form10-q.htm
 


 

 
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, 2008
 
OR
 
 
o        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 0-6233
 
corplogo
(Exact name of registrant as specified in its charter)
 

INDIANA
 
35-1068133
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)



100 North Michigan Street
South Bend, Indiana
46601
(Address of principal executive offices) (Zip Code)

 (574) 235-2000
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report.)

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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):


 
Large accelerated filer
   
Accelerated filer
X
 
Non-accelerated filer
 
Smaller reporting company
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 


 
Yes
   
No
X
 

 
Number of shares of common stock outstanding as of April 18, 2008 – 24,104,797 shares
 





TABLE OF CONTENTS
 

PART I.  FINANCIAL INFORMATION
 
   
Page
Item 1.
Financial Statements (Unaudited)
 
 
3
 
4
 
5
 
6
 
7
Item 2.
14
Item 3.
22
Item 4.
22
     
PART II.  OTHER INFORMATION
 
     
Item 1.
23
Item 1A.
23
Item 2.
23
Item 3.
23
Item 4.
23
Item 5.
24
Item 6.
24
     
25
     
EXHIBITS Exhibit 31.1  
  Exhibit 31.2  
  Exhibit 32.1  
  Exhibit 32.2  
   

 



1st SOURCE CORPORATION
           
           
(Unaudited - Dollars in thousands)
           
   
March 31,
   
December 31,
 
   
2008
   
2007
 
ASSETS
           
Cash and due from banks
  $ 118,844     $ 153,137  
Federal funds sold and
               
interest bearing deposits with other banks
    90,351       25,817  
Investment securities available-for-sale
               
(amortized cost of $763,024 and $790,859
               
at March 31, 2008 and December 31, 2007, respectively)
    772,994       794,918  
Mortgages held for sale
    37,853       25,921  
Loans and leases - net of unearned discount:
               
Commercial and agricultural loans
    641,159       593,806  
Auto, light truck and environmental equipment
    301,879       305,238  
Medium and heavy duty truck
    281,554       300,469  
Aircraft financing
    575,676       587,022  
Construction equipment financing
    370,276       377,785  
Loans secured by real estate
    876,885       881,646  
Consumer loans
    142,412       145,475  
Total loans and leases
    3,189,841       3,191,441  
Reserve for loan and lease losses
    (67,428 )     (66,602 )
Net loans and leases
    3,122,413       3,124,839  
Equipment owned under operating leases, net of accumulated depreciation
    79,844       81,960  
Net premises and equipment
    44,365       45,048  
Goodwill and intangible assets
    93,165       93,567  
Accrued income and other assets
    102,491       101,897  
Total assets
  $ 4,462,320     $ 4,447,104  
                 
LIABILITIES
               
Deposits:
               
Noninterest bearing
  $ 419,287     $ 418,529  
Interest bearing
    3,085,837       3,051,134  
Total deposits
    3,505,124       3,469,663  
                 
Federal funds purchased and securities
               
sold under agreements to repurchase
    237,558       303,429  
Other short-term borrowings
    74,387       34,403  
Long-term debt and mandatorily redeemable securities
    35,025       34,702  
Subordinated notes
    89,692       100,002  
Accrued expenses and other liabilities
    80,219       74,401  
Total liabilities
    4,022,005       4,016,600  
                 
SHAREHOLDERS' EQUITY
               
Preferred stock; no par value
               
Authorized 10,000,000 shares; none issued or outstanding
    -       -  
Common stock; no par value
               
Authorized 40,000,000 shares; issued 25,913,889 at March 31, 2008
               
and 25,927,510 at December 31, 2007, less unearned shares
               
(270,383 at March 31, 2008 and 284,004 at December 31, 2007)
    342,840       342,840  
Retained earnings
    123,420       117,373  
Cost of common stock in treasury (1,538,971 shares at March 31, 2008, and
               
1,551,396 shares at December 31, 2007)
    (32,091 )     (32,231 )
Accumulated other comprehensive income
    6,146       2,522  
Total shareholders' equity
    440,315       430,504  
Total liabilities and shareholders' equity
  $ 4,462,320     $ 4,447,104  
                 
                 
The accompanying notes are a part of the consolidated financial statements.
               




1st SOURCE CORPORATION
           
CONSOLIDATED STATEMENTS OF INCOME
           
(Unaudited - Dollars in thousands, except per share amounts)
           
   
Three Months Ended
 
   
 March 31,
 
   
2008
   
2007
 
Interest income:
           
Loans and leases
  $ 53,263     $ 48,274  
Investment securities, taxable
    6,600       5,730  
Investment securities, tax-exempt
    2,105       1,417  
Other
    156       532  
Total interest income
    62,124       55,953  
Interest expense:
               
Deposits
    25,120       25,270  
Short-term borrowings
    2,381       2,690  
Subordinated notes
    1,772       1,094  
Long-term debt and mandatorily redeemable securities
    554       627  
Total interest expense
    29,827       29,681  
Net interest income
    32,297       26,272  
Provision for (recovery of provision for) loan and lease losses
    1,539       (623 )
Net interest income after provision for
               
(recovery of provision for) loan and lease losses
    30,758       26,895  
Noninterest income:
               
Trust fees
    4,262       3,643  
Service charges on deposit accounts
    5,108       4,570  
Mortgage banking income
    1,117       571  
Insurance commissions
    1,946       1,638  
Equipment rental income
    5,749       5,098  
Other income
    2,222       1,719  
Investment securities and other investment gains
    623       247  
Total noninterest income
    21,027       17,486  
Noninterest expense:
               
Salaries and employee benefits
    20,634       17,566  
Net occupancy expense
    2,476       1,936  
Furniture and equipment expense
    3,978       3,094  
Depreciation - leased equipment
    4,616       4,076  
Supplies and communication
    1,669       1,272  
Other expense
    4,528       3,856  
Total noninterest expense
    37,901       31,800  
Income before income taxes
    13,884       12,581  
Income tax expense
    4,530       4,058  
                 
Net income
  $ 9,354     $ 8,523  
                 
Per common share
               
Basic net income per common share
  $ 0.39     $ 0.38  
Diluted net income per common share
  $ 0.38     $ 0.37  
Dividends
  $ 0.140     $ 0.140  
Basic weighted average common shares outstanding
    24,096,274       22,504,799  
Diluted weighted average common shares outstanding
    24,382,507       22,797,557  
                 
The accompanying notes are a part of the consolidated financial statements.
         
