1st Source - 10-Q quarterly report FY

            For the quarterly period ended     March 31, 2009

OR

            INDIANA                                                                                                                 60;                                            35-1068133

(State or other jurisdiction of                                                                                                                      (I.R.S. Employer  Identification No.)

incorporation or organization)                                                                                                                 

(Address of principal executive offices)                                                                                                                                                                         & #160;                                (Zip Code)

                                                                          (Registrant’s telephone number, including area code)

(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):

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 – 24,189,776shares

PART I.  FINANCIAL INFORMATION

                                                    Page

Item 1.                 Financial Statements (Unaudited)

Item 2.                 Management’s Discussion and Analysis of Financial Condition

Item 3.                 Quantitative and Qualitative Disclosures About Market Risk                                                                                                                                                              25

Item 4.                 Controls and Procedures                                                                                                                                                                        & #160;                                                    25

PART II.  OTHER INFORMATION

Item 1.                 Legal Proceedings                                                                                                                                                                                                                                         25

Item 1A.             Risk Factors                                                                                                                                                                         0;                                                                         25

Item 2.                 Unregistered Sales of Equity Securities and Use of Proceeds                                                                                      25

Item 3.                 Defaults Upon Senior Securities                                                                                                                                                                        & #160;                                       25

Item 4.                 Submission of Matters to a Vote of Security Holders                                                                                                                                                                         0;   26

Item 5.                 Other Information                                                                                                                                                                                                                                          26

Item 6                  Exhibits                                                                                                                                                                                                                                                            26

SIGNATURES                                                                                                                                       160;                                                                                                                                     27

CERTIFICATIONS                                                                                                                                                                                                                                                                 

Note 1.                      Basis of 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.

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

Note 5.        Financial Instruments with Off-Balance-Sheet Risk and Derivative Transactions

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.

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

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.

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:

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:

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 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:

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: