
Senior Vice President
Vice Presidents
Deborah L. Apgar (16 years)
Judi L. Cooper (4 years)
J. Greg Gibbs (20 years)
Kim D. LaSota (4 years)
J. Michael B. MacDonald (2 years)
Andrea L. McIlwraith (10 years)
Connie L. Nelson (3 years)
Michael W. Olsen (2 years)
Market Vice Presidents
Stephen E. Buchanan (6 years)
Thomas M. Koesters (18 years)
Toni R. Santo (6 years)
Timothy A. Simpson (6 years)
Lisa M. Straziota (4 years)
J. Tracy Whitaker (12 years)
FINANCIAL MANAGEMENT GROUP
David L. Gray* (18 years)
Senior Vice President, Chief Financial Officer
Vice Presidents
Michael T. McAninch (17 years)
Controller
Barton L. Shroyer (9 years)
Treasurer
COMMERCIAL AND MORTGAGE BANKING GROUP
Merrill E. Matlock (16 years)
Senior Vice President, and President, One Mortgage Corporation
First Vice President
Gregory P. O'Connor (8 years)
Vice Presidents
Elizabeth A. Amy (one year)
Daniel R. Dierlam (8 years)
Victoria H. Duckworth (17 years)
Kristin K. Guy (one year)
Max E. Inglert (28 years)
Julie C. Kitcoff (one year)
Charles B. Lauck (2 years)
Michael D. Mathew (5 years)
Kevin P. Murphy (one year)
Joel J. Pruis (2 years)
Michael S. Rigsby (3 years)
Susan Kaiser-Rohr (5 years)
Amanda K. St. Clair (4 years)
Anthony P. Schlicte (2 years)
Stephen M. Spicer (3 years)
James A. Woodward (one year)
*Officer, First Indiana Corporation
<PAGE>
1999 Annual Report Page Nine
BOARD OF DIRECTORS AND MANAGEMENT
Regional Vice Presidents
Wilbur L. Harwell (3 years)
William C. Hewitt (3 years)
Robert N. McFall (16 years)
Market Vice Presidents
Brian A. Carlson (7 years)
Cynde G. Emory (11 years)
Tracy N. Galloway (2 years)
Kevin P. Riley (2 years)
Amy F. Watts (3 years)
COORESPONDENT BANKING SERVICES AND SECONDARY MARKETING GROUP
Timothy J. O'Neill (30 years)
Senior Vice President
Technology and Operations Group
Edward E. Pollack (2 years)
Senior Vice President
Vice Presidents
John D. Ehrhart (22 years)
John M. Huter (33 years)
John V. Kirby (4 years)
Denise L. Maines (12 years)
Thomas M. Ryan (20 years)
Morteza M. Semnani (one year)
Mickey J. Walden (17 years)
FIRSTTRUST INDIANA
Ralph G. Nowak (2 years)
President and Chief Investment Officer
David G. King (2 years)
Executive Vice President and Chief Operating Officer
Robert H. Everitt (2 years)
Executive Vice President and Trust Counsel
James H. Hernandez (2 years)
Senior Vice President
Christian L. Rieddle (2 years)
Senior Vice President
R. Todd Musser (2 years)
Senior Vice President
Mary Anne Smith (2 years)
Vice President
MOORESVILLE DIVISION
Boyd C. Head (39 years)
Chairman of the Board
Charles D. Swisher (17 years)
Vice Chairman of the Board
Norman T. Lloyd (27 years)
President
Advisory Directors
Robert S. Gregory (35 years)
Boyd C. Head (39 years)
Russell J. Lockwood (16 years)
Eugene D. Perry (17 years)
Charles F. Quillen (16 years)
Charles D. Swisher (17 years)
George Watson (27 years)
RUSHVILLE DIVISION
W. Richard Waggoner (34 years)
Chairman of the Board
E. Eugene Spurlin (30 years)
Vice Chairman of the Board
Garry E. Cooley (15 years)
President
Advisory Directors
Richard K. Levi (12 years)
Marjorie Shoemaker (19 years)
E. Eugene Spurlin (30 years)
W. Richard Waggoner (34 years)
Central Indiana Advisory Boards
Franklin
Gilmore C. Abplanalp (29 years)
Timothy J. Dell (7 years)
Jerry B. Maguire (10 years)
Pendleton
Hugh W. Begley (31 years)
Ralph E. Miller (21 years)
David L. Puckett (21 years)
L. Ann Reeder (8 years)
Phillip R. Shirley, DVM (24 years)
Westfield
Manson E. Church (43 years)
Toni K. Dickover (5 years)
J. Joseph Edwards (7 years)
James Gapenski (7 years)
Jerry C. McMullan (31 years)
<PAGE>
Page Ten First Indiana Corporation
<PAGE>
1999 Annual Report Page Eleven
FINANCIAL REVIEW
First Indiana Corporation and Subsidiaries
<PAGE>
Page Twelve First Indiana Corporation
FINANCIAL REVIEW
First Indiana Corporation posted another year of record earnings in 1999.
Net earnings were $22,733,000, or $1.81 per basic share, for the year ended
December 31, 1999, including a gain from the sale of the deposits of the
Evansville Division of First Indiana Bank, the Corporation's principal
subsidiary. This represents a 19 percent increase over 1998 earnings of
$19,147,000, or $1.50 per basic share. Earnings for the year ended December
31, 1997, were $17,744,000, or $1.40 per basic share. Excluding the gain
from the Evansville sale, 1999 earnings were $21,738,000, or $1.73 per basic
share, a 14 percent increase, which is also a record.
Diluted earnings per share, including the Evansville sale, were $1.77 for
the year, compared to $1.44 for the year ended December 31, 1998, and $1.69
excluding the Evansville sale.
Return on average equity for 1999 was 13.37 percent, compared with 11.96
percent in 1998 and 12.16 percent in 1997.
To reflect confidence in the continued earnings potential of the
Corporation, the Board of Directors authorized an 8 percent increase in the
Corporation's annual cash dividend, to $.56 per share from $.52 per share,
beginning with the first quarterly dividend payment on March 15, 2000.
Dividends per common share (adjusted for stock dividends and splits) were
$.52 in 1999, $.48 in 1998, and $.40 in 1997. All per-share amounts in the
1999 Annual Report have been adjusted for all stock dividends and splits.
During the third quarter of 1999, First Indiana completed two significant
events that affected earnings. These were the sale of $120 million of
deposits of the Bank's five Evansville, Indiana-area branches and changes in
the Bank's mortgage banking strategy.
In August, First Indiana sold its Evansville Division to another bank.
This action reflects the Bank's relationship-based strategy as it allowed the
Bank to focus resources in Central Indiana, the fastest-growing region of the
state.
Also in the third quarter, the Bank exited the traditional mortgage banking
business in favor of originating mortgages for relationship customers.
Mortgage lending has become a commodity business, where the only
differentiating factor for most customers is a low rate; consequently, First
Indiana shifted its emphasis onto products and services where the Bank can add
value in other ways. First Indiana continues to offer consumer loan products,
which allows the Bank to capitalize on prosperous markets throughout the United
States and diversify geographic risk, without the overhead of fixed offices.
The initial result of this change in strategy was a decrease in residential
loan originations. Residential mortgage loan originations amounted to $494
million in 1999, compared with $744 million in 1998.
Originations in home equity lending were $526 million, compared with $433
million in 1998. This significant increase was a result of several factors.
First, the Bank continued to expand its distribution network and currently
provides loans in 45 states. Much of the expansion concentrated in the western
United States, where growth potential is strong. Second, the Bank diversified
its product offering and began pursuing larger first lien loans more
aggressively. Third, the environment of 1999 produced difficulties for some
competitors and gave First Indiana the opportunity to secure more business.
Last, in keeping with the Bank's overall strategy of deepening relationships,
plans were implemented to concentrate on loan originations through a smaller
number of larger producers. This resulted in operational efficiencies as
well as larger sales.
Relationship building was a key in construction lending, and resulted in
originations of $521 million, compared with $481 million the previous year.
In addition, new markets were added, and a variety of unique products were
developed to take advantage of growing markets.
Another area of asset growth in 1999 was the business-related segments of
the market. Business loans outstanding increased to $236 million at year-end
1999 from $179 million one year earlier.
The significant growth in originations in these core assets areas translated
into growth on the balance sheet. At December 31, 1999, home equity,
construction, and business loans outstanding were $665 million, $274 million,
and $236 million, compared with $566 million, $216 million, and $179 million
one year earlier.
The provision for loan losses in 1999 was $9,410,000, compared with
$9,780,000 in 1998 and $10,700,000 in 1997. By continuing to provide for loan
losses in a manner consistent with the higher risk associated with and losses
inherent in home equity, construction, and business lending, the Bank's loan
loss allowance was $28,759,000 at year-end, or 163 percent of non-performing
loans, compared with $25,700,000, or 150 percent of non-performing loans, at
December 31, 1998.
FirstTrust Indiana, the Bank's trust and investment advisory division,
completed its first year of operation since receiving trust powers on December
31, 1998. Account relationships have been accepted in three product lines:
personal trust, institutional investment management, and estate and
guardianship administration. Assets under management stood at approximately
$450 million at year-end 1999, approaching $1 billion during the year,
including a short-term institutional assignment.
The Corporation's total assets increased 10.2 percent to $1,979,774,000
at year-end, compared with $1,795,990,000 at December 31, 1998. Shareholders'
equity increased to $177,103,000 at December 31, 1999, a 6.7 percent increase
over the December 31, 1998 level of $165,970,000. The tangible and core
capital of the Bank was $157,725,000, or 7.98 percent of assets, which exceeded
regulatory minimums by $128,090,000 and $78,699,000 at year-end 1999. Average
shareholders' equity to average assets equaled 9.00 percent and 9.33 percent
for 1999 and 1998.
First Indiana Corporation is a non-diversified, unitary savings and loan
holding company. First Indiana Bank is a federally chartered stock savings
bank insured by the Federal Deposit Insurance Corporation. First Indiana is the
largest publicly held bank based in Indianapolis.
<PAGE>
1999 Annual Report Page Thirteen
NET INTEREST INCOME
Net interest income is the most critical component of First Indiana's net
earnings. It is affected by both the volume and interest rate of
interest-earning assets and interest-bearing liabilities.
Net interest income was $70,851,000 in 1999, compared with $63,851,000 in
1998 and $64,034,000 in 1997. This increase is primarily due to growth in
earning assets, with 1999 levels at ten percent over 1998.
NET INTEREST MARGIN
First Indiana's net interest margin is the clearest indicator of its ability
to generate core earnings. The margin was 3.92 percent for the year ended
December 31, 1999, compared with 3.88 percent in 1998 and 4.39 percent in 1997.
Net interest margin consists of two components: interest-rate spread and the
contribution of interest-free funds (primarily shareholders' equity and other
non-interest-bearing liabilities). Interest-rate spread is the difference
between the return on total earning assets and the cost of total
interest-bearing liabilities.
The Corporation's average interest-rate spread for the year ended December
31, 1999 was 3.28 percent, compared with 3.16 percent in 1998 and 3.70 percent
in 1997.
The contribution of interest-free funds to First Indiana's net interest
margin varies depending on the level of capital and use of interest-free
liabilities. Average interest-free funds provided an additional 64 basis
points to the margin in 1999, compared with 72 and 69 basis points in 1998
and 1997.
[This page contains the following bar graph]
<TABLE>
<CAPTION>
NET INTEREST INCOME (Dollars in Thousands)
- ------------------------------------------
<S> <C>
1995 59,040
1996 62,716
1997 64,034
1998 63,851
1999 70,851
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------------------------------------------------------
Average Average Average
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
----------------------------------------------------------------------------------------
Assets
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning Assets
Federal Funds Sold $ 8,572 $ 411 4.79% $ 9,469 $ 521 5.50% $ 12,739 $ 695 5.46%
Investments 103,551 6,247 6.03 124,756 7,465 5.98 113,037 6,818 6.03
Federal Home Loan
Bank Stock 17,977 1,476 8.21 14,171 1,097 7.73 13,207 1,055 7.99
Mortgage-Backed
Securities 50,155 3,255 6.49 32,446 2,065 6.36 35,130 2,446 6.96
Loans Receivable (1) 1,625,666 135,037 8.31 1,465,288 125,783 8.58 1,284,212 117,371 9.14
-------------------- -------------------- --------------------
Total Earning Assets 1,805,921 146,426 8.11 1,646,130 136,931 8.32 1,458,325 128,385 8.80
-------------------- -------------------- --------------------
Other Assets 82,917 68,885 52,168
---------- ---------- ----------
Total Assets $1,888,838 $1,715,015 $1,510,493
========== ========== ==========
Liabilities and Share-
holders' Equity
Interest-Bearing
Liabilities
Deposits
NOW and Money
Market Checking $ 98,515 $ 1,611 1.64% $ 84,891 $ 1,951 2.30% $ 84,761 $ 1,908 2.25%
Passbook and
Statement Savings 375,684 15,381 4.09 330,917 15,225 4.60 302,635 13,881 4.59
Money Market Savings 24,603 764 3.11 28,819 990 3.44 30,416 1,001 3.29
Jumbo Certificates 235,320 13,208 5.61 184,332 10,771 5.84 113,632 6,583 5.79
Fixed-Rate
Certificates 446,610 23,509 5.26 464,839 25,998 5.59 470,853 26,563 5.64
Federal Home Loan
Bank Advances 328,470 18,309 5.57 270,491 15,348 5.67 219,685 12,288 5.59
Short-Term
Borrowings 56,348 2,793 4.96 52,922 2,797 5.29 39,018 2,127 5.45
-------------------- -------------------- --------------------
Total Interest-Bearing
Liabilities 1,565,550 75,575 4.83 1,417,211 73,080 5.16 1,261,000 64,351 5.10
-------------------- -------------------- --------------------
Other Liabilities 153,249 137,737 103,566
Shareholders' Equity 170,039 160,067 145,927
---------- ---------- ----------
Total Liabilities and
Shareholders' Equity $1,888,838 $1,715,015 $1,510,493
========== ========== ==========
Net Interest
Income/Spread $ 70,851 3.28% $ 63,851 3.16% $ 64,034 3.70%
======= ===== ======= ===== ======== =====
Net Interest Margin 3.92% 3.88% 4.39%
===== ===== =====
(1) Included in loans receivable are loans held for sale totaling $32,567,
$98,588, and $34,217 in 1999, 1998, and 1997, and non-accrual loans.
</TABLE>
<PAGE>
Page Fourteen First Indiana Corporation
CHANGES IN RATE/VOLUME
The following table shows the impact on net interest income of changes
in interest rates and volume of the Corporation's assets and liabilities.
<TABLE>
<CAPTION>
1999 Compared with 1998 1998 Compared with 1997
Increase (Decrease) Increase (Decrease)
Due to Changes in Due to Changes in
-----------------------------------------------------------------------
Net Net
(Dollars in Thousands) Rate Volume Other Change Rate Volume Other Change
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income
Federal Funds Sold $ (67) $ (49) $ 6 $ (110) $ 6 $ (178) $ (2) $ (174)
Investments 61 (1,269) (10) (1,218) (54) 707 (6) 647
Federal Home Loan Bank Stock 68 294 17 379 (78) 129 (9) 42
Mortgage-Backed Securities 41 1,127 22 1,190 (210) (187) 16 (381)
Loans Receivable (4,068) 13,767 (445) 9,254 (7,132) 16,550 (1,006) 8,412
-------------------------------- -------------------------------------
(3,965) 13,870 (410) 9,495 (7,468) 17,021 (1,007) 8,546
-------------------------------- -------------------------------------
Interest Expense
Deposits
NOW and Money Market Checking (563) 313 (90) (340) 40 3 - 43
Passbook and Statement Savings (1,677) 2,060 (277) 156 43 1,297 4 1,344
Money Market Savings (95) (145) 14 (226) 44 (53) (2) (11)
Jumbo Certificates (425) 2,979 (117) 2,437 57 4,096 35 4,188
Fixed-Rate Certificates (1,530) (1,019) 60 (2,489) (229) (339) 3 (565)
Federal Home Loan Bank Advances (271) 3,290 (58) 2,961 177 2,842 41 3,060
Short-Term Borrowings (174) 181 (11) (4) (65) 758 (23) 670
-------------------------------- -------------------------------------
(4,735) 7,659 (429) 2,495 67 8,604 58 8,729
-------------------------------- -------------------------------------
Net Interest Income $ 770 $6,211 $ 19 $7,000 $(7,535) $ 8,417 $(1,065) $ (183)
================================ =====================================
</TABLE>
<PAGE>
1999 Annual Report Page Fifteen
<TABLE>
<CAPTION>
NON-INTEREST INCOME
The following table shows First Indiana's non-interest income for the past three years.
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
Increase Increase
(Decrease) (Decrease)
-----------------------------------------------------------------
(Dollars in Thousands) 1999 Amount Percent 1998 Amount Percent 1997
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sale of Investments $ (886) $(1,281) (324.3%) $ 395 $ 178 82.0% $ 217
Sale of Loans and
Mortgage Backed Securities 5,288 (4,498) (46.0) 9,786 4,854 98.4 4,932
Sale of Deposits 7,590 7,590 100.0 - - - -
Loan Servicing Income 1,220 (415) (25.4) 1,635 (1,132) (40.9) 2,767
Loan Fees 3,626 534 17.3 3,092 734 31.1 2,358
Insurance Commissions 108 2 1.9 106 (132) (55.5) 238
Trust Fees 1,080 1,080 100.0 - - - -
Customer Fee Income 5,296 1,189 29.0 4,107 403 10.9 3,704
Other 3,636 81 2.3 3,555 821 30.0 2,734
------------------ ----------------- --------
$26,958 $ 4,282 18.9 $22,676 $5,726 33.8 $16,950
================== ================= ========
</TABLE>
NON-INTEREST INCOME
The increase in non-interest income was due to several important factors.
FirstTrust completed its first full year of operation, which produced a
significant increase in trust fees. Customer fee income grew substantially as
a benefit of a significant increase in the number of consumer and business
checking accounts during 1999. This growth was due to marketing efforts and
the fallout of mergers by other banks in the market. These increases were
offset by decreases in the gains on sales of investments and loans. During
the third quarter of 1999, the Bank recognized a $7.6 million gain on the sale
of deposits at its Evansville, Indiana-area branches. The Bank also elected to
sell certain loans and investment securities available for sale, which
resulted in a $4.4 million loss. In addition, approximately $1.6 million in
various non-interest expenses related to the Evansville and mortgage
restructuring were recognized during the quarter.
<PAGE>
Page Sixteen First Indiana Corporation
<TABLE>
<CAPTION>
NON-INTEREST EXPENSE
The following table describes First Indiana's non-interest expense for each of the past three years.
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
(Dollars in Thousands) Increase (Decrease) Increase (Decrease)
------------------------------------------------------------------
1999 Amount Percent 1998 Amount Percent 1997
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and Benefits $ 39,343 $5,965 17.9% $33,378 $ 7,442 28.7% $25,936
Capitalized Salaries
and Benefits (11,191) (514) 4.8 (10,677) (4,657) (77.4) (6,020)
Net Occupancy 2,942 49 1.7 2,893 41 1.4 2,852
Deposit Insurance 712 21 3.0 691 (2) (0.3) 693
Real Estate Owned
Operations - Net 537 (321) (37.4) 858 206 31.6 652
Equipment 5,825 783 15.5 5,042 350 7.5 4,692
Office Supplies and Postage 2,059 27 1.3 2,032 183 9.9 1,849
Other 12,119 580 5.0 11,539 1,089 10.4 10,450
------------------ ------------------ --------
$52,346 $6,590 14.4% $45,756 $ 4,652 11.3% $41,104
================== ================== ========
</TABLE>
NON-INTEREST EXPENSE
Non-interest expense increased in 1999, in support of several long-term
strategies; however, the majority of the increase was reflected in salaries and
benefits. Approximately $3.0 million, or 45%, of the increase in non-interest
expense can be attributed to record loan originations. Also, in connection with
the sale of the Evansville Division and the restructuring of the Bank's
mortgage lending business, appropriate severance packages were provided for a
number of employees, primarily in the third quarter. Furthermore, the first
full year of operation of the Bank's FirstTrust Division added salaries and
benefits for 11 employees. Even though salaries and benefits increased
compared to those of 1998, the fourth quarter saw a decrease of 8 percent over
the prior fourth quarter. In addition, expenses rose due to Year 2000
preparedness planning. The "other" category increased as a consequence of
marketing and expenses related to the Bank's increase in the number of
checking accounts.
<PAGE>
1999 Annual Report Page Seventeen
ASSET QUALITY
First Indiana's asset quality is directly affected by the credit risk of
the assets on its balance sheet. The procedures for reviewing the quality of
First Indiana's loans, the appropriateness of loan and real estate owned
("REO") classifications, and the adequacy of loan and REO loss allowances
are reviewed by First Indiana's Board of Directors.
General Allowances - First Indiana establishes general allowances as
percentages of loans outstanding. The percentages are based on the Bank's
risk model, which incorporates empirical data about loss experience, credit
risk, geographic diversity, general economic trends, and other factors.
Adequacy of Allowances - Management believes that First Indiana's current
loan and REO loss allowances are sufficient to absorb future losses inherent
in the current loan and REO portfolio. However, there can be no assurance
that additional allowances will not be required or that the amount of any
such allowances will not be significant. Various regulatory agencies
periodically review these allowances and may require First Indiana to
recognize additions to them.
The Investment Committee of First Indiana's Board of Directors is
responsible for monitoring and reviewing investment quality and liquidity.
This committee approves investment policies and meets quarterly to review
investment transactions. Credit risk is controlled by limiting the number
and size of investments and by approving the brokers and dealers through
which investments are made.
NON-PERFORMING ASSETS
First Indiana has managed its loan portfolio to reduce concentration
of loan types and to diversify assets geographically. Non-performing assets,
which consist of non-accrual, impaired and restructured loans, REO, and
other repossessed assets, decreased to $19.4 million at December 31, 1999
from $19.9 million one year earlier.
The table on the following page sets forth the amounts of First Indiana's
non-performing assets. The information pertaining to non-accrual loans and
restructured loans is set forth by type of loan.
Non-Accrual, Impaired, and Restructured Loans - First Indiana places loans
on non-accrual status when payments of principal or interest become 90 days
or more past due, or earlier when an analysis of a borrower's creditworthiness
indicates that payments could become past due. A loan is considered impaired
when it is probable that all principal and interest amounts due will not be
collected in accordance with the loan's contractual terms. Impairment is
recognized by allocating a portion of the allowance for loan losses to such a
loan to the extent that the recorded investment of an impaired loan exceeds
its value. A loan's value is based on the loan's underlying collateral or the
calculated present value of projected cash flows discounted at the contractual
interest rate.
Real Estate Owned - Real estate owned is generally acquired through
foreclosure, and is carried at the lower of the Bank's book balance in the
property or the fair market value of the property, less reasonable costs of
disposition. A review of REO properties, including the adequacy of the loss
allowance and decisions whether to charge off REO, occurs in conjunction with
the review of the loan portfolios described above.
Potential Problem Assets - The Corporation had $21.0 million in potential
problem loans at December 31, 1999. Of this amount, $16.8 million consisted of
loans to residential builders, $2.9 million represented loans to business
borrowers, and $1.3 million represented loans to commercial real estate/land
development borrowers. These loans are currently performing according to their
loan agreements, but the borrower's financial operations and condition caused
management to question their ability to comply with present repayment terms.
The collateral for the builder loans is one-to-four family dwellings and fully
developed lots. The business loans are also collateralized with
non-residential real estate and other assets. The land development loans are
collateralized with developed lots or development in progress and raw land.
[This page contains bar graphs showing the following information]
<TABLE>
<CAPTION>
BANK CAPITAL/ASSETS
- -------------------
Actual Required
- ------ --------
<C> <C>
7.98% 1.50%
7.98 4.00
11.10 8.00
LOAN AND REO LOSS ALLOWANCES LOAN LOSS ALLOWANCE TO
(Dollars in Thousands) NON-PERFORMING LOANS
- ---------------------------- -----------------------
<S> <C> <S> <C>
1995 $17,300 1995 67.91%
1996 19,311 1996 84.19
1997 22,897 1997 121.60
1998 26,200 1998 149.63
1999 29,259 1999 162.73
</TABLE>
<PAGE>
Page Eightteen First Indiana Corporation
<TABLE>
<CAPTION>
Non-Performing Assets DECEMBER 31,
--------------------------------------------
(Dollars in Thousands) 1999 1998 1997 1996 1995
--------------------------------------------
<S>
Non-Accrual Loans <C> <C> <C> <C> <C>
Residential Mortgage $ 3,564 $4,268 $3,718 $3,849 $2,399
Residential Construction 4,090 4,714 6,059 4,573 2,229
Commercial Real Estate - - 99 - 1,514
Business 806 1,019 254 166 428
Consumer 7,493 7,175 8,302 6,792 8,120
--------------------------------------------
Total Non-Accrual Loans 15,953 17,176 18,432 15,380 14,690
--------------------------------------------
Impaired Loans 1,719 - - - 3,306
Restructured Loans - - - 6,913 5,909
Real Estate Owned 1,727 2,704 4,390 4,828 2,943
Other Repossessed Assets - - - - 317
--------------------------------------------
Total Non-Performing Assets $19,399 $19,880 $22,822 $27,121 $27,165
============================================
</TABLE>
<TABLE>
<CAPTION>
The following schedule is a summary of REO, net of the allowance for REO losses.
Real Estate Owned
(Dollars in Thousands) DECEMBER 31,
-----------------------------------------
1999 1998 1997 1996 1995
-----------------------------------------
<S> <C> <C> <C> <C> <C>
Residential Mortgage $ 214 $ 291 $ 858 $ 371 $ 430
Residential Construction 633 563 749 915 713
Commercial Real Estate - 154 95 95 94
Consumer 880 1,696 2,688 3,447 1,706
Allowance for REO Losses (500) (500) (483) (543) (1,066)
------------------------------------------
Real Estate Owned-Net $1,227 $2,204 $3,907 $4,285 $1,877
==========================================
</TABLE>
<TABLE>
<CAPTION>
Summary of Loan Loss Experience YEARS ENDED DECEMBER 31,
------------------------------------------------
(Dollars in Thousands) 1999 1998 1997 1996 1995
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance of Allowance for Loan
Losses at Beginning of Year $25,700 $22,414 $18,768 $16,234 $12,525
Charge-Offs
Residential Mortgage (30) (91) (83) (9) (34)
Residential Construction (412) (658) (1,190) (360) (231)
Commercial Real Estate - (93) (75) - (1,139)
Consumer (5,114) (6,934) (7,210) (9,592) (2,969)
Business (2,015) (15) (528) - (61)
------------------------------------------------
Total Charge-Offs (7,571) (7,791) (9,086) (9,961) (4,434)
------------------------------------------------
Recoveries
Residential Mortgage - 2 - 26 6
Residential Construction 235 270 40 69 16
Commercial Real Estate - - 727 135 13
Consumer 963 986 1,261 1,429 190
Business 22 39 4 42 18
------------------------------------------------
Total Recoveries 1,220 1,297 2,032 1,701 243
------------------------------------------------
Net Charge-Offs (6,351) (6,494) (7,054) (8,260) (4,191)
Provision for Loan Losses 9,410 9,780 10,700 11,815 7,900
Recapture of Loan Loss Provision
Due to Auto Portfolio Sale - - - (1,021) -
Balance of Allowance for
Loan Losses at End of Year 28,759 25,700 22,414 18,768 16,234
------------------------------------------------
Balance of REO Loss
Allowance at End of Year 500 500 483 543 1,066
------------------------------------------------
Balance of Loan and REO Loss
Allowance at End of Year $29,259 $26,200 $22,897 $19,311 $17,300
================================================
</TABLE>
SUMMARY OF LOAN LOSS EXPERIENCE
Loan losses decreased primarily due to reduced consumer and construction
loan charge-offs. The net charge-offs of $6.4 million, $6.5 million, and
$7.1 million in 1999, 1998, and 1997, respectively, reflect both the
significant increase in home equity loans outstanding and the adoption of a
more conservative charge-off policy. The Bank now 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 less than 90 percent, the
loan is written down to its estimated disposition value after considering
any first mortgage position and disposition costs.
The Bank's loan loss provision of $9.4 million and $9.8 million in 1999
and 1998, respectively, reflects the improved charge-off experience and a
decrease in delinquencies in the Bank's portfolio of home equity loans.
The allowance for loan losses increased to $28,759,000 at December 31,
1999, or 163 percent of the non-performing loans at year-end.
<PAGE>
1999 Annual Report Page Nineteen
<TABLE>
<CAPTION>
Summary of Loan Loss Experience (continued)
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1999 1998 1997 1996 1995
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
Ratio of Net Charge-Offs to
Average Loans Outstanding 0.39% 0.44% 0.55% 0.67% 0.35%
Ratio of Allowance for
Loan Losses to
Loans Receivable 1.69% 1.66% 1.63% 1.52% 1.28%
Ratio of Total Loan and
REO Loss Allowance to
Non-Performing Assets 150.73% 131.79% 100.33% 71.20% 63.68%
Ratio of Allowance for
Loan Losses to
Non-Performing Loans 162.73% 149.63% 121.60% 84.19% 67.91%
</TABLE>
CAPITAL RESOURCES AND LIQUIDITY
CAPITAL
At December 31, 1999, First Indiana's shareholders' equity was $177,103,000,
or 8.95 percent of total assets, compared with $165,970,000, or 9.24 percent of
total assets, at December 31, 1998.
In April 1999, the Corporation's Board of Directors authorized the
repurchase from time to time of up to an additional $10,000,000 of the
Corporation's outstanding common stock. Of the additional $10,000,000
authorized, $3,679,000 has been repurchased. Through December 31, 1999, the
Corporation had repurchased a total of 1,088,813 shares of its common stock,
at a cost of $13,981,000, or 9 percent of its shares outstanding.
In November 1997, the Corporation's Board of Directors established a
shareholder rights agreement, whereby each common shareholder is entitled to
one preferred stock right for each share of common stock held. The rights
"flip in" upon the acquisition of 20 percent of the Corporation's outstanding
common stock in a takeover attempt, and offer current shareholders a measure
of protection of their investment in First Indiana.
LIQUIDITY
First Indiana Corporation conducts its business through subsidiaries.
The main source of funds for the Corporation is dividends from the Bank.
The Bank's primary source of funds is its deposits, which were
$1,312,115,000 at December 31, 1999 and $1,227,918,000 at December 31, 1998.
In recent years, First Indiana has relied on loan payments, loan payoffs,
sale of loans, Federal Home Loan Bank advances, repurchase agreements,
mortgage-backed bonds, and floating-rate notes as sources of funds. Although
the Bank will continue to rely on core retail deposits as its chief source
of funds, the use of borrowed funds, including Federal Home Loan Bank advances,
continues to be an important component of the Bank's liquidity.
Scheduled loan payments are a relatively stable source of funds, but loan
payoffs, the sale of loans, and deposit inflows and outflows fluctuate
significantly, depending on interest rates and economic conditions. However,
management does not expect any of these items to occur in amounts that would
affect the Corporation's ability to meet consumer demand for liquidity or
regulatory liquidity requirements.
Regulations require the Bank's primary regulator, the Office of Thrift
Supervision ("OTS") to set minimum liquidity levels between four and ten
percent of assets. In 1997, the regulations were altered to lower the
liquidity requirement to four percent of net withdrawable assets, and the
definition of net withdrawable assets was simplified. This change did not
have a significant impact on the Bank's liquidity position. The Bank's
liquidity ratio for the fourth quarter of 1999 was 6.80 percent.
<TABLE>
<CAPTION>
ALLOCATION OF LOAN LOSS ALLOWANCE
The following table presents an allocation of First Indiana's allowance for loan losses at the dates indicated.
