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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, 2005

or

(   ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period from ________ to ________

0-14354
(Commission File Number)

FIRST INDIANA CORPORATION
(Exact name of registrant as specified in its charter)

INDIANA
(State or other jurisdiction of incorporation or organization)

35-1692825
(IRS Employer Identification Number)

135 NORTH PENNSYLVANIA STREET
SUITE 2800
INDIANAPOLIS, IN 46204
(Address of principal executive office)

(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 |_|

On April 29, 2005, the registrant had 13,958,876 shares of common stock outstanding, $0.01 par value.

FIRST INDIANA CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX

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

See Notes to Condensed Consolidated Financial Statements

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

Condensed Consolidated Statement of Shareholders’ Equity
First Indiana Corporation and Subsidiaries
(Dollars in Thousands, except Per Share Data)
(Unaudited)

See Notes to Condensed Consolidated Financial Statements

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

See Notes to Condensed Consolidated Financial Statements

First Indiana Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three Months Ended March 31, 2005 and 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 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 subsidiary of the Corporation is First Indiana Bank and its subsidiaries (“Bank”). 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, 2004.

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

        In preparing the Condensed Consolidated Financial Statements, management is required to make estimates and assumptions that affect the amounts reported for assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses, assumptions used to value loan servicing assets, goodwill, and the determination of the valuation allowance for deferred taxes.

Note 2 — Earnings Per Share

        The following table presents the calculation of basic and diluted earnings per share.

(Dollars in Thousands, except Per Share Data)

Note 3 — Stock-Based Compensation

        First Indiana maintains various stock-based employee compensation plans. These plans provide for the granting of stock options, restricted stock, deferred shares and other stock-based awards to selected First Indiana employees and directors. First Indiana accounts for those plans under 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 any of the periods presented, except with respect to restricted stock grants and deferred stock grants as disclosed in the accompanying table. 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-based employee 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 and decreased by the provision for loan losses charged or credited 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 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.

Note 5 — Segment Reporting

        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, and traditional cash management services for business customers. The consumer finance bank segment originates and sells home equity loans and holds home equity loans originated for sale. Non-segment includes investment portfolio management, the servicing of all loans and deposits, the parent company activities and other items not directly attributable to a specific segment. Revenues in the Corporation’s segments are generated from loans, 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, including the cost to service all loans. The Corporation attempts to match fund each business unit by reviewing the earning assets and interest-bearing 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.

Segment Reporting
(Dollars in Thousands)

Note 6 — Certain 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. Unrecognized prior service amounts and unrecognized net gains and losses for all plans are amortized using the straight-line method.

(Dollars in Thousands)

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)

        On March 31, 2005, the Bank sold its loan servicing rights to EverBank of Jacksonville, Florida. At March 31, 2004, the valuation allowance relating to capitalized loan servicing rights was $2,915,000 and the amount of loans serviced for others was $416,929,000.

        The following tables show changes in the carrying amount of goodwill (excluding the Somerset Financial goodwill which was reclassified in assets of discontinued operations) for the three months ended March 31, 2005 and 2004 all of which is assigned to the community bank segment.

(Dollars in Thousands)

        The following table summarizes the carrying amount of other intangible assets at March 31, 2005, December 31, 2004, and March 31, 2004.

(Dollars in Thousands)

        Projected annual intangible amortization for the years 2005 through 2009 is $696,000, $342,000, $321,000, $300,000, and $280,000, respectively.

Note 8 — Obligations under Guarantees and Commitments and Contingencies

        As of March 31, 2005, the Corporation had issued $42,595,000 in standby letters of credit, predominately with remaining terms of three years or less. The Corporation has recognized a liability at March 31, 2005, December 31, 2004, and March 31, 2004 of $242,000, $337,000, and $199,000, respectively, relating to these commitments.

        At March 31, 2005, December 31, 2004, and March 31, 2004, the Corporation had a reserve for losses on standby letters of credit of $442,000 which is included in other liabilities.

        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, 2005, the Bank has pledged collateral totaling $24,584,000 at March 31, 2005.

Note 9 — Discontinued Operations

        On October 25, 2004 First Indiana Corporation sold substantially all the assets of Somerset Financial Services, LLC (“Somerset Financial”), to Somerset CPAs, P.C. Somerset Financial is a subsidiary of the Corporation and represented a majority of the operations of The Somerset Group, Inc., which was acquired by the Corporation in September, 2000. Somerset CPAs was formed by a management group from Somerset Financial and assumed substantially all the liabilities of Somerset Financial. Somerset Financial has been presented as discontinued operations for the period ended March 31, 2004, and the results of operations and cash flows have been removed from the Corporation’s results of continuing operations for all periods presented in the Condensed Consolidated Statements of Earnings, Condensed Consolidated Statements of Cash Flows and Notes to Condensed Consolidated Financial Statements. Likewise, the assets and liabilities of Somerset Financial have been reclassified to assets and liabilities of discontinued operations on the Condensed Consolidated Balance Sheets as of March 31, 2004. Prior to the announced sale, Somerset Financial Services, LLC was included in the Somerset operating segment.

        Results of operations for Somerset Financial Services, LLC were as follows:

(Dollars in Thousands)

        The following is summarized financial information for Somerset Financial Services, LLC:

(Dollars in Thousands)

Note 10 — Recently Issued Accounting Pronouncements

        In December 2004, the Financial Accounting Standards Board (“FASB”) issued a revised SFAS No. 123 “Share-Based Payment” (“SFAS 123 (R)”). This Statement is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related implementation guidance. SFAS 123 (R) requires an entity to measure the cost of employee services received in exchange for an award of equity instruments (e.g., stock options, stock grants) based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award – the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. SFAS 123 (R) eliminates the alternative use of Opinion No. 25’s intrinsic value method of accounting that was provided in the original SFAS 123. Under Opinion No. 25, issuing stock options to employees generally resulted in recognition of no compensation cost. SFAS 123 (R) originally was to be effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. However, in April, 2005, the Securities and Exchange Commission issued a new rule that allows companies with December 31 year-ends to defer the effective date to January 1, 2006. SFAS 123 (R) applies to all awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. The cumulative effect of initially applying this Statement, if any, is recognized as of the required effective date. As of the required effective date, entities that use the fair-value-based method for either recognition or disclosure under SFAS 123 will apply this Statement using a modified version of prospective application. Under that transition method, compensation cost is recognized on or after the required effective date for the portion of outstanding awards for which requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under SFAS 123 for either recognition or pro forma disclosures. For periods before the required effective date, those entities may elect to apply a modified version of retrospective application under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods by SFAS 123. First Indiana currently accounts for stock-based compensation under the recognition and measurement principles of Opinion No. 25. We are evaluating the impact of the pronouncement, and we expect upon adoption of SFAS 123 (R), First Indiana’s results of operations will reflect compensation from stock-based payments comparable to the pro forma impact currently disclosed under SFAS 123 in Note 3 of the Notes to Condensed Consolidated Financial Statements.

        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 when 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 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. First Indiana adopted this pronouncement beginning January 1, 2005 with no impact to First Indiana’s financial condition, results of operations, or cash flows.

        In March 2004, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The EITF reached a consensus on an other-than-temporary impairment model for debt and equity securities accounted for under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and cost method investments. 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. In September 2004 FASB issued a proposed FASB Staff Position, FSP EITF Issue 03-1-a, Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The proposed FSP would provide implementation guidance with respect to debt securities that are impaired solely due to interest rates and/or sector spreads and analyzed for other-than-temporary impairment under paragraph 16 of Issue 03-1. FASB has delayed the effective date for the measurement and recognition guidance contained in paragraphs 10 through 20 of Issue 03-1. This delay does not suspend the requirement to recognize other-than-temporary impairments as required by existing authoritative literature. The delay of the effective date for paragraphs 10 through 20 of Issue 03-1 will be superceded concurrent with the final issuance of FSP EITF Issue 03-1-a. The disclosure guidance in paragraphs 21 and 22 of Issue 03-1 remains effective. The amount of any other-than-temporary impairment that may need to be recognized in the future will be dependent on market conditions, the occurrence of certain events or changes in circumstances relative to an investee and the Corporation’s intent to hold the impaired investments at the time of the valuation.

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)

Summary of Corporation’s Results

        First Indiana Corporation and subsidiaries had net earnings of $5,622,000, or $0.40 per diluted share for the three months ended March 31, 2005. Earnings for the first quarter of the previous year were $5,406,000, or $0.34 per diluted share. Earnings from continuing operations for the first quarter of the previous year were $4,254,000, or $0.27 per diluted share. Included in the first quarter of 2005 results are the following pre-tax items: a negative provision for loan losses of $2,550,000; a $1,708,000 loss on the sale of the Bank’s third-party loan servicing portfolio; and an $804,000 loss on the sale of $35,000,000 of Federal Home Loan Bank bonds.