                 
 

 



                             
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
                             
(Unaudited - Dollars in thousands, except per share amounts)
                         
                               
                           
Net
 
                           
Unrealized
 
                           
Appreciation
 
                     
Cost of
   
(Depreciation)
 
                     
Common
   
of Securities
 
         
Common
   
Retained
   
Stock
   
Available-
 
   
Total
   
Stock
   
Earnings
   
in Treasury
   
For-Sale
 
Balance at January 1, 2007
  $ 368,904     $ 289,163     $ 99,572     $ (19,571 )   $ (260 )
Comprehensive Income, net of tax:
                                       
Net Income
    8,523       -       8,523       -       -  
Change in unrealized appreciation
                                       
of available-for-sale securities, net of tax
    621       -       -       -       621  
Total Comprehensive Income
    9,144       -       -       -       -  
Issuance of 30,355 common shares
                                       
under stock based compensation awards,
                                       
including related tax effects
    340       -       292       48       -  
Cost of 16,758 shares of common
                                       
stock acquired for treasury
    (174 )     -       -       (174 )     -  
Cash dividend ($0.14 per share)
    (3,156 )     -       (3,156 )     -       -  
Balance at March 31, 2007
  $ 375,058     $ 289,163     $ 105,231     $ (19,697 )   $ 361  
                                         
Balance at January 1, 2008
  $ 430,504     $ 342,840     $ 117,373     $ (32,231 )   $ 2,522  
Comprehensive Income, net of tax:
                                       
Net Income
    9,354       -       9,354       -       -  
Change in unrealized appreciation
                                       
of available-for-sale securities, net of tax
    3,624       -       -       -       3,624  
Total Comprehensive Income
    12,978       -       -       -       -  
Issuance of 12,425 common shares
                                       
under stock based compensation awards,
                                       
including related tax effects
    214       -       74       140       -  
Cash dividend ($0.14 per share)
    (3,381 )     -       (3,381 )     -       -  
Balance at March 31, 2008
  $ 440,315     $ 342,840     $ 123,420     $ (32,091 )   $ 6,146  
                                         
The accompanying notes are a part of the consolidated financial statements.
                                 
                                         
 

 


           
CONSOLIDATED STATEMENTS OF CASH FLOWS
           
(Unaudited - Dollars in thousands)
           
   
Three Months Ended March 31,
 
   
2008
   
2007
 
Operating activities:
           
Net income
  $ 9,354     $ 8,523  
Adjustments to reconcile net income to net cash
               
provided by operating activities:
               
Provision for (recovery of provision for) loan and lease losses
    1,539       (623 )
Depreciation of premises and equipment
    1,470       1,215  
Depreciation of equipment owned and leased to others
    4,616       4,076  
Amortization of investment security premiums
               
and accretion of discounts, net
    127       (64 )
Amortization of mortgage servicing rights
    694       639  
Mortgage servicing asset impairment/(recoveries)
    587       (1 )
Deferred income taxes
    (1,515 )     (1,354 )
Realized investment securities(gains)
    (623 )     (247 )
Change in mortgages held for sale
    (11,932 )     8,510  
Change in interest receivable
    162       938  
Change in interest payable
    (2,055 )     1,162  
Change in other assets
    (1,635 )     1,455  
Change in other liabilities
    7,103       4,683  
Other
    679       177  
Net change in operating activities
    8,571       29,089  
                 
Investing activities:
               
Proceeds from sales of investment securities
    5,579       -  
Proceeds from maturities of investment securities
    192,520       154,101  
Purchases of investment securities
    (169,768 )     (88,034 )
Net change in short-term investments
    (64,534 )     (71,429 )
Net change in loans and leases
    887       (48,354 )
Net change  in equipment owned under operating leases
    (2,500 )     (3,307 )
Purchases of premises and equipment
    (880 )     (839 )
Net change in investing activities
    (38,696 )     (57,862 )
                 
Financing activities:
               
Net change in demand deposits, NOW
               
accounts and savings accounts
    (23,898 )     (17,684 )
Net change in certificates of deposit
    59,359       2,830  
Net change in short-term borrowings
    (25,887 )     (244 )
Proceeds from issuance of long-term debt
    10,006       -  
Payments on subordinated notes
    (10,310 )     -  
Payments on long-term debt
    (10,214 )     (255 )
Net proceeds from issuance of treasury stock
    214       340  
Acquisition of treasury stock
    -       (174 )
Cash dividends
    (3,438 )     (3,209 )
Net change in financing activities
    (4,168 )     (18,396 )
                 
Net change in cash and cash equivalents
    (34,293 )     (47,169 )
                 
Cash and cash equivalents, beginning of year
    153,137       118,131  
                 
Cash and cash equivalents, end of period
  $ 118,844     $ 70,962  
                 
The accompanying notes are a part of the consolidated financial statements.
               
                 
 




1ST SOURCE CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1.  Basis of Presentation

The accompanying unaudited consolidated financial statements reflect all adjustments (all of which are normal and recurring in nature) which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position, the results of operations, changes in shareholders’ equity, and cash flows for the periods presented. These unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission (SEC) and, therefore, certain information and footnote disclosures normally included in financial statements prepared in accordance with U. S. generally accepted accounting principles (GAAP) have been omitted. The Notes to the Consolidated Financial Statements appearing in 1st Source Corporation’s Annual Report on Form 10-K (2007 Annual Report), which include descriptions of significant accounting policies, should be read in conjunction with these interim financial statements. The balance sheet at December 31, 2007 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U. S. generally accepted accounting principles for complete financial statements.  Certain amounts in the prior period consolidated financial statements have been reclassified to conform with the current year presentation.

