Back to GetFilings.com

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, 2004

or

(   ) Transition Report Pursuant to Section 13 or 15(d) of theSecurities
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)

        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:

FIRST INDIANA CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX

		Page
Part I	Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of June 30, 2004, December 31, 2003, and June 30, 2003	3
	Condensed Consolidated Statements of Earnings for the Three and Six Months Ended June 30, 2004 and 2003	4
	Condensed Consolidated Statement of Shareholders’ Equity for the Six Months Ended June 30, 2004	5
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 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	15
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	28
Item 4.	Controls and Procedures	30
Part II	Other Information
Item 1.	Legal Proceedings	31
Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	31
Item 3.	Defaults upon Senior Securities	31
Item 4.	Submission of Matters to a Vote of Security Holders	31
Item 5.	Other Information	32
Item 6.	Exhibits and Reports on Form 8-K	33
	Signatures

 

2

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

	June 30 2004		December 31 2003		June 30 2003
Assets
Cash	$      53,983		$      58,590		$      68,065
Interest-Bearing Due from Banks	54,495		1,715		8,949
Cash and Cash Equivalents	108,478		60,305		77,014
Securities Available for Sale	216,213		215,453		156,421
Other Investments	25,509		24,957		24,316
Loans
Business	506,353		515,316		594,909
Consumer	542,946		612,025		638,982
Residential Mortgage	295,914		316,822		298,789
Single-Family Construction	183,788		192,450		203,735
Commercial Real Estate	176,283		178,378		167,435
Total Loans	1,705,284		1,814,991		1,903,850
Allowance for Loan Losses	(52,432)		(53,197)		(46,247)
Net Loans	1,652,852		1,761,794		1,857,603
Premises and Equipment	24,874		25,673		26,278
Accrued Interest Receivable	8,403		9,353		10,361
Loan Servicing Rights	5,673		5,985		8,368
Goodwill	37,042		37,042		36,940
Other Intangible Assets	4,262		4,621		4,989
Other Assets	54,373		47,954		48,765
Total Assets	$ 2,137,679		$ 2,193,137		$ 2,251,055
Liabilities
Non-Interest-Bearing Deposits	$    291,653		$    235,811		$    253,571
Interest-Bearing Deposits
Demand Deposits	180,839		217,353		212,023
Savings Deposits	510,566		400,804		427,572
Certificates of Deposit	519,659		636,004		652,418
Total Interest-Bearing Deposits	1,211,064		1,254,161		1,292,013
Total Deposits	1,502,717		1,489,972		1,545,584
Short-Term Borrowings	121,225		147,074		150,832
Federal Home Loan Bank Advances	218,325		265,488		278,550
Subordinated Notes	46,596		46,534		24,322
Accrued Interest Payable	2,152		2,156		2,560
Advances by Borrowers for Taxes and Insurance	1,026		1,533		2,736
Other Liabilities	33,680		31,486		28,970
Total Liabilities	1,925,721		1,984,243		2,033,554
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 — 17,584,431 Shares;      2003 — 17,473,764 and 17,372,811 Shares	176		175		174
Capital Surplus	48,270		46,595		44,472
Retained Earnings	190,502		185,012		192,005
Accumulated Other Comprehensive Income (Loss)	(2,010)		1,756		3,755
Treasury Stock at Cost:     2004 — 1,943,187 Shares;     2003 — 1,927,017 and 1,830,750 Shares	(24,980)		(24,644)		(22,905)
Total Shareholders' Equity	211,958		208,894		217,501
Total Liabilities and Shareholders' Equity	$ 2,137,679		$ 2,193,137		$ 2,251,055

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)

