|
(Exact name of registrant as specified in its charter) |
|---|
Indiana | 35-1692825 |
(State or other jurisdiction of |
(IRS Employer Identification Number) |
incorporation or organization) | |
135 North Pennsylvania Street, Indianapolis, IN | 46204 |
(Address of principal executive office) |
(Zip Code) |
(317) 269-1200 | |
(Registrant's telephone number, including area code) | |
| Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) | |
| Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: | |
Class |
Shares |
Common Stock, par value $0.01 per share |
Outstanding at 07/26/2002 |
15,574,410 |
FIRST INDIANA CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX
| Page | ||
| Part I | Financial Information | |
| Item 1. | Financial Statements | |
| Condensed Consolidated Balance Sheets as of June 30, 2002, December 31, 2001, and June 30, 2001 | 3 | |
| Condensed Consolidated Statements of Earnings
for the Three and Six Months Ended June 30, 2002 and 2001 | 4 | |
| Condensed Consolidated Statement of Shareholders'
Equity for the Six Months Ended June 30, 2002 | 5 | |
| Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001 | 6 | |
| Notes to Condensed Consolidated Financial Statements | 7 | |
| Item 2. | Management's Discussion and
Analysis of Results of Operations and Financial Condition | 12 |
| Item 3. | Disclosures About Market Risk | 24 |
| Part II | Other Information | |
| Item 1. | Legal Proceedings | 26 |
| Item 2. | Changes in Securities and Use of Proceeds | 26 |
| Item 3. | Defaults Upon Senior Securities | 26 |
| Item 4. | Submission of Matters to a Vote of Security Holders | 26 |
| Item 5. | Other Information | 26 |
| Item 6. | Exhibits and Reports on Form 8-K | 27 |
| Signatures | 28 |
2
Condensed Consolidated Balance Sheets
First Indiana Corporation and Subsidiaries
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
June 30 December 31 June 30
2002 2001 2001
------------- ------------ ------------
Assets
Cash $ 62,464 $ 62,147 $ 43,183
Federal Funds Sold - - -
------------- ------------ ------------
Total Cash and Cash Equivalents 62,464 62,147 43,183
Securities Available for Sale 145,085 147,863 154,527
Federal Home Loan Bank and Federal Reserve Bank Stock 22,491 22,491 21,591
Loans
Business 495,427 443,461 370,332
Consumer 672,972 675,111 727,543
Residential Mortgage 278,505 292,503 398,354
Single-Family Construction 220,658 224,926 240,722
Commercial Real Estate 142,532 120,485 113,445
------------- ------------ ------------
Total Loans 1,810,094 1,756,486 1,850,396
Allowance for Loan Losses (37,353) (37,135) (35,304)
------------- ------------ ------------
Net Loans 1,772,741 1,719,351 1,815,092
Premises and Equipment 20,148 20,587 20,918
Accrued Interest Receivable 11,936 15,246 17,325
Goodwill 13,045 13,045 13,482
Other Assets 49,428 45,927 44,976
------------- ------------ ------------
Total Assets $ 2,097,338 $ 2,046,657 $ 2,131,094
============= ============ ============
Liabilities and Shareholders' Equity
Liabilities
Non-Interest-Bearing Deposits $ 169,461 $ 165,023 $ 165,392
Interest-Bearing Deposits
Demand Deposits 160,781 140,175 113,166
Savings Deposits 414,581 447,832 411,498
Certificates of Deposit 638,725 626,448 744,952
------------- ------------ ------------
Total Interest-Bearing Deposits 1,214,087 1,214,455 1,269,616
------------- ------------ ------------
Total Deposits 1,383,548 1,379,478 1,435,008
Short-Term Borrowings 143,142 121,082 117,388
Federal Home Loan Bank Advances 319,538 296,647 326,652
Accrued Interest Payable 2,942 3,804 5,229
Advances by Borrowers for Taxes and Insurance 11,363 12,251 12,574
Other Liabilities 18,742 24,364 24,685
------------- ------------ ------------
Total Liabilities 1,879,275 1,837,626 1,921,536
------------- ------------ ------------
Shareholders' Equity
Preferred Stock, $0.01 Par Value: 2,000,000 Shares
Authorized; None Issued - - -
Common Stock, $0.01 Par Value: 33,000,000 Shares Authorized;
Issued: 2002 - 17,246,624 Shares;
2001 - 17,127,770 and 17,053,075 Shares 172 171 171
Capital Surplus 43,222 41,837 40,877
Retained Earnings 191,077 183,196 180,543
Accumulated Other Comprehensive Income 3,825 4,084 3,062
Treasury Stock at Cost: 2002 - 1,680,730 Shares;
2001 - 1,684,476 and 1,420,839 Shares (20,233) (20,257) (15,095)
------------- ------------ ------------
Total Shareholders' Equity 218,063 209,031 209,558
------------- ------------ ------------
Total Liabilities and Shareholders' Equity $ 2,097,338 $ 2,046,657 $ 2,131,094
============= ============ ============
See Notes to Condensed Consolidated Financial Statements
3
Condensed Consolidated Statements of Earnings
First Indiana Corporation and Subsidiaries
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended June 30 Six Months Ended June 30
-------------------------------- ---------------------------------
2002 2001 2002 2001
-------------------------------- ---------------- ----------------
Interest Income
Loans $ 29,343 $ 37,761 $ 58,371 $ 77,162
Securities Available for Sale 2,173 2,541 4,415 5,135
Dividends on FRB and FHLB Stock 350 417 683 843
Federal Funds Sold 3 158 15 340
-------------------------------- ---------------- ----------------
Total Interest Income 31,869 40,877 63,484 83,480
-------------------------------- ---------------- ----------------
Interest Expense
Deposits 9,772 16,075 19,972 33,213
Short-Term Borrowings 527 1,126 922 2,552
Federal Home Loan Bank Advances 3,097 4,796 6,923 9,709
-------------------------------- ---------------- ----------------
Total Interest Expense 13,396 21,997 27,817 45,474
-------------------------------- ---------------- ----------------
Net Interest Income 18,473 18,880 35,667 38,006
Provision for Loan Losses 4,159 2,439 6,769 4,878
-------------------------------- ---------------- ----------------
Net Interest Income after Provision for Loan
Losses 14,314 16,441 28,898 33,128
-------------------------------- ---------------- ----------------
Non-Interest Income
Loan and Deposit Charges 3,897 3,354 7,407 5,347
Loan Servicing Income 203 123 434 451
Loan Fees 792 1,010 1,397 1,993
Trust Fees 655 535 1,328 1,035
Somerset Financial Services Fees 2,539 2,226 6,822 6,295
Investment Product Sales Commissions 927 468 1,535 803
Sale of Loans 2,052 3,015 3,933 5,163
Sale of Investment Securities 223 - 223 -
Other 667 704 1,370 1,172
-------------------------------- ---------------- ----------------
Total Non-Interest Income 11,955 11,435 24,449 22,259
Non-Interest Expense
Salaries and Benefits 8,616 9,390 18,653 18,916
Net Occupancy 1,041 909 2,021 1,822
Equipment 1,555 1,786 3,144 3,461
Professional Services 1,025 1,014 2,096 1,943
Marketing 494 690 1,153 1,381
Telephone, Supplies, and Postage 893 903 1,672 1,785
Goodwill Amortization - 237 - 463
Other 1,669 1,796 3,644 3,651
-------------------------------- ---------------- ----------------
Total Non-Interest Expense 15,293 16,725 32,383 33,422