Note 2.  Recent Accounting Pronouncements

Disclosures About Derivative Instruments and Hedging Activities:  In March 2008, the Financial Accounting Standards Board (FASB) issued Statement No. 161, “Disclosures About Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133” (SFAS No. 161).  SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements.  SFAS No. 161 is effective for fiscal years beginning after November 15, 2008. Although we do not expect the provisions of SFAS No. 161 to have a material impact on our financial statements, we are assessing the potential disclosure effects.
 
Noncontrolling Interests in Consolidated Financial Statements:  In December 2007, the FASB issued Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51” (SFAS No. 160).  SFAS No. 160 requires that a noncontrolling interest in a subsidiary be reported separately within equity and the amount of consolidated net income specifically attributable to the noncontrolling interest be identified in the consolidated financial statements.  It also calls for consistency in the manner of reporting changes in the parent’s ownership interest and requires fair value measurement of any noncontrolling equity investment retained in a deconsolidation.  SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  We do not expect the provisions of SFAS No. 160 to have a material impact on our financial condition and results of operations.

Business Combinations:  In December 2007, the FASB issued SFAS No. 141R, “Business Combinations.”  SFAS No. 141R broadens the guidance of SFAS No. 141, extending its applicability to all transactions and other events in which one entity obtains control over one or more other businesses.  It broadens the fair value measurement and recognition of assets acquired, liabilities assumed, and interests transferred as a result of business combinations.  SFAS No. 141R expands on required disclosures to improve the statement users’ abilities to evaluate the nature and financial effects of business combinations.  SFAS No. 141R is effective for the first annual reporting period beginning on or after December 15, 2008.  The provisions of SFAS No. 141R will only impact us if we are party to a business combination closing on or after January 1, 2009.
 
 
-7-


 
Written Loan Commitments Recorded at Fair Value Through Earnings:  In November 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 109 (SAB 109), “Written Loan Commitments Recorded at Fair Value through Earnings,” an amendment of  SAB 105, “Application of Accounting Principles to Loan Commitments.”  Under SAB 109, the expected net future cash flows of associated loan servicing activities should be included in the measurement of written loan commitments accounted for at fair value through earnings.  The guidance in SAB 109 is applied on a prospective basis to derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007.  We adopted the provisions of SAB 109 on January 1, 2008.  Details related to the adoption of SAB 109 and the impact on our financial statements are more fully discussed in Note 6 – Fair Value.

Fair Value Option:  In February 2007, the Financial Accounting Standards Board (FASB) issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB No. 115” (SFAS No. 159).  The fair value option permits companies to choose to measure eligible items at fair value at specified election dates.  Companies will report unrealized gains and losses on items for which the fair value option has been elected in earnings after adoption.  SFAS No. 159 requires additional disclosures related to the fair value measurements included in the companies financial statements.  This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007.  We adopted the provisions of SFAS No. 159 on January 1, 2008.  Details related to the adoption of SFAS No. 159 and the impact on our financial statements are more fully discussed in Note 6 – Fair Value.

Fair Value Measurements:  In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.”  This standard clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability. Additionally, it establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The provisions of SFAS No. 157 are effective as of the beginning of our 2008 fiscal year.   We adopted the provisions of SFAS No. 157 on January 1, 2008.  Details related to the adoption of SFAS No. 157 and the impact on our financial statements are more fully discussed in Note 6 – Fair Value.
 
Note 3.  Reserve for Loan and Lease Losses

The reserve for loan and lease losses is maintained at a level believed to be adequate by management to absorb probable losses inherent in the loan and lease portfolio.  The determination of the reserve requires significant judgment reflecting management’s best estimate of probable loan and lease losses related to specifically identified loans and leases as well as probable losses in the remainder of the various loan and lease portfolios.  The methodology for assessing the appropriateness of the reserve consists of several key elements, which include: specific reserves for identified special attention loans and leases (classified loans and leases and internal watch list credits), percentage allocations for special attention loans and leases without specific reserves, formula reserves for each business lending division portfolio, and reserves for pooled homogeneous loans and leases.  Management’s evaluation is based upon a continuing review of these portfolios, estimates of future customer performance, collateral values and dispositions and forecasts of future economic and geopolitical events, all of which are subject to judgment and will change.
 
 
-8-


 
Note 4.  Financial Instruments with Off-Balance-Sheet Risk and Derivative Transactions

To meet the financing needs of our customers, 1st Source Corporation and its subsidiaries are parties to financial instruments with off-balance-sheet risk in the normal course of business. These off-balance-sheet financial instruments include commitments to originate, purchase and sell loans and standby letters of credit.  The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition.  Our exposure to credit loss in the event of nonperformance by the other party to the financial instruments for loan commitments and standby letters of credit is represented by the dollar amount of those instruments. We use the same credit policies and collateral requirements in making commitments and conditional obligations as we do for on-balance-sheet instruments.

We occasionally enter into derivative financial instruments as part of our interest rate risk management strategies.  These derivative financial instruments consist entirely of interest rate swaps.  As of March 31, 2008, the notional amount of non-hedging interest rate swaps was $264.20 million.

1st Source Bank (Bank), a subsidiary of 1st Source Corporation, grants mortgage loan commitments to borrowers, subject to normal loan underwriting standards. The interest rate risk associated with these loan commitments is managed by entering into contracts for future deliveries of loans.  Loan commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

We issue letters of credit which are conditional commitments that guarantee the performance of a customer to a third party. The credit risk involved and collateral obtained in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers.

As of March 31, 2008 and December 31, 2007, 1st Source had commitments outstanding to originate and purchase mortgage loans aggregating $125.73 million and $71.50 million, respectively. Outstanding commitments to sell mortgage loans aggregated $73.05 million at March 31, 2008, and $45.53 million at December 31, 2007. Standby letters of credit totaled $61.13 million and $83.38 million at March 31, 2008, and December 31, 2007, respectively. Standby letters of credit have terms ranging from six months to one year.

