United States Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2000
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period from ________ to ________
Commission File Number 0-14354
FIRST INDIANA CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-1692825
- ------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
135 North Pennsylvania Street, Indianapolis, IN 46204
- ------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
(317) 269-1200
- ------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes (X) No ( )
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Class Shares
- ------------------------------------------------------------------------------
Common Stock, par value $0.01 per share Outstanding at 04/30/2000
12,626,603
<PAGE>
<TABLE>
<CAPTION>
FIRST INDIANA CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX
<S> <C> <C>
Page
Part I Financial Information 3
Item 1. Financial Highlights 3
Condensed Consolidated Financial Statements: 3
Condensed Consolidated Balance Sheets as of March 31, 2000 and 4
December 31, 1999
Condensed Consolidated Statements of Earnings for the Three Months 5
Ended March 31, 2000 and 1999
Condensed Consolidated Statements of Shareholders' Equity for the 6
Three Months Ended March 31, 2000
Condensed Consolidated Statements of Cash Flows for the Three Months 7
Ended March 31, 2000 and 1999
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and 10
Results of Operations
Item 3. Disclosures About Market Risk 19
Part II Other Information 20
Signatures 21
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Financial Highlights
First Indiana Corporation and Subsidiaries
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
For the Three Months Ended
March 31,
2000 1999
---------------------------
<S> <C> <C>
Total Interest Income $ 40,256 $ 34,287
Total Interest Expense 21,295 17,799
Net Earnings 5,517 4,630
Basic Earnings Per Share 0.44 0.37
Diluted Earnings Per Share 0.43 0.36
Dividends Per Share 0.14 0.13
Net Interest Margin 3.93% 3.82%
Net Interest Spread 3.26 3.18
Return on Average Equity 12.30 11.10
Return on Average Assets 1.11 1.03
Average Shares Outstanding 12,607,682 12,679,940
Average Diluted Shares Outstanding 12,798,432 12,925,995
<CAPTION>
At March 31,
2000 1999
---------------------------
<S> <C> <C>
Assets $ 2,065,247 $ 1,826,565
Loans - Net 1,764,268 1,547,263
Deposits 1,351,794 1,305,728
Shareholders' Equity 180,770 167,301
Shareholders' Equity/Assets 8.75% 9.16%
Shareholders' Equity Per Share $ 14.32 $ 13.21
Market Closing Price 18.50 19.00
Price/Earnings Multiple 10.76x 13.19x
<CAPTION>
At March 31, 2000
Actual Required
-------------------
<S> <C> <C>
Capital Adequacy Ratios
Tangible Capital/Total Assets 7.85% 1.50%
Core (Tier One) Capital/Total Assets 7.85 4.00
Risk-Based Capital/Risk-Weighted Assets 11.01 8.00
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
Condensed Consolidated Balance Sheets
First Indiana Corporation and Subsidiaries
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
March 31, December 31,
2000 1999
------------ -----------
<S> <C> <C>
Assets
Cash $ 46,732 $ 30,941
Federal Funds Sold 15,000 30,500
----------- -----------
Total Cash and Cash Equivalents 61,732 61,441
Investments Available for Sale 100,374 103,169
Mortgage-Backed Securities Available for Sale 52,739 54,734
Loans Held for Sale 31,130 32,567
Loans Receivable 1,763,268 1,669,614
Less Allowance for Loan Losses 30,130 28,759
----------- -----------
Loans Receivable - Net 1,764,268 1,673,422
Premises and Equipment 17,167 17,071
Accrued Interest Receivable 14,129 13,554
Real Estate Owned - Net 1,146 1,227
Prepaid Expenses and Other Assets 53,692 55,156
----------- -----------
Total Assets $2,065,247 $1,979,774
=========== ===========
Liabilities and Shareholders' Equity
Liabilities
Non-Interest-Bearing Deposits $ 139,797 $ 114,356
Interest-Bearing Deposits 1,211,997 1,197,759
----------- -----------
Total Deposits 1,351,794 1,312,115
Federal Home Loan Bank Advances 391,821 366,854
Short-Term Borrowings 114,842 98,754
Accrued Interest Payable 6,394 5,605
Advances by Borrowers for Taxes and Insurance 4,844 1,377
Other Liabilities 14,782 17,966
----------- -----------
Total Liabilities 1,884,477 1,802,671
----------- -----------
Shareholders' Equity
Preferred Stock, $.01 Par Value: 2,000,000
Shares Authorized; None Issued - -
Common Stock, $.01 Par Value: 33,000,000 Shares
Authorized; 13,712,527 and 13,611,965 Shares Issued
and Outstanding, Including Shares in Treasury 137 136
Paid-In Capital in Excess of Par 39,341 37,962
Retained Earnings 156,733 153,710
Accumulated Other Comprehensive Income (Loss) (1,478) (724)
Treasury Stock-at Cost, 1,086,671 and 1,088,813 Shares (13,963) (13,981)
----------- -----------
Total Shareholders' Equity 180,770 177,103
----------- -----------
Commitments and Contingent Liabilities - -
----------- -----------
Total Liabilities and Shareholders' Equity $2,065,247 $1,979,774
=========== ===========
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
Condensed Consolidated Statements of Earnings
First Indiana Corporation and Subsidiaries
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended
March 31,
2000 1999
-------- --------
<S> <C> <C>
Interest Income
Loans $ 37,068 $ 31,717
Investments 1,711 1,543
Mortgage-Backed Securities 950 541
Dividends on Federal Home Loan Bank Stock 405 366
Federal Funds Sold and Interest-Bearing Deposits 122 120
-------- --------
Total Interest Income 40,256 34,287
-------- --------
Interest Expense
Deposits 14,395 13,174
Federal Home Loan Bank Advances 5,530 4,146
Short-Term Borrowings 1,370 479
-------- --------
Total Interest Expense 21,295 17,799
-------- --------
Net Interest Income 18,961 16,488
Provision for Loan Losses 2,439 2,460
-------- --------
Net Interest Income After Provision for Loan Losses 16,522 14,028
-------- --------
Non-Interest Income
Customer Fee Income 1,653 1,245
Sale of Investments Held For Sale 10 218
Sale of Loans 1,020 2,120
Loan Servicing Income 296 347
Loan Fees 657 846
Trust Fees 306 27
Other 836 1,290
-------- --------
Total Non-Interest Income 4,778 6,093
-------- --------
Non-Interest Expense
Salaries and Benefits 7,033 7,006
Net Occupancy 680 790
Equipment 1,420 1,123
Deposit Insurance 66 182
Real Estate Owned Operations - Net 124 120
Office Supplies and Postage 470 549
Other 2,595 2,732
-------- --------
Total Non-Interest Expense 12,388 12,502
-------- --------
Earnings Before Income Taxes 8,912 7,619
Income Taxes 3,395 2,989
-------- --------
Net Earnings $ 5,517 $ 4,630
======== ========
Basic Earnings Per Share $ 0.44 $ 0.37
======== ========
Diluted Earnings Per Share $ 0.43 $ 0.36
======== ========
Dividends Per Common Share $ 0.14 $ 0.13
======== ========
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
Condensed Consolidated Statements of Shareholders' Equity
First Indiana Corporation and Subsidiaries
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
Paid-In Accumulated
Capital Other Total
Common Stock in Excess Retained Comprehensive Treasury Shareholders'
Shares Amount of Par Earnings Income Stock Equity
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 12,523,152 $136 $37,962 $153,710 $ (724) $(13,981) $177,103
Comprehensive Income:
Net Earnings - Year to Date - - - 5,517 - - 5,517
Unrealized Loss on Securities Available
for Sale, Net of Income Taxes of $1,246
and Reclassification Adjustment of $10 - - - - (754) - (754)
---------
Total Comprehensive Income 4,763
---------
Common Stock Issued Under Restricted
Stock Plans - Net of Amortization 36,000 - 792 (726) - - 66
Exercise of Stock Options 67,213 1 401 - - - 402
Redemption of Common Stock (2,651) - (56) - - - (56)
Tax Benefit of Option Compensation - - 214 - - - 214
Dividends on Common Stock ($.14 per share) - - - (1,768) - - (1,768)
Reissuance of Treasury Stock 2,142 - 28 - - 18 46
----------------------------------------------------------------------------------
Balance at March 31, 2000 12,625,856 $137 $39,341 $156,733 $(1,478) $(13,963) $180,770
==================================================================================
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE> 7
<TABLE>
<CAPTION>
Condensed Consolidated Statements of Cash Flows
First Indiana Corporation and Subsidiaries
(Dollars in Thousands)
(Unaudited)
Three Months Ended March 31,
2000 1999
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities
Net Earnings $ 5,517 $ 4,630
Adjustments to Reconcile Net Earnings to:
Net Cash Provided (Used) by Operating Activities
(Gain) Loss on Sale of Assets and Deposits (1,030) (2,338)
Amortization of Net Premium, Prepaid Assets and
Negative Goodwill (96) 586
Amortization of Restricted Stock Plan 66 111
Depreciation 702 495
Loan and Mortgage-Backed Securities Net Accretion (59) (153)
Provision for Loan Losses, Net 2,439 2,460
Origination of Loans Held For Sale Net of Principal
Collected (66,101) (278,820)
Proceeds from Sale of Loans Held for Sale 68,558 222,130
Change In:
Accrued Interest Receivable (575) 32
Prepaid Expenses, Market Valuation, and Other Assets 422 (894)
Accrued Interest Payable 789 1,195
Other Liabilities (3,184) (729)
---------- ----------
Net Cash Provided (Used) by Operating Activities 7,448 (51,295)
Cash Flows from Investing Activities
Proceeds from Sale of Investments Available for Sale 12,255 30,211
Proceeds from Maturities of Investment Securities
Held to Maturity - 13,663
Proceeds from Maturities of Investment Securities
Available for Sale 10 -
Purchase of Investment Securities Available for Sale (10,000) (29,701)
Purchase of Mortgage Backed Securities Available for Sale - (30,284)
Principal Collected on Mortgage-Backed Securities 1,504 251
Originations of Loans Net of Principal Collected (93,251) 29,015
Purchase of Premises and Equipment (660) (1,357)
Proceeds from Sale of Premises and Equipment (54) 25
---------- ----------
Net Cash Provided (Used) by Investing Activities (90,196) 11,823
Cash Flows from Financing Activities
Net Change in Deposits 39,679 77,810
Repayment of Federal Home Loan Bank Advances (320,034) (397,031)
Borrowings of Federal Home Loan Bank Advances 345,001 340,000
Net Change in Short-Term Borrowings 16,088 6,527
Net Change in Advances by Borrowers for Taxes and Insurance 3,467 1,709
Stock Option Proceeds and Redemption of Common Stock 346 154
Tax Benefit of Stock Option Compensation 214 212
Purchase of Treasury Stock - (1,619)
Reissuance of Treasury Stock 46 -
Dividends Paid (1,768) (1,645)
---------- ----------
Net Cash Provided by Financing Activities 83,039 26,117
Net Change in Cash and Cash Equivalents 291 (13,355)
