Washington, D.C. 20549


            For the quarterly period ended     March 31, 2009

For the transition period from    ______________   to ________________
                                          Commission file number 0-6233
(Exact name of registrant as specified in its charter)

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

          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.    x Yes              o     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):
o Large accelerated filer             x Accelerated filer                      o Non-accelerated filer (Do not check if a smaller reporting company)                  o Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o  Yes   x   No

Number of shares of common stock outstanding as of April 20, 2009 – 24,189,776 shares



Item 1.                 Financial Statements (Unaudited)
Consolidated statements of financial condition--
March 31, 2009, and December 31, 2008                                                                                                                                                                                          3
Consolidated statements of income --
three months ended March 31, 2009 and 2008                                                                                                                                                                       4
Consolidated statements of changes in shareholders’ equity
three months ended March 31, 2009 and 2008                                                               5
Consolidated statements of cash flows --
three months ended March 31, 2009 and 2008                                                                                                                                                                               6
Notes to the Consolidated Financial Statements                                                                                                                                                                          7
Item 2.                 Management’s Discussion and Analysis of Financial Condition
and Results of Operations                                                                                                                                                                                                               16
Item 3.                 Quantitative and Qualitative Disclosures About Market Risk                                                                                                                                                              25
Item 4.                 Controls and Procedures                                                                                                                                                                                                                             25


Item 1.                 Legal Proceedings                                                                                                                                                                                                                                        25
Item 1A.              Risk Factors                                                                                                                                                                                                                                                  25
Item 2.                 Unregistered Sales of Equity Securities and Use of Proceeds                                                                                      25
Item 3.                 Defaults Upon Senior Securities                                                                                                                                                                                                                25
Item 4.                 Submission of Matters to a Vote of Security Holders                                                                                                                                                                            26
Item 5.                 Other Information                                                                                                                                                                                                                                         26
Item 6                  Exhibits                                                                                                                                                                                                                                                           26

SIGNATURES                                                                                                                                                                                                                                                                            27

Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

(Unaudited - Dollars in thousands, except share amounts)
March 31,
December 31,
Cash and due from banks
  $ 60,444     $ 119,771  
Federal funds sold and
   interest bearing deposits with other banks
    8,490       6,951  
Investment securities available-for-sale
     (amortized cost of $921,980 and $715,380
     at March 31, 2009 and December 31, 2008, respectively)
    929,982       724,754  
Other investments
    18,612       18,612  
Trading account securities
    99       100  
Mortgages held for sale
    126,486       46,686  
Loans and leases - net of unearned discount
   Commercial and agricultural loans
    622,533       643,440  
   Auto, light truck and environmental equipment
    335,267       353,838  
   Medium and heavy duty truck
    228,092       243,375  
   Aircraft financing
    633,372       632,121  
   Construction equipment financing
    354,667       375,983  
   Loans secured by real estate
    917,960       918,749  
   Consumer loans
    122,834       130,706  
Total loans and leases
    3,214,725       3,298,212  
   Reserve for loan and lease losses
    (84,357 )     (79,776 )
Net loans and leases
    3,130,368       3,218,436  
Equipment owned under operating leases, net
    80,224       83,062  
Net premises and equipment
    39,755       40,491  
Goodwill and intangible assets
    91,350       91,691  
Accrued income and other assets
    115,471       113,620  
Total assets
  $ 4,601,281     $ 4,464,174  
  Noninterest bearing
  $ 435,482     $ 416,960  
  Interest bearing
    3,112,386       3,097,582  
Total deposits
    3,547,868       3,514,542  
Federal funds purchased and securities
  sold under agreements to repurchase
    275,407       272,529  
Other short-term borrowings
    25,734       23,646  
Long-term debt and mandatorily redeemable securities
    20,132       29,832  
Subordinated notes
    89,692       89,692  
Accrued expenses and other liabilities
    75,246       80,269  
Total liabilities
    4,034,079       4,010,510  
Preferred stock; no par value
    Authorized 10,000,000 shares; issued 111,000 at March 31, 2009
    and none at December 31, 2008
    103,990       -  
Common stock; no par value
    Authorized 40,000,000 shares; issued 25,886,919 at March 31, 2009
    and 25,895,505 at December 31, 2008, less unearned shares
    (243,413 at March 31, 2009 and 251,999 at December 31, 2008)
    350,260       342,982  
Retained earnings
    139,121       136,877  
Cost of common stock in treasury (1,454,382 shares at March 31, 2009, and
     1,532,576 shares at December 31, 2008)
    (31,140 )     (32,019 )
Accumulated other comprehensive income
    4,971       5,824  
Total shareholders' equity
    567,202       453,664  
Total liabilities and shareholders' equity
  $ 4,601,281     $ 4,464,174  
The accompanying notes are a part of the consolidated financial statements.

(Unaudited - Dollars in thousands, except per share amounts)
Three Months Ended
March 31,
Interest income:
Loans and leases
  $ 44,597     $ 53,263  
Investment securities, taxable
    4,036       6,447  
Investment securities, tax-exempt
    1,710       2,105  
    333       309  
Total interest income
    50,676       62,124  
Interest expense:
    17,606       25,120  
Short-term borrowings
    349       2,381  
Subordinated notes
    1,647       1,772  
Long-term debt and mandatorily redeemable securities
    352       554  
Total interest expense
    19,954       29,827  
Net interest income
    30,722       32,297  
Provision for loan and lease losses
    7,785       1,539  
Net interest income after provision for
loan and lease losses
    22,937       30,758  
Noninterest income:
Trust fees
    3,804       4,262  
Service charges on deposit accounts
    4,746       5,108  
Mortgage banking income
    2,570       1,117  
Insurance commissions
    1,516       1,946  
Equipment rental income
    6,147       5,749  
Other income
    2,235       2,222  
Investment securities and other investment (losses) gains
    (469 )     623  
Total noninterest income
    20,549       21,027  
Noninterest expense:
Salaries and employee benefits
    20,086       20,634  
Net occupancy expense
    2,601       2,476  
Furniture and equipment expense
    3,481       3,978  
Depreciation - leased equipment
    4,956       4,616  
Professional fees
    1,062       1,158  
Supplies and communication
    1,567       1,669  
Other expense
    4,887       3,370  
Total noninterest expense
    38,640       37,901  
Income before income taxes
    4,846       13,884  
Income tax (benefit) expense
    (1,405 )     4,530  
Net income
    6,251       9,354  
Preferred stock dividends and discount accretion
    (1,313 )     -  
Net income available to common shareholders
  $ 4,938     $ 9,354  
Per common share
Basic net income per common share
  $ 0.20     $ 0.39  
Diluted net income per common share
  $ 0.20     $ 0.38  
  $ 0.14     $ 0.14  
Basic weighted average common shares outstanding
    24,150,200       24,096,274  
Diluted weighted average common shares outstanding
    24,191,610       24,370,049  
The accompanying notes are a part of the consolidated financial statements.

