|
(Exact name of registrant as specified in its charter) |
|---|
Indiana | 35-1692825 |
(State or other jurisdiction of |
(IRS Employer Identification Number) |
incorporation or organization) | |
135 North Pennsylvania Street, Indianapolis, IN | 46204 |
(Address of principal executive office) |
(Zip Code) |
(317) 269-1200 | |
(Registrant's telephone number, including area code) | |
| Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) | |
| Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Securities Exchange Act). Yes (X) No ( ) | |
| Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: | |
Class |
Shares |
Common Stock, par value $0.01 per share |
Outstanding at 04/25/2003 |
15,549,737 |
FIRST INDIANA CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX
| Page | ||
| Part I | Financial Information | |
| Item 1. | Financial Statements | |
| Condensed Consolidated Balance Sheets as of March 31, 2003, December 31, 2002, and March 31, 2002 | 3 | |
| Condensed Consolidated Statements of Earnings for the Three Months Ended March 31, 2003 and 2002 | 4 | |
| Condensed Consolidated Statement of Shareholders' Equity for the Three Months Ended March 31, 2003 | 5 | |
| Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002 | 6 | |
| Notes to Condensed Consolidated Financial Statements | 7 | |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 12 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 22 |
| Item 4. | Controls and Procedures | 24 |
| Part II | Other Information | |
| Item 1. | Legal Proceedings | 25 |
| Item 2. | Changes in Securities and Use of Proceeds | 25 |
| Item 3. | Defaults Upon Senior Securities | 25 |
| Item 4. | Submission of Matters to a Vote of Security Holders | 25 |
| Item 5. | Other Information | 27 |
| Item 6. | Exhibits and Reports on Form 8-K | 28 |
| Signatures | ||
| Certifications of Principal Executive Officer and Principal Financial Officer |
2
Condensed Consolidated Balance Sheets
First Indiana Corporation and Subsidiaries
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
March 31 December 31 March 31
2003 2002 2002
------------ ------------ ------------
Assets
Cash $ 52,187 $ 76,050 $ 61,215
Interest-Bearing Due from Banks 10,359 - -
Federal Funds Sold 29,000 - -
Securities Available for Sale 154,696 138,457 147,111
Federal Home Loan Bank and Federal Reserve Bank Stock 24,802 22,491 22,491
Loans
Business 588,086 501,213 445,022
Consumer 665,371 666,150 669,820
Residential Mortgage 306,081 311,324 285,448
Single-Family Construction 206,289 212,772 227,268
Commercial Real Estate 154,490 146,174 125,707
------------ ------------ ------------
Total Loans 1,920,317 1,837,633 1,753,265
Allowance for Loan Losses (48,178) (44,469) (38,193)
------------ ------------ ------------
Net Loans 1,872,139 1,793,164 1,715,072
Premises and Equipment 25,798 21,528 20,303
Accrued Interest Receivable 10,286 10,771 13,584
Mortgage Servicing Rights 8,642 9,065 9,863
Goodwill 35,983 13,045 13,045
Other Intangible Assets 5,173 - -
Other Assets 41,739 40,643 41,883
------------ ------------ ------------
Total Assets $ 2,270,804 $ 2,125,214 $ 2,044,567
============ ============ ============
Liabilities
Non-Interest-Bearing Deposits $ 214,811 $ 180,389 $ 166,144
Interest-Bearing Deposits
Demand Deposits 187,711 179,751 160,322
Savings Deposits 441,080 398,752 443,096
Certificates of Deposit 695,488 580,312 638,864
------------ ------------ ------------
Total Interest-Bearing Deposits 1,324,279 1,158,815 1,242,282
------------ ------------ ------------
Total Deposits 1,539,090 1,339,204 1,408,426
Short-Term Borrowings 145,456 170,956 99,083
Federal Home Loan Bank Advances 315,492 346,532 281,609
Trust Preferred Securities 11,808 11,797 -
Accrued Interest Payable 3,151 2,290 3,140
Advances by Borrowers for Taxes and Insurance 3,946 1,820 5,062
Other Liabilities 29,504 31,404 34,941
------------ ------------ ------------
Total Liabilities 2,048,447 1,904,003 1,832,261
------------ ------------ ------------
Shareholders' Equity
Preferred Stock, $.01 Par Value: 2,000,000 Shares Authorized; None Issued - - -
Common Stock, $.01 Par Value: 33,000,000 Shares Authorized;
Issued: 2003 - 17,359,861 Shares; 2002 - 17,295,351 and 17,179,654 Shares 174 173 172
Capital Surplus 44,313 43,296 42,400
Retained Earnings 196,232 194,738 187,177
Accumulated Other Comprehensive Income 4,244 4,644 2,790
Treasury Stock at Cost: 2003 - 1,812,750 Shares;
2002 - 1,754,891 and 1,680,730 Shares (22,606) (21,640) (20,233)
------------ ------------ ------------
Total Shareholders' Equity 222,357 221,211 212,306
------------ ------------ ------------
Total Liabilities and Shareholders' Equity $ 2,270,804 $ 2,125,214 $ 2,044,567
============ ============ ============
See Notes to Consolidated Financial Statements
3
Condensed Consolidated Statements of Earnings
First Indiana Corporation and Subsidiaries
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended March 31
--------------------------------
2003 2002
--------------- ----------------
Interest Income
Loans $ 27,758 $ 29,028
Securities Available for Sale 2,029 2,242
Dividends on FRB and FHLB Stock 346 333
Federal Funds Sold 3 12
Interest-Bearing Due from Banks 6 -
--------------- ----------------
Total Interest Income 30,142 31,615
Interest Expense
Deposits 7,391 10,200
Short-Term Borrowings 387 395
Federal Home Loan Bank Advances 2,601 3,826
Trust Preferred Securities 222 -
--------------- ----------------
Total Interest Expense 10,601 14,421
--------------- ----------------
Net Interest Income 19,541 17,194
Provision for Loan Losses 6,237 2,610
--------------- ----------------
Net Interest Income After Provision for Loan Losses 13,304 14,584
Non-Interest Income
Loan and Deposit Charges 4,260 3,510
Loan Servicing Income (Expense) (97) 231
Loan Fees 589 605
Trust Fees 726 673
Somerset Fees 4,699 4,283
Investment Product Sales Commissions 348 608
Sale of Loans 2,473 1,881
Sale of Investment Securities 7 -
Other 914 703
--------------- ----------------
Total Non-Interest Income 13,919 12,494
Non-Interest Expense
Salaries and Benefits 12,163 10,037
Net Occupancy 1,149 980
Equipment 1,673 1,589
Professional Services 1,089 1,071
Marketing 617 659
Telephone, Supplies, and Postage 1,044 779
Other Intangible Asset Amortization 184 -
Other 1,840 1,975
--------------- ----------------
Total Non-Interest Expense 19,759 17,090
--------------- ----------------
Earnings before Income Taxes 7,464 9,988
Income Taxes 2,736 3,605
--------------- ----------------
Net Earnings $ 4,728 $ 6,383
=============== ================
Basic Earnings Per Share $ 0.30 $ 0.41
=============== ================
Diluted Earnings Per Share $ 0.30 $ 0.41
=============== ================
Dividends Per Common Share $ 0.165 $ 0.160
=============== ================
See Notes to Consolidated Financial Statements
4
Condensed Consolidated Statement of Shareholders' Equity
First Indiana Corporation and Subsidiaries
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
Accumulated
Other Total
Common Stock Capital Retained Comprehensive Treasury Shareholders'
-----------------------------
Shares Amount Surplus Earnings Income (Loss) Stock Equity
----------------- ----------- ----------- ----------- ----------------- --------------- --------------
Balance at December 31, 2002 15,540,460 $ 173 $ 43,296 $ 194,738 $ 4,644 $ (21,640) $ 221,211
Comprehensive Income:
Net Earnings - - - 4,728 - - 4,728
Unrealized Loss on Securities Available for Sale of $664,
Net of Income Taxes and Reclassification Adjustment of
$3, Net of Income Taxes - - - - (400) - (400)
--------------
Total Comprehensive Income 4,328
Dividends on Common Stock - $0.165 per share - - - (2,574) - - (2,574)
Exercise of Stock Options 34,764 - 307 - - - 307
Tax Benefit of Option Compensation - - 55 - - - 55
Common Stock Issued under Restricted Stock Plans -
Net of Amortization 36,000 1 719 (660) - - 60
Common Stock Issued under Deferred Compensation Plan - - (3) - - - (3)
Purchase of Treasury Stock (62,708) - - - - (998) (998)
Reissuance of Treasury Stock 4,849 - 57 - - 32 89
Redemption of Common Stock (6,254) - (118) - - - (118)
----------------- ----------- ----------- ----------- ----------------- --------------- --------------
Balance at March 31, 2003 15,547,111 $ 174 $ 44,313 $ 196,232 $ 4,244 $ (22,606) $ 222,357
================= =========== =========== =========== ================= =============== ==============
See Notes to Condensed Consolidated Financial Statements
5
Condensed Consolidated Statements of Cash Flows
First Indiana Corporation and Subsidiaries
(Dollars in Thousands)
(Unaudited)
(Dollars in Thousands) Three Months Ended March 31
--------------------------------
2003 2002
--------------- ----------------
Cash Flows from Operating Activities
Net Earnings $ 4,728 $ 6,383
Adjustments to Reconcile Net Earnings to Net Cash Provided by
Operating Activities
Gain on Sale of Assets, Net (2,480) (1,881)
Amortization of Premium, Discount, and Intangibles, Net 788 743
Depreciation and Amortization of Premises and Equipment 629 733
Amortization of Net Deferred Loan Fees 464 311
Provision for Loan Losses 6,237 2,610
Origination of Loans Held For Sale, Net of Principal Collected (80,851) (45,798)
Proceeds from Sale of Loans Held for Sale 83,316 74,491
Tax Benefit of Option Compensation 55 -
Change In:
Accrued Interest Receivable 1,153 1,662
Other Assets (6,476) (8,965)
Accrued Interest Payable 229 (664)
Other Liabilities (5,209) 1,379
--------------- ----------------
Net Cash Provided by Operating Activities 2,583 31,004
--------------- ----------------
Cash Flows from Investing Activities
Proceeds from Sale of Securities Available for Sale 12,650 -
Proceeds from Maturities of Securities Available for Sale 5,310 8,636
Purchase of Securities Available for Sale (10,000) (10,000)
Purchase of FHLB and FRB Stock (136) -
Principal Collected on Loans, Net of Originations 53,481 (112)
Purchase of Loans (25,020) (22,040)
Purchase of Premises and Equipment (3,237) (516)
Acquisition of Somerset, Net of Cash Acquired (6) (6)
Acquisition of MetroBanCorp, Net of Cash Acquired 15,738 -
Proceeds from Sale of Premises and Equipment 116 67
--------------- ----------------
Net Cash Provided (Used) by Investing Activities 48,896 (23,971)
--------------- ----------------
Cash Flows from Financing Activities
Net Change in Deposits 38,377 28,948
Repayment of Federal Home Loan Bank Advances (255,040) (150,038)
Borrowings of Federal Home Loan Bank Advances 215,000 135,000
Net Change in Short-Term Borrowings (33,144) (21,999)
Net Change in Advances by Borrowers for Taxes and Insurance 2,121 2,015
Stock Option Proceeds 189 534
Fractional Shares - (11)
Deferred Compensation (3) -
Purchase of Treasury Stock (998) -
Reissuance of Treasury Stock 89 65
Dividends Paid (2,574) (2,479)
--------------- ----------------
Net Cash Provided (Used) by Financing Activities (35,983) (7,965)
--------------- ----------------
Net Change in Cash and Cash Equivalents 15,496 (932)
Cash and Cash Equivalents at Beginning of Year 76,050 62,147
--------------- ----------------
Cash and Cash Equivalents at End of Year $ 91,546 $ 61,215
=============== ================
See Notes to Consolidated Financial Statements
6
FIRST INDIANA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 2003
(Unaudited)
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (comprising only normal recurring accruals) necessary for a fair presentation of the condensed consolidated financial statements have been included. Results for any interim period are not necessarily indicative of results to be expected for the year. The condensed consolidated financial statements include the accounts of First Indiana Corporation and its subsidiaries (“First Indiana” or “Corporation”). The principal subsidiaries of the Corporation are First Indiana Bank and its subsidiaries (“Bank”) and Somerset Financial Services, LLC (“Somerset”). A summary of the Corporation’s significant accounting policies is set forth in Note 1 of the Notes to Consolidated Financial Statements in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2002.
All share and per share data have been restated to reflect the five-for-four stock split declared on January 16, 2002.
Certain amounts in the Condensed Consolidated Financial Statements relating to prior periods have been reclassified to conform to current reporting presentation.
Basic earnings per share for 2003 and 2002 were computed by dividing net earnings by the weighted average shares of common stock outstanding (15,573,638 and 15,473,859 for the three months ended March 31, 2003 and 2002). Diluted earnings per share for 2003 and 2002 were computed by dividing net earnings by the weighted average shares of common stock and common stock that would have been outstanding assuming the issuance of all dilutive potential common shares outstanding (15,711,282 and 15,725,480 for the three months ended March 31, 2003 and 2002). Dilution of the per-share calculation relates to stock options.
7
First Indiana accounts for awards of stock-based employee compensation plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related Interpretations. No stock-based employee compensation cost has been recognized in respect of stock option grants, except for deferred compensation expense in connection with certain Somerset options that is being amortized over the life of the respective options. The following table illustrates the effect on net earnings and earnings per share if the Corporation had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” to stock option compensation.
(Dollars in Thousands, Except Per Share Data) Three Months Ended March 31
2003 2002
---------------- ----------------
Net Earnings, As Reported $ 4,728 $ 6,383
Add: Stock option employee compensation expense
included in reported net income, net of related tax effects 13 49
Deduct: Total stock option employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (229) (240)
---------------- ----------------
Pro Forma Net Earnings $ 4,512 $ 6,192
================ ================
Basic Earnings Per Share
As Reported $ 0.30 $ 0.41
Pro Forma 0.29 0.40
Diluted Earnings Per Share
As Reported $ 0.30 $ 0.41
Pro Forma 0.29 0.39
An allowance has been established for loan losses. The provision for loan losses charged to operations is based on management’s judgment of current economic conditions and the credit risk of the loan portfolio. Management believes that this allowance is adequate for the losses inherent in the loan portfolio. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review this allowance and may require the Corporation to recognize additions to the allowance based on their judgment about information available to them at the time of their examination.