Cash and Cash Equivalents at Beginning of Period 61,441 57,653
---------- ----------
Cash and Cash Equivalents at End of Period $ 61,732 $ 44,298
========== ==========
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Period For:
Interest on Deposits, Advances, and Other Borrowed Money $ 20,506 $ 16,604
Income Taxes 760 3,836
Transfer of Loans to Real Estate Owned 1,435 1,232
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE> 8
FIRST INDIANA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 2000
(Unaudited)
Note 1 - Basis of Presentation
The accompanying financial statements have been prepared with generally
accepted accounting principles for interim financial information and with the
instruction to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (comprising only normal recurring
accruals) necessary for a fair presentation of the condensed consolidated
financial statements have been included. Results for any interim period are
not necessarily indicative of results to be expected for the year. The
condensed consolidated financial statements include the accounts of First
Indiana Corporation and its subsidiaries ("Corporation"). The principal
subsidiary of the Corporation is First Indiana Bank and its subsidiaries
("Bank"). A summary of the Corporation's significant accounting policies is
set forth in Note 1 of the Notes to Consolidated Financial Statements in the
Corporation's Annual Report on Form 10-K for the year ended December 31, 1999.
Note 2 - Earnings Per Share
Basic earnings per share for 2000 and 1999 were computed by dividing net
earnings by the weighted averages shares of common stock outstanding,
12,607,682 and 12,679,940 for the three months ended March 31, 2000 and 1999.
Diluted earnings per share for 2000 and 1999 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 (12,798,432 and 12,925,995 for the three months
ended March 31, 2000 and 1999). Dilution of the per-share calculation relates
to stock options.
Note 3 - Allowance for Loan Losses
Allowances have been established for losses on loans and real estate owned
("REO"). The provisions for losses charged to operations are based on
management's judgment of current circumstances and the credit risk of the loan
portfolio and REO. Management believes that these allowances are adequate to
provide for loan losses inherent in the loan and REO portfolios. While
management uses available information to recognize losses on loans and REO,
future additions to the allowances may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an
integral part of their examinations, periodically review these allowances and
may require the Corporation to recognize additions to the allowances based on
their judgments about information available to them at the time of their
examination.
<PAGE> 9
Note 4 - Segment Reporting
The Corporation's business units are primarily organized to operate in the
banking industry, and are determined by the products and services offered.
The consumer segment includes the origination, sale, servicing, and portfolio
activities of both home equity and installment loans, and the residential
segment encompasses the origination, sale, servicing, and 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. The
retail segment includes the Bank's 23-branch network, as well as virtual
banking services, which were introduced in February 1998. FirstTrust, which
commenced operations in the first quarter of 1999, provides trust and advisory
services to the Bank's customers. Revenues in the Corporation's segments are
generated from loans, deposits, investments, servicing fees, loan sales and
trust and advisory services. There are no foreign operations.
<TABLE>
<CAPTION>
Segment Reporting
First Quarter
2000
Total Intersegment Consolidated
Consumer Residential Business Treasury Retail FirstTrust Segments Eliminations Totals
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average Segment Assets $706,629 $497,034 $554,744 $216,135 $20,042 $1,016 $1,995,600 $(1,103) (1) $1,994,497
Net Interest Income 5,561 1,590 4,643 963 4,911 - 17,668 1,293 (2) 18,961
Non-Interest Income
(Expense) 1,344 370 847 10 1,415 306 4,292 486 (3) 4,778
Intersegment Income
(Expense) 1,088 (9) - - - - 1,079 (1,079) (4) -
Significant Non-cash
Items:
Provision for Loan
Losses 2,151 62 226 - - - 2,439 - 2,439
Earnings (Loss) Before
Income Tax 4,998 1,323 3,155 827 3,091 (56) 13,338 (4,426) (3) 8,912
<CAPTION>
First Quarter
1999
Total Intersegment Consolidated
Consumer Residential Business Treasury Retail FirstTrust Segments Eliminations Totals
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average Segment Assets $604,700 $529,930 $432,414 $170,695 $49,812 $ 842 $1,788,393 $17,105 (1) $1,805,498
Net Interest Income 5,219 1,926 2,814 456 3,445 - 13,860 2,628 (2) 16,488
Non-Interest Income
(Expense) 2,141 1,454 571 193 937 27 5,323 770 (3) 6,093
Intersegment Income
(Expense) 1,818 1,600 (540) - 146 - 3,024 (3,024) (4) -
Significant Non-cash
Items:
Provision for Loan
Losses 1,792 12 656 - - - 2,460 - 2,460
Earnings (Loss) Before
Income Tax 5,990 3,155 1,771 436 832 (381) 11,803 (4,184) (3) 7,619
<CAPTION>
(1) Segment assets differ from consolidated assets due to reclassification adjustments (primarily related to income tax assets)
that are not reflected in the management reporting system.