Note 5.  Stock-Based Compensation

As of March 31, 2008, we had five stock-based employee compensation plans, which are more fully described in Note L of the Consolidated Financial Statements in 1st Source’s Annual Report on Form 10-K for the year ended December 31, 2007.  These plans include two stock option plans, the Employee Stock Purchase Plan, the Executive Incentive Plan, and the Restricted Stock Award Plan.

Stock-based compensation expense for all stock-based compensation awards granted is based on the grant-date fair value.  For all awards except stock option awards, the grant date fair value is either the fair market value per share or book value per share (corresponding to the type of stock awarded) as of the grant date.  For stock option awards, the grant date fair value is estimated using the Black-Scholes option pricing model.  For all awards we recognize these compensation costs only for those shares expected to vest on a straight-line basis over the requisite service period of the award, for which we use the related vesting term. We estimate forfeiture rates based on historical employee option exercise and employee termination experience. We have identified separate groups of awardees that exhibit similar option exercise behavior and employee termination experience and have considered them as separate groups in the valuation models and expense estimates.
 
 
-9-

 
 
The stock-based compensation expense recognized in the condensed consolidated statement of operations for the three months ended March 31, 2008 and 2007 was based on awards ultimately expected to vest, and accordingly has been adjusted by the amount of estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based partially on historical experience.

The aggregate intrinsic value in the table below represents the total pretax intrinsic value (the difference between 1st Source’s closing stock price on the last trading day of the first quarter of 2008 (March 31, 2008) and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on March 31, 2008. This amount changes based on the fair market value of 1st Source’s stock. Total fair value of options vested and expensed was $3 thousand and $267 thousand, net of tax, for the three months ended March 31, 2008 and 2007, respectively.
 

                 
   
March 31, 2008
       
           
Average
   
       
Weighted
 
Remaining
 
Total
       
Average
 
Contractual
 
Intrinsic
   
Number of
 
Grant-date
 
Term
 
Value
   
Shares
 
Fair Value
 
(in years)
 
(in 000's)
                 
Options outstanding, beginning of year
 
471,517
 
$26.51
       
Granted
 
-
 
-
       
Exercised
 
-
 
-
       
Forfeited
 
(6,670)
 
25.44
       
Options outstanding, March 31, 2008
 
464,847
 
$26.53
 
0.89
 
$255
                 
                 
Vested and expected to vest at March 31, 2008
 
464,847
 
$26.53
 
0.89
 
$255
Exercisable at March 31, 2008
 
453,847
 
$26.88
 
0.79
 
$156
 
 
    No options were granted during the three months ended March 31, 2008.
 
As of March 31, 2008, there was $2.81 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of 4.72 years.
 
The following table summarizes information about stock options outstanding at March 31, 2008:


   
Weighted
     
   
Average
Weighted
 
Weighted
Range of
Number
Remaining
Average
Number
Average
Exercise
of shares
Contractual
Exercise
of shares
Exercise
Prices
Outstanding
Life
Price
Exercisable
Price
$12.04 to $17.99
29,508
4.49
$13.38
18,508
$14.18
$18.00 to $26.99
55,587
2.93
20.46
48,917
20.46
$27.00 to $28.40
386,422
0.35
28.30
386,422
28.30
 
The fair value of each stock option was estimated on the date of grant using the Black-Scholes option-pricing model.

 
-10-

 
Note 6.  Fair Value

As of January 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements” and SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” including an amendment of SFAS No. 115 .  SFAS No. 157 does not change existing guidance as to whether or not an asset or liability is carried at fair value.  It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  SFAS No. 159 generally permits the measurement of selected eligible financial instruments at fair value at specified election dates, subject to the conditions set forth in the standard.

We elected to adopt SFAS No. 159 for mortgages held for sale (MHFS) at fair value prospectively for new MHFS originations starting on January 1, 2008.  We believe the election for MHFS (which are now hedged with free-standing derivatives (economic hedges)) will reduce certain timing differences and better match changes in the value of these assets with changes in the value of derivatives used as economic hedges for these assets.  There was no transition adjustment required upon adoption of SFAS No. 159 for MHFS because we continued to account for MHFS originated prior to January 1, 2008 at the lower of cost or fair value.  At March 31, 2008, MHFS carried at fair value totaled $37.85 million. There were no MHFS that were originated prior to January 1, 2008 that remain outstanding at March 31, 2008.

In accordance with SFAS No. 157, we group our financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.  These levels are:

§  
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

§  
Level 2 – Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date.  The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.

§  
Level 3 – Assets and liabilities that have little to no pricing observability as of the reported date.  These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

Certain assets and liabilities are measured at fair value on a recurring basis.  The following is a discussion of these assets and liabilities and valuation techniques applied to each for fair value measurement:

§  
Investment securities available for sale are valued primarily by a third party pricing agent and both the market and income valuation approaches are implemented using the following types of inputs:
 
 
-11-


 
§  
U.S. treasuries are priced using the market approach and utilizing live data feeds from active market exchanges for identical securities.
§  
Government-sponsored agency debt securities and corporate bonds are primarily priced using available market information through processes such as benchmark curves, market valuations of like securities, sector groupings and matrix pricing.
§  
Other government-sponsored agency securities, mortgage-backed securities and some of the actively traded REMICs and CMO’s, are primarily priced using available market information including benchmark yields, prepayment speeds, spreads and volatility of similar securities.
§  
Other inactive government-sponsored agency securities are primarily priced using consensus pricing and dealer quotes.
§  
State and political subdivisions are largely grouped by characteristics, i.e., geographical data and source of revenue in trade dissemination systems.  Since some securities are not traded daily and due to other grouping limitations, active market quotes are often obtained using benchmarking for like securities.  Local tax anticipation warrants, with very little market activity, are priced using an appropriate market yield curve.
§  
Marketable equity (common) securities are primarily priced using the market approach and utilizing live data feeds from active market exchanges for identical securities.
§  
Marketable equity (preferred) securities are primarily priced using available market information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing.
§  
Other non-marketable securities are primarily priced using cost or book values due to an absence of market activity and market data.
§  
Stock in the Federal Reserve Bank and the Federal Home Loan Bank, which totaled $14.88 million at March 31, 2008, is carried at cost and is not reported in the table of assets and liabilities measured at fair value at March 31, 2008.