8
Beginning in 2003, the Corporation changed its segment definitions to conform to new internal management reporting to monitor and manage financial performance. Prior year segment information has been restated to conform to these new segment definitions. The Corporation’s business units are primarily organized to operate in the financial services industry and are determined by the products and services offered. The Community Bank includes business, consumer, residential mortgage, single-family construction and commercial real estate loans. The Community Bank also includes the Bank’s 33-branch network and investment product sales division. The Consumer Finance Bank includes the origination, processing, servicing, and sale of consumer and residential mortgage loans. Investment portfolio management is included in the treasury segment. FirstTrust Indiana includes trust fees and related expenses. The Somerset segment includes all activities of the Corporation’s Somerset subsidiary. Revenues in the Corporation’s segments are generated from loans, deposits, investments, servicing fees, loan sales, and fee income. There are no foreign operations.
The following segment financial information is based on the internal management reporting structure used by the Corporation to monitor and manage financial performance. The Corporation evaluates segment performance based on average assets and profit or loss before income taxes and indirect expenses. Indirect expenses include the Corporation’s overhead and support expenses. The Corporation attempts to match fund each business unit by reviewing the assets and liabilities held by each unit and assigning an appropriate expense or income offset based on the cost of funds. The Corporation accounts for intersegment revenues, expenses, and transfers based on estimates of the value of the services performed.
9
(Dollars in Thousands) First Quarter
Consumer 2003
Community Finance Consolidated
Bank Bank FirstTrust Somerset Treasury Non-Segment Totals
---------------- ---------------- ---------------- ---------------- ---------------- ---------------- -----------------
Average Segment Assets $ 1,910,841 $ 71,428 $ 527 $ 13,225 $ 208,632 $ 31,954 $ 2,236,607
Net Interest Income (Expense) (2) 16,882 747 (4) 10 2,495 (589) 19,541
Provision for Loan Losses (6,237) - - - - - (6,237)
Non-Interest Income 5,354 2,999 726 4,699 22 119 13,919
Intangible Amortization (184) - - - - - (184)
Other Non-Interest Expense (11,022) (2,174) (570) (2,727) (395) (2,687) (19,575)
Intersegment Income (Expense) (3) (2,467) 1,238 - - - 1,229 -
---------------- ---------------- ---------------- ---------------- ---------------- ---------------- -----------------
Earnings before Income Tax 2,326 2,810 152 1,982 2,122 (1,928) 7,464
================ ================ ================ ================ ================ ================ =================
(Dollars in Thousands) First Quarter
Consumer 2002
Community Finance Consolidated
Bank Bank FirstTrust Somerset Treasury Non-Segment Totals
---------------- ---------------- ---------------- ---------------- ---------------- ---------------- -----------------
Average Segment Assets $ 1,777,979 $ 42,691 $ 538 $ 12,476 $ 159,527 $ 26,245 $ 2,019,456
Net Interest Income (Expense) (2) 15,065 477 (5) 9 2,051 (403) 17,194
Provision for Loan Losses (2,610) - - - - - (2,610)
Non-Interest Income 4,078 3,296 673 4,317 15 115 12,494
Other Non-Interest Expense (9,640) (2,140) (590) (2,645) (327) (1,748) (17,090)
Intersegment Income (Expense) (3) (2,378) 2,783 - - - (405) -
---------------- ---------------- ---------------- ---------------- ---------------- ---------------- -----------------
Earnings before Income Tax 4,515 4,416 78 1,681 1,739 (2,441) 9,988
================ ================ ================ ================ ================ ================ =================
| (1) | First Indiana implemented a new management reporting structure in the first quarter of 2003. Amounts shown for 2002 have been reclassified to reflect the change in management reporting format. |
| (2) | The net interest income amounts in the segment results reflect not only the actual interest income and expense from segment activities, but also amounts for transfer income and expense to match fund each segment. Transfer income and expense is assigned to assets and liabilities based on the cost of funds. |
| (3) | Intersegment revenues are received by one segment for performing a service for another segment. In the case of residential and consumer portfolios, the amount paid to the consumer loan processing office is capitalized and amortized over a four-year period. These entries are not included in the Corporation’s actual results. |
10
On January 13, 2003, First Indiana acquired Carmel, Indiana-based MetroBanCorp through a merger. MetroBanCorp was the holding company for MetroBank, with assets of $196,000,000 and seven offices in Carmel, Fishers, and Noblesville, Indiana. The acquisition was accounted for using the purchase method of accounting, and accordingly, the financial results of the acquired entity were included in First Indiana’s consolidated financial statements from the January 13, 2003 acquisition date. In the merger, MetroBanCorp shareholders received $17.00 in cash in exchange for each share of MetroBanCorp stock. The cost of the acquisition was approximately $37,500,000. Goodwill of $22,938,000, a core deposit intangible of $4,357,000, and a non-compete agreement intangible of $1,000,000 were recorded in connection with the merger. The weighted average life of the core deposit intangible and the non-compete agreement intangible are 7.2 years and 1.5 years, respectively. The weighted average life of these intangible assets in total is 6.1 years.
The following table shows the change in the carrying amount of capitalized loan servicing rights:
(Dollars in Thousands) Three Months Ended March 31
2003 2002
---------------- ----------------
Balance at Beginning of Period $ 9,065 $ 9,819
Additions 411 732
Amortization of Servicing Rights (623) (684)
Change in Valuation Reserves (211) (4)
---------------- ----------------
Balance at End of Period $ 8,642 $ 9,863
================ ================
Effective January 1, 2002, the Corporation adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”) resulting in no goodwill impairment. In accordance with the new standard, goodwill and intangible assets with indefinite lives are no longer amortized, but are subject to impairment tests at least annually. The Corporation had no existing intangible assets acquired in prior purchase business combinations and recognized no impairment loss relating to goodwill and other intangible assets upon adoption of SFAS 142.
11
The following tables show changes in the carrying amount of goodwill for the three months ended March 31, 2003 and 2002.
(Dollars in Thousands) Community
Bank Somerset Total
Segment Segment Goodwill
-------------- ------------ -------------
Balance as of January 1, 2003 $ 6,685 $ 6,360 $ 13,045
Addition due to MetroBanCorp Acquisition 22,938 - 22,938
-------------- ------------ -------------
Balance as of March 31, 2003 $ 29,623 $ 6,360 $ 35,983
============== ============ =============
Community
Bank Somerset Total
Segment Segment Goodwill
-------------- ------------ -------------
Balance as of January 1, 2002 $ 6,685 $ 6,360 $ 13,045
Change during the period - - -
-------------- ------------ -------------
Balance as of March 31, 2002 $ 6,685 $ 6,360 $ 13,045
============== ============ =============
The following table summarizes the carrying amount of other intangible assets at March 31, 2003.
(Dollars in Thousands) Total
Core Non-compete Other
Deposit Agreement Intangible
Intangible Intangible Assets
--------------- --------------- ------------
Gross Carrying Amount $ 4,357 $ 1,000 $ 5,357
Less: Accumulated Amortization (101) (83) (184)
--------------- --------------- ------------
Net Carrying Amount $ 4,256 $ 917 $ 5,173
=============== =============== ============
Amortization expense on other intangible assets is expected to total $736,000, $718,000, $697,000, $342,000, and $321,000 in 2003, 2004, 2005, 2006, and 2007, respectively.