(2) The net interest income amounts in the segment results reflect not only the actual interest income and expense from segment
activities, but also amounts for transfer income and expense to match fund each segment. Transfer income and expense is
assigned to each asset and liability based on the treasury yield curve. These match-funding entries are not made to the
Corporation's actual results.
(3) Represents other income and expense items which are allocated to Corporate overhead departments. These amounts are included
in the Corporation's overall results, but are not part of the management reporting system.
(4) Intersegment income and expenses are received by one segment for performing a service for another segment. In the case of
residential and consumer portfolios, an amount is paid to the origination office which is capitalized in the portfolio and
amortized over a four-year period. These charges are similar to premiums paid for the purchase of loans, and are treated as
such for management reporting. These entries are eliminated from the Corporation's actual results.
</TABLE>
<PAGE> 10
Note 5 - Current Accounting Pronouncements
FASB Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133, an
Amendment of FASB Statement No. 133" was issued in June 1999. Statement No.
137 defers the effective date of Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" for one year. Statement No. 133, as
amended, is now effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000.
FASB Statement No. 133 generally requires that derivatives embedded in
hybrid instruments be separated from their host contracts and be accounted for
separately as derivative contracts. For instruments existing at the date of
adoption, Statement No. 133 provides an entity the option of not applying this
provision to such hybrid instruments entered into before January 1, 1998 and
not substantially modified thereafter. Consistent with the deferral of the
effective date for one year, Statement No. 137 also provides an entity the
option of not applying this provision to hybrid instruments entered into
before January 1, 1998 or 1999 and not substantially modified thereafter.
Management is currently assessing the impact of this Statement on the
financial condition and results of operations of the Corporation in the year
of adoption.
Note 6 - Reclassifications
Certain amounts in the 1999 Condensed Consolidated Financial Statements have
been reclassified to conform to the 2000 presentation.
Note 7 - Subsequent Event
On April 19, 2000, First Indiana and The Somerset Group, Inc. ("Somerset")
jointly announced the signing of a definitive agreement pursuant to which
Somerset will be merged with and into a wholly-owned subsidiary of First
Indiana. The merger agreement provides that each shareholder of Somerset will
have the option of receiving 1.21 shares of First Indiana common stock (valued
at $21.48, based on First Indiana's April 18, 2000 closing price of $17.75 per
share) or $24.70 in cash, or a combination of each (with cash limited to 35% of
Somerset's shares outstanding at closing), for each share of Somerset stock
owned as of the effective date of the merger. Based on First Indiana's April
18, 2000 closing price, and assuming that 80% of Somerset's shares are
exchanged for stock and 20% are exchanged for cash, the transaction has an
aggregate value of approximately $63 million. This transaction, which is
expected to close in August 2000, will be accounted for using purchase
accounting. The transaction is also subject to approval by First Indiana and
Somerset shareholders, the Office of Thrift Supervision, and the Securities and
Exchange Commission.
<PAGE> 11
Management's Discussion and Analysis of Results of Operations and Financial
Condition
Summary of Corporation's Results
First Indiana Corporation and subsidiaries had net earnings of $5,517,000
for the first quarter of 2000, compared with net earnings of $4,630,000 in the
first quarter of 1999. Diluted earnings per share for the three months ended
March 31, 2000 were $.43, compared with $.36 per share for the same period one
year ago. Cash dividends for the first quarter of 2000 and 1999 were $.14 and
$.13 per share of common stock outstanding, respectively.
Net Interest Income
Net interest income was $18,961,000 for the three months ended March 31,
2000, compared with $16,488,000 for the three months ended March 31, 1999. In
order to enhance net interest income, First Indiana has targeted the consumer,
business, and construction loan portfolios for growth in 2000 while
de-emphasizing residential loan portfolio growth.
Net loans outstanding increased to $1,764,268,000 at March 31, 2000,
compared with $1,547,263,000 one year earlier. At March 31, 2000, home equity
loans outstanding were $707,283,000, compared with $583,492,000 at March 31,
1999, a 21 percent increase. Business loans were $254,775,000 at March 31,
2000, compared with $200,568,000 one year earlier, a 27 percent increase.
Construction loans outstanding increased 13 percent to $276,265,000 at March
31, 2000 compared with $245,553,000 at March 31, 1999. Residential loan sales
for the first quarter of 2000 were $9,057,000, compared with $151,703,000 for
the same period in 1999. Consumer loans sales for the first quarter of 2000
were $58,481,000, compared with $68,307,000 for the same period in 1999.
Interest income for the first quarter of 2000 was $40,256,000, compared
with $34,287,000 for the three months ended March 31, 1999. Interest expense
for the first quarter of 2000 was $21,295,000, compared with $17,799,000 for
the three months ended March 31, 1999. The increase in interest expense is
related to both the growth in deposits and the increase in short-term
borrowings to fund the increase in loans outstanding.