        Annualized return on average total assets was 1.24 percent for the three months ended March 31, 2005, compared with 1.02 percent for the same period one year ago. Annualized return on average total equity was 13.04 percent for the three months ended March 31, 2005, compared with 10.24 percent for the same period one year ago.

        First Indiana paid a cash dividend of $0.18 per common share outstanding in the first quarter of 2005 compared to $0.165 per common share outstanding in the first quarter of 2004, an increase of 9.1 percent.

Net Interest Income

        Net interest income for the first quarter of 2005 was $16,340,000 compared to $17,626,000 for the first quarter of 2004. The decrease was due to a lower level of average earning assets when comparing quarters. Net interest margin was 3.77 percent for the first quarter of 2005 compared to 3.50 percent for the first quarter of 2004. Because of the Corporation’s asset-sensitive position in its balance sheet, net interest margin increased for the first quarter 2005 when compared to the first quarter 2004 due to the impact of the Federal Reserve Board’s rate increases. The improvement in first quarter 2005 net interest margin was partially offset by an adjustment for prepayment activity relating to residential mortgage loans purchased at a premium and the residual impact of the excess liquidity created by the fourth quarter 2004 sale of non-Indiana construction loan offices which reduced the first quarter 2005 net interest margin by approximately 6 basis points.

        Earning assets averaged $1,737,931,000 in the first quarter of 2005, compared with $2,018,666,000 for the same quarter in 2004. The decrease in earning assets was primarily due to lower loans outstanding. For the three months ended March 31, 2005, loans averaged $1,478,613,000 compared to $1,770,918,000 for the first quarter of 2004.

        The following table provides information on the Corporation’s net interest margin.

Net Interest Margin
First Indiana Corporation and Subsidiaries
(Dollars in Thousands)

Summary of Loan Loss Experience and Non-Performing Assets

        In the first quarter 2005, the provision for loan losses was a negative $2,550,000, compared to a charge of $3,000,000 for the first quarter of 2004, reflecting continued improvement in the credit quality of the loan portfolio.

        Net loan charge-offs for the first quarter of 2005 were $1,277,000 compared to $3,163,000 for the first quarter of 2004. Charge-offs of business loans totaled $400,000 with recoveries of $230,000 for the three months ended March 31, 2005 compared to $4,588,000 of charge-offs and recoveries of $2,608,000 during the first quarter 2004. Consumer loan charge-offs for the quarter ended March 31, 2005 totaled $1,481,000 compared to $1,401,000 for the same period in 2004.

        At March 31, 2005, the allowance for loan losses to total loans was 3.34 percent compared to 3.01 percent at March 31, 2004. The allowance for loan losses to non-performing loans at March 31, 2005 increased to 328.66 percent compared to 153.17 percent at March 31, 2004, reflecting a decrease of $19,611,000 in non-performing loans.

Loan Charge-Offs and Recoveries
First Indiana Corporation and Subsidiaries
(Dollars in Thousands)

        Non-performing assets at March 31, 2005 were $15,773,000, or 1.07 percent of loans and foreclosed assets, compared with $21,445,000, or 1.43 percent of loans and foreclosed assets at December 31, 2004, and $38,548,000, or 2.19 percent of loans and foreclosed assets at March 31, 2004. The decrease in consumer and residential non-performing loans at March 31, 2005 from year-end 2004 is largely due to the sale of $2,595,000 in non-performing loans during the first quarter of 2005. In addition, the levels of non-performing business, commercial real estate, and single-family construction loans at March 31, 2005 decreased a net $2,885,000 from comparable totals at December 31, 2004 primarily due to loan payments. The decrease in foreclosed assets at March 31, 2005 from year-end 2004 is the result of the sale of $866,000 of residential OREO property. The decrease in consumer and residential non-performing loans at March 31, 2005 from March 31, 2004 is largely due to $7,925,000 of sales of non-performing assets in the third quarter of 2004 and $2,595,000 of sales in the first quarter of 2005. Non-performing single-family construction loans at March 31, 2005 decreased $7,738,000 from levels at March 31, 2004 due to the resolution of several non-performing single-family construction loans in conjunction with payments received and, in some instances, additional charge-offs due to deterioration of the value of the underlying collateral securing the loans.

