Back to GetFilings.com
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from____ to ____
Commission File Number 0-14354
FIRST INDIANA CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-1692825
(State of Incorporation) (I.R.S. Employer Identification No.)
135 N. Pennsylvania St.
Indianapolis, Indiana 46204
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(317) 269-1200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
Common Stock, $.01 par value NASDAQ
______________________________________
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No ___.
State the aggregate market value of the voting stock held
by non-affiliates of the registrant: $180,704,000 as of February 28,
1999.
On February 28, 1999, the registrant had 12,653,646 shares of
common stock outstanding, $.01 par value
Documents Incorporated by Reference: Portions of the Annual Report to
Shareholders for the Year Ended December 31, 1998 (Part II) and portions of
the definitive proxy statement for the 1998 Annual Meeting of Shareholders
(Part III).
1
FIRST INDIANA CORPORATION
FORM 10-K
Table of Contents
Page
PART I 3
Item 1. Business 3
Item 2. Properties 23
Item 3. Legal Proceedings 23
Item 4. Submission of Matters to a Vote
of Security Holders 23
PART II 24
Item 5. Market for Registrant's Common Equity
and Related Shareholder Matters 24
Item 6. Selected Financial Data 24
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operation 24
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk 24
Item 8. Financial Statements and
Supplementary Data 24
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 24
PART III 25
Item 10. Directors and Executive Officers
of the Registrant 25
Item 11. Executive Compensation 26
Item 12. Security Ownership of Certain
Beneficial Owners and Management 26
Item 13. Certain Relationships and
Related Transactions 26
PART IV 27
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K 27
SIGNATURES 28
EXHIBIT INDEX 29
2
This Annual Report on Form 10-K ("Form 10-K") contains
statements which constitute forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
These statements appear in a number of places in this Form 10-K and
include statements regarding the intent, belief, outlook, estimate or
expectations of the Corporation (as defined below), its directors or its
officers primarily with respect to future events and the future financial
performance of the Corporation. Readers of this Form 10-K are
cautioned that any such forward looking statements are not
guarantees of future events or performance and involve risks and
uncertainties, and that actual results may differ materially from those
in the forward looking statements as a result of various factors. The
accompanying information contained in this Form 10-K identifies
important factors that could cause such differences. These factors
include changes in interest rates, loss of deposits and loan demand to
other savings and financial institutions, substantial changes in
financial markets; changes in real estate values and the real estate
market; regulatory changes, or unanticipated results in pending legal
proceedings.
PART I
Item I. Business
First Indiana Corporation
First Indiana Corporation, an Indiana corporation formed in 1986
(the "Corporation"), is a nondiversified, unitary savings and loan holding
company. The principal asset of the Corporation is the outstanding stock
of First Indiana Bank ("First Indiana" or the "Bank"), its wholly owned
subsidiary. The Corporation has no separate operations, and its business
consists only of First Indiana and its subsidiaries. First Indiana's
subsidiaries include One Mortgage Corporation, a mortgage origination
subsidiary, One Investment Corporation, an operating subsidiary, and One
Property Corporation, a real estate investment subsidiary.
First Indiana Bank
First Indiana is a federally chartered stock savings bank whose
depository accounts are insured by the Savings Association Insurance Fund
("SAIF") of the Federal Deposit Insurance Corporation (the "FDIC").
Established in 1934, First Indiana was operated as a federally chartered,
mutual savings and loan institution until August 1983, when it converted
to a federal stock savings bank. First Indiana has $1.8 billion in assets and
is the largest publicly-held bank based in Indianapolis.
First Indiana is engaged primarily in the business of attracting
deposits from the general public and originating residential mortgage
loans, business loans, and consumer loans. First Indiana offers a full range
of banking services through 27 banking offices located throughout
metropolitan Indianapolis, Evansville, Franklin, Pendleton, Westfield,
Mooresville and Rushville, Indiana. The Bank's divisions in Evansville,
Mooresville, and Rushville operated under the names Mid-West Federal
Savings Bank, Mooresville Savings Bank, and First Federal Savings and
Loan of Rushville until June 1996, when all three divisions adopted the
First Indiana Bank name. The Bank also originates home equity loans
indirectly through a network of loan originators and loan agents throughout
the United States.
First Indiana operates mortgage origination offices in Florida and
North Carolina as One Mortgage Corporation. First Indiana has mortgage
and consumer loan service offices throughout Indiana, Florida, Georgia,
Illinois, North Carolina, Ohio, and Oregon. First Indiana's investment and
insurance subsidiaries were sold in the second quarter of 1996 to The
Somerset Group, Inc., a publicly held affiliate which owns approximately
23 percent of the Corporation's stock. In early 1999, First Indiana
established a new operating subsidiary, One Investment Corporation. One
Investment Corporation may purchase and sell loan participations
originated by First Indiana and by others in the secondary market.
3
In the fourth quarter of 1998, First Indiana established a new
division, FirstTrust Indiana. An investment advisory and trust fund
service, 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.
The metropolitan area served by First Indiana consists of
Indianapolis, the State's largest city and capital, and the surrounding
six-county suburban and agricultural areas in the central part of the State.
The population of the metropolitan Indianapolis area in 1990 was
approximately 1,200,000. Indianapolis' diversified economy includes
manufacturing and service industries, such as Eli Lilly & Company
(pharmaceuticals), the federal and state governments, General Motors
(automotive), and Ameritech (communications).
First Indiana's Evansville Division is based in the third largest
metropolitan area in Indiana, and conducts business through five offices in
Evansville and surrounding communities. The 1990 population of the
Evansville metropolitan statistical area was about 280,000. The local
economy is primarily agricultural- and manufacturing-based. Among the
largest local employers are Bristol-Myers Squibb (nutritional and
pharmaceutical products), Whirlpool (refrigerators and freezers), and
General Electric Co. (plastics). Evansville is the regional hub for a tri-
state area which includes portions of Indiana, Kentucky and Illinois.
First Indiana experiences substantial competition in attracting and
retaining deposits and in lending funds. The primary factors in competing
for deposits are the ability to offer attractive interest rates and products,
and meeting and exceeding customer expectations regarding office
locations and flexible hours. Direct competition for deposits comes from
other depository institutions, money market mutual funds, and other
investment products. The primary factors in competing for loans are
interest rates, loan origination fees, and loan product variety. Competition
for origination of loans normally comes from other depository institutions,
lending brokers, and insurance companies.
Lending Activities
General. First Indiana offers a broad range of lending products
to selected segments of the markets it serves. The Bank has expanded
upon its heritage as a single-family mortgage lender by offering a complete
array of loans secured primarily by real estate. In addition to first mortgage
loans, the Bank now has a substantial market presence in residential
construction lending, commercial real estate lending, business loans to
selected segments of the market, and consumer loans, primarily home
equity loans originated both on a direct and indirect basis.
The Bank's management believes that the surest path for the
Bank's long-term success is to concentrate on selected product lines sold
to certain segments of the market. The Bank implemented a series of
process and operational enhancements that enable it to act as both a
mortgage banker and portfolio lender with maximum efficiencies as
interest rates cause consumer preferences to shift between these two types
of residential mortgage loan products.
To minimize the mismatch between the duration of its interest-rate-
sensitive assets and liabilities, First Indiana has a policy of (i)
increasing its portfolio of adjustable-rate and shorter-term mortgage,
consumer and business loans; (ii) selling most fixed-rate, longer-term
loans into the secondary market unless those loans can be funded by
liabilities of a similar maturity; and (iii) increasing transaction accounts,
which are less volatile than certificates of deposit.
Loan Portfolio Composition. The following tables set forth
information concerning the composition of First Indiana's loan portfolio in
dollar amounts and in percentages, by type of security, and by type of loan.
Also presented is a reconciliation of total loans receivable and mortgage-
backed securities ("loans") before net items to loans receivable after net
items. Net items consist of loans in process (undisbursed portion of loan
balances), deferred income, unearned discounts and unamortized
premiums, and allowances for loan losses.
4
Loan Portfolio Composition
(Dollars in Thousands) At December 31,
---------------
1998 1997 1996
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Loans by Type of Security:
First Mortgage Loans Secured by:
Single-Family Units $ 937,321 52.9% $ 750,619 49.4% $ 640,743 47.3%
2-4 Family Units 1,489 0.1% 1,093 0.1% 1,643 0.1%
Over 4 Family Units 7,365 0.4% 9,844 0.6% 9,586 0.7%
Mortgage-Backed Securities 29,680 1.7% 38,081 2.6% 36,152 2.8%
Commercial Real Estate and
Other Mortgage Loans 25,411 1.4% 32,269 2.1% 37,735 2.8%
Consumer Loans 580,525 32.8% 548,016 36.1% 526,769 38.9%
Business Loans 189,074 10.7% 137,517 9.1% 100,513 7.4%
---------- ------ ---------- ----------------- ------
Total Mortgage-Backed
Securities and Loans Receivable
(Before Net Items) $1,770,865 100.0% $1,517,439 100.0% $1,353,141 100.0%
========== ====== ========== ====== ========== ======
Loans by Type of Loan:
Real Estate:
Conventional:
Loans on Existing Property $ 551,641 31.1% $ 530,603 34.9% $ 463,211 34.2%
Construction Loans:
Commercial Real Estate Loans 0 0.0% 0 0.0% 11 0.0%
Commercial and Industrial Loans 10,141 0.6% 13,050 0.8% 7,944 0.6%
Residential Loans 406,650 23.0% 253,259 16.7% 214,433 15.8%
Insured or Guaranteed:
Mortgage-Backed Securities 29,680 1.7% 38,081 2.6% 36,152 2.8%
FHA and VA Loans 13,295 0.7% 9,963 0.7% 12,052 0.9%
Total Real Estate Loans 1,011,407 57.1% 844,956 55.7% 733,803 54.3%
Consumer Loans 580,525 32.8% 548,016 36.1% 526,769 38.9%
Business Loans 178,933 10.1% 124,467 8.2% 92,569 6.8%
---------- ----- ---------- ----- ----------- -----
Total Mortgage-Backed Securities
and Loans Receivable
(Before Net Items) $1,770,865 100.0% $1,517,439 100.0% $1,353,141 100.0%
========== ====== ========== ====== ========== ======
At December 31,
----------------
1995 1994
Amount Percent Amount Percent
------ ------- ------ -------
Loans by Type of Security:
First Mortgage Loans Secured by:
Single-Family Units $ 625,133 45.0% $ 583,345 47.1%
2-4 Family Units 1,885 0.1% 2,173 0.2%
Over 4 Family Units 18,946 1.4% 21,881 1.7%
Mortgage-Backed Securities 49,089 3.6% 69,061 5.6%
Commercial Real Estate and
Other Mortgage Loans 46,137 3.3% 45,647 3.7%
Consumer Loans 575,009 41.4% 474,465 38.3%
Business Loans 72,146 5.2% 41,770 3.4%
---------- ------ ---------- ------
Total Mortgage-Backed
Securities and Loans Receivable
(Before Net Items) $1,388,345 100.0% $1,238,342 100.0%
========== ====== ========== =====
Loans by Type of Loan:
Real Estate:
Conventional:
Loans on Existing Property $ 464,604 33.5% $ 450,935 36.4%
Construction Loans:
Commercial Real Estate Loans 6,835 0.5% 9,019 0.7%
Business Loans 0 0.0% 0 0.0%
Residential Loans 207,957 15.0% 186,145 15.0%
Insured or Guaranteed:
Mortgage-Backed Securities 49,089 3.5% 69,061 5.6%
FHA and VA Loans 12,705 0.9% 6,947 0.6%
Total Real Estate Loans 741,190 53.4% 722,107 58.3%
Consumer Loans 575,009 41.4% 474,465 38.3%
Business Loans 72,146 5.2% 41,770 3.4%
-------- ----- -------- -----
Total Mortgage-Backed Securities
and Loans Receivable
(Before Net Items) $1,388,345 100.0% $1,238,342 100.0%
========== ====== ========== ====
5
Loan Portfolio Composition
(Continued) At December 31,
----------------
1998 1997 1996 1995 1994
(Dollars in Thousands) ---- ---- ---- ---- ----
Total Loans Receivable $ 1,741,185 $ 1,479,358 $ 1,316,989 $ 1,339,256 $ 1,169,281
(Before Net Items)
Less:
Undisbursed Portion of Loans 200,732 110,629 84,173 72,511 78,588
Deferred Income, Unearned Discounts,
and Unamortized Premiums (3,790) (2,412) (1,762) (624) (521)
Allowance for Loan Losses 25,700 22,414 18,768 16,234 12,525
Plus:
Loan Valuation Adjustment
for Acquisitions 0 0 0 0 341
---------- ---------- ---------- --------- ---------
Total Loans Receivable Before Mortgage-
Backed Securities 1,518,543 1,348,727 1,215,810 1,251,135 1,079,030
Plus:
Mortgage-Backed Securities 29,680 38,081 36,152 49,089 69,061
----------- ----------- ----------- ----------- -----------
Mortgage-Backed Securities and Loans
Receivable - Net $ 1,548,223 $ 1,386,808 $ 1,251,962 $ 1,300,224 $ 1,148,091
=========== =========== =========== =========== ===========
6
Adjustable- and Fixed-Rate Loans. The following table sets forth the
balances at the dates indicated of all loans receivable and mortgage-backed
securities before net items which have fixed interest rates and adjustable
interest rates. Adjustable-rate loans include all loans with original
maturities of five years or less.
At December 31,
---------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
Residential Mortgage Loans
Fixed Rates $ 230,955 $ 189,323 $ 166,968 $ 186,885 $ 157,706
Adjustable Rates 737,500 602,835 512,965 491,681 494,090
----------- ----------- ----------- ----------- -----------
Total $ 968,455 $ 792,158 $ 679,933 $ 678,566 $ 651,796
=========== =========== =========== =========== ===========
Commercial Real Estate Loans
Fixed Rates $ 6,855 $ 6,099 $ 17,213 $ 11,948 $ 15,770
Adjustable Rates 25,956 33,649 28,713 50,676 54,541
----------- ----------- ----------- ----------- -----------
Total $ 32,811 $ 39,748 $ 45,926 $ 62,624 $ 70,311
=========== =========== =========== =========== ===========
Total Residential Mortgage and
Commercial Real Estate Loans
Fixed Rates $ 237,810 $ 195,422 $ 184,181 $ 198,833 $ 173,476
Adjustable Rates 763,456 636,484 541,678 542,357 548,631
----------- ----------- ----------- ----------- -----------
Total $ 1,001,266 $ 831,906 $ 725,859 $ 741,190 $ 722,107
=========== =========== =========== =========== ===========
Consumer Loans
(Includes Home Equity Loans)
Fixed Rates $ 437,267 $ 395,423 $ 368,697 $ 411,030 $ 307,136
Adjustable Rates 143,258 152,593 158,072 163,979 167,329
----------- ----------- ----------- ----------- -----------
Total $ 580,525 $ 548,016 $ 526,769 $ 575,009 $ 474,465
=========== =========== =========== =========== ===========
Business Loans
Fixed Rates $ 61,272 $ 47,577 $ 0 $ 5,699 $ 2,028
Adjustable Rates 127,802 89,940 100,513 66,447 39,742
----------- ----------- ----------- ----------- -----------
Total $ 189,074 $ 137,517 $ 100,513 $ 72,146 $ 41,770
=========== =========== =========== =========== ===========
Total Mortgage-Backed Securities
and Loans Receivable
Fixed Rates $ 736,349 $ 638,422 $ 552,878 $ 615,562 $ 482,640
Adjustable Rates 1,034,516 879,017 800,263 772,783 755,702
----------- ----------- ----------- ----------- -----------
Total $ 1,770,865 $ 1,517,439 $ 1,353,141 $ 1,388,345 $ 1,238,342
=========== =========== =========== =========== ===========
7
Residential Mortgage Loans. The original contractual loan
payment period for residential loans originated by First Indiana normally
ranges from 10 to 30 years. Because borrowers may refinance or prepay
their loans, however, such loans normally remain outstanding for a
substantially shorter period. First Indiana sells most fixed-rate residential
loans to secondary market investors, including the Federal Home Loan
Mortgage Corporation ("FHLMC") and the Federal National Mortgage
Association ("FNMA").
Residential originations amounted to $744 million in 1998, nearly
double the level in 1997. Much of this increase resulted from the Bank's
continued efforts to consolidate and centralize origination and servicing
processes in its Commercial and Mortgage Banking Group. First Indiana
strengthened its national presence by opening additional offices in the
southeastern United States and aggressively pursued alternative delivery
channels for its residential loans, including a telemarketing call center and
wholesale alliances. First Indiana sold residential mortgage loans into the
secondary market as part of the Bank's normal mortgage banking activity,
resulting in pre-tax gains of $3.0 million during 1998. This compares with
gains of $1.9 million in 1997.
First Indiana's fixed-rate mortgage loans include a due-on-sale
clause, which gives the Bank the right to declare a loan immediately due
and payable if, among other things, the borrower sells or otherwise
disposes of the real property subject to the mortgage and the loan is not
repaid. Due-on-sale clauses are generally considered important tools to
prevent both the unrestricted transfer of low interest-rate loans in high
interest-rate environments and the corresponding increase in the average
life of such loans. First Indiana's policy is to enforce these clauses in its
loan contracts.
First Indiana's construction loans are made both to individuals
and builders. These loans have terms ranging from six months to one year
and include options for the home buyer to convert the loan to fixed- or
adjustable-rate permanent financing. The interest rate on construction
loans is generally one percent over the Bank's prime rate and adjusts upon
changes in the prime rate. At December 31, 1998 and 1997, the Bank's
gross construction loans outstanding equaled $407 million and $253
million, respectively.
Commercial Loans. First Indiana offers a variety of
commercial loans, primarily business loans and commercial real estate
loans (including land development loans).
Included in business loans are $38 million in land development
loans, which are exclusively for the acquisition and development of land
into individual single-family building lots. The interest rate on land
development loans is generally one and one-quarter percent over the
Bank's prime rate, which adjusts upon changes in the prime rate, and the
term of these loans is generally 36 months.
The following table presents the remaining maturities and rate
sensitivity of residential construction and business loans.
Remaining Maturities
--------------------
One Year Over One Year Over
or Less to Five Years Five Years Total Percent
(Dollars in Thousands) -------- ------------- ---------- ----- -------
Type of Loan:
Residential Construction $ 205,511 $10,548 $ - $216,059 54.7 %
Business 115,792 35,728 27,413 178,933 45.3
------------- ------- ------- -------- -------
Total $ 321,303 $46,276 $ 27,413 $394,992 100.0 %
============= ======= ======= ======== =======
Rate Sensitivity:
Fixed Rate $ 4,053 $32,374 $ 24,844 $ 61,271 15.5 %
Adjustable Rate 317,250 13,902 2,569 333,721 84.5
------------- ------- ------- -------- -------
Total $ 321,303 $46,276 $ 27,413 $394,992 100.0 %
============= ======= ======= ======== =======
8
Multi-family and commercial real estate lending was a substantial
part of First Indiana's business activities from the early 1970s until 1991,
when such activity was largely curtailed because of the economic
environment. With the changing economic environment and improved
market for commercial real estate lending, the Bank intends to increase
somewhat its volume of these loans to include permanent financing for
selected apartments, office buildings and warehouses. The Bank's
management continues to monitor the credit quality of these loans
aggressively, both with respect to new originations and loans already in
the portfolio.