During the first quarter of 2000, the Corporation's cost of funds was 5.08
percent, compared with 4.76 percent one year ago. The yield on earning assets
was 8.34 percent for the first quarter of 2000, compared with 7.94 percent one
year ago. These changes are both related to the rising interest rate
environment.
Annualized return on total average assets was 1.11 percent for the three
months ended March 31, 2000, compared with 1.03 percent for the same period
in 1999.
<PAGE> 12
Net Interest Margin
Net interest margin consists of two components: interest-rate spread and
the contribution of interest-free funds (primarily capital and other
non-interest-bearing liabilities). The following analysis of net interest
margin reflects the Corporation's ability to generate strong net interest
income resulting from a prudent combination of assets and liabilities.
<TABLE>
<CAPTION>
Net Interest Margin Three Months Ended March 31,
(Dollars in Thousands) 2000 1999
----------- -----------
<S> <C> <C>
Net Interest Income $ 18,961 $ 16,488
=========== ===========
Average Interest-Earning Assets $1,929,852 $1,727,871
Average Interest-Bearing Liabilities 1,675,944 1,494,253
----------- -----------
Average Interest-Free Funds $ 253,908 $ 233,618
=========== ===========
Yield on Interest-Earning Assets 8.34% 7.94%
Yield on Interest-Bearing Liabilities 5.08 4.76
----------- -----------
Interest-Rate Spread 3.26 3.18
Impact of Interest-Free Funds 0.67 0.64
----------- -----------
Net Interest Margin 3.93% 3.82%
=========== ===========
<CAPTION>
All non-accruing delinquent loans have been included in average
interest-earning assets.
</TABLE>
Margin has been closely monitored throughout the industry because recent
interest rate increases have put upward pressure on deposit costs. To
counteract this, the Bank has focused efforts on prime-based business and
consumer lending, which helps ease the downward pressure on net interest
margin. A direct result of loan growth has been favorable gains in net
interest margin.
<PAGE> 13
Non-Performing Assets and Summary of Loan Loss Experience
The following table analyzes the allowance for loan losses and REO
for the three months ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
Allowance for Loan & REO
Loan Losses REO Loss Allowance Loss Allowance
2000 1999 2000 1999 2000 1999
------------------- ------------------ ------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance of Loss Allowance at Beginning of Year $28,759 $25,700 $ 500 $ 500 $29,259 $26,200
Provision for Losses 2,439 2,460 (96) (6) 2,343 2,454
Charge-Offs - Residential (24) - - (14) (24) (14)
- Consumer (1,151) (1,678) (3) (17) (1,154) (1,695)
- Construction (25) (34) (2) - (27) (34)
- Business (65) (277) - - (65) (277)
- Commercial Real Estate - - - (79) - (79)
Recoveries - Residential - - 4 8 4 8
- Consumer 151 207 56 80 207 287
- Construction 36 28 41 28 77 56
- Business 10 2 - - 10 2
- Commercial Real Estate - - - - - -
------------------- ----------------- -------------------
Balance at March 31, $30,130 $26,408 $ 500 $ 500 $30,630 $26,908
=================== ================= ===================
Ratio of Allowance for Loan Losses
to Loans Receivable 1.68% 1.68%
Ratio of REO Loss Allowance
to Real Estate Owned 30.38% 19.75%
Ratio of Total Loan and REO Loss
Allowance to Non-Performing Assets 141.49% 153.73%
</TABLE>
Non-performing assets were $21,649,000, or 1.05 percent of assets, at
March 31, 2000. This compares with $19,399,000, or 0.98 percent of assets, at
December 31, 1999 and $17,503,000, or 0.96 percent of assets, at March 31,
1999. This category includes not only non-accrual loans and real estate owned,
but also restructured loans on which the Bank continues to accrue interest.
The Bank regularly reviews all non-performing assets to evaluate the
adequacy of the allowances for losses on loans and REO inherent in the loan
portfolio. The allowance for loan losses is maintained through a provision for
loan losses, which is charged to earnings. The provisions are determined in
conjunction with management's review and evaluation of current economic
conditions, changes in the character and size of the loan portfolio, estimated
charge-offs, and other pertinent information derived from a quarterly review of
the loan portfolio and REO properties.
The amount of the provision in 2000 is the result of management's ongoing
evaluation of the adequacy of its loan and real estate owned loss allowances
and the changing composition of the Corporation's loan portfolio and REO.
Management will continue to evaluate the adequacy of the provision and will
adjust it if necessary, based on the risk inherent in the portfolio.
<PAGE> 14
Non-Interest Income
Total non-interest income was $4,778,000 for the three months ended
March 31, 2000, compared with $6,093,000 for the same period in 1999.
Non-interest income was down primarily due to a reduction in gain on sale for
loans. This stems from a restructuring of the Bank's mortgage operations in
October of 1999. The decrease in non-interest income is offset by a decrease
in non-interest expense from the mortgage operations restructuring.
The 2000 gain on sale of loans of $1,020,000 is comprised of both a
$1,027,000 gain on the sale of fixed-rate home equity loans and a $7,000 loss
on residential mortgage loans. A national network of agents, coupled with a
call center, has allowed the Bank to aggressively pursue originations of home
equity products with loan-to-value ratios of greater than 80 percent. The
Bank processes and underwrites these loans and subsequently sells them into
the secondary market. In some cases, the Bank retains the servicing rights on
the home equity loan sales.
