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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 March 31, 2004

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 or other jurisdiction of incorporation or organization)	(IRS Employer Identification Number)

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 04/30/2004 15,658,459

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, 2004, December 31, 2003, and March 31, 2003	3
	Condensed Consolidated Statements of Earnings for the Three Months Ended March 31, 2004 and 2003	4
	Condensed Consolidated Statement of Shareholders’ Equity for the Three Months Ended March 31, 2004	5
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004 and 2003	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25
Item 4.	Controls and Procedures	28
Part II	Other Information
Item 1.	Legal Proceedings	29
Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	29
Item 3.	Defaults upon Senior Securities	29
Item 4.	Submission of Matters to a Vote of Security Holders	30
Item 5.	Other Information	30
Item 6.	Exhibits and Reports on Form 8-K	31
	Signatures

 

2

Condensed Consolidated Balance Sheets

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

	March 31 2004		December 31 2003		March 31 2003
Assets
Cash	$     48,448		$     58,590		$     52,187
Interest-Bearing Due from Banks	35,463		1,715		10,359
Federal Funds Sold	—		—		29,000
Cash and Cash Equivalents	83,911		60,305		91,546
Securities Available for Sale	212,220		215,453		156,093
Other Investments	25,248		24,957		23,649
Loans
Business	499,688		515,316		588,086
Consumer	572,546		612,025		665,371
Residential Mortgage	324,709		316,822		306,081
Single-Family Construction	187,381		192,450		206,289
Commercial Real Estate	175,482		178,378		154,490
Total Loans	1,759,806		1,814,991		1,920,317
Allowance for Loan Losses	(53,034	)	(53,197	)	(48,178	)
Net Loans	1,706,772		1,761,794		1,872,139
Premises and Equipment	25,233		25,673		25,798
Accrued Interest Receivable	8,602		9,353		10,286
Loan Servicing Rights	5,716		5,985		8,642
Goodwill	37,042		37,042		36,022
Other Intangible Assets	4,441		4,621		5,173
Other Assets	51,690		47,954		41,744
Total Assets	$2,160,875		$2,193,137		$2,271,092
Liabilities
Non-Interest-Bearing Deposits	$   261,383		$   235,811		$   214,811
Interest-Bearing Deposits
Demand Deposits	176,845		217,353		187,711
Savings Deposits	452,017		400,804		441,080
Certificates of Deposit	595,808		636,004		695,488
Total Interest-Bearing Deposits	1,224,670		1,254,161		1,324,279
Total Deposits	1,486,053		1,489,972		1,539,090
Short-Term Borrowings	123,754		147,074		145,456
Federal Home Loan Bank Advances	250,426		265,488		315,492
Subordinated Notes	46,565		46,534		12,180
Accrued Interest Payable	2,876		2,156		3,156
Advances by Borrowers for Taxes and Insurance	3,070		1,533		3,946
Other Liabilities	35,258		31,486		29,455
Total Liabilities	1,948,002		1,984,243		2,048,775
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: 2004 - 17,576,964 Shares; 2003 - 17,473,764 and         17,359,861 Shares	176		175		174
Capital Surplus	48,106		46,595		44,313
Retained Earnings	187,959		185,012		196,232
Accumulated Other Comprehensive Income	1,251		1,756		4,204
Treasury Stock at Cost: 2004 - 1,923,187 Shares;
2003 - 1,927,017 and 1,812,750 Shares	(24,619	)	(24,644	)	(22,606	)
Total Shareholders’ Equity	212,873		208,894		222,317
Total Liabilities and Shareholders’ Equity	$ 2,160,875		$ 2,193,137		$ 2,271,092

See Notes to Condensed Consolidated Financial Statements

 

