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First Indiana Corp – ‘10-K’ for 12/31/98 – EX-13

As of:  Wednesday, 3/24/99   ·   For:  12/31/98   ·   Accession #:  789670-99-3   ·   File #:  0-14354

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  As Of                Filer                Filing    For·On·As Docs:Size

 3/24/99  First Indiana Corp                10-K       12/31/98    8:386K

Annual Report   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                         31    163K 
 2: EX-3        Articles of Incorporation/Organization or By-Laws     23±    88K 
 3: EX-13       Annual or Quarterly Report to Security Holders        79±   323K 
 4: EX-21       Subsidiaries of the Registrant                         1      5K 
 5: EX-22       Published Report Regarding Matters Submitted to a     23     87K 
                          Vote of Security Holders                               
 6: EX-23       Consent of Experts or Counsel                          2      8K 
 7: EX-23       Consent of Experts or Counsel                          1      7K 
 8: EX-27       Financial Data Schedule (Pre-XBRL)                     2±    10K 


EX-13   —   Annual or Quarterly Report to Security Holders

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[front cover of 1998 annual report] FIRST INDIANA CORPORATION Discovery. Delivery. Dialogue. 1998 Annual Report to Shareholders [First Indiana Logo]
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[inside front cover]
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[Download Table] Contents Letter to Shareholders 2 Mission Statement 5 Management and Advisory Boards 6 Board of Directors 8 Year in Review 8 Financial Review 12 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 46 Affirmative Action Policy 46 Corporate Information 47 Statement of Management Responsibility 48 [This page contains bar graphs showing the following information] [Download Table] Net Earnings (Dollars in Thousands) Earnings Per Share ----------------------------------- -------------------------- 1994 10,636 1994 0.80 1995 17,267 1995 1.34 1996 13,704 1996 1.06 1997 17,744 1997 1.36 1998 19,147 1998 1.44 Shareholders' Equity Net Interest Margin (Dollars in Thousands) ------------------- -------------------- 1994 3.96 1994 120,712 1995 4.12 1995 129,297 1996 4.37 1996 138,658 1997 4.36 1997 153,036 1998 3.85 1998 165,970 Price/Earnings Multiple ----------------------- 1994 10.94x 1995 10.73x 1996 16.85x 1997 18.56x 1998 13.89x [Download Table] OUR FINANCIAL HIGHLIGHTS First Indiana Corporation and Subsidiaries Years Ended December 31, ------------------- (Dollars in Thousands, Except Per Share Data) 1998 1997 ------------------- Net Earnings $19,147 $17,744 Basic Earnings Per Share 1.50 1.40 Diluted Earnings Per Share 1.44 1.36 Dividends Per Common Share 0.48 0.40 Return on Average Total Assets 1.12% 1.17% Return on Average Shareholders' Equity 11.96 12.16 Yield on Interest-Earning Assets 8.32% 8.81% Cost of Interest-Bearing Liabilities 5.16 5.10 Net Interest Margin 3.85 4.36 Net Interest Spread 3.16 3.71 At December 31, ------------------- 1998 1997 ----------------------- Assets $1,795,990 $1,613,405 Loans Receivable, Net 1,518,543 1,348,529 Deposits 1,227,918 1,107,555 Shareholders' Equity $ 165,970 $ 153,036 Shareholders' Equity/Assets 9.24% 9.49% Book Value Per Share $ 13.07 $ 12.08 Market Closing Price 20.00 25.21 Price/Earnings Multiple 13.89x 18.56x -------------------- December 31, 1998 -------------------- Actual Required Tangible Capital/Total Assets 7.80% 1.50% Core Capital/Total Assets 7.80 3.00 Risk-Based Capital/Risk-Weighted Assets 11.24 8.00
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1 [This page contains photographs of the following persons and these captions] Robert H. McKinney Chairman and Chief Executive Officer (46 Years' Service) Marni McKinney Vice Chairman (15 Years' Service) Owen B. Melton, Jr. President and Chief Operating Officer (21 Years' Service) [This page contains bar graphs showing the following information] [Download Table] Total Loans Originated (Dollars in Thousands) --------------------------------------------- 1994 982,754 1995 1,021,753 1996 985,165 1997 1,107,311 1998 1,506,789 Non-Performing Assets (Dollars in Thousands) -------------------------------------------- 1994 29,077 1995 27,165 1996 27,121 1997 22,822 1998 19,880 LETTER TO THE SHAREHOLDERS To Our Shareholders: First Indiana Corporation again announced record earnings in 1998, continuing a positive trend as a locally based, responsive provider of financial services. For the year ended December 31, 1998, First Indiana's net earnings were $19.1 million, or $1.44 per diluted share, an eight percent increase over net earnings of $17.7 million, or $1.36 per diluted share, for the year ended December 31, 1997. To reflect confidence in the continued earnings potential of the Corporation, the Board of Directors has authorized an eight percent increase in the Corporation's annual cash dividend, to $.52 per share from $.48 per share, beginning with the first quarterly dividend payment on March 16, 1999. This is the seventh such increase in eight years, either through stock dividends and splits or through cash dividends. Record low interest rates and a strong national economy helped First Indiana achieve its earnings in 1998. In addition, changes in the markets in which First Indiana operates and new strategies for building partnerships with customers helped the Corporation reach its goals. As successful as 1998 was, however, First Indiana's Board of Directors and management are aware of the pressure always to bring something different to the market, and a set of products and services that customers cannot obtain from a competitor. This is a difficult challenge, given trends toward consolidation and the commoditized nature of the banking industry, but the Corporation made strides in differentiating itself throughout 1998. In the growing Central Indiana market, where much of First Indiana's business is centered, two superregional banks each announced the acquisition of another bank with a significant presence in Indianapolis. The result has been a major consolidation of processes and decisions, often in markets outside Indianapolis, which places decisions farther away from the customer. First Indiana's local presence gives the Bank an opportunity to form local partnerships with customers and respond to requests quickly and efficiently. To capitalize on competitors' mergers, First Indiana adopted a comprehensive, detailed strategy for ascertaining the needs of customers, working closely with them to develop their financial goals, and following through with customers during their business or personal life cycle. The chief benefit of this strategy in
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2 1998 was a 13 percent growth in loans outstanding, to $1.52 billion at De- cember 31, 1998 from $1.35 billion at year-end 1997. Total loan originations eclipsed all previous records, amounting to $1.5 billion, a 35 percent increase over 1997's record levels. The increases in the Bank's loans occurred in all of its targeted portfolios. Loans to businesses increased 44 percent to $179 million from $124 million at year-end 1997. Residential Construction loans grew 19 percent, to $182 million from $153 million; and consumer loans grew 6 percent to $581 million from $548 million at the end of 1997. Growth in business loans was fueled by First Indiana's relationship-building approach, centering on the needs of small and middle-market business customers. The mergers of large bank competitors create an opportunity for First Indiana to capitalize on the lack of attention that small and middle market customers feel they are receiving from their bank. Construction loan growth occurred not only in Central Indiana, but also in dynamic markets in North Carolina and Florida through long-standing relationships with builders who are taking advantage of expansion in these popular regions. First Indiana expanded its reach in 1998 with new offices in Phoenix, Arizona, and Portland, Oregon. The significant growth in the Bank's loan portfolios contributed to net interest income of $62.8 million, a slight decrease from $63.0 million in 1997. The decrease arises from a compressed net interest margin due to lower loan yields in the current interest-rate environment. The net interest margin for 1998 was 3.85 percent, compared with 4.36 percent in 1997. However, net interest margin increased in the fourth quarter of 1998 to 3.84 percent over the 3.77 percent in the third quarter. Compression of margin is not unexpected in a low interest-rate environment, but the improvement in the fourth quarter bodes well for a higher margin in 1999. First Indiana's strategies for building relationships also led to an 11 percent increase in deposits, which grew to $1.2 billion at December 31, 1998, compared with $1.1 billion at year-end 1997. The increases occurred primarily through higher levels of business deposits, the introduction of nine new consumer checking account products, and a competitively priced liquid savings account that provides temporary shelter for customers waiting for certificate of deposit rates to rebound. All of these products are priced at lower rates than traditional certificates of deposits, which will help alleviate pressure on the Bank's funding costs, support its net interest margin, and reduce reliance on borrowed funds. Through concentrated marketing and sales efforts, First Indiana's new checking account households grew over 200 percent in 1998. This growth signifies expansion of the Bank's retail franchise and an excellent opportunity for deepening relationships with new customers through their checking account. Recognizing the importance of fee income to First Indiana's earnings, the Corporation expanded its production and sale of non-portfolio loans in 1998. Through the sale of residential and consumer loans in the secondary market, First Indiana earned $9.4 million pre-tax in non-interest income, a 92 percent increase over 1997 sales of $4.9 million. Many of the loans sold represent consumer loans originated through First Indiana's national network of loan originators, which services consumer loan brokers in 19 states. Total non-interest income was $23.8 million, a 32 percent increase over $18 million in 1997. The Corporation is exploring opportunities for heightened fee income in 1999. Again in 1998, the Bank experienced a favorable trend in loan charge-offs. Net loan charge-offs were $6.5 million for the year ended December 31, 1998, compared with $7.1 million in 1997. First Indiana's allowance for losses on loans and real estate owned at year-end 1998 was $26.2 million, or 150 percent of non-performing loans, compared with 122 percent one year earlier. Further enhancements in underwriting, including automated credit scoring and product design enhancements, will continue [This page contains a pie chart showing the following information] [Download Table] Composition of Loan Portfolio 1990 vs. 1998 ------------------------------------------- 1990 1998 ---- ---- Residential Mortgage 58% 35% Residential Construction 6 14 Commercial Real Estate 13 2 Consumer 23 38 Business 0 11
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3 to keep the Bank's charge-off experience at acceptable levels. In the fourth quarter of 1998, First Indiana established a new subsidiary, FirstTrust Indiana. An investment advisory and trust fund company, FirstTrust brings together First Indiana's reputation for local decisions and responsive service with the talent of nine experienced former executives of one of Indianapolis' leading bank trust departments. FirstTrust will enable First Indiana to diversify sources of non-interest income while providing a broader spectrum of products to retail and commercial customers. First Indiana's shareholders' equity amounted to $166 million at December 31, 1998, compared with $153 million one year earlier, well in excess of minimum requirements. Total assets grew to $1.8 billion at year-end 1998, up from $1.6 billion one year earlier. Of concern in 1998 was the continued growth in First Indiana's operating expenses. Non-interest expense grew 11% in 1998 to $45.8 million from $41.1 million in 1997. Much of the expense arose from higher commissions in connection with loan growth, but the increase was nevertheless disappointing. The entire management team has committed to the control of operating expenses in 1999. Recognizing the importance of technology in keeping First Indiana competitive while maintaining favorable operating expenses, a new Senior Vice President for Technology and Operations joined First Indiana on January 1, 1999. Edward E. Pollack comes to First Indiana with many years experience in operations and technology at the nation's largest guarantor of student loans. Ted will be able to add new dimensions to First Indiana's technology and operations, not only in connection with readiness for the Year 2000, but also in Internet banking applications and backroom efficiencies. The years ahead promise to be challenging, but the marketplace continues to create opportunities for First Indiana to set itself apart. We appreciate the confidence that you, our shareholders, have placed in First Indiana, and we look forward to another productive year. Sincerely, /s/Robert H. McKinney Robert H. McKinney Chairman and Chief Executive Officer /s/ Marni McKinney Marni McKinney Vice Chairman /s/Owen B. Melton, Jr. Owen B. Melton, Jr. President and Chief Operating Officer [The following sidebar text appears on this page] FIRSTTRUST INDIANA LAUNCHED IN 1998 During the fourth quarter of 1998, First Indiana Bank launched FirstTrust Indiana, a full-service investment advisory and trust company, with three lines of business: 1. Institutional portfolio management 2. Fiduciary and investment services for high net worth individuals 3. Estate administration FirstTrust was founded on the premise that Central Indiana investment management accounts have favored the following five attributes: nationally ranked investment performance, local decision making, local portfolio construction, experienced and highly qualified personnel, and competitive fees. To provide these important services to our customers, we have hired nine former NBD trust professionals with over 168 years' combined experience in this area. FirstTrust is an example of putting into action the Bank's goal for a holistic approach to our customers. As a bank, our desire is to provide full service financial services to the Indianapolis community, and thereby produce value for our shareholders. FirstTrust, working with our affiliate, The Somerset Group, and our banking centers will allow us to do just that.
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4 MISSION STATEMENT First Indiana Bank's mission is to deliver relationship-based service to the individuals and businesses in our community by building and preserving our brand. The First Indiana brand 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 and brought to them efficiently and responsively through superior service. Dialogue with our customers to give us direction for continuous improvement of the products and services we have designed for them. We build and preserve the First Indiana brand through six guiding principles: Local, Hands-on Involvement - Customers want to be called by name, given quick answers, and served by 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. Discipline - We keep our eye on the long term by choosing a course and sticking with it. We avoid today's fads in favor of tomorrow's long-lasting solutions. Efficiency - There are ways to be efficient other than by being the biggest. We use discipline, organization, and lack of bureaucracy to achieve even greater efficiencies. Knowledge-based Marketing - Knowing the customer is the key. By finding out as much as we can about our customers, we will know their long-term goals and can anticipate their needs, add value, and win their loyalty. Strategic Niches - As a smaller bank in a world of giants, we have an opportunity to be different by meeting the needs of unserved niches. We are able to design products and specialized services and deliver them to our customers quickly and flexibly. Our passion for constructive, customer-driven change has helped us home in on this segment, which has been all but ignored by big banks. People - A company is its people. Our goal is to create an environment that fosters 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. 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 community in which we live. [The following sidebar text appears on this page] THE TRIANGLE OF QUALITY An important symbol of how First Indiana approaches our business is the Joiner Triangle, developed by Brian L. Joiner in his book Fourth Generation Management. The Joiner Triangle combines three aspects: customer-defined quality, a scientific approach, and all-one-team. At the top of the triangle is customer defined quality. This requires various methods of gaining input from customer groups before developing products or methods. Next is the scientific approach, which dictates using data to make decisions, not only financial data, but also customer data. In addition, it involves developing effective methodology for determining needs, opportunities, success, and problems associated with product lines and procedures. The all-one-team approach reflects associates working together effectively, particularly between departments and divisions, to use customer and product data to cooperatively make changes and create esprit de corps. At First Indiana, the Joiner Triangle represents our transition to the true understanding of customer expectations and the scientific approach of meeting those expectations. The Bank has placed great emphasis on developing and utilizing data about our customers. This is critical to our success because it allows us to manage our processes and develop a deeper understanding of our customers and the financial services they need.