(Unaudited - Dollars in thousands, except per share amounts)
Cost of
of Securities
in Treasury
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  
Balance at January 1, 2009
  $ 453,664     $ -     $ 342,982     $ 136,877     $ (32,019 )   $ 5,824  
Comprehensive Income, net of tax:
Net Income
    6,251       -       -       6,251       -       -  
   Change in unrealized appreciation
   of available-for-sale securities, net of tax
    (853 )     -       -       -       -       (853 )
Total Comprehensive Income
    5,398       -       -       -       -       -  
Issuance of 78,194 common shares
 under stock based compensation awards,
 including related tax effects
    1,566       -       -       687       879       -  
Issuance of preferred stock
    103,725       103,990       -       (265 )     -       -  
Issuance of warrants to purchase common stock
    7,275       -       7,275       -       -       -  
Preferred stock dividend paid and/or accrued
    (1,048 )     -       -       (1,048 )     -       -  
Common stock dividend ($0.14 per share)
    (3,381 )     -       -       (3,381 )     -       -  
Stock based compensation
    3       -       3       -       -       -  
Balance at March 31, 2009
  $ 567,202     $ 103,990     $ 350,260     $ 139,121     $ (31,140 )   $ 4,971  
The accompanying notes are a part of the consolidated financial statements.
(Unaudited - Dollars in thousands)
Three Months Ended March 31,
Operating activities:
Net income
  $ 6,251     $ 9,354  
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan and lease losses
    7,785       1,539  
Depreciation of premises and equipment
    1,226       1,470  
Depreciation of equipment owned and leased to others
    4,956       4,616  
Amortization of investment security premiums
and accretion of discounts, net
    1,662       127  
Amortization of mortgage servicing rights
    724       694  
Mortgage servicing asset impairment
    565       587  
Deferred income taxes
    (1,944 )     (1,515 )
Realized investment securities losses(gains)
    469       (623 )
Originations/purchases of loans held for sale, net of principal collected
    (195,322 )     (105,479 )
Proceeds from the sales of loans held for sale
    117,411       94,173  
Net gain on sale of loans held for sale
    (1,888 )     (626 )
Change in trading account securities
    1       -  
Change in interest receivable
    (1,002 )     162  
Change in interest payable
    2,165       (2,055 )
Change in other assets
    665       (1,635 )
Change in other liabilities
    (7,896 )     7,103  
    587       679  
Net change in operating activities
    (63,585 )     8,571  
Investing activities:
Proceeds from sales of investment securities
    98,945       5,579  
Proceeds from maturities of investment securities
    77,103       192,520  
Purchases of investment securities
    (384,778 )     (169,768 )
Net change in short-term investments
    (1,539 )     (64,534 )
Loans sold or participated to others
    3,978       -  
Net change in loans and leases
    76,305       887  
Net change in equipment owned under operating leases
    (2,119 )     (2,500 )
Purchases of premises and equipment
    (542 )     (880 )
Net change in investing activities
    (132,647 )     (38,696 )
Financing activities:
Net change in demand deposits, NOW
accounts and savings accounts
    59,910       (23,898 )
Net change in certificates of deposit
    (26,584 )     59,359  
Net change in short-term borrowings
    4,966       (25,887 )
Proceeds from issuance of long-term debt
    12       10,006  
Payments on subordinated notes
    -       (10,310 )
Payments on long-term debt
    (10,186 )     (10,214 )
Net proceeds from issuance of treasury stock
    1,566       214  
Proceeds from issuance of preferred stock & common stock warrants
    111,000       -  
Cash dividends
    (3,779 )     (3,438 )
Net change in financing activities
    136,905       (4,168 )
Net change in cash and cash equivalents
    (59,327 )     (34,293 )
Cash and cash equivalents, beginning of year
    119,771       153,137  
Cash and cash equivalents, end of period
  $ 60,444     $ 118,844  
The accompanying notes are a part of the consolidated financial statements.

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 (2008 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, 2008 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.                      Other Activity

On January 23, 2009, we entered into a Letter Agreement with the United States Department of the Treasury (“Treasury”), pursuant to which we agreed to issue and sell (i) 111,000 shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”) and (ii) a warrant (the “Warrant”) to purchase 837,947 shares of our common stock, without par value (the “Common Stock”), for an aggregate purchase price of $111,000,000 in cash.

 The Series A Preferred Stock will qualify as Tier 1 capital and will pay cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter. The Series A Preferred Stock is non-voting except with respect to certain matters affecting the rights of the holders thereof, and may be redeemed by us subject to consultation with the Federal Reserve Bank.  At the time of repayment, the Secretary of Treasury shall liquidate the warrants at the current market price.

The Warrant has a 10-year term and is immediately exercisable upon its issuance, with an exercise price, subject to anti-dilution adjustments, equal to $19.87 per share of the Common Stock.

In addition, we may not increase the quarterly dividend we pay on our common stock above $0.16 per share  during the three-year period ending January 23, 2012, without consent of the Treasury, unless the Treasury no longer holds shares of the Series A Preferred Stock.