The following table shows, as of December 31, 1998 and 1997,
outstanding multi-family and commercial real estate loans originated and
purchased by First Indiana.
1998 1997
(Dollars in Millions) Amount Percent Amount Percent
Loans Originated $32.0 97.6 $38.7 97.5
Loans Purchased 0.8 2.4 1.0 2.5
----- ---- ----- ----
$32.8 100.0 $39.7 100.0
===== ===== ===== =====
Consumer Lending. As part of its strategy for growth, First
Indiana has increased its origination and purchase of consumer loans,
primarily home equity loans and home equity lines of credit. At December
31, 1998, such loans totaled $580.5 million, of which $45,929,000 were
held for sale, compared with $548.0 million, of which $24,828,000 were
held for sale, at December 31, 1997. Much of the increase in 1998
occurred as the Bank aggressively pursued originations of products with
loan-to-value ratios greater than 80 percent for sale into the secondary
market. Additionally, First Indiana capitalized on alternative delivery
channels for originations by utilizing a national network of originators and
a telemarketing call center.
Consumer loans generally have shorter terms and higher interest
rates than residential loans but involve somewhat higher credit risks,
particularly for unsecured lending. Of the $580.5 million of consumer
loans outstanding at December 31, 1998, 97.5 percent were secured by
first or second mortgages on real property, 0.6 percent was secured by
deposits, and 1.9 percent were secured by personal property or were
unsecured.
First Indiana offers revolving lines of credit and loans secured by
a lien on the equity in the borrower's home in amounts up to 100 percent
of the appraised value of the real estate. For lines of credit at or below an
80 percent loan-to-value ("LTV") ratio, the interest rate is typically the
Wall Street Journal prime rate plus one or two percent, depending on the
amount of the loan. The interest rate rises in various increments as the
LTV ratio increases. The highest rate charged is the Wall Street Journal
prime rate plus 3.5 percent for lines of credit at a 100 percent LTV. At
December 31, 1998, the Bank had approximately $300.1 million in home
equity loans above 80 percent LTV. Monthly, holders of revolving lines
of credit with up to an 80 percent LTV ratio are billed for interest at the
daily periodic rate due on the daily loan balances for the billing cycle.
Holders of revolving lines of credit above 85 percent LTV are required to
pay at least two percent of the outstanding loan balance. At December 31,
1998, First Indiana had approved $252 million of 80 percent LTV lines of
credit, of which $110 million were outstanding, compared with $237
million of such lines which had been approved at December 31, 1997,
$114 million of which were outstanding.
First Indiana also offers variable- and fixed-rate term home equity
loans with up to a 100 percent LTV ratio. Borrowers of fixed-rate term
loans make fixed payments over a term ranging from one to 15 years.
Variable-rate term loans in excess of 80 percent LTV feature monthly
payments equal to two percent of the outstanding loan balance.
9
Until August 1994, First Indiana offered indirect auto lending
through a network of dealers throughout the Midwest. The Bank
discontinued this activity as part of its strategic plan to focus its resources
on real estate lending activities in which management believes it can
differentiate itself from the competition more effectively. The Bank
completed the sale of approximately $32.8 million of its indirect
automobile portfolio during the third quarter of 1996 at a loss of $898,000.
The balances of First Indiana's installment loans were $10 million and $15
million at December 31, 1998 and 1997. This portfolio is expected to
decline further, although First Indiana continues to offer direct automobile
loans through its banking centers as an accommodation to its customers.
These loans will be made generally for terms of one to five years at
variable and fixed rates of interest.
First Indiana makes loans secured by deposits and overdraft loans
in connection with its checking accounts. First Indiana also offers fixed-
rate, fixed-term unsecured loans; and Visa credit cards through an agent.
Consumer loans may entail greater risk than residential mortgage
loans, particularly in the case of consumer loans that are unsecured or
secured by rapidly depreciating assets such as automobiles. First Indiana
has endeavored to reduce certain of these risks by, among other things,
employing individuals experienced in this type of lending and emphasizing
prompt collection efforts. In addition, First Indiana adds general
provisions to its loan loss allowance, in amounts determined to be adequate
to cover loan losses inherent in the portfolio, at the time the loans are
originated.
Federal regulations limit the amount of consumer loans that
savings institutions are able to originate and hold in their loan portfolios.
First Indiana complies with such regulations, and the amount of its
consumer loan portfolio is approximately $489 million below the
maximum permitted.
Origination, Purchase, and Sale of Loans. As a federally
chartered savings bank, First Indiana has general authority to make real
estate loans throughout the United States. At December 31, 1998,
however, most of First Indiana's real estate loans receivable were secured
by real estate located in Indiana. First Indiana also originates mortgage
loans in Florida, Georgia, and North Carolina. The Bank originates home
equity loans through consumer loan offices in those states and in Ohio and
Illinois and in approximately 13 other states via an origination network of
independent loan agents.
Interest rates charged by First Indiana on its loans are affected
primarily by the demand for such loans and the supply of money available
for lending purposes. These factors are in turn affected by general
economic conditions and such other factors as monetary policies of the
federal government, including the Federal Reserve Board, the general
supply of money in the economy, legislative tax policies, and governmental
budgetary matters.
Loan originations come from a number of sources. Residential
loan originations are attributable primarily to referrals from real estate
brokers, builders, and walk-in customers. Construction loan originations
are obtained primarily by direct solicitation of builders and repeat business
from builders. Multi-family and commercial real estate loan originations
are obtained from previous borrowers and direct contacts with First
Indiana. Consumer loans come from walk-in customers, loan brokers,
agents and originators. First Indiana aggressively solicits residential loans
with a sales force that works with real estate brokers, agents and builders
to obtain referrals.
First Indiana obtains title insurance on secured properties and
requires borrowers to obtain hazard insurance and, if applicable, flood
insurance. First Indiana's appraisers note any obvious environmental
problems, and the title companies used to close loans give First Indiana an
endorsement insuring over any existing environmental liens.
Income from Lending Activities. In making long-term one- to
four-family home mortgage loans, First Indiana generally charges an
origination fee of one percent of the loan amount. As part of the loan
application, the applicant also reimburses First Indiana for its out-of-pocket
costs in reviewing the application, such as the appraisal fee,
whether or not the loan is closed. The interest rate charged is normally the
prevailing market rate at the time the loan application is received.
Commitments to home purchasers generally have a term of 60 days or less
from the date First Indiana issues the loan commitment.
10
In the case of one-to-four-family residential construction loans,
First Indiana charges a one to three percent non-refundable commitment
fee. Interest rates on construction loans are based on the prevailing market
rate at the time the commitment is extended. Commitment fees and other
terms of commercial real estate and business loans are individually
negotiated.
First Indiana earns fees on existing loans, including prepayment
charges, late charges, and assumption fees.
Servicing Activity. First Indiana's sale of whole loans and loan
participations in the secondary market generates income and provides
additional funds for loan originations. During 1998, the Bank identified
and sold $187 million in out-of-market loan servicing at a gain of
$1,438,000.
At December 31, 1998, First Indiana serviced approximately
$909 million in loans and loan participations which it had sold. As of
December 31, 1998, approximately $10.9 million in loans, or about 0.7
percent of First Indiana's mortgage-backed securities and loans receivable
after net items, were serviced by others.
The total cost of mortgage loans originated with the intent to sell
is allocated between the loan servicing right and the mortgage loan without
servicing based on their relative fair values at the date of sale. The
capitalized cost of loan servicing rights is amortized in proportion to, and
over the period of, estimated net servicing revenue. For this purpose,
estimated servicing revenues include late charges and other ancillary
income. Estimated servicing costs include direct costs associated with
performing the servicing function and appropriate allocations of other
costs.
Mortgage servicing rights are periodically evaluated for
impairment by stratifying them based on predominant risk characteristics
of the underlying serviced loans. These risk characteristics include loan
type (fixed or adjustable rate), investor type (FHLMC, GNMA, private),
term, and note rate. Impairment represents the excess of carrying value of
an individual mortgage servicing rights stratum over its estimated fair
value, and is recognized through a valuation allowance.
Fair values for individual strata are based on the present value of
estimated future cash flows using a discount rate commensurate with the
risks involved. Estimates of fair value include assumptions about
prepayment, default and interest rates, and other factors which are subject
to change over time. Changes in these underlying assumptions could cause
the fair value of loan servicing rights, and the related valuation allowance,
to change significantly in the future. At December 31, 1998 and 1997, the
balance of mortgage 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 at December 31, 1998 of $45,000, all of which was
provided during 1998.
Asset Quality
General. First Indiana's asset quality is directly affected by the
credit risk of the assets on its balance sheet. Most of First Indiana's credit
risk is concentrated in its loan portfolios and, to a lesser extent, its real
estate owned ("REO") portfolio. Consequently, First Indiana has
established policies and procedures to ensure accurate and timely
assessment of credit risk from the date the loan is originated.
The procedures for reviewing the quality of First Indiana's loans,
the appropriateness of loan and REO classifications, and the adequacy of
loan and REO loss allowances fall within the purview of First Indiana's
Board of Directors. To manage these tasks, the Board of Directors has
established a two-tiered asset review system. Under this system, standing
management committees regularly discuss and review potential losses on
all loans and REO and the adequacy of First Indiana's loan and REO loss
allowances. Recommendations on the allowances are forwarded to the
Investment Committee of First Indiana's Board of Directors for approval
each quarter, then presented to the full Board of Directors for approval and
ratification. Management committees also recommend loan and REO
classifications which, if approved by the Investment Committee of the
Board of Directors, are referred to the full Board for final approval and
ratification.