Non-Performing Assets
First Indiana Corporation and Subsidiaries
(Dollars in Thousands)

Non-Interest Income

        Total non-interest income was $5,959,000 for the three months ended March 31, 2005, compared with $9,871,000 for the same period in 2004. Included in non-interest income is a loss of $1,708,000 on the sale of the Bank’s third-party loan servicing portfolio to EverBank in Jacksonville, Florida, at the end of the first quarter. This sale is the final step in the Corporation’s strategic decision to exit third party loan servicing. Additionally, $35,000,000 in Federal Home Loan Bank bonds were sold resulting in a loss of $804,000. This transaction did not have a material impact on interest rate risk.

        Deposit charges decreased 8 percent to $3,791,000 in the first quarter of 2005 compared to $4,117,000 in the first quarter of 2004. The decline was largely due to a decrease in returned check fees and account analysis fees. The decline in account analysis fees reflects a higher earnings credit rate in the first quarter of 2005 when compared to the first quarter of 2004.

        Loan fees decreased 19 percent to $550,000 in the first quarter of 2005 when compared to $679,000 for the same period of 2004. Construction loan fees are down as a result of the sale of the non-Indiana construction loan offices in November 2004.

        FirstTrust Indiana’s fees increased 6 percent to $928,000 in the first quarter of 2005 compared to $876,000 for the same period of 2004. The Bank’s investment advisory and trust division had assets under management at March 31, 2005 of $935,132,000, compared to $919,079,000 at March 31, 2004. The increase in trust fees reflects the growth in assets under management which is due to new business and market appreciation of assets under management for existing clients.

        Investment and insurance product sales commissions, generated by the Bank’s subsidiary First Indiana Investor Services, decreased to $144,000 in the first quarter of 2005 from $633,000 in the first quarter of 2004 due to the elimination of the existing sales channel as a part of the cost reduction plan implemented in the third quarter 2004.

        Gain on the sale of loans in the first quarter of 2005 decreased 4 percent to $2,545,000 from $2,657,000 for the same quarter last year as a result of tightened spreads in the non-conforming market due to increased competition. Home equity loans originated in the first quarter of 2005 totaled $98,063,000 compared to first quarter 2004 home equity loan originations of $82,319,000. Home equity loans sold in the first quarter of 2005 totaled $87,153,000 compared to $83,729,000 in the first quarter of 2004.

        Loan servicing income in the first quarter of 2005 was $9,000 compared to a loss of $86,000 in the first quarter 2004. Valuation impairment charges in the first quarter of 2004 were $184,000 and explain the reason for the loss in that quarter. In the first quarter of 2005 the impairment valuation was reduced by $39,000 thus increasing loan servicing income quarter to quarter by $223,000. Offsetting this increase was a $155,000 decrease in loan servicing fees reflecting the continuing decline in the loans serviced for others. Since the rights for servicing loans for others have been sold, loan servicing income will no longer be earned following the expected transfer of servicing to the purchaser in the second quarter of 2005.

        In addition to the sale of $35,000,000 in Federal Home Loan Bank bonds in the first quarter of 2005, the Bank sold its holdings of Fannie Mae and Freddie Mac preferred stock at a loss of $9,000.

        Other income in the first quarter of 2005 was $513,000 compared to $715,000 in the first quarter of 2004. Loan payment late fees in the first quarter of 2005 decreased from the comparable period of 2004, reflecting the contraction in the consumer loan portfolio, coupled with a reduction in consumer and residential loan delinquencies. Ancillary consumer and residential loan servicing and payoff fees for the first quarter of 2005 decreased from the comparable periods of 2004 due to a decrease in loans serviced and a decrease in loan payoffs.

Non-Interest Expense

        Non-interest expense for the three months ended March 31, 2005 was $16,010,000 compared to $17,827,000 for the same period in 2004, a decrease of 10 percent. A significant portion of this decrease was the result of the cost reduction plan implemented in the third quarter of 2004 and the sale of the non-Indiana construction loan offices in the fourth quarter of 2004.

        Salaries and benefits expense for the first quarter of 2005 was $9,468,000 compared to $10,608,000 for the first quarter of 2004. Salary expense was $7,067,000 in the first quarter of 2005, a decrease of 12 percent when compared to $8,033,000 for the first quarter of 2004. The decrease was a result of a lower number of employees as a part of the cost reduction plan and the sale of the non-Indiana construction loan offices in 2004. The Corporation had 596 full time equivalent employees at March 31, 2005, compared with 667 full time equivalent employees at March 31, 2004. Employee benefits expense was $2,401,000 for the first quarter of 2005 and $2,575,000 for the first quarter of 2004, a decrease of 7 percent. The decrease in 2005 employee benefits expense for the quarter was primarily due to a decrease in group insurance expense and reflects both a reduction in the number of covered associates and lower group insurance premium rates.