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5 MANAGEMENT AND ADVISORY BOARDS FIRST INDIANA BANK Robert H. McKinney* (46 years' service), Chairman, Execuitve Committee of the Board of Directors Marni McKinney* (15 years), Chairman Owen B. Melton, Jr.* (21 years), President and Chief Executive Officer David J. Gunderson (16 years), Vice President and Credit Review Officer Richard E. Walke (13 years), Director of Internal Audit David A. Butcher* (16 years), Secretary Retail Banking Group Marketing and Strategic Planning Group Kenneth L. Turchi (14 years), Senior Vice President Vice Presidents Scott E. Baker (1 year) Timothy J. Dell (6 years) Toni K. Dickover (4 years) Paul R. Wainman, Jr. (1 year) Freda F. Wampner (19 years) Central Indiana Advisory Boards Franklin Gilmore C. Abplanalp (28 years) Timothy J. Dell (6 years) Jerry B. Maguire (9 years) Pendleton Hugh W. Begley (30 years) Ralph E. Miller (20 years) David L. Puckett (20 years) L. Ann Reeder (7 years) Phillip R. Shirley, DVM (23 years) Westfield Manson E. Church (42 years) Toni K. Dickover (4 years) J. Joseph Edwards (6 years) James Gapenski (6 years) Jerry C. McMullan (30 years) Consumer Finance Group David A. Lindsey (16 years), Senior Vice President Vice Presidents Judi L. Cooper (3 years) J. Michael B. MacDonald (1 year) Connie L. Nelson (2 years) Michael W. Olsen (1 year) Market Vice Presidents Stephen E. Buchanan (5 years) Craig S. Hagen (1 year) Hector X. Morris (1 year) Toni R. Santo (5 years) J. Tracy Whitaker (11 years) Financial Management Group David L. Gray* (17 years), Senior Vice President, Chief Financial Officer, and Treasurer Vice President Michael T. McAninch (16 years), Controller Commercial and Mortgage Banking Group Merrill E. Matlock (15 years), Senior Vice President, and President, One Mortgage Corporation First Vice Presidents Larry L. Grubbs (4 years), Executive Vice President, One Mortgage Corporation Gregory P. O'Connor (7 years) Vice Presidents Daniel R. Dierlam (7 years) David J. Fitzgerald (8 years) Teresa E. Gray (1 year) Max E. Inglert (27 years) Beth A. Kouns (7 years) Charles B. Lauck (1 year) Michael D. Mathew (4 years) Larry J. Northenor (1 year) Michael S. Rigsby (2 years) Susan Kaiser-Rohr (4 years) Amanda K. St. Clair (3 years) Anthony P. Schlicte (1 year) William H. Shipley, Jr. (2 years) Stephen M. Spicer (2 years) Regional Vice Presidents N. Jeanne Bowling (15 years) Victoria H. Duckworth (16 years) Bonnie J. Fletcher (2 years) Darrel D. Thornton (27 years) *Officer--First Indiana Corporation
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6 MANAGEMENT AND ADVISORY BOARDS Market Vice Presidents William N. Snodgrass (16 years) Steven R. Waddell (4 years) Correspondent Banking Services Group Timothy J. O'Neill (29 years), Senior Vice President Technology and Operations Group Edward E. Pollack (1 year), Senior Vice President Vice Presidents John D. Ehrhart (21 years) John M. Huter (32 years) John V. Kirby (3 years) Denise L. Maines (11 years) Thomas M. Ryan (19 years) Mickey J. Walden (16 years) One Mortgage Corporation Vice Presidents Terry C. Barrett (3 years), Raleigh Office Wilber L. Harwell (3 years), Charlotte Office Thomas E. Helms (6 years), Orlando Office Market Vice Presidents Brian A. Carlson (5 years) Cynde G. Emory (10 years) Melia L. Favorite (2 years) Salvatore S. Rodriguez (2 years) Sylvia D. Stark (11 years) Amy F. Watts (2 years) Joseph A. Winsser (2 years) Donald R. Witter III (5 years) FIRSTTRUST INDIANA Ralph G. Nowak, President and Chief Investment Officer David G. King, Executive Vice President and Chief Operating Officer Robert H. Everitt, Executive Vice President and Trust Counsel James H. Hernandez, Senior Vice President, Estate Administration Christian L. Rieddle, Senior Vice President, Institutional Portfolio Management Robert Todd Musser, Senior Vice President, Personal Portfolio Management Mary Anne Smith, Vice President, Client Services and Technology EVANSVILLE DIVISION Maurice E. Mobley (46 years), Chairman of the Board Sherry F. Haynes (4 years), President Vice Presidents Sandra K. Potter (11 years) Wayne R. Stovall (32 years) Regional Vice President Patricia L. Griffin (2 years) Market Vice President Rick G. McDonald (8 years) Advisory Directors James O. Baxter (25 years) Sherry F. Haynes (4 years) Maurice E. Mobley (46 years) Paul G. Mosier (21 years) Lewis A. Plane (34 years) Ben M. Redden (27 years) Dr. David L. Rice (21 years) MOORESVILLE DIVISION Boyd C. Head (38 years), Chairman of the Board Charles D. Swisher (16 years), Vice Chairman of the Board Norman T. Lloyd (26 years), President Advisory Directors Robert S. Gregory (34 years) Boyd C. Head (38 years) Russell J. Lockwood (15 years) Eugene D. Perry (16 years) Charles F. Quillen (15 years) Charles D. Swisher (16 years) George Watson (26 years) RUSHVILLE DIVISION W. Richard Waggoner (33 years), Chairman of the Board E. Eugene Spurlin (29 years), Vice Chairman of the Board Garry E. Cooley (14 years), President Advisory Directors Dr. Frank H. Green (39 years) Richard K. Levi (11 years) Marjorie Shoemaker (18 years) E. Eugene Spurlin (29 years) W. Richard Waggoner (33 years)
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7 OUR YEAR IN REVIEW Nineteen ninety-eight was a year of extremes in the financial services industry. Interest rates fell to the lowest point in this half of the century. Mergers between mega-banks intensified, transforming big banks into giants. Financial services companies glutted the market, escalating competition for customers. The Internet assumed greater importance in the sale of financial services. Complicating the situation are the facts that financial services companies are alike in fundamental ways and that we are a relatively small player in a field of giants. Despite all that, we have demonstrated the vision and resolve to compete and win in this aggressive environment. This winning strategy revolves around several initiatives. First, we have chosen to fill specific niches as opposed to trying to provide all the services larger banks do. Second, we have chosen a path that emphasizes the collection of data about our customers and providing the experience and products they need based upon that data. Finally, we have made a conscious effort to remain independent and run by local management, with local decisions. As a result, we have stayed close to our customers and remained nimble in responding to them. This customer-focused approach allows us to build strong relationships that provide a foundation for success and growth. The Three "D's" In 1998, First Indiana articulated our guiding principles in a new Mission Statement printed at the beginning of this report. Central to the statement are the concepts of discovery, delivery, and dialogue. These are not platitudes, but concrete representations of how we approach our customers. Consistently, we spend time researching our customers to discover what they require from their financial services provider. This information allows us to develop innovative products and dictates the type of service used to deliver these products. But our customer-focused approach doesn't stop there. We have continual dialogue with our customers to determine adjustments or changes that are inevitable with changing consumer expectations. Each of our business units has built its strategies upon this customer-focused approach. Here are highlights of their accomplishments during 1998 as a result: Retail Banking Group In retail banking, our goal is to create a different experience for our customers from what they can get at another bank. In addition to our exemplary customer service, we take time to identify our customers' current and future needs, so that we can offer them the right products at the right time. This is done through [This page contains photographs of the following persons and these captions] BOARD OF DIRECTORS Robert H. McKinney Chairman and Chief Executive Officer, First Indiana Corporation (46 Years' Service) Marni McKinney Vice Chairman, First Indiana Corporation; President and Chief Executive Officer, The Somerset Group, Inc.(15 Years) Owen B. Melton, Jr. President and Chief Operating Officer, First Indiana Corporation (21 Years) H.J. Baker Chairman Emeritus, BMW Constructors, Inc. (32 Years) Gerald L. Bepko Vice President for Long-Range Planning, Indiana University, Chancellor, IUPUI (12 Years)
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8 face-to-face consultations that we call profiling, which helps us anticipate our customers' needs and follow up with them at the right time. The strategic use of customer data in direct mail campaigns further helps us broaden relationships by putting additional products in front of customers when they need them. We have found that deposit products - especially checking accounts - are the gateway to building share of customer. And as we develop relationships through consumer and business checking and savings products, we have the opportunity to determine other ways in which we can meet customers' needs. Our research shows that many consumers want a financial partner who will help them reach their goals. By focusing on customer needs rather than product sales, we have set ourselves apart from mass-market competitors who compete on volume and price. Guiding us in the selection of products and services we offer is the idea that if we can't build share of customer and do it profitably, we shouldn't do it. The addition of customer profitability measures in the second half of 1999 will help us make informed decisions about pricing and product strategies that build share of customer. These strategies produced strong results in retail banking in 1998. Checking accounts grew 20 percent, introducing the First Indiana experience to thousands of new customers. We look forward to deepening our relationships with these customers in the years ahead. Business Consumer Group Mergers in the Indianapolis market continue to present opportunities for this group. In particular, the merger of Bank One and First Chicago NBD created a window of opportunity for capitalizing on the current confusion in the minds of customers regarding the impact of these changes. These competitors have transferred small business accounts out of state, resulting in borrowers doing business via an 800 number. This has led to dissatisfaction with the level of service. We are keenly aware, however, that we are not the only institution trying to take advantage of this opportunity. Over 30 other bank and non-bank competitors in the market are looking for relationships in our market niche. Our challenge is to create value for the consumer through our understanding of their needs, so that we act as a financial partner as our customers' businesses grow. There are several main strategies we have used to overcome pricing wars and the myriad of competition. First, many customers perceive value beyond pricing and want to do business with a locally owned financial institution that responds quickly and efficiently with minimal bureaucracy. Second, our sales force is expert at the partnership-based approach to business lending. Third, we take the time to understand the customer's business through a proven information-gathering sales method and provide customers with solutions, not cookie-cutter products. Mortgage Banking Group Several environmental forces were at work in this line of business during 1998. Continued consolidations gave the giants more pricing power with investors who buy mortgage loans for sale in the secondary market. These large financial institutions spend heavily on technology, the benefits of which they extend to brokers as a strategy to capture more wholesale business. Brokers, on the other hand, increased pricing pressure on traditional lenders, even in specific niche products. Technology was an important factor in the Mortgage Banking Group's success in meeting these challenges. During 1998, First Indiana Bank invested in new technology to streamline processes for both retail and wholesale channels, and the operations area became proficient users of automated underwriting to approve more loans, faster. Although it is not First Indiana's goal to become the lowest cost provider, efficiencies gained from technology and continuous improvement helped maintain our competitive edge. Our competitors continued to compete on features and [This page contains photographs of the following persons and these captions] BOARD OF DIRECTORS Andrew Jacobs, Jr. United States Congressional Representative (retired); Adjunct Professor, IUPUI (2 Years) Phyllis W. Minott Chairman and Chief Executive Officer, Minott Motion Pictures, Inc. (23 Years) Michael L. Smith Senior Vice President, Finance, Anthem, Inc. (14 Years) John W. Wynne Director, Duke Realty Investments, Inc. (9 Years)
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9 prices that First Indiana can't or won't match and still maintain appropriate profitability. As a result, the competition has driven pricing lower in established markets. While combating this environment with strategies to maintain our presence in these markets, we countered by seeking additional opportunities in new markets where better pricing was available. For example, we opened offices in Portland, Oregon, and Phoenix, Arizona. These offices brought with them quality outstandings with fees and margins well above average. Consumer Finance Group In 1998, First Indiana's Consumer Finance Group relied upon several strategies to grow in this highly competitive market. Our two key strategies were aggressively marketing to our broker network throughout the country and the enlargement of our network. The addition of WestNet, which operates home equity offices in three states, was a major factor in network growth. With falling interest rates, we've seen many competitors and brokers pricing for survival in this tough market. First Indiana combated the pricing situation in two main ways. First, we instituted a line of credit recapture fee and capped waived closing costs to prevent consumers from jumping from teaser rate to teaser rate. Second, we offered first lien products redesigned for investor sales offering various rates and prepay penalty options. Internally, several changes helped this group prosper. Operations hours were increased to 7:00 p.m. for better service, particularly on the West Coast. Underwriter callbacks on all final turndowns were initiated. The use of e-mailing closing documents was greatly expanded to help us drive down costs. In addition, a re-engineering project was initiated in the fourth quarter to further improve our level of service. Correspondent Banking Services Group First Indiana's new Correspondent Banking Services Group was launched in 1998. The initial challenge was to take the time to listen to correspondent customers and determine the products and delivery channels they required. As a result of this, the unit enjoyed a profitable first year. Achievements included the sale of $125 million in residential loans while retaining the servicing. Sales and servicing is an excellent method for First Indiana to establish a relationship with these banks. We also formed an alliance with EDS for image processing of checks to broaden our offering to community banks. Correspondent Banking Services allows the Bank to leverage our investment in products, people, and technology through a customer group that has goals compatible with ours. The sale of residential and consumer loans allows us to maximize our origination capacity and efficiency. It also allows us to generate servicing income and utilize availability of investment funds of correspondents, while fulfilling their investment needs. Looking to the Future The real test of any organization comes not when the wind is at its back, but when times get tough. We believe the next several years will be challenging for First Indiana and our entire industry. Companies that stay on top will be forward-thinking, disciplined, and customer-focused. First Indiana is determined to be one of those companies. It is with pride and confidence that we look to the future and the rewards we will be able to provide all our stakeholders. [The following sidebar text appears on this page] SHARE OF CUSTOMER If we could summarize our guiding strategy into one idea, it would be to bring something different to our customers-something they can't get across the street. This is not an easy goal in the highly competitive environ- ment in which we operate. That's why we have developed a holistic approach to serving our customers. In other words, we work toward building share of customer. To build share of customer, we must look at the sum of our customers' financial needs and offer the products that will help them reach their goals. This can only be accomplished through dialogue with individuals and the development of relationships based on what we learn from them. Therefore, it is critical for us to form partnerships with our customers and work with them one-to-one. By adopting this strategy, we are able to add value to our shareholders without relying so much on market share or being the biggest. We also believe that putting the customer first will lead to greater profitability. Our goal is simple: earn 100% of every profitable customer's business.