-------------------------------- ---------------- ----------------
Earnings before Income Taxes 10,976 11,151 20,964 21,965
Income Taxes 4,080 4,308 7,685 8,432
-------------------------------- ---------------- ----------------
Net Earnings $ 6,896 $ 6,843 $ 13,279 $ 13,533
================================ ================ ================
Basic Earnings Per Share $ 0.45 $ 0.44 $ 0.86 $ 0.87
================================ ================ ================
Diluted Earnings Per Share $ 0.43 $ 0.42 $ 0.84 $ 0.84
================================ ================ ================
Dividends Per Common Share $ 0.16 $ 0.128 $ 0.32 $ 0.256
================================ ================ ================
See Notes to Condensed Consolidated Financial Statements
4
Condensed Consolidated Statement of Shareholders' Equity
First Indiana Corporation and Subsidiaries
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
Accumulated
Other Total
Common Stock Capital Retained Comprehensive Treasury Shareholders'
-----------------------------
Shares Amount Surplus Earnings Income (Loss) Stock Equity
----------------- ----------- ----------- ----------- ----------------- --------------- --------------
Balance at December 31, 2001 15,443,294 $ 171 $41,837 $183,196 $ 4,084 $ (20,257) $ 209,031
Comprehensive Income:
Net Earnings - - - 13,279 - - 13,279
Unrealized Loss on Securities Available for Sale of $428,
Net of Income Taxes and Reclassification Adjustment of
$135, Net of Income Taxes - - - - (259) - (259)
--------------
Total Comprehensive Income 13,020
Dividends on Common Stock - $0.32 per share - - - (4,969) - - (4,969)
Exercise of Stock Options 130,566 1 1,444 - - - 1,445
Tax Benefit of Option Compensation - - 122 - - - 122
Common Stock Issued under Restricted Stock Plans -
Net of Amortization - - - (429) - - (429)
Purchase of Treasury Stock (4) - - - - - -
Reissuance of Treasury Stock 3,751 - 41 - - 24 65
Payment for Fractional Shares (530) - (11) - - - (11)
Redemption of Common Stock (11,183) - (211) - - - (211)
----------------- ----------- ----------- ----------- ----------------- --------------- --------------
Balance at June 30, 2002 15,565,894 $ 172 $43,222 $191,077 $ 3,825 $ (20,233) $ 218,063
================= =========== =========== =========== ================= =============== ==============
See Notes to Condensed Consolidated Financial Statements
5
Condensed Consolidated Statements of Cash Flows
First Indiana Corporation and Subsidiaries
(Dollars in Thousands)
(Unaudited)
Six Months Ended June 30
------------------------------------
2002 2001
------------------ -----------------
Cash Flows from Operating Activities
Net Earnings $ 13,279 $ 13,533
Adjustments to Reconcile Net Earnings to
Net Cash from Operating Activities
Gain on Sale of Loans and Securities Available for Sale, Net (4,156) (5,163)
Amortization of Goodwill - 463
Amortization of Premium, Discount, and Other Intangibles 315 1,197
Depreciation and Amortization of Premises and Equipment 1,384 1,376
Net Accretion of Loans 485 299
Provision for Loan Losses 6,769 4,878
Origination of Loans Held For Sale Net of Principal Collected (100,409) (128,921)
Proceeds from Sale of Loans Held for Sale 141,544 134,368
Tax Benefit of Option Compensation 122 160
Change In:
Accrued Interest Receivable 3,310 1,002
Other Assets (4,712) (11,507)
Accrued Interest Payable (862) (1,523)
Other Liabilities (5,579) 2,524
------------------ -----------------
Net Cash Provided by Operating Activities 51,490 12,686
------------------ -----------------
Cash Flows from Investing Activities
Proceeds from Sale of Securities Available for Sale 10,223 -
Proceeds from Maturities of Securities Available for Sale 12,989 6,106
Purchase of Securities Available for Sale (20,000) -
Originations of Loans Net of Principal Collected (55,872) (64,225)
Purchase of Loans (41,974) -
Purchase of Premises and Equipment (1,194) (3,442)
Proceeds from Sale of Premises and Equipment 246 343
Acquisition of Somerset, Net of Cash Acquired (43) (333)
------------------ -----------------
Net Cash Used by Investing Activities (95,625) (61,551)
------------------ -----------------
Cash Flows from Financing Activities
Net Change in Deposits 4,070 35,025
Net Change in Short-Term Borrowings 22,060 (337)
Repayment of Federal Home Loan Bank Advances (247,109) (125,102)
Borrowings of Federal Home Loan Bank Advances 270,000 115,000
Net Change in Advances by Borrowers for Taxes and Insurance (888) 6,386
Stock Option Proceeds 1,234 814
Purchase of Treasury Stock - (849)
Reissuance of Treasury Stock 65 -
Payment for Fractional Shares (11) -
Dividends Paid (4,969) (4,003)
------------------ -----------------
Net Cash Provided by Financing Activities 44,452 26,934
------------------ -----------------
Net Change in Cash and Cash Equivalents 317 (21,931)
Cash and Cash Equivalents at Beginning of Period 62,147 65,114
------------------ -----------------
Cash and Cash Equivalents at End of Period $ 62,464 $ 43,183
================== =================
See Notes to Condensed Consolidated Financial Statements
6
FIRST INDIANA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Months Ended June 30, 2002
(Unaudited)
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (comprising only normal recurring accruals) necessary for a fair presentation of the condensed consolidated financial statements have been included. Results for any interim period are not necessarily indicative of results to be expected for the year. The condensed consolidated financial statements include the accounts of First Indiana Corporation and its subsidiaries ("Corporation"). The principal subsidiaries of the Corporation are First Indiana Bank and its subsidiaries ("Bank") and Somerset Financial Services, LLC ("Somerset"). A summary of the Corporation's significant accounting policies is set forth in Note 1 of the Notes to Consolidated Financial Statements in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2001.
All share and per share data have been restated to reflect the five-for-four stock split declared on January 16, 2002.
Certain amounts in the Condensed Consolidated Financial Statements relating to prior periods have been reclassified to conform to current reporting presentation.
Note 2 - Earnings Per ShareBasic earnings per share for 2002 and 2001 were computed by dividing net earnings by the weighted average shares of common stock outstanding (15,546,223 and 15,647,628 for the three months ended June 30, 2002 and 2001 and 15,510,241 and 15,625,271 for the six months ended June 30, 2002 and 2001). Diluted earnings per share for 2002 and 2001 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 (15,899,768 and 16,104,571 for the three months ended June 30, 2002 and 2001 and 15,813,105 and 16,081,306 for the six months ended June 30, 2002 and 2001). Dilution of the per-share calculation relates to stock options.
7
An allowance has been established for loan losses. The provision for loan losses charged to operations is based on management's judgment of current economic conditions and the credit risk of the loan portfolio. Management believes that this allowance is adequate for the losses inherent in the loan portfolio. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review this allowance and may require the Corporation to recognize additions to the allowance based on their judgment about information available to them at the time of their examination.
Note 4 - Segment ReportingThe Corporation's business units are primarily organized to operate in the financial services industry and are determined by the products and services offered. The commercial segment originates business, single-family construction, and commercial real estate loans, encompasses the portfolio of Community Reinvestment Act loans, and provides traditional cash management services to business customers. 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 residential first mortgage loans. Investment portfolio management is included in the treasury segment. The retail segment includes the Bank's 26-branch network and investment product sales division. FirstTrust Indiana includes the services, fees, and costs of the trust segment. The Somerset segment includes all activities of the Corporation's Somerset Financial Services subsidiary. Revenues in the Corporation's segments are generated from loans, deposits, investments, servicing fees, loan sales, and fee income. There are no foreign operations.
The following segment financial information is based on the internal management reporting used by the Corporation to monitor and manage financial performance. 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 assets and liabilities held by each unit and assigning an appropriate expense or income offset based on the cost of funds. The Corporation accounts for intersegment revenues, expenses, and transfers based on estimates of the actual costs to perform the intersegment services.
8
Second Quarter
Somerset 2002
Retail Financial Consolidated
Commercial Consumer Residential Treasury Banking FirstTrust Services Non-Segment Totals
-------------- -------------- -------------- --------------- ------------ ------------ ------------ ------------------- ------------------
Average Segment Assets $ 816,486 $ 669,364 $ 286,440 $ 213,754 $ 20,960 $ 512 $14,201 $ 45,943 $ 2,067,660
Net Interest Income 7,592 6,022 1,008 1,615 2,105 - 13 118 (2) 18,473
Non-Interest Income 1,193 1,567 - 268 4,322 654 2,540 1,411 11,955
Intersegment Income (Expense) - 109 (109) - - - - - (3) -
Significant Noncash Items:
Provision for Loan Losses 2,887 1,249 23 - - - - - 4,159
Goodwill Amortization - - - - - - - - -
Earning (Loss) before Income Taxes 2,995 4,762 755 1,332 1,710 141 56 (775) 10,976
Second Quarter
Somerset 2001
Retail Financial Consolidated
Commercial Consumer Residential Treasury Banking FirstTrust Services Non-Segment Totals
-------------- -------------- -------------- --------------- ------------ ------------ ------------ ------------------- ------------------
Average Segment Assets $ 661,069 $ 721,782 $ 421,917 $ 234,099 $ 18,203 $ 814 $13,565 $ 49,269 $ 2,120,718
Net Interest Income 7,099 5,532 826 381 4,812 - 20 210 (2) 18,880
Non-Interest Income 1,444 2,738 0 15 3,263 535 2,228 1,212 11,435
Intersegment Income (Expense) - 106 (106) - - - - - (3) -
Significant Noncash Items:
Provision for Loan Losses 1,172 1,235 32 - - - - - 2,439
Goodwill Amortization - - - - 31 - 117 89 237
Earning (Loss) before Income Taxes 4,745 5,183 325 (268) 4,204 127 (58) (3,107) 11,151
First Six
Somerset Months 2002
Retail Financial Consolidated
Commercial Consumer Residential Treasury Banking FirstTrust Services Non-Segment Totals
-------------- -------------- -------------- --------------- ------------ ------------ ------------ ------------------- ------------------
Average Segment Assets $ 796,989 $ 666,691 $ 283,158 $ 217,375 $ 20,830 $ 525 $13,343 $ 44,780 $ 2,043,691
Net Interest Income 14,835 11,964 1,835 2,604 4,153 - 22 254 (2) 35,667
Non-Interest Income 2,248 3,033 - 283 7,872 1,327 6,857 2,829 24,449
Intersegment Income (Expense) - 218 (218) - - - - - (3) -
Significant Noncash Items:
Provision for Loan Losses 3,358 3,444 (33) - - - - - 6,769
Goodwill Amortization - - - - - - - - -
Earning (Loss) before Income Taxes 8,002 7,989 1,392 1,788 2,956 242 1,737 (3,142) 20,964
First Six
Somerset Months 2001
Retail Financial Consolidated
Commercial Consumer Residential Treasury Banking FirstTrust Services Non-Segment Totals
-------------- -------------- -------------- --------------- ------------ ------------ ------------ ------------------- ------------------
Average Segment Assets $ 622,866 $ 727,399 $ 439,948 $ 230,635 $ 17,731 $ 672 $12,881 $ 48,921 $ 2,101,053
Net Interest Income 13,419 10,437 1,995 4,796 6,877 - 37 445 (2) 38,006
Non-Interest Income 2,694 4,539 - 27 5,177 1,035 6,297 2,490 22,259
Intersegment Income (Expense) - 215 (215) - - - - - (3) -
Significant Noncash Items:
Provision for Loan Losses 1,917 2,892 69 - - - - - 4,878
Goodwill Amortization - - - - 61 - 228 174 463
Earning (Loss) before Income Taxes 9,145 8,476 976 3,550 4,236 171 1,612 (6,201) 21,965
| (1) | First Indiana implemented a new management reporting system in the first quarter of 2002, including a new transfer pricing methodology for funds used or provided by the various segments. Amounts shown for 2001 have been reclassified to reflect the change in management reporting format. |
| (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 assets and liabilities based on the cost of funds. |
| (3) | Intersegment revenues are received by one segment for performing a service for another segment. In the case of residential and consumer portfolios, the amount paid to the consumer loan processing office is capitalized and amortized over a four-year period. These entries are not included in the Corporation’s actual results. |
9
Effective January 1, 2002, the Corporation adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") resulting in no goodwill impairment. In accordance with the new standard, goodwill and intangible assets with indefinite lives are no longer amortized, but are subject to impairment tests at least annually. The Corporation had no existing intangible assets acquired in prior purchase business combinations and recognized no impairment loss relating to intangible assets upon adoption of SFAS 142.
The following table shows information relating to the adoption of SFAS 142.
(Dollars in Thousands, Except Per Share Amounts)
For the Three Months Ended For the Six Months Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------------ ------------------- ------------------ ------------------
Net Income $ 6,896 $ 6,843 $ 13,279 $ 13,533
Add back: Goodwill Amortization - 237 - 463
------------------ ------------------- ------------------ ------------------
Adjusted Net Income $ 6,896 $ 7,080 $ 13,279 $ 13,996
================== =================== ================== ==================
Basic Earnings Per Share $ 0.45 $ 0.44 $ 0.86 $ 0.87
Add back: Goodwill Amortization - 0.02 - 0.03
------------------ ------------------- ------------------ ------------------
Adjusted Basic Earnings Per Share $ 0.45 $ 0.46 $ 0.86 $ 0.90
================== =================== ================== ==================
Diluted Earnings Per Share $ 0.43 $ 0.42 $ 0.84 $ 0.84
Add back: Goodwill Amortization - 0.01 - 0.03
------------------ ------------------- ------------------ ------------------
Adjusted Diluted Earnings Per Share $ 0.43 $ 0.43 $ 0.84 $ 0.87
================== =================== ================== ==================
The following table shows changes in the carrying amount of goodwill for the six months ended June 30, 2002.
(Dollars in Thousands) Somerset
Retail Financial
Commercial Banking Services
Segment Segment Segment Total
-------------- ------------- ------------ ------------
Balance as of January 1, 2002 $ 4,108 $ 2,578 $ 6,359 $ 13,045
Changes during the period - - - -
-------------- ------------- ------------ ------------
Balance as of June 30, 2002 $ 4,108 $ 2,578 $ 6,359 $ 13,045
============== ============= ============ ============
10
The following table shows the change in the carrying amount of capitalized loan servicing rights:
(Dollars in Thousands) Three Months Ended June 30 Six Months Ended June 30
2002 2001 2002 2001
---------------- ---------------- ---------------- ----------------
Balance at Beginning of Period $ 9,863 $ 8,870 $ 9,819 $ 8,249
Additions 512 1,564 1,244 2,684
Amortization of Servicing Rights (629) (637) (1,313) (1,136)
Change in Valuation Reserves (67) (100) (71) (100)
---------------- ---------------- ---------------- ----------------
Balance at End of Period $ 9,679 $ 9,697 $ 9,679 $ 9,697
================ ================ ================ ================
Effective January 1, 2002, the Corporation adopted Statement of Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. Since SFAS 144 maintains many of the fundamental provisions of current accounting pronouncements, the adoption of this standard did not have a material impact on the financial condition or results of operations of the Corporation.
11
Financial Highlights
(Dollars in Thousands, Except Per Share Data)
For the Three Months Ended For the Six Months Ended
June 30 June 30
------------------------------ ------------------------------
2002 2001 2002 2001
-------------- ------------- ------------- --------------
Net Interest Income $ 18,473 $ 18,880 $ 35,667 $ 38,006
Provision for Loan Losses 4,159 2,439 6,769 4,878
Non-Interest Income 11,955 11,435 24,449 22,259
Non-Interest Expense 15,293 16,725 32,383 33,422
Net Earnings 6,896 6,843 13,279 13,533
Basic Earnings Per Share $ 0.45 $ 0.44 $ 0.86 $ 0.87
Diluted Earnings Per Share 0.43 0.42 0.84 0.84
Dividends Per Share 0.160 0.128 0.320 0.256
Net Interest Margin 3.76 % 3.73 % 3.68 % 3.78 %
Efficiency Ratio 50.26 55.17 53.87 55.46
Annualized Return on Average Equity 12.80 13.19 12.53 13.29
Annualized Return on Average Assets 1.34 1.29 1.31 1.30
Average Shares Outstanding 15,546,223 15,647,628 15,510,241 15,625,271
Average Diluted Shares Outstanding 15,899,768 16,104,571 15,813,105 16,081,306
At June 30
------------------------------
2002 2001
-------------- -------------
Assets $ 2,097,338 $ 2,131,094
Loans 1,810,094 1,850,396
Deposits 1,383,548 1,435,008
Shareholders' Equity 218,063 209,558
Shareholders' Equity/Assets 10.40 % 9.83 %
Shareholders' Equity Per Share $ 14.01 $ 13.41
Market Closing Price 21.77 20.82
Shares Outstanding 15,565,894 15,632,236
12
First Indiana Corporation and subsidiaries had net earnings of $6,896,000 for the three months ended June 30, 2002, compared with net earnings of $6,843,000 for the same period last year. Diluted earnings per share for the three months ended June 30, 2002 were $0.43, compared with $0.42 per share for the same period one year ago. Cash dividends for the second quarter of 2002 and 2001 were $0.16 and $0.128 per share of common stock outstanding.
For the first six months of 2002, net earnings were $13,279,000, compared with $13,533,000 one year ago. For the six months ended June 30, 2002, diluted earnings per share were $0.84, compared with $0.84 for the same period one year ago. Cash dividends for the six months ended June 30, 2002 and 2001 were $0.32 and $0.256 per common share outstanding.
Effective January 1, 2002, First Indiana adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets;” (“SFAS 142”). In accordance with the new standard, goodwill and intangible assets with indefinite lives are no longer amortized, but are subject to impairment tests at least annually. If these standards had been adopted in 2001, earnings for the second quarter would have been $7,080,000 or $0.43 per diluted share. Earnings for the six months ended June 30, 2001 would have been $13,996,000 or $0.87 per diluted share.
Annualized return on total average assets was 1.34 percent for the three months ended June 30, 2002, compared with 1.29 percent for the same period one year ago. For the six months ended June 30, 2002, the Corporation's annualized return on total average assets was 1.31 percent, compared with 1.30 percent for the same period in 2001.
Annualized return on total average equity was 12.80 percent for the three months ended June 30, 2002, compared with 13.19 percent for the same period one year ago. For the six months ended June 30, 2002, the Corporation's annualized return on total average equity was 12.53 percent, compared with 13.29 percent for the same period in 2001.
13
Net interest income was $18,473,000 and $35,667,000 for the three and six months ended June 30, 2002, respectively, compared with $18,880,000 and $38,006,000 for the three and six months ended June 30, 2001, respectively. Earning assets averaged $1,962,889,000 in the second quarter of 2002, compared with $2,020,588,000 for the same quarter in 2001. Net interest margin was 3.76 percent and 3.68 percent in the second quarter and first six months of 2002, respectively, compared to 3.73 percent and 3.78 percent in the second quarter and first six months of 2001, respectively. Rapidly falling interest rates in 2001, combined with a net asset-sensitive position within a one year-time period accounts for the lower margin in the year-to-date comparisons. A 16 percent increase in lower-cost interest-bearing demand and savings deposits in the first six months of 2002 compared to the first six months of 2001 helped to partially mitigate the impact of the rate reductions on the net interest margin. Net interest margin in the second quarter 2002 increased 18 basis points over the first quarter 2002 margin of 3.58 percent. This rebound reflects the downward repricing of liability rates as they catch up with the rate reductions in assets that occurred last year.
The contribution of interest-free funds to net interest margin varies depending on the level of interest-free funds and the level of interest rates. Interest-free funds averaged $299,157,000 and $298,385,000 in the second quarter and first six months of 2002, respectively, compared to $281,743,000 and $274,196,000 for the comparable periods of 2001. Average interest-free funds provided 49 and 53 basis points to the second quarter and year to date 2002 margin, respectively, compared with 70 and 73 basis points for the same periods in 2001. Although interest-free funds were higher in both periods of 2002, their impact declined compared to the second quarter and first six months of 2001 due to the lower interest rate environment.
14
The following tables provide information on the Corporation's net interest margin.