        Equipment expense in the first quarter of 2005 decreased 11 percent to $1,346,000 from $1,505,000 in the first quarter of 2004. Decreases were achieved in equipment rent, repairs and maintenance, and depreciation.

        Professional services expense in the first quarter of 2005 decreased 7 percent to $1,056,000 from $1,133,000 in the first quarter of 2004. The decrease was primarily due to a decrease in legal fees reflecting a reduction in expenses associated with non-performing assets. Audit fees in the first quarter of 2005 increased over audit fees in the comparable period of 2004 reflecting the increased cost of compliance with laws and regulations.

        Telephone, supplies, and postage expense in the first quarter of 2005 decreased 5 percent to $807,000 from $853,000 in the first quarter of 2004. The decrease between years reflects expense reduction efforts.

        Net expense from other real estate owned (“OREO”) operations in the first quarter of 2005 was $32,000 compared to income of $105,000 for the same period of 2004 as a result of OREO sale gains, an increase of $137,000. This increase in expense reflects additional expenses connected with the disposition of non-performing assets.

        Other expense was $1,510,000 in the first quarter of 2005 and $2,064,000 for the first quarter of 2004, a decrease of 27 percent. This improvement reflects decreases in demand deposit, ATM, and personnel expenses resulting from the cost reduction plan implemented in the third quarter of 2004.

        The Corporation’s efficiency ratio was 71.80 percent for the first quarter of 2005, compared to 64.84 percent for the first quarter of 2004. The loss on the servicing sale and the loss on the sale of securities reduced non-interest income and had the effect of increasing the efficiency ratio for the first quarter of 2005 by 727 basis points.

Income Tax Expense (Benefit) from Continuing Operations

        Income tax expense for the first quarter of 2005 was $3,217,000 with an effective tax rate of 36.4 percent compared to first quarter 2004 income tax expense of $2,416,000 with an effective tax rate of 36.2 percent.

Discontinued Operations

        On October 25, 2004 First Indiana Corporation sold substantially all the assets of Somerset Financial Services, LLC (“Somerset Financial”), to Somerset CPAs, P.C. Somerset Financial is a subsidiary of the Corporation and represented a majority of the operations of The Somerset Group, Inc., which was acquired by the Corporation in September, 2000. Somerset CPAs was formed by a management group from Somerset Financial and assumed substantially all the liabilities of Somerset Financial. Somerset Financial has been presented as discontinued operations for the period ended March 31, 2004, and the results of operations and cash flows have been removed from the Corporation’s results of continuing operations for all periods presented in the Condensed Consolidated Statements of Earnings, Condensed Consolidated Statements of Cash Flows and Notes to Condensed Consolidated Financial Statements. Likewise, the assets and liabilities of Somerset Financial have been reclassified to assets and liabilities of discontinued operations on the Condensed Consolidated Balance Sheets as of March 31, 2004. Prior to the announced sale, Somerset Financial Services, LLC was included in the Somerset operating segment.

Financial Condition

        Total assets at March 31, 2005 were $1,832,033,000, a decrease of $66,230,000 from $1,898,263,000 at December 31, 2004 and a decrease of $321,604,000 from $2,153,637,000 at March 31, 2004.

        Loans outstanding were $1,476,147,000 at March 31, 2005, compared to $1,500,190,000 at December 31, 2004, and $1,759,806,000 at March 31, 2004.

        Business loans decreased to $474,874,000 at March 31, 2005, compared with $499,688,000 at March 31, 2004, a 5 percent decrease. The decrease in business loans is primarily due to the deliberate and continuing shift in the mix of loans in the Bank’s portfolios to emphasize credits that match the Corporation’s targeted risk profile and the reduction of non-performing and under-performing loans.

        Commercial real estate loans at March 31, 2005 decreased 5 percent to $166,798,000 from $175,145,000 at December 31, 2004 and $175,482,000 one year ago. The contraction in loan balances since year end was primarily the result of payoffs from out of state customer relationships originally developed through the Bank’s non-Indiana construction loan offices. It was anticipated that most of these business relationships would end with the sale of these loan offices.

        At March 31, 2005 and 2004, the Bank’s construction loans outstanding were $67,268,000 and $187,381,000, respectively. In November 2004, First Indiana sold its non-Indiana residential construction loan business. The transaction included $134,373,000 of outstanding residential construction loans with total commitments of $264,477,000 and the construction loan offices in Phoenix, Arizona; Orlando, Florida; and Charlotte and Raleigh, North Carolina. The Bank continues to originate construction loans through its lending office in Indianapolis, Indiana.

        Consumer loans outstanding totaled $495,762,000 at March 31, 2005, compared to $520,611,000 at December 31, 2004 and $572,546,000 at March 31, 2004. Consumer loans declined 5 percent from December 31, 2004, and 13 percent from March 31, 2004 due to prepayments.

        Residential mortgage loans outstanding at March 31, 2005 totaled $271,445,000 compared to $279,051,000 at December 31, 2004 and $324,709,000 at March 31, 2004, a decrease of 16 percent. Due to low residential loan interest rates in 2004, First Indiana experienced significant loan prepayments in its residential loan portfolio.

        The Bank has pursued a strategy of building core deposits, retail and commercial checking and savings accounts, primarily through emphasizing relationship building. First Indiana’s demand and savings deposits were $928,703,000 on March 31, 2005 compared to $918,793,000 at December 31, 2004, an increase of 1 percent, and $890,245,000 at March 31, 2004, an increase of 4 percent. Demand deposits were $471,473,000 at March 31, 2005, compared to $455,114,000 at December 31, 2004, an increase of 4 percent, and $438,228,000 a year ago, an increase of 8 percent. Savings deposits were $457,230,000 at March 31, 2005 compared to $463,679,000 at December 31, 2004, a decrease of 1 percent, and $452,017,000 a year ago, an increase of 1 percent. The increases in core deposits from one year ago are reflective of the Bank’s strong emphasis on developing relationships with business and consumer clients, improving liquidity, and securing low cost funding sources.

        Growth in core deposits from first quarter 2004 to first quarter 2005 has reduced funding costs and improved the liquidity position of the Bank. Certificates of deposit were $454,591,000 at March 31, 2005, compared to $451,904,000 at December 31, 2004 and $595,808,000 at March 31, 2004. This decline from first quarter of prior year reflected decreased levels of short-term negotiable and medium-term retail certificates of deposit. Borrowed funds totaled $240,306,000 at March 31, 2005, compared to $323,364,000 at December 31, 2004 and $420,745,000 at March 31, 2004.

Capital

        At March 31, 2005, shareholders’ equity was $173,095,000, or 9.45 percent of total assets, compared with $172,143,000, or 9.07 percent of total assets, at December 31, 2004 and $212,873,000, or 9.88 percent of total assets, at March 31, 2004. In the fourth quarter of 2004, the Corporation repurchased 1,730,000 shares of common stock through a self-tender offer which reduced shareholders’ equity by $40,901,000. In the first quarter of 2005, the Corporation repurchased 149,000 shares of common stock under a program authorized by the Board of Directors which reduced shareholders’ equity by $3,638,000. The decrease in the equity ratios due to the stock repurchase was partially offset by the reduction of total assets in late 2004.

        The Corporation paid a quarterly dividend of $0.18 per common share on March 16, 2005 to shareholders of record as of March 4, 2005, an increase of nine percent over the quarterly dividend one year ago of $0.165. This is the 73rd consecutive quarter First Indiana has paid a cash dividend and the 13th dividend increase in as many years. The Board of Directors of First Indiana Corporation declared on April 20, 2005, a quarterly dividend of $0.18 per share of common stock. The dividend will be paid June 16, 2005, to shareholders of record as of June 7, 2005.

        On April 20, 2005, the Board of Directors of the Corporation approved the repurchase, from time to time, on the open market of up to 750,000 outstanding shares of the Corporation’s common stock. The Board provided for the repurchase of shares to begin at any time and terminated all prior unfulfilled share repurchase programs. The Board’s authorization has no expiration date.

        First Indiana Corporation is subject to capital requirements and guidelines imposed on bank holding companies and financial 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 (“OCC”). The Corporation and the Bank are required by their respective regulators to maintain minimum capital ratios. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators which, if undertaken, could have a direct material effect on the Corporation’s or the Bank’s financial statements.

        Under capital adequacy guidelines and the regulatory framework for prompt corrective action, First Indiana and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. First Indiana’s and the Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require First Indiana and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier 1 capital (as defined) to average assets (as defined).

        The following table shows the Corporation’s and the Bank’s capital levels and compliance with all capital requirements at March 31, 2005, December 31, 2004 and March 31, 2004. Additionally, the Bank exceeds the capital levels set by FDICIA for a bank to be considered well-capitalized.

(Dollars in Thousands)