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

The following management's discussion and analysis is presented to provide information concerning our financial condition as of June 30, 2009, as compared to December 31, 2008, and the results of operations for the three and six months ended June 30, 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 June 30, 2009, were $4.54 billion, an increase of $80.20 million or 1.80% from December 31, 2008. Total loans and leases were $3.15 billion, a decrease of $143.80 million or 4.36% from December 31, 2008. Mortgages held for sale were $136.51 million, an increase of $89.82 million or 192.39% from December 31, 2008. Total investment securities, available for sale were $883.05 million which represented an increase of $158.29 million or 21.84% and total deposits were $3.62 billion, an increase of $100.50 million or 2.86% over the comparable figures at the end of 2008.

Nonperforming assets at June 30, 2009, were $80.72 million, which was an increase of $36.55 million or 82.75% from the $44.17 million reported at December 31, 2008. At June 30, 2009, nonperforming assets were 2.48% of net loans and leases compared to 1.30% at December 31, 2008.

Accrued income and other assets were as follows:

(Dollars in Thousands)

                                                 June 30,       December 31,
                                                   2009             2008
Accrued income and other assets:
Bank owned life insurance cash surrender value   $  39,446     $       38,837
Accrued interest receivable                         16,999             17,910
Mortgage servicing assets                            8,769              4,635
Other real estate                                    1,790              1,381
Former bank premises held for sale                   3,095              3,356
Repossessions                                        6,960              1,669
All other assets                                    40,467             45,832
Total accrued income and other assets            $ 117,526     $      113,620

As of June 30, 2009, total shareholders' equity was $568.89 million, up $115.23 million or 25.40% from the $453.66 million at December 31, 2008. In addition to net income of $12.53 million, other significant changes in shareholders' equity during the first six 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 $9.21 million of dividends paid and/or accrued. The accumulated other comprehensive income/(loss) component of shareholders' equity totaled $5.29 million at June 30, 2009, compared to $5.82 million at December 31, 2008. The decline in accumulated other comprehensive income/(loss) during 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 12.52% as of June 30, 2009, compared to 10.16% at December 31, 2008. Book value per common share rose to $19.21 at June 30, 2009, up from $18.82 at December 31, 2008.

We declared and paid dividends per common share of $0.14 during the second quarter of 2009. The trailing four quarters dividend payout ratio, representing dividends per common share divided by diluted earnings per common share, was 53.70%. 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 June 30, 2009, are presented in the table below:

                                                                                       To Be Well
                                                                                   Capitalized Under
                                                        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             $ 605,436         16.90 %   $ 286,615          8.00 %   $  358,268         10.00 %
1st Source Bank           569,867         15.95       285