 
§  
Mortgages held for sale and the related loan commitments and forward contracts (hedges) are valued using an income approach and utilizing an appropriate current market yield and a loan commitment closing rate based on historical analysis.

§  
Interest rate swap positions, both assets and liabilities, are valued by a third-party pricing agent using an income approach and utilizing models that use as their basis readily observable market parameters.  This valuation process considers various factors including interest rate yield curves, time value and volatility factors.

The table below presents the balance of assets and liabilities at March 31, 2008 measured at fair value on a recurring basis:

 

         
March 31, 2008
(Dollars in thousands)
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                       
Investment securities available for sale
  $ 60,792     $ 683,638     $ 13,681     $ 758,111  
Mortgages held for sale
    -       37,853       -       37,853  
Accrued Income and other assets (Interest rate swap agreements)
    -       9,726       -       9,726  
Total
  $ 60,792     $ 731,217     $ 13,681     $ 805,690  
                                 
Liabilities
                            -  
Accrued expenses and other liabilities (Interest rate swap agreements)
  $ -     $ 9,726     $ -     $ 9,726  
Total
  $ -     $ 9,726     $ -     $ 9,726  

 
-12-

 
 
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:

 
(Dollars in thousands)
 
Quarter ended March 31, 2008
 
   
Investment securities available for sale
 
Beginning balance January 1, 2008
  $ 42,212  
  Total gains or losses (realized/unrealized):
       
          Included in earnings
    794  
          Included in other comprehensive income
    (709 )
  Purchases and issuances
    3,917  
  Settlements
    -  
  Expirations
    (32,533 )
  Transfers in and/or out of Level 3
    -  
Ending balance March 31, 2008
  $ 13,681  
         
The amount of total gains or (losses) for the period included in earnings
       
attributable to the change in unrealized gains or losses relating to
       
assets and liabilities still held at March 31, 2008.
  $ -  

We may be required, from time to time, to measure certain other financial assets at fair value on a nonrecurring basis in accordance with GAAP.  These assets consist of venture capital partnership investments and the adjustments to fair value primarily result from application of lower-of-cost-or-fair value accounting.  These assets are valued using financial statements provided by the partnerships.  For assets measured at fair value on a nonrecurring basis on hand at March 31, 2008, the following table provides the level of valuation assumptions used to determine each valuation and the carrying value of the related assets:


 
                       
   
March 31, 2008
 
(Dollars in thousands)
 
Level 1
   
Level 2
   
Level 3
   
Total
 
                         
Loans (1)
  $ -     $ -     $ 5,892     $ 5,892  
Accrued income and other assets (venture capital partnership investments)
    -       -       2,896       2,896  
    $ -     $ -     $ 8,788     $ 8,788  
                                 
(1) Represents carrying value and related write-downs of loans for which adjustments are based on the appraised value of the collateral.
 
The carrying value of loans fully charged off, the majority of which are unsecured lines and loans, is zero.
                 

Fair Value Option

The following table reflects the differences between the fair value carrying amount of mortgages held for sale measured at fair value under SFAS No. 159 and the aggregate unpaid principal amount we are contractually entitled to receive at maturity on March 31, 2008:


(Dollars in thousands)
 
Fair value carrying amount
   
Aggregate unpaid principal
   
Excess of fair value carrrying amount over (under) unpaid principal
 
                   
Mortgages held for sale reported at fair value:
                 
  Total loans
  $ 37,853     $ 37,331     $ 522 (1)
  Nonaccrual loans
    -       -       -  
  Loans 90 days or more past due and still accruing
    -       -       -  
                         
(1) The excess of fair value carrying amount over unpaid principal includes changes in fair value recorded at and
 
subsequent to funding, gains and losses on the related loan commitment prior to funding, and premiums on acquired loans.
 

 
 
-13-


 
ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Except for historical information contained herein, the matters discussed in this document express “forward-looking statements.” Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “will,” “should,” and similar expressions indicate forward-looking statements. Those statements, including statements, projections, estimates or assumptions concerning future events or performance, and other statements that are other than statements of historical fact, are subject to material risks and uncertainties. We caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made. We may make other written or oral forward-looking statements from time to time. Readers are advised that various important factors could cause our actual results or circumstances for future periods to differ materially from those anticipated or projected in such forward-looking statements. Such factors include, but are not limited to, changes in law, regulations or U. S. generally accepted accounting principles; our competitive position within the markets we serve; increasing consolidation within the banking industry; unforeseen changes in interest rates; unforeseen changes in loan prepayment assumptions; unforeseen downturns in or major events affecting the local, regional or national economies or the industries in which we have credit concentrations; and other matters discussed in our filings with the SEC, including our Annual Report on Form 10-K  for 2007, which filings are available from the SEC. We undertake no obligation to publicly update or revise any forward-looking statements.

The following management’s discussion and analysis is presented to provide information concerning our financial condition as of March 31, 2008, as compared to December 31, 2007, and the results of operations for the three months ended March 31, 2008 and 2007. This discussion and analysis should be read in conjunction with our consolidated financial statements and the financial and statistical data appearing elsewhere in this report and our 2007 Annual Report.

FINANCIAL CONDITION

    Our total assets at March 31, 2008, were $4.46 billion, relatively unchanged from December 31, 2007. Total loans and leases increased 1.02% and total deposits remained stable over the comparable figures at the end of 2007.

         Nonperforming assets at March 31, 2008, were $18.58 million, which was relatively unchanged from the $18.48 million reported at December 31, 2007.  At March 31, 2008, nonperforming assets were 0.57% of net loans and leases compared to 0.56% at December 31, 2007.