12
Financial Highlights
First Indiana Corporation and Subsidiaries
(Dollars in Thousands, Except Per Share Data)
For the Three Months Ended
March 31
-----------------------------
2003 2002
------------- -------------
Net Interest Income $ 19,541 $ 17,194
Provision for Loan Losses 6,237 2,610
Non-Interest Income 13,919 12,494
Non-Interest Expense 19,759 17,090
Net Earnings 4,728 6,383
Basic Earnings Per Share $ 0.30 $ 0.41
Diluted Earnings Per Share 0.30 0.41
Dividends Per Share 0.165 0.160
Net Interest Margin 3.73 % 3.58 %
Efficiency Ratio 59.05 57.57
Annualized Return on Average Assets 0.86 1.28
Annualized Return on Average Equity 8.53 12.24
Average Shares Outstanding 15,573,638 15,473,859
Average Diluted Shares Outstanding 15,711,282 15,725,480
At March 31
-----------------------------
2003 2002
------------- -------------
Assets $ 2,270,804 $ 2,044,567
Loans 1,920,317 1,753,265
Deposits 1,539,090 1,408,426
Shareholders' Equity 222,357 212,306
Shareholders' Equity/Assets 9.79 % 10.38 %
Shareholders' Equity Per Share $ 14.30 $ 13.70
Market Closing Price 15.80 19.45
Shares Outstanding 15,547,111 15,498,924
13
First Indiana Corporation and subsidiaries had net earnings of $4,728,000 for the three months ended March 31, 2003, compared with net earnings of $6,383,000 for the same period last year. Diluted earnings per share for the three months ended March 31, 2003 were $0.30, compared with $0.41 per share for the same period one year ago. Cash dividends for the first quarter of 2003 and 2002 were $0.165 and $0.160 per share of common stock outstanding.
The provision for loan losses was $6,237,000 for the first quarter of 2003, compared to $2,610,000 for the first quarter of 2002. The provision for the first quarter of 2003 reflects an increase in business loan charge-offs and an increase in non-performing loans. Net charge-offs for the first quarter of 2003 were $4,237,000 compared to net charge-offs of $1,552,000 for the first quarter of 2002.
Annualized return on average total assets was 0.86 percent for the three months ended March 31, 2003, compared with 1.28 percent for the same period one year ago. Annualized return on average total equity was 8.53 percent for the three months ended March 31, 2003, compared with 12.24 percent for the same period one year ago.
On January 13, 2003, First Indiana acquired Carmel, Indiana-based MetroBanCorp through a merger. MetroBanCorp was the holding company for MetroBank, with assets of $196,000,000 and seven offices in Carmel, Fishers, and Noblesville, Indiana. The acquisition was accounted for using the purchase method of accounting, and, accordingly, the financial results of the acquired entity were included in First Indiana’s consolidated financial statements from the January 13, 2003 acquisition date. The Corporation expects the transaction to be accretive to earnings by the fourth quarter of 2003.
Net interest income was $19,541,000 for the three months ended March 31, 2003, compared with $17,194,000 for the three months ended March 31, 2002. Earning assets averaged $2,100,902,000 in the first quarter of 2003, compared with $1,912,842,000 for the same quarter in 2002. First quarter 2003 average earning assets from the MetroBanCorp merger totaled $113,647,000. Net interest margin was 3.73 percent in the first quarter of 2003, compared to 3.58 percent in the first quarter of 2002. This increase was expected following a relatively stable interest rate environment during most of 2002, which allowed the repricing of funding liabilities downward to catch up with the repricing of earning assets. However, the 50 basis point rate cut by the Federal Reserve Board in the fourth quarter of 2002 placed pressure on the net interest margin of First Indiana, which has an asset-sensitive pricing structure. If the Federal Reserve Board maintains its current rate structure or increases rates, First Indiana’s net interest margin should continue to improve in 2003.
14
The contribution of interest-free funds to net interest margin varies depending on the level of interest-free funds and the level of interest rates. Interest-free funds averaged $323,813,000, or 15.4 percent of earning assets in the first quarter of 2003, compared to $297,604,000, or 15.6 percent of earning assets for the comparable period of 2002. Average interest-free funds provided 37 basis points to the first quarter 2003 margin, compared with 55 basis points for the same period in 2002. Although interest-free funds as a percentage of earning assets were approximately the same in the first quarter of 2003 and 2002, their impact declined compared to the first quarter of 2002 due to the lower interest rate environment.
The following table provides information on the Corporation's net interest margin.
Net Interest Margin
First Indiana Corporation and Subsidiaries
(Dollars in Thousands)
Three Months Ended
-----------------------------------------------------------------
March 31, 2003 March 31, 2002
-------------------------------- --------------------------------
Average Yield / Average Yield /
Balance Interest Rate Balance Interest Rate
------------ ------------------- ------------ -------------------
Assets
Interest-Bearing Due from Banks $ 1,803 $ 6 1.30 % $ - $ - - %
Federal Funds Sold 728 3 1.71 3,011 12 1.61
Securities Available for Sale 160,915 2,029 5.04 148,923 2,242 6.02
FHLB and FRB Stock 24,459 346 5.65 22,491 333 5.92
Loans
Business 566,016 7,231 5.18 437,580 6,259 5.80
Consumer 684,716 11,555 6.79 674,763 13,141 7.82
Residential Mortgage 299,163 4,235 5.66 278,833 4,659 6.68
Single-Family Construction 210,197 2,558 4.93 224,243 2,943 5.32
Commercial Real Estate 152,905 2,179 5.75 122,998 2,026 6.65
------------ ---------- ------------ ----------
Total Loans 1,912,997 27,758 5.85 1,738,417 29,028 6.72
------------ ---------- ------------ ----------
Total Earning Assets 2,100,902 30,142 5.78 1,912,842 31,615 6.65
Other Assets 135,705 106,614
------------ ------------
Total Assets $ 2,236,607 $ 2,019,456
============ ============
Liabilities and Shareholders' Equity
Interest-Bearing Deposits
Demand Deposits $ 187,783 $ 290 0.63 % $ 145,440 $ 289 0.80 %
Savings Deposits 436,807 1,007 0.93 447,134 1,568 1.42
Certificates of Deposit 694,975 6,094 3.56 627,351 8,343 5.39
------------ ---------- ------------ ----------
Total Interest-Bearing Deposits 1,319,565 7,391 2.27 1,219,925 10,200 3.39
Short-Term Borrowings 135,367 387 1.16 95,476 395 1.68
Federal Home Loan Bank Advances 310,354 2,601 3.40 299,837 3,826 5.17
Trust Preferred Securities 11,803 222 7.53 - - -
------------ ---------- ------------ ----------
Total Interest-Bearing Liabilities 1,777,089 10,601 2.42 1,615,238 14,421 3.62
Non-Interest-Bearing Demand Deposits 193,946 146,578
Other Liabilities 40,667 46,182
Shareholders' Equity 224,905 211,458
------------ ------------
Total Liabilities and Shareholders' Equity $ 2,236,607 $ 2,019,456
============ ---------- ============ ----------
Net Interest Income/Spread $ 19,541 3.36 % $ 17,194 3.03 %
=================== ===================
Net Interest Margin 3.73 % 3.58 %
========= =========
15
The first quarter of 2003 provision for loan losses was $6,237,000, compared to $2,610,000 for the first quarter of 2002. The significant increase in provision results from two main factors. The first is the further deterioration of a business loan identified as non-performing in the fourth quarter of 2002. The second is the identification of the under-collateralization of a single-family home builder’s loans in an out-of-state construction loan office. Net charge-offs for the first quarter of 2003 were $4,237,000, or 0.89 percent of average loans on an annualized basis, compared to net charge-offs for the first quarter of 2002 of $1,552,000, or 0.36 percent of average loans. Business loan net charge-offs were $2,436,000 for the first quarter of 2003 (which included a charge-off of approximately $2,500,000 on the business loan identified as non-performing in the fourth quarter of 2002 as discussed above), compared to net charge-offs of $307,000 for the first quarter of 2002. Consumer loan net charge-offs were $1,464,000 for the first quarter of 2003, compared to $1,270,000 for the first quarter of 2002. Included in the allowance for loan losses at March 31, 2003 was $1,709,000 acquired in the merger with MetroBanCorp during the first quarter of 2003.