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		Retained		Accumulated Other Comprehensive		Treasury		Total Shareholders’
	Shares		Amount		Surplus		Earnings		Income (Loss)		Stock		Equity
Balance at December 31, 2003	15,546,747		$ 175		$ 46,595		$ 185,012		$ 1,756		$ (24,644	)	$ 208,894
Comprehensive Income:
Net Earnings	—		—		—		10,408		—		—		10,408
Unrealized Loss on Securities Available for Sale of $6,225,        Net of Income Taxes and Reclassification       Adjustment of$169, Net of Income Taxes	—		—		—		—		(3,766	)	—		(3,766	)
Total Comprehensive Income													6,642
Dividends on Common Stock — $0.165 per share	—		—		—		(5,159	)	—		—		(5,159	)
Exercise of Stock Options	122,823		1		1,688		—		—		—		1,689
Tax Benefit of Option Compensation	—		—		217		—		—		—		217
Amortization of Common Stock Issued    under Restricted Stock Plans	—		—		—		241		—		—		241
Common Stock Issued under Deferred Compensation Plan	—		—		(24	)	—		—		—		(24	)
Common Stock Issued under Stock Incentive Plan	2,785		—		49		—		—		—		49
Purchase of Treasury Stock	(20,000	)	—		—		—		—		(361	)	(361	)
Reissuance of Treasury Stock	3,830		—		49		—		—		25		74
Redemption of Common Stock	(14,941	)	—		(304	)	—		—		—		(304	)
Balance at June 30, 2004	15,641,244		$ 176		$ 48,270		$ 190,502		$ (2,010	)	$ (24,980	)	$ 211,958

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)

	Six Months Ended June 30
	2004		2003
Cash Flows from Operating Activities
Net Earnings	$  10,408		$   3,005
Adjustments to Reconcile Net Earnings to Net Cash Provided by
Operating Activities
Gain on Sale of Loans and Investment Securities, Net	(6,123	)	(5,375	)
Amortization of Premium, Discount, and Intangibles, Net	173		1,737
Depreciation and Amortization of Premises and Equipment	1,565		1,383
Amortization of Net Deferred Loan Fees	1,323		792
Provision for Loan Losses	6,250		22,328
Origination of Loans Held For Sale, Net of Principal Collected	(179,290	)	(175,711	)
Proceeds from Sale of Loans Held for Sale	203,151		178,033
Tax Benefit of Option Compensation	217		55
Option Compensation	49		—
Change In:
Accrued Interest Receivable	950		1,078
Other Assets	(5,164	)	(13,029	)
Accrued Interest Payable	(4	)	(368	)
Other Liabilities	2,201		(4,993	)
Net Cash Provided by Operating Activities	35,706		8,935
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	19,011		12,161
Purchase of Securities Available for Sale	(45,000	)	(17,986	)
Purchase of Other Investments	—		(431	)
Principal Collected on Loans, Net of Originations	108,117		74,474
Purchase of Loans	(24,725	)	(44,588	)
Purchase of Premises and Equipment	(1,293	)	(4,507	)
Acquisition of MetroBanCorp, Net of Cash Acquired	(8	)	14,850
Acquisition of Somerset, Net of Cash Acquired	—		(7	)
Proceeds from Sale of Premises and Equipment	738		146
Net Cash Provided by Investing Activities	77,120		46,762
Cash Flows from Financing Activities
Net Change in Deposits	12,888		43,481
Repayment of Federal Home Loan Bank Advances	(287,124	)	(394,116	)
Borrowings of Federal Home Loan Bank Advances	240,000		317,000
Issuance of Subordinated Notes	—		11,760
Net Change in Short-Term Borrowings	(25,849	)	(27,768	)
Net Change in Advances by Borrowers for Taxes and Insurance	(507	)	911
Stock Option Proceeds	1,385		341
Deferred Compensation	—		(7	)
Purchase of Treasury Stock	(361	)	(1,297	)
Reissuance of Treasury Stock	74		100
Dividends Paid	(5,159	)	(5,138	)
Net Cash Used by Financing Activities	(64,653	)	(54,733	)
Net Change in Cash and Cash Equivalents	48,173		964
Cash and Cash Equivalents at Beginning of Period	60,305		76,050
Cash and Cash Equivalents at End of Period	$ 108,478		$ 77,014

See Notes to Condensed Consolidated Financial Statements

 