3

Condensed Consolidated Statements of Earnings

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

	Three Months Ended March 31
	2004		2003
Interest Income
Interest-Bearing Due from Banks	$       20		$         6
Federal Funds Sold	—		3
Securities Available for Sale	2,179		2,043
Dividends on Other Investments	344		338
Loans	23,572		27,758
Total Interest Income	26,115		30,148
Interest Expense
Deposits	5,391		7,391
Short-Term Borrowings	286		387
Federal Home Loan Bank Advances	1,971		2,601
Subordinated Notes	841		228
Total Interest Expense	8,489		10,607
Net Interest Income	17,626		19,541
Provision for Loan Losses	3,000		6,237
Net Interest Income After Provision for Loan Losses	14,626		13,304
Non-Interest Income
Deposit Charges	4,117		4,011
Loan Servicing Income (Expense)	(86	)	(97	)
Loan Fees	679		589
Trust Fees	876		726
Somerset Fees	4,927		4,699
Investment Product Sales Commissions	633		348
Sale of Loans	2,657		2,473
Sale of Investment Securities	280		7
Other	715		1,163
Total Non-Interest Income	14,798		13,919
Non-Interest Expense
Salaries and Benefits	12,972		12,163
Net Occupancy	1,230		1,149
Equipment	1,621		1,673
Professional Services	1,303		1,089
Marketing	594		617
Telephone, Supplies, and Postage	947		1,044
Other Intangible Asset Amortization	180		184
Other	2,058		1,840
Total Non-Interest Expense	20,905		19,759
Earnings before Income Taxes	8,519		7,464
Income Taxes	3,113		2,736
Net Earnings	$  5,406		$  4,728
Basic Earnings Per Share	$    0.35		$    0.30
Diluted Earnings Per Share	$    0.34		$    0.30
Dividends Per Common Share	$  0.165		$  0.165

See Notes to Condensed Consolidated Financial Statements

 

4

Condensed Consolidated Statement of Shareholders’ Equity

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

	Common Stock				Capital Surplus		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Treasury Stock		Total Shareholders’ Equity
	Shares		Amount
Balance at December 31, 2003	15,546,747		$ 175		$ 46,595		$ 185,012		$ 1,756		$ (24,644	)	$ 208,894
Comprehensive Income:
Net Earnings	—		—		—		5,406		—		—		5,406
Unrealized Loss on Securities Available for Sale of $835,
Net of Income Taxes and Reclassification Adjustment of          $169, Net of Income Taxes	—		—		—		—		(505	)	—		(505	)
Total Comprehensive Income													4,901
Dividends on Common Stock - $0.165 per share	—		—		—		(2,578	)	—		—		(2,578	)
Exercise of Stock Options	118,141		1		1,657		—		—		—		1,658
Tax Benefit of Option Compensation	—		—		123		—		—		—		123
Common Stock Issued under Restricted Stock Plans -    Net of Amortization	—		—		—		119		—		—		119
Common Stock Issued under Deferred Compensation Plan	—		—		(14	)	—		—		—		(14	)
Reissuance of Treasury Stock	3,830		—		49		—		—		25		74
Redemption of Common Stock	(14,941)		—		(304	)	—		—		—		(304	)
Balance at March 31, 2004	15,653,777		$ 176		$ 48,106		$ 187,959		$ 1,251		$ (24,619	)	$ 212,873

See Notes to Condensed Consolidated Financial Statements

 