Loan Charge-Offs and Recoveries
First Indiana Corporation and Subsidiaries
(Dollars in Thousands)
Three Months Ended
March 31, 2003 March 31, 2002
----------------- ----------------
Allowance for Loan Losses at Beginning of Period $ 44,469 $ 37,135
Charge-Offs
Business 2,747 308
Consumer 1,650 1,383
Residential Mortgage 81 -
Single-Family Construction 283 -
Commercial Real Estate - 10
-------------- -------------
Total Charge-Offs 4,761 1,701
Recoveries
Business 311 1
Consumer 186 113
Single-Family Construction 27 34
Commercial Real Estate - 1
-------------- -------------
Total Recoveries 524 149
-------------- -------------
Net Charge-Offs 4,237 1,552
Provision for Loan Losses 6,237 2,610
Allowance Related to Bank Acquired 1,709 -
-------------- -------------
Allowance for Loan Losses at End of Period $ 48,178 $ 38,193
============== =============
Net Charge-Offs to Average Loans (Annualized) 0.89 % 0.36 %
Allowance for Loan Losses to Loans at End of Period 2.51 2.18
Allowance for Loan Losses to Non-Performing Loans
at End of Period 97.97 102.28
16
The level of non-performing assets at March 31, 2003 increased from non-performing assets at December 31, 2002 and March 31, 2002. Non-performing assets at March 31, 2003 were $55,544,000, or 2.88 percent of loans and other real estate owned (“OREO”), compared with $51,756,000, or 2.80 percent of loans and OREO at December 31, 2002, and $45,720,000, or 2.60 percent of loans and OREO at March 31, 2002.
March 31, 2003 non-performing assets include $11,241,000 in outstanding loan balances of the single-family home builder discussed above. As a result of the Corporation’s review of this relationship, and its normal ongoing review of its internal controls, the Corporation is revising and strengthening several of its internal controls with regard to its construction lending operations, as further discussed in Part I, Item 4 of this Form 10-Q. Non-performing commercial real estate loans increased from $2,059,000 at December 31, 2002 to $6,301,000 at March 31, 2003 due to the placement of three land development loans on non-accrual status. One of these land development loans approximating $700,000 is included in the $11,241,000 in outstanding balances discussed above.
Decreases in non-performing residential loans and other real estate owned during the first quarter of 2003 were the result of specific, ongoing efforts to reduce non-performing loans. Non-performing assets attributable to MetroBanCorp totaled $379,000 at March 31, 2003.
Non-Performing Assets
First Indiana Corporation and Subsidiaries
(Dollars in Thousands)
March 31, 2003 December 31, 2002 March 31, 2002
-------------------- --------------------- --------------------
Non-Performing Loans
Non-Accrual Loans
Business $ 14,270 $ 20,234 $ 6,486
Consumer 9,637 9,405 12,501
Residential Mortgage 2,045 2,474 6,225
Single-Family Construction 14,127 4,286 8,094
Commercial Real Estate 6,301 2,059 1,117
------------------ ------------------- ------------------
Total Non-Accrual Loans 46,380 38,458 34,423
------------------ ------------------- ------------------
Accruing Loans
Business - Past Due 90 Days or More - 1,535 -
Consumer - Past Due 90 Days or More 2,796 3,093 2,666
Single-Family Construction - Past Due 90 Days or More - - 253
------------------ ------------------- ------------------
Total Accruing Loans 2,796 4,628 2,919
------------------ ------------------- ------------------
Total Non-Performing Loans 49,176 43,086 37,342
Other Real Estate Owned, Net 6,368 8,670 8,378
------------------ ------------------- ------------------
Total Non-Performing Assets $ 55,544 $ 51,756 $ 45,720
================== =================== ==================
Non-Performing Loans to Loans at End of Period 2.56 % 2.34 % 2.13 %
Non-Performing Assets to Loans and OREO at End of Period 2.88 2.80 2.60
17
Total non-interest income was $13,919,000 for the three months ended March 31, 2003, compared with $12,494,000 for the same period in 2002. Included in first quarter 2003 non-interest income is $287,000 from the MetroBanCorp acquisition.
Loan and deposit charges increased 21 percent to $4,260,000 in the first quarter of 2003 compared to $3,510,000 in the first quarter of 2002. The growth from the first quarter of 2002 was in returned check charges, service charges on demand and savings accounts, account analysis fees from business demand accounts, and debit card fees in addition to loan and deposit fees from the MetroBanCorp acquisition.
Loan servicing income in the first quarter of 2003 was a loss of $97,000 compared to income of $231,000 in the first quarter 2002. Increasing residential and home equity loan prepayment speeds reduced loan servicing fees and increased impairment in capitalized loan servicing rights when comparing first quarter 2003 to first quarter 2002.
FirstTrust Indiana’s fees totaled $726,000 in the first quarter of 2003, an increase of 8 percent compared to the same period last year. Fees earned in the estate administration area contributed the majority of the year to year increase. The Bank’s investment advisory and trust division had assets under management at March 31, 2003 of $679,262,000, compared to $658,357,000 at December 31, 2002 and $690,584,000 at March 31, 2002.
Somerset fees for the first quarter 2003 were $4,699,000 compared to $4,283,000 for the first quarter 2002, an increase of 10 percent. The increase was primarily the result of the addition of new clients, and to a lesser extent, an increase in the number of services provided to existing clients. Somerset historically generates strong first quarter fees from year-end audit and tax preparation services.
Investment and insurance product sales commissions, generated by the Bank’s subsidiary First Indiana Investor Services, decreased 43 percent to $348,000 in the first quarter of 2003 from $608,000 in the first quarter of 2002. Investment and insurance product sales fell in the first quarter of 2003, largely the result of the lower interest rate environment and the continued uncertainty of the equity markets.
Gain on the sale of loans in the first quarter of 2003 was $2,473,000 compared to $1,881,000 for the same quarter last year. Consumer loans sold in the first quarter of 2003 totaled $80,204,000 compared to $72,296,000 in the first quarter of 2002. When compared to the first three months of 2002, gain on the sale of loans for the same period of 2003 increased primarily due to better pricing along with a higher volume of sales.
Other income in the first quarter of 2003 was $914,000 compared to $703,000 in the first quarter of 2003. Included in other income in the first quarter of 2003 is a $114,000 gain on the sale of a branch building and land. In addition, ancillary residential and consumer loan servicing fees increased $109,000 in the first quarter of 2003 when compared to the first quarter of 2002.
18
Non-interest expense for the three months ended March 31, 2003 was $19,759,000 compared to $17,090,000 for the same period in 2002, an increase of 16 percent. Excluding MetroBanCorp, non-interest expense would have increased approximately 10 percent. Approximately $100,000 in expenses were directly associated with the integration of MetroBanCorp.
