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United States Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2003

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)

FIRST INDIANA CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX

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Condensed Consolidated Balance Sheets
First Indiana Corporation and Subsidiaries
(Dollars in Thousands, Except Per Share Data)
(Unaudited)

See Notes to Consolidated Financial Statements

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Condensed Consolidated Statements of Earnings
First Indiana Corporation and Subsidiaries
(Dollars in Thousands, Except Per Share Data)
(Unaudited)

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)

See Notes to Consolidated Financial Statements

5

Condensed Consolidated Statements of Cash Flows
First Indiana Corporation and Subsidiaries
(Dollars in Thousands, Except Per Share Data)
(Unaudited)

See Notes to Consolidated Financial Statements

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FIRST INDIANA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Months Ended June 30, 2003
(Unaudited)

Note 1 — Basis of Presentation

        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.

        Certain amounts in the Condensed Consolidated Financial Statements relating to prior periods have been reclassified to conform to current reporting presentation.

Note 2 — Earnings Per Share

         Basic earnings (loss) per share for 2003 and 2002 were computed by dividing net earnings (loss) by the weighted average shares of common stock outstanding (15,540,010 and 15,546,223 for the three months ended June 30, 2003 and 2002 and 15,556,731 and 15,510,241 for the six months ended June 30, 2003 and 2002). Diluted earnings (loss) per share for 2003 and 2002 were computed by dividing net earnings (loss) 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 (15,540,010 and 15,899,768 for the three months ended June 30, 2003 and 2002 and 15,682,268 and 15,813,105 for the six months ended June 30, 2003 and 2002). Dilution of the per-share calculation relates to stock options. For the three months ended June 30, 2003, the stock options are not dilutive due to the net loss for the period.

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Note 3 — Stock Options

        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 (loss) and earnings (loss) 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)

Note 4 — Allowance for Loan Losses

        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.

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Note 5 — Segment Reporting

        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 and investment advisory 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.

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Segment Reporting⁽¹⁾
(Dollars in Thousands)

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Note 6 — Business Combination

        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 $23,856,000, 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.

Note 7 — Mortgage Servicing Rights, Goodwill, and Other Intangible Assets

        The following table shows the change in the carrying amount of capitalized loan servicing rights:

(Dollars in Thousands)

        The valuation allowance relating to capitalized loan servicing rights was $979,000 at June 30, 2003.

        Effective January 1, 2002, the Corporation adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). In accordance with SFAS 142, 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.

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        The following tables show changes in the carrying amount of goodwill for the six months ended June 30, 2003 and 2002.

(Dollars in Thousands)

        The following table summarizes the carrying amount of other intangible assets at June 30, 2003.

(Dollars in Thousands)

        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.

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Note 8 — Trust Preferred Securities

        On June 12, 2003, First Indiana formed First Indiana Capital Statutory Trust II, a wholly owned grantor trust (“grantor trust”), to issue $12,000,000 in trust preferred securities through a private placement. The grantor trust invested the proceeds of such trust preferred securities in junior subordinated debentures (“Notes”) of the Corporation. These trust preferred securities were issued at a discount of $240,000. The sole assets of the grantor trust are the Notes held by the grantor trust. The Notes have a stated term of 30 years (June 26, 2033) but may be redeemed at par in part or in full beginning June 26, 2008 and quarterly thereafter subject to approval by the Federal Reserve Board. The Notes have a fixed rate of interest of 5.55 percent through June 26, 2008 and a floating rate of interest, reset quarterly, equal to the London interbank offered rate (“LIBOR”) plus 3.10 percent thereafter to maturity. Interest on the Notes is payable quarterly in arrears. The distribution rate on the trust preferred securities equals the interest rate of the Notes. The Corporation has the right to defer payment of interest on the Notes at any time or from time to time for a period not to exceed five years provided that no extension period may extend beyond the stated maturity of the Notes. During any such extension period, distributions on the trust preferred securities will also be deferred and First Indiana’s ability to pay dividends on its common stock will be restricted.

        The trust preferred securities are subject to mandatory redemption upon repayment of the Notes at their stated maturity dates or their earlier redemption at a redemption price equal to their liquidation amount plus accrued distributions to the date fixed for redemption and the premium, if any, paid by the Corporation upon concurrent repayment of the Notes.

        Periodic cash payments and payments upon liquidation or redemption with respect to trust preferred securities are guaranteed by First Indiana to the extent of funds held by the grantor trust (“the Preferred Securities Guarantee”). The Preferred Securities Guarantee, when taken together with the Corporation’s other obligations, including its obligations under the Notes, will constitute a full and unconditional guarantee, on a subordinated basis, by the Corporation of payments due on the trust preferred securities.

        The trust preferred securities qualify as Tier 1 capital of the Corporation for regulatory capital purposes.

        At June 30, 2003, the total balance of all trust preferred securities (including securities issued previously), net of discount, was $23,578,000 with an aggregate principal amount of $24,000,000.

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Note 9 — Obligations under Guarantees

        In November 2002, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”), which requires additional disclosures by a guarantor about its obligations under certain guarantees that it has issued. FIN 45 also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The most significant instruments impacted for the Corporation are standby letters of credit. The disclosure requirements of FIN 45 became effective for the Corporation on December 31, 2002. The recognition requirements of FIN 45 became effective for the Corporation on January 1, 2003, on a prospective basis. The impact of adoption was not material to the Corporation’s results of operations, financial position, or cash flows.

        Standby letters of credit are contingent commitments issued by the Corporation to support the obligations of a customer to a third party. Standby letters of credit are issued to support public and private financing, and other financial or performance obligations of customers. Standby letters of credit have maturities which generally reflect the maturities of the underlying obligations. The credit risk involved in issuing standby letters of credit is the same as that involved in extending loans to customers and, as such, is collateralized when necessary.

        As of June 30, 2003, the Corporation had issued $54,002,000 in standby letters of credit, predominately for terms of one year or less. Of these commitments, $16,981,000 have been issued or renewed since December 31, 2002, and, in accordance with FIN 45, the Corporation recognized a liability of $56,000 relating to these commitments.

Note 10 — Recently Issued Accounting Pronouncements

        In January 2003, FASB issued Interpretation No. 46 “Consolidation of Variable Interest Entities” (“FIN 46”), which provides guidance with respect to the identification and consolidation of variable interest entities. A variable interest entity exists and is required to be consolidated when either the total equity investment at risk is not sufficient to permit the entity to finance its activities by itself, or the equity investors lack one of three characteristics associated with owning a controlling financial interest. Those characteristics include the direct or indirect ability to make decisions about an entity’s activities through voting rights or similar rights, the obligation to absorb the expected losses of an entity if they occur, and the right to receive the expected residual returns of the entity if they occur.

        FIN 46 was effective immediately for new entities that were created or acquired after January 31, 2003, and is effective on July 1, 2003, for entities in which the Corporation had a variable interest prior to February 1, 2003. The Corporation believes that adoption of FIN 46 will not have a material impact on its results of operations, financial position, or cash flows.

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         The Corporation has statutory trusts formed for the purpose of issuing trust preferred securities. We currently believe the continued consolidation of these trusts is appropriate under FIN 46. However, the application of FIN 46 to this type of trust is an emerging issue and a possible unintended consequence of FIN 46 is the deconsolidation of these trusts. The deconsolidation of these statutory trusts would not have a material effect on the Corporation’s consolidated balance sheet or consolidated statement of earnings. In July 2003, the Board of Governors of the Federal Reserve System issued a supervisory letter instructing bank holding companies to continue to include the trust preferred securities in their Tier 1 capital for regulatory capital purposes until notice is given to the contrary. The Federal Reserve intends to review the regulatory implications of any accounting treatment changes and, if necessary or warranted, provide further appropriate guidance. There can be no assurance that the Federal Reserve will continue to allow institutions to include trust preferred securities in Tier 1 capital for regulatory capital purposes.

        The Corporation is a limited partner in two low income housing developments which do not meet the FIN 46 criteria for consolidation. As of June 30, 2003, the Corporation’s investment in these partnerships was $645,000, with no future funding commitment. The maximum risk of loss is equal to the Corporation’s recorded investment in these partnerships.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Financial Highlights
First Indiana Corporation and Subsidiaries
(Dollars in Thousands, Except Per Share Data)