5

Condensed Consolidated Statements of Cash Flows

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

	Three Months Ended March 31
	2004		2003
Cash Flows from Operating Activities
Net Earnings	$  5,406		$  4,728
Adjustments to Reconcile Net Earnings to Net Cash Provided by
Operating Activities
Gain on Sale of Assets, Net	(2,937	)	(2,480	)
Amortization of Premium, Discount, and Intangibles, Net	(409	)	788
Depreciation and Amortization of Premises and Equipment	870		629
Amortization of Net Deferred Loan Fees	514		464
Provision for Loan Losses	3,000		6,237
Origination of Loans Held For Sale, Net of Principal Collected	(72,473	)	(80,851	)
Proceeds from Sale of Loans Held for Sale	87,482		83,316
Tax Benefit of Option Compensation	123		55
Change In:
Accrued Interest Receivable	751		1,153
Other Assets	(3,760	)	(6,476	)
Accrued Interest Payable	720		229
Other Liabilities	3,777		(5,209	)
Net Cash Provided by Operating Activities	23,064		2,583
Cash Flows from Investing Activities
Proceeds from Sale of Securities Available for Sale	20,280		12,650
Proceeds from Maturities of Securities Available for Sale	13,641		5,310
Purchase of Securities Available for Sale	(30,000	)	(10,000	)
Purchase of Other Investments	(291	)	(136	)
Principal Collected on Loans, Net of Originations	63,901		53,481
Purchase of Loans	(24,725	)	(25,020	)
Purchase of Premises and Equipment	(436	)	(3,237	)
Acquisition of MetroBanCorp, Net of Cash Acquired	(5	)	15,738
Acquisition of Somerset, Net of Cash Acquired	—		(6	)
Proceeds from Sale of Premises and Equipment	—		116
Net Cash Provided by Investing Activities	42,365		48,896
Cash Flows from Financing Activities
Net Change in Deposits	(3,847	)	38,377
Repayment of Federal Home Loan Bank Advances	(185,043	)	(255,040	)
Borrowings of Federal Home Loan Bank Advances	170,000		215,000
Net Change in Short-Term Borrowings	(23,320	)	(33,144	)
Net Change in Advances by Borrowers for Taxes and Insurance	1,537		2,121
Stock Option Proceeds	1,354		189
Deferred Compensation	—		(3	)
Purchase of Treasury Stock	—		(998	)
Reissuance of Treasury Stock	74		89
Dividends Paid	(2,578	)	(2,574	)
Net Cash Used by Financing Activities	(41,823	)	(35,983	)
Net Change in Cash and Cash Equivalents	23,606		15,496
Cash and Cash Equivalents at Beginning of Year	60,305		76,050
Cash and Cash Equivalents at End of Period	$ 83,911		$ 91,546

See Notes to Condensed Consolidated Financial Statements

6

FIRST INDIANA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Three Months Ended March 31, 2004 (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, 2003.

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 per share for 2004 and 2003 were computed by dividing net earnings by the weighted average shares of common stock outstanding (15,596,942 and 15,573,638 for the three months ended March 31, 2004 and 2003). Diluted earnings per share for 2004 and 2003 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 (15,837,418 and 15,711,282 for the three months ended March 31, 2004 and 2003). Dilution of the per-share calculation relates to stock options.

 

7

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 was 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
	2004		2003
Net Earnings As Reported	$ 5,406		$ 4,728
Add: Stock option employee compensation expense included in reported net income, net of related tax effects	—		13
Deduct: Total stock option employee compensation expense determined under fair value based method for all awards, net of related tax effects	(172	)	(212	)
Pro Forma Net Earnings	$ 5,234		$ 4,529
Basic Earnings Per Share
As Reported	$  0.35		$  0.30
Pro Forma	0.34		0.29
Diluted Earnings Per Share
As Reported	$  0.34		$  0.30
Pro Forma	0.33		0.29

Note 4 - Allowance for Loan Losses

The allowance for loan losses is maintained at the level deemed adequate to cover losses inherent in the loan portfolio. The allowance for loan losses is increased by the provision for loan losses charged to expense and reduced by loans charged off, net of recoveries. The determination of the adequacy of the allowance for loan losses is based on projections and estimates concerning portfolio trends and credit losses, national and local economic trends, portfolio management and trends, the assessment of credit risk of performing and non-performing loans, and qualitative management factors. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions and historical loss experience. 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

Note 5 - Segment Reporting

In 2004, the Corporation changed its segment presentation. Prior year segment information has been reclassified to conform to this new presentation. 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 segment includes the Bank’s branch network, investment and insurance subsidiary, the trust division, and home equity, installment, and residential loans originated and purchased for the Bank’s portfolio. The community bank segment also originates business, single-family construction, and commercial real estate loans; encompasses the portfolio of Community Reinvestment Act loans; and provides traditional cash management services to business customers. The consumer finance bank segment originates home equity loans, sells and services home equity, installment, and residential loans, and holds home equity loans originated for sale. The Somerset segment includes all activities of Somerset, an accounting and consulting firm. All Other includes investment portfolio management, the parent company activities and other items not directly attributable to a specific segment. Revenues in the Corporation’s segments are generated from loans, investments, servicing fees, loan sales, and fee income. There are no foreign operations.