Accrued income and other assets were as follows:
 
 
-14-



(Dollars in Thousands)
     
       
   
March 31,
   
December 31,
 
   
2008
   
2007
 
Accrued income and other assets:
           
Bank owned life insurance cash surrender value
  $ 37,692     $ 38,871  
Accrued interest receivable
    19,131       19,293  
Mortgage servicing assets
    6,463       7,279  
Other real estate
    4,742       4,821  
Repossessions
    1,604       2,291  
Intangible assets
    93,165       93,567  
All other assets
    32,859       29,341  
Total accrued income and other assets
  $ 195,656     $ 195,463  


CAPITAL

      As of March 31, 2008, total shareholders' equity was $440.32 million, up 2.28% from the $430.50 million at December 31, 2007.  In addition to net income of $9.35 million, other significant changes in shareholders’ equity during the first three months of 2008 included $3.38 million of dividends paid.  The accumulated other comprehensive income/(loss) component of shareholders’ equity totaled $6.15 million at March 31, 2008, compared to $2.52 million at December 31, 2007.  The improvement in accumulated other comprehensive income/(loss) for the first quarter of 2008 over the same period of 2007 was primarily a result of changes in unrealized gain/(loss) on securities in the available-for-sale portfolio.   Our equity-to-assets ratio was 9.87% as of March 31, 2008, compared to 9.68% at December 31, 2007.  Book value per common share rose to $18.27 at March 31, 2008, up from $17.87 at December 31, 2007.

      We declared and paid dividends per common share of $0.14 during the first quarter of 2008.  The trailing four quarters dividend payout ratio, representing dividends per share divided by diluted earnings per share, was 43.41%.   The dividend payout is continually reviewed by management and the Board of Directors.

      The banking regulators have established guidelines for leverage capital requirements, expressed in terms of Tier 1 or core capital as a percentage of average assets, to measure the soundness of a financial institution.  In addition, banking regulators have established risk-based capital guidelines for U.S. banking organizations.  The actual capital amounts and ratios of 1st Source Corporation, 1st Source Bank, and First National Bank, Valparaiso (FNBV) as of March 31, 2008, are presented in the table below:

 
         
Minimum Capital
   
Prompt Corrective
 
   
Actual
   
Adequacy
   
Action Provisions
 
(Dollars in thousands)
 
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
Total Capital (To Risk-Weighted Assets):
                                   
1st Source Corporation
  $ 474,703       12.89 %   $ 294,552       8.00 %   $ 368,191       10.00 %
1st Source Bank
    409,851       11.93       274,837       8.00       343,546       10.00  
First National Bank, Valparaiso
    64,825       23.08       22,474       8.00       28,093       10.00  
Tier 1 Capital (to Risk-Weighted Assets):
                                               
1st Source Corporation
    427,821       11.62       147,276       4.00       220,914       6.00  
1st Source Bank
    366,638       10.67       137,418       4.00       206,127       6.00  
First National Bank, Valparaiso
    62,008       22.07       11,237       4.00       16,856       6.00  
Tier 1 Capital (to Average Assets):
                                               
1st Source Corporation
    427,821       10.02       170,743       4.00       213,429       5.00  
1st Source Bank
    366,638       9.44       155,347       4.00       194,183       5.00  
First National Bank, Valparaiso
    62,008       10.25       24,191       4.00       30,239       5.00  

 
LIQUIDITY AND INTEREST RATE SENSITIVITY

Effective liquidity management ensures that the cash flow requirements of depositors and borrowers, as well as the operating cash needs of 1st Source Corporation, are met.  Funds are available from a number of sources, including the securities portfolio, the core deposit base, Federal Home Loan Bank borrowings, and the capability to package loans for sale.   Our loan to asset ratio was 71.48% at March 31, 2008 compared to 71.76% at December 31, 2007 and 72.35% at March 31, 2007.  Cash and cash equivalents totaled $118.84 million at March 31, 2008 compared to $153.14 million at December 31, 2007 and $70.96 million at March 31, 2007.  At March 31, 2008, the consolidated statement of financial condition was rate sensitive by $1.03 billion more liabilities than assets scheduled to reprice within one year, or approximately 0.71%.  Management believes that the present funding sources provide adequate liquidity to meet our cash flow needs.
 
 
-15-

 


SUBORDINATED DEBT

During the first quarter of 2008, we redeemed $10.31 million in floating-rate trust preferred securities issued by 1st Source Capital Trust III and $0.43 million of pre-tax capitalized debt issuance costs were written off.   We will dissolve our unconsolidated subsidiary 1st Source Capital Trust III.
 

RESULTS OF OPERATIONS

      Net income for the three-month period ended March 31, 2008, was $9.35 million, compared to $8.52 million for the same period in 2007.  Diluted net income per common share was $0.38 for the three month period ended March 31, 2008, compared to $0.37 for the same period in 2007.  Return on average common shareholders' equity was 8.56% for the three months ended March 31, 2008, compared to 9.24% in 2007. The return on total average assets was 0.86% for the three months ended March 31, 2008, compared to 0.94% in 2007.

The increase in net income for the three months ended March 31, 2008, over the first three months of 2007, was primarily the result of an increase in net interest income and total noninterest income. These positive impacts to net income were somewhat offset by an increase in the provision for loan and lease losses and noninterest expense.  Details of the changes in the various components of net income are discussed further below.

 
NET INTEREST INCOME

      The taxable equivalent net interest income for the three months ended March 31, 2008, was $33.22 million, an increase of 23.18% over the same period in 2007. The May 31, 2007 acquisition of FNBV accounted for over half of the growth in taxable equivalent net interest income.  The net interest margin on a fully taxable equivalent basis was 3.33% for the three months ended March 31, 2008, compared to 3.17% for the three months ended March 31, 2007.

During the first quarter of 2008, average earning assets increased $558.56 million or 16.18% while average interest-bearing liabilities increased $547.84 million or 18.71% over the comparable period one year ago.  The yield on average earning assets decreased 34 basis points to 6.32% for the first quarter of 2008 from 6.66% for the first quarter of 2007.  The rate earned on assets decreased due to the decrease in short-term market interest rates from a year ago.  Total cost of average interest-bearing liabilities decreased 66 basis points to 3.45% as of March 31, 2008 from 4.11% at March 31, 2007, as liabilities were also affected by short-term market interest rate decreases.  The result was an increase of 16 basis points to the net interest margin, or the difference between interest income on earning assets and expense on interest-bearing liabilities.
 
 
-16-


 
   The largest contributor to the decrease in the yield on average earning assets for the first three months of 2008 compared to the first three months of 2007 was a decline in the yield of 45 basis points despite the $528.87 million or 17.41% increase in net loans and leases.  Total average investment securities increased 17.09% for the three month period over one year ago.  Average mortgages held for sale decreased 16.96% primarily due to a reduction of our mortgage purchase activity with the majority of our production affiliates.  Other investments, which include federal funds sold, time deposits with other banks and commercial paper, decreased 48.19% for the three month period over one year ago as excess funds were invested.
 
      Average interest-bearing deposits increased $432.14 million or 16.78% for the first three months of 2008 over the same period in 2007. The effective rate paid on average interest-bearing deposits decreased 62 basis points to 3.36% as of March 31, 2008 compared to 3.98% as of March 31, 2007.  The decrease in the average cost of interest-bearing deposits during the first three months of 2008 as compared to the first three months of 2007 was primarily the result of decreases in interest rates offered on deposit products due to decreases in market interest rates.  Average interest-bearing deposits at FNBV were $475.18 million for the first quarter of 2008.

Average short-term borrowings increased $90.41 million or 36.33% for the first quarter of 2008, compared to the same period in 2007.  Interest paid on short-term borrowings decreased 156 basis points due to the interest rate decrease in adjustable rate borrowings.  Average subordinated notes increased $35.77 million for the first quarter of 2008, compared to the same period in 2007.  This increase is due to the issuance of $40.00 million of trust preferred securities on June 7, 2007, which were used to fund a portion of the purchase price for FNBV.  Average long-term debt decreased $9.49 million or 21.77% during the first three months of 2008 as compared to the first three months of 2007.  The majority of the decrease in long-term debt was made up of Federal Home Loan Bank borrowings.

Average demand deposits increased $56.20 million during the first quarter of 2008, compared to the same period one year ago.  The majority of the increase was due to demand deposits at FNBV.

      The following table provides an analysis of net interest income and illustrates the interest earned and interest expense charged for each major component of interest-earning assets and interest-bearing liabilities.  Yields/rates are computed on a tax-equivalent basis, using a 35% rate.  Nonaccrual loans and leases are included in the average loan and lease balance outstanding.

 
-17-

 

             
INTEREST RATES AND INTEREST DIFFERENTIAL
             
(Dollars in thousands)
             
   
Three months ended March 31,
 
         
2008
               
2007
       
                                     
         
Interest
               
Interest
       
   
Average
   
Income/
   
Yield/
   
Average
   
Income/
   
Yield/
 
   
Balance
   
Expense
   
Rate
   
Balance
   
Expense
   
Rate
 
ASSETS:
                                   
Investment securities:
                                   
Taxable
  $ 542,980     $ 6,600       4.89 %   $ 484,489     $ 5,730       4.80 %
Tax exempt
    236,082       2,895       4.93 %     180,861       2,018       4.53 %
Mortgages - held for sale
    32,361       484       6.02 %     38,969       638       6.64 %
Net loans and leases
    3,177,595       52,908       6.70 %     2,706,462       47,728       7.15 %
Other investments
    21,155       156       2.97 %     40,832       532       5.28 %
                                                 
Total Earning Assets
    4,010,173       63,043       6.32 %     3,451,613       56,646       6.66 %
                                                 
Cash and due from banks
    95,576                       70,166                  
Reserve for loan and lease losses
    (66,834 )                     (58,800 )                
Other assets
    322,822                       218,817                  
                                                 
Total
  $ 4,361,737                     $ 3,681,796                  
                                                 
LIABILITIES AND SHAREHOLDERS' EQUITY:
                                         
Interest-bearing deposits
  $ 3,007,404     $ 25,120       3.36 %   $ 2,576,261     $ 25,270       3.98 %
Short-term borrowings
    339,282       2,381       2.82 %     248,871       2,690       4.38 %
Subordinated notes
    94,790       1,772       7.52 %     59,022       1,094       7.52 %
Long-term debt and
                                               
mandatorily redeemable securities
    34,089       554       6.54 %     43,575       627       5.84 %
                                                 
Total Interest-Bearing Liabilities
    3,475,565       29,827       3.45 %     2,927,729       29,681       4.11 %
Noninterest-bearing deposits
    370,320                       314,124                  
Other liabilities
    76,103                       65,749                  
Shareholders' equity
    439,749                       374,194                  
                                                 
Total
  $ 4,361,737                     $ 3,681,796                  
                                                 
                                                 
Net Interest Income
          $ 33,216                     $ 26,965          
                                                 
                                                 
Net Yield on Earning Assets on a Taxable
                                               
Equivalent Basis
                    3.33 %                     3.17 %
                                                 



 

PROVISION AND RESERVE FOR LOAN AND LEASE LOSSES

The provision for loan and lease losses for the three month period ended March 31, 2008 was $1.54 million compared to a recovery of the provision for loan and lease losses in the three month period ended March 31, 2007 of $0.62 million.  Net charge-offs of $0.71 million were recorded for the first quarter 2008, compared to net recoveries of $0.52 million for the same quarter a year ago.

       On March 31, 2008, loan and lease delinquencies were 0.73% as compared to 0.25% on March 31, 2007. The change in delinquencies for the first quarter of 2008 and the first quarter of 2007, were spread throughout the various types of loans and leases in the loan and lease portfolio.  The reserve for loan and lease losses as a percentage of loans and leases outstanding at the end of the period was 2.11% as compared to 2.13% one year ago and 2.09% at December 31, 2007.  A summary of loan and lease loss experience during the three-month periods ended March 31, 2008 and 2007 is provided below.



   
Summary of Reserve for Loan and Lease Losses
 
   
(Dollars in Thousands)
 
   
Three Months Ended
 
   
March 31,
 
   
2008
   
2007
 
             
             
             
Reserve for loan and lease losses - beginning balance
  $ 66,602     $ 58,802  
Charge-offs
    (1,582 )     (1,345 )
Recoveries
    869       1,868  
Net (charge-offs)/recoveries
    (713 )     523  
                 
Provision for (recovery of provision for) loan and lease losses
    1,539       (623 )
                 
Reserve for loan and lease losses - ending balance
  $ 67,428     $ 58,702  
                 
Loans and leases outstanding at end of period
  $ 3,189,841     $ 2,751,415  
Average loans and leases outstanding during period
    3,177,595       2,706,462  
                 
                 
Reserve for loan and lease losses as a percentage of
               
loans and leases outstanding at end of period
    2.11 %     2.13 %
Ratio of net charge-offs/(recoveries) during period to
               
average loans and leases outstanding
    0.09 %     (0.08 )%


 
 
 
NONPERFORMING ASSETS

Nonperforming assets were as follows:
 

(Dollars in thousands)
                 
   
March 31,
   
December 31,
   
March 31,
 
   
2008
   
2007
   
2007
 
                   
                   
Loans and leases past due 90 days or more
  $ 1,072     $ 1,105     $ 75  
Nonaccrual and restructured loans and leases
    10,966       10,136       12,275  
Other real estate
    4,742       4,821       534  
Repossessions
    1,604       2,291       1,019  
Equipment owned under operating leases
    200       126       112  
                         
Total nonperforming assets
  $ 18,584     $ 18,479     $ 14,015  

Nonperforming assets totaled $18.58 million at March 31, 2008, relatively unchanged from the $18.48 million reported at December 31, 2007, and a 32.60% increase from the $14.02 million reported at March 31, 2007.  The increase during the first quarter 2008 compared the same period in 2007 was primarily related to an increase in other real estate.  The increase in other real estate is due to $3.34 million of former bank premises held for sale at FNBV.  Nonperforming assets as a percentage of total loans and leases were 0.57% at March 31, 2008, 0.56% at December 31, 2007, and 0.50% at March 31, 2007.

Repossessions consisted mainly of aircraft, automobiles, light trucks, medium and heavy duty trucks, and construction equipment at March 31, 2008.  At the time of repossession, the recorded amount of the loan or lease is written down, if necessary, to the estimated value of the equipment or vehicle by a charge to the reserve for loan and lease losses, unless the equipment is in the process of immediate sale.  Any subsequent write-downs are included in noninterest expense.


Supplemental Loan and Lease Information as of March 31, 2008
 

(Dollars in thousands)
       
Nonaccrual
   
Other real estate
   
Year-to-date
 
   
Loans and leases
   
and
   
owned and
   
net credit losses/
 
   
outstanding
   
restructured loans
   
repossessions
   
recoveries
 
                         
Commercial and agricultural loans
  $ 641,159     $ 787     $ -     $ 131  
Auto, light truck and environmental equipment
    301,879       509       255       (57 )
Medium and heavy duty truck
    281,554       839       375       433  
Aircraft financing
    575,676       1,948       768       (400 )
Construction equipment financing
    370,276       698       150       431  
Loans secured by real estate
    876,885       6,106       936       16  
Consumer loans
    142,412       79       57       127  
                                 
Total
  $ 3,189,841     $ 10,966     $ 2,541     $ 681  
 
For financial statements purposes, nonaccrual loans and leases are included in loan and lease outstandings, whereas repossessions and other real estate are included in other assets.  Net credit losses include net charge-offs on loans and leases and valuation adjustments and gains and losses on disposition of repossessions and defaulted operating leases.
 
 
-20-

 

 
NONINTEREST INCOME

Noninterest income for the three-month periods ended March 31, 2008 and 2007 was $21.02 million and $17.49 million, respectively.   Details of noninterest income follow:
 

(Dollars in thousands)
 
Three Months Ended
 
   
March 31,
 
   
2008
   
2007
 
Noninterest income:
           
  Trust fees
  $ 4,262     $ 3,643  
  Service charges on deposit accounts
    5,108       4,570  
  Mortgage banking income
    1,117       571  
  Insurance commissions
    1,946       1,638  
  Equipment rental income
    5,749       5,098  
  Other income
    2,222       1,719  
  Investment securities and other investment gains
    623       247  
                 
Total noninterest income
  $ 21,027     $ 17,486  
 

Noninterest income increased in all categories for the first quarter of 2008 as compared to the first quarter of 2007.  Trust fees increased $0.62 million, or 16.98%, during the first quarter of 2008 as compared to the first quarter of 2007.  This increase was primarily due to an increase in assets under management and an increase in our investment advisory management fees received from the 1st Source Monogram Funds.  Service charges on deposit accounts increased $0.54 million, or 11.78% during the first quarter of 2008 as compared to the first quarter of 2007.  The growth in service charges on deposit accounts reflects growth in the number of deposit accounts and a higher volume of fee-generating transactions, primarily overdrafts, debit card and nonsufficient funds transactions.

Mortgage banking income increased $0.55 million, or 95.62%, in the first quarter of 2008 as compared to the first quarter of 2007.  This increase was due to increased gains on the sales of mortgage loans offset by $0.59 million of impairment of mortgage servicing assets.  Insurance commissions increased $0.31 million, or 18.81% during the first quarter of 2008 as compared to the first quarter of 2007, mainly due to an October 2007 acquisition of an insurance agency in the Fort Wayne area.  Equipment rental income generated from operating leases increased during the first quarter of 2008 as compared to the first quarter of 2007 due to an increase in the operating lease portfolio from one year ago.  Other income increased from the three-month