Salaries and benefits for the first quarter of 2003 were $12,163,000 compared to $10,037,000 for the first quarter of 2002. Salary expense was $9,845,000 in the first quarter of 2003 and $8,186,000 for the first quarter of 2002, an increase of 20 percent. Along with normal salary increases, salary expense grew in 2003 due to the addition of the MetroBank staff and staffing increases in the community bank, Somerset, and consumer finance bank segments. In addition, management incentive bonus expense was higher in 2003 when compared to 2002 due to the reduction of these expense accruals in the first quarter of 2002. Employee benefits expense was $2,318,000 for the first quarter of 2003 and $1,851,000 for the first quarter of 2002. The increase in 2003 consisted largely of increased pension, group insurance, and payroll tax expenses.
Net occupancy expense in the first quarter of 2003 increased 17 percent to $1,149,000 from $980,000 in the first quarter of 2002. These increases are due to normal increases in rental expense, rental expense for new and acquired branch facilities, and related increases in utilities, depreciation, and maintenance expenses. In addition, maintenance expenses were higher in the first quarter of 2003 versus the same quarter of 2002 due to snow removal expenses reflecting the harsh winter weather experienced in 2003.
Telephone, supplies, and postage expense in the first quarter of 2003 was $1,044,000 compared to $779,000 for the same period of 2002, an increase of 34 percent. Chief among the increases in 2003 were additional expenses for the former MetroBank retail branches. In addition, postage expense reflects an increase in postage rates and the impact of additional courier pickups at the Bank’s retail branches.
Other intangible asset amortization in the first quarter of 2003 was $184,000. In the first quarter of 2003, First Indiana established a core deposit intangible and non-compete agreement intangible related to the purchase of MetroBanCorp. The amortization of these intangibles commenced in the first quarter of 2003.
Other non-interest expense in the first quarter of 2003 decreased 7 percent to $1,840,000 from $1,975,000 in the first quarter of 2002. OREO operations expense decreased $98,000 in the first three months of 2003 to $65,000 versus $163,000 for the same period in 2002. This decrease is due primarily to a higher level of gains on the disposition of OREO properties. The Corporation’s efficiency ratio was 59.05 percent for the first quarter of 2003, compared to 57.57 percent for the first quarter of 2002.
19
Total assets at March 31, 2003 were $2,270,804,000, an increase of $145,590,000 from $2,125,214,000 at December 31, 2002 and an increase of $226,237,000 from $2,044,567,000 at March 31, 2002. The purchase of Carmel, Indiana-based MetroBanCorp through a merger on January 13, 2003 added approximately $196,000,000 to total assets in the first quarter of 2003. The increase in assets due to the acquisition of MetroBanCorp was partially offset by the use of cash for the acquisition, as well as by prepayment activity in consumer loans as discussed below.
Loans outstanding were $1,920,317,000 at March 31, 2003, compared to $1,753,265,000 one year ago. Excluding loans acquired through the MetroBanCorp merger, loans outstanding increased 3 percent over March 31, 2002 outstandings. Business loans increased to $588,086,000 at March 31, 2003, compared with $445,022,000 one year ago. Excluding loans acquired through the MetroBanCorp merger, business loans outstanding at March 31, 2003 increased 14 percent over March 31, 2002. Consumer loans outstanding totaled $665,371,000 at March 31, 2003, compared to $669,820,000 one year earlier. Excluding loans acquired through the MetroBanCorp merger, consumer loans declined 5 percent from March 31, 2002, reflecting prepayment activity. While the Bank decided to de-emphasize the traditional mortgage banking business in 1999, there remains a need within the Bank’s loan portfolio for credit and yield diversification. Consequently, in light of the strong residential mortgage loan prepayments during 2002, the Bank pursued a strategy of maintaining a level of diversification by originating and purchasing these loans. In the first quarter of 2003, the Bank originated $7,697,000 and purchased $24,741,000 in fixed and adjustable rate residential mortgage loans. In 2002, the Bank originated $14,264,000 and purchased $142,492,000 in primarily adjustable rate residential mortgage loans.
First Indiana’s core demand and savings deposits increased 10 percent to $843,602,000 on March 31, 2003 from $769,562,000 at March 31, 2002. This increase resulted largely from the MetroBanCorp acquisition. Demand deposits were $402,522,000 at March 31, 2003, compared to $326,466,000 a year ago. Savings deposits were $441,080,000 at March 31, 2003 compared to $443,096,000 a year ago. Excluding MetroBanCorp deposits, demand deposits increased 11 percent over March 31, 2002 balances, while savings deposits declined 11 percent for the same period. Certificates of deposit were $695,488,000 at March 31, 2003, compared to $580,312,000 at December 31, 2002 and $638,864,000 at March 31, 2002. Of the $115,176,000 certificates of deposit growth in the first quarter of 2003, $59,790,000 (or 52 percent) represented deposits acquired through the merger with MetroBanCorp. The remainder of this growth reflected the increased levels of short-term negotiable certificates of deposit that were used in lieu of short-term borrowings and short-term Federal Home Loan Bank (“FHLB”) advances. Certificates of deposit averaged $694,975,000 and $627,351,000 for the first three months of 2003 and 2002. In the first quarter 2003, certificates of deposit acquired through the MetroBanCorp merger averaged $52,436,000.
20
Short-term borrowings decreased to $145,456,000 at March 31, 2003 compared with $170,956,000 at December 31, 2002. Short-term borrowings were $99,083,000 at March 31, 2002. FHLB advances totaled $315,492,000 at March 31, 2003, compared with $346,532,000 at December 31, 2002 and $281,609,000 at March 31, 2002. Trust preferred securities, issued during the fourth quarter of 2002 to partially fund the MetroBanCorp merger, were $11,808,000 at March 31, 2003 and $11,797,000 at December 31, 2002.
At March 31, 2003, shareholders’ equity was $222,357,000, or 9.79 percent of total assets, compared with $221,211,000, or 10.41 percent, at December 31, 2002 and $212,306,000, or 10.38 percent, at March 31, 2002. Shareholders’ equity as a percentage of total assets decreased in the first quarter of 2003 primarily due to the assets acquired through the merger with MetroBanCorp.
The Corporation paid a quarterly dividend of $0.165 per common share on March 14, 2003 to shareholders of record as of March 5, 2003. This reflects a 3.1 percent increase from the quarterly dividend of $0.160 per share in 2002.
First Indiana Corporation is subject to capital requirements and guidelines imposed on bank holding companies by the Federal Reserve Board. First Indiana Bank is subject to capital requirements and guidelines imposed on national banks by the Office of the Comptroller of the Currency. The Corporation and the Bank are required by their respective regulators to maintain minimum capital ratios. The Federal Deposit Insurance Corporation Improvement Act of 1999 (“FDICIA”) established ratios and guidelines for banks to be considered “well-capitalized.” These capital requirements establish higher capital standards for banks and bank holding companies that assume greater risks. For this purpose, assets and certain specified off-balance sheet commitments are assigned to four risk categories, each weighted differently based on the level of credit risk ascribed to such assets or commitments. The Corporation’s trust preferred securities are included in its Tier 1 capital and total capital at March 31, 2003.
The following table shows the Corporation’s and the Bank’s capital levels and compliance with all capital requirements at March 31, 2003. Additionally, the Bank exceeds the capital levels set by FDICIA for a bank to be considered well-capitalized.