Net Interest Margin
(Dollars in Thousands, Except Per Share Data)
Three Months Ended
--------------------------------------------------------------------
June 30, 2002 June 30, 2001
--------------------------------- ----------------------------------
Average Yield / Average Yield /
Balance Interest Rate Balance Interest Rate
------------ ---------- --------- ------------ ---------- ---------
Assets
Federal Funds Sold $ 1,341 $ 3 0.97 % $ 14,846 $ 158 4.26 %
Securities Available for Sale 146,239 2,173 5.94 157,123 2,541 6.47
FHLB and FRB Stock 22,491 350 6.22 21,591 417 7.73
Loans
Business 469,760 6,630 5.66 333,900 6,826 8.20
Consumer 681,360 12,825 7.53 733,006 16,553 9.03
Residential Mortgage 284,780 4,795 6.74 421,047 7,474 7.10
Single-Family Construction 225,502 2,982 5.30 229,540 4,610 8.05
Commercial Real Estate 131,416 2,111 6.44 109,535 2,298 8.41
------------ ---------- ------------------------
Total Loans 1,792,818 29,343 6.55 1,827,028 37,761 8.28
------------ ---------- ------------------------
Total Earning Assets 1,962,889 31,869 6.50 2,020,588 40,877 8.10
Other Assets 104,771 100,130
------------ -------------
Total Assets $2,067,660 $2,120,718
============ =============
Liabilities and Shareholders' Equity
Interest-Bearing Deposits
Demand Deposits $ 168,690 $ 357 0.85 % $ 121,190 $ 430 1.42 %
Savings Deposits 425,240 1,430 1.35 401,964 3,706 3.70
Certificates of Deposit 657,105 7,985 4.87 773,852 11,939 6.19
------------ ---------- ------------------------
Total Interest-Bearing Deposits 1,251,035 9,772 3.13 1,297,006 16,075 4.97
Short-Term Borrowings 123,207 527 1.72 108,437 1,126 4.17
Federal Home Loan Bank Advances 289,490 3,097 4.29 333,402 4,796 5.77
------------ ---------- ------------------------
Total Interest-Bearing Liabilities 1,663,732 13,396 3.23 1,738,845 21,997 5.07
Non-Interest-Bearing Demand
Deposits 148,288 126,950
Other Liabilities 39,635 46,808
Shareholders' Equity 216,005 208,115
------------ -------------
Total Liabilities and Shareholders'
Equity $2,067,660 $2,120,718
============ ---------- =============-----------
Net Interest Income/Spread $ 18,473 3.27 % $ 18,880 3.03 %
========== ========= =========== =========
Net Interest Margin 3.76 % 3.73 %
========= =========
15
Net Interest Margin
(Dollars in Thousands, Except Per Share Data)
Six Months Ended
--------------------------------------------------------------------
June 30, 2002 June 30, 2001
--------------------------------- ----------------------------------
Average Yield / Average Yield /
Balance Interest Rate Balance Interest Rate
------------ ---------- --------- ------------ ---------- ---------
Assets
Federal Funds Sold $ 2,171 $ 15 1.41 % $ 13,986 $ 340 4.90 %
Securities Available for Sale 147,573 4,415 5.98 158,172 5,135 6.49
FHLB and FRB Stock 22,491 683 6.07 21,591 843 7.81
Loans
Business 453,759 12,889 5.73 306,489 13,229 8.70
Consumer 678,081 25,966 7.66 738,639 34,088 9.23
Residential Mortgage 281,823 9,454 6.71 438,950 15,771 7.19
Single-Family Construction 224,876 5,925 5.31 220,489 9,446 8.64
Commercial Real Estate 127,230 4,137 6.54 106,703 4,628 8.72
----------- ---------- -----------------------
Total Loans 1,765,769 58,371 6.63 1,811,270 77,162 8.54
----------- ---------- -----------------------
Total Earning Assets 1,938,004 63,484 6.57 2,005,019 83,480 8.35
Other Assets 105,687 96,034
----------- ------------
Total Assets $2,043,691 $2,101,053
=========== ============
Liabilities and Shareholders' Equity
Interest-Bearing Deposits
Demand Deposits $ 157,129 $ 646 0.83 % $ 119,201 $ 868 1.47 %
Savings Deposits 436,126 2,998 1.39 393,889 8,019 4.11
Certificates of Deposit 642,311 16,328 5.13 781,020 24,326 6.28
----------- ---------- -----------------------
Total Interest-Bearing Deposits 1,235,566 19,972 3.26 1,294,110 33,213 5.18
Short-Term Borrowings 109,418 922 1.70 107,626 2,552 4.78
Federal Home Loan Bank Advances 294,635 6,923 4.74 329,087 9,709 5.95
----------- ---------- -----------------------
Total Interest-Bearing Liabilities 1,639,619 27,817 3.42 1,730,823 45,474 5.30
Non-Interest-Bearing Demand
Deposits 147,438 120,252
Other Liabilities 42,890 44,702
Shareholders' Equity 213,744 205,276
----------- ------------
Total Liabilities and Shareholders'
Equity $2,043,691 $2,101,053
=========== ---------- ============-----------
Net Interest Income/Spread $ 35,667 3.15 % $ 38,006 3.05 %
========== ========= =========== =========
Net Interest Margin 3.68 % 3.78 %
========= =========
The continued uncertain economic environment, together with credit difficulties of several borrowers, led to an increase in the Corporation's provision for loan losses and charge-offs for the quarter. The provision increased to $4,159,000 from $2,439,000 for the same quarter last year. Net charge-offs for the second quarter 2002 were $4,999,000, or 1.12 percent of average loans on an annualized basis, compared to net charge-offs for the second quarter of 2001 of $1,882,000, or 0.41 percent of average loans. Business loan net charge-offs were $3,147,000 for the second quarter 2002, compared to $307,000 for the prior quarter. Consumer loan net charge-offs were $1,737,000 for the second quarter 2002, compared to $1,270,000 for the prior quarter.
16
Loan Charge-Offs and Recoveries
(Dollars in Thousands)
Three Months Ended Six Months Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
----------------------- ----------------------- ---------------------- ----------------------
Allowance for Loan Losses at Beginning of Period $ 38,193 $ 34,747 $ 37,135 $ 33,578
Charge-Offs
Business 3,217 176 3,525 199
Consumer 2,023 1,592 3,406 2,845
Residential Mortgage 20 41 20 89
Single-Family Construction 71 248 71 293
Commercial Real Estate 52 117 62 185
------------------- ------------------- ------------------ ------------------
Total Charge-Offs 5,383 2,174 7,084 3,611
Recoveries
Business 70 83 71 93
Consumer 286 170 399 318
Residential Mortgage - 12 - 12
Single-Family Construction 15 27 49 36
Commercial Real Estate 13 - 14 -
-------------------- ------------------- ------------------ ------------------
Total Recoveries 384 292 533 459
------------------- ------------------- ------------------ ------------------
Net Charge-Offs 4,999 1,882 6,551 3,152
Provision for Loan Losses 4,159 2,439 6,769 4,878
------------------- ------------------- ------------------ ------------------
Allowance for Loan Losses at End of Period $ 37,353 $ 35,304 $ 37,353 $ 35,304
=================== =================== ================== ==================
Net Charge-Offs to Average Loans (Annualized) 1.12 % 0.41 % 0.74 % 0.35 %
Allowance for Loan Losses to Loans at End of Period 2.06 1.91 2.06 1.91
Allowance for Loan Losses to Non-Performing Loans 108.83 101.29 108.83 101.29
Non-performing assets decreased to $42,037,000, or 2.31 percent of loans and other real estate owned ("OREO"), at June 30, 2002 compared with $45,720,000, or 2.60 percent of loans and OREO, at March 31, 2002 and $46,803,000, or 2.65 percent of loans and OREO at December 31, 2001, due to decreases in residential mortgage and single-family construction non-accrual loans, partially offset by an increase in commercial real estate non-accrual loans. Non-performing assets at June 30, 2001 were $37,827,000, or 2.04 percent of loans and OREO. The increase in non-performing assets compared to one year ago reflects an increase in OREO.
17
(Dollars in Thousands) June 30, 2002 December 31, 2001 June 30, 2001
------------------ ------------------ -----------------
Non-Performing Loans
Non-Accrual Loans
Business $ 6,310 $ 5,880 $ 3,847
Consumer 12,118 13,532 8,438
Residential Mortgage 3,773 6,447 4,951
Single-Family Construction 5,116 8,165 4,798
Commercial Real Estate 3,127 2,475 2,584
---------------- --------------- ---------------
Total Non-Accrual Loans 30,444 36,499 24,618
---------------- --------------- ---------------
Accruing Loans
Business - Current as to Interest and Principal - - 5,557
Business - Past Due 90 Days or More 1,148 307 309
Consumer - Past Due 90 Days or More 2,683 3,005 4,371
Single-Family Construction - Past Due 90 Days or More 48 - -
---------------- --------------- ---------------
Total Accruing Loans 3,879 3,312 10,237
---------------- --------------- ---------------
Total Non-Performing Loans 34,323 39,811 34,855
Other Real Estate Owned, Net 7,714 6,992 2,972
---------------- --------------- ---------------
Total Non-Performing Assets $ 42,037 $ 46,803 $ 37,827
================ =============== ===============
Non-Performing Loans to Loans at End of Period 1.90 % 2.27 % 1.88 %
Non-Performing Assets to Loans and OREO at End of Period 2.31 2.65 2.04
Non-Interest Income
Total non-interest income was $11,955,000 for the three months ended June 30, 2002, compared with $11,435,000 for the same period in 2001. For the six months ended June 30, 2002 and 2001, total non-interest income was $24,449,000 and $22,259,000. The increase in non-interest income for the three and six months ended June 30, 2002 over the same periods in 2001 was broad-based and was the result of First Indiana's strategy of expanding client relationships.
Loan and deposit charges increased 16 percent to $3,897,000 in the second quarter of 2002 compared to $3,354,000 in the second quarter of 2001. For the six months ended June 30, 2002 and 2001 loan and deposit charges were $7,407,000 and $5,347,000. The growth from both periods of 2001 resulted from a new fee initiative introduced in the second quarter of 2001 and an expanded core checking and savings account base.
18
Loan servicing income in the second quarter of 2002 was $203,000 compared to $123,000 in the second quarter 2001. Loan servicing income for the first six months of 2002 was $434,000 compared to $451,000 for the same period in 2001. Loan servicing income was reduced in the first quarter of 2002 compared to the first quarter of 2001 due to the high level of residential loan prepayments. In the second quarter of 2002 prepayments returned to a more normal level. Additions to the mortgage servicing rights valuation reserves were $33,000 less in the second quarter of 2002 than in the second quarter 2001, which had a favorable impact on the quarter-to-quarter comparison.
Loan fees totaled $792,000 for the three months ended June 30, 2002 compared to $1,010,000 in the same period one year ago. For the six months ended June 30, 2002 and 2001, loan fees were $1,397,000 and $1,993,000. This decline in fees is primarily due to decreased business and single-family construction loan originations.
FirstTrust Indiana's fees increased 22 percent and 28 percent to $655,000 and $1,328,000 in the second quarter and first six months of 2002 compared to the same periods last year. The Bank's investment advisory and trust division had assets under management at June 30, 2002 of $664,657,000, compared to $593,459,000 one year earlier.
Somerset fees for the second quarter 2002 were $2,539,000 compared to $2,226,000 for the second quarter 2001, an increase of 14 percent. Somerset fees for the first six months of 2002 increased 8 percent to $6,822,000 from $6,295,000 for the same period of 2001. Investment product sales commissions, generated by the Bank's subsidiary First Indiana Investor Services, increased 98 percent to $927,000 in the second quarter of 2002 from $468,000 in the second quarter of 2001. For the six months ended June 30, 2002, investment product sales commissions grew 91 percent to $1,535,000 from $803,000 for the same period of 2001. Somerset Financial Services and First Indiana Investor Services have increased fee-generating activities as a part of the Corporation's strategy of expanding client relationships.
Gain on the sale of loans in the second quarter of 2002 was $2,052,000 compared to $3,015,000 for the same quarter last year. Gains on the sale of loans was $3,933,000 for the first six months of 2002 compared to $5,163,000 for the first six months of last year. Consumer loans sold in the second quarter of 2002 totaled $65,001,000 compared to $75,442,000 in the second quarter of 2001. For the six months ended June 30, 2002 and 2001, consumer loans sold totaled $137,297,000 and $127,994,000. Gain on the sale of loans was down primarily due to lower prices in 2002 following relatively high prices realized in 2001.
In the second quarter of 2002, the Corporation sold $10,000,000 of securities available for sale for a net gain of $223,000.
Other non-interest income for the three months ended June 30, 2002 decreased $37,000 to $667,000 from $704,000 for the same period in 2001 and is primarily the result of lower prepayment fees on consumer loans.
19
Non-interest expense for the three months ended June 30, 2002 was $15,293,000 compared to $16,725,000 for the same period in 2001, a decrease of nine percent. For the six months ended June 30, 2002 and 2001, total non-interest expense was $32,383,000 and $33,422,000, a decrease of three percent.
Salaries and benefits for the second quarter of 2002 were $8,616,000 compared to $9,390,000 for the second quarter of 2001. For the first six months of 2002 salaries and benefits were $18,653,000 compared to $18,916,000 for the same period of 2001. Salary expense was $7,012,000 in the second quarter of 2002 and $7,877,000 for the second quarter of 2001. Salary expense for the first six months of 2002 was $15,198,000 compared to $15,816,000 for the first six months of 2001. The increased level of loan charge-offs in the second quarter of 2002 led to a significant reduction in the management incentive accrual since the payment of incentives to the management group at year-end 2002 is linked to the attainment of certain financial results. Partially offsetting this reduction were normal salary increases and staffing growth in the Corporation's commercial lending and Somerset Financial Services lines of business. Employee benefits expense was $1,604,000 for the second quarter of 2002 and $1,513,000 for the second quarter of 2001. Employee benefits expense was $3,455,000 for the six months ended June 30, 2002 and $3,100,000 for the same period of 2001. The increase in 2002 consisted largely of increased group insurance and payroll tax expenses.
Net occupancy expense in the second quarter of 2002 increased 15 percent to $1,041,000 from $909,000 in the second quarter of 2001. Net occupancy expense for the first six months of 2002 increased 11 percent to $2,021,000 from $1,822,000 for the comparable period of 2001. These increases are due to normal increases in rental expense, rental expense for new branch facilities, and related increases in utilities, depreciation, and maintenance expenses.
Professional services expense was $2,096,000 for the first six months of 2002 compared to $1,943,000 for the first six months of 2001. This increase is primarily due to increased expenses associated with loan delinquencies and foreclosures in the first quarter of 2002.
Equipment, marketing, telephone, supplies, and postage, and other non-interest expenses decreased in the second quarter and first six months of 2002 compared to the same periods last year as a result of ongoing expense control efforts. Included in other non-interest expense in the first quarter of 2001 was a $128,000 loss on the disposition of Somerset Financial Services' 50 percent stake in Paradym Technologies, Inc. ("Paradym"). As a condition of the approval of the Bank's charter change, federal regulators required the disposition of Paradym.
In accordance with the provisions of SFAS 142, the Corporation ceased the amortization of goodwill beginning January 1, 2002. Goodwill amortization for the second quarter and first six months of 2001 was $237,000 and $463,000, respectively.
20
The Corporation's efficiency ratio was 50.26 percent for the second quarter of 2002, compared to 55.17 percent for the second quarter of 2001. The Corporation's efficiency ratio for the six months ended June 30, 2002 and 2001 was 53.87 percent and 55.46 percent. The decrease in non-interest expense compared to last year for both periods presented helped to lower the efficiency ratio.
Financial ConditionTotal assets at June 30, 2002 were $2,097,338,000, an increase of $50,681,000 from $2,046,657,000 at December 31, 2001 and a decrease of $33,756,000 from $2,131,094,000 at June 30, 2001.
Loans at June 30, 2002 were $1,810,094,000, compared with $1,756,486,000 at December 31, 2001 and $1,850,396,000 at June 30, 2001. The continued effects of the loan portfolio restructuring are evident from growth in the targeted portfolios of business and commercial real estate loans. Business loans at June 30, 2002 were $495,427,000, compared to $370,332,000 at June 30, 2001. Commercial real estate loans at June 30, 2002 were $142,532,000, compared to $113,445,000 at June 30, 2001. Consumer and residential mortgage loan outstandings declined as a result of prepayments due to the lower interest rate environment. Though residential mortgages also decreased as a result of the Corporation's strategy to de-emphasize origination of residential mortgages, prepayments caused outstandings to decline faster than anticipated. To counteract this decrease, the Bank purchased $21,770,000 and $20,013,000, respectively, in residential mortgage loans during the first and second quarters of 2002.
Total deposits were $1,383,548,000 at June 30, 2002, compared with $1,435,008,000 at June 30, 2001. Due to the Corporation's continuing relationship-oriented strategy, the mix of deposits shifted to an increased percentage of demand and savings core deposits, which reduced the Corporation's dependence on higher-interest certificates of deposit and borrowed funds. Demand deposits were $330,242,000 at June 30, 2002 compared to $278,558,000 at June 30, 2001, an increase of 19 percent. Average demand deposits for the first six months of 2002 and 2001 were $304,567,000 and $239,453,000, an increase on average of $65,114,000 or 27 percent. The increase in average demand deposits for the first six months of 2002 when compared to the comparable period of 2001 better reflects this shift to core deposits. Savings deposits were $414,581,000 at June 30, 2002 compared to $411,498,000 at June 30, 2001. Average savings deposits for the first six months of 2002 increased 11 percent when compared to the same period of 2001. Certificates of deposit were $638,725,000 at June 30, 2002, compared to $626,448,000 at December 31, 2001 and $744,952,000 at June 30, 2001. Certificates of deposits averaged $642,311,000 and $781,020,000 for the first six months of 2002 and 2001.
Short-term borrowings increased to $143,142,000 at June 30, 2002 compared with $121,082,000 at December 31, 2001 and $117,388,000 at June 30, 2001. Federal Home Loan Bank ("FHLB") advances totaled $319,538,000 at June 30, 2002, compared with $296,647,000 at December 31, 2001 and $326,652,000 at June 30, 2001.
21
At June 30, 2002, shareholders' equity was $218,063,000, or 10.40 percent of total assets, compared with $209,031,000, or 10.21 percent, at December 31, 2001 and $209,558,000, or 9.83 percent, at June 30, 2001.
On January 16, 2002, the Board of Directors approved a five-for-four stock split, which was effected on February 27, 2002. All share and per share information has been restated to reflect the stock split.
The Corporation paid a quarterly dividend of $0.16 per common share on June 14, 2002 to shareholders of record as of June 6, 2002. This reflects a 25 percent increase from the quarterly dividend of $0.128 per share in 2001.
First Indiana Corporation is subject to capital requirements and guidelines imposed on bank holding companies by the Federal Reserve Board. First Indiana Bank is subject to capital requirements and guidelines imposed on national banks by the Office of the Comptroller of the Currency. The Corporation and the Bank are required by their respective regulators to maintain minimum capital ratios. The Federal Deposit Insurance Corporation Improvement Act of 1999 ("FDICIA") established ratios and guidelines for banks to be considered "well-capitalized." These capital requirements establish higher capital standards for banks and bank holding companies that assume greater risks. For this purpose, assets and certain specified off-balance sheet commitments are assigned to four risk categories, each weighted differently based on the level of credit risk ascribed to such assets or commitments.
The following table shows the Corporation's and the Bank's strong capital levels and compliance with all capital requirements at June 30, 2002. Additionally, the Bank exceeds the capital levels set by FDICIA for a bank to be considered well-capitalized.
(Dollars in Thousands) Minimum To be
Actual Capital Adequacy Well Capitalized
------------------- ------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------------------- ------------------- --------------------
June 30, 2002
Leverage (Tier 1 Capital to Average Assets)
First Indiana Corporation $201,193 9.79 % $ 82,185 4.00 % N/A N/A
First Indiana Bank 178,739 8.74 81,793 4.00 $102,241 5.00 %
Tier 1 Capital (to Risk-Weighted Assets)
First Indiana Corporation $201,193 10.42 % $ 77,260 4.00 % N/A N/A
First Indiana Bank 178,739 9.28 77,063 4.00 $115,595 6.00 %
Total Capital (to Risk-Weighted Assets)
First Indiana Corporation $225,500 11.67 % $154,520 8.00 % N/A N/A
First Indiana Bank 202,985 10.54 154,127 8.00 $192,658 10.00 %
22
First Indiana Corporation conducts its business through subsidiaries. The main source of funds for the Corporation is dividends from the Bank. The Corporation has no significant assets other than its investments in the Bank and Somerset.
The Bank's primary source of funds is deposits, which were $1,383,548,000 at June 30, 2002, $1,379,478,000 at December 31, 2001, and $1,435,008,000 at June 30, 2001. The Bank also relies on FHLB advances, repurchase agreements, loan payments, loan payoffs, and sale of loans as sources of funds. Although the Bank continues to rely on core deposits as its chief source of funds, the use of borrowed funds, including FHLB advances, continues to be an important component of the Bank's liquidity. Scheduled loan payments are a relatively stable source of funds, but loan payoffs, the sale of loans, and deposit inflows and outflows fluctuate, depending on interest rates and economic conditions. However, management does not expect any of these fluctuations to occur in amounts that would affect the Corporation's ability to meet consumer demand for liquidity or regulatory liquidity requirements.
23
First Indiana engages in rigorous, formal asset/liability management, with objectives to manage interest rate risk, ensure adequate liquidity, and coordinate sources and uses of funds. The management of interest rate risk entails the control, within acceptable limits, of the impact on earnings caused by fluctuating interest rates and changing rate relationships. In this process, management uses an internal earnings simulation model to identify and measure interest rate sensitivity. The Asset/Liability Committee ("ALCO") reviews the earnings impact of various changes in interest rates each month and manages the risk to maintain an acceptable level of change in net interest income. The Board of Directors also reviews this information every quarter.
The Corporation's success is largely dependent upon its ability to manage interest rate risk, which is defined as the exposure of the Corporation's net interest income and net earnings to changes in interest rates. ALCO is responsible for managing interest rate risk, and the Corporation has established acceptable limits for interest rate exposure, which are reviewed monthly. The Corporation uses a model that measures interest rate sensitivity to determine the impact on net interest income 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, expected repricing spreads on variable-rate products, and contractual maturities and repayments on lending and investment products. The model incorporates interest rate sensitive instruments that are held to maturity or available for sale. The Corporation has no trading assets. Based on the information and assumptions in effect at June 30, 2002, the model forecasts that a 100 basis point increase in interest rates over a 12-month period would result in a 3.9 percent increase in net interest income while a 100 basis point decrease in interest rates would result in a 4.9 percent decrease 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 model forecasts may not be indicative of actual results.
The Corporation also monitors interest rate sensitivity using traditional gap analysis. Gap analysis is a static management tool used to identify mismatches in the repricing of assets and liabilities within specified periods of 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 may be made when the interest rate outlook changes.
At June 30, 2002, First Indiana's six-month and one-year cumulative gaps stood at a positive 4.90 percent and a positive 6.84 percent of total interest-earning assets. This compares with a positive 5.43 percent and a positive 3.30 percent at December 31, 2001.
24
The following table shows First Indiana's interest rate sensitivity at June 30, 2002 and December 31, 2001.
(Dollars in Thousands) Over 180 Over One
Percent Within Days to Year to Over
Rate Balance of Total 180 Days One Year Five Years Five Years
------- ---------------------- ----------- ------------ ----------- ------------
Interest-Earning Assets
Federal Funds Sold - % $ - - % $ - $ - $ - $ -
Securities Available for Sale 6.18 145,085 7.34 10,371 23,778 104,612 6,324
FHLB / FRB Stock 6.22 22,491 1.14 - - - 22,491
Loans (1)
Business 5.66 495,427 25.05 428,676 5,109 61,642 -
Consumer 7.43 672,972 34.02 341,255 43,784 214,673 73,260
Residential Mortgage 6.70 278,505 14.08 76,170 58,456 112,525 31,354
Single-Family Construction 5.25 220,658 11.16 198,592 11,033 11,033 -
Commercial Real Estate 6.44 142,532 7.21 105,342 8,773 20,800 7,617
----------------------------------- ------------ ----------- ------------
6.46 $ 1,977,670 100.00 % 1,160,406 150,933 525,285 141,046
========================----------- ------------ ----------- ------------
Interest-Bearing Liabilities
Deposits
Demand Deposits (2) 0.85 $ 160,781 9.59 % 30,592 - - 130,189
Savings Deposits (2) 1.30 414,581 24.73 368,786 1,184 9,501 35,110
Certificates of Deposit $100,000 or
Greater 4.64 298,370 17.79 176,721 53,114 68,535 -
Other Certificates of Deposit 4.78 340,355 20.30 156,177 53,384 130,794 -
---------------------- ----------- ------------ ----------- ------------
3.04 1,214,087 72.41 732,276 107,682 208,830 165,299
Borrowings
Short-Term Borrowings 1.69 143,142 8.54 143,142 - - -
FHLB Advances 3.87 319,538 19.05 188,000 5,000 85,823 40,715
----------------------------------- ------------ ----------- ------------
3.08 1,676,767 100.00 % 1,063,418 112,682 294,653 206,014
===========
Net - Other (3) 300,903 300,903
------------- ----------- ------------ ----------- ------------
Total $ 1,977,670 1,063,418 112,682 294,653 506,917
=============
----------- ------------ ----------- ------------
Rate Sensitivity Gap $ 96,988 $ 38,251 $ 230,632 $(365,871)
=========== ============ =========== ============
June 30, 2002 - Cumulative Rate Sensitivity Gap $ 96,988 $ 135,239 $ 365,871
=========== ============ ===========
Percent of Total Interest-Earning Assets 4.90% 6.84% 18.50%
=========== ============ ===========
December 31, 2001 - Cumulative Rate Sensitivity Gap $ 104,575 $ 63,624 $ 329,676
=========== ============ ===========
Percent of Total Interest-Earning Assets 5.43% 3.30% 17.11%
=========== ============ ===========
| (1) | The distribution of fixed-rate loans is based upon contractual maturity and scheduled contractual repayments adjusted for estimated prepayments. The distribution of adjustable-rate loans is based on the earliest repricing date for each loan. Included in consumer loans are $12.0 million of home equity loans held for sale. |
| (2) | 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 trends on these types of deposits experienced through periods of significant increases and decreases in interest rates without changes in rates paid on these deposits. The rates represent a blended rate on all deposit types in the category. |
| (3) | Net - Other is the excess of non-interest-bearing liabilities and capital over non-interest-earning assets. |
25
Items 1, 2, 3, and 4 are not applicable. |
Item 5. |
Other Information
|
|
|
26
| Item 6. | Exhibits and Reports on Form 8-K |
| (a) Exhibits | |
|
3(i)
Articles of Incorporation of First Indiana Corporation, incorporated by reference to Exhibit 3(a) to the Annual Report on Form 10-K of First Indiana Corporation for the year ended December 31, 2000. |
|
|
3(ii)
Amended and Restated Bylaws of First Indiana Corporation, incorporated by reference to Exhibit 3(b) to the Annual Report on Form 10-K of First Indiana Corporation for the year ended December 31, 2000. |
|
|
4
Amendment to Rights Agreement, incorporated by reference to Exhibit 4 of the Form 10-Q of First Indiana Corporation which was filed on May 13, 2002. |
|
| (b) Reports on Form 8-K | |
|
(i)
On April 16, 2002, a
Form 8-K was filed related to the April 15, 2002, first quarter 2002 earnings release. |
|
|
(ii)
On April 30, 2002, a Form 8-K was filed incorporating slides
presented at the First Indiana Corporation annual shareholders’meeting held April 30, 2002. |
|
|
(iii)
On May 29, 2002, a Form 8-K was filed related to the election of Anat Bird to the
Corporation’s Board of Directors. |
|
|
(iv)
On July 17, 2002, a Form 8-K was filed related to the July 16, 2002, second quarter 2002
earnings release. |
|
|
(v)
On July 25, 2002, a Form 8-K was filed related to the July 23, 2002, press release
announcing
the declaration of a quarterly dividend. |
27
28