6

FIRST INDIANA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Months Ended June 30, 2004 and 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, 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 (loss) per share for 2004 and 2003 were computed by dividing net earnings (loss) by the weighted average shares of common stock outstanding (15,648,153 and 15,540,010 for the three months ended June 30, 2004 and 2003 and 15,622,547 and 15,556,731 for the six months ended June 30, 2004 and 2003). Diluted earnings (loss) per share for 2004 and 2003 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 (15,799,187 and 15,540,010 for the three months ended June 30, 2004 and 2003 and 15,818,322 and 15,682,268 for the six months ended June 30, 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 amortized over the life of the respective options through 2003. 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)

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 for loan losses may be necessary based on changes to one or more of the above noted risk factors. 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. Non-segment 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)

 

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)

        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.

 

11

Note 7 – Loan Servicing Rights, Goodwill, and Other Intangible Assets

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

(Dollars in Thousands)

        The valuation allowance relating to capitalized loan servicing rights was $2,758,000 at June 30, 2004 compared to $979,000 at June 30, 2003. The amount of loans serviced for others was $383,756,000 at June 30, 2004 compared to $526,152,000 at June 30, 2003. Projected annual servicing rights amortization for the years 2004 through 2008 is $1,683,000, $1,314,000, $1,173,000, $963,000, and $832,000, respectively.

        The following tables show changes in the carrying amount of goodwill for the six months ended June 30, 2004 and 2003.

(Dollars in Thousands)

 

12

        The following table summarizes the carrying amount of other intangible assets at June 30, 2004.

(Dollars in Thousands)

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

Note 8 – Obligations under Guarantees and Commitments and Contingencies

        As of June 30, 2004, the Corporation had issued $33,221,000 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 June 30, 2004, of $171,000 relating to these commitments.

        At June 30, 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 June 30, 2004, the Bank has pledged collateral totaling $38,637,000 at June 30, 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

 

13

commitments and is effective for loan commitments accounted for as derivatives and entered into subsequent to March 31, 2004.

        First Indiana Bank issues commitments to originate residential mortgage loans for sale into the secondary market. These commitments are designated as free-standing derivatives and net changes in their fair value are recorded as either assets or liabilities on the balance sheet and income or expense in current earnings. At the time the Bank issues these commitments, it enters into a mandatory agreement to sell residential mortgage loans of similar interest rates and loan terms. These mandatory agreements to sell are also designated as free-standing derivatives and as such, are accounted for as described above. In accordance with SAB 105, the Bank does not include the expected future cash flows related to the associated servicing of the loan nor consider any other internally-developed intangible assets in accounting for these derivatives. While the Bank’s objective for entering into these two types of derivatives is to lock in a gain on the sale of the resulting residential loans, there is no attempt by the Bank to qualify them for hedge accounting treatment. At June 30, 2004, First Indiana had $954,000 in commitments to originate residential mortgage loans for sale and held $954,000 in mandatory commitments to sell residential mortgage loans. The adoption of SAB 105 did not have a material effect on the Corporation’s financial condition or results of operations.

        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:

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. 

        In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position No. 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer” (“SOP 03-3”), to address accounting for differences between the contractual cash flows of certain loans and debt securities and the cash flows expected to be collected when loans or debt securities are acquired in a transfer and those cash flow differences are attributable, at least in part, to credit quality. As such, SOP 03-3 applies to such loans and debt securities acquired in purchase business combinations and does not apply to originated loans. The application of SOP 03-3 limits the interest income, including accretion of purchase price discounts that may be recognized for certain loans and debt

 

14

securities. Additionally, SOP 03-3 requires that the excess of contractual cash flows over cash flows expected to be collected (nonaccretable difference) not be recognized as an adjustment of yield or valuation allowance, such as the allowance for credit losses. Subsequent to the initial investment, increases in expected cash flows generally should be recognized prospectively through adjustment of the yield on the loan or debt security over its remaining life. Decreases in expected cash flows should be recognized as impairment. SOP 03-3 is effective for loans and debt securities acquired in fiscal years beginning after December 15, 2004, with early application encouraged. The impact of this new pronouncement is not expected to be material to First Indiana’s financial condition, results of operations, or cash flows.

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