11
The second part of First Indiana's asset review system is managed
by an independent chief credit officer appointed by the Board of Directors.
The chief credit officer makes an independent evaluation of First Indiana's
portfolio and management's recommendations on allowances for loan and
REO losses. He regularly reviews these recommendations with the
Corporation's Chairman and the Chairman of the Executive Committee of
the Board of Directors. These meetings give the chief credit officer a
forum for discussing asset quality issues with members of the Board of
Directors. This system provides an independent review and assessment of
management's recommendations about loan and REO classifications and
loss allowances. This entire process is subject to the continual review and
approval by the Board of Directors.
An allowance for loan and lease losses ("ALLL") is established
for each significant loan portfolio of the Bank in an amount adequate to
absorb the losses inherent within each loan portfolio. The ALLL is
segmented into three major components based on the credit characteristics
of the underlying loans within each loan portfolio: Special Mention Loans,
Classified Loans and Pass Loans (loans not rated Special Mention or
Classified).
A Risk Rating Analysis (loan grade) is completed on all loans
that exceed a minimum loan amount threshold for the asset specific loan
portfolios, namely, construction, business, commercial real estate and land
development lending. The Risk Rating Analysis is an eight grade system
with five pass grades. The final three grades, Special Mention,
Substandard and Doubtful correlate to the Office of Thrift Supervision's
criticized assets. The loans with a grade of Special Mention or worse
exhibit or may exhibit certain defined weaknesses which, if left
uncorrected, may jeopardize the full repayment of the loan. These loans
pose a higher level of risk to the Bank than the loans in a Pass grade.
Therefore, loans with a grade of Special Mention, Substandard or Doubtful
are assigned a Target Reserve within the ranges established by the Office
of Thrift Supervision ("OTS").
For the homogeneous loan portfolios and the asset specific loan
portfolios where the loan amount is less than the minimum threshold
established for that portfolio, when a loan becomes contractually
delinquent 90 days in either interest or principal, the loan in considered
non-accrual and is classified as Substandard. All other loans within these
portfolio segments are considered pass loans. For the asset specific loan
portfolios, a loan is considered non-accrual based on the specific
circumstances but in no event later than a contractual delinquency of 90
days in either interest or principal.
The determination of the required ALLL (the "Target Reserve")
for Pass Loans is based on two different analyses of the empirical data for
each loan portfolio over the preceding 36 months. The first analysis, the
Trend Forecast, consists of linear and non-linear regression analysis of the
loans outstanding, the level and trend of delinquencies and the level and
trend of net charge-offs for the portfolio. The second analysis, the Formula
Calculation, is completed for each loan portfolio and is based on the
correlation of the level of loans delinquent 60 days or more to the level of
net charge-offs. The result of each analysis is the projected level of net
charge-offs for the next twelve months for the individual loan portfolio.
Due to the potentially positive impact to net charge-offs of other
factors specific to a loan portfolio's performance and for new loan
products within a loan portfolio, a Policy Limit is established for each loan
portfolio. The Policy Limit represents the minimum level of loss
established for each portfolio and is based on historical losses for the
Bank's loan portfolios in conjunction with expected losses for similar loan
types within the Bank's loan portfolio.
The greater of the Policy Limit, Trend Forecast or Formula Ratio
for each loan portfolio is set as the Base Reserve for that portfolio. The
Base Reserve is then adjusted for factors that may influence the loan
portfolio's actual net charge-offs. The final adjusted Base Reserve is equal
to the Target Reserve for the Pass Loans for an individual loan portfolio.
The regulatory classification of loans and determination of non-accrual
status is completed each month. The determination of the Target
Reserve for the pass portfolio using the analyses discussed above is
completed on a quarterly basis and the Target Reserve adjusted
accordingly.
In addition to the ALLL established for each loan portfolio, the
Bank maintains an unallocated ALLL to cover the residual losses inherent
in the loan portfolio. As discussed above, the Target Reserve for the Pass
Loans is established for a 12-month period. A residual loss is the inherent
loss within the loan portfolio over the life of the loans in the portfolio.
Management believes that First Indiana's current loan and REO
loss allowances are sufficient to absorb potential
12
losses which are inherent in the loan portfolio; however, there can
be no assurance that additional allowances will not be required or that
the amount of any such allowances will not be significant. In addition,
various regulatory agencies, as an integral part of their examinations,
periodically review these allowances and may require First Indiana to
recognize additions to the allowances based on their judgment about
information available at the time of their examination. No such additions
were required by the OTS in their most recent examinations of First Indiana.
The Investment Committee of First Indiana's Board of Directors
is responsible for monitoring and reviewing First Indiana's liquidity and
investments. The Investment Committee approves investment policies and
meets quarterly to review transactions. Credit risk is controlled by limiting
the number and size of investments and by approving the brokers and
agents through which investments are made.
Regulatory Classification of Assets. Federal regulations
require that each savings institution regularly classify its own assets. In
addition, in connection with examinations of savings institutions, the OTS
and the FDIC examiners have authority to identify problem assets and, if
appropriate, to require them to be classified.
There are three classifications for problem assets: Substandard,
Doubtful and Loss. Substandard assets have one or more defined
weaknesses and are characterized by the distinct possibility that the
institution will sustain some loss if the deficiencies are not corrected.
Doubtful assets have the weaknesses of Substandard assets, with the
additional characteristic that the weaknesses make collection or liquidation
in full on the basis of currently existing facts, conditions and values
questionable, and there is a significant possibility of loss. An asset
classified as Loss is considered uncollectible and of such little value that
continuation as an asset of the savings institution is not warranted.
Assets classified as Substandard or Doubtful require the savings
institution to establish prudent general allowances for loan losses. If an
asset or portion thereof is classified as Loss, the savings institution must
either establish specific allowances for loan losses in the amount of 100
percent of the portion of the asset classified Loss or charge off such
amount. If a savings institution does not agree with an examiner's
classification of an asset, it may appeal this determination to the District
Director of the OTS.
On the basis of management's review of its assets as of December
31, 1998 on a net basis, First Indiana had classified $31.8 million as
Substandard, compared with $33.4 million and $36.7 million at December
31, 1997 and 1996, respectively. The amount of First Indiana's Doubtful
and Loss loans at each such date was immaterial.
Non-Performing Assets. First Indiana categorizes its non-performing
assets into four categories: Non-Accrual Loans, Impaired Loans, Restructured
Loans, and Real Estate Owned.
First Indiana places loans on non-accrual status when payments
of principal or interest become 90 days or more past due, or earlier when
an analysis of a borrower's creditworthiness indicates that payments could
become past due. Total non-accrual loans were $17.2 million at
December 31, 1998, compared with $18.4 and $15.4 million at December
31, 1997 and 1996, respectively.
Loans are classified as impaired when an analysis of a borrower's
creditworthiness indicates it is unlikely that the borrower can meet
contractual obligations for principal and interest repayments.
Loan modifications classified as troubled debt restructuring
amounted to $6.9 million at December 31, 1996. Management modified
the payment terms, interest rates, and contractual maturities of these loans
with the objective of improving the likelihood of recovery of First Indiana's
investment. These loans were repaid in 1997.
REO is generally acquired by deed in lieu of foreclosure and is
carried at the lower of cost (the unpaid balance at the date of acquisition
plus foreclosure and other related costs) or fair market value. A review of
REO properties, including the adequacy of the loss allowance and
decisions whether to charge off REO, occurs in conjunction with the
review of the loan portfolios.
First Indiana has carefully managed its loan portfolio, including
its non-performing assets, to reduce exposure to
13
the commercial real estate loan sector and to diversify its assets
geographically and by type of loan. Accordingly, First Indiana has not
experienced the difficulties faced by savings institutions which have had
concentrations in areas of the country most adversely affected by economic
cycles. First Indiana's non-performing assets fell in 1998 to $19.9 million
at December 31, 1998 from $22.8 million one year earlier.
Summary of Loan Loss Experience. First Indiana regularly
reviews the status of all non-performing assets to evaluate the adequacy of
the allowances for losses on loans and REO. For additional information
relating to the Corporation's loan and REO loss allowances, see the
Corporation's Consolidated Financial Statements, including Note 5
thereto.
Investment Activities
Federally chartered savings institutions have authority to invest
in various types of liquid assets, including United States Treasury
obligations, securities of various federal agencies, certain certificates of
deposits of insured banks and savings institutions, certain bankers'
acceptances, and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest a portion of their assets in
commercial paper and corporate debt securities and in mutual funds whose
assets conform to the investments a federally chartered savings institution
is otherwise authorized to make directly.
As an Indiana corporation, the Corporation has authority to invest
in any type of investment permitted under Indiana law. As a savings and
loan holding company, however, its investments are subject to certain
regulatory restrictions described under "Savings Institution Regulation."
The relative mix of investment securities and loans in First
Indiana's portfolio is dependent upon management's evaluation of the
yields available on loans compared to investment securities. The Board of
Directors has established an investment policy, and the Investment
Committee of the Board meets quarterly with management to establish
more specific investment guidelines about types of investments, relative
amounts, and maturities. First Indiana's current investment guidelines do
not permit investment purchases in below investment grade corporate
bonds (minimum investment rating of A-) or "junk" bonds. Liquid
investments are managed to ensure that regulatory liquidity requirements
are satisfied.
As required by SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, First Indiana continually
reassesses the classification of securities as either available-for-sale or
held-to-maturity. During the third quarter of 1998, management changed
its positive intent to hold held-to-maturity investments and mortgage-backed
securities. Accordingly, the entire portfolios of mortgage-backed
securities with an amortized cost of $19,274,000 and investment securities
with an amortized cost of $5,243,000 were transferred from held-to-maturity
to available-for-sale. At the time of the transfer, these mortgage-backed
securities and investment securities had unrecognized gains of
$374,000 and $86,000, respectively, which were recognized as a separate
component of accumulated other comprehensive income. Management
elected to transfer these securities which had been previously designated
as held-to-maturity.