(Dollars in Thousands) Minimum To be
Actual Capital Adequacy Well Capitalized
-------------------- -------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
-------------------- -------------------- --------------------
March 31, 2003
Leverage (Tier 1 Capital to Average Assets)
First Indiana Corporation $188,532 8.59 % $ 87,810 4.00 % N/A N/A
First Indiana Bank 176,862 8.09 87,440 4.00 $109,301 5.00 %
Tier 1 Capital (to Risk-Weighted Assets)
First Indiana Corporation $188,532 9.42 % $ 80,076 4.00 % N/A N/A
First Indiana Bank 176,862 8.88 79,658 4.00 $119,487 6.00 %
Total Capital (to Risk-Weighted Assets)
First Indiana Corporation $213,842 10.68 % $160,153 8.00 % N/A N/A
First Indiana Bank 202,043 10.15 159,316 8.00 $199,145 10.00 %
21
The Corporation’s leverage ratio was 8.59 percent at March 31, 2003, compared to 10.10 percent at December 31, 2002 and 9.79 percent at March 31, 2002. The Corporation’s Tier 1 capital to risk-weighted assets was 9.42 percent at March 31, 2003, compared to 11.26 percent at December 31, 2002 and 10.55 percent at March 31, 2002. The Corporation’s total capital to risk-weighted assets was 10.68 percent at March 31, 2003, compared to 12.52 percent at December 31, 2002 and 11.81 percent at March 31, 2002. In October 2002, the Corporation, through a wholly-owned subsidiary First Indiana Capital Trust 1, issued $12,000,000 of trust preferred securities to fund a portion of the purchase of MetroBanCorp in January 2003. The trust preferred securities qualify as Tier 1 capital of the Corporation and are a primary reason for the increase in the Corporation’s capital ratios from March 31, 2002 to December 31, 2002. The decrease in the Corporation’s capital ratios from December 31, 2002 to March 31, 2003 is the result of the goodwill and other intangible assets totaling $28,295,000 acquired in the merger of MetroBanCorp. Goodwill and other intangible assets are deducted from capital when calculating the regulatory capital ratios.
First Indiana Corporation conducts its business through subsidiaries. The main sources of funds for the Corporation are dividends from the Bank and a $10,000,000 line of credit with a commercial bank. The Corporation has no significant assets other than its investments in the Bank and Somerset. In October 2002, the Corporation, through a wholly-owned subsidiary First Indiana Capital Trust I, issued $12,000,000 of trust preferred securities to help fund the purchase of MetroBanCorp in January 2003. For a further description of these securities, see “Financial Condition” in the Corporation’s Form 10-K dated December 31, 2002.
The Bank’s primary source of funds is deposits, which were $1,539,090,000 at March 31, 2003, $1,339,204,000 at December 31, 2002, and $1,408,426,000 at March 31, 2002. The Bank also relies on FHLB advances, repurchase agreements, loan payments, loan payoffs, and sale of loans as sources of funds. Although the Bank continues to rely on core deposits as its chief source of funds, the use of borrowed funds, including FHLB advances, continues to be an important component of the Bank’s liquidity. Scheduled loan payments are a relatively stable source of funds, but loan payoffs, the sale of loans, and deposit inflows and outflows fluctuate, depending on interest rates and economic conditions. However, management does not expect any of these fluctuations to occur in amounts that would affect the Bank’s ability to meet consumer demand for liquidity or regulatory liquidity requirements.
The Bank’s primary use of funds is the funding of loans, which totaled $1,920,317,000 at March 31, 2003, $1,875,633,000 at December 31, 2002, and $1,753,265,000 at March 31, 2002. In addition, the Bank invests in federal funds sold and securities available for sale.
22
First Indiana engages in rigorous, formal asset/liability management, with objectives to manage interest rate risk, ensure adequate liquidity, and coordinate sources and uses of funds. The management of interest rate risk entails the control, within acceptable limits, of the impact on earnings caused by fluctuating interest rates and changing rate relationships. In this process, management uses an internal earnings simulation model to identify and measure interest rate sensitivity. The Asset/Liability Committee (“ALCO”) reviews the earnings impact of various changes in interest rates each month and manages the risk to maintain an acceptable level of change in net interest income. The Board of Directors also reviews this information every quarter.
The Corporation’s success is largely dependent upon its ability to manage interest rate risk, which is defined as the exposure of the Corporation’s net interest income, net earnings, and equity to changes in interest rates. ALCO is responsible for managing interest rate risk, and the Corporation has established acceptable limits for interest rate exposure, which are reviewed monthly. The Corporation uses a model that measures interest rate sensitivity to determine the impact on net interest income and equity of immediate and sustained upward and downward movements in interest rates. Incorporated into the model are assumptions regarding the current and anticipated interest rate environment, estimated prepayment rates of certain assets and liabilities, forecasted loan and deposit originations, contractual maturities and renewal rates on certificates of deposit, estimated borrowing needs, expected repricing spreads on variable-rate products, and contractual maturities and repayments on lending and investment products. The model incorporates interest rate sensitive instruments that are held to maturity or available for sale. The Corporation has no trading assets. Based on the information and assumptions in effect at March 31, 2003, the model forecasts that a 100 basis point increase in interest rates over a 12-month period would result in a 4.9 percent increase in net interest income while a 100 basis point decrease in interest rates would result in a 5.6 percent decrease in net interest income. Because of the numerous assumptions used in the computation of interest rate sensitivity, and the fact that the model does not assume any actions ALCO could take in response to the change in interest rates, the model forecasts may not be indicative of actual results.
The Corporation also monitors interest rate sensitivity using traditional gap analysis. Gap analysis is a static management tool used to identify mismatches in the repricing of assets and liabilities within specified periods of time. It is a static indicator and does not attempt to predict the net interest income of a dynamic business in a rapidly changing environment. Significant adjustments may be made when the interest rate outlook changes. At March 31, 2003, First Indiana’s six-month and one-year cumulative gaps stood at a positive 13.33 percent and a positive 17.77 percent of total interest-earning assets. This compares with a positive 12.11 percent and a positive 17.30 percent at December 31, 2002.
23
The following table shows First Indiana’s interest rate sensitivity at March 31, 2003 and December 31, 2002.