The following segment financial information is based on the internal management reporting used by the Corporation to monitor and manage financial performance. The Corporation evaluates segment performance based on average assets and profit or loss before income taxes and indirect expenses. Indirect expenses include the Corporation’s overhead and support expenses. The Corporation attempts to match fund each business unit by reviewing the earning assets and costing liabilities held by each unit and assigning an appropriate expense or income offset based on the external cost of funds. The Corporation accounts for intersegment revenues, expenses, and transfers based on estimates of the actual costs to perform the intersegment services.

 

9

Segment Reporting (1)

(Dollars in Thousands)

		Community Bank		Consumer Finance Bank		Somerset		All Other		First Quarter 2004 Consolidated Totals
Average Segment Assets		$ 1,778,985		$ 68,065		$ 14,620		$ 277,886		$ 2,139,556
Net Interest Income (Expense) (2)		17,830		874		9		(1,087	)	17,626
Provision for Loan Losses		(3,000	)	—		—		—		(3,000	)
Non-Interest Income		6,630		3,098		4,927		143		14,798
Intangible Amortizationa		(180	)	—		—		—		(180	)
Other Non-Interest Expense		(12,353	)	(1,972	)	(3,098	)	(3,302	)	(20,725	)
Intersegment Income (Expense) (3)		(1,379	)	714		—		665		—
Earnings (Loss) before Income Tax		$        7,548		$   2,714		$   1,838		$     (3,581	)	$        8,519
		Community Bank		Consumer Finance Bank		Somerset		All Other		First Quarter 2003 Consolidated Totals
Average Segment Assets		$ 1,916,837		$ 72,781		$ 13,225		$ 234,062		$ 2,236,905
Net Interest Income (Expense) (2)		19,009		747		10		(225	)	19,541
Provision for Loan Losses		(6,237	)	—		—		—		(6,237	)
Non-Interest Income		6,260		2,999		4,699		(39	)	13,919
Intangible Amortization		(184	)	—		—		—		(184	)
Other Non-Interest Expense		(11,592	)	(2,174	)	(2,727	)	(3,082	)	(19,575	)
Intersegment Income (Expense) (3)		(2,263	)	1,034		—		1,229		—
Earnings (Loss) before Income Tax		$        4,993		$   2,606		$   1,982		$   (2,117	)	$        7,464

(1)

In 2004, the Corporation changed its segment presentation. Prior year segment information has been reclassified to conform to this new presentation.

(2)

The net interest income amounts in the segment results reflect the actual interest income and expense from segment activities and 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 eliminated from the Corporation’s actual results.

 

10

Note 6 - Employee Benefit Plans

The net periodic benefit cost of the supplemental pension benefit plan and the postretirement medical, dental, and life insurance programs included in the results of operations is as follows.

(Dollars in Thousands)

	Supplemental Pension Benefits				Postretirement Benefits
	Three Months Ended March 31				Three Months Ended March 31
	2004		2003		2004		2003
Service Cost	$   52		$   71		$   4		$   3
Interest Cost	127		153		18		15
Expected Return on Plan Assets	—		—		—		—
Amortization of Net (Gain) or Loss	—		—		—		(7	)
Amortization of Prior Service Cost	9		—		—		—
Amortization of Transition Obligation	3		3		—		—
Total Net Periodic Benefit Cost	$ 191		$ 227		$ 22		$ 11

The accumulated postretirement benefit did not take into consideration the effect on these programs of the Medicare Prescription Drug Improvement and Modernization Act of 2003 enacted by Congress and signed into law by the President in late 2003. The Corporation is currently reviewing this legislation and its options to modify benefits provided by these plans.