The Corporation's residential loan servicing portfolio amounted to
$821,894,000 at March 31, 2000, compared with $971,059,000 at March 31, 1999.
The consumer loan servicing portfolio was $285,463,000 at March 31, 2000,
compared with $123,230,000 at March 31, 1999.
Customer fee income increased $408,000 for the three months ended March 31,
2000 compared with the same period last year, primarily as a result of the
Bank's successful promotional campaigns to acquire new checking accounts.
First Indiana's trust subsidiary, FirstTrust Indiana, had $508,392,000 in
trust assets under management at March 31, 2000. Trust fees generated from
these assets are also included in other non-interest income.
During the first quarter of 1999, the Bank recognized $905,000 on the sale
of $148 million in loan servicing rights, which is included as a component of
other non-interest income.
Non-Interest Expense
Total non-interest expense was $12,388,000 for the three months ended March
31, 2000, compared with $12,502,000 for the same period in 1999. Salaries and
benefits increased $27,000 during the three months ended March 31, 2000
compared to the first quarter of 1999. Occupancy expenses decreased $110,000 in
2000 when compared with 1999. Both are primarily due to the discontinuance of
mortgage banking operations and the August 1999 sale of the Evansville
division. Resources have been redeployed to commercial and consumer banking.
Equipment, a component of other operating expenses, increased $297,000 in 2000
compared with the first quarter of 1999, primarily due to additional
depreciation of equipment and software related to hardware and software
improvements.
<PAGE> 15
Deposit Insurance premiums for the quarter ended March 31, 2000 were
$66,000, compared to $182,000 for the quarter ended March 31, 1999. This
$116,000 reduction is due to a drop in premiums to realign thrifts with banks.
Capital Resources and Liquidity
At March 31, 2000, shareholders' equity was $180,770,000, or 8.75 percent
of total assets, compared with $177,103,000, or 8.95 percent, at December 31,
1999 and $167,301,000, or 9.16 percent, at March 31, 1999.
The Corporation paid a quarterly dividend of $.14 per common share on March
15, 2000 to shareholders of record as of March 3, 2000. This reflects an
increase from a quarterly dividend of $.13 per share in 1999.
The following table shows First Indiana's strong capital levels and
compliance with all capital requirements at March 31, 2000. First Indiana
Bank is classified as "well-capitalized" under the OTS regulatory framework
for prompt corrective action, its highest classification. To be categorized
as "well-capitalized," the Bank must maintain minimum total risk-based, tier
one risk-based and tier one leverage ratios as set forth in the table. The
table reflects categories of assets includable under OTS regulations. There
are no conditions or events since the date of classification that management
believes have changed the Bank's category.
<TABLE>
<CAPTION>
Capital Requirements To Be Well
Capitalized under
For FDICIA OTS Prompt
(Dollars in Thousands) Capital Corrective Action
Actual Adequacy Purposes Provisions
Amount Ratio Amount Ratio Amount Ratio
---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
First Indiana Bank Capital $160,381
Tangible Capital (1) 161,859 7.85% $ 30,948 1.50% N/A N/A
Core (Tier One) Capital 161,859 7.85 82,528 4.00 $103,160 5.00%
Tier One Risk-Based Capital 161,859 9.85 N/A N/A 98,552 6.00
Total Risk-Based Capital (2) 180,908 11.01 131,403 8.00 164,425 10.00
<CAPTION>
(1) First Indiana Bank capital differs from tangible capital by the FAS115 equity securities
adjustment of ($1,478).
(2) Risk-based capital includes a $20,649 addition for general loan loss reserves and a
$1,600 deduction for land loans with loan-to-value ratios in excess of 80 percent.
</TABLE>
The Corporation conducts its business through its subsidiaries. The main
source of funds for the Corporation is dividends from the Bank. The
Corporation has no significant assets other than its investment in the Bank.
<PAGE> 16
Regulations require the director of the OTS to set minimum liquidity levels
between four and 10 percent of assets. In the fourth quarter of 1997, the
regulations were altered to lower the liquidity requirement to four percent of
net withdrawable assets, and the definition of net withdrawable assets was
simplified. This change did not have a significant impact on the Corporation's
liquidity position. The Corporation's liquidity ratio at March 31, 2000, was
4.72 percent.
Financial Condition
Total assets at March 31, 2000, were $2,065,247,000, an increase of
$85,473,000 from $1,979,774,000 at December 31, 1999.
Net loans receivable at March 31, 2000, were $1,764,268,000, compared with
$1,673,422,000 at December 31, 1999. The predominant growth in loans occurred
in the targeted portfolios of construction, business, and consumer, all of
which increased from year-end 1999.
Total deposits were $1,351,794,000 at March 31, 2000, compared with
$1,312,115,000 at December 31, 1999. This increase is primarily due to an
increase in retail checking deposits and jumbo certificates of deposit.
Non-interest-bearing deposits consist of retail and commercial checking
accounts, as well as official checking accounts. Commercial checking accounts
are expected to become a more significant source of funds. Included in
commercial checking accounts at March 31, 2000 and December 31, 1999 were
approximately $3,413,000 and $3,407,000 of escrow balances maintained for loans
serviced for others. These balances represent principal, interest, taxes, and
insurance that require separate maintenance at the request of the investor.
Official checking accounts at March 31, 2000 and December 31, 1999 were
$35,633,000 and $26,111,000, respectively.
Federal Home Loan Bank advances totaled $391,821,000 at March 31, 2000,
compared with $366,854,000 at December 31, 1999.
The Corporation also uses short-term repurchase agreements as sources of
funds. Borrowings will continue to be used in the short run to compensate for
periodic or other reductions in deposits or inflows at less than projected
levels, and long-term to support lending activities.
<PAGE> 17
Interest-Rate Sensitivity
First Indiana engages in rigorous, formal asset/liability management, the
objectives of which are to manage interest-rate risk, ensure adequate
liquidity, and coordinate sources and uses of funds. At March 31, 2000, the
Corporation's cumulative one-year interest-rate gap stood at a negative 7.80
percent. This means that 7.80 percent of First Indiana's liabilities will
reprice within one year without a corresponding repricing of the assets they
fund. Because of the changing interest rate environment, it is management's
intention to reduce this liability sensitive position throughout the year.
<PAGE> 18
<TABLE>
<CAPTION>
The following schedule analyzes the difference in rate-sensitive assets and liabilities or
gap at March 31, 2000 and December 31, 1999.
Rate Sensitivity by Period of Maturity or Rate Change
March 31, 2000
Over 180 Over One
Percent Within Days to Year to Over
(Dollars in Thousands) Rate Balance of Total 180 Days One Year Five Years Five Years
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Investment Securities & Other 6.70% $ 135,717 6.84% $ 25,667 $ 50 $ 89,657 $ 20,343
Loans Receivable (1)
Mortgage-Backed Securities 7.24 52,739 2.66 4,927 4,647 29,299 13,866
Residential Mortgage Loans 7.53 510,915 25.77 89,264 63,618 314,155 43,878
Commercial Real Estate Loans 8.68 33,604 1.69 4,937 7,342 15,582 5,743
Business Loans 9.16 254,775 12.85 190,574 5,651 44,315 14,235
Consumer Loans 9.46 718,839 36.26 277,191 39,013 227,909 174,726
Residential Construction Loans 8.72 276,265 13.93 250,403 16,567 9,295 -
-------------------------------------------------------------------
Total Interest-Earning Assets 8.56% $1,982,854 100.00% 842,963 136,888 730,212 272,791
==========================
Interest-Bearing Liabilities
Deposits:
Demand Deposits (2) 1.04% $ 97,330 5.66% - - - 97,330
Passbook Deposits (3) 2.18 39,461 2.30 4,368 907 7,258 26,928
Money Market Savings 4.67 335,016 19.49 335,016 - - -
Jumbo Certificates 5.97 333,809 19.42 129,941 36,758 167,110 -
Fixed-Rate Certificates 5.42 406,381 23.65 174,791 92,989 138,601 -
-------------------------------------------------------------------
Total Deposits 4.91 1,211,997 70.52 644,116 130,654 312,969 124,258
Borrowings:
FHLB Advances 6.09 391,821 22.80 170,000 75,000 140,000 6,821
Short-Term Borrowings 5.56 114,842 6.68 114,842 - - -
-------------------------------------------------------------------
Total Interest-Bearing Liabilities 5.22% 1,718,660 100.00% 928,958 205,654 452,969 131,079
===== =======
Net - Other (4) 264,194 264,194
---------- ---------------------------------------------
Total $1,982,854 928,958 205,654 452,969 395,273
========== ---------------------------------------------
Rate Sensitivity Gap $ (85,995) $ (68,766) $277,243 $(122,482)
=============================================
March 31, 2000 $ (85,995) $(154,761) $122,482
=================================
Percent of Total Interest-
Earning Assets (4.34%) (7.80%) 6.18%
=================================
December 31, 1999 $(101,665) $(162,521) $184,713
=================================
Percent of Total Interest-
Earning Assets (5.32%) (8.50%) 9.67%
=================================
(1) The distribution of fixed-rate loans is based upon contractual maturity and scheduled contractual
repayment adjusted for estimated prepayments. For adjustable-rate loans, interest rates adjust at
intervals of six months to five years. Included in Residential Mortgage Loans are $350 of Loans
Held for Sale. Included in Consumer Loans are $30,780 of Home Equity Loans Held for Sale.
(2) These deposits have been included in the Over 5 Years category to reflect management's assumption
that these accounts are not rate-sensitive. This assumption is based upon historic trends of these
deposits through periods of significant increases and decreases in interest rates without changes in
rates paid on these deposits. Included in this category are NOW, money market checking and
non-interest bearing deposits. The rate represents a blended rate on all deposit types in the category.
(3) A portion of these deposits have been included in the Over 5 Years category to reflect management's
assumption that these accounts are not rate-sensitive. This assumption is based upon the historic minimal
decay rates on these types of deposits experienced through periods of significant increases and decreases
in interest rates without changes in rates paid on these deposits.
(4) Net - Other is the excess of other non-interest-bearing liabilities and capital over other
non-interest-bearing assets.