At December 31, 1998, First Indiana's investments totaled
$113.3 million, or 6.31 percent of total assets, and consisted primarily of
U.S. Treasury and agency obligations, corporate debt securities and asset-
backed securities. For additional information concerning investments held
by the Corporation at certain dates, see the Corporation's Consolidated
Financial Statements, including Note 2 thereto.
First Indiana also purchased mortgage-backed securities available
for sale in 1998. At December 31, 1998, these mortgage-backed securities
totaled $29.7 million, or 1.65 percent of total assets. For additional
information concerning mortgage-backed securities held by the
Corporation, see the Corporation's Consolidated Financial Statements,
including Notes 2 and 3 thereto.
14
Sources of Funds
General. Deposits are an important source of the Corporation's
funds for use in lending and for other general business purposes. In
addition to deposits, First Indiana derives funds from repayments of loans
and mortgage-backed securities, Federal Home Loan Bank of Indianapolis
("FHLB") advances, repurchase agreements, short-term borrowings, and
sales of loans. Repayments of loans and mortgage-backed securities are
a relatively stable source of funds, while deposit inflows and outflows are
significantly influenced by general interest rates and money market
conditions. Borrowings may be used to compensate for reductions in
normal sources of funds, such as deposit inflows at less than projected
levels, or to support expanded activities. Historically, First Indiana's
borrowings have been primarily from the FHLB and through repurchase
agreements.
Deposits. First Indiana has a wide variety of deposit programs
designed to attract both short-term and long-term deposits from the general
public. These deposit accounts include passbook accounts, non-interest-bearing
consumer and commercial demand accounts, NOW accounts, and
money market checking accounts, as well as fixed-rate certificates and
money market accounts. In 1999, First Indiana plans to continue to
increase consumer and commercial checking accounts and certificates of
deposit in an effort to reduce funding costs and strengthen core deposits.
The following table shows the distribution of First Indiana's
deposits by interest-rate categories at each of the dates indicated:
At December 31,
(Dollars in Thousands) 1998 1997 1996
Rate
Under 3.00% $551,421 $205,265 $259,798
3.00 - 5.00 217,244 385,859 110,786
5.01 - 7.00 457,988 493,012 689,390
7.01 - 9.00 756 23,032 35,156
9.01 - 11.00 509 387 356
--------- --------- ---------
$1,227,918 $1,107,555 $1,095,486
15
The following table reflects the increase (decrease) in
deposits for various types of deposit programs offered by First
Indiana for each of the periods indicated:
At December 31,
1998 1997 1996
(Dollars in Thousands)
NOW Checking and
Non-Interest-Bearing
Deposits $ 41,210 $ 13,342 $ 12,300
Money Market
Checking (1,858) (9,106) (2,344)
Passbook and
Statement Savings 63,052 (1,056) 55,252
Money Market Savings (661) (2,914) (4,495)
Jumbo Certificates of
$100 or More 49,232 23,358 (23,067)
Fixed-Rate Certificates (30,612) (11,555) (79,140)
-------- -------- --------
Net Increase (Decrease) $120,363 $ 12,069 $(41,494)
======== ======== ========
First Indiana's jumbo certificates of $100,000 or more at
December 31, 1998, the maturities of such deposits, and the percentage of
total deposits represented by these certificates are set forth in the table
below:
Over
Three
Three Months to Over Six
Months or Six Months to Over One Percent of
Less Months One Year Year Total Deposits
(Dollars in Thousands) --------- ---------- --------- ---- ----- --------
Jumbo Certificates of $100
or More $59,272 $26,234 $42,861 $41,621 $169,988 13.84%
Borrowings. The FHLB functions as a central reserve bank
providing credit for depository institutions in Indiana and Michigan. As a
member of the FHLB, First Indiana is required to own capital stock in the
FHLB and is authorized to apply for advances on the security of such stock
and certain of First Indiana's residential mortgage loans and other assets,
subject to credit standards. The FHLB advances are made pursuant to
several different credit programs, each with its own interest rate and range
of maturities.
The FHLB prescribes the acceptable uses for advances and
imposes size limits on them. Acceptable uses have included expansion of
residential mortgage lending and short-term liquidity needs. Depending
on the program, limitations on the amount of advances are generally based
on the FHLB's assessment of the institution's creditworthiness. At
December 31, 1998, First Indiana had $327.2 million in FHLB advances
(18.22 percent of total assets), with a weighted average rate of 5.44
percent.
First Indiana also enters into repurchase agreements as a short-term
source of borrowing, but only with registered government securities
dealers.
16
The following table sets forth certain information regarding
repurchase agreements and federal funds purchased (short-term
borrowings) at and for the years ended on the dates indicated.
At December 31,
1998 1997 1996
(Dollars in Thousands)
Highest Month-End Balance of Short-Term Borrowings
During the Year $62,620 $84,896 $39,651
Average Month-End Balance of Short-Term Borrowings
During The Year 51,166 38,899 18,133
Weighted Average Interest Rate of Short-Term Borrowings
During the Year 5.29% 5.45% 5.41%
Weighted Average Interest Rate of Short-Term Borrowings
at End of the Year 4.81 5.48 5.19
Regulatory Capital
Risk-Based Capital. Savings institutions are required to have
risk-based capital of eight percent of risk-weighted assets. At December,
31, 1998, First Indiana's risk-based capital was $155.8 million, or 11.24
percent of risk-weighted assets. Risk-based capital is defined as common
equity, less goodwill, the excess portion of land loans with a loan-to-value
ratio of greater than 80 percent, and investments in non-mortgage-lending-
related subsidiaries, plus general allowances for loan losses. Risk-
weighting of assets is derived from assigning one of four risk-weighted
categories to an institution's assets, based on the degree of credit risk
associated with the asset. The categories range from zero percent for low-risk
assets (such as United States Treasury securities) to 100 percent for
high-risk assets (such as real estate owned). The carrying value of each
asset is then multiplied by the risk-weighting applicable to the asset
category. The sum of the products of the calculation equals total
risk-weighted assets.
Core Capital. Savings institutions are also required to maintain
a minimum leverage ratio, under which core (Tier One) capital must equal
at least three percent of total assets, but not less than the minimum required
by the Office of the Comptroller of the Currency (the "OCC") for national
banks, which minimum currently stands at four percent. First Indiana's
primary regulator, the OTS, is expected to adopt the OCC minimum. The
components of core capital are the same as those set by the OCC for
national banks, and consist of common equity, plus non-cumulative
preferred stock and minority interest in consolidated subsidiaries, minus
certain intangible assets, including purchased loan servicing. At
December 31, 1998, First Indiana's core capital and leverage ratio were
$140.0 million and 7.80 percent.
Tangible Capital. Savings institutions must also maintain
minimum tangible capital of 1.5 percent of total assets. First Indiana's
tangible capital and tangible capital ratio at December 31, 1998, were
$140.0 million and 7.80 percent respectively.
Capital Regulations. The OTS has minimum capital standards
that place savings institutions into one of five categories, from "critically
undercapitalized" to "well-capitalized," depending on levels of three
measures of capital. A well-capitalized institution as defined by the
regulations has a total risk-based capital ratio of at least ten percent, a Tier
One (core) risk-based capital ratio of at least six percent, and a leverage
(core) risk-based capital ratio of at least five percent. At December 31,
1998 First Indiana was classified as "well-capitalized."
Effective January 1, 1994, the OTS adopted regulations adding
an interest-rate risk component to the proposed capital regulations. Under
this component, an institution with an "above normal" level of interest-rate
risk exposure is subject to an "add-on" to its risk-based capital
requirement. "Above normal" interest-rate risk is defined as a reduction
in "market value portfolio equity" (as defined) resulting from a 200 basis
point increase or decrease in interest rates, if the decline in value exceeds
two percent of the institution's assets. Institutions failing to meet this
test will be required to add to their risk-based capital.
17
The OTS issued this final rule to implement the portions of
Section 305 of the Federal Deposit Insurance Corporation Improvement
Act of 1991, which requires the agencies to revise their risk-based capital
standards for insured depository institutions to ensure that those standards
take adequate account of concentration of credit risk and the risks of
nontraditional activities. The final rule amends the risk-based capital
standards by explicitly identifying concentration of credit risk and certain
risks arising from nontraditional activities, as well as an institution's
ability to manage these risks, as important factors in assessing an
institution's overall capital adequacy. Based on its interest-rate risk at
December 31, 1998, First Indiana was not required to add to its risk-based
capital under the new regulation.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented
herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position
and operating results in terms of historical dollars without considering
changes in the relative purchasing power of money over time due to
inflation.
Almost all of the assets and liabilities of a savings institution are
monetary, which limits the usefulness of data derived by adjusting a
savings institution's financial statements for the effects of changing prices.
Regulation
Federal Deposit Insurance Corporation Improvement Act of
1991
The Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), contains various provisions intended to recapitalize the
Bank Insurance Fund and enacts a number of regulatory reforms that affect
all insured depository institutions, regardless of the insurance fund in
which they participate. Among other things, FDICIA grants the OTS
broader regulatory authority to take prompt corrective action against
insured institutions that do not meet capital requirements, including
placing severely under-capitalized institutions into conservatorship or
receivership. Since First Indiana exceeded all capital requirements at
December 31, 1998, these provisions are not expected to have an impact
on its operations.
Savings and Loan Holding Company Regulations
General. Under the Home Owner's Loan Act ("HOLA"), as
amended, the Director of the OTS has regulatory jurisdiction over savings
and loan holding companies. The Corporation, as a savings and loan
holding company within the meaning of HOLA, is subject to regulation,
supervision and examination by and the reporting requirements of the
Director of OTS.