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10 FINANCIALS First Indiana Corporation and Subsidiaries
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11 FINANCIAL REVIEW First Indiana Corporation posted yet another year of record earnings in 1998 while enjoying substantial asset growth. Net earnings were $19,147,000 for the year ended December 31, 1998, compared with $17,744,000 for the same period in 1997 and $13,704,000 for the year ended December 31, 1996. Reported net earnings for 1996 include a one-time after-tax charge of $4,016,000 for an industry-wide special assessment in the third quarter by the Federal Deposit Insurance Corporation to recapitalize the Savings Association Insurance Fund, which insures the Bank's customers' deposits. This one-time charge resulted in an ongoing reduction in deposit premiums beginning in 1997. Net earnings per share for 1998 were $1.44, compared with $1.36 in 1997 and $1.06 in 1996. Return on average equity for 1998 was 11.96 percent, compared with 12.16 percent in 1997 and 10.15 percent in 1996. 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 $.52 per share from $.48 per share, beginning with the first quarterly dividend payment on March 6, 1999. The Board authorized a six-for-five stock dividend effective March 6, 1998 for shareholders of record as of February 19, 1998. Dividends per common share (adjusted for stock dividends and splits) were $.48 in 1998, $.40 in 1997 and $.38 in 1996. All per-share amounts in the 1998 Annual Report have been adjusted for all stock dividends and splits. First Indiana Corporation is a nondiversified, unitary savings and loan holding company. First Indiana 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. Residential mortgage loan originations amounted to $744 million, compared with $373 million in 1997. The Bank continued its efforts to consolidate and centralize origination and servicing processes in its Commercial and Mortgage Banking Group. Additionally, the Bank aggressively pursued alternative delivery channels for its residential loans, such as wholesale outlets and a telemarketing call center. Originations in home equity lending were $450 million, compared with $276 million in 1997. A national network of originators, coupled with the call center, allowed the Bank to capitalize on alternative delivery channels for orginations. The Bank also aggressively pursued originations of products with loan-to-value ratios greater than 80 percent for sale into the secondary market. Secondary market gains on the sale of both first mortgage and home equity loans contributed significantly to 1998 earnings. The Bank continued to develop relationship banking in construction lending, with originations of $182 million, compared with $153 million last year. A variety of unique products and the development of new markets throughout the United States contributed to construction loan growth. The Bank's strategy of targeting the business-related segments of the market continued to provide asset and earnings growth in 1998. Originations in this segment totaled $126 million in 1998. Business loans outstanding increased to $179 million at year-end 1998 from $124 million one year earlier. The significant growth in originations in these four core areas translated into growth on the balance sheet. At December 31, 1998, home equity, construction, and residential loans outstanding were $532 million, $216 million and $566 million, compared with $528 million, $156 million and $501 million one year earlier. The net loan loss provision in 1998 was $9,780,000, compared with $10,700,000 in 1997 and $10,794,000 in 1996. By continuing to provide for loan losses in a manner consistent with the higher risk associated with, and losses inherent in, business, construction, and home equity lending, the Bank's loan loss allowance was $25,700,000 at year-end, or 150 percent of non-performing loans, compared with $22,414,000, or 122 percent of non-performing loans, at December 31, 1997. Total assets increased 11.3 percent to $1,795,990,000 at year-end, compared with $1,613,405,000 at December 31, 1997. Shareholders' equity increased to $165,970,000 at December 31, 1998, an eight percent increase over the December 31, 1997 level of $153,036,000. The tangible and core capital of the Bank was $139,992,000 or 7.80 percent of assets, which exceeded regulatory minimums by $113,077,000 and $86,161,000 at year-end 1998. Average shareholders' equity to average assets equaled 9.33 percent and 9.66 percent for 1998 and 1997. [This page contains photographs of the following persons and these captions] David L. Gray Senior Vice President Financial Management Group (17 Years' Service) David A. Lindsey Senior Vice President Consumer Finance Group (16 Years) Merrill E. Matlock Senior Vice President Commercial and Mortgage Banking Group (15 Years) Timothy J. O'Neill Senior Vice President Correspondent Banking Services Group (29 Years) Edward E. Pollack Senior Vice President Technology and Operations Group (1 Year) Kenneth L. Turchi Senior Vice President Retail Banking, Marketing and Strategic Planning Group (14 Years)
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12 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 $62,754,000 in 1998, compared with $62,979,000 in 1997 and $61,683,000 in 1996. Net Interest Margin First Indiana's net interest margin is the clearest indicator of its ability to generate core earnings. The margin was 3.85 percent for the year ended December 31, 1998, compared with 4.36 percent in 1997 and 4.37 percent in 1996. 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, 1998 was 3.16 percent, compared with 3.71 percent in 1997 and 3.70 percent in 1996. 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 69 basis points to the margin in 1998, compared with 65 and 67 basis points in 1997 and 1996. The following table analyzes First Indiana's net interest margin and the components which contributed to it: [Enlarge/Download Table] 1998 1997 1996 ------------------------------------------------------------------------------------- Average Average Average (Dollars in Thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate ------------------------------------------------------------------------------------- Assets Earning Assets Federal Funds Sold $ 9,469 $521 5.50% $12,739 $695 5.46% $14,782 $796 5.38% Investments 124,756 7,465 5.98 113,037 6,818 6.03 115,836 6,887 5.95 Mortgage-Backed Securities 32,446 2,065 6.36 35,130 2,446 6.96 42,958 2,986 6.95 Loans Receivable (1) 1,465,288 125,783 8.58 1,284,212 117,371 9.14 1,237,036 114,799 9.28 ------------------ ------------------ ------------------ Total Earning Assets 1,631,959 135,834 8.32 1,445,118 127,330 8.81 1,410,612 125,468 8.89 Other Assets 83,056 ------- 65,375 ------- 74,904 ------- --------- --------- --------- Total Assets $1,715,015 $1,510,493 $1,485,516 ========= ========= ========= Liabilities and Share- holders' Equity Interest-Bearing Liabilities Deposits: NOW and Money Market Checking $ 84,891 1,951 2.30 $ 84,761 1,908 2.25 $ 88,633 2,531 2.86 Passbook and Statement Savings 330,917 15,225 4.60 302,635 13,881 4.59 284,471 12,954 4.55 Money Market Savings 28,819 990 3.44 30,416 1,001 3.29 17,481 575 3.29 Jumbo Certificates 184,332 10,771 5.84 113,632 6,583 5.79 111,318 6,370 5.72 Fixed-Rate Certificates 464,839 25,998 5.59 470,853 26,563 5.64 524,064 29,647 5.66 Federal Home Loan Bank Advances 270,491 15,348 5.67 219,685 12,288 5.59 185,551 10,706 5.77 Short-Term Borrowings 52,922 2,797 5.29 39,018 2,127 5.45 18,518 1,002 5.41 ------------------ ------------------ ------------------ Total Interest-Bearing Liabilities 1,417,211 73,080 5.16 1,261,000 64,351 5.10 1,230,036 63,785 5.19 Other Liabilities 137,737 ------ 103,566 ------ 120,501 ------ Shareholders' Equity 160,067 145,927 134,979 --------- --------- --------- Total Liabilities and Shareholders' Equity $1,715,015 $1,510,493 $1,485,516 ========= ========= ========= Net Interest Income/Spread $62,754 3.16% $62,979 3.71% $61,683 3.70% ====== ===== ====== ===== ====== ===== Net Interest Margin 3.85% 4.36% 4.37% ===== ===== ===== (1) Included in loans receivable are loans held for sale totaling $98,588, $34,217, and $42,872 in 1998, 1997, and 1996, and non-accrual loans. [This page contains the following bar graph] [Download Table] Net Interest Income (Dollars in Thousands) ------------------------------------------ 1994 49,229 1995 58,044 1996 61,683 1997 62,979 1998 62,754
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13 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. [Enlarge/Download Table] 1998 Compared with 1997 1997 Compared with 1996 Increase (Decrease) Increase (Decrease) Due to Change in Due to Change in ------------------------------------------------------------------------ Net Net (Dollars in Thousands) Rate Volume Other Change Rate Volume Other Change ------------------------------------------------------------------------ Interest Income Loans $(7,132)$16,550 $(1,006) $ 8,412 $(1,740)$ 4,378 $ (66) $ 2,572 Investments (54) 707 (6) 647 100 (166) (3) (69) Mortgage-Backed Securities (210) (187) 16 (381) 5 (544) (1) (540) Federal Funds Sold 6 (178) (2) (174) 10 (110) (1) (101) --------------------------------- --------------------------------- (7,390) 16,892 (998) 8,504 (1,625) 3,558 (71) 1,862 --------------------------------- --------------------------------- Interest Expense Deposits NOW and Money Market Checking 40 3 - 43 (536) (110) 23 (623) Passbook and Statement Savings 43 1,297 4 1,344 94 827 6 927 Money Market Savings 44 (53) (2) (11) 0 426 0 426 Jumbo Certificates 57 4,096 35 4,188 79 132 2 213 Fixed-Rate Certificates (229) (339) 3 (565) (82) (3,010) 8 (3,084) Federal Home Loan Bank Advances 177 2,842 41 3,060 (327) 1,969 (60) 1,582 Short-Term Borrowings (65) 758 (23) 670 7 1,109 9 1,125 --------------------------------- --------------------------------- 67 8,604 58 8,729 (765) 1,343 (12) 566 --------------------------------- --------------------------------- Net Interest Income $(7,457) $8,288 $(1,056) $ (225) $ (860) $2,215 $(59) $1,296 ================================= =================================
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14 Non-Interest Income The following table shows First Indiana's non-interest income for the past three years. [Enlarge/Download Table] Years Ended December 31, ---------------------------------------------------------- (Dollars in Thousands) Increase (Decrease) Increase (Decrease) ---------------------------------------------------------- 1998 Amount Percent 1997 Amount Percent 1996 ----------------------------------------------------------- Sale of Investments $ 395 $ 178 82.1% $ 217 $ (64) (22.8)%$ 281 Sale of Loans 9,786 4,854 98.4 4,932 1,857 60.4 3,075 Sale of Subsidiary - - - - (1,165) (100.0) 1,165 Dividends on FHLB Stock 1,097 42 4.0 1,055 22 2.1 1,033 Loan Servicing Income 1,635 (1,132) (40.9) 2,767 (141) (4.8) 2,908 Loan Fees 3,092 734 31.1 2,358 56 2.4 2,302 Insurance Commissions 106 (132) (55.5) 238 (424) (64.0) 662 Accretion of Negative Goodwill 948 - - 948 - - 948 Deposit Product Fee Income 3,075 429 16.2 2,646 53 2.0 2,593 Other 3,639 795 28.0 2,844 (37) (1.3) 2,881 ---------------- ---------------- -------- $23,773 $5,768 32.0 $18,005 $ 157 0.9 $17,848 ================ ================ ======== The principal increase in non-interest income in 1998 occurred in the gains realized by the Bank in the sale of residential and home equity loans into the secondary market. Pre-tax gains during 1998 were $6,388,000 on the sale of $168 million of fixed-rate home equity loans, while residential gains amounted to $3,031,000 from sales of $434 million of loans. During 1998, the Bank identified and sold $187 million in out-of-market loan servicing at a gain of $1,438,000, a component of other non-interest income. Loan servicing income declined in 1998 as a result of accelerated amortization of mortgage servicing rights. The accelerated amortization resulted from higher than anticipated prepayments on the underlying residential mortgage loans. Insurance commission income decreased from 1997 and 1996 due to the sale of the Bank's investment and insurance subsidiaries, One Investment Corporation and One Insurance Agency, to The Somerset Group, Inc., an affiliate of the Bank. This sale resulted in a pre-tax gain of $1,165,000 in 1996.
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15 Non-Interest Expense The following table describes First Indiana's non-interest expense for each of the past three years. [Enlarge/Download Table] Years Ended December 31, -------------------------------------------------------------- (Dollars in Thousands) Increase (Decrease) Increase (Decrease) ---------------------------- ------------------------------------ 1998 Amount Percent 1997 Amount Percent 1996 ---------------------------- ------------------------------------ Salaries and Benefits $33,378 $ 7,442 28.7 % $25,936 $ 1,713 7.1 % $24,223 Capitalized Salaries and Benefits (10,677) (4,657) (77.4) (6,020) 109 1.8 (6,129) Net Occupancy 2,893 41 1.4 2,852 (235) (7.6) 3,087 Deposit Insurance 691 (2) (0.3) 693 (8,493) (92.5) 9,186 Real Estate Owned Operations - Net 858 206 31.6 652 54 9.0 598 Equipment 5,042 350 7.5 4,692 184 4.1 4,508 Office Supplies and Postage 2,032 183 9.9 1,849 (220) (10.6) 2,069 Other 11,539 1,089 10.4 10,450 739 7.6 9,711 ---------------- ---------------- -------- $45,756 $ 4,652 11.3 $41,104 $(6,149) (13.0) $47,253 ================ ================ ======== In 1996, the FDIC levied a special deposit insurance assessment on all savings institutions to recapitalize its Savings Association Insurance Fund ("SAIF"), which insures the Bank's deposits. First Indiana incurred a one-time pre-tax charge of $6,749,000 to comply with this assessment. This one-time charge reduced First Indiana's deposit insurance premiums 93 percent in 1997. Salary expenses increased in 1998 in order to maintain pace with the increased loan production levels.
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16 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 potential future losses. 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. The Investment 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 $19.9 million at December 31, 1998 from $22.8 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. 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 $10.5 million in potential problem loans at December 31, 1998. Of this amount, $8 million consisted of loans to residential builders and $2.5 million represented loans to business 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 with loan-to-value ratios of 80 percent or less. The business loans are also collateralized with real estate. [This page contains bar graphs showing the following information] [Download Table] Loan and REO Loss Allowances Loan Loss Allowance to (Dollars in Thousands) Non-Performing Loans -------------------------- ----------------------- 1994 13,741 1994 57.72 1995 17,300 1995 67.91 1996 19,311 1996 84.19 1997 22,897 1997 121.60 1998 26,200 1998 149.63 Bank Capital/Assets Checking Deposits (Dollars in Thousands) ------------------- ---------------------------------------- Actual Required ------ -------- 1994 163,023 1995 177,804 7.80% 1.50% 1996 187,760 7.80 3.00 1997 191,996 11.24 8.00 1998 231,348
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17 [Download Table] Non-Performing Assets December 31, ------------------------------------------ (Dollars in Thousands) 1998 1997 1996 1995 1994 -------- -------- ------------------------ Non-Accrual Loans Residential Mortgage $4,268 $3,718 $3,849 $2,399 $1,720 Residential Construction 4,714 6,059 4,573 2,229 2,212 Commercial Real Estate - 99 - 1,514 105 Business 1,019 254 166 428 331 Consumer 7,175 8,302 6,792 8,120 6,603 -------- -------- ------------------------ Total Non-Accrual Loans 17,176 18,432 15,380 14,690 10,971 -------- -------- ------------------------ Other Impaired Loans - - - 3,306 - Restructured Loans - - 6,913 5,909 10,730 Real Estate Owned 2,704 4,390 4,828 2,943 7,012 Other Repossessed Assets - - - 317 364 ------------------------------------------- Total Non-Performing Assets $19,880 $22,822 $27,121 $27,165 $29,077 =========================================== The following schedule is a summary of REO, net of the allowance for REO losses. [Download Table] Real Estate Owned (Dollars in Thousands) December 31, ---------------------------------------- 1998 1997 1996 1995 1994 ------- ------- ----------------------- Residential Mortgage $ 291 $ 858 $ 371 $ 430 $1,427 Residential Construction 563 749 915 713 791 Commercial Real Estate 154 95 95 94 3,503 Consumer 1,696 2,688 3,447 1,706 1,291 Allowance for REO Losses (500) (483) (543) (1,066) (1,216) ------------------------------------------- Real Estate Owned-Net $2,204 $3,907 $4,285 $1,877 $5,796 =========================================== Summary of Loan Loss Experience The following is a summary of activity in First Indiana's allowance for loan losses for the periods indicated. The loan loss provision since 1996 has increased in response to significant growth in the Bank's targeted portfolios of home equity, residential construction, and business loans. While management believes that these portfolios have strong credit quality, it recognizes the increased risk of such portfolios compared to traditional residential portfolios, and has increased the loan loss provision accordingly. [Enlarge/Download Table] Summary of Loan Loss Experience Years Ended December 31, -------------------------------------------------- (Dollars in Thousands) 1998 1997 1996 1995 1994 ----------------------------------------------------- Balance of Allowance for Loan Losses at Beginning of Year $22,414 $18,768 $16,234 $12,525 $11,506 Charge-Offs Residential Mortgage (91) (83) (9) (34) (82) Residential Construction (658) (1,190) (360) (231) (425) Commercial Real Estate (93) (75) - (1,139) (167) Consumer (6,934) (7,210) (9,592) (2,969) (2,181) Business (15) (528) - (61) (194) ----------- ----------- ----------- ----------------- Total Charge-Offs (7,791) (9,086) (9,961) (4,434) (3,049) ----------- ----------- ----------- ----------------- Recoveries Residential Mortgage 2 - 26 6 3 Residential Construction 270 40 69 16 - Commercial Real Estate - 727 135 13 - Consumer 986 1,261 1,429 190 165 Business 39 4 42 18 - ----------- ----------- ----------- ----------------- Total Recoveries 1,297 2,032 1,701 243 168 ----------- ----------- ----------- ----------------- Net Charge-Offs (6,494) (7,054) (8,260) (4,191) (2,881) Provision for Loan Losses 9,780 10,700 11,815 7,900 3,900 Recapture of Loan Loss Provision Due to Auto Portfolio Sale - - (1,021) - - Balance of Allowance for Loan Losses at ----------- ----------- ----------- ----------------- End of Year 25,700 22,414 18,768 16,234 12,525 ----------- ----------- ----------- ----------------- Balance of REO Loss Allowance at End of Year 500 483 543 1,066 1,216 ----------- ----------- ----------- ----------------- Balance of Loan and REO Loss Allowance at End of Year $26,200 $22,897 $19,311 $17,300 $13,741 ====================================================== The net charge-offs of $6.5 million, $7.1 million, and $8.3 million in 1998, 1997, and 1996, respectively, reflect both the significant increase in home equity loans outstanding and the adoption of a more conservative charge-off policy. The Bank writes down consumer loans at the date of foreclosure and charges off the entire balance of home equity loans greater than 120 days delinquent
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18 [Enlarge/Download Table] Summary of Loan Loss Experience (continued) Ratio of Net Charge-Offs to Average Loans Outstanding 0.44% 0.55% 0.67% 0.35% 0.29% Ratio of Allowance for Loan Losses to Loans Receivable 1.66% 1.63% 1.52% 1.28% 1.15% Ratio of Total Loan and REO Loss Allowance to Non-Performing Assets 131.79% 100.33% 71.20% 63.68% 47.26% Ratio of Allowance for Loan Losses to Non-Performing Loans 149.63% 121.60% 84.19% 67.91% 57.72% 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. Indirect automobile loans greater than 120 days delinquent are charged off in full. If collection efforts result in a subsequent recovery of all or a portion of the charged-off amount, the Bank recognizes the recovery at the time of receipt. The Bank's loan loss provision of $9.8 million and $10.7 million in 1998 and 1997, respectively, reflects the charge-off policy discussed above and a decrease in delinquencies in the Bank's portfolio of home equity and automobile loans. During 1996, the Bank completed the sale of its indirect automobile loan portfolio of approximately $32,756,000 at a loss of $898,000, and recaptured $1,021,000 of its loan loss provision as a result of this sale. The allowance for loan losses increased to $25,700,000 at December 31, 1998, or 150 percent of the non-performing loans at year-end. Capital Resources and Liquidity Capital At December 31, 1998, First Indiana's shareholders' equity was $165,970,000, or 9.24 percent of total assets, compared with $153,036,000, or 9.49 percent of total assets, at December 31, 1997. In July 1996, the Corporation's Board of Directors authorized the repurchase from time to time of up to an additional $5,000,000 of the Corporation's outstanding common stock. At December 31, 1998, the Corporation had repurchased 809,608 shares of its common stock, at a cost of $8,682,000, or six percent of its shares outstanding. Allocation of Loan Loss Allowance The following table presents an allocation of First Indiana's allowance for loan losses at the dates indicated. [Enlarge/Download Table] Allocation of Loan Loss Allowance (Dollars in Thousands) December 31, ----------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------------- ----------------------------------------------------------------------- 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 ----------------- ----------------------------------------------------------------------- Balance At End of Period Applicable to: Residential Mortgage Loans $ 609 34.6% $ 588 36.7% $ 632 34.9% $ 426 33.3% $ 376 36.4% Residential Construction Loans 4,613 14.0 3,663 11.4 3,270 11.2 2,928 11.2 2,110 10.7 Commercial Real Estate Loans 298 2.1 330 2.9 777 3.7 1,095 4.4 2,219 5.6 Consumer Loans 9,508 37.7 9,706 39.9 9,042 42.7 7,808 45.4 5,375 43.5 Business Loans 2,727 11.6 2,008 9.1 1,809 7.5 820 5.7 519 3.8 Unallocated 7,945 - 6,119 - 3,238 - 3,157 - 1,926 - ----------------- ----------------- ----------------- ----------------- ------------------ $25,700 100.0% $22,414 100.0% $18,768 100.0% $16,234 100.0% $12,525 100.0% ================= ================= ================= ================= ===============
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19 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 $1,227,918,000 at December 31, 1998 and $1,107,555,000 at December 31, 1997. 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, is likely to increase because of expected growth. 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 director of 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 at December 31, 1998 was 8.00 percent. Impact of Accounting Standards Not Yet Adopted In June 1998, FASB issued Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities". The Statement is effective for fiscal years beginning after June 15, 1999, with earlier application allowed. Management is currently assessing the impact of this Statement on the financial condition and results of operations of the Corporation upon adoption. In October 1998, FASB issued Statement of Financial Accounting Standard No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." This Statement is effective for fiscal quarters beginning after December 15, 1998, with earlier application permitted. Management has determined the impact of this Statement on the financial condition and results of operations of the Corporation to be immaterial. Year 2000 Compliance The Bank is required by the Federal Financial Institutions Examination Council ("FFIEC") to assess both the Bank's and its vendors' ability to be Year 2000 ready by December 31, 1998 for all mission critical systems. The Year 2000 issue refers to shortcomings which exist in some current computer hardware and software that preclude the correct calculation of date-sensitive information from, into, and between the years 1999 and 2000, including leap year calculations. Because the Bank relies heavily on technology for transaction processing and interest calculation, preparing for the Year 2000 is a critical focus of the Bank's resources. In addition to testing the technology, the Bank also has embedded systems in elevators, alarm systems, and HVAC units which must be checked for Year 2000 readiness. The Bank has assembled a team of associates which meets regularly to lead the Bank's Year 2000 readiness efforts. All hardware and software vendors, as well as significant other vendors and borrowers, have been identified and contact has been initiated with these individuals or companies. The Bank has an inventory of known potential Year 2000 readiness issues, and has developed action plans and contingency plans for each issue. During 1998, the Bank tested systems for the purpose of validating Year 2000 readiness, began upgrading or replacing existing hardware, software, or embedded systems, and implementing contingency plans in the event a particular vendor or borrower will not assist the Bank in its Year 2000 efforts. The team is monitoring significant vendor and borrower relationships to ensure that no issues arise which cause management to question the ability of the vendor or borrower to adequately prepare for the Year 2000, and thus possibly affect the Bank's own ability to conduct business beyond the century change. The OTS is conducting quarterly audits of all financial institutions to assess Year 2000 readiness in accordance with FFIEC guidelines. The Bank uses an external data services bureau which provides most of the automated processing of First Indiana's customer transactions. Proxy testing is being conducted with the service bureau. The service bureau is also being examined by the OTS. The Bank completed an upgrade of all personal computers in the fourth quarter at a cost approximating $550,000. Although management sees no internal impact or risk to the Bank's ability to operate in the 21st Century, it is not possible to assess the financial impact of lost revenue due to Year 2000 issues or future expenditures due to external factors at this time. As the June 1999 compliance date approaches for non-mission critical applications, First Indiana will maintain the Year 2000 situation as a priority to provide a smooth transition for customers and prevent unnecessary risk to its shareholders.
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20 Interest-Rate Sensitivity The following table shows First Indiana's interest-rate sensitivity at December 31, 1998 and 1997. [Enlarge/Download Table] (Dollars in Thousands) Rate Sensitivity by Period of Maturity or Rate Change At December 31, 1998 -------------------------------------------------------------------------- Percent Over 180 Over One Over of Within Days to Year to Five Rate Balance Total 180 Days One Year Five Years Years -------------------------------------------------------------------------- Interest-Earning Assets Investment Securities and Other 6.04%$ 125,791 7.40 % $ 47,373 $ 12,621 $ 65,797 $ -- Loans Receivable (1) Mortgage-Backed Securities 4.95 29,680 1.75 6,751 4,782 18,147 -- Residential Mortgage Loans 7.24 536,124 31.54 293,454 74,743 150,609 17,318 Residential Construction Loans 8.48 216,059 12.71 194,695 10,816 10,548 -- Commercial Real Estate Loans 8.93 32,602 1.92 9,396 4,738 14,463 4,005 Business Loans 8.87 178,933 10.53 113,419 2,373 35,728 27,413 Consumer Loans 9.49 580,525 34.15 250,081 55,429 231,478 43,537 ----------------------------------------------------------------- 8.24 $1,699,714 100.00 % 915,169 165,502 526,770 92,273 ===================== ---------------------------------------- Interest-Bearing Liabilities Deposits Demand Deposits (2) 1.64 $ 86,414 5.84 % -- -- -- 86,414 Passbook Deposits (3) 3.00 41,233 2.78 2,241 1,008 8,064 29,920 Money Market Savings 4.54 351,387 23.74 351,387 -- -- -- Jumbo Certificates 5.49 171,171 11.56 86,388 43,076 41,707 -- Fixed-Rate Certificates 5.40 448,670 30.31 146,066 126,216 176,388 -- ---------------------------------------------------------------- 4.76 1,098,875 74.23 586,082 170,300 226,159 116,334 Borrowings FHLB Advances 5.44 327,247 22.11 142,000 10,000 170,000 5,247 Short-Term Borrowings 4.81 54,219 3.66 54,219 -- -- -- ---------------------------------------------------------------- 4.91 1,480,341 100.00 % 782,301 180,300 396,159 121,581 ======== Net - Other (4) 219,373 219,373 ---------- ---------------------------------------- Total $1,699,714 782,301 180,300 396,159 340,954 ========== ---------------------------------------- Rate Sensitivity Gap $ 132,868 $ (14,798)$ 130,611 $ (248,681) =========================================== December 31, 1998 Gap Cumulative Rate- Sensitivity Gap $ 132,868 118,070 $ 248,681 ================================ Percent of Total Interest-Earning Assets 7.82 % 6.95 % 14.63% ================================ December 31, 1997 Gap Cumulative Rate- Sensitivity Gap $ (10,423)$ (3,148)$ 167,284 ================================ Percent of Total Interest-Earning Assets (0.68)% (0.20)% 10.89% ================================ (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 $66,469 of loans held for sale. Included in Consumer Loans are $45,929 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.