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)

		Three Months Ended March 31
		2004		2003
Balance at Beginning of Period		$ 5,985		$ 9,065
Additions		354		411
Amortization of Servicing Rights		(439	)	(623	)
Change in Valuation Reserves		(184	)	(211	)
Balance at End of Period		$ 5,716		$ 8,642

The valuation allowance relating to capitalized loan servicing rights was $2,915,000 at March 31, 2004 compared to $529,000 at March 31, 2003. The amount of loans serviced for others was $416,929,000 at March 31, 2004 compared to $578,251,000 at March 31, 2003.

 

11

The following tables show changes in the carrying amount of goodwill for the three months ended March 31, 2004 and 2003.

(Dollars in Thousands)

	Community Bank Segment		Somerset Segment		Total Goodwill
Balance as of January 1, 2004	$ 30,682		$ 6,360		$ 37,042
Change during the period	—		—		—
Balance as of March 31, 2004	$ 30,682		$ 6,360		$ 37,042
	Community Bank Segment		Somerset Segment		Total Goodwill
Balance as of January 1, 2003	$   6,685		$ 6,360		$ 13,045
Addition due to MetroBanCorp Acquisition	22,977		—		22,977
Balance as of March 31, 2003	$ 29,662		$ 6,360		$ 36,022

The following table summarizes the carrying amount of other intangible assets at March 31, 2004.

(Dollars in Thousands)

	Core Deposit Intangible		Non-compete Agreement Intangible		Total Other Intangible Assets
Gross Carrying Amount	$ 4,357		$ 1,000		$ 5,357
Less: Accumulated Amortization	(499	)	(417	)	(916	)
Net Carrying Amount	$ 3,858		$    583		$ 4,441

Projected annual intangible amortization for the years 2004 through 2008 is $718,000, $697,000, $342,000, $321,000, and $300,000, respectively.

 

12

Note 8 - Obligations under Guarantees and Commitments and Contingencies

As of March 31, 2004, the Corporation had issued $47,636,000 in standby letters of credit, predominately with remaining terms of three years or less. In accordance with Financial Accounting Standards Board Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” (“FIN 45”), the Corporation has recognized a liability at March 31, 2004, of $199,000 relating to these commitments.

At March 31, 2004, the Corporation had a reserve for losses on standby letters of credit of $442,000. Prior to the adoption of FIN 45, commitments related to standby letters of credit were considered by the Corporation in determining the adequacy of the allowance for loan losses.

The Bank maintains back up letter of credit facility agreements with rated financial institutions covering certain of the Bank’s letters of credit. Due to a return on asset performance target in the back up facilities not being met at March 31, 2004, the Bank has pledged collateral totaling $39,230,000 at March 31, 2004.

Note 9 - Recently Issued Accounting Pronouncements

On March 9, 2004, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 105, “Application of Accounting Principles to Loan Commitments,” (“SAB 105”). SAB 105 provides recognition guidance for entities that issue loan commitments that are required to be accounted for as derivative instruments. SAB 105 indicates that expected future cash flows related to the associated servicing of the loan and any other internally-developed intangible assets should not be considered when recognizing a loan commitment at inception or through its life. SAB 105 also discusses disclosure requirements for loan commitments and is effective for loan commitments accounted for as derivatives and entered into subsequent to March 31, 2004. At this time, management believes the effect of this pronouncement will not be material to future financial statements.

In the first quarter of 2004, the Emerging Issues Task Force (“EITF”) of the Financial Accounting Standards Board (“FASB”) reached consensus on accounting guidance concerning impairment of investment securities. The new guidance effectively codifies the provisions of a Securities and Exchange Commission Staff Accounting Bulletin No. 59. The new guidance prescribes a three-step process to:

•

Identify impairment of investment securities,

•

Classify impairment as either temporary or other than temporary, and

•

Recognize loss in the case of other than temporary impairment of investment securities.

 

13

The impairment accounting guidance is effective for reporting periods beginning after June 15, 2004, and related disclosure requirements are effective for annual reporting periods ending after June 15, 2004. Management anticipates this new guidance will not have a material effect on the Corporation’s financial condition or results of operations.