Savings Institution Regulation
General. As a SAIF-insured savings institution, First Indiana is
subject to supervision and regulation by the OTS. Under OTS regulations,
First Indiana is required to obtain audits by independent auditors and to be
examined periodically by the Director of OTS. First Indiana is subject to
assessments by OTS and the FDIC to cover the costs of such examinations.
The OTS may revalue assets of First Indiana based upon appraisals and
require the establishment of specified reserves in amounts equal to the
difference between such revaluation and the book value of the assets. The
Director of the OTS also is authorized to promulgate regulations to ensure
the safe and sound operations of savings institutions and may impose
various requirements and restrictions on the activities of savings
institutions.
The regulations and policies of the OTS for the safe and sound
operations of savings institutions can be no less stringent than those
established by the OCC for national banks. Additionally, under the
FDICIA, the OTS prescribed safety and soundness regulations in 1995
relating to (i) internal controls, information systems, and internal audit
systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest-rate
exposure; (v) asset growth; and (vi) compensation and benefit standards
for officers, directors, employees and principal shareholders. These
regulations did not have a material effect on First Indiana.
18
As a member of SAIF, First Indiana is also subject to regulation
and supervision by the FDIC, in its capacity as administrator of SAIF, to
ensure the safety and soundness of SAIF.
Qualified Thrift Lender Requirement. In order for First
Indiana to exercise the powers granted to federally chartered savings
institutions and maintain full access to FHLB advances, it must be a
"qualified thrift lender" ("QTL"). A savings institution is a QTL if its
qualified thrift investments equal or exceed 65 percent of the savings
institution's portfolio assets on a monthly average basis in nine out of 12
months. As amended by the FDICIA, qualified thrift investments generally
consist of (i) various housing related loans and investments (such as
residential construction and mortgage loans, home improvement loans,
mobile home loans, home equity loans, and mortgage-backed securities);
(ii) certain obligations of the FDIC, the Federal Savings and Loan
Insurance Corporation Resolution Fund and the Resolution Trust
Corporation (for limited periods); and (iii) shares of stock issued by any
Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation,
or the Federal National Mortgage Association.
At December 31, 1998, the qualified thrift investment percentage
test for First Indiana was near 86 percent. First Indiana complies with the
new QTL test as revised upon enactment of FDICIA.
Liquidity. Under applicable federal regulations, savings
institutions are required to maintain an average daily balance of liquid
assets (including cash, certain time deposits, certain banker's acceptances,
certain corporate debt securities and highly rated commercial paper,
securities of certain mutual funds and specified United States government,
state or federal agency obligations) equal to a monthly average of not less
than a specified percentage of withdrawable deposits plus short-term
borrowings. Under HOLA, this liquidity requirement may be changed
from time to time by the Director of the OTS to any amount within the
range of four percent to ten percent, depending upon economic conditions
and the deposit flows of member institutions. The Bank's liquidity ratio at
December 31, 1998 was 8.00 percent. In 1997, the OTS lowered the
liquidity requirement to four percent of net withdrawable assets, simplified
the definition of net withdrawable assets, and eliminated a separate
requirement for short-term liquidity. At December 31, 1998, First Indiana
was in compliance with these liquidity requirements.
Loans-to-One-Borrower Limitations. HOLA generally
requires savings institutions to comply with the loans-to-one-borrower
limitations applicable to national banks. In general, national banks may
make loans to one borrower in amounts up to 15 percent of the bank's
unimpaired capital and surplus, plus an additional 10 percent of capital and
surplus for loans secured by readily marketable collateral. At December
31, 1998, First Indiana's loan-to-one borrower limitation was
approximately $23.4 million, and no loans to a single borrower exceeded
that amount.
Commercial Real Property Loans. HOLA limits the aggregate
amount of commercial real estate loans that a federal savings institution
may make to an amount not in excess of 400 percent of the savings
institution's capital. First Indiana was in compliance with the commercial
real property loan limitation at December 31, 1998.
Limitation on Capital Distributions. Under OTS regulations, a savings
institution is classified as a tier 1 institution, a tier 2 institution
or a tier 3 institution, depending on its level of regulatory capital both
before and after giving effect to a proposed capital distribution. A tier 1
institution may generally make capital distributions in any calendar year up
to 100 percent of its net income to date during the calendar year plus the
amount that would reduce by one-half its "surplus capital ratio" (i.e., the
percentage by which the institution's capital-to-assets ratio exceeds the
ratio of its fully-phased-in capital requirements to its assets) at the
beginning of the calendar year. No regulatory approval of the capital
distribution is required, but prior notice must be given to the OTS.
Restrictions exist on the ability of tier 2 and tier 3 institutions to make
capital distributions. For purposes of these regulations, First Indiana is a
tier 1 institution.
Limitation of Equity Risk Investments. Under applicable
regulations, First Indiana is generally prohibited from investing directly in
equity securities and real estate (other than that used for offices and related
facilities or acquired through, or in lieu of, foreclosure or on which a
contract purchaser has defaulted). In addition, OTS regulations limit the
aggregate investment by savings institutions in certain equity risk
investments including equity securities, real estate, service corporations
and operating subsidiaries and loans for the purchase of land and
construction loans made after February 27, 1987 on non-residential
properties with loan-to-value ratios exceeding 80 percent. At December
31, 1998, First Indiana was in compliance with the equity risk investment
limitations.
19
Insurance of Deposits. FDIC-insured institutions pay deposit
insurance premiums depending on their placement within one of nine
categories. The categories are determined by (i) the insured institution's
placement in capital group 1, 2, or 3, depending on its classification as
"well-capitalized," "adequately capitalized," or "undercapitalized," and (ii)
its supervisory rating of A, B, or C. Prior to October 1, 1996, well-
capitalized institutions with a supervisory rating of A paid $.23 per $100
of deposits, while undercapitalized institutions with a rating of C paid $.31
per $100 of deposits.
In the third quarter of 1996, the FDIC levied an industry-wide
special assessment to recapitalize the Savings Association Insurance Fund
("SAIF"), which insures First Indiana's customers' deposits. The Bank
incurred a one-time pre-tax charge to earnings of $6,749,000 to comply
with this assessment. Beginning January 1, 1997, deposit insurance
premiums between $.00 and $.27 per $100 of deposits are in effect, based
on the same nine-category rating system discussed in the previous
paragraph. The Deposit Insurance Funds Act of 1996 ("Funds Act") also
separated, effective January 1, 1997, the Financing Corporation ("FICO")
assessment to service the interest on its bond obligations from the SAIF
assessment. As part of the deposit insurance assessments, institutions pay
a FICO assessment for debt service requirements. The FICO assessment
rate is subject to change on a quarterly basis, depending on the debt service
requirements. First Indiana most recently paid $.0610 per $100 of
deposits to comply with this assessment.
First Indiana was a well-capitalized institution throughout 1998,
and paid no deposit insurance premiums other than the FICO assessment.
Because it is well-capitalized, First Indiana will continue to pay no deposit
insurance premiums in 1999, but these premiums could increase in the
future if the aggregate SAIF premiums paid by all SAIF-insured
institutions do not equal or exceed 1.25% of insurable deposits.
Community Reinvestment Act. Ratings of savings institutions
under the Community Reinvestment Act of 1977 ("CRA") must be
disclosed. The disclosure includes both a four-tier descriptive rating using
terms such as satisfactory and unsatisfactory and a written evaluation of
each institution's performance. Also, the FHLB is required to adopt
regulations establishing standards of community investment and service for
members of the FHLB System to meet to be eligible for long-term
advances. Those regulations are required to take into account a savings
institution's CRA record and the member's record of lending to first-time
home buyers. At December 31, 1998, the Bank's rating was
"outstanding". The Bank intends to maintain its long-standing record of
community lending and to meet or exceed the CRA standards under
FIRREA.
Transactions with Affiliates
Pursuant to HOLA, transactions engaged in by a savings institution
or one of its subsidiaries with affiliates of the savings institution
generally are subject to the affiliate transaction restrictions contained in
Sections 23A and 23B of the Federal Reserve Act. Section 23A of the
Federal Reserve Act imposes both quantitative and qualitative restrictions
on transactions engaged in by a member depository institution or one of its
subsidiaries with an affiliate, while Section 23B of the Federal Reserve Act
requires, among other things, that all transactions with affiliates be on
terms substantially the same as and at least as favorable to the member
bank or its subsidiary as the terms that would apply to or would be offered
in a comparable transaction with an unaffiliated party.
Section 22(h) of the Federal Reserve Act imposes restrictions on
loans to executive officers, directors and principal shareholders. Under
Section 22(h), loans to an executive officer or to a greater than 10 percent
shareholder of a savings institution, or certain affiliated entities of either,
may not exceed the institution's loan-to-one-borrower limit when
considered with all other outstanding loans to such person and affiliated
entities. Section 22(h) also prohibits loans above amounts prescribed by
the appropriate federal banking agency to directors, executive officers and
greater than 10 percent shareholders of a savings institution and their
respective affiliates, unless the loan is approved in advance by a majority
of the board of directors of the institution with any interested director not
participating in the voting. The Federal Reserve Board has prescribed the
loan amount (which includes all other outstanding loans to such person) for
which such prior board of director approval is required, as the greater of
$25,000 or 5 percent of capital and surplus (up to $500,000). First
Indiana was in compliance with these regulations at December 31, 1998.
20
Federal Home Loan Bank System
The Federal Home Loan Bank System ("FHLB") consists of 12
regional Banks, each subject to supervision and regulation by the Federal
Housing Finance Board. The FHLB provides a central credit facility for
member savings institutions. As a member of the FHLB, First Indiana is
required to own shares of capital stock in the FHLB in an amount at least
equal to one percent of the aggregate principal amount of its unpaid
residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each year, or 1/20 of its advances from the
FHLB, whichever is greater. As of December 31, 1998, First Indiana was
in compliance with this requirement.
Federal Reserve System
The Federal Reserve Board has adopted regulations that require
savings institutions to maintain non-earning reserves against their
transaction accounts (primarily NOW and regular checking accounts) and
non-personal time deposits (those which are transferable or held by a
person other than a natural person) with an original maturity of less than
one and one-half years. At December 31, 1998, First Indiana was in
compliance with these requirements. These reserves may be used to
satisfy liquidity requirements imposed by the Director of the OTS.
Because required reserves must be maintained in the form of vault cash or
non-interest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce the amount of the institution's interest-
earning assets.
Savings institutions also have the authority to borrow from the
Federal Reserve discount window. Federal Reserve Board regulations,
however, require savings institutions to exhaust all the FHLB sources
before borrowing from a Federal Reserve Bank. The FDICIA places
limitations upon a Federal Reserve Bank's ability to extend advances to
under-capitalized and critically under-capitalized depository institutions.
The FDICIA provides that a Federal Reserve bank generally may not have
advances outstanding to an under-capitalized institution for more than 60
days in any 120-day period.
Federal Securities Law
The stock of the Corporation is registered with the Securities and
Exchange Commission ("SEC") under the Securities Exchange Act of
1934 (the "Exchange Act"). The Corporation will be subject to the
information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Exchange Act.
Corporation stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Corporation may not
be resold without registration or unless sold in accordance with certain
resale restrictions. If the Corporation meets specified current public
information requirements, each affiliate of the Corporation is able to sell
in the public market, without registration, a limited number of shares in
any three-month period.
Taxation
Federal. The Corporation, on behalf of itself, First Indiana and
its subsidiaries, files a calendar tax year consolidated federal income tax
return and reports items of income and expense using the accrual method
of accounting.
Savings institutions are generally taxed in the same manner as
other corporations. In August 1996, President Clinton signed the Small
Business Job Protection Act (the "Act") into law. One provision of the
Act repealed the reserve method of accounting for bad debts for savings
institutions, effective for taxable years beginning after 1995. Another
provision of the Act disallows the use of the experience method of
accounting for bad debt for "large" institutions, defined to include
institutions with greater than $500 million in total assets. 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 ratably over 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.
21
In accordance with Statement of Financial Accounting Standard
No. 109, "Accounting for Income Taxes" ("SFAS 109"), a deferred
liability has not been established for the Bank's tax bad debt base year
reserves of $16,586,000. The base year reserves are generally the balance
of reserves as of December 31, 1987, reduced proportionally for
reductions in the Bank's loan portfolio since that date. The base year
reserves will continue to be subject to recapture and the Bank could be
required to recognize a tax liability if: (i) the Bank fails to qualify as a
"bank" for federal income tax purposes; (ii) certain distributions are made
with respect to the stock of the Bank; (iii) the bad debt reserves are used
for any purpose other than to absorb bad debt losses; or (iv) there is a
change in tax law. The enactment of this legislation had no material
impact on the Corporation's operations or financial position.
Under SFAS 109, the Corporation may recognize deferred tax
assets for deductible temporary differences based on an evaluation of the
likelihood of realizing the underlying tax benefits. The realization of these
benefits principally depends upon the following sources of taxable income:
(i) taxable income in the current year or prior years that is available
through carryback (potential recovery of taxes paid for the current year or
prior years); (ii) future taxable income that will result from the reversal of
existing taxable temporary differences (potential offsetting of deferred tax
liabilities); or (iii) future taxable income, exclusive of the reversal of
existing temporary differences, that is generated by future operations.
In addition, tax-planning strategies may be available to accelerate
taxable income or deductions, change the character of taxable income or
deductions, or switch from tax-exempt to taxable investments so that there
would be sufficient taxable income of the appropriate character and in the
appropriate periods to allow for realization of the tax benefits.
The Federal Financial Institutions Examination Council (the
"FFIEC") has adopted all provisions of SFAS 109 for regulatory reporting
purposes, including those provisions related to deferred tax assets.
However, the FFIEC agencies have imposed a limitation on the amount of
net deferred tax assets that may be included in the calculation of regulatory
capital. The limitation requires an institution to deduct from capital, when
computing its regulatory capital ratios, any amount of net deferred tax asset
that is not supported by the sum of the carryback potential of the institution
plus the lower of the next twelve months' estimated earnings or ten percent
of Tier 1 capital. At December 31, 1998, First Indiana met all the above
requirements and had no adjustments to regulatory capital.
As a result of a routine tax audit, the IRS adjusted certain income
taxes owed by First Indiana for the years ended December 31, 1985 and
1986. The adjustments involved the timing of First Indiana's deduction of
interest expense paid on customers' certificate of deposit accounts. First
Indiana paid the taxes and interest and subsequently filed for a refund of
these amounts. A settlement was reached, which the Bank received in
1997. The Internal Revenue Service has examined the tax returns of First
Indiana through 1996.
State. The State of Indiana imposes a franchise tax on the
"adjusted gross income" of depository institutions at a fixed rate of 8.5
percent per year. This franchise tax is imposed in lieu of the gross income
tax, adjusted gross income tax, savings and loan excise tax and
supplemental net income tax otherwise imposed on certain corporate
entities and depository institutions. "Adjusted gross income" is computed
by making certain modifications to an institution's federal taxable income.
For example, tax-exempt interest is included in the depository institution's
adjusted gross income for state franchise tax purposes. The Indiana
Department of Revenue has examined the state income tax returns of First
Indiana through 1994.
Service Corporation Subsidiaries
OTS regulations permit federal savings institutions to invest in
the capital stock, obligations or specified types of securities of subsidiaries
(referred to as "service corporations") and to make loans to such
subsidiaries and joint ventures in which such subsidiaries are participants
in an aggregate amount not exceeding two percent of an institution's assets,
plus an additional one percent of assets if the amount over two percent is
used for specified community or inner-city development purposes. In
addition, federal regulations permit institutions to make specified types of
loans to such subsidiaries (other than special-purpose finance
subsidiaries), in which the institution owns more than ten percent of the
stock, in an aggregate amount not exceeding 50 percent of the institution's
regulatory capital if the institution's regulatory capital is in compliance
with applicable regulations. FIRREA requires a savings institution which
acquires a non-savings institution subsidiary, or which elects to conduct a
new activity within a subsidiary, to give the FDIC and the OTS at least 30
days' advance written notice. The FDIC may, after consultation with the
OTS, prohibit specific activities if it determines such activities pose a
22
serious threat to the SAIF. Moreover, savings institutions must deduct
from capital, for purposes of meeting the leverage limit, tangible capital,
and risk-based capital requirements, their entire investment in and loans
to a subsidiary engaged in activities permissible for a national bank (other
than exclusively agency activities for its customers or mortgage banking
subsidiaries).
One Mortgage Corporation. One Mortgage Corporation is a
wholly owned mortgage banking subsidiary which originates single-family
residential mortgage loans outside of Indiana for sale to First Indiana or for
sale into the secondary market. It originates loans through offices located
in Orlando, Tampa and West Palm Beach, Florida, and in Charlotte and
Raleigh, North Carolina.
One Investment Corporation. One Investment Corporation is
a wholly owned subsidiary formed in January, 1999 to engage in the
purchase and sale of loan participations originated both by First Indiana
and by others in the secondary market.
One Property Corporation. One Property Corporation is a
wholly owned subsidiary formed in 1985 to engage in commercial real
estate investment activities. To date, One Property Corporation has not
engaged in any such activities.
Pioneer Service Corporation. Pioneer Service Corporation is
a wholly owned subsidiary of the Bank. In April 1990, Pioneer Service
Corporation invested in a limited partnership which was formed to develop
and own a 112-unit apartment complex in Greencastle, Indiana.
Employees
At December 31, 1998, the Corporation and its subsidiaries
employed 752 persons, including part-time employees. Management
considers its relations with its employees to be excellent. None of these
employees is represented by any collective bargaining group.
The Corporation and its subsidiaries currently maintain a
comprehensive employee benefit program providing, among other benefits,
a qualified pension plan, a 401(k) plan, medical reimbursement accounts,
hospitalization and major medical insurance, paid sick leave, short-term
and long-term disability insurance, life insurance, an employees' stock
purchase plan, tuition reimbursement, and reduced loan rates for
employees who qualify.
Item 2. Properties
At December 31, 1998, the Corporation operated through 27 full-service
banking centers and 14 loan origination offices in addition to its
headquarters and operations locations. The Corporation leases its
headquarters location, 10 of the branches and 13 of the origination offices,
and owns the remaining locations. The aggregate carrying value at
December 31, 1998 of the properties owned or leased, including
headquarters properties and leasehold improvements at the leased offices,
was $18.5 million. See Note 6 to the Corporation's Consolidated Financial
Statements. The carrying value of First Indiana's data processing
equipment at December 31, 1998 was $1.7 million.
Item 3. Legal Proceedings
There are no pending legal proceedings to which the Corporation
or any subsidiary was a party or to which any of their property is subject
other than litigation which, in the opinion of management, is not material
to the Corporation's business, operations, or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Corporation's security
holders during the three months ended December 31, 1998.
23
Part II
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters
The information required by this item is incorporated by
reference from page 47 of the Corporation's 1998 Annual Report under the
heading, "Corporate Information."
For restrictions on the Corporation's present or future ability to
pay dividends, see Note 11 of "Notes to Consolidated Financial
Statements" on page 37 - 39 of the Corporation's 1998 Annual Report,
which is incorporated herein by reference.