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21 Asset/Liability Management 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 examines the Bank's 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, 1998, First Indiana's six-month and one-year cumulative gap stood at 7.82 percent and 6.95 percent of total interest-earning assets. This compares with a negative 0.68 percent and a negative 0.20 percent at December 31, 1997. This means that 7.82 and 6.95 percent of First Indiana's assets will reprice within six months and one year without a corresponding repricing of the liabilities funding them. The 1998 gap position represents funding choices made by the Bank late in the year and is not indicative of future anticipated gap position. Management intends to maintain a relatively neutral gap position to manage the volatility of earnings. Financial Condition First Indiana's total assets at December 31, 1998 were $1,795,990,000, compared with $1,613,405,000 at December 31, 1997. Loans receivable stood at $1,518,543,000 at year-end 1998, compared with $1,348,529,000 one year earlier. The composition of the Bank's loan portfolio continued to change in 1998, as the Bank added higher-yielding loans to the balance sheet through the origination of home equity and residential construction, and business loans. Residential loans outstanding amounted to $532,123,000 at December 31, 1998, compared with $500,818,000 in 1997. This growth occurred through the Bank's employment of alternative delivery channels, such as a call center, wholesale lending, and the development of strategic alliances with builders and realtors. Consumer loans outstanding were $580,525,000 at the end of 1998, compared with $548,016,000 one year earlier. This increase primarily represents the Bank's efforts to build a portfolio of loans available for sale to the secondary market. Construction loans outstanding increased to $216,059,000, compared with $155,680,000 at the end of 1997. The Bank focused on offering new products to builders and customers in 1998 in order to develop a multi-faceted relationship. Total loan sales in 1998 amounted to $608,243,000, compared with $217,132,000 in 1997 and $332,021,000 in 1996. The Bank's loan servicing portfolio was $908,582,000 at December 31, 1998, compared with $969,089,000 and $1,057,731,000 at December 31, 1997 and 1996. The servicing portfolio provides a source of fee income, but is subject to fluctuations as rates fall and serviced loans pay off. 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 December 31, 1998, management believes that a 100 basis point increase or decrease in interest rates over a 12 month period would result in a 9.8 percent increase and a 9.5 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 residential fixed-rate mortgage loans at a specified yield in order to limit market risk associated with its pipeline of residential mortgage loans held for sale and commitments to fund residential mortgage loans. Market risk arises from the possible inability of either party to comply with the contract terms. The Bank designates these forward sales contracts as hedges. To qualify as a hedge, the forward sales contract must be effective in reducing the market risk of the identified anticipated residential mortgage loan sale which is probable to occur. Effectiveness is evaluated on an ongoing basis through analysis of the residential mortgage loan pipeline position. Commitments under these forward sales contracts and the underlying residential mortgage loans are valued, and the net position is carried at the lower of cost or market. Unrecognized gains and losses on these forward sales contracts are generally immaterial and are charged to current earnings as an adjustment to the gain or loss on residential mortgage loan sales when realized, when the contract matures, or is terminated.
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22 Five Year Summary of Selected Financial Data [Enlarge/Download Table] First Indiana Corporation and Subsidiaries At December 31, -------------------------------------------------- (Dollars in Thousands, 1998 1997 1996 1995 1994 Except Per Share Data) -------- -------------------------------------------- Selected Financial Condition Data Total Assets $1,795,990 $1,613,405 $1,496,421 $1,541,843 $1,408,629 Loans Receivable -- Net 1,518,543 1,348,529 1,215,550 1,250,726 1,078,494 Mortgage-Backed Securities 29,680 38,279 36,412 49,498 69,597 Investments 113,291 111,400 106,895 102,656 149,529 Total Deposits 1,227,918 1,107,555 1,095,486 1,136,980 1,031,911 Federal Home Loan Bank Advances 327,247 s 257,458 s 215,466 214,781 201,155 Short-Term Borrowings 54,219 75,751 30,055 38,642 35,922 Shareholders' Equity 165,970 153,036 138,658 129,297 120,712 For the Year Ended December 31, 1998 1997 1996 1995 1994 Selected Operations Data Interest Income $135,834 $127,330 $125,468 $124,061 $97,572 Interest Expense 73,080 64,351 63,785 66,017 48,343 Provision for Losses on Loans and Real Estate Owned, Net 9,780 10,700 10,794 7,900 3,900 Net Earnings 19,147 17,744 13,704 17,267 10,636 Net Interest Margin During Year 3.85% 4.36% 4.37% 4.12% 3.96% Basic Earnings Per Common Share $ 1.50 $ 1.40 $ 1.10 $ 1.39 $ .82 Diluted Earnings Per Common Share 1.44 1.36 1.06 1.34 .80 Dividends Declared Per Common Share .48 .40 .38 .32 .28 Selected Ratios Net Earnings to: Average Total Assets 1.12% 1.17% .92% 1.16% .80% Average Shareholders' Equity 11.96 12.16 10.15 14.03 9.08 Average Shareholders' Equity to Average Total Assets 9.33 9.66 9.09 8.28 8.83 Dividend Payout Ratio 31.99 28.53 33.89 22.45 35.23 [This page contains the bar graphs showing the following information] [Download Table] Construction Loans Outstanding Assets (Dollars in Thousands) (Dollars in Thousands) ----------------------------- ----------------------------- 1994 1,408,629 1994 117,170 1995 1,541,843 1995 142,299 1996 1,496,421 1996 138,135 1997 1,613,405 1997 155,680 1998 1,795,990 1998 216,059 Home Equity Loans Outstanding Loan Servicing Portfolio (Dollars in Thousands) (Dollars in Thousands) ----------------------------- ------------------------ 1994 328,594 1994 802,191 1995 485,032 1995 1,130,209 1996 498,739 1996 1,057,731 1997 528,185 1997 969,089 1998 565,932 1998 908,582
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23 [Enlarge/Download Table] Consolidated Balance Sheets First Indiana Corporation and Subsidiaries December 31, ------------------------ (Dollars in Thousands, Except Share Data) 1998 1997 -------------- ----------- Assets Cash $ 45,153 $ 34,231 Federal Funds Sold 12,500 16,000 -------------- ----------- Total Cash and Cash Equivalents 57,653 50,231 Investments Available For Sale (Notes 2 and 9) 113,291 106,095 Investments Held to Maturity (Market Value of $5,419) (Notes 2 and 9) -- 5,305 Mortgage-Backed Securities Available for Sale (Notes 3 and 9) 29,680 17,077 Mortgage-Backed Securities Held to Maturity--Net (Market Value of $21,549) (Notes 3 and 9) -- 21,202 Loans Held for Sale 112,398 57,518 Loans Receivable 1,431,845 1,313,425 Less Allowance for Loan Losses (25,700) (22,414) ---------------- ------------- Loans Receivable--Net(Notes 4,5,8, and 12) 1,518,543 1,348,529 Premises and Equipment (Note 6) 18,546 13,947 Accrued Interest Receivable 11,680 11,322 Real Estate Owned--Net (Note 5) 2,204 3,907 Prepaid Expenses and Other Assets (Note 10) 44,393 35,790 ------------------------------- Total Assets $1,795,990 $1,613,405 =============================== Liabilities and Shareholders' Equity Liabilities Non-Interest-Bearing Deposits $ 129,043 $ 90,612 Interest-Bearing Deposits 1,098,875 1,016,943 ---------------- ------------- Total Deposits (Note 7) 1,227,918 1,107,555 Federal Home Loan Bank Advances (Note 8) 327,247 257,458 Short-Term Borrowings (Note 9) 54,219 75,751 Accrued Interest Payable 2,646 2,715 Advances by Borrowers for Taxes and Insurance 1,958 1,419 Other Liabilities 12,242 10,733 ---------------- ------------- Total Liabilities 1,626,230 1,455,631 ---------------- ------------- Negative Goodwill 3,790 4,738 ---------------- ------------- 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; 13,512,902 and 13,374,799 Shares Issued and Outstanding, Including Shares in Treasury 135 134 Paid-In Capital in Excess of Par 37,029 35,318 Retained Earnings 137,063 123,699 Accumulated Other Comprehensive Income 425 325 Treasury Stock - At Cost, 809,608 and 706,608 Shares in 1998 and 1997 (8,682) (6,440) --------------- ------------ Total Shareholders' Equity 165,970 153,036 Commitments and Contingencies (Note 12) - - --------------- ------------ Total Liabilities and Shareholders' Equity $1,795,990 $1,613,405 =============================== See Notes to Consolidated Financial Statements
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24 [Enlarge/Download Table] Consolidated Statements of Earnings First Indiana Corporation and Subsidiaries Years Ended December 31, ------------------------------------- (Dollars in Thousands, Except Per Share Data) 1998 1997 1996 -------------------------------------- Interest Income Loans $125,783 $117,371 $114,799 Investments 7,465 6,818 6,887 Mortgage-Backed Securities 2,065 2,446 2,986 Federal Funds Sold and Interest-Bearing Deposits 521 695 796 ------------- ------------- -------- Total Interest Income 135,834 127,330 125,468 ------------- ------------- -------- Interest Expense Deposits (Note 7) 54,935 49,936 52,077 Federal Home Loan Bank Advances 15,348 12,288 10,706 Short-Term Borrowings 2,797 2,127 1,002 ------------- ------------- -------- Total Interest Expense 73,080 64,351 63,785 ------------- ------------- -------- Net Interest Income 62,754 62,979 61,683 Provision for Loan Losses, Net (Note 5) 9,780 10,700 10,794 ------------- ------------- -------- Net Interest Income After Provision for Loan Losses 52,974 52,279 50,889 ------------- ------------- -------- Non-Interest Income Sale of Investments Available for Sale 395 217 281 Sale of Mortgage-Backed Securities Available for Sale 368 - - Sale of Loans 9,418 4,932 3,075 Sale of Subsidiary - - 1,165 Dividends on FHLB Stock 1,097 1,055 1,033 Loan Servicing Income 1,635 2,767 2,908 Loan Fees 3,092 2,358 2,302 Insurance Commissions 106 238 662 Accretion of Negative Goodwill 948 948 948 Deposit Product Fee Income 3,075 2,646 2,593 Other 3,639 2,844 2,881 ------------- ------------- -------- Total Non-Interest Income 23,773 18,005 17,848 ------------- ------------- -------- Non-Interest Expense Salaries and Benefits 22,701 19,916 18,094 Net Occupancy 2,893 2,852 3,087 Equipment 5,042 4,692 4,508 Deposit Insurance 691 693 9,186 Real Estate Owned Operations--Net 858 652 598 Office Supplies and Postage 2,032 1,849 2,069 Other 11,539 10,450 9,711 ------------- ------------- -------- Total Non-Interest Expense 45,756 41,104 47,253 ------------- ------------- -------- Earnings Before Income Taxes 30,991 29,180 21,484 Income Taxes (Note 10) 11,844 11,436 7,780 ------------- ------------- -------- Net Earnings $19,147 $17,744 $13,704 ============= ====================== Basic Earnings Per Share $ 1.50 $ 1.40 $ 1.10 ============= ====================== Diluted Earnings Per Share $ 1.44 $ 1.36 $ 1.06 ============= ====================== Dividends Per Common Share $ 0.48 $ 0.40 $ 0.38 ==================================== See Notes to Consolidated Financial Statements
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25 [Enlarge/Download Table] Consolidated Statements of Shareholders' Equity First Indiana Corporation and Subsidiaries Accumulated Paid-In Other Common Stock Capital Compre- Total -------------------- in Excess Retained hensive Treasury Shareholders' (Dollars in Thousands, Except Per Share Data) Shares Amount of Par Earnings Income Stock Equity ---------------------------------------------------------------------------------- Balance at December 31, 1995 12,408,485 $132 $32,671 $102,449 $ 395 $ (6,350) $129,297 Comprehensive Income: Net Earnings for 1996 - - - 13,704 - - 13,704 Unrealized Loss on Securities Available for Sale, Net of Income Taxes of $(320) and Reclassification Adjustment (Note 2) - - - - (467) - (467) Total Comprehensive Income 13,237 Common Stock Issued Under Restricted Stock Plans-Net of Amortization (Note 13) - - 195 278 - - 473 Common Stock Issued Under Deferred Compensation Plan - - - (20) - - (20) Exercise of Stock Options 47,701 - 331 - - - 331 Dividends -- $.38 Per Share - - - (4,644) - - (4,644) Payment for Fractional Shares (1,064) - (16) - - - (16) -------------------------------------------------------------------------------- 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 See Notes to Consolidated Financial Statements
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26 [Enlarge/Download Table] Consolidated Statements of Cash Flows First Indiana Corporation and Subsidiaries (Dollars in Thousands) Years Ended December 31, ----------------------------------- 1998 1997 1996 ------------ ------------ -------- Cash Flows from Operating Activities Net Earnings $ 19,147 $ 17,744 $ 13,704 Adjustments to Reconcile Net Earnings to Net Cash Provided (Used) by Operating Activities Loss (Gain) on Sale of Assets (10,181) (5,149) (4,521) Amortization 1,941 864 1,325 Amortization of Restricted Stock Plan 427 363 473 Depreciation 2,211 2,022 1,958 Loan and Mortgage-Backed Securities Net Accretion 490 668 (51) Provision for Loan Losses,Net 9,780 10,700 10,794 Origination of Loans Held for Sale Net of Principal Collected (630,620) (240,558) (263,197) Proceeds from Sale of Loans Held for Sale 598,676 211,858 295,764 Change In: Accrued Interest Receivable (358) (626) 949 Other Assets (19,337) (10,180) (1,169) Accrued Interest Payable (69) 697 (697) Other Liabilities 1,509 2,882 (2,755) -------------------------------------- Net Cash Provided (Used) by Operating Activities (26,384) (8,715) 52,577 -------------------------------------- Cash Flows From Investing Activities Proceeds From Sales of Investments Available for Sale 20,399 14,991 35,703 Proceeds from Sales of Mortgage-Backed Securities Available for Sale 23,483 -- -- Proceeds from Maturities of Investment Securities Held to Maturity 99 237 306 Proceed From Sale of Mortgage-Backed Securities -- 7,528 -- Proceeds From Maturities of Investment Securities Available for Sale 25,756 20,695 27,305 Purchase of Investment Securities Available for Sale (47,375) (39,912) (68,225) Purchase of Mortgage-Backed Securities Available for Sale (30,261) (17,568) -- Principal Collected on Mortgage-Backed Securities 1,928 7,903 13,086 Originations of Loans Net of Principal Collected (125,399) (107,404) (41,050) Proceeds From Sale of Indirect Installment Portfolio -- -- 32,756 Proceeds From Sale of Loans 9,567 5,274 3,501 Purchase of Premises and Equipment (6,810) (2,291) (2,653) Proceeds From Sale of Premises and Equipment -- 27 150 -------------------------------------- Net Cash Provided (Used) by Investing Activities (128,613) (110,520) 879 -------------------------------------- Cash Flows From Financing Activities Net Change in Deposits 120,363 12,069 (41,494) Repayments of Federal Home Loan Bank Advances (344,048) (174,028) (288,025) Borrowings of Federal Home Loan Bank Advances 413,837 216,020 288,710 Net Change in Short-Term Borrowings (21,532) 45,696 (8,587) Net Change in Advances by Borrowers for Taxes and Insurance 539 299 (987) Stock Option Proceeds 702 367 331 Tax Benefit of Option Compensation 870 656 -- Common Stock Issued Under Deferred Compensation Plan 65 (24) (20) Payment for Fractional Shares (10) (12) (16) Purchase of Treasury Stock (2,242) (132) -- Dividends Paid (6,125) (5,063) (4,644) -------------------------------------- Net Cash Provided (Used) By Financing Activities 162,419 95,848 (54,732) -------------------------------------- Net Change in Cash and Cash Equivalents 7,422 (23,387) (1,276) Cash and Cash Equivalents at Beginning of Year 50,231 73,618 74,894 -------------------------------------- Cash and Cash Equivalents at End of Year $ 57,653 $ 50,231 $ 73,618 ====================================== See Notes to Consolidated Financial Statements
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27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS First Indiana Corporation and Subsidiaries Years Ended December 31, 1998, 1997, and 1996 (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 residential mortgage, commercial, and consumer loans. The Bank offers a full range of banking services from 27 banking offices located throughout Metropolitan Indianapolis, Evansville, Franklin, Mooresville, Pendleton, Rushville, and Westfield, Indiana. In addition, the Bank has mortgage and consumer loan service offices throughout Indiana and in Florida, Georgia, Illinois, North Carolina, Ohio, and Oregon. One Mortgage Corporation, a subsidiary, operates offices in Orlando, Tampa, and West Palm Beach, Florida, and Charlotte and Raleigh, North Carolina. 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
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28 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 mortgage loans and selected fixed-rate home equity loans for sale in the secondary market. Adjustable-rate mortgage and 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 manage effectively 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 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 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 cost 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. As of December 31, 1998 and 1997, the balance of capitalized loan servicing rights included in other assets was $5,815,000 and $4,522,000, with a fair market value of $6,865,000 and $5,867,000. The amounts capitalized in 1998, 1997, and 1996 were $3,891,000, $893,000, and $986,000 and the amounts amortized to loan servicing income were $1,823,000, $819,000, and $92,000. There was a valuation allowance of $45,000 at December 31, 1998, all of which was provided during 1998. (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 Dealer Fees. Discounts and premiums on the purchase of loans and prepaid dealer 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. 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.
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29 Loans considered to be impaired are reduced to the present value of expected future cash flows or to the fair value of collateral by allocating a portion of the allowance for loan losses to such loans. 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 1998, 1997, and 1996 were computed by dividing net earnings by the weighted average shares of common stock outstanding (12,735,570, 12,643,615 and 12,433,282, in 1998, 1997, and 1996, respectively). Diluted earnings per share for 1998, 1997, and 1996 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 (13,256,972, 13,050,746, and 12,920,510 in 1998, 1997 and 1996, 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 1997 and 1996 Consolidated Financial Statements have been reclassified to conform to the current year presentation. (N) Negative Goodwill. Negative goodwill (the excess of assigned value of assets and liabilities acquired over the cost of the acquired enterprises) arises from the Bank's acquisition of Mooresville Savings Bank and First Federal Savings and Loan Association of Rushville in 1992. The gross amount of $9,858,000 is being accreted to earnings over a ten-year period using the straight-line method. (O) Comprehensive Income. Comprehensive income is the total of net income and all nonowner changes in equity as required by FAS 130 which was adopted as of December 31, 1997.
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30 (2) Investments and Their Scheduled Maturities [Enlarge/Download Table] Investments Available for Sale: December 31, ---------------------------------------------------------------------- 1998 1997 ------------------------------------ ---------------------------------- Unreal- Unreal- Unreal- Unreal- Book ized ized Market Book ized ized Market Value Gains Losses Value Value Gains Losses Value (Dollars in Thousands) ------------------------------------ ---------------------------------- U.S. Treasury and Government Agencies' Obligations $73,497 $632 $ - $74,129 $83,355 $222 $ (42) $83,535 Corporate Debt Securities 22,416 259 - 22,675 10,281 149 - 10,430 Asset-Backed Securities 16,392 - (57) 16,335 11,884 37 - 11,921 Other 145 7 - 152 200 9 - 209 ------------------------------------ ---------------------------------- $112,450 $898 $ (57)$113,291 $105,720 $417 $ (42)$106,095 ==================================== ================================== [Enlarge/Download Table] Scheduled Maturities: December 31, 1998 ------------------------------------------------------------------------------ U.S Treasury and Corporate Asset- Government Agencies' Debt Backed Obligations Securities Securities ------------------------------------------------------------------------------ Book Market Book Market Book Market Value Value Yield Value Value Yield Value Value Yield ------------------------------------------------------------------------------ (Dollars in Thousands) One Year or Less $28,485 $28,607 5.89% $ 2,534 $ 2,552 9.88% $ - $ - -% After One Year to Five Years 45,012 45,522 5.72 19,882 20,123 6.74 - - - After Five Years to Ten Years - - - - - - 11,452 11,452 6.57 After Ten Years - - - - - - 4,940 4,883 6.63 ---------------- ---------------- ---------------- $73,497 $74,129 $22,416 $22,675 $16,392 $16,335 ================ ================ ================ 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.
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31 (2) Investments and Their Scheduled Maturities (continued) ------------------------------------------------------ Other Securities Total Portfolio ------------------------------------------------------ Book Market Book Market Value Value Yield Value Value Yield ------------------------------------------------------ (Dollars in Thousands) One Year or Less $ - $ - -% $31,019 $31,159 6.22% After One Year to Five Years 145 152 6.50 65,039 65,797 6.04 After Five Years to Ten Years - - - 11,452 11,452 6.57 After Ten Years - - - 4,940 4,883 6.63 ------------- ---------------- $145 $152 $112,450 $113,291 ============= ================
The weighted average yield on investments available for sale was 6.17 percent at December 31, 1998 and 6.05 percent at December 31, 1997. At December 31, 1998, all of First Indiana's corporate debt securities were issued by 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 student loan receivables. While the majority of these securities have maturity dates in excess of five years, they are expected to prepay within the next five to seven years. 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 $12,000 and $(17,000). In 1996, realized gains (losses) from the sale of investment securities available for sale were $307,000 and $(10,000). The following table discloses the reclassification adjustments, net of tax, for Comprehensive Income: [Download Table] December 31, 1998 1997 1996 ----------------------------- Unrealized Holding Gains (Losses) Arising During the Period $335 $ 526 $(300) Reclassification Adjustment for Gains Included in Net Earnings (235) (129) (167) ------------------------------ Net Unrealized Gain (Loss) on Securities Available for Sale $100 $ 397 $(467) ============================== [Download Table] Investments Held to Maturity: December 31, ---------------------------------------- 1997 ---------------------------------------- Unreal- Unreal- Book ized ized Market (Dollars in Thousands) Value Gains Losses Value ---------------------------------------- Asset-Backed Securities $5,305 $114 $ - $ 5,419 ----------------------------------------- $ 5,305 $ 114 $ - $ 5,419 ========================================= There were no held-to-maturity investment securities at December 31, 1998. The average yield on investments held to maturity was 7.56 percent at December 31, 1997. In 1997 and 1996, there were no realized gains or losses from the sale of held-to-maturity investment securities.
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32 (3) Mortgage-Backed Securities [Enlarge/Download Table] Available for Sale: December 31, 1998 ------------------------------------------------ Unreal- Unreal- Book ized ized Market Value Gains Losses Value (Dollars in Thousands) ------------------------------------------------ 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 ================================================ Available for Sale: December 31, 1997 ------------------------------------------------ Unreal- Unreal- Book ized ized Market Value Gains Losses Value (Dollars in Thousands) ------------------------------------------------ FHLMC $ 9,736 $ 152 $ - $ 9,888 FNMA 7,083 106 - 7,189 Deferred Income and Net Unearned Discounts 87 - (87) - ------------------------------------------------ $ 16,906 $ 258 $ (87) $ 17,077 ================================================ The weighted average yield on mortgage-backed securities available for sale was 4.95 and 6.96 percent at December 31, 1998 and 1997, and the majority of the securities have maturities in excess of 10 years. Realized gains on the sale of mortgage-backed securities available for sale in 1998 were $368,000. [Enlarge/Download Table] Held to Maturity: December 31, 1997 ------------------------------------------------ Unreal- Unreal- Book ized ized Market Value Gains Losses Value (Dollars in Thousands) ------------------------------------------------ FHLMC $ 9,354 $ 324 $ - $ 9,678 FNMA 11,209 247 (31) 11,425 GNMA 116 5 - 121 Participation Certificates 325 - - 325 Deferred Income and Net Unearned Discounts 198 - (198) - ------------------------------------------------ $ 21,202 $ 576 $ (229) $ 21,549 ================================================ There were no held-to-maturity mortgage-backed securities at December 31, 1998. The weighted average yield on mortgage-backed securities held to maturity was 7.19 percent at December 31, 1997. Seventy-one percent of the Bank's mortgage-backed securities have maturities in excess of 10 years, with the remaining 29 percent maturing in five to 10 years. Realized gains in 1997 on the sale of mortgage-backed securities near maturity were $221,000. (4) Loans Receivable [Download Table] December 31, --------------------------- 1998 1997 (Dollars in Thousands) ---------------------------- Residential Mortgage Loans Loans Held for Sale $ 66,469 $ 32,690 Loans Held in Portfolio 465,654 468,128 Residential Construction Loans 406,650 253,259 Commercial Real Estate Loans 32,813 39,748 Business Loans 189,074 137,517 Consumer Loans Home Equity Loans Held for Sale 45,929 24,828 Home Equity Loans Held in Portfolio 520,003 503,357 Installment Loans 10,334 14,994 Other Consumer Loans 4,259 4,837 Undisbursed Portion of Loans Residential Construction Loans (190,591) (97,579) Business Loans (10,141) (13,050) Deferred Income and Net Unearned Discounts 3,790 2,214 Allowance for Loan Losses (25,700) (22,414) ---------------------------- $1,518,543 $1,348,529 ===========================
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33 (4) Loans Receivable (continued) The weighted average yield on loans was 8.48 percent and 9.06 percent at December 31, 1998 and 1997. Loans serviced for others amounted to $908,582,000 and $969,089,000 at December 31, 1998 and 1997. Over 70 percent of First Indiana's residential construction and permanent mortgage loans are secured by collateral located in Indiana, with another 12 percent and 10 percent located in North Carolina and Florida. Over 58 percent of the Bank's consumer loans are secured by collateral located in Indiana and its contiguous states, with 36 percent located in Indiana itself. 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 $168 million, $72 million, and $63 million in fixed-rate loans were sold in 1998, 1997, and 1996. In addition, at December 31, 1998 and 1997, the Bank had classified $45,929,000 and $24,828,000 of home equity loans as held for sale. During 1998, 1997, and 1996, the Bank transferred $9,572,000, $7,922,000 and $7,216,000 from loans to real estate owned. (5) Allowance for Loan and REO Losses A summary of activity in the allowance for loan and REO losses for the years ended December 31, 1998, 1997, and 1996 follows: [Enlarge/Download Table] December 31, ----------------------------------- 1998 1997 1996 (Dollars in Thousands) ------------------------------------- Balance of Allowance for Loan Losses at Beginning of Year $22,414 $18,768 $16,234 Charge-Offs Residential Mortgage (91) (83) (9) Residential Construction (658) (1,190) (360) Commercial Real Estate (93) (75) - Consumer (6,934) (7,210) (9,592) Business (15) (528) - ------------- ------------- ------- Total Charge-Offs (7,791) (9,086) (9,961) ------------- ------------- ------- Recoveries Residential Mortgage 2 - 26 Residential Construction 270 40 69 Commercial Real Estate - 727 135 Consumer 986 1,261 1,429 Business 39 4 42 ------------- ------------- ------- Total Recoveries 1,297 2,032 1,701 ------------- ------------- ------- Net Charge-Offs (6,494) (7,054) (8,260) ------------- ------------- ------- Provision for Loan Losses 9,780 10,700 11,815 Recapture of Loan Loss Provision Due to Auto Portfolio Sale - - (1,021) ------------- ------------- ------- Balance of Allowance for Loan Losses at End of Year 25,700 22,414 18,768 Balance of REO Loss Allowance at End of Year 500 483 543 ------------------------------------ Balance of Loan and REO Loss Allowance at End of Year $26,200 $22,897 $19,311 ==================================== A summary of activity in the allowance for REO losses for the years ended December 31, 1998, 1997, and 1996 follows. [Download Table] December 31, ------------------------- 1998 1997 1996 ------------------------- (Dollars in Thousands) Balance at Beginning of Year $ 483 $ 543 $1,066 REO Recoveries (Charge-Offs) 179 (60) (123) Recapture of REO Loss Provision (162) - (400) ------------------------- Balance at End of Year $ 500 $ 483 $ 543 ========================= (6) Premises and Equipment [Download Table] December 31, -------------------------- 1998 1997 (Dollars in Thousands) --------------------------- Land $ 2,710 $ 2,313 Buildings 8,800 8,769 Leasehold Improvements 1,373 1,343 Furniture, Fixtures, and Equipment 22,822 16,679 Accumulated Depreciation and Amortization (17,159) (15,157) --------------------------- $18,546 $13,947 ==========================
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34 (7) Deposits [Enlarge/Download Table] December 31, ---------------------------------------------------------------- 1998 1997 ------------------------------- -------------------------------- Weighted Weighted (Dollars in Thousands) Average Average Amount Percent Rate Amount Percent Rate Type ------------------------------- -------------------------------- Non-Interest Bearing Checking $ 129,043 10.51% - % $ 90,612 8.18% - % NOW Checking 102,068 8.31 1.87 99,289 8.97 2.53 Money Market Checking 237 0.02 1.30 2,095 0.19 2.39 Passbook and Statement Savings 365,641 29.78 4.48 302,589 27.32 4.63 Money Market Savings 11,087 0.90 2.61 11,748 1.06 3.27 Jumbo Certificates of Deposit of $100 or Greater 169,988 13.84 5.49 120,756 10.90 5.85 Fixed-Rate Certificates of Deposit 449,854 36.64 5.40 480,466 43.38 5.70 ----------------- ----------------- $1,227,918 100.00% 4.25 $1,107,555 100.00% 4.64 ========= ========= Maturity Amount Percent Amount Percent ------------------ ------------------ Checking $ 231,348 18.85% $ 191,996 17.34% Passbook and Statement Savings 365,641 29.78 302,589 27.32 Money Market Savings 11,087 0.90 11,748 1.06 Certificates of Deposit Maturing in One Year 377,656 30.76 390,051 35.22 Two Years 183,256 14.92 123,231 11.13 Three Years 33,264 2.71 80,450 7.26 Four Years 21,771 1.77 4,553 0.41 Five Years 3,895 0.31 2,937 0.26 ------------------ ------------------ $1,227,918 100.00% $1,107,555 100.00% ================== ================== Interest expense for the years ended December 31, 1998, 1997, and 1996 was as follows: [Download Table] (Dollars in Thousands) December 31, ----------------------------------- 1998 1997 1996 ----------------------------------- NOW and Money Market Checking $ 2,570 $ 2,473 $ 2,531 Passbook, Statement, and Money Market Savings 15,596 14,317 13,529 Certificates of Deposit 36,769 33,146 36,017 ----------------------------------- $54,935 $49,936 $52,077 =================================== Official checking accounts at December 31, 1998 and 1997 were $51,293,000 and $32,517,000, respectively. Included in official checking accounts at December 31, 1998 and 1997 were $4,285,000 and $4,624,000 of non-interest-bearing escrows held for investors under the terms of various servicing agreements. Net earnings for 1996 include a one-time pre-tax charge of $6,749,000 to deposit insurance premiums for an industry-wide special assessment by the FDIC to recapitalize SAIF, which insures the Bank's customers' deposits. As a result of this one-time assessment, the Corporation's deposit insurance premiums were reduced for years after 1996. Cash paid during the year for interest on deposits, advances, and other borrowed money was $73,149,000, $63,654,000 and $64,482,000 for 1998, 1997, and 1996.
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35 (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: [Download Table] December 31, ----------------------------------------------------------- (Dollars in Thousands) 1998 1997 --------------------------------- ------------------------- Interest Interest Rates Amount Rates Amount --------------------------------- ------------------------- Maturity 1998 -% $ - 4.98 to 5.95% $ 87,000 1999 5.00 to 6.29 152,000 5.13 to 6.29 92,000 2000 5.52 to 6.01 100,000 5.52 to 6.01 75,000 2001 4.99 to 5.61 35,000 - - 2002 - - - - 2003 5.24 to 5.74 25,000 - - Thereafter 2.75 to 8.57 15,247 3.50 to 8.57 3,458 -------- --------- $327,247 $257,458 ======== ======== The weighted average interest rate on advances was 5.44 and 5.62 percent at December 31, 1998 and 1997. 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 a $5,000,000 line of credit with the FHLB. As of December 31, 1998 and 1997, First Indiana had sufficient collateral under this agreement. (9) Other Borrowings Short-term borrowings represent federal funds purchased and repurchase agreements. At December 31, 1998 and 1997, short-term borrowings had balances of $54,219,000 and $75,751,000 with weighted average interest rates of 4.81 and 5.48 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 $51,166,000 and $38,899,000 during 1998 and 1997, and the maximum amounts outstanding at the end of any month during 1998 and 1997 were $62,620,000 and $84,896,000. The carrying value of the underlying securities at December 31, 1998 and 1997 was $53,866,000 and $76,296,000 with market values of $53,866,000 and $76,741,000. These securities are under the Bank's control. First Indiana had $38,000,000 and $48,000,000 in unused lines of credit available from local financial institutions, the Federal Reserve Bank, and the FHLB of Indianapolis at December 31, 1998 and 1997. There are no fees associated with these lines. (10) Income Taxes Income tax expense attributable to earnings before income taxes consists of: [Download Table] (Dollars in Thousands) Current Deferred Total ---------------------------------------- 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 ======================================== Year Ended December 31, 1996: Federal $ 5,454 $ 668 $ 6,122 State and Local 1,481 177 1,658 ---------------------------------------- $ 6,935 $ 845 $ 7,780 ======================================== The effective income tax rate differs from the statutory federal corporate tax rate as follows: [Download Table] Years Ended December 31, ------------------------------------- 1998 1997 1996 ------------------------------------- Statutory Rate 35.0% 35.0% 35.0% State Income Taxes 5.5 5.5 5.1 Negative Goodwill (0.9) (1.0) (1.4) Non-Taxable Interest Income (0.1) (0.1) (0.3) Other (0.1) (0.2) (0.7) ------------------------------------- Effective Rate 39.4% 39.2% 37.7% =====================================
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36 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: [Download Table] (Dollars in Thousands) Deferred Tax Assets 1998 1997 -------------------------- Allowance for Loan and REO Losses $10,738 $ 9,400 Pension and Retirement Benefits 3,012 2,750 Interest Credited 205 194 Premises and Equipment 273 275 Excess Servicing 11 29 Accrued Compensation 679 328 Other 577 328 ------------------------- 15,495 13,304 ------------------------- Deferred Tax Liabilities Loan Servicing Rights 1,589 641 FHLB Stock Dividends 574 574 Interest on Proposed Tax Deficiency - 79 Net Deferred Loan Fees 4,487 3,388 Excess Tax Reserves 243 324 Unrealized Gain on Investments 289 221 Other 51 220 ------------------------- 7,233 5,447 ------------------------- Net Deferred Tax Assets $ 8,262 $ 7,857 ========================= In August 1996, President Clinton signed the Small Business Job Protection Act (the "Act") into law. One provision of the Act repeals the reserve method of accounting for bad debts for savings institutions, effective for taxable years beginning after 1995. The Bank therefore is required to use the specific charge-off method on its tax returns for 1996 and thereafter. The Bank is required to recapture over approximately six years its "applicable excess reserves," which are its federal tax bad debt reserves in excess of the base year reserve amount described in the following paragraph. The Bank has approximately $1,001,000 of applicable excess reserves and has provided a deferred tax liability related to this recapture. 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 $11,187,000, $11,360,000 and $8,013,000 for 1998, 1997, and 1996. (11) Shareholders' Equity The Corporation is subject to regulation as a savings and loan holding company by the Office of Thrift Supervision. 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 eight 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, 1998, 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 three 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, 1998, 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
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37 "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, 1998 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, 1998, First Indiana does not expect to be required to add to its risk-based capital under the proposed regulations. 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, 1998 and 1997. 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, 1998, 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 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. In November 1997, the Corporation's Board of Directors established a share- [Enlarge/Download Table] 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 --------------------- ---------------------- ---------------------- 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 140,417 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. [Enlarge/Download Table] December 31, 1997 (Dollars in Thousands) To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions --------------------- ---------------------- ---------------------- Amount Ratio Amount Ratio Amount Ratio --------------------- ---------------------- ---------------------- Tangible Capital(1) $134,990 8.37% $24,184 1.50% $ N/A N/A Core (Tier One) Capital 134,990 8.37 48,368 3.00 80,614 5.00% Tier One Risk- Based Capital 134,990 10.91 N/A N/A 74,254 6.00 Total Risk- Based Capital (2) 148,386 11.99 99,005 8.00 123,756 10.00 First Indiana Bank Capital 135,315 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 $325. (2) Risk-based capital includes a $15,555 addition for general loan loss reserves and a $2,159 deduction for land loans with loan-to-value ratios in excess of 80 percent.
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38 holder 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. (12) Commitments and Contingencies At December 31, 1998 and 1997, First Indiana had the following outstanding commitments to fund loans: [Download Table] (Dollars in Thousands) December 31, ------------------------- 1998 1997 ------------------------- Commitments to Fund: Residential Mortgage Loans $252,576 $ 83,109 Commercial Real Estate Loans 16,422 8,796 Consumer Loans: Home Equity Loans 155,447 133,470 Other 7,226 5,492 ------------------------- $431,671 $230,867 ========================= Of the commitments to fund loans at December 31, 1998, nearly 90 percent are commitments to fund variable-rate products, while the remaining 10 percent are commitments to fund fixed-rate products. Commitments to sell loans at December 31, 1998 and 1997 were $134,198,000 and $45,379,000. At December 31, 1998, the Corporation had approximately $5,822,000 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 during the first five years of the 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. The Bank receives a fee upon issuing the lines of credit. At December 31, 1998, First Indiana had outstanding lines of credit totaling $152,730,000, with $87,552,000 disbursed against those lines. First Indiana's collateral policy on these residential construction loans requires a first mortgage on the underlying real estate and improvements. In 1985, First Indiana issued a letter of credit to enhance the bond rating of economic development bonds guaranteed by local government authorities for the construction and permanent financing of multi-family apartment buildings. First Indiana receives a fee upon issuing the letter of credit and annual fees throughout the term of the bonds. At December 31, 1998, First Indiana had a letter of credit outstanding totaling $5,762,000. Should this letter of credit be submitted for payment, First Indiana's collateral policy requires the assignment of the mortgage on the underlying commercial real estate. Evaluation of the credit risk of this property is part of First Indiana's commercial real estate loan review procedures. This letter of credit is not required to be collateralized. Rental Obligations. Obligations under non-cancelable operating leases for office space at December 31, 1998 require minimum future payments of $1,671,000 in 1999, $1,565,000 in 2000, $1,474,000 in 2001, $1,363,000 in 2002, $1,126,000 in 2003, and $4,330,000 thereafter. Minimum future payments have not been reduced by minimum sublease rental income of $348,000 receivable in the future under non-cancelable subleases. Rental expense on office buildings was $1,637,000, $1,616,000 and $1,956,000, for 1998, 1997, and 1996. 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, Evansville, 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 FIRF or Mooresville pension plans but are precluded from being paid by limitations under the Internal Revenue Code.
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39 Net periodic pension expense for the plan consists of the following: [Download Table] (Dollars in Thousands) Years Ended December 31, ------------------------- 1998 1997 1996 ------------------------ Service Cost-Benefits Earned During the Year $198 $150 $156 Interest Cost on Projected Benefit Obligation 486 440 359 Net Amortization and Deferral 60 29 13 ------------------------ Net Pension Costs $744 $619 $528 ======================== The funded status of the plan and the amounts reflected in the accompanying consolidated balance sheets are as follows: [Download Table] (Dollars in Thousands) December 31, ----------------------- 1998 1997 ----------------------- Projected Benefit Obligation $7,861 $6,849 Fair Value of Plan Assets - - ----------------------- Excess of Projected Benefit Obligation Over Fair Value of Plan Assets 7,861 6,849 Unrecognized Net Transition Obligation (182) (182) Unrecognized Loss (1,403) (1,097) ----------------------- Accrued Pension Cost $6,276 $5,570 ======================= The unrecognized net transition obligation is being amortized over 15 years. The projected benefit obligations were determined using an assumed discount rate of 6.75 percent and 7.00 percent at December 31, 1998 and 1997. The assumed long-term salary increases were 5 percent at December 31, 1998 and December 31, 1997, compounded annually. Additionally, First Indiana is a participant in a pension fund known as the Financial Institutions Retirement Fund ("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, 1998, the date of the latest actuarial valuation. Pension expense was $12,000, $59,000 and $30,000 for 1998, 1997, and 1996. During 1995, the Bank established a voluntary savings plan for eligible employees which qualifies under Section 401(k) of the Internal Revenue Code. Employees can participate after twelve 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. First Indiana made matching contributions of $172,000, $129,000 and $80,000 in 1998, 1997, and 1996. 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 $752,000 and $714,000, and the accrued liability was $1,094,000 and $1,056,000 at December 31, 1998 and 1997. Expense under the programs was $38,000 in 1998, $35,000 in 1997 and $28,000 in 1996. The accumulated post-retirement benefit obligation was determined using an assumed discount rate of 7.00 percent and 7.50 percent at December 31, 1998 and 1997. The assumed long-term salary increase was 5.00 percent for 1998 and 1997. 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 six 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 that has been charged against income for its performance-based plan was $777,000, $660,000, and $860,000 in 1998, 1997, and 1996. The compensation cost that has been charged against income for the Employees' Stock Purchase Plan was $184,000, $153,000 and $141,000 in 1998, 1997, and 1996. 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: [Download Table] 1998 1997 1996 ----------- -------------- ---------- Net Earnings As Reported $19,147 $17,744 $13,704 Pro Forma 18,704 17,675 13,360 Basic Earnings Per Share As Reported $ 1.50 $ 1.40 $ 1.10 Pro Forma 1.46 1.40 1.07 Diluted Earnings Per Share As Reported $ 1.44 $ 1.36 $ 1.06 Pro Forma 1.41 1.35 1.03 The effects of applying FAS No. 123 in this pro forma disclosure are not indicative of future amounts.
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40 A summary of the status of First Indiana's fixed stock option plans as of December 31, 1998, 1997, and 1996, and changes during the years ended on those dates is presented below: [Enlarge/Download Table] 1998 1997 1996 ------------------ ------------------- ------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------- -------- ------- -------- ------- --------- Outstanding at Beginning of Year 688,076 $ 8.33 863,903 $ 7.16 754,723 $ 5.64 Granted 119,316 23.52 25,479 16.30 156,881 14.43 Exercised (139,147) 6.37 (201,306) 4.32 (47,701) 6.95 Surrendered (6,347) 24.67 -- -- -- -- ------- ------- ------- Outstanding at End of Year 661,898 11.32 688,076 8.33 863,903 7.16 ======= ======= ======= Options Exercisable at Year End 548,902 662,597 707,022 ======= ======= ======= Weighted Average Fair Value of Options Granted During the Year $ 6.25 $ 4.54 $ 3.68 ======= ======= ======= 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 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 year. Similar plans were effected upon completion of the mergers with the Evansville, 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 1998, 1997, and 1996: dividend yield of 3.0 percent for all years; expected volatility of 23 percent for all years; weighted average risk-free interest rates of 5.66 percent, 6.89 percent, and 5.75 percent respectively; and expected lives of seven years for all years. The following table summarizes information about fixed stock options outstanding at December 31, 1998: [Enlarge/Download Table] Options Outstanding Options Exercisable ---------------------------------------------- ------------------------------ Weighted Average Weighted Weighted Range of Number Remaining Average Number Average Exercise Outstanding Contractual Exercise Exercisable Exercise Prices At 12/31/98 Life Price At 12/31/98 Price -------------------------------------------------------------------------------------------------- $ 3 -$7 276,290 2.84 $ 5.87 276,290 $5.87 $7.01-$15 229,152 5.81 10.93 229,152 10.93 $ 15 -$28 156,456 8.76 22.49 43,460 16.26 ---------------------------------------------------------------------------------- $ 3-$28 661,898 4.97 11.32 548,902 8.80 In addition to the options outstanding at December 31, 1998, 759,545 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 26, 1994, First Indiana awarded 57,600 shares of stock to each of two executive officers. These shares were subject to recall by First Indiana in the event certain specified employment and performance objectives were not met by December 31, 1996. The employment and performance objectives were
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41 met on December 31, 1996, and the restrictions on the shares lapsed. In connection with these awards, First Indiana expensed $860,000 in 1996. 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 $777,000 and $660,000 in 1998 and 1997 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 38 percent of eligible employees have participated in the plan in the last three years. 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. 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, 1997 and 1996 plan years. First Indiana's matching contributions for the years ended 1998, 1997, and 1996 were $184,000, $153,000 and $141,000. (14) Parent Company Statements [Enlarge/Download Table] Condensed Balance Sheets December 31, -------------------------- 1998 1997 (Dollars in Thousands) ------------------ ------- Assets Certificate of Deposit and Interest-Bearing Checking Account with the Bank $ 501 $ 501 Due from Bank 23,575 16,595 Investment in the Bank 140,418 135,315 Other Assets 1,476 689 --------------------------- Total Assets $165,970 $153,100 =========================== Liabilities $ - $ 64 Shareholders' Equity 165,970 153,036 --------------------------- Total Liabilities and Shareholders' Equity $165,970 $153,100 =========================== Condensed Statements of Earnings Years Ended December 31, -------------------------------- 1998 1997 1996 (Dollars in Thousands) ---------------------------------- Cash Dividends from the Bank $15,295 $14,241 $ 9,951 Interest Income on Certificate of Deposit and Checking Account 28 27 26 Expenses (1,965) (240) (216) Income Tax Credit 786 81 73 ------------ ------------ ------- Earnings Before Equity in Undistributed Net Earnings of the Bank 14,144 14,109 9,834 Equity in Undistributed Net Earnings of the Bank 5,003 3,635 3,870 ---------------------------------- Net Earnings $19,147 $17,744 $13,704 ==================================
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42 Condensed Statements of Cash Flows Years Ended December 31, ---------------------------------- 1998 1997 1996 (Dollars in Thousands) ---------------------------------- Cash Flows from Operating Activities Net Earnings $19,147 $17,744 $13,704 Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities Equity in Undistributed Earnings of the Bank (5,003) (3,635) (3,870) Amortization of Restricted Stock Plan 427 363 473 Change in Other Liabilities (64) 127 22 Change in Due from the Bank and Other Assets (7,767) (10,391) (5,980) --------------------------------- Net Cash Provided by Operating Activities 6,740 4,208 4,349 --------------------------------- Cash Flows from Financing Activities Stock Option Proceeds 702 367 331 Common Stock Issued Under Deferred Compensation Plan 65 (24) (20) Purchase of Treasury Stock (2,242) (132) - Payment for Fractional Shares (10) (12) (16) Tax Benefit of Option Compensation 870 656 - Dividends Paid (6,125) (5,063) (4,644) -------------------------------- Net Cash Used by Financing Activities (6,740) (4,208) (4,349) -------------------------------- 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 ================================
(15) Interim Quarterly Results (Unaudited) [Enlarge/Download Table] First Second Third Fourth Quarter Quarter Quarter Quarter (Dollars in Thousands, Except Per Share Data) ------------------------------------------ 1998 Total Interest Income $32,868 $33,991 $34,551 $34,424 Net Interest Income 15,431 15,562 15,646 16,115 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 1997 Total Interest Income $30,881 $31,253 $32,518 $32,678 Net Interest Income 15,494 15,517 16,278 15,690 Provision for Loan Loss 2,820 2,680 2,600 2,600 Earnings Before Income Taxes 6,685 6,512 7,751 8,232 Net Earnings 4,079 3,973 4,706 4,986 Basic Earnings Per Share 0.32 0.31 0.37 0.39 Diluted Earnings Per Share 0.31 0.31 0.36 0.38 (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 held for trading purposes and securities held for investment purposes, 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-gov-
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43 ernmental 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 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. 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 orig- [Download Table] December 31, 1998 December 31, 1997 ------------------------------------- Estimated Estimated Carrying Fair Carrying Fair (Dollars in Thousands) Amount Value Amount Value ------------------------------------- Assets Cash and Cash Equivalents $57,653 $57,653 $50,231 $50,231 Investment Securities 113,291 113,291 111,400 111,514 Mortgage-Backed Securities 29,680 29,680 38,279 38,626 Loans Receivable Residential Mortgage Loans 535,515 542,035 502,624 516,416 Residential Construction Loans 211,446 211,012 152,017 151,935 Commercial Real Estate Loans 32,304 33,402 39,238 39,413 Business Loans 176,206 177,522 122,459 122,117 Consumer Loans 571,017 585,212 538,310 543,490 Accrued Interest Receivable 11,680 11,680 11,322 11,322 Liabilities Deposits Demand Deposits 215,457 215,457 191,996 191,996 Passbook Deposits 41,233 41,233 42,004 42,004 Money Market Savings 351,387 351,387 272,333 272,333 Jumbo Certificates 171,171 171,579 122,825 123,093 Fixed-Rate Certificates 448,670 454,845 478,397 482,603 Borrowings FHLB Advances 327,247 328,936 257,458 256,657 Short-Term Borrowings 54,219 54,228 75,751 75,743 Accrued Interest Payable 2,646 2,646 2,715 2,715 Advances by Borrowers for Taxes and Insurance 1,958 1,958 1,419 1,419 Off-Balance-Sheet Instruments (Unrealized Gains (Losses)) Commitments to Extend Credit - 137 - 129 Letters of Credit - (2) - (279) Loan Servicing Rights (Unaudited) - 2,589 - 5,075
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44 ination, sale and servicing of residential loans. The retail segment includes the Bank's 27-branch network, as well as the relatively newer virtual banking services. One Insurance Agency offered insurance products and services to the Bank's customers until it was sold in 1996. 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 below 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. [Enlarge/Download Table] 1998 Resi- Mortgage Segment Intersegment Consolidated Consumer dential Business Treasury Banking Retail Totals Eliminations Totals 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 44,364 18,390 (2) 62,753 Other Revenue from External Customers 6,399 113 3,661 1,917 4,955 3,259 20,305 3,468 (3) 23,773 Intersegment Revenues 5,369 (1,678) (1,551) 0 8,662 2,666 13,468 (13,468) (4) 0 Significant noncash items: Provision for Loan Losses 7,076 136 2,568 0 0 0 9,780 0 9,780 Segment Direct Profit (Loss) 16,384 1,350 10,697 2,576 10,569 2,871 44,448 (13,456) (3) 30,991 1997 Resi- Mortgage Segment Intersegment Consolidated Consumer dential Business Treasury Banking Retail Totals Eliminations Totals 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 10,361 (2) 62,979 Other Revenue from External Customers 3,109 118 2,783 1,418 4,883 2,664 14,975 3,030 (3) 18,005 Intersegment Revenues (312) (1,061) 76 0 5,222 475 4,400 (4,400) (4) 0 Significant noncash items: Provision for Loan Losses 9,281 152 1,267 0 0 0 10,700 0 10,700 Segment Direct Profit (Loss) 9,444 3,058 9,867 1,590 5,735 9,796 39,490 (10,310) (3) 29,180 One 1996 Resi- Mortgage Insur- Segment Intersegment Consolidated Consumer dential Business Treasury Banking Retail ance Totals Eliminations Totals Average Segment Assets $550,136 $411,591 $264,945 $189,672 $ 23,852 $43,522 $ 248 $1,483,966 $ 1,550 (1) $1,485,516 Net Interest Income 20,417 4,456 10,477 (400) 206 17,886 0 53,040 8,643 (2) 61,683 Other Revenue from External Customers 1,249 101 2,943 1,333 5,194 2,477 1,770 15,068 2,780 (3) 17,848 Intersegment Revenues (281) (997) 94 0 5,193 274 (35) 4,248 (4,248) (4) 0 Significant noncash items: Provision for Loan Losses 10,559 112 123 0 0 0 0 10,794 0 10,794 Segment Direct Profit (Loss) 8,261 3,448 12,020 759 6,066 7,325 1,455 39,334 (17,850) (3) 21,484 (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.
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45 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, 1998 and 1997 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, 1998. 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, 1998 and 1997 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/KPMG LLP Indianapolis, Indiana January 19, 1999 AFFIRMATIVE ACTION POLICY It has been the policy and will continue to be the policy of First Indiana Bank to afford 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.
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46 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 27 banking centers in Metropolitan Indianapolis, Evansville, Franklin, Pendleton, Westfield, Rushville, and Mooresville. In addition, the Bank has mortgage and consumer loan service offices throughout Indiana and in Florida, Georgia, Illinois, North Carolina, Ohio and Oregon. One Mortgage Corporation, a subsidiary, operates offices in Orlando, Tampa, and West Palm Beach, Florida and Charlotte and Raleigh, North Carolina. 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, P.O. Box A3504, Chicago, Illinois 60690-3504, 1-800-573-4048. Annual Meeting of Shareholders. The annual meeting of shareholders will be held on Thursday, April 15, 1999, 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. [Download Table] 1998 1997 ------------------------ -------------------------- Book Book High Low Value High Low Value ------ ------ ------ ------- ------ ------ First Quarter $30.00 $22.92 $12.27 $20.17 $15.31 $11.26 Second Quarter 27.38 23.75 12.54 18.75 14.48 11.48 Third Quarter 27.75 19.13 12.83 20.83 17.08 11.77 Fourth Quarter 22.13 17.38 13.07 26.46 19.58 12.08 At December 31, 1998, there were approximately 1,600 shareholders of record and 12,703,294 shares of common stock outstanding.
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47 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 19, 1999 /s/Robert H. McKinney /s/Marni McKinney Robert H. McKinney Marni McKinney Chairman and Chief Executive Officer Vice Chairman /s/Owen B. Melton, Jr. /s/David L. Gray Owen B. Melton, Jr. David L. Gray President and Chief Operating Officer Treasurer
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48 [inside back cover of annual report]
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[back cover of annual report] First Indiana Corporation [logo] First Indiana Bank One Mortgage Corporation FirstTrust Indiana First Indiana Plaza 135 North Pennsylvania Street Indianapolis, IN 46204 (317)269-1200 www.FirstIndiana.com

Dates Referenced Herein   and   Documents Incorporated by Reference

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12/31/994410-K,  10-K/A,  11-K,  DEF 14A
6/15/9922
4/15/9949
Filed on:3/24/99
3/16/994
3/6/9914
1/19/994850
1/1/996
For Period End:12/31/9834911-K,  DEF 14A
12/15/9822
6/30/984210-Q
4/15/9844
3/6/9814
2/19/9814
12/31/9744810-K,  11-K,  DEF 14A,  PRE 14A
1/23/9744
12/31/96144410-K,  11-K,  DEF 14A,  NT 11-K
1/26/9443
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