</TABLE>
<PAGE> 19
Disclosures About Market Risk
The Corporation's success is largely dependent upon its ability to manage
interest-rate risk, which is defined as the exposure of the Corporation's net
interest income and net earnings to changes in interest rates. The Bank's
Asset/Liability Committee ("ALCO") is responsible for managing interest-rate
risk and the Corporation has established acceptable limits for interest-rate
exposure, which are reviewed on a monthly basis. The Bank uses a model which
measures interest-rate sensitivity to determine the impact on net earnings of
immediate and sustained upward and downward movements in interest rates.
Incorporated into the model are assumptions regarding the current and
anticipated interest rate environment, estimated prepayment rates of certain
assets and liabilities, forecasted loan and deposit originations, contractual
maturities, and renewal rates on certificates of deposits, estimated borrowing
needs, anticipated loan loss provision, projected secondary marketing gains and
losses, expected repricing spreads on variable-rate products, and contractual
maturities and repayments on lending and investment products. The model
incorporates interest-rate sensitive instruments which are held to maturity
or available for sale. The Bank has no trading assets. Based on the
information and assumptions in effect at March 31, 2000, management believes
that a 100 basis point increase or decrease in interest rates over a 12 month
period would result in a 0.6 percent decrease and a 2.2 percent decrease in
net earnings, respectively, because of the change in net interest income.
Because of the numerous assumptions used in the computation of interest-rate
sensitivity, and the fact that the model does not assume any actions the ALCO
could take in response to the change in interest rates, the results should not
be relied upon as indicative of actual results.
Historically the Bank enters into forward sales contracts for future
delivery of residential fixed-rate mortgage loans at a specified yield in order
to limit market risk associated with its pipeline of residential mortgage loans
held for sale and commitments to fund residential mortgage loans. Market risk
arises from the possible inability of either party to comply with the contract
terms.
The Bank designates these forward sales contracts as hedges. To qualify as
a hedge, the forward sales contract must be effective in reducing the market
risk of the identified anticipated residential mortgage loan sale which is
probable to occur. Effectiveness is evaluated on an ongoing basis through
analysis of the residential mortgage loan pipeline position. Commitments under
these forward sales contracts and the underlying residential mortgage loans are
valued, and the net position is carried at the lower of cost or market.
Unrecognized gains and losses on these forward sales contracts are generally
immaterial and are charged to current earnings as an adjustment to the gain or
loss on residential mortgage loan sales when realized, or when the contract
matures or is terminated.
<PAGE> 20
Other Information
Items 1, 2, and 3 are not applicable.
Item 4. Submission of matters to Vote of Security Holders.
An annual meeting of shareholders was held April 20, 2000.
The following directors were elected at this meeting.
Votes For Votes Withheld
--------------------------------------------------
Gerald L. Bepko 10,741,181 104,173
Andrew Jacobs, Jr. 10,775,979 69,376
John W. Wynne 10,792,343 53,011
The following directors' terms of office continued after the meeting.
Robert J. Laikin
Marni McKinney
Phyllis W. Minott
Robert H. McKinney
Owen B. Melton, Jr.
Michael L. Smith
Item 5. When used in this Form 10-Q, the words "believes," "expects,"
"estimates," "will likely result," or "will continue" and similar
expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties which
could cause actual results to differ materially. In particular, among
the factors that could cause actual results to differ materially are
general business and economic conditions, competitive and regulatory
factors, credit risks of lending activities, and interest rates.
Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof.
The Corporation undertakes no obligation to publicly release the
results of any revisions to these forward-looking statements which may
be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits - Financial Data Schedule
(b) Reports on Form 8-K - There were no reports on Form 8-K filed
during the three months ended March 31, 2000.
<PAGE> 21
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
First Indiana Corporation
May 12, 2000 /s/Owen B. Melton, Jr.
Owen B. Melton, Jr.
President
May 12, 2000 /s/David L. Gray
David L. Gray
Vice President and Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
all reported numbers are unaudited.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 46732
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 15000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 153113
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1794398
<ALLOWANCE> 30130
<TOTAL-ASSETS> 2065247
<DEPOSITS> 1351794
<SHORT-TERM> 274842
<LIABILITIES-OTHER> 26020
<LONG-TERM> 231821
0
0
<COMMON> 137
<OTHER-SE> 180633
<TOTAL-LIABILITIES-AND-EQUITY> 2065247
<INTEREST-LOAN> 37068
<INTEREST-INVEST> 2661
<INTEREST-OTHER> 527
<INTEREST-TOTAL> 40256
<INTEREST-DEPOSIT> 14395
<INTEREST-EXPENSE> 21295
<INTEREST-INCOME-NET> 18961
<LOAN-LOSSES> 2439
<SECURITIES-GAINS> 10
<EXPENSE-OTHER> 12388
<INCOME-PRETAX> 8912
<INCOME-PRE-EXTRAORDINARY> 8912
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5517
<EPS-BASIC> .44
<EPS-DILUTED> .43
<YIELD-ACTUAL> 3.93
<LOANS-NON> 19668
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 18912
<ALLOWANCE-OPEN> 28759
<CHARGE-OFFS> 1265
<RECOVERIES> 196
<ALLOWANCE-CLOSE> 30130
<ALLOWANCE-DOMESTIC> 00588
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 10588
</TABLE>