The Corporation paid a cash dividend of $.12 per share
outstanding in each quarter of 1998 and $.10 per share outstanding in each
quarter of 1997, as adjusted for a six-for-five stock dividend on March 6,
1998.
Item 6. Selected Financial Data
The information required by this item is incorporated by
reference to page 23 of the Corporation's 1998 Annual Report from the
material under the heading "Five-Year Summary of Selected Financial
Data."
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of
Operations
The information required by this item is incorporated by
reference to pages 12 - 22 of the Corporation's 1998 Annual Report from
the material under the heading "Financial Review."
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk
The information required by this item is incorporated by reference to page
22 of the Corporation's 1998 Annual Report from the material under the
heading "Disclosures About Market Risk."
Item 8. Financial Statements and Supplementary Data
The Corporation's Consolidated Financial Statements and Notes
to Consolidated Financial Statements at December 31, 1998 and 1997 and
for each of the years in the three-year period ended December 31, 1998 are
incorporated by reference to pages 24 - 46 of the Corporation's 1998
Annual Report. The Corporation's unaudited quarterly financial data for
each of the years in the two-year period ended December 31, 1998 is
incorporated by reference to Note 15 of "Notes to Consolidated Financial
Statements" on page 43 of the Corporation's 1998 Annual Report.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
24
Part III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item with respect to the directors
is incorporated by reference to pages 5-7 and page 19 of the Corporation's
Proxy Statement dated March 11, 1999 under the heading "Election of
Directors," and "Section 16(a) Beneficial Ownership Reporting
Compliance."
The following table sets forth information about the executive
officers of the Corporation and the Bank who are not directors of the
Corporation or the Bank. All executive officers are appointed by the
Board of Directors and serve at the discretion of the Board of Directors.
Year First
Name Position Age Elected Officer
------------- ------------- ------- ---------------
David L. Gray Vice President and Treasurer 55 1981
of the Corporation; Chief
Financial Officer, Treasurer,
and Senior Vice President,
Financial Management
Group of the Bank
David A. Lindsey Senior Vice President, 48 1983
Consumer Finance Group
of the Bank;
Merrill E. Matlock Senior Vice President, 49 1984
Commercial and Mortgage
Banking Group of the Bank
Timothy J. O'Neill Senior Vice President, 51 1972
Correspondent Banking
Services Group of the Bank
Edward E. Pollack Senior Vice President, 50 1998
Technology and Operations
Group of the Bank
Kenneth L. Turchi Senior Vice President, Retail 40 1987
Banking, Marketing, and Strategic
Planning Group of the Bank
David L. Gray has been with the Bank since July 1981, and
currently serves as the Corporation's vice president and treasurer, and the
Bank's chief financial officer, treasurer, and senior vice president,
Financial Management Group. He also serves as the chairman of the
Bank's Asset/Liability Committee.
David A. Lindsey has been with the Bank since January 1983,
serving as the Bank's senior vice president, Consumer Finance Group. He
oversees the Bank's national consumer sales force.
Merrill E. Matlock is senior vice president of the Bank's
Commercial and Mortgage Banking Group. He is responsible for the
Bank's residential, construction, business, and commercial real estate
lending. Mr. Matlock has worked for First Indiana since 1984 and was
most recently first vice president of the construction lending department.
Timothy J. O'Neill has been with the Bank since 1970. He
currently serves as the Bank's senior vice president, Correspondent
Banking Services Group. As part of his current responsibilities, he
develops relationships with smaller community banks to provide private
label products and services to their customers.
Edward E. Pollack joined the Bank in 1998, and offers many
years of experience in operations and technology at the nation's largest
guarantor of student loans. He is serving as senior vice president,
Technology and Operations Group.
25
Kenneth L. Turchi joined First Indiana in September 1985 and
currently serves as senior vice president, Retail Banking, Marketing, and
Strategic Planning Group. His duties include strategic planning,
marketing, advertising, market research, investor and public relations,
telemarketing, and supervision of retail banking center sales and
operations.
Item 11. Executive Compensation.
The information required by this item with respect to executive
compensation is incorporated by reference to pages 9-18 of the material
under the heading "Executive Compensation" in the Corporation's Proxy
Statement.
During 1997, the Corporation effected change-of-control
arrangements with its key officers. The full text of these arrangements can
be found in Exhibits 10(j) and 10(k) of the 1997 Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The information required by this item is incorporated by
reference to pages 1-7 of the material under the heading "Proxy Statement"
and "Proposal No 1: Election of Directors" in the Corporation's Proxy
Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by
reference to page 8 of the material under the heading "Certain
Transactions" in the Corporation's Proxy Statement.
26
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
a. The following documents are filed as part of this report:
1998 Annual
Report
(Exhibit 13)
Financial Statements Page(s)
-------------------- ------------
Consolidated Balance Sheets as of
December 31, 1998 and 1997 24
Consolidated Statements of Earnings
for the Years Ended December 31, 1998, 1997 and 1996 25
Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 1998, 1997 and 1996 26
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1998, 1997 and 1996 27
Notes to Consolidated Financial Statements 28-45
Independent Auditors' Report 46
Exhibits
Refer to list of exhibits on pages 29-30
b. Reports on Form 8-K
No Reports on Form 8-K were filed during the three months ended
December 31, 1998.
c. The exhibits filed herewith or incorporated by reference herein are
set forth on the Exhibit index on pages 29-30.
d. Financial Statement Schedules required by Regulation S-X.
None
27
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FIRST INDIANA CORPORATION
By:/s/ Owen B. Melton, Jr.
Owen B. Melton, Jr.
President and Chief Operating Officer
Date: March 18, 1999
Pursuant to the requirements of the Securities and Exchange Act of
1934, this annual report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
Officers
By: /s/Robert H. McKinney By: /s/David L. Gray
Robert H. McKinney David L. Gray
Chairman and Chief Vice President and
Executive Officer Treasurer
Date: March 18, 1999 Date: March 18, 1999
Directors
By: /s/Gerald L. Bepko By: /s/Robert H. McKinney
Gerald L. Bepko Robert H. McKinney
Date: March 18, 1999 Date: March 18, 1999
By: /s/Andrew Jacobs, Jr. By: /s/Owen B. Melton, Jr.
Andrew Jacobs, Jr. Owen B. Melton, Jr.
Date: March 18, 1999 Date: March 18, 1999
By: /s/Marni McKinney By: /s/Phyllis W. Minott
Marni McKinney Phyllis W. Minott
Date: March 18, 1999 Date: March 18, 1999
By: /s/John W. Wynne By: /s/Michael L. Smith
John W. Wynne Michael L. Smith
Date: March 18, 1999 Date: March 18, 1999
By: /s/H.J. Baker
H.J. Baker
Date: March 18, 1999
28
Exhibit Index
Page(s)
Exhibit (by Sequential
Number Numbering System)
3(a) Articles of Incorporation and Bylaws of First Indiana Corporation 10-K 31
4(a) Form of Certificate of Common Stock of Registrant, incorporated by
reference to Exhibit 4(c) of the Registrant's registration statement on
Form S-1, filed as No. 33-46547 on March 20, 1992.
4(b) Shareholder Rights Agreement between First Indiana Corporation and
Harris Trust and Savings Bank dated November 14, 1997,
incorporated by reference to the Registrant's Form 8-A filed on
December 2, 1997.
10(a) First Indiana Bank 1997 Long-Term Management Performance Incentive
Plan, incorporated by reference to Exhibit 10(a) of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997
10(b) First Indiana Corporation 1991 Stock Option and Incentive Plan,
incorporated by reference to Exhibit A of the Registrant's March 20,
1991 Proxy Statement, Pages A-1 to A-8.
10(c) First Indiana Corporation 1998 Stock Incentive Plan, incorporated by
reference to Exhibit 10(c) of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1997
10(d) First Indiana Corporation 1992 Director Stock Option Plan,
incorporated by reference to Exhibit A of the Registrant's March 13,
1992 Proxy Statement, Pages A-1 to A-3.
10(e) First Indiana Corporation 1992 Stock Option Plan, incorporated by
reference to Exhibit A of the Registrant's March 12, 1993 Proxy
Statement, pages 15 to 19.
10(f) First Indiana Corporation Supplemental Benefit Plan effective May 1,
1997, incorporated by reference to Exhibit 10(f) of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997.
10(g) First Indiana Corporation Supplemental Benefit Plan Agreement
effective May 1, 1997 between Registrant and Robert H. McKinney,
incorporated by reference to Exhibit 10(g) of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997.
29
10(h) First Indiana Corporation Supplemental Benefit Plan Agreement
effective May 1, 1997 between Registrant and each of Owen B.
Melton, Jr. and Marni McKinney, incorporated by reference to Exhibit
10(h) of the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.
10(i) Supplemental Benefit Plan Agreement effective May 1, 1997 between
First Indiana and each of David L. Gray, David A. Lindsey, Merrill E.
Matlock, Timothy J. O'Neill, and Kenneth L. Turchi, incorporated
by reference to Exhibit 10(i) of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997.
10(j) Form of Employment Agreement between Registrant and each of
Robert H. McKinney, Owen B. Melton, Jr. and Marni McKinney,
incorporated by reference to Exhibit 10(j) of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997.
10(k) Form of Employment Agreement between First Indiana and each of
David L. Gray, David A. Lindsey, Merrill E. Matlock, Timothy J.
O'Neill and Kenneth L. Turchi, incorporated by reference to Exhibit
10(k) of the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.
13 1998 Annual Report. 10-K 54
21 Subsidiaries of First Indiana Corporation and First Indiana Bank. 10-K 106
22 Definitive Proxy Statement relating to the 1999 Annual Meeting of
Shareholders. 10-K 107
23 Consent of KPMG Peat Marwick LLP. 10-K 131
27 Financial Data Schedule. 10-K 133
30