(Dollars in Thousands) Over 180 Over One
Percent Within Days to Year to Over
Rate Balance of Total 180 Days One Year Five Years Five Years
------- ---------------------- ----------- ----------- ----------- ------------
Interest-Earning Assets
Interest-Bearing Due from Banks 1.35 % $ 10,359 0.48 % $ 10,359 $ - $ - $ -
Federal Funds Sold 1.50 29,000 1.36 29,000 - - -
Securities Available for Sale 5.70 154,696 7.23 29,398 20,782 97,377 7,139
FHLB / FRB Stock 5.75 24,802 1.16 - - - 24,802
Loans (1)
Business 5.04 588,086 27.49 494,455 17,695 75,936 -
Consumer 6.80 665,370 31.11 414,285 52,372 179,559 19,154
Residential Mortgage 5.72 306,081 14.31 127,452 87,347 79,703 11,579
Single-Family Construction 4.90 206,289 9.64 185,660 10,314 10,315 -
Commercial Real Estate 5.83 154,491 7.22 113,017 21,050 6,028 14,396
------------------------------------ ----------- ----------- ------------
5.71 $ 2,139,174 100.00 % 1,403,626 209,560 448,918 77,070
=========================----------- ----------- ----------- ------------
Interest-Bearing Liabilities
Deposits
Demand Deposits (2) 0.54 $ 187,711 10.45 % 38,274 - - 149,437
Savings Deposits (2) 0.92 441,080 24.54 382,916 1,507 12,059 44,598
Certificates of Deposit Under $100,000 3.73 342,226 19.04 131,366 50,743 159,844 273
Certificates of Deposit $100,000 or Greater 2.91 353,262 19.66 226,510 36,224 90,176 352
---------------------- ----------- ----------- ----------- ------------
2.12 1,324,279 73.69 779,066 88,474 262,079 194,660
Borrowings
Short-Term Borrowings 2.50 145,456 8.09 145,456 - - -
FHLB Advances 3.30 315,492 17.56 194,000 26,000 64,783 30,709
Trust Preferred Securities 7.28 11,808 0.66 - - 11,808 -
------------------------------------ ----------- ----------- ------------
2.35 1,797,035 100.00 % 1,118,522 114,474 338,670 225,369
============
Net - Other (3) 342,139 342,139
------------- ----------- ----------- ----------- ------------
Total $ 2,139,174 1,118,522 114,474 338,670 567,508
=============
----------- ----------- ----------- ------------
Rate Sensitivity Gap $ 285,104 $ 95,086 $ 110,248 $(490,438)
=========== =========== =========== ============
March 31, 2003 - Cumulative Rate Sensitivity Gap $ 285,104 $ 380,190 $ 490,438
=========== =========== ===========
Percent of Total Interest-Earning Assets 13.33% 17.77% 22.93%
=========== =========== ===========
December 31, 2002 - Cumulative Rate Sensitivity Gap $ 241,982 $ 345,783 $ 468,200
=========== =========== ===========
Percent of Total Interest-Earning Assets 12.11% 17.30% 23.43%
=========== =========== ===========
| (1) | The distribution of fixed-rate loans is based upon contractual maturity and scheduled contractual repayments adjusted for estimated prepayments. The distribution of adjustable-rate loans is based on the earliest repricing date for each loan. Included in consumer loans are $50.1 million of consumer loans held for sale. |
| (2) | A portion of these deposits has been included in the Over Five Years category to reflect management’s assumption that these accounts are not rate-sensitive. This assumption is based upon the historic trends on these types of deposits experienced through periods of significant increases and decreases in interest rates without changes in rates paid on these deposits. The rates represent a blended rate on all deposit types in the category. |
| (3) | Net - Other is the excess of non-interest-bearing liabilities and capital over non-interest-earning assets. |
24
Disclosure controls and procedures are controls and other procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Within the 90 days prior to the date of this Quarterly Report on Form 10-Q, First Indiana evaluated the effectiveness of the design and operation of its disclosure controls and procedures under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. The evaluation of First Indiana’s disclosure controls and procedures included a review of the controls’ objectives and design, First Indiana’s implementation of the controls and the effect of the controls on the information generated for use in this Quarterly Report. Immediately following the Signatures section of this Quarterly Report, there are “Certifications” of First Indiana’s Chief Executive Officer and Chief Financial Officer in accord with Rule 13a-14 of the Securities Exchange Act of 1934. This Controls and Procedures section of the Quarterly Report includes the information concerning the controls evaluation referred to in Rule 13a-14, and it should be read in conjunction with the Rule 13a-14 Certifications for a more complete understanding of the topics presented.
First Indiana’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s disclosure controls and procedures will prevent all errors. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met.
In the course of its evaluation of disclosure controls and procedures, management determined that First Indiana’s internal controls over property inspections and bank disbursement of funds in connection with its construction lending activities should be strengthened. Specifically, although First Indiana’s construction loan policies require the use of independent inspectors to determine percentage of completion and, therefore, the allowable percentage of loan funding, management determined that this policy had been inadequately communicated to loan officers and operations personnel and that management oversight of First Indiana’s inspection and disbursement practices was insufficient. These weaknesses were partly responsible for, and discovered in the investigation of, a potential construction loan loss resulting from the under-collateralization of a single-family home builder’s loans in an out-of-state construction loan office. See Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Summary of Loan Loss Experience and Non-Performing Assets.” Following the initial discovery of this internal control deficiency in April 2003, First Indiana performed substantial additional procedures designed to confirm that the deficiency had not exposed the Bank to the risk of material construction loan losses and to ensure that there would be no material misstatement in First Indiana’s consolidated financial statements. Based on these additional procedures, as well as their general evaluation of disclosure controls and procedures, First Indiana’s Chief Executive Officer and Chief Financial Officer concluded that First
25
Indiana’s disclosure controls and procedures are effective to ensure that information required to be disclosed by First Indiana in reports that it files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
Management intends to implement changes promptly to improve communication of the independent inspection policy and management oversight of First Indiana’s inspection and disbursement practices and may take other corrective actions with respect to the internal control deficiency noted above. From the date of management’s evaluation of disclosure controls and procedures to the date of this Quarterly Report, there have been no other significant changes in internal controls or in other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
First Indiana’s management will continue to evaluate the effectiveness of disclosure controls and internal controls and procedures on an ongoing basis and will take further action as appropriate.
Items 1, 2, and 3 are not applicable. |
26
Item 5. |
Other Information
|
|
|
27
| Item 6. | Exhibits and Reports on Form 8-K |
| (a) Exhibits | |
|
2
Agreement and Plan of Merger dated September 4, 2002, by and amoung MetroBanCorp, Inc. and MetroBank and First Indiana Corporation, FIC Acquisition Corp. and First Indiana Bank, National Association incorporated by reference to Exhibit 2 of the Form 8-K filed September 6, 2002. |
|
|
3(i)
Articles of Incorporation of First Indiana Corporation, incorporated by reference to Exhibit 3(a) to the Annual Report on Form 10-K of First Indiana Corporation for the year ended December 31, 2000. |
|
|
3(ii)
Amended and Restated Bylaws of First Indiana Corporation, incorporated by reference to Exhibit 3(b) to the Annual Report on Form 10-K of First Indiana Corporation for the year ended December 31, 2000. |
|
|
99(a)
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of teh Sarbanes-Oxley Act of 2002. |
|
|
99(b)
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of teh Sarbanes-Oxley Act of 2002. |
|
| (b) Reports on Form 8-K | |
|
(i)
On January 10, 2003, a Form 8-K was filed related to the announcement
of a conference call to be held Friday, January 24, 2003. |
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(ii)
On January 14, 2003, a Form 8-K was filed related to the January 13, 2003
consummation of the acquisition of MetroBanCorp. |
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(iii)
On January 24, 2003, a Form 8-K was filed related to the announcement of earnings and
other financial data for the three and twelve months ended December 31, 2002. |
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(iv)
On January 24, 2003, a Form 8-K was filed related to the announcement
of the declaration of a quarterly dividend. |
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(v)
On April 2, 2003, a Form 8-K was filed related to the announcement
of a conference call to be held Wednesday, April 16, 2003. |
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(vi)
On April 15, 2003, a Form 8-K was filed related to the announcement of earnings
and other financial data for the three months ended March 31, 2003. |
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(vii)
On April 18, 2003, a Form 8-K was filed related to the earnings
conference call held on April 16, 2003. |
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|
(viii)
On April 18, 2003, a Form 8-K was filed related to the announcement of
the declaration of a quarterly dividend. |
28
| 1. | I have reviewed this quarterly report on Form 10-Q of First Indiana Corporation; |
| 2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
| a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
| b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and |
| c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): |
| a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6. | The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
| 1. | I have reviewed this quarterly report on Form 10-Q of First Indiana Corporation; |
| 2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
| a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
| b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and |
| c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): |
| a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6. | The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |