1st Source Reports on Third Quarter, Dividend Announced

1st Source Corporation (NASDAQ:SRCE), parent company of 1st Source Bank and First National Bank, Valparaiso, today reported net income of $6.13 million for the third quarter of 2007, a decrease from the $10.96 million for the third quarter of 2006. For the first nine months of 2007, net income for 1st Source Corporation was $22.71 million, down from the $31.17 million reported for the same period in 2006. Diluted net income per share for the third quarter of 2007 amounted to $0.25 versus $0.48 reported for the same period last year. Diluted net income per common share for the first three quarters of 2007 was $0.96, a decrease from the $1.36 for the same period of 2006. Christopher J. Murphy III, Chairman and Chief Executive Officer, announced that at its October meeting, that the Board of Directors approved a cash dividend of $0.14 per share. The cash dividend will be payable on November 15, 2007, to shareholders of record on November 5, 2007. Mr. Murphy commented, "The third quarter was very challenging for 1st Source Corporation. We were down from a year earlier where we received $3.2 million on the sale of mortgage servicing rights, which did not recur this year. Additionally, the squeeze on the margin continues which exerts downward pressure on our earnings. We also provided $3.66 million to our loan loss reserve this quarter compared to a recovery of provision of $670,000 a year earlier. This reflects lower recoveries from previously charged off loans, increased loan volumes, and a slight decrease in loan quality. The difference in loan quality is not connected to the subprime mortgage mess reported in the headlines. Our mortgage business has always been conventional and conservative. "On the positive side, we completed the main installation of our new core computer system in mid-July. Although this contributed to higher costs for the quarter, the new core system should upgrade our effectiveness and efficiency in the long-term. It was an exhausting project for the hundreds of employees who were involved but went well according to those who have been involved in this kind of major installation at other financial institutions. We continue to work on completing the conversion and improving our service to customers, and will do so until all systems are working at the maximum capability as promised. "The acquisition of the First National Bank, Valparaiso, a $600 million bank, was completed in May. We are well into the process of training our new employees, meeting our new customers, and understanding our new market opportunities. Although the bank acquisition adds costs to the income statement which cannot be adequately reduced until next year, it’s a long-term investment in the future of 1st Source,” concluded Mr. Murphy. Noninterest income for the three month period ended September 30, 2007 was $17.90 million, a decrease from the $20.82 million reported in the same period of 2006. For the first three quarters of 2007, noninterest income was $54.45 million versus $58.90 million for the first three quarters of 2006. Declines in mortgage banking income of $4.20 million and $7.43 million, respectively, for the three and nine month periods of 2007 compared to 2006 was the primary factor in the overall decline in noninterest income. The third quarter 2006 bulk sale of mortgage servicing rights combined with the second quarter 2006 bulk sale of mortgage servicing rights of $1.25 million, resulted in a 2006 year-to-date gain of $4.45 million, pre-tax. Noninterest expense for the third quarter was $37.44 million, an increase from the $31.82 million reported in the third quarter a year earlier. Noninterest expense for the first nine months was $103.69 million versus $93.62 million for the same period of 2006. Salaries and employee benefits increased $2.60 million and $5.93 million, respectively, for the third quarter and 2007 year-to-date compared to a year earlier. The majority of this increase was due to the acquisition of First National Bank, Valparaiso which added $2.49 million to salaries and employee benefit expense for the third quarter of 2007, and $3.28 million since the date of acquisition on May 31, 2007. Additionally, during the first quarter of 2006 we benefited from the reversal of previously recognized stock-based compensation expense under historical accounting methods related to the estimated forfeiture of prior years stock awards. This one-time reversal, combined with the adoption of SFAS No. 123(R) estimated forfeiture accounting requirements, resulted in a reduction in stock-based compensation of $2.07 million, pre-tax. Average net loans and leases at the close of the third quarter were $3.2 billion, up 21.59 percent from a year earlier. 1st Source’s reserve for loan and lease losses as of September 30, 2007, was 2.02 percent of total loans and leases compared to 2.25 percent at September 30, 2006. 