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)

		For the Three Months Ended March 31
		2004		2003
Net Interest Income		$       17,626		$       19,541
Provision for Loan Losses		3,000		6,237
Non-Interest Income		14,798		13,919
Non-Interest Expense		20,905		19,759
Net Earnings		5,406		4,728
Basic Earnings Per Share		$           0.35		$           0.30
Diluted Earnings Per Share		0.34		0.30
Dividends Per Share		0.165		0.165
Net Interest Margin		3.50	%	3.73	%
Efficiency Ratio		64.48		59.05
Annualized Return on Average Assets		1.02		0.86
Annualized Return on Average Equity		10.24		8.53
Average Shares Outstanding		15,596,942		15,573,638
Average Diluted Shares Outstanding		15,837,418		15,711,282
		At March 31
		2004		2003
Assets		$  2,160,875		$  2,271,092
Loans		1,759,806		1,920,317
Deposits		1,486,053		1,539,090
Shareholders’ Equity		212,873		222,317
Shareholders' Equity/Assets		9.85	%	9.79	%
Shareholders' Equity Per Share		$         13.60		$         14.30
Market Closing Price		20.15		15.80
Shares Outstanding		15,653,777		15,547,111

 

14

Summary of Corporation’s Results

First Indiana Corporation and subsidiaries had net earnings of $5,406,000 for the three months ended March 31, 2004, compared with net earnings of $4,728,000 for the same period last year. Diluted earnings per share for the three months ended March 31, 2004 were $0.34, compared with diluted earnings per share of $0.30 for the same period one year ago. The increase in net income in the first quarter of 2004 compared to the first quarter of 2003 was primarily due to a $3,237,000 decrease in the provision for loan losses, partially offset by a $1,915,000 decrease in net interest income.

Annualized return on average total assets was 1.02 percent for the three months ended March 31, 2004, compared with 0.86 percent for the same period one year ago. Annualized return on average total equity was 10.24 percent for the three months ended March 31, 2004, compared with 8.53 percent for the same period one year ago.

Cash dividends for the first quarter of 2004 and 2003 were $0.165 per share of common stock outstanding.

Net Interest Income

Net interest income was $17,626,000 for the three months ended March 31, 2004, compared with $19,541,000 for the three months ended March 31, 2003. The decrease was due to lower loan outstandings and narrowed interest rate spreads. Loans averaged $1,770,918,000 in the first quarter of 2004, compared with $1,912,997,000 for the same quarter in 2003. Net interest margin was 3.50 percent in the first quarter of 2004, compared to 3.55 percent in the fourth quarter of 2003, and 3.73 percent in the first quarter of 2003. Net interest spread declined 21 basis points to 3.14 percent in the first quarter of 2004 from 3.35 percent in the first quarter of 2003.

 

15

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, 2004							March 31, 2003
	Average Balance		Interest		Yield / Rate			Average Balance		Interest		Yield / Rate
Assets
Interest-Bearing Due from Banks	$       7,779		$       20		1.05	%		$       1,803		$         6		1.30	%
Federal Funds Sold	—		—		—			728		3		1.71
Securities Available for Sale	214,792		2,179		4.06			162,127		2,043		5.04
Other Investments	25,177		344		5.47			23,509		338		5.76
Loans
Business	500,205		6,175		4.97			566,016		7,231		5.18
Consumer	591,147		9,124		6.18			684,716		11,555		6.76
Residential Mortgage	311,066		3,786		4.87			299,163		4,235		5.66
Single-Family Construction	189,569		2,114		4.49			210,197		2,558		4.93
Commercial Real Estate	178,931		2,373		5.33			152,905		2,179		5.78
Total Loans	1,770,918		23,572		5.34			1,912,997		27,758		5.85
Total Earning Assets	2,018,666		26,115		5.19			2,101,164		30,148		5.77
Other Assets	120,890							135,741
Total Assets	$ 2,139,556							$ 2,236,905
Liabilities and Shareholders’ Equity
Interest-Bearing Deposits
Demand Deposits	$   182,067		$     158		0.35	%		$   187,783		$     290		0.63	%
Savings Deposits	446,906		698		0.63			436,807		1,007		0.93
Certificates of Deposit	628,950		4,535		2.90			694,975		6,094		3.56
Total Interest-Bearing Deposits	1,257,923		5,391		1.72			1,319,565		7,391		2.27
Short-Term Borrowings	125,634		286		0.92			135,367		387		1.16
Federal Home Loan Bank Advances	239,230		1,971		3.31			310,354		2,601		3.40
Subordinated Notes	46,552		841		7.23			12,175		228		7.52
Total Interest-Bearing Liabilities	1,669,339		8,489		2.05			1,777,461		10,607		2.42
Non-Interest-Bearing Demand Deposits	222,566							193,946
Other Liabilities	35,318							40,627
Shareholders’ Equity	212,333							224,871
Total Liabilities and Shareholders' Equity	$   2,139,556							$ 2,236,905
Net Interest Income/Spread			$ 17,626		3.14	%				$ 19,541		3.35	%
Net Interest Margin					3.50	%						3.73	%

 

16

Summary of Loan Loss Experience and Non-Performing Assets

The first quarter 2004 provision for loan losses was $3,000,000, compared to $6,237,000 for the first quarter of 2003.

Net loan charge-offs for the first quarter of 2004 were $3,163,000 compared to $4,237,000 for the first quarter of 2003. Net charge-off activity for the first quarter of 2004 reflects the Corporation’s continued management of credit matters identified last year. Charge-offs of business loans totaled $4,588,000 in the first quarter of 2004 and were primarily on previously identified potential problem loans. Additionally, recoveries on business loans in the first quarter of 2004 totaled $2,608,000. Consumer loan net charge-offs for the three months ended March 31, 2004 were $1,240,000 compared to $1,464,000 for the same period in 2003.

The provision for loan losses for the first quarter of 2003 reflected increased levels of non-performing loans and charge-offs.

The allowance for loan losses is maintained at the level deemed adequate to cover losses inherent in the loan portfolio. The allowance for loan losses is increased by the provision for loan losses charged to expense and reduced by loans charged off, net of recoveries. The determination of the adequacy of the allowance for loan losses is based on projections and estimates concerning portfolio trends and credit losses, national and local economic trends, portfolio management and trends, the assessment of credit risk of performing and non-performing loans, and qualitative management factors. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions and historical loss experience. In addition, various regulatory agencies, as an integral part of their examination process, periodically review this allowance for loan losses and may require the Corporation to recognize additions to the allowance for loan losses based on their judgment about information available to them at the time of their examination.

At March 31, 2004, the allowance for loan losses to total loans was 3.01 percent compared to 2.51 percent at March 31, 2003. The allowance for loan losses to non-performing loans at March 31, 2004 was 153.17 percent compared to 97.97 percent at March 31, 2003.

 

17

Loan Charge-Offs and Recoveries

First Indiana Corporation and Subsidiaries (Dollars in Thousands)

	Three Months Ended
	March 31, 2004			March 31, 2003
Allowance for Loan Losses at Beginning of Period	$ 53,197			$ 44,469
Charge-Offs
Business	4,588			2,747
Consumer	1,401			1,650
Residential Mortgage	—			81
Single-Family Construction	—			283
Total Charge-Offs	5,989			4,761
Recoveries
Business	2,608			311
Consumer	161			186
Single-Family Construction	57			27
Total Recoveries	2,826			524
Net Charge-Offs	3,163			4,237
Provision for Loan Losses	3,000			6,237
Allowance Related to Bank Acquired	—			1,709
Allowance for Loan Losses at End of Period	$ 53,034			$ 48,178
Net Charge-Offs to Average Loans (Annualized)	0.72	%		0.90	%
Allowance for Loan Losses to Loans at End of Period	3.01			2.51
Allowance for Loan Losses to Non-Performing Loans    at End of Period	153.17			97.97