On December 12, 2008, 1st Source Corporation Investment Advisors, Inc. (“1st Source Investment Advisors”), a wholly-owned subsidiary of 1st Source Bank and second tier subsidiary of 1st Source Corporation, finalized a Purchase and Sale Agreement with WA Holdings, Inc. (“Buyer”) whereby 1st Source Investment Advisors sold certain assets to Buyer and entered into a long-term strategic partnership with Buyer (the “Transaction”). Under terms of the Purchase and Sale Agreement, we received a one time payment of $11.70 million at closing and will receive performance payments (earnout fees) over the next ten years based on the net growth and investment performance returns of the Funds.
Pursuant to the Purchase and Sale Agreement, Buyer and its wholly-owned subsidiary, Wasatch Advisors, Inc., investment advisor of the Wasatch Funds, Inc., acquired assets of 1st Source Investment Advisors related to the management of the 1st Source Monogram Mutual Funds - the Income Equity Fund, the Long/Short Fund and the Income Fund. The 1st Source Monogram Mutual Funds were reorganized into the Wasatch - 1st Source Income Equity Fund, the Wasatch - 1st Source Long/Short Fund, and the Wasatch - 1st Source Income Fund.
Note 3.                      Recent Accounting Pronouncements

FASB Amends Disclosures about Fair Value of Financial Instruments:  In April 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.”  The FSP requires a public entity to provide disclosures about fair value of financial instruments in interim financial information.  FSP 107-1 and APB 28-1 will be effective for interim and annual financial periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  An entity adopting this FSP early must also adopt FSP FAS 157-4 and FSP FAS 115-2, FAS 124-2.  We will not adopt the provisions of FSP FAS 107-1 and APB 28-1 until April 1, 2009. We are assessing the potential disclosure impact of FSP FAS 107-1 and APB 28-1.
FASB Clarifies Other-Than-Temporary Impairment:  In April 2009, the FASB issued FSP FAS 115-2, FAS124-2 and EITF 99-20-2, “Recognition and Presentation of Other-Than-Temporary-Impairment.”  The FSP (i) changes existing guidance for determining whether an impairment is other than temporary to debt securities and (ii) replaces the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis.  Under FSP FAS 115-2, FAS124-2 and EITF 99-20-2, declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses.  The amount of impairment related to other factors is recognized in other comprehensive income.  FAS 115-2, FAS 124-2 and EITF 99-20-2 will be effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  An entity adopting this FSP early must also adopt FSP FAS 157-4.  We will not adopt the provisions of FSP FAS 115-2, FAS 124-2 and EITF 99-20-2-1 until April 1, 2009.  Although we are assessing the potential impact of FSP FAS 115-2, FAS 124-2 and EITF 99-20-2, we do not expect it to have a material impact on our financial condition or results of operations.

FASB Clarifies Application of Fair Value Accounting:  In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.”  The FSP affirms the objective of fair value when a market is not active, clarifies and includes additional factors for determining whether there has been a significant decrease in market activity, eliminates the presumption that all transactions are distressed unless proven otherwise, and requires an entity to disclose a change in valuation technique.  The FSP is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  An entity adopting this FSP early must also adopt FSP FAS 115-2, FAS 124-2 and EITF 99-20-2.  We will not adopt the provisions of FSP FAS 157-4 until April 1, 2009.  Although we are assessing the potential impact of FSP FAS 157-4, we do not expect it to have a material impact on our financial condition or results of operations.
Earnings Per Share (EPS):  In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Shared-Based Payment Transaction are Participating Securities.”  The FSP clarifies that unvested share-based payment awards with a right to receive nonforfeitable dividends are participating securities. This FSP also provides guidance on how to allocate earnings to participating securities and compute EPS using the two-class method.  The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years.  All prior-period EPS data presented shall be adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform with the provisions of this FSP.  The provisions of FSP EITF 03-6-1 did not have a material impact on our EPS calculation.
Disclosures About Derivative Instruments and Hedging Activities:  In March 2008, the 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. We adopted the provisions of SFAS No. 161 on January 1, 2009. Details related to the adoption of SFAS No. 161 and the impact on our financial statements are more fully discussed in Note 5– Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions.

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 adopted the provisions of SFAS No. 160 on January 1, 2009. The provisions of SFAS No. 160 did not have an impact on our financial condition and results of operations.

Business Combinations:  In December 2007, the FASB issued Statement  No. 141R, “Business Combinations” (SFAS No. 141R).  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.  In April 2009, the FASB issued FSP FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies”.  This FSP amends the guidance in FASB Statement No. 141(R) and is effective for the first annual reporting period beginning on or after December 15, 2008.  The provisions of SFAS No. 141R and FSP 141(R)-1 will only impact us if we are party to a business combination closing on or after January 1, 2009.

Note 4.        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 impaired loans with the impairment reserve determined in accordance with SFAS 114, percentage allocations for special attention loans and leases (classified loans and leases and internal watch list credits) 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 customer performance, collateral values and dispositions, and assessments of economic and geopolitical events, all of which are subject to judgment and will change
Note 5.        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 have certain interest rate derivative positions that relate to transactions in which we enter into an interest rate swap with a client while at the same time entering into an offsetting interest rate swap with another financial institution.  In connection with each transaction, we agree to pay interest to the client on a notional amount at a variable interest rate and receive interest from the client on the same notional amount at a fixed interest rate.  At the same time, we agree to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount.  The transaction allows our client to effectively convert a variable rate loan to a fixed rate.  Because the terms of the swaps with our customers and the other financial institution offset each other, with the only difference being counterparty credit risk, changes in the fair value of the underlying derivative contracts are not materially different and do not significantly impact our results of operations.  Changes in the fair value are included in other expense.  The fair value of interest rate swap positions is determined 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.

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.  Commitments to originate or purchase residential mortgage loans held for sale and forward commitments to sell residential mortgage loans are considered derivative instruments and changes in the fair value are recorded to mortgage banking income.  Fair value of mortgage loan commitments is determined using an income approach and utilizing an appropriate current market yield and a loan commitment closing rate based on historical analysis.

Fair values of derivative instruments as of March 31, 2009:
(Dollars in thousands)
Asset derivatives
Liability derivatives
Notional or
Derivatives not designated as
hedging instruments under
SFAS 133
Interest rate swap contracts
  $ 442,479
          Other assets
$ 21,370  
     Other liabilities
    $ 21,707  
Mortgages held for sale
Forward contracts
Mortgages held for sale
        $ 20,945           $ 21,707  
        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.  Standby letters of credit totaled $48.66 million and $82.18 million at March 31, 2009, and December 31, 2008, respectively.  Standby letters of credit have terms ranging from six months to one year.

Note 6.                            Stock-Based Compensation

As of March 31, 2009, 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, 2008. 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.
The stock-based compensation expense recognized in the condensed consolidated statement of operations for the three months ended March 31, 2009 and 2008 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 2009 (March 31, 2009) 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, 2009. 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 $6 thousand, net of tax, for the three months ended March 31, 2009 and 2008, respectively.
March 31, 2009
Number of
(in years)
(in 000's)
Options outstanding, beginning of year
    80,948     $ 18.51              
    -       -              
    -       -              
    -       -              
Options outstanding, March 31, 2009
    80,948     $ 18.51       2.59     $ 138  
Vested and expected to vest at March 31, 2009
    80,948     $ 19.25       2.42     $ 138  
Exercisable at March 31, 2009
    72,698     $ 18.51       2.59     $ 88  
    No options were granted during the three months ended March 31, 2009.
 As of March 31, 2009, there was $2.87 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 3.81 years.
The following table summarizes information about stock options outstanding at March 31, 2009:

Options Outstanding
Options Exercisable
Range of
of shares
of shares
$12.04 to $17.99
$18.00 to $26.99
$27.00 to $29.46
The fair value of each stock option was estimated on the date of grant using the Black-Scholes option-pricing model.

Note 7.                            Income Taxes

        The total amount of unrecognized tax benefits that would affect the effective tax rate if recognized was $1.15 million at March 31, 2009 and $4.19 million at December 31, 2008.  Interest and penalties were recognized through the income tax provision.  For the three months ending March 31, 2009 and the twelve months ending December 31, 2008, we recognized approximately ($0.81) million and $0.14 million in interest, net of tax effect, and penalties, respectively.  Interest and penalties of approximately $0.46 and $1.27 million were accrued at March 31, 2009 and December 31, 2008, respectively.

        Tax years that remain open and subject to audit include the federal 2005-2008 years and the Indiana 2005-2008 years.  Additionally, during the first quarter of 2009 we reached a resolution of audit examinations for the 2002-2007 years and as a result recorded a reduction of unrecognized tax benefits in the amount of $4.80 million that will affect the effective tax rate and increased earnings in the amount of $2.60 million.  We do not anticipate a significant change in the amount of uncertain tax positions within the next 12 months.
Note 8.                            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 also adopted the provisions of FASB Staff Position (FSP) No. 157-2, which deferred until January 1, 2009 the application of SFAS 157 to nonfinancial assets and nonfinancial liabilities not recognized or disclosed at least annually at fair value.  Items affected by this deferral included goodwill, repossessions and other real estate, all for which any necessary impairment analyses are performed using fair value measurements.

        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, 2009, MHFS carried at fair value totaled $126.49 million.

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.

The table below presents the balance of assets and liabilities at March 31, 2009 measured at fair value on a recurring basis:
(Dollars in thousands)
Level 1
Level 2
Level 3
Investment securities available for sale
 $         83,590
 $      816,160
 $     30,232
 $         929,982
Trading account securities
Mortgages held for sale
Accrued income and other assets (Interest rate swap agreements)
 $         83,689
 $      964,016
 $     30,232
 $      1,077,937
Accrued expenses and other liabilities (Interest rate swap agreements)
 $                   -
 $        21,707
 $               -
 $           21,707
 $                   -
 $        21,707
 $               -
 $           21,707
        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, 2009
Investment securities available for sale
Beginning balance January 1, 2009
  $ 19,416  
  Total gains or losses (realized/unrealized):
          Included in earnings
          Included in other comprehensive income
    (174 )
  Purchases and issuances
    (2,230 )
  Transfers in and/or out of Level 3
Ending balance March 31, 2009
  $ 30,232  

There were no 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, 2009.

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 other financial assets include loans measured for impairment under SFAS 114, venture capital partnership investments, mortgage servicing rights, goodwill, repossessions and other real estate.  Impaired loans and related write-downs are based on the fair value of the underlying collateral if repayment is expected solely from the collateral.  Collateral values are estimated using customized discounting criteria, appraisals and dealer and trade magazine quotes which are used in a market valuation approach.  Repossessions are similarly valued.  Venture capital partnership investments and the adjustments to fair value primarily result from application of lower-of-cost-or-fair value accounting.  The partnership investments are priced using financial statements provided by the partnerships.  Mortgage servicing rights (MSRs) and related adjustments to fair value result from application of lower-of-cost-or-fair value accounting.  Fair value measurements for mortgage servicing rights are derived based on a variety of inputs including prepayment speeds, discount rates, scheduled servicing cash flows, delinquency rates and other assumptions.  MSRs do not trade in an active, open market with readily observable prices and though sales of MSRs do occur, precise terms and conditions typically are not readily available.  Goodwill is reviewed for impairment at least annually, or on an interim basis if an event occurs or circumstances change that would more likely than not reduce the carrying amount.  Goodwill is allocated into two reporting units as defined by SFAS 142.  Fair value for each reporting unit is estimated using stock price multiples or revenue multiples.  Other real estate (ORE) is based on the fair value of the underlying collateral less expected selling costs.  Collateral values are estimated primarily using appraisals and reflect a market value approach.

For assets measured at fair value on a nonrecurring basis the following represents impairment charges recognized on these assets during the quarter ended March 31, 2009:  impaired loans - $2.87 million; venture capital partnership investments - $0.17 million; mortgage servicing rights - $0.57 million; goodwill - $0.00 million; repossessions - $0.00 million, and other real estate - $0.02 million.
        For assets measured at fair value on a nonrecurring basis on hand at March 31, 2009, the following table provides the level of valuation assumptions used to determine each valuation and the carrying value of the related assets:
(Dollars in thousands)
Level 1
Level 2
Level 3
  $ -     $ -     $ 53,270     $ 53,270  
Accrued income and other assets (venture capital partnership investments)
    -       -       2,083       2,083  
Accrued income and other assets (mortgage servicing rights)
    -       -       5,397       5,397  
Goodwill and intangible assets (goodwill)
    -       83,329       -       83,329  
Accrued income and other assets (repossessions)
    -       -       2,919       2,919  
Accrued income and other assets (other real estate)
    -       -       4,851       4,851  
    $ -     $ 83,329     $ 68,520     $ 151,849  
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, 2009:

(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
  $ 126,486     $ 123,722     $ 2,764  (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.



Except for historical information contained herein, the matters discussed in this document express “forward-looking statements.” Generally, the words “believe,” “contemplate,” “seek,” “plan,” “possible,” “assume,” “expect,” “intend,” “targeted,” “continue,” “remain,” “estimate,” “anticipate,” “project,” “will,” “should,” “indicate,” “would,” “may” 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 2008, 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, 2009, as compared to December 31, 2008, and the results of operations for the three months ended March 31, 2009 and 2008. 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 2008 Annual Report.

Our total assets at March 31, 2009, were $4.60 billion, an increase of $137.11 million or 3.07% from December 31, 2008.  Total loans and leases were $3.21 billion, a decrease of $83.49 million or 2.53% from December 31, 2008.  Total investment securities, available for sale were $929.98 million which represented an increase of $205.23 million or 28.32% and total deposits increased $33.33 million or 0.95% over the comparable figures at the end of 2008.


    Nonperforming assets at March 31, 2009, were $69.12 million, which was an increase of $24.95 million or 56.49% from the $44.17 million reported at December 31, 2008.  At March 31, 2009, nonperforming assets were 2.09% of net loans and leases compared to 1.30% at December 31, 2008. Accrued income and other assets were as follows:
(Dollars in Thousands)
March 31,
December 31,
Accrued income and other assets:
Bank owned life insurance cash surrender value
  $ 39,066     $ 38,837  
Accrued interest receivable
    18,912       17,910  
Mortgage servicing assets
    5,219       4,635  
Other real estate
    1,495       1,381  
Former bank premises held for sale
    3,356       3,356  
    2,919       1,669  
All other assets
    44,504       45,832  
Total accrued income and other assets
  $ 115,471     $ 113,620  

As of March 31, 2009, total shareholders' equity was $567.20 million, up $113.54 million or 25.03% from the $453.66 million at December 31, 2008.  In addition to net income of $6.25 million, other significant changes in shareholders’ equity during the first three months of 2009 included $111.00 million from the issuance of preferred stock and common stock warrants to the Treasury as part of the Treasury's Capital Purchase Program and $4.43 million of dividends paid and/or accrued.  The accumulated other comprehensive income/(loss) component of shareholders’ equity totaled $4.97 million at March 31, 2009, compared to $5.82 million at December 31, 2008.  The decline in accumulated other comprehensive income/(loss) for the first quarter of 2009 was primarily a result of changes in unrealized gain/(loss) on securities in the available-for-sale portfolio.   Our equity-to-assets ratio was 12.33% as of March 31, 2009, compared to 10.16% at December 31, 2008.  Book value per common share rose to $19.15 at March 31, 2009, up from $18.82 at December 31, 2008.

         We declared and paid dividends per common share of $0.14 during the first quarter of 2009.  The trailing four quarters dividend payout ratio, representing dividends per share divided by diluted earnings per share, was 48.74%.  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 and 1st Source Bank  as of March 31, 2009, are presented in the table below:
To Be Well
Capitalized Under
Minimum Capital
Prompt Corrective
Action Provisions
(Dollars in thousands)
Total Capital (To Risk-Weighted Assets):
1st Source Corporation
  $ 604,831       16.48 %   $ 293,661       8.00 %   $ 367,076       10.00  
1st Source Bank
    569,249       15.56       292,656       8.00       365,820       10.00  
Tier 1 Capital (to Risk-Weighted Assets):
1st Source Corporation
    557,743       15.19       146,830       4.00       220,245       6.00  
1st Source Bank
    523,026       14.30       146,328       4.00       219,492       6.00  
Tier 1 Capital (to Average Assets):
1st Source Corporation
    557,743       12.55       177,799       4.00       222,249       5.00  
1st Source Bank
    523,026       11.81       177,113       4.00       221,391       5.00