1st Source’s provision for losses was $3.66 million this quarter compared to a recovery of provision for losses of $0.67 million for the third quarter of 2006. Net charge-offs were $1.68 million for the third quarter 2007 compared to net recoveries of $0.47 million for the same quarter last year. The ratio of nonperforming assets to net loans and leases was 0.52 percent on September 30, 2007, compared to 0.54 percent on September 30, 2006. As of September 30, 2007, the 1st Source common equity-to-assets ratio was 9.68 percent compared to 10.04 percent a year ago. Common shareholders' equity was $427.20 million, up 17.54 percent from the $363.45 million reported a year ago. Total assets at the end of the third quarter of 2007 were $4.41 billion, up 21.84 percent from a year ago. Total loans and leases were up 21.87 percent and total deposits were up 18.37 percent over the comparable figures at the end of the third quarter of 2006. 1st Source Corporation is the largest locally controlled financial institution serving the northern Indiana-southwestern Michigan area. While delivering a comprehensive range of consumer and commercial banking services, 1st Source has distinguished itself with highly personalized services. 1st Source Bank also competes for business nationally by offering specialized financing services for new and used private and cargo aircraft, automobiles for leasing and rental agencies, medium and heavy duty trucks, construction and environmental equipment. As of mid-October, the Corporation has over 80 banking centers in 17 counties, 6 1st Source Insurance offices, plus 24 locations nationwide for the 1st Source Bank Specialty Finance Group. With a history dating back to 1863, 1st Source Bank has a tradition of providing superior service to clients while playing a leadership role in the continued development of the communities in which it serves. 1st Source may be accessed on its home page at "www.1stsource.com.” Its common stock is traded on the Nasdaq Global Select Market under "SRCE" and appears in the National Market System tables in many daily newspapers under the code name "1st Src." Marketmakers in 1st Source common shares are Crowell, Weedon & Company; FTN Midwest Securities Corp.; Goldman, Sachs & Company; Keefe, Howe Barnes Investments, Bruyette & Woods, Incorporated; Lehman Brothers, Incorporated; Morgan Stanley & Company, Incorporated; Sandler O’Neill & Partners; Stifel, Nicolaus & Company; Susquehanna Capital Group; and UBS Securities LLC. 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. 1st Source cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the date made. 1st Source may make other written or oral forward-looking statements from time to time. Readers are advised that various important factors could cause 1st Source’s actual results or circumstances for future periods to differ materially from those anticipated or projected in such forward-looking statements. Such factors, among others, include changes in laws, regulations or accounting principles generally accepted in the United States; 1st Source’s competitive position within its markets served; increasing consolidation within the banking industry; unforeseen changes in interest rates; unforeseen downturns in the local, regional or national economies or in the industries in which 1st Source has credit concentrations; and other risks discussed in 1st Source’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K, which filings are available from the SEC. 1st Source undertakes no obligation to publicly update or revise any forward-looking statements.   1st SOURCE CORPORATION 3rd QUARTER 2007 FINANCIAL HIGHLIGHTS (Unaudited - Dollars in thousands, except for per share data)     Three Months Ended   Nine Months Ended September 30 September 30 2007     2006   2007     2006   END OF PERIOD BALANCES Assets $ 4,412,651 $ 3,621,633 Loans and leases 3,201,595 2,627,153 Deposits 3,415,169 2,885,268 Reserve for loan and lease losses 64,664 59,002 Intangible assets 91,546 19,639 Common shareholders' equity 427,195 363,446   AVERAGE BALANCES Assets $ 4,446,719 $ 3,574,874 $ 4,053,944 $ 3,488,108 Earning assets 4,103,807 3,331,383 3,771,816 3,250,454 Investments 841,311 633,851 737,599 631,669 Loans and leases 3,179,234 2,614,743 2,930,077 2,538,558 Deposits 3,490,193 2,790,506 3,193,139 2,704,478 Interest bearing liabilities 3,576,200 2,802,797 3,235,392 2,711,949 Common shareholders' equity 430,710 360,399 400,566 353,991   INCOME STATEMENT DATA Net interest income $ 31,698 $ 27,451 $ 86,841 $ 79,695 Net interest income - FTE 32,735 28,064 89,398 81,594 Provision for (recovery of) loan and lease losses 3,660 (667 ) 4,284 (2,638 ) Noninterest income 17,897 20,823 54,453 58,895 Noninterest expense 37,440 31,824 103,686 93,616 Net income 6,130 10,964 22,713 31,174   PER SHARE DATA Basic net income per common share $ 0.25 $ 0.49 $ 0.97 $ 1.38 Diluted net income per common share 0.25 0.48 0.96 1.36 Cash dividends paid per common share 0.140 0.140 0.420 0.394 Book value per common share 17.67 16.15 17.67 16.15 Market value - High 26.530 31.330 32.620 31.330 Market value - Low 18.410 28.460 18.410 22.636 Basic weighted average common shares outstanding 24,275,794 22,497,930 23,309,281 22,549,914 Diluted weighted average common shares outstanding 24,567,404 22,811,273 