DECEMBER 31,
---------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------------------------------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Amount Category Amount Category Amount Category Amount Category Amount Category
(Dollars in Thousands) ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance At End of Period
Applicable to:
Residential Mortgage
Loans $ 673 27.0% $ 609 34.6% $ 588 36.7% $ 632 34.9% $ 426 33.3%
Residential
Construction Loans 5,464 16.4 4,613 14.0 3,663 11.4 3,270 11.2 2,928 11.2
Commercial Real
Estate Loans 323 2.1 298 2.1 330 2.9 777 3.7 1,095 4.4
Consumer Loans 10,665 40.4 9,508 37.7 9,706 39.9 9,042 42.7 7,808 45.4
Business Loans 4,350 14.1 2,727 11.6 2,008 9.1 1,809 7.5 820 5.7
Unallocated 7,285 - 7,945 - 6,119 - 3,238 - 3,157 -
----------------------------------------------------------------------------------------------
$28,759 100.0% $25,700 100.0% $22,414 100.0% $18,768 100.0% $16,234 100.0%
==============================================================================================
</TABLE>
<PAGE>
Page Twenty First Indiana Corporation
IMPACT OF ACCOUNTING STANDARDS NOT YET ADOPTED
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 the 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.
YEAR 2000 COMPLIANCE
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. Because the Bank relies heavily on
technology for transaction processing and interest calculation, preparing
for the Year 2000 was a critical focus of the Bank's resources. In addition
to testing the technology, the Bank also made 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 faced two primary risks regarding
Year 2000 issues: technical and liquidity risks. Technical risk refers to
possible disruption of the Bank's operations because of computer failure at
the Bank or third parties. The most serious effect on the operations of the
Bank could have resulted if basic services provided by the Bank's external
service bureau were disrupted; however, disruption in services such as
telecommunications and electric power could have also had a serious effect
on the business, operations, and/or financial condition of the Bank.
Liquidity risk refers to the concern that Bank customers would withdraw
substantial amounts of currency in response to fears about the Year 2000.
The Bank took several steps to address this possibility.
State of Readiness - The Bank assembled a team of associates to lead the
Bank's Year 2000 readiness efforts. All hardware and software vendors, as
well as other significant vendors and borrowers, were identified and contacted
to determine their readiness. The Bank developed action plans and contingency
plans for known potential Year 2000 readiness issues. This included completing
integrated testing of interdependent systems, testing date interfaces with
third parties, and developing Bank-wide contingency plans which were tested
during the latter half of the year. The OTS conducted regular examinations
of all financial institutions to assess Year 2000 readiness in accordance with
FFIEC guidelines. The Bank's external data services bureau, which provides most
of the automated processing of First Indiana's customer transactions, was also
examined by the OTS.
Costs to Address Year 2000 Issues - The Bank's expenditures associated with
the Year 2000 as of December 31, 1999 totaled $4.7 million. These costs
included 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 $774,000 of these expenditures in 1999. The remaining expenditures
relating to system and equipment purchases were capitalized in accordance with
generally accepted accounting principles. While these costs are fairly
self-evident, it is not possible to assess the financial impact of lost revenue
due to Year 2000 issues attributable to external factors, although management
foresees no internal impact or risk to the Bank's ability to operate in the
21st century.
Contingency Plans - Even though the Bank made significant efforts to
assess, remediate, and test its technical systems to address Year 2000
processing issues, contingency plans were also developed. These plans were
intended to provide alternative processes and actions in the event of systems
malfunctions or failure due to Year 2000 issues. The Bank was required to
follow FFIEC guidance advising two levels of contingency planning: remediation
and business resumption. Remediation contingency plans addressed the actions
to be taken if the remediation efforts fell behind schedule or appeared in
jeopardy of not delivering a Year 2000 ready system when required.
The Bank defined remediation contingency plan requirements that were
intended to provide alternative processes and actions to address failed or
unsuccessful remediation efforts. The first priority was core processes and
mission-critical systems. Business resumption contingency plans addressed
the actions that would be taken if key business processes could not be
performed in the normal manner due to Year 2000 related system or third party
failures. The Bank developed business resumption contingency plans for each
of its key business processes and completed testing of them in November 1999.
The business resumption plans of the Bank include the four phases cited in
the FFIEC contingency planning process. These four phases are (1)
establishment of organization planning guidelines; (2) completion of a
business impact analysis, including the definition of Year 2000 failure
scenarios; (3) development of a contingency plan for core systems including
contingency trigger dates; and (4) review and periodic testing of plan
viability.
Throughout the rollover period into Year 2000 and the first month of the
New Year, there were no significant Year 2000-related system issues; however,
the Bank will continue to monitor these issues.
<PAGE>
1999 Annual Report Page Twenty-one
<TABLE>
<CAPTION>
INTEREST-RATE SENSITIVITY
The following table shows First Indiana's interest-rate sensitivity at December 31, 1999 and 1998.
RATE SENSITIVITY BY PERIOD OF MATURITY OR RATE CHANGE AT DECEMBER 31, 1999
---------------------------------------------------------------------------
Percent Over 180 Over One Over
of Within Days to Year to Five
(Dollars in Thousands) Rate Balance Total 180 Days One Year Five Years Years
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Investment Securities and Other 6.53% $ 154,012 8.06% $ 48,390 $ - $ 85,279 $ 20,343
Loans Receivable (1)
Mortgage-Backed Securities 7.03 54,734 2.86 5,380 5,572 43,781 -
Residential Mortgage Loans 7.49 481,034 25.17 115,618 78,291 229,333 51,793
Commercial Real Estate Loans 8.51 35,434 1.85 6,029 6,741 16,595 6,070
Business Loans 8.92 235,941 12.35 168,735 11,540 46,463 9,202
Consumer Loans 9.43 675,762 35.37 273,518 49,895 251,875 100,474
Residential Construction Loans 8.51 274,010 14.34 246,711 13,706 13,593 -
--------------------------------------------------------------------
8.43 $1,910,927 100.00% 864,381 165,745 686,919 193,882
=================== ---------------------------------------------
Interest-Bearing Liabilities
Deposits
Demand Deposits (2) 1.07 $ 97,253 5.85% $ - $ - $ - $ 97,253
Passbook Deposits (3) 3.85 37,201 2.24 2,108 907 7,258 26,928
Money Market Savings 4.23 343,822 20.67 343,822 - - -
Jumbo Certificates 5.72 308,088 18.52 140,550 40,291 127,247 -
Fixed-Rate Certificates 5.29 411,395 24.73 155,812 135,403 120,180 -
--------------------------------------------------------------------
4.71 1,197,759 72.01 642,292 176,601 254,685 124,181
Borrowings
FHLB Advances 5.75 366,854 22.05 225,000 50,000 85,000 6,854
Short-Term Borrowings 5.35 98,754 5.94 98,754 - - -
--------------------------------------------------------------------
4.97 1,663,367 100.00% 966,046 226,601 339,685 131,035
Net - Other (4) 247,560 ======= 247,560
---------- -----------------------------------------------
Total $1,910,927 966,046 226,601 339,685 378,595
========== -----------------------------------------------
Rate Sensitivity Gap $(101,665) $ (60,856) $347,234 $(184,713)
===============================================
December 31, 1999 $(101,665) $(162,521) $184,713
=================================
Percent of Total
Interest-Earning Assets (5.32%) (8.50%) 9.67%
=================================
December 31, 1998 $ 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 $5,995,797 of
loans held for sale. Included in Consumer Loans are $26,571,869 of home equity loans held for sale.
(2) These deposits have been included in the Over Five Years category to reflect management's
assumption that these accounts are not rate-sensitive. This assumption is based on historic trends
of these deposits through periods of significant increases and decreases in interest rates without
changes in rates paid on these deposits. Included in this category are NOW, money market checking,
and non-interest bearing deposits. The rate represents a blended rate on all deposit types in the
category.
(3) A portion of these deposits has been included in the Over Five Years category to reflect
management's assumption that these accounts are not rate-sensitive. This assumption is based upon
the historic minimal decay rates on these types of deposits experienced through periods of
significant increases and decreases in interest rates without changes in rates paid on these
deposits.
(4) Net-Other is the excess of other non-interest-bearing liabilities and capital over other
non-interest-bearing assets.
</TABLE>
<PAGE>
Page Twenty-two First Indiana Corporation
FINANCIAL CONDITION
First Indiana's total assets at December 31, 1999 were $1,979,774,000,
compared with $1,795,990,000 at December 31, 1998. Loans receivable stood at
$1,673,422,000 at year-end 1999, compared with $1,518,543,000 one year earlier.
The composition of the Bank's loan portfolio continued to change in 1999,
as the Bank added higher-yielding loans to the balance sheet through the
origination of home equity, residential construction, and business loans.
Consumer loans outstanding were $675,763,000 at the end of 1999, compared
with $580,525,000 one year earlier. Construction loans outstanding increased
to $274,010,000, compared with $216,059,000 at the end of 1998. The Bank
focused on offering new products to builders and customers in 1999 in order
to develop a multi-faceted relationship. Business loans outstanding increased
to $235,941,000, compared with $178,933,000 at the end of 1998. Residential
loans outstanding amounted to $481,034,000 at December 31, 1999, compared
with $536,124,000 in 1998. This is due to the Bank's departure from the
traditional mortgage banking business.
Total loan sales in 1999 amounted to $718,028,000, compared with
$608,243,000 in 1998 and $217,132,000 in 1997.
The Bank's residential loan servicing portfolio was $843,443,000 at
December 31, 1999, compared with $908,582,000 and $969,089,000 at December
31, 1998 and 1997. The decrease in residential loan servicing is due to
two factors. First, the Bank sold $148 million in residential loan servicing
during the first quarter of 1999. Second, with the mortgage restructuring,
the Bank is originating fewer residential mortgage loans. The Bank's consumer
loan servicing portfolio was $260,223,000 at December 31, 1999, compared with
$106,243,000 and $53,645,000 at December 31, 1998 and 1997. The strategy of
the Bank is to continue to build the consumer loan servicing portfolio. The
servicing portfolio as a whole provides a source of fee income, but is subject
to fluctuations as rates fall and serviced loans pay off.
To fund asset growth, First Indiana emphasized lower cost demand and
savings deposits. As a result of this strategy, average balances of NOW and
Money Market accounts increased to $99 million in 1999, from $85 million in
1998. A similar increase occurred in Passbook and Savings Statement accounts,
with average balances rising to $376 million in 1999, from $331 million in
1998. In the fourth quarter of 1999, First Indiana introduced an Indexed
Money Market account as further evidence of this strategy. In addition, the
Bank continues to use borrowed fund and jumbo certificates of deposit for
funding.
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
First Indiana engages in rigorous, formal asset/liability management,
the objectives of which are to manage interest-rate risk, ensure adequate
liquidity, and coordinate sources and uses of funds.
The management of interest-rate risk entails the control, within
acceptable limits, of the impact on earnings caused by fluctuating interest
rates and changing rate relationships. In this process, management uses an
internal earnings simulation model to identify and measure interest-rate
sensitivity. The Asset/Liability Committee ("ALCO") and the Board of Directors
review the earnings impact of various changes in interest rates each month and
manage the risk to maintain an acceptable level of change to net interest
income. The Bank also monitors interest rate sensitivity using GAP analysis.
This method recognizes the dynamics of the balance sheet and the effect of
changing interest rates on First Indiana's net earnings.
The cumulative rate-sensitivity gap reflects First Indiana's sensitivity
to interest-rate changes over time. It is a static indicator and does not
attempt to predict the net interest income of a dynamic business in a rapidly
changing environment. Significant adjustments are made when the rate outlook
changes.
At December 31, 1999, First Indiana's six-month and one-year cumulative
gap stood at a negative 5.32 percent and a negative 8.50 percent of total
interest-earning assets. This compares with a positive 7.74 percent and a
positive 6.88 percent at December 31, 1998. This means that 5.32 and 8.50
percent of First Indiana's liabilities will reprice within six months and
one year without a corresponding repricing of the assets they are funding.
The 1999 gap position represents funding choices made by the Bank late in
the year and is not indicative of future anticipated gap positions. Management
intends to maintain a relatively neutral gap position to manage the volatility
of earnings.
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. ALCO is
responsible for managing interest-rate risk, and the Corporation has
established acceptable limits for interest-rate exposure, which are reviewed
monthly. The Bank uses a model that 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 that are held to maturity or available for sale. The
Bank has no trading assets.
Based on the information and assumptions in effect at December 31, 1999,
management believes that a 100 basis point increase or decrease in interest
rates over a 12 month period would result in a .2 percent decrease and a 5.9
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 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 loans
at a specified yield in order to limit market risk associated with its
pipeline of loans held for sale and commitments to fund loans. Market risk
arises from the possible inability of either party to comply with the contract
terms.
These forward sales contracts are designated as hedges by the Bank. To
qualify as a hedge, the forward sales contract must be effective in reducing
the market risk of the identified anticipated loan sale that is probable to
occur. Effectiveness is evaluated on an ongoing basis through analysis of the
loan pipeline position. Commitments under these forward sales contracts and
the underlying 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 loan sales when realized, when the contract
matures, or is terminated.
<PAGE>
1999 Annual Report Page Twenty-three
<TABLE>
<CAPTION>
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
First Indiana Corporation and Subsidiaries
AT DECEMBER 31,
---------------------------------------------------------------
(Dollars in Thousands, Except Per Share Data) 1999 1998 1997 1996 1995
---------------------------------------------------------------
Selected Financial Condition Data
<S> <C> <C> <C> <C> <C>
Total Assets $1,979,774 $1,795,990 $1,613,405 $1,496,421 $1,541,843
Loans Receivable - Net 1,673,422 1,518,543 1,348,529 1,215,550 1,250,726
Mortgage-Backed Securities 54,734 29,680 38,279 36,412 49,498
Investments 103,169 113,291 111,400 106,895 102,656
Total Deposits 1,312,115 1,227,918 1,107,555 1,095,486 1,136,980
Federal Home Loan Bank Advances 366,854 327,247 257,458 215,466 214,781
Short-Term Borrowings 98,754 54,219 75,751 30,055 38,642
Shareholders' Equity 177,103 165,970 153,036 138,658 129,297
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------
Selected Operations Data
<S> <C> <C> <C> <C> <C>
Interest Income $ 146,426 $ 136,931 $ 128,385 $ 126,501 $ 125,057
Interest Expense 75,575 73,080 64,351 63,785 66,017
Provision for Losses on Loans and
Real Estate Owned, Net 9,410 9,780 10,700 10,794 7,900
Net Earnings 22,733 19,147 17,744 13,704 17,267
Net Interest Margin During Year 3.92% 3.88% 4.39% 4.40% 4.15%
Basic Earnings Per Common Share $ 1.81 $ 1.50 $ 1.40 $ 1.10 $ 1.39
Diluted Earnings Per Common Share 1.77 1.44 1.36 1.06 1.34
Dividends Declared Per Common Share 0.52 0.48 0.40 0.38 0.32
Selected Ratios
Net Earnings to:
Average Total Assets 1.20% 1.12% 1.17% 0.92% 1.16%
Average Shareholders' Equity 13.37 11.96 12.16 10.15 14.03
Average Shareholders' Equity to
Average Total Assets 9.00 9.33 9.66 9.09 8.28
Dividend Payout Ratio 28.73 32.00 28.57 34.55 23.02
</TABLE>
[This page contains the bar graphs showing the following information]
<TABLE>
<CAPTION>
ASSETS CONSTRUCTION LOANS OUTSTANDING
(Dollars in Thousands) (Dollars in Thousands)
- ----------------------------- ------------------------------
<S> <C> <S> <C>
1995 $1,541,843 1995 $142,999
1996 1,496,421 1996 138,135
1997 1,613,405 1997 155,680
1998 1,795,990 1998 216,059
1999 1,979,774 1999 274,010
<CAPTION>
HOME EQUITY LOANS OUTSTANDING LOAN SERVICING PORTFOLIO
(Dollars in Thousands) (Dollars in Thousands)
- ----------------------------- ------------------------------
<S> <C> <S> <C>
1995 $485,032 1995 $1,130,209
1996 498,739 1996 1,057,731
1997 528,185 1997 1,022,734
1998 565,932 1998 1,014,825
1999 664,174 1999 1,103,666
</TABLE>
<PAGE>
Page Twenty-four First Indiana Corporation
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
First Indiana Corporation and Subsidiaries
DECEMBER 31,
-------------------------
(Dollars in Thousands) 1999 1998
-------------------------
<S> <C> <C>
Assets
Cash $ 30,941 $ 45,153
Federal Funds Sold 30,500 12,500
-------------------------
Total Cash and Cash Equivalents 61,441 57,653
Investments Available For Sale (Notes 2 and 9) 103,169 113,291
Mortgage-Backed Securities Available for Sale (Notes 3 and 9) 54,734 29,680
Loans Held for Sale 32,567 112,398
Loans Receivable 1,669,614 1,431,845
Less Allowance for Loan Losses (28,759) (25,700)
-------------------------
Loans Receivable - Net(Notes 4, 5, 8, and 12) 1,673,422 1,518,543
Premises and Equipment (Note 6) 17,071 18,546
Accrued Interest Receivable 13,554 11,680
Real Estate Owned - Net (Note 5) 1,227 2,204
Prepaid Expenses and Other Assets (Note 10) 55,156 44,393
-------------------------
Total Assets $1,979,774 $1,795,990
=========================
Liabilities and Shareholders' Equity
Liabilities
Non-Interest-Bearing Deposits $ 114,356 $ 129,043
Interest-Bearing Deposits 1,197,759 1,098,875
-------------------------
Total Deposits (Note 7) 1,312,115 1,227,918
Federal Home Loan Bank Advances (Note 8) 366,854 327,247
Short-Term Borrowings (Note 9) 98,754 54,219
Accrued Interest Payable 5,605 2,646
Advances by Borrowers for Taxes and Insurance 1,377 1,958
Other Liabilities 17,966 16,032
-------------------------
Total Liabilities 1,802,671 1,630,020
-------------------------
Shareholders' Equity (Notes 10, 11, and 13)
Preferred Stock, $.01 Par Value: 2,000,000 Shares Authorized; None Issued - -
Common Stock, $.01 Par Value: 33,000,000 Shares Authorized; 13,611,965 and
13,512,902 Shares Issued and Outstanding, Including Shares in Treasury 136 135
Paid-In Capital in Excess of Par 37,962 37,029
Retained Earnings 153,710 137,063
Accumulated Other Comprehensive Income (Loss) (724) 425
Treasury Stock - At Cost 1,088,813 and 809,608 Shares (13,981) (8,682)
-------------------------
Total Shareholders' Equity 177,103 165,970
Commitments and Contingencies (Note 12) - -
-------------------------
Total Liabilities and Shareholders' Equity $1,979,774 $1,795,990
=========================
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
1999 Annual Report Page Twenty-five
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
First Indiana Corporation and Subsidiaries
YEARS ENDED DECEMBER 31,
------------------------------
(Dollars in Thousands, Except Per Share Data) 1999 1998 1997
------------------------------
<S> <C> <C> <C>
Interest Income
Loans (Note 4) $135,037 $125,783 $117,371
Investments 6,247 7,465 6,818
Mortgage-Backed Securities 3,255 2,065 2,446
Dividends on Federal Home Loan Bank Stock 1,476 1,097 1,055
Federal Funds Sold and Interest-Bearing Deposits 411 521 695
------------------------------
Total Interest Income 146,426 136,931 128,385
------------------------------
Interest Expense
Deposits (Note 7) 54,473 54,935 49,936
Federal Home Loan Bank Advances 18,309 15,348 12,288
Short-Term Borrowings 2,793 2,797 2,127
------------------------------
Total Interest Expense 75,575 73,080 64,351
------------------------------
Net Interest Income 70,851 63,851 64,034
Provision for Loan Losses (Note 5) 9,410 9,780 10,700
------------------------------
Net Interest Income After Provision for Loan Losses 61,441 54,071 53,334
------------------------------
Non-Interest Income
Sale of Investments Available for Sale (886) 395 217
Sale of Mortgage-Backed Securities Available for Sale (2,129) 368 -
Sale of Loans 7,417 9,418 4,932
Sale of Deposits 7,590 - -
Loan Servicing Income 1,220 1,635 2,767
Loan Fees 3,626 3,092 2,358
Insurance Commissions 108 106 238
Trust Fees 1,080 - -
Customer Fee Income 5,296 4,107 3,704
Other 3,636 3,555 2,734
------------------------------
Total Non-Interest Income 26,958 22,676 16,950
------------------------------
Non-Interest Expense
Salaries and Benefits 28,152 22,701 19,916
Net Occupancy 2,942 2,893 2,852
Equipment 5,825 5,042 4,692
Deposit Insurance 712 691 693
Real Estate Owned Operations - Net 537 858 652
Office Supplies and Postage 2,059 2,032 1,849
Other 12,119 11,539 10,450
------------------------------
Total Non-Interest Expense 52,346 45,756 41,104
------------------------------
Earnings Before Income Taxes 36,053 30,991 29,180
Income Taxes (Note 10) 13,320 11,844 11,436
------------------------------
Net Earnings $ 22,733 $ 19,147 $ 17,744
==============================
Basic Earnings Per Share $ 1.81 $ 1.50 $ 1.40
==============================
Diluted Earnings Per Share $ 1.77 $ 1.44 $ 1.36
==============================
Dividends Per Common Share $ 0.52 $ 0.48 $ 0.40
==============================
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
Page Twenty-six First Indiana Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
First Indiana Corpoartion and Subsidiaries
Accumulated
Paid-In Other Com-
Common Stock Capital prehensive Total
------------------- in Excess Retained Income Treasury Shareholders'
(Dollars in Thousands, Except Per Share Data) Shares Amount of Par Earnings (Loss) Stock Equity
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 12,455,122 $132 $33,181 $111,767 $ (72) $ (6,350) $138,658
Comprehensive Income:
Net Earnings for 1997 - - - 17,744 - - 17,744
Unrealized Gain on Securities Available
for Sale, Net of Income Taxes of $271
and Reclassification Adjustment (Note 2) - - - - 397 - 397
Total Comprehensive Income 18,141
Tax Benefit of Stock Options Exercised - - 656 - - - 656
Common Stock Issued Under Restricted
Stock Plans-Net of Amortization (Note 13) 43,500 - 1,088 (725) - - 363
Common Stock Issued Under Deferred
Compensation Plan - - - (24) - - (24)
Exercise of Stock Options 201,306 2 866 - - - 868
Dividends - $.40 Per Share - - - (5,063) - - (5,063)
Redemption of Common Stock (29,823) - (501) - - - (501)
Purchase of Treasury Stock (6,000) - - - - (132) (132)
Reissuance of Treasury Stock 4,591 - 40 - - 42 82
Payment for Fractional Shares (505) - (12) - - - (12)
------------------------------------------------------------------------------
Balance at December 31, 1997 12,668,191 134 35,318 123,699 325 (6,440) 153,036
Comprehensive Income:
Net Earnings for 1998 - - - 19,147 - - 19,147
Unrealized Gain on Securities Available
for Sale, Net of Income Taxes of $68
and Reclassification Adjustment (Note 2) - - - - 100 - 100
Total Comprehensive Income 19,247
Tax Benefit of Stock Options Exercised - - 870 - - - 870
Common Stock Issued Under Restricted
Stock Plans-Net of Amortization (Note 13) 6,000 - 150 277 - - 427
Common Stock Issued Under Deferred
Compensation Plan - - - 65 - - 65
Exercise of Stock Options 139,147 1 885 - - - 886
Dividends - $.48 Per Share - - - (6,125) - - (6,125)
Redemption of Common Stock (6,695) - (184) - - - (184)
Purchase of Treasury Stock (103,000) - - - - (2,242) (2,242)
Payment for Fractional Shares (349) - (10) - - - (10)
------------------------------------------------------------------------------
Balance at December 31, 1998 12,703,294 135 37,029 137,063 425 (8,682) 165,970
Comprehensive Income:
Net Earnings for 1999 - - - 22,733 - - 22,733
Unrealized Loss on Securities Available
for Sale, Net of Income Taxes of $861
and Reclassification Adjustment (Note 2) - - - - (1,149) - (1,149)
Total Comprehensive Income 21,584
Tax Benefit of Stock Options Exercised - - 468 - - - 468
Common Stock Issued Under Restricted
Stock Plans-Net of Amortization (Note 13) - 1 (160) 446 - - 286
Exercise of Stock Options 102,147 1 682 - - - 683
Dividends on Common Stock - $.52 Per Share - - - (6,532) - - (6,532)
Redemption of Common Stock (3,084) - (57) - - - (57)
Purchase of Treasury Stock (279,205) - - - - (5,299) (5,299)
------------------------------------------------------------------------------
Balance at December 31, 1999 12,523,152 $136 $37,962 $153,710 $ (724) $(13,981) $177,103
==============================================================================
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
1999 Annual Report Page Twenty-seven
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
First Indiana Corporation and Subsidiaries
YEARS ENDED DECEMBER 31,
----------------------------------
(Dollars in Thousands) 1999 1998 1997
----------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Earnings $ 22,733 $ 19,147 $ 17,744
Adjustments to Reconcile Net Earnings to Net
Cash Provided (Used) by Operating Activities
Gain on Sale of Assets and Deposits (11,992) (10,181) (5,149)
Amortization 1,818 1,941 864
Amortization of Restricted Stock Plan 286 427 363
Depreciation 2,524 2,211 2,022
Loan and Mortgage-Backed Securities Net Accretion (240) 490 668
Provision for Loan Losses 9,410 9,780 10,700
Origination of Loans Held for Sale Net of Principal Collected (558,535) (630,620) (240,558)
Proceeds from Sale of Loans Held for Sale 647,113 598,676 211,858
Change In:
Accrued Interest Receivable (1,874) (358) (626)
Other Assets (17,789) (19,337) (10,180)
Accrued Interest Payable 2,959 (69) 697
Other Liabilities 1,934 1,509 2,882
----------------------------------
Net Cash Provided (Used) by Operating Activities 98,347 (26,384) (8,715)
----------------------------------
Cash Flows From Investing Activities
Proceeds From Sales of Investments Available for Sale 147,486 20,399 14,991
Proceeds from Sales of Mortgage-Backed Securities Available for Sale 55,752 23,483 -
Proceeds from Maturities of Investment Securities Held to Maturity - 99 237
Proceed From Sale of Mortgage-Backed Securities Held to Maturity - - 7,528
Proceeds From Maturities of Investment Securities Available for Sale 3,143 25,756 20,695
Purchase of Investment Securities Available for Sale (144,898) (47,375) (39,912)
Purchase of Mortgage-Backed Securities Available for Sale (89,604) (30,261) (17,568)
Principal Collected on Mortgage-Backed Securities 6,343 1,928 7,903
Originations of Loans Net of Principal Collected (306,488) (125,399) (107,404)
Proceeds From Sale of Loans 70,915 9,567 5,274
Purchase of Premises and Equipment (2,965) (6,810) (2,291)
Proceeds From Sale of Premises and Equipment 1,146 - 27
----------------------------------
Net Cash Used by Investing Activities (259,170) (128,613) (110,520)
----------------------------------
Cash Flows From Financing Activities
Net Change in Deposits 204,137 120,363 12,069
Sale of Deposits (112,350) - -
Repayments of Federal Home Loan Bank Advances (662,087) (344,048) (174,028)
Borrowings of Federal Home Loan Bank Advances 701,694 413,837 216,020
Net Change in Short-Term Borrowings 44,535 (21,532) 45,696
Net Change in Advances by Borrowers
for Taxes and Insurance (581) 539 299
Stock Option Proceeds 626 702 367
Tax Benefit of Option Compensation 468 870 656
Common Stock Issued Under Deferred
Compensation Plan - 65 (24)
Payment for Fractional Shares - (10) (12)
Purchase of Treasury Stock (5,299) (2,242) (132)
Dividends Paid (6,532) (6,125) (5,063)
----------------------------------
Net Cash Provided by Financing Activities 164,611 162,419 95,848
----------------------------------
Net Change in Cash and Cash Equivalents 3,788 7,422 (23,387)
Cash and Cash Equivalents at Beginning of Year 57,653 50,231 73,618
----------------------------------
Cash and Cash Equivalents at End of Year $ 61,441 $ 57,653 $ 50,231
==================================
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
Page Twenty-eight First Indiana Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Indiana Corporation and Subsidiaries
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(1) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
First Indiana Corporation ("First Indiana" or the "Corporation") is a
nondiversified, unitary savings and loan holding company. First Indiana Bank
and its subsidiaries (collectively the "Bank"), the principal asset of the
Corporation, is a federally chartered stock savings bank insured by the
Federal Deposit Insurance Corporation. First Indiana is the largest publicly
held bank based in Indianapolis.
The Bank is engaged primarily in the business of attracting deposits from
the general public and originating commercial, consumer, and construction
loans. The Bank offers a full range of banking services from 23 banking
centers located throughout Metropolitan Indianapolis, Franklin, Mooresville,
Pendleton, Rushville, and Westfield, Indiana. In the third quarter of 1999,
the Bank sold the deposits and branch facilities of its Evansville banking
centers. In addition, the Bank has construction and consumer loan offices
throughout Indiana and in Florida, Georgia, Illinois, North Carolina, Ohio,
and Oregon.
The Bank experiences substantial competition in attracting and retaining
deposits and in lending funds. The primary factors in competing for deposits
are the ability to offer attractive rates and the availability of convenient
access. Direct competition for deposits comes from other depository
institutions, money market mutual funds, corporate and government securities,
and other non-insured investments. The primary factors in competing for loans
are interest rates, loan origination fees, and loan product variety.
Competition for origination of loans normally comes from other depository
institutions, lending brokers, and insurance companies.
The majority of the Bank's assets and liabilities is financial instruments
(investments, loans, deposits, and borrowings). Each of these financial
instruments earns or pays interest for a given term at a negotiated rate of
interest. First Indiana's Asset/Liability Committee manages these financial
instruments for the dual objectives of maximizing net interest income (the
difference between interest income and interest expense) while limiting
interest-rate risk. The Bank manages interest-rate risk by closely matching
both the maturities and interest-rate repricing dates of its assets and
liabilities. Should this matching objective not be achieved, significant,
rapid, and sustained changes in market interest rates will significantly
increase or decrease net interest income. Because of this risk, the Committee
continuously monitors its financial instruments to ensure that these dual
objectives are achieved. The accounting and reporting policies of the
Corporation and its subsidiaries conform to generally accepted accounting
principles and to general practices within the savings bank industry.
The more significant policies are summarized below.
(A) Basis of Financial Statement Presentation - The Consolidated Financial
Statements include the accounts of the Corporation and of the Bank. All
significant intercompany balances and transactions have been eliminated in
consolidation. In preparing the Consolidated Financial Statements, management
is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the balance sheet and revenues and
expenses for the period. Actual results could differ significantly from those
estimates.
Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of allowances for loan and real
estate owned losses.
(B) Investments and Mortgage-Backed Securities - The Bank classifies
investments in debt securities as either trading, held to maturity, or
available for sale. Investments and debt securities classified as held to
maturity are stated at cost, as adjusted for amortization of premiums and
accretion of discounts using the level yield method. The Bank has the ability
and positive intent to hold these securities to maturity.
Investments in debt securities classified as available for sale are stated
at fair value, based on quoted market prices, with unrealized holding gains
and losses excluded from earnings and reported net of related income taxes as
a separate component of shareholders' equity until realized. A decline in the
fair value of any available-for-sale or held-to-maturity security below cost
that is deemed other than temporary is charged to earnings, resulting in the
establishment of a new cost basis for the security. Investments in debt
securities classified as trading are stated at fair value. Unrealized holding
gains and losses for trading securities are included in earnings.
Dividend and interest income are recognized when earned. Realized gains and
losses for securities classified as available for sale are included in earnings
and are derived using the specific identification method for determining the
cost of securities sold.
(C) Loans - Loans originated for portfolio are recorded at cost, with any
discount or premium amortized to maturity using the level-yield method. Loans
are placed on non-accrual status when payments of principal or interest become
90 days or more past due or earlier when an analysis of a borrower's
creditworthiness indicates that payments could become past due. Interest income
on such loans is recognized only to the extent that cash is received and where
future collection is probable. Interest accruals are resumed on such loans only
when they are brought current with respect to interest and principal and when,
in the opinion of management, the loans are estimated to be fully collectible.
(D) Mortgage and Home Equity Loan Origination Activities - In general, the
Bank originates fixed-rate residential mortgage loans and selected fixed-rate
home equity loans for sale in the secondary market. Adjustable-rate
residential mortgage and other home equity loans are originated primarily for
investment purposes, with the intention of holding them to maturity. In
certain instances, adjustable-rate mortgage loans originated are identified as
held for sale. This action is taken primarily to effectively manage the total
interest-rate risk levels of the Bank's asset/liability structure.
Loans held for sale are carried at the lower of cost or estimated market
value in the aggregate. The Bank continuously monitors its loan pipeline and
conservatively manages it through limits on market exposure. Currently, the
Bank achieves this objective through the use of forward sales contracts. The
Bank enters into forward sales contracts for future delivery of loans at a
specified yield in order to limit market risk associated with its pipeline of
loans held for sale and commitments to fund loans. Market risk arises from
the possible inability of either party to comply with the contract terms. The
total cost of residential mortgage and home equity loans originated with the
intent to sell is allocated between the loan servicing right and the loan
without servicing based on their relative fair values at the date of sale.
The capitalized cost of loan servicing rights is
<PAGE>
1999 Annual Report Page Twenty-nine
amortized in proportion to, and over the period of, estimated net
servicing revenue. For this purpose, estimated servicing revenues include
late charges and other ancillary income. Estimated servicing costs include
direct costs associated with performing the servicing function and
appropriate allocations of other costs.
Loan servicing rights are periodically evaluated for impairment by
stratifying them based on predominant risk characteristics of the underlying
serviced loans. These risk characteristics include loan type (fixed or
adjustable rate), investor type (FHLMC, GNMA, private), term, and note rate.
Impairment represents the excess of cost of an individual loan servicing
rights stratum over its estimated fair value, and is recognized through a
valuation allowance.
Fair values for individual strata are based on the present value of
estimated future cash flows using a discount rate commensurate with the risks
involved. Estimates of fair value include assumptions about prepayment,
default and interest rates, and other factors that are subject to change over
time. Changes in these underlying assumptions could cause the fair value of
loan servicing rights, and the related valuation allowance, to change
significantly in the future. As of December 31, 1999 and 1998, the balance of
capitalized loan servicing rights included in other assets was $8,759,000 and
$5,770,000, with a fair market value of $11,405,000 and $6,865,000. The
amounts capitalized in 1999, 1998, and 1997 were $6,040,000, $3,891,000, and
$893,000 and the amounts amortized to loan servicing income were $1,919,000,
$1,823,000, and $819,000.
(E) Loan Fees - Non-refundable loan fees and certain direct costs are
deferred and the net amount amortized over the contractual life of the related
loan as an adjustment of the yield.
(F) Discounts, Premiums, and Prepaid Fees - Discounts and premiums on the
purchase of loans and prepaid fees are amortized to interest income on a
level-yield basis.
(G) Real Estate Owned - Real estate owned ("REO") generally is acquired by
deed in lieu of foreclosure and is carried at the lower of cost or fair market
value.
(H) Loss Allowances - Allowances have been established for possible loan and
REO losses. The provisions for losses charged to operations are based on
management's judgment of current economic conditions and the credit risk of
the loan portfolio and REO. Management believes that these allowances are
adequate 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 examination process, periodically review these allowances and
may require the Corporation to recognize additions to the allowances based on
their judgment about information available to them at the time of their
examination.
A loan is considered impaired when it is probable that all principal and
interest amounts due will not be collected in accordance with the loan's
contractual terms. Impairment is recognized by allocating a portion of the
allowance for loan losses to such a loan to the extent that the recorded
investment of an impaired loan exceeds its value. A loan's value is based on
the loan's underlying collateral or the calculated present value of projected
cash flows discounted at the contractual interest rate. Allocations on impaired
loans are considered in relation to the overall adequacy of the allowance for
loan losses and adjustments are made to the provision for loan losses as deemed
necessary.
The recorded investment in impaired loans is periodically adjusted to
reflect cash payments, revised estimates of future cash flows, and increases
in the present value of expected cash flows due to the passage of time. Cash
payments representing interest income are reported as such. Other cash payments
are reported as reductions in recorded investment. Increases or decreases due
to changes in estimates of future payments and the passage of time are
considered in relation to the overall adequacy of the allowance for loan losses.
(I) Income Taxes - The Corporation uses the asset and liability method to
account for income taxes. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. First
Indiana files a consolidated income tax return.
(J) Earnings Per Share - Basic earnings per share for 1999, 1998, and 1997
were computed by dividing net earnings by the weighted average shares of
common stock outstanding (12,578,145, 12,735,570, and 12,643,615, in 1999,
1998, and 1997, respectively). Diluted earnings per share for 1999, 1998, and
1997 were computed by dividing net earnings by the weighted average shares of
common stock and common stock that would have been outstanding assuming the
issuance of all dilutive potential common shares outstanding (12,839,678,
13,256,972, and 13,050,746 in 1999, 1998 and 1997, respectively). Dilution of
the per-share calculation relates to stock options.
(K) Premises and Equipment - Premises and equipment are carried at cost,
less accumulated depreciation and amortization. Depreciation and amortization
are provided on a straight-line basis over the estimated useful lives of the
various classes of assets.
(L) Cash and Cash Equivalents - For purposes of reporting cash flows, cash
and cash equivalents include cash on hand, amounts due from banks,
interest-bearing deposits with banks, and federal funds sold. Generally,
federal funds are sold for one-day periods. All cash and cash equivalents
mature within 90 days.
(M) Reclassification - Certain amounts in the 1998 and 1997 Consolidated
Financial Statements have been reclassified to conform to the current year
presentation.
(N) Comprehensive Income - Comprehensive income is the total of net income
and all nonowner changes in shareholders' equity.
<PAGE>
Page Thirty First Indiana Corporation
(2) INVESTMENTS AND THEIR SCHEDULED MATURITIES
<TABLE>
<CAPTION>
Investments Available for Sale:
DECEMBER 31,
---------------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------------
Unreal- Unreal- Unreal- Unreal-
Book ized ized Market Book ized ized Market
Value Gains Losses Value Value Gains Losses Value
(Dollars in Thousands) ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and Government
Agencies' Obligations $ 68,610 $ - $(661) $ 67,949 $ 73,497 $632 $ - $ 74,129
Corporate Debt Securities 19,557 27 (230) 19,354 22,416 259 - 22,675
Asset-Backed Securities 15,717 26 (24) 15,719 16,392 - (57) 16,335
Other Securities 145 2 - 147 145 7 - 152
---------------------------------------------------------------------------
$104,029 $55 $(915) $103,169 $112,450 $898 $ (57) $113,291
===========================================================================
</TABLE>
<TABLE>
<CAPTION>
Scheduled Maturities:
DECEMBER 31, 1999
---------------------------------------------------------------------------
U.S Treasury and
Government Agencies' Corporate Debt Asset-Backed
Obligations Securities Securities
---------------------------------------------------------------------------
Book Market Book Market Book Market
Value Value Yield Value Value Yield Value Value Yield
(Dollars in Thousands) ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One Year or Less $ - $ - - $ 2,101 $ 2,101 5.78% $ - $ - -
After One Year to Five Years 68,610 67,949 6.29% 17,456 17,253 6.73 - - -
After Five Years to Ten Years - - - - - - 10,774 10,751 7.48%
After Ten Years - - - - - - 4,943 4,968 7.47
---------------- ---------------- ----------------
$68,610 $67,949 $19,557 $19,354 $15,717 $15,719
================ ================ ================
<CAPTION>
Scheduled Maturities (continued)
Other Securities Total Portfolio
------------------------------------------------
Book Market Book Market
Value Value Yield Value Value Yield
(Dollars in Thousands) ------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
One Year or Less $145 $147 6.50% $ 2,246 $ 2,248 5.83%
After One Year to Five Years - - - 86,066 85,202 6.33
After Five Years to Ten Years - - - 10,774 10,751 7.48
After Ten Years - - - 4,943 4,968 7.47
----------- ------------------
$145 $147 $104,029 $103,169
=========== ==================
</TABLE>
As required by SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities, First Indiana continually reassesses the classification of
securities as either available-for-sale or held-to-maturity. During the third
quarter of 1998, management changed its positive intent to hold
held-to-maturity investments and mortgage-backed securities. Accordingly, the
entire portfolios of mortgage-backed securities with an amortized cost of
$19,274,000 and investment securities with an amortized cost of $5,243,000
were transferred from held-to-maturity to available-for-sale. At the time of
the transfer, these mortgage-backed securities and investment securities had
unrecognized gains of $374,000 and $86,000, respectively, which were recognized
as a separate component of accumulated other comprehensive income.
<PAGE>
1999 Annual Report Page Thirty-one
The weighted average yield on investments available for sale was 6.52
percent and 6.17 at December 31, 1999 and 1998.
At December 31, 1999, all of First Indiana's corporate debt securities
were issued by banks and finance companies and were rated investment grade or
higher by Standard & Poor's or Moody's Investor Services. The Bank's
investment policy prohibits investment in non-investment grade issues. The
asset-backed securities are collateralized by home equity and student loan
receivables.
In 1999, realized gains (losses) from the sale of investment securities
available for sale were $218,000 and $(1,104,000). In 1998, realized gains
(losses) from the sale of investment securities available for sale were
$401,000 and $(6,000). In 1997, realized gains (losses) from the sale of
investment securities available for sale were $234,000 and $(17,000).
(2) INVESTMENTS AND THEIR SCHEDULED MATURITIES (continued)
<TABLE>
<CAPTION>
The following table discloses the reclassification adjustments, net of tax, for Comprehensive Income:
DECEMBER 31,
--------------------------
1999 1998 1997
(Dollars in Thousands) --------------------------
<S> <C> <C> <C>
Unrealized Holding Gains (Losses)
Arising During the Period $ (617) $ 335 $ 526
Reclassification Adjustment for
Gains (Losses) Included in Net Earnings (532) (235) (129)
--------------------------
Net Unrealized Gains (Losses) on
Securities Available for Sale $(1,149) $ 100 $ 397
==========================
</TABLE>
<PAGE>
Page Thirty-two First Indiana Corporation
(3) MORTGAGE-BACKED SECURITIES
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------
Available for Sale: Unreal- Unreal-
Book ized ized Market
Value Gains Losses Value
(Dollars in Thousands) ----------------------------------
<S> <C> <C> <C> <C>
FHLMC $34,364 $ 11 $(223) $34,152
FNMA 20,720 7 (151) 20,576
Participation Certificates 6 - - 6
Deferred Income and Net Unearned Discounts 23 - (23) -
----------------------------------
$55,113 $ 18 $(397) $54,734
==================================
DECEMBER 31, 1998
----------------------------------
Available for Sale: Unreal- Unreal-
Book ized ized Market
Value Gains Losses Value
(Dollars in Thousands) ----------------------------------
<S> <C> <C> <C> <C>
FHLMC $ 8,085 $132 $ - $ 8,217
FNMA 6,501 132 - 6,633
Participation Certificates 14,789 105 (64) 14,830
Deferred Income and Net Unearned Discounts 432 - (432) -
----------------------------------
$29,807 $369 $(496) $29,680
==================================
</TABLE>
The weighted average yield on mortgage-backed securities available for sale
was 7.03 and 6.76 percent at December 31, 1999 and 1998. The majority of the
securities have maturities in excess of 10 years. Realized losses on the sale
of mortgage-backed securities available for sale were $2,129,000 in 1999.
Realized gains on sale of mortgage-backed securities were $368,000 in 1998.
(4) LOANS RECEIVABLE
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
(Dollars in Thousands) -------------------------
<S> <C> <C>
Residential Mortgage Loans
Loans Held for Sale $ 5,996 $ 66,469
Loans Held in Portfolio 470,824 465,654
Residential Construction Loans 453,384 406,650
Commercial Real Estate Loans 35,697 32,813
Business Loans 255,199 189,074
Consumer Loans
Home Equity Loans Held for Sale 26,571 45,929
Home Equity Loans Held in Portfolio 638,606 520,003
Installment Loans 7,424 10,334
Other Consumer Loans 3,162 4,259
Undisbursed Portion of Loans
Residential Construction Loans (179,374) (190,591)
Business Loans (19,258) (10,141)
Deferred Income and Net Unearned Discounts 3,950 3,790
Allowance for Loan Losses (28,759) (25,700)
-------------------------
$1,673,422 $1,518,543
=========================
</TABLE>
The weighted average yield on loans was 8.64 percent and 8.48 percent at
December 31, 1999 and 1998. Residential loans serviced for others amounted
to $843,443,000 and $908,582,000 at December 31, 1999 and 1998. Consumer
loans serviced for others amounted to $260,223,000 and $106,243,000 at December
31, 1999 and 1998.
Over 45 percent of First Indiana's residential construction and permanent
mortgage loans are secured by collateral located in Indiana, with another 20
percent and 19 percent located in North Carolina and Florida. Over 54 percent
of the Bank's consumer loans are secured by collateral located in Indiana and
its contiguous states, with 35 percent located in Indiana. The Bank's
commercial real estate and business loans are secured primarily by collateral
in Indiana and contiguous states.
In connection with the Bank's efforts to establish a secondary market for
its home equity loan originations, over $297 million, $168 million, and $72
million in fixed-rate loans were sold in 1999, 1998, and 1997. In addition,
at December 31, 1999 and 1998, the Bank had classified $26,571,000 and
$45,929,000 of home equity loans as held for sale.
During 1999, 1998, and 1997, the Bank transferred $9,542,000, $9,572,000,
and $7,922,000 from loans to real estate owned.
At December 31, 1999, First Indiana had identified one impaired loan,
totaling $1,719,000, which had an allocated reserve of $71,000.
<PAGE>
1999 Annual Report Page Thirty-three
(5) ALLOWANCE FOR LOAN AND REO LOSSES
<TABLE>
<CAPTION>
A summary of activity in the allowance for loan losses for the years ended
December 31, 1999, 1998, and 1997 follows:
DECEMBER 31,
----------------------------
1999 1998 1997
(Dollars in Thousands) ----------------------------
<S> <C> <C> <C>
Balance of Allowance for Loan
Losses at Beginning of Year $25,700 $22,414 $18,768
Charge-Offs
Residential Mortgage (30) (91) (83)
Residential Construction (412) (658) (1,190)
Commercial Real Estate - (93) (75)
Consumer (5,114) (6,934) (7,210)
Business (2,015) (15) (528)
----------------------------
Total Charge-Offs (7,571) (7,791) (9,086)
----------------------------
Recoveries
Residential Mortgage - 2 -
Residential Construction 235 270 40
Commercial Real Estate - - 727
Consumer 963 986 1,261
Business 22 39 4
----------------------------
Total Recoveries 1,220 1,297 2,032
----------------------------
Net Charge-Offs (6,351) (6,494) (7,054)
----------------------------
Provision for Loan Losses 9,410 9,780 10,700
----------------------------
Balance of Allowance for Loan Losses
at End of Year $28,759 25,700 22,414
============================
</TABLE>
A summary of activity in the allowance for REO losses for the years ended
December 31, 1999, 1998, and 1997 follows.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998 1997
(Dollars in Thousands) ----------------------
<S> <C> <C> <C>
Balance at Beginning of Year $ 500 $ 483 $ 543
REO Recoveries (Charge-Offs) 617 179 (60)
Recapture of REO Loss Provision (617) (162) -
----------------------
Balance at End of Year $ 500 $ 500 $ 483
======================
</TABLE>
(6) PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
(Dollars in Thousands) --------------------
<S> <C> <C>
Land $ 3,485 $ 2,710
Buildings 5,492 8,800
Leasehold Improvements 1,513 1,373
Furniture, Fixtures, and Equipment 21,648 22,822
Accumulated Depreciation and Amortization (15,067) (17,159)
--------------------
$ 17,071 $ 18,546
====================
</TABLE>
<PAGE>
Page Thirty-four First Indiana Corporation
(7) DEPOSITS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------
1999 1998
-------------------------------------------------------------
Weighted Weighted
(Dollars in Thousands) Average Average
Amount Percent Rate Amount Percent Rate
Type -------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-Interest-Bearing Checking $ 114,356 8.72% - $ 129,043 10.51% -
NOW Checking 108,041 8.23 1.23% 102,068 8.31 1.87%
Money Market Checking 188 0.01 0.99 237 0.02 1.30
Passbook and Statement Savings 343,848 26.21 4.15 365,641 29.78 4.48
Money Market Savings 26,200 2.00 3.85 11,087 0.90 2.61
Jumbo Certificates of Deposit
of $100 or Greater 306,914 23.39 5.72 169,988 13.84 5.49
Fixed-Rate Certificates of Deposit 412,568 31.44 5.29 449,854 36.64 5.40
------------------- -------------------
$1,312,115 100.00% 4.27% $1,227,918 100.00% 4.25
=================== ===================
<CAPTION>
------------------- -------------------
Amount Percent Amount Percent
Maturity ------------------- -------------------
<S> <C> <C> <C> <C>
Checking $ 222,585 16.96% $ 231,348 18.85%
Passbook and Statement Savings 343,848 26.21 365,641 29.78
Money Market Savings 26,200 2.00 11,087 0.90
Certificates of Deposit Maturing in
One Year 466,804 35.58 377,656 30.76
Two Years 189,193 14.42 183,256 14.92
Three Years 49,783 3.79 33,264 2.71
Four Years 12,200 0.93 21,771 1.77
Five Years 1,502 0.11 3,895 0.31
------------------- -------------------
$1,312,115 100.00% $1,227,918 100.00%
=================== ===================
</TABLE>
Interest expense for the years ended December 31, 1999, 1998, and
1997 was as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) DECEMBER 31,
--------------------------
1999 1998 1997
---------------------------
<S> <C> <C> <C>
NOW and Money Market Checking $ 2,072 $ 2,570 $ 2,473
Passbook, Statement, and Money Market Savings 15,684 15,596 14,317
Certificates of Deposit 36,717 36,769 33,146
---------------------------
$54,473 $54,935 $49,936
===========================
</TABLE>
Official checking accounts at December 31, 1999 and 1998 were $26,111,000
and $51,293,000, respectively. Included in official checking accounts at
December 31, 1999 and 1998 were $3,407,000 and $4,285,000 of
non-interest-bearing escrows held for investors under the terms of various
servicing agreements.
Cash paid during the year for interest on deposits, advances, and other
borrowed money was $72,616,000, $73,149,000, and $63,654,000 for 1999, 1998,
and 1997.
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 expenses related to the Evansville sale
and mortgage restructuring were recognized during the quarter.
<PAGE>
1999 Annual Report Page Thirty-five
(8) FEDERAL HOME LOAN BANK ADVANCES
Each Federal Home Loan Bank ("FHLB") is authorized to make advances to
its member institutions, subject to FHLB regulations and limitations. First
Indiana's advances outstanding and their stated rates were as follows at
the dates shown:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1999 1998
-------------------------------------------------
(Dollars in Thousands) Interest Interest
Rates Amount Rates Amount
Maturity -------------------------------------------------
<S> <C> <C> <C> <C>
1999 - $ - 5.00 to 6.29% $152,000
2000 5.60 to 6.01% 205,000 5.52 to 6.01 100,000
2001 4.99 to 5.61 35,000 4.99 to 5.61 35,000
2002 5.54 25,000 - -
2003 5.24 to 6.04 85,000 5.24 to 5.74 25,000
2004 - - - -
Thereafter 2.75 to 8.57 16,854 2.75 to 8.57 15,247
-------- --------
$366,854 $327,247
========= ========
</TABLE>
The weighted average interest rate on advances was 5.75 and 5.44 percent
at December 31, 1999 and 1998. Under a security agreement with the FHLB, First
Indiana is required to pledge FHLB stock and qualifying first mortgages equal
to the sum of 160 percent of FHLB advances. Additionally, First Indiana
maintains an unused $10,000,000 line of credit with the FHLB. As of December
31, 1999 and 1998, First Indiana had sufficient collateral under this
agreement.
(9) OTHER BORROWINGS
Short-term borrowings represent federal funds purchased and repurchase
agreements. At December 31, 1999 and 1998, short-term borrowings had balances
of $98,754,000 and $54,219,000 with weighted average interest rates of 5.35
and 4.81 percent, respectively.
Repurchase agreements represent an indebtedness of First Indiana secured by
investments and mortgage-backed securities issued by (or fully guaranteed as
to principal and interest by) the United States or an agency of the United
States. All agreements represent obligations to repurchase the same securities
at maturity. Repurchase agreements averaged $54,578,000 and $51,166,000 during
1999 and 1998, and the maximum amounts outstanding at the end of any month
during 1999 and 1998 were $98,754,000 and $62,620,000. The carrying value of
the underlying securities at December 31, 1999 and 1998 was $98,370,000 and
$53,673,000 with market values of $97,818,000 and $53,866,000. These
securities are under the Bank's control.
First Indiana had $68,000,000 and $28,000,000 in unused lines of credit
available from local financial institutions, and the FHLB of Indianapolis at
December 31, 1999 and 1998. There are no fees associated with these lines.
(10) INCOME TAXES
Income tax expense attributable to earnings before income taxes consists of:
<TABLE>
<CAPTION>
(Dollars in Thousands) Current Deferred Total
----------------------------
<S> <C> <C> <C>
Year Ended December 31, 1999:
Federal $10,371 $ 353 $10,724
State and Local 2,160 436 2,596
----------------------------
$12,531 $ 789 $13,320
============================
Year Ended December 31, 1998:
Federal $ 9,611 $ (374) $ 9,237
State and Local 2,706 (99) 2,607
----------------------------
$12,317 $ (473) $11,844
============================
Year Ended December 31, 1997:
Federal $10,564 $(1,590) $ 8,974
State and Local 2,927 (465) 2,462
----------------------------
$13,491 $(2,055) $11,436
============================
</TABLE>
The effective income tax rate differs from the statutory federal
corporate tax rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1999 1998 1997
----------------------------
<S> <C> <C> <C>
Statutory Rate 35.0% 35.0% 35.0%
State Income Taxes 4.2 5.5 5.5
Negative Goodwill (1.8) (0.9) (1.0)
Non-Taxable Interest Income (0.1) (0.1) (0.1)
Other (0.4) (1.3) (0.2)
----------------------------
Effective Rate 36.9% 38.2% 39.2%
============================
</TABLE>
<PAGE>
Page Thirty-six First Indiana Corporation
(10) INCOME TAXES (continued)
Deferred income tax assets and liabilities result from temporary and timing
differences in the recognition of income and expense for income tax and
financial reporting purposes. The tax effects of temporary differences that
give rise to significant portions of net deferred tax assets included in other
assets are presented below:
<TABLE>
<CAPTION>
(Dollars in Thousands)
-----------------
Deferred Tax Assets 1999 1998
-----------------
<S> <C> <C>
Allowance for Loan and REO Losses $11,671 $10,738
Pension and Retirement Benefits 3,308 3,012
Interest Credited 479 205
Premises and Equipment 449 273
Excess Servicing - 11
Accrued Compensation - 679
Unrealized Loss on Investments 493 -
Other 717 577
-----------------
17,117 15,495
-----------------
Deferred Tax Liabilities
Loan Servicing Rights 3,014 1,589
FHLB Stock Dividends 559 574
Net Deferred Loan Fees 5,079 4,487
Excess Tax Reserves 158 243
Unrealized Gain on Investments - 289
Excess Servicing 7 -
Other 45 51
-----------------
8,862 7,233
-----------------
Net Deferred Tax Assets $ 8,255 $ 8,262
=================
</TABLE>
In accordance with Statement of Financial Accounting Standard No. 109,
"Accounting for Income Taxes," a deferred liability has not been established
for the Bank's tax bad debt base year reserves of $16,586,000. The base year
reserves are generally the balance of reserves as of December 31, 1987, reduced
proportionally for reductions in the Bank's loan portfolio since that date.
The base year reserves will continue to be subject to recapture and the Bank
could be required to recognize a tax liability if: (1) the Bank fails to
qualify as a "bank" for federal income tax purposes; (2) certain distributions
are made with respect to the stock of the Bank; (3) the bad debt reserves are
used for any purpose other than to absorb bad debt losses; or (4) there is a
change in tax law. The enactment of this legislation had no material impact
on the Corporation's operations or financial position.
Cash paid during the year for income taxes was $14,869,000, $11,187,000,
and $11,360,000 for 1999, 1998, and 1997.
(11) SHAREHOLDERS' EQUITY
The Corporation is subject to regulation as a savings and loan holding
company by the Office of Thrift Supervision ("OTS"). The Bank, as a subsidiary
of a savings and loan holding company, is subject to certain restrictions in
its dealings with the Corporation. The Bank is further subject to the
regulatory requirements applicable to a federal savings bank.
Savings institutions are required to have risk-based capital of 8 percent
of risk-weighted assets. Risk-based capital is defined as the Bank's common
equity, less goodwill and investments in non-mortgage-lending-related
subsidiaries, plus general allowances for loan and REO losses. Risk weighting
of assets is derived from assigning one of five risk-weighted categories to
an institution's assets, based on the degree of credit risk associated with
the asset. The categories range from zero percent for low-risk assets (such
as United States Treasury securities) to 100 percent for high-risk assets
(such as real estate owned). The book value of each asset is then multiplied
by the risk weighting applicable to the asset category. The sum of the
products of the calculation equals total risk-weighted assets. At December
31, 1999, the Bank's risk-based capital exceeded the minimum requirement.
Savings institutions are also required to maintain a minimum leverage
ratio, under which core (Tier One) capital must equal at least 4 percent
of total assets. The components of core capital consist of common equity
plus non-cumulative preferred stock and minority interests in consolidated
subsidiaries, minus certain intangible assets, including purchased loan
servicing. Savings institutions must also maintain minimum tangible capital
of one and one-half percent of total assets. At December 31, 1999, the Bank
exceeded the minimum tangible and core capital requirements.
OTS has adopted additional minimum capital standards that place savings
institutions into one of five categories, from "critically undercapitalized"
to "well-capitalized," depending on levels of three measures of capital. A
well-capitalized institution as defined by the regulations has a total
risk-based capital ratio of at least 10 percent, a Tier One risk-based
capital ratio of at least six percent, and a leverage risk-based capital
ratio of at least five percent. At December 31, 1999, First Indiana was
classified as well-capitalized.
OTS has further proposed an interest-rate risk component of the proposed
capital regulations. Under this component, an institution with an "above
normal" level of interest-rate risk exposure will be subject to an "add-on"
to its risk-based capital requirement. "Above normal" interest-rate risk is
defined as a reduction in "market value portfolio equity" (as defined)
resulting from a 200 basis point increase or decrease in interest rates, if
the decline in value exceeds two percent of the institution's assets.
Institutions failing to meet this test will be required to add to their
risk-based capital. Based on its interest-rate risk at December 31, 1999,
First Indiana does not expect to be required to add to its risk-based capital
under the proposed regulations.
<PAGE>
1999 Annual Report Page Thirty-seven
First Indiana Corporation is not required under OTS regulations to meet
regulatory capital restrictions. The following tables show First Indiana
Bank's strong capital levels and compliance with all capital requirements
at December 31, 1999 and 1998. First Indiana is classified as
"well-capitalized" under the OTS regulatory framework for prompt corrective
action, its highest classification. To be categorized as "well-capitalized,"
the Bank must maintain minimum total risk-based, tier one risk-based and tier
one leverage ratios as set forth in the table. The table reflects categories
of assets includable under OTS regulations. There are no conditions or events
since the date of classification that management believes have changed the
Bank's category.
Pursuant to prior OTS regulations, liquidation accounts for the benefit of
eligible account holders were established in amounts equal to the net worths
of the merged or converted entities. At December 31, 1999, the liquidation
accounts relating to all prior transactions aggregated $12,907,000, which
amount satisfies the minimum required of each. The Bank is not permitted to
pay dividends on its common stock if its shareholders' equity would be reduced
below the aggregate amount then required for the liquidation accounts.
The Corporation is not subject to any regulatory restrictions on the payment
of dividends to its shareholders. However, the Bank may not declare or pay a
cash dividend on its stock if, as a result, the Bank's capital would be reduced
below the minimum requirements. The Bank is required to give the OTS 30 days'
advance notice before declaring a dividend. Under OTS regulations, the Bank
may, without prior OTS approval, make capital distributions to the
Corporation of up to all of the Bank's net earnings over the most recent
four-quarter period, less capital distributions made during such four-quarter
period.
The Corporation has a shareholder rights agreement, whereby each common
shareholder is entitled to one preferred stock right for each share of common
stock owned. The rights "flip in" upon the acquisition of 20 percent of the
Corporation's outstanding common stock in a takeover attempt, and offer current
shareholders a measure of protection for their investment in First Indiana.
First Indiana's stock has split six times since December 31, 1991. In March
1998, the Corporation paid a six-for-five stock dividend. In March 1997, the
Corporation effected a five-for-four stock split. All per-share amounts in this
Annual Report have been adjusted to reflect the stock dividend and split.
<TABLE>
<CAPTION>
Regulatory Capital
DECEMBER 31, 1999
---------------------------------------------------------
(Dollars in Thousands) To Be Well-
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tangible Capital(1) $157,725 7.98% $29,635 1.50% $ N/A N/A
Core (Tier One) Capital 157,725 7.98 79,026 4.00 98,783 5.00%
Tier One Risk-Based Capital 157,725 9.94 N/A N/A 95,171 6.00
Total Risk-Based Capital (2) 176,090 11.10 126,895 8.00 158,619 10.00
First Indiana Bank Capital 157,002 N/A N/A N/A N/A N/A
(1) First Indiana Bank capital differs from tangible capital by the FAS115 equity securities adjustment of $724.
(2) Risk-based capital includes a $19,937 addition for general loan loss reserves and a $1,571 deduction for
land loans with loan-to-value ratios in excess of 80 percent.
</TABLE>
<TABLE>
<CAPTION>
Regulatory Capital
DECEMBER 31, 1998
---------------------------------------------------------
(Dollars in Thousands) To Be Well-
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tangible Capital(1) $139,992 7.80% $26,915 1.50% $ N/A N/A
Core (Tier One) Capital 139,992 7.80 53,831 3.00 89,718 5.00%
Tier One Risk-Based Capital 139,992 10.10 N/A N/A 83,190 6.00
Total Risk-Based Capital (2) 155,839 11.24 110,919 8.00 138,649 10.00
First Indiana Bank Capital 140,418 N/A N/A N/A N/A N/A
(1) First Indiana Bank capital differs from tangible capital by the FAS115 equity securities adjustment of $425.
(2) Risk-based capital includes a $17,434 addition for general loan loss reserves and a $1,587 deduction for
land loans with loan-to-value ratios in excess of 80 percent.
</TABLE>
<PAGE>
Page Thirty-eight First Indiana Corporation
(12) COMMITMENTS AND CONTINGENCIES
At December 31, 1999 and 1998, First Indiana had the following outstanding
commitments to fund loans:
<TABLE>
<CAPTION>
(Dollars in Thousands)
DECEMBER 31,
-------------------
1999 1998
-------------------
<S> <C> <C>
Commitments to Fund:
Residential Mortgage Loans $ 56,329 $252,576
Commercial Real Estate Loans 10,950 16,422
Consumer Loans:
Home Equity Loans 169,482 155,447
Other 5,764 7,226
-------------------
$242,525 $431,671
===================
</TABLE>
Of the commitments to fund loans at December 31, 1999, nearly all are
commitments to fund variable-rate products. Commitments to sell loans at
December 31, 1999 and 1998 were $3,520,000 and $134,198,000, respectively.
At December 31, 1999, the Corporation had approximately $36,995,000 in
commitments to repurchase convertible adjustable-rate mortgage loans from
third-party investors. If the borrower under any of these loans elects to
convert the loan to a fixed rate loan, the investor has the option to require
First Indiana to repurchase the loan. If the investor exercises this option,
First Indiana sets a purchase price for the loan which equals its market
value, and immediately sells the loan in the secondary market. Thus, the
Bank incurs minimal interest-rate risk upon repurchase because of the
immediate resale.
First Indiana issues lines of credit to residential builders to purchase
residential lots to build model or speculative homes as well as homes for
committed buyers. At December 31, 1999, First Indiana had outstanding lines
of credit totaling $270,487,000 with $157,862,000 disbursed against those
lines. First Indiana also makes residential construction loans to individual
borrowers. At December 31, 1999, First Indiana had outstanding commitments
for these loans totaling $28,094,000 with $16,861,000 disbursed against those
commitments. First Indiana's collateral policy on these residential
construction loans requires a first mortgage on the underlying real estate
and improvements.
First Indiana issues letters of credit on behalf of its commercial loan
customers in exchange for a fee. At December 31, 1999, outstanding letters
of credit totaled $35.6 million. Letters of credit issued to enhance the bond
rating of economic development bonds totaled $31.4 million. Should these
letters be submitted for payment, First Indiana's collateral policy requires
the assignment of the underlying commercial real estate. The Bank also had
outstanding $2.9 million of standby letters of credit which guarantee payment
to a vendor for goods and services in the event of customer default. To
insure the completion of infrastructure improvements (sewers, streets,
sidewalks, underground utilities etc.), the Bank had outstanding $1.3 million
of completion letters of credit. These letters were issued to municipal
authorities and utility companies on behalf of the Bank's commercial real
estate borrowers. The standby and completion letters of credit are
collateralized by all assets of the borrower. Evaluation of the credit risk
associated with these letters of credit is part of the Bank's commercial loan
review procedures.
Rental Obligations - Obligations under non-cancelable operating leases for
office space at December 31, 1999 require minimum future payments of $1,541,000
in 2000, $1,473,000 in 2001, $1,367,000 in 2002, $1,189,000 in 2003, $984,000
in 2004, and $3,260,000 thereafter. Minimum future payments have not been
reduced by minimum sublease rental income of $232,000 receivable in the future
under non-cancelable subleases. Rental expense on office buildings was
$1,736,000, $1,637,000, and $1,616,000, for 1999, 1998, and 1997.
Other Contingencies - Other lawsuits and claims are pending in the ordinary
course of business on behalf of and against First Indiana. In the opinion of
management, adequate provision has been made for these items in the
Consolidated Financial Statements.
(13) EMPLOYEE BENEFIT PLANS
Retirement Plans - First Indiana maintains non-qualified retirement plans
for the directors of its Mooresville and Rushville Divisions and supplemental
pension benefit plans covering certain senior officers of the Bank and its
divisions. These supplemental benefit plans provide benefits for some of their
participants that normally would be paid under the Financial Institution
Retirement Fund ("FIRF") or Mooresville pension plans but are precluded from
being paid by limitations under the Internal Revenue Code.
The unrecognized net transition obligation is being amortized over 15 years.
The projected benefit obligations were determined using an assumed discount
rate of 8.00 percent and 6.75 percent at December 31, 1999 and 1998. The
assumed long-term salary increases were 5 percent at December 31, 1999 and
December 31, 1998, compounded annually.
Net periodic pension expense for the plan consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
(Dollars in Thousands) 1999 1998 1997
------------------------
<S> <C> <C> <C>
Service Cost-Benefits Earned During the Year $186 $198 $150
Interest Cost on Projected Benefit Obligation 543 486 440
Net Amortization and Deferral 80 60 29
------------------------
Net Pension Costs $809 $744 $619
========================
</TABLE>
The funded status of the plan and the amounts reflected in the accompanying
consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
(Dollars in Thousands) 1999 1998
-----------------
<S> <C> <C>
Projected Benefit Obligation $8,098 $7,861
Fair Value of Plan Assets - -
-----------------
Excess of Projected Benefit Obligation Over Fair Value of Plan Assets 8,098 7,861
Unrecognized Net Transition Obligation (158) (170)
Unrecognized Loss (914) (1,415)
-----------------
Accrued Pension Cost $7,026 $6,276
=================
</TABLE>
<PAGE>
1999 Annual Report Page Thirty-nine
Additionally, First Indiana is a participant in FIRF. This plan is a
multi-employer plan; separate actuarial valuations are not made with respect
to each participating employer. According to FIRF administrators, the market
value of the fund's assets exceeded the value of vested benefits in the
aggregate as of June 30, 1999, the date of the latest actuarial valuation.
Pension expense was $16,000, $12,000, and $59,000 for 1999, 1998, and 1997.
The Bank has a voluntary savings plan for eligible employees which qualifies
under Section 401(k) of the Internal Revenue Code. Employees can participate
after 12 months' employment by designating a portion of their salary to
purchase appropriate investment options. The Corporation in turn matches the
first six percent of the employee contribution at a rate of $.25 for every
$1 in employee contributions. In 1999, the Corporation matched employee
contributions for the Corporation's common stock at a rate of $.50 for every
$1. First Indiana made matching contributions of $233,000, $172,000, and
$129,000 in 1999, 1998, and 1997.
Post-Retirement Benefits Other Than Pension - The projected benefit
obligation for post-retirement medical, dental, and life insurance programs
for Board members and certain officers of those institutions relating to
merger agreements of prior acquisitions was $717,000 and $752,000, and the
accrued liability was $1,123,000 and $1,094,000 at December 31, 1999 and 1998.
Expense under the programs was $29,000, $38,000, and $35,000 in 1999, 1998,
and 1997, respectively.
The accumulated post-retirement benefit obligation was determined using an
assumed discount rate of 8.00 percent and 6.75 percent at December 31, 1999
and 1998. The assumed long-term salary increase was 5.00 percent for 1999 and
1998. The assumed health care cost trend rates used were 7 percent for 1998,
6 percent for 1999 and 5.50 percent for 2000 and later years. The trend rate
for years 10 and thereafter was 6 percent per year.
Stock-Based Compensation - First Indiana has four stock-based compensation
plans, which are described below. First Indiana applies APB Opinion No. 25,
"Accounting for Stock Issued to Employees" and related Interpretations in
accounting for these plans. Accordingly, no compensation cost has been
recognized for its fixed stock option plans. The compensation cost charged
against income for its performance-based plan was $523,000, $777,000, and
$660,000 in 1999, 1998, and 1997. The compensation cost charged against income
for the Employees' Stock Purchase Plan was $377,000, $184,000, and $153,000
in 1999, 1998, and 1997. Had compensation cost been determined based on the
fair value at the grant date for awards under those plans consistent with the
method of Statement of Financial Accounting Standard No. 123, First Indiana's
net earnings and earnings per share would have been reduced to the pro forma
amounts indicated below. The effects of applying FAS No. 123 in this pro forma
disclosure are not indicative of future amounts.
<TABLE>
<CAPTION>
(Dollars in Thousands, Except Per Share Data) 1999 1998 1997
---------------------------
<S> <C> <C> <C>
Net Earnings
As Reported $22,733 $19,147 $17,744
Pro Forma 22,578 18,704 17,675
Basic Earnings Per Share
As Reported $ 1.81 $ 1.50 $ 1.40
Pro Forma 1.80 1.46 1.40
Diluted Earnings Per Share
As Reported 1.77 1.44 1.36
Pro Forma 1.76 1.41 1.35
</TABLE>
A summary of the status of First Indiana's fixed stock option plans as of
December 31, 1999, 1998, and 1997, and changes during the years ended on
those dates is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at Beginning of Year 661,898 $11.56 688,076 $ 8.33 863,903 $ 7.16
Granted 101,476 18.98 119,316 23.52 25,479 16.30
Exercised (102,147) 6.68 (139,147) 6.37 (201,306) 4.32
Surrendered (2,940) 20.44 (6,347) 24.67 - -
--------- --------- ---------
Outstanding at End of Year 658,287 13.42 661,898 11.56 688,076 8.33
========= ========= =========
Options Exercisable at Year End 553,677 548,902 662,597
========= ========= =========
Weighted Average Fair Value of
Options Granted During the Year $ 5.68 $ 6.25 $ 4.54
========= ========= =========
</TABLE>
Fixed Stock Option Plans - First Indiana has three fixed stock option plans:
the 1991 Stock Option and Incentive Plan, the 1992 Directors' Stock Option
Plan, and the 1998 Stock Option and Incentive Plan. Under the 1991 and 1998
Plans, First Indiana is authorized to grant options to its employees for up to
562,500 and 630,000 shares of
The following table summarizes information about fixed stock
options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- --------------- ------------------------------------- ---------------------
Weighted Weighted Weighted
Range of Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices At 12/31/99 Life (years) Price At 12/31/99 Price
- --------------- ------------------------------------- ---------------------
<S> <C> <C> <C> <C> <C>
$ 3.00 - $ 7.00 198,277 2.40 $ 6.51 198,277 $ 6.51
7.01 - 15.00 217,160 4.80 10.96 217,160 10.96
15.01 - 28.00 242,850 8.26 21.26 138,240 22.74
------- ---- -------
3.00 - 28.00 658,287 5.35 13.42 553,677 12.31
======= ==== =======
</TABLE>
common stock, respectively. Under the 1992 Plan, First Indiana is authorized to
grant options to its outside directors (i.e., directors who are not employees
of the Corporation or any subsidiary) for up to 262,500 shares. Under all
plans, the exercise price of each option equals the market price of the
Corporation's stock on the date of grant, the option's maximum term is ten
years, and all options fully vest at the end of one or five years. Similar
plans were effected upon completion of the mergers with the Evansville,
<PAGE>
Page Forty First Indiana Corporation
Rushville, and Mooresville divisions, which allow grants for up to
approximately 415,000 shares of common stock. In lieu of cash, some optionees
elect to fund their option exercises with stock they currently own. In that
event, the Corporation cancels the stock certificates received from the
optionee in the stock swap transaction.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 1999, 1998, and 1997:
dividend yield of 3.0 percent for all years; expected volatility of 32
percent for 1999 and 23 percent for 1998 and 1997; weighted average
risk-free interest rates of 5.22 percent, 5.66 percent, and 6.89 percent
respectively; and expected lives of seven years for all years.
In addition to the options outstanding at December 31, 1999, 644,673
shares of common stock were available for future grants or awards.
Performance-Based Stock Plan - Under the 1991 Stock Option and Incentive
Plan, First Indiana may award restricted stock to executive officers. On
January 23, 1997, First Indiana awarded 43,500 shares of stock among three
executive officers. On April 15, 1998, First Indiana awarded 6,000 shares
of stock to an executive officer. All of these shares are subject to recall
by First Indiana in the event certain specified performance objectives are
not met by December 31, 1999. First Indiana expensed $523,000, $777,000, and
$660,000 in 1999, 1998 and 1997, respectively, in connection with these awards.
Employees' Stock Purchase Plan - Under the 1987 Employees' Stock Purchase
Plan, all full-time employees and directors are eligible to participate after
six months' employment. Approximately 51 percent of eligible employees
participated in the plan in 1999. Under the terms of the Plan, employees can
choose to have up to 10 percent of their annual base earnings withheld to
purchase the Corporation's common stock. The Corporation in turn matches the
employee contribution at a rate of $1 for every $3 or $4 in employee
contributions, depending on whether the Corporation has met specified
performance objectives for the previous calendar year. In 1999 the matching
contribution was increased to $1 for every $2 in employee contributions.
This action was taken in order to encourage increased participation in the
plan. The contributions are then paid to a trustee, who purchases the
Corporation's stock each month at the then prevailing market price. A
one-to-three contribution was in effect for the 1998 and 1997 plan years.
First Indiana's matching contributions were $377,000, $184,000, and $153,000
for the years ended 1999, 1998, and 1997, respectively.
(14) PARENT COMPANY STATEMENTS
<TABLE>
<CAPTION>
Condensed Balance Sheets
DECEMBER 31,
--------------------
1999 1998
(Dollars in Thousands) --------------------
<S> <C> <C>
Assets
Certificate of Deposit and Checking
Account with the Bank $ 501 $ 501
Due from Bank 16,260 23,575
Investment in the Bank 157,002 140,418
Other Assets 3,340 1,476
--------------------
Total Assets $177,103 $165,970
====================
Liabilities $ - $ -
Shareholders' Equity 177,103 165,970
--------------------
Total Liabilities and
Shareholders' Equity $177,103 $165,970
====================
<CAPTION>
Condensed Statements of Earnings
YEARS ENDED DECEMBER 31,
----------------------------
1999 1998 1997
(Dollars in Thousands) ----------------------------
<S> <C> <C> <C>
Cash Dividends from the Bank $ 6,532 $15,295 $14,241
Interest Income on Certificate
of Deposit 25 28 27
Expenses (2,557) (1,965) (240)
Income Tax Credit 1,000 786 81
----------------------------
Earnings Before Equity in Undistributed
Net Earnings of the Bank 5,000 14,144 14,109
Equity in Undistributed Net
Earnings of the Bank 17,733 5,003 3,635
----------------------------
Net Earnings $22,733 $19,147 $17,744
============================
</TABLE>
<PAGE>
1999 Annual Report Page Forty-one
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows YEARS ENDED DECEMBER 31,
-------------------------------
(Dollars in Thousands) 1999 1998 1997
-------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Earnings $ 22,733 $19,147 $17,744
Adjustments to Reconcile Net Earnings to
Net Cash Provided by Operating Activities
Equity in Undistributed Earnings of the Bank (17,733) (5,003) (3,635)
Amortization of Restricted Stock Plan 286 427 363
Change in Other Liabilities - (64) 127
Change in Due from the Bank and Other Assets 6,302 (7,767) (10,391)
-------------------------------
Net Cash Provided by Operating Activities 11,588 6,740 4,208
-------------------------------
Cash Flow from Investing Activities
Investment in Equity Security (851) - -
-------------------------------
Cash Flows from Financing Activities
Stock Option Proceeds 626 702 367
Common Stock Issued Under Deferred Compensation Plan - 65 (24)
Purchase of Treasury Stock (5,299) (2,242) (132)
Payment for Fractional Shares - (10) (12)
Tax Benefit of Option Compensation 468 870 656
Dividends Paid (6,532) (6,125) (5,063)
-------------------------------
Net Cash Used by Financing Activities (10,737) (6,740) (4,208)
-------------------------------
Net Change in Cash and Cash Equivalents - - -
Cash and Cash Equivalents at Beginning of Year 501 501 501
-------------------------------
Cash and Cash Equivalents at End of Year $ 501 $ 501 $ 501
===============================
</TABLE>
(15) INTERIM QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
(Dollars in Thousands, Except Per Share Data) -------------------------------------
<S> <C> <C> <C> <C>
1999
Total Interest Income $34,383 $35,917 $37,545 $38,581
Net Interest Income 16,584 17,490 18,244 18,533
Provision for Loan Loss 2,460 2,460 1,950 2,540
Earnings Before Income Taxes 7,619 8,096 10,531 9,807
Net Earnings 4,630 5,021 6,622 6,460
Basic Earnings Per Share 0.37 0.40 0.53 0.52
Diluted Earnings Per Share 0.36 0.39 0.52 0.50
<S> <C> <C> <C> <C>
1998
Total Interest Income $33,130 $34,255 $34,857 $34,689
Net Interest Income 15,693 15,826 15,952 16,380
Provision for Loan Loss 2,820 2,320 2,320 2,320
Earnings Before Income Taxes 7,278 7,524 8,174 8,015
Net Earnings 4,418 4,617 5,003 5,109
Basic Earnings Per Share 0.35 0.36 0.39 0.40
Diluted Earnings Per Share 0.33 0.35 0.38 0.39
</TABLE>
(16) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The table on the next page discloses the estimated fair value of financial
instruments and is made in accordance with the requirements of Statement of
Financial Accounting Standard No. 107, "Disclosures about Fair Value of
Financial Instruments." The estimated fair value amounts have been determined
by the Corporation using available market information and appropriate
valuation methodologies. However, considerable judgment is required to
interpret market data to develop the estimates of fair value. Accordingly,
the estimates herein are not necessarily indicative of the amounts the
Corporation could realize in a current market exchange. The use of different
market assumptions and/or estimation methods may have a material effect on
the estimated fair value amount.
Cash and Cash Equivalents - For cash and equivalents, the carrying amount
is a reasonable estimate of fair value.
Investment Securities- For securities, fair values are based on quoted
market prices or dealer quotes.
Mortgage-Backed Securities - Estimated fair value for mortgage-backed
securities issued by quasi-governmental agencies is based on quoted market
prices. The fair value of mortgage-backed securities issued by
non-quasi-governmental agencies is estimated based on similar securities with
quoted market prices and adjusted for any differences in credit ratings or
maturities.
Loans Receivable - For certain homogeneous categories of loans, such as
some residential mortgages, fair value is estimated using the quoted market
prices for securities backed by similar loans, adjusted for differences in
loan characteristics. The fair value
<PAGE>
Page Forty-two First Indiana Corporation
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
(Dollars in Thousands) Amount Value Amount Value
----------------------------------------
<S> <C> <C> <C> <C>
Assets
Cash and Cash Equivalents $ 61,441 $ 61,441 $ 57,653 $ 57,653
Investment Securities 103,169 103,169 113,291 113,291
Mortgage-Backed Securities 54,734 54,734 29,680 29,680
Loans Receivable
Residential Mortgage Loans 480,361 479,309 535,515 542,035
Residential Construction Loans 268,546 267,335 211,446 211,012
Commercial Real Estate Loans 35,111 35,114 32,304 33,402
Business Loans 231,591 231,707 176,206 177,522
Consumer Loans 665,097 662,058 571,017 585,212
Accrued Interest Receivable 13,554 13,554 11,680 11,680
Loan Servicing Rights 8,759 11,405 5,770 6,865
Liabilities
Deposits
Demand Deposits 211,609 211,609 215,457 215,457
Passbook Deposits 37,201 37,201 41,233 41,233
Money Market Savings 343,822 343,822 351,387 351,387
Jumbo Certificates 308,088 308,088 171,171 171,579
Fixed-Rate Certificates 411,395 411,395 448,670 454,845
Borrowings
FHLB Advances 366,854 363,664 327,247 328,936
Short-Term Borrowings 98,754 98,765 54,219 54,228
Accrued Interest Payable 5,605 5,605 2,646 2,646
Advances by Borrowers for
Taxes and Insurance 1,377 1,377 1,958 1,958
Off-Balance-Sheet Instruments
(Unrealized Gains (Losses))
Commitments to Extend Credit - (245) - 137
Letters of Credit - - - (2)
Loan Servicing Rights - 1,916 - 2,589
</TABLE>
of other types of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities. Interest
rates on such loans approximate current lending rates.
Deposits - The fair value of demand deposits, savings accounts, and
certain money market deposits is the amount payable on demand at the reporting
date. The fair value of fixed-maturity certificates of deposit is estimated
using the rates currently offered for deposits of similar remaining
maturities, but not less than the carrying amount.
Borrowings - Rates currently available to the Corporation for debt with
similar terms and remaining maturities are used to estimate fair value of
existing debt.
Commitments to Extend Credit and Letters of Credit - The fair value of
commitments is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also includes the difference
between current levels of interest rates and the committed rates. The
fair value of guaranties and letters of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate them
or otherwise settle the obligations with the counterparties at the reporting
date.
Loan Servicing Rights - The fair value of residential and consumer loan
servicing rights is determined based on the estimated discounted net cash
flows to be received less the estimated costs of servicing. This estimated
fair value approximates the amount for which the servicing could currently
be sold.
Accrued Interest Receivable, Accrued Interest Payable, and Advances by
Borrowers for Taxes and Insurance - The estimated fair value of these
financial instruments approximates their carrying value.
(17) SEGMENT REPORTING
The Corporation's business units are primarily organized to operate in
the banking industry, and are determined by the products and services offered.
The consumer segment includes the origination, sale, and portfolio activities
of both home equity and installment loans, and the residential segment
encompasses the portfolio of both residential first mortgage and Community
Reinvestment Act loans. The business segment originates construction,
commercial, and commercial real estate loans, and provides traditional cash
management services to business customers. Investment portfolio management is
included in the treasury segment. Mortgage banking activities include the
origination, sale, and servicing of residential loans. The retail segment
includes the Bank's 23-branch network, as well as the relatively newer virtual
banking services. Revenues in the Corporation's segments are generated from
loans, deposits, investments, servicing fees, and loan sales. There are no
foreign operations.
The segment financial information provided on the next page is based on
the internal management reporting software used by the Corporation's Executive
Committee to monitor and manage the financial performance of the Corporation.
The Corporation evaluates segment performance based on average assets and
profit or loss before income taxes and indirect expenses. Indirect expenses
include the Corporation's overhead and support expenses. The Corporation
attempts to match fund each business unit by reviewing the earning assets and
costing liabilities held by each unit and assigning an appropriate expense or
income offset based on the Treasury yield curve. The Corporation accounts for
intersegment revenues, expenses, and transfers based on estimates of the actual
costs to perform the intersegment services.
<PAGE>
1999 Annual Report Page Forty-three
<TABLE>
<CAPTION>
1999
Mortgage First Segment Intersegment Consolidated
Consumer Residential Business Treasury Banking Retail Trust Totals Eliminations Totals
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Average Segment Assets $634,377 $442,739 $482,519 $182,729 $ 76,033 $53,037 $ 851 $1,872,284 $ 16,554 (1) $1,888,838
Net Interest Income 22,460 5,713 17,330 1,049 1,460 15,817 - 63,829 7,022 (2) 70,851
Non-Interest Income 4,886 (401) 4,228 4,538 3,942 4,791 1,080 23,064 3,894 (3) 26,958
Intersegment Income
(Expense) 4,821 (1,271) (1,945) - 6,651 957 - 9,213 (9,213) (4) -
Significant Noncash items:
Provision for
Loan Losses 6,174 87 3,149 - - - - 9,410 - 9,410
Earnings (Loss)
before Income Tax 22,077 3,583 11,298 4,611 5,691 5,685 (452) 52,491 (16,438) (3) 36,053
<CAPTION>
1998
Mortgage Segment Intersegment Consolidated
Consumer Residential Business Treasury Banking Retail Totals Eliminations Totals
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Average Segment Assets $557,676 $464,118 $352,883 $183,107 $120,109 $46,939 $1,724,832 $(9,817) (1) $1,715,015
Net Interest Income 14,663 3,051 13,486 1,003 2,233 9,927 44,363 19,488 (2) 63,851
Non-Interest Income 6,399 113 3,661 1,917 4,955 3,259 20,304 2,373 (3) 22,677
Intersegment Income
(Expense) 5,369 (1,678) (1,551) - 8,662 2,666 13,468 (13,468) (4) -
Significant Noncash items:
Provision for
Loan Losses 7,076 136 2,568 - - - 9,780 - 9,780
Earnings (Loss)
before Income Tax 16,384 1,350 10,697 2,576 10,569 2,871 44,447 (13,456) (3) 30,991
<CAPTION>
1997
Mortgage Segment Intersegment Consolidated
Consumer Residential Business Treasury Banking Retail Totals Eliminations Totals
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Average Segment Assets $542,438 $433,857 $296,966 $177,659 $ 27,673 $38,404 $1,516,997 $(6,504) (1) $1,510,493
Net Interest Income 18,399 4,153 11,056 365 270 18,375 52,618 11,416 (2) 64,034
Non-Interest Income 3,109 118 2,783 1,418 4,883 2,664 14,975 1,975 (3) 16,950
Intersegment Income
(Expense) (312) (1,061) 76 - 5,222 475 4,400 (4,400) (4) -
Significant Noncash items:
Provision for
Loan Losses 9,281 152 1,267 - - - 10,700 - 10,700
Earnings (Loss)
before Income Tax 9,444 3,058 9,867 1,590 5,735 9,796 39,490 (10,310) (3) 29,180
(1) Segment assets differ from consolidated assets due to reclassification adjustments (primarily related to income tax assets)
that are not reflected in the management reporting system.
(2) The net interest income amounts in the segment results reflect not only the actual interest income and expense from segment
activities, but also amounts for transfer income and expense to match fund each segment. Transfer income and expense is
assigned to each asset and liability based on the treasury yield curve. These match funding entries are not made to the
Corporation's actual results.
(3) Represents income and expense items which are allocated to Corporate overhead departments. These amounts are included in
the Corporation's overall results, but are not part of the managment reporting system.
(4) Intersegment revenues are received by one segment for performing a service for another segment. In the case of residential
and consumer portfolios, an amount is paid to the origination office which is capitalized in the portfolio and amortized
over a four-year period. These charges are similar to premiums paid for the purchase of loans, and are treated as such
for management reporting. These entries are not made to the Corporation's actual results.
</TABLE>
<PAGE>
Page Forty-four First Indiana Corporation
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of First Indiana Corporation:
We have audited the accompanying Consolidated Balance Sheets of First
Indiana Corporation and Subsidiaries as of December 31, 1999 and 1998 and
the related Consolidated Statements of Earnings, Shareholders' Equity, and
Cash Flows for each of the years in the three-year period ended December 31,
1999. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Indiana Corporation and subsidiaries as of December 31, 1999 and 1998 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999 in conformity with generally accepted
accounting principles.
/s/KPMG LLP
Indianapolis, Indiana
January 18, 2000
AFFIRMATIVE ACTION POLICY
First Indiana Bank affords equal-opportunity employment to qualified
individuals regardless of race, color, religion, sex, national origin,
veteran status, and mental or physical disability.
First Indiana Bank will continue to take affirmative action to ensure
that all recruitment, hiring, and promotion decisions are based on the
principles of equal employment opportunity and that all personnel actions,
such as compensation, transfers, layoffs, benefits, educational assistance,
and social and recreational programs, will be administered without regard
to race, color, religion, sex, national origin, veteran status, or mental
or physical disability.
The successful achievement of a non-discriminatory employment program
requires cooperation between management and employees. In fulfilling its
part of this cooperative effort, management will continue to lead the way
by establishing and implementing affirmative action procedures and practices
which will ensure our objective: equal employment for all.
<PAGE>
1999 Annual Report Page Forty-five
STATEMENT OF MANAGEMENT RESPONSIBILITY
Management of First Indiana Corporation has prepared and is responsible
for the financial statements and for the integrity and consistency of other
related information contained in the Annual Report. In the opinion of
management, the financial statements, which necessarily include amounts
based on management's estimates and judgments, have been prepared in
conformity with generally accepted accounting principles appropriate to the
circumstances.
The Corporation maintains a system of internal accounting controls
designed to provide reasonable assurance that assets are safeguarded, that
transactions are executed in accordance with the Corporation's authorizations
and policies, and that transactions are properly recorded so as to permit
preparation of financial statements that fairly present the financial position
and results of operations in conformity with generally accepted accounting
principles. Internal accounting controls are augmented by written policies
covering standards of personal and business conduct and an organizational
structure providing for division of responsibility and authority.
The effectiveness of and compliance with established control systems is
monitored through a continuous program of internal audit and credit
examinations. In recognition of cost-benefit relationships and inherent
control limitations, some features of the control systems are designed to
detect rather than prevent errors, irregularities, and departures from approved
policies and practices. Management believes the system of controls has
prevented or detected on a timely basis any occurrences that could be material
to the financial statements and that timely corrective actions have been
initiated when appropriate.
The Corporation engaged the firm of KPMG LLP, independent certified public
accountants, to render an opinion on the financial statements. The accountants
have advised management that they were provided with access to all information
and records necessary to render their opinion.
The Board of Directors exercises its responsibility for the financial
statements and related information through the Audit Committee, which is
composed entirely of outside directors. The Audit Committee meets regularly
with management, the auditor of the Corporation, and KPMG LLP to assess the
scope of the annual audit plan, to review the status and results of audits, to
review the Annual Report and Form 10-K, including major changes in accounting
policies and reporting practices, and to approve non-audit services rendered
by the independent auditors.
KPMG LLP also meets with the Audit Committee, without management present,
to afford the Committee the opportunity to express its opinion on the adequacy
of compliance with established corporate policies and procedures and the
quality of financial reporting.
January 20, 2000
/s/Marni McKinney
Marni McKinney
Vice Chairman and Chief Executive Officer
/s/Owen B. Melton, Jr. /s/David L. Gray
Owen B. Melton, Jr. David L. Gray
President and Chief Operating Officer Treasurer
<PAGE>
Page Forty-six First Indiana Corporation
CORPORATE INFORMATION
First Indiana Corporation is a holding company whose principal subsidiary is
First Indiana Bank. The Bank is engaged primarily in retail banking and lending
through 23 banking centers in Metropolitan Indianapolis, Franklin, Pendleton,
Westfield, Rushville, and Mooresville. In addition, the Bank has mortgage and
consumer loan service offices throughout Indiana and in Arizona, Florida,
Illinois, North Carolina, Oregon, and Ohio; and provides investment advisory
and trust services through FirstTrust Indiana.
Stock Trading Information - First Indiana Corporation's common stock is
traded on the National Association of Securities Dealers' Automated Quotations
("NASDAQ") National Market System under the symbol FISB. The abbreviations
often used in newspaper listings are "FstInd" and "Fst Indiana."
Transfer Agent and Registrar - Harris Trust and Savings Bank, Attention:
Shareholder Services, 311 West Monroe Street, 14th floor, Chicago, Illinois
60606, 1-800-573-4048.
Annual Meeting of Shareholders - The annual meeting of shareholders will be
held on April 20, 2000, at 9:00 a.m. E.S.T. in the Conference Center of First
Indiana Plaza, 135 North Pennsylvania Street, Seventh Floor, Indianapolis,
Indiana.
Annual Report on Form 10-K - Upon request, shareholders may receive, without
charge, a copy of the Annual Report on Form 10-K filed with the Securities and
Exchange Commission. Requests should be directed to First Indiana Corporation,
Investor Relations Department, First Indiana Plaza, 135 North Pennsylvania
Street, Indianapolis, Indiana 46204, (317) 269-1231.
Information on Forward-Looking Statements - The statements in the Annual
Report that are not historical are forward-looking statements. Although the
Corporation believes that its expectations are based upon reasonable
assumptions within the bounds of its knowledge of its business, there can be
no assurance that the Corporation's financial goals will be realized.
Numerous factors may affect the Corporation's actual results and may cause
results to differ materially from those expressed in forward-looking
statements made by or on behalf of the Corporation.
Market Information - The following table sets forth the high and low prices
per share and ending book value per share of First Indiana Corporation's
common stock for the periods indicated.
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------
Book Book
High Low Value High Low Value
------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $20.50 $18.00 $13.21 $30.00 $22.92 $12.27
Second Quarter 21.38 18.38 13.30 27.38 23.75 12.54
Third Quarter 25.75 20.88 13.82 27.75 19.13 12.83
Fourth Quarter 26.13 19.75 14.14 22.13 17.38 13.07
</TABLE>
At December 31, 1999, there were approximately 1,800 shareholders
of record and 12,523,152 shares of common stock outstanding.
<PAGE>
<PAGE>
<PAGE>
[First Indiana Logo]
FIRST INDIANA CORPORATION
<PAGE>
<PAGE>
<PAGE>
[inside back cover of annual report]
<PAGE>
[back cover of annual report]
[First Indiana Logo]
FIRST INDIANA CORPORATION
FIRST INDIANA BANK - FIRSTTRUST INDIANA
First Indiana Plaza 135 North Pennsylvania Street
Indianapolis, IN 46204 (317)269-1200 www.firstindiana.com
Exhibit 21
SUBSIDIARIES OF FIRST INDIANA CORPORATION AND
FIRST INDIANA BANK
First Indiana Corporation's wholly owned subsidiary is First Indiana Bank,
which is organized under the laws of the United States.
First Indiana Bank has the following direct and indirect subsidiaries:
Name State of Incorporation
One Mortgage Corporation Indiana
One Investment Corporation Delaware
One Property Corporation Indiana
Pioneer Service Corporation Indiana
[KPMG Letterhead]
2400 First Indiana Plaza
135 North Pennsylvania Street
Indianapolis, IN 46204-2452
The Board of Directors
First Indiana Corporation:
We consent to incorporation by reference in the registration statement
(No. 33-64851) on Form S-8 of First Indiana Corporation of our report dated
January 18, 2000, relating to the consolidated balance sheets of First Indiana
Corporation and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1999, which
report appears in the December 31, 1999, annual report on Form 10-K/A of First
Indiana Corporation.
/s/ KPMG LLP
KPMG LLP
Indianapolis, Indiana
April 5, 2000
KPMG LLP. KPMG LLP, a U.S.limited liability partnership, is
a member of KPMG International, a Swiss association.
[KPMG Letterhead]
2400 First Indiana Plaza
135 North Pennsylvania Street
Indianapolis, IN 46204-2452
The Board of Directors
First Indiana Corporation:
We consent to incorporation by reference in the registration statement
(No. 333-68297) on Form S-8 of First Indiana Corporation of our report
dated January 18, 2000, relating to the consolidated balance sheets of
First Indiana Corporation and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of earnings, shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1999, which report appears in the December 31, 1999, annual
report on Form 10-K/A of First Indiana Corporation.
/s/ KPMG LLP
KPMG LLP
Indianapolis, Indiana
April 5, 2000
KPMG LLP. KPMG LLP, a U.S.limited liability partnership, is
a member of KPMG International, a Swiss association.
<TABLE> <S> <C>
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This schedule contains summary financial information extracted from the
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