23,603,676 22,843,785   KEY RATIOS Return on average assets 0.55 %   1.22 %   0.75 %   1.19 % Return on average common shareholders' equity 5.65 12.07 7.58 11.77 Average common shareholders' equity to average assets 9.69 10.08 9.88 10.15 End of period tangible common equity to tangible assets 7.77 9.54 7.77 9.54 Net interest margin 3.16 3.34 3.17 3.36 Efficiency: expense to revenue 71.30 61.66 69.56 64.82 Net charge-offs to average loans and leases 0.21 (0.07 ) 0.03 (0.16 ) Loan and lease loss reserve to loans and leases 2.02 2.25 2.02 2.25 Nonperforming assets to loans and leases 0.52 0.54 0.52 0.54   ASSET QUALITY Loans and leases past due 90 days or more $ 693 $ 264 Nonaccrual and restructured loans and leases 10,211 11,248 Other real estate 2,679 759 Repossessions 3,430 2,356 Equipment owned under operating leases 114 66 Total nonperforming assets 17,127 14,693   1st SOURCE CORPORATION CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited - Dollars in thousands)     September 30, 2007 September 30, 2006 ASSETS Cash and due from banks $ 117,564 $ 87,166 Federal funds sold and interest bearing deposits with other banks 3,754 57,742 Investment securities available-for-sale (amortized cost of $807,441 and $630,169 at September 30, 2007 and 2006, respectively) 810,802 628,691   Mortgages held for sale 25,074 54,185   Loans and leases, net of unearned discount: Commercial and agricultural loans 585,842 490,612 Auto, light truck and environmental equipment 330,967 323,671 Medium and heavy duty truck 315,116 335,039 Aircraft financing 583,533 453,975 Construction equipment financing 377,069 287,172 Loans secured by real estate 858,818 610,612 Consumer loans   150,250     126,072   Total loans and leases 3,201,595 2,627,153 Reserve for loan and lease losses   (64,664 )   (59,002 ) Net loans and leases 3,136,931 2,568,151   Equipment owned under operating leases, net 78,041 74,218 Net premises and equipment 49,272 36,927 Goodwill and intangible assets 91,546 19,639 Accrued income and other assets   99,667     94,914     Total assets $ 4,412,651   $ 3,621,633     LIABILITIES Deposits: Noninterest bearing $ 389,099 $ 334,319 Interest bearing   3,026,070     2,550,949   Total deposits 3,415,169 2,885,268   Federal funds purchased and securities sold under agreements to purchase 327,623 184,726 Other short-term borrowings 24,611 24,484 Long-term debt and mandatorily redeemable securities 44,303 43,689 Subordinated notes 100,002 59,022 Accrued expenses and other liabilities   73,748     60,998   Total liabilities 3,985,456 3,258,187   SHAREHOLDERS' EQUITY Preferred stock; no par value - - Common stock; no par value 342,840 289,163 Retained earnings 112,938 94,595 Cost of common stock in treasury (30,717 ) (19,393 ) Accumulated other comprehensive income (loss)   2,134     (919 ) Total shareholders' equity   427,195     363,446     Total liabilities and shareholders' equity $ 4,412,651   $ 3,621,633     1st SOURCE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited - Dollars in thousands)     Three Months Ended   Nine Months Ended September 30 September 30   2007       2006     2007     2006   Interest income: Loans and leases $ 57,970 $ 47,468 $ 159,322 $ 132,777 Investment securities, taxable 7,365 5,298 19,086 14,020 Investment securities, tax-exempt 2,213 1,279 5,351 3,838 Other   782     334     2,856   921     Total interest income 68,330 54,379 186,615 151,556   Interest expense: Deposits 31,184 22,399 85,249 58,715 Short-term borrowings 2,978 2,776 8,240 8,358 Subordinated notes 1,846 1,098 4,236 3,228 Long-term debt and mandatorily redeemable securities 624 655 2,049 1,560         Total interest expense   36,632     26,928     99,774   71,861     Net interest income 31,698 27,451 86,841 79,695 Provision for (recovery of provision for) loan and lease losses   3,660     (667 )   4,284   (2,638 )   Net interest income after provision for (recovery of provision for) loan and lease losses 28,038 28,118 82,557 82,333   Noninterest income: Trust fees 3,853 3,271 11,367 10,320 Service charges on deposit accounts 5,278 5,020 15,074 14,323 Mortgage banking income 770 4,971 2,400 9,833 Insurance commissions 964 1,012 3,540 3,626 Equipment rental income 5,345 5,032 15,730 13,910 Other income 1,841 1,740 6,042 4,873 Investment securities and other investment (losses) gains (154 ) (223 ) 300 2,010         Total noninterest income   17,897     20,823     54,453   58,895     Noninterest expense: Salaries and employee benefits 20,035 17,433 55,754 49,820 Net occupancy expense 2,467 1,854 6,552 5,581 Furniture and equipment expense 3,996 2,936 10,838 9,029 Depreciation - leased equipment 4,284 4,031 12,603 10,960 Supplies and communication 1,666 1,358 4,450 4,028 Other expense 4,992 4,212 13,489 14,198         Total noninterest expense   37,440     31,824     103,686   93,616     Income before income taxes 8,495 17,117 33,324 47,612 Income tax expense   2,365     6,153     10,611   16,438     Net income $ 6,130   $ 10,964   $ 22,713 $ 31,174       The NASDAQ Stock Market National Market Symbol: "SRCE" (CUSIP #336901 10 3) Please contact us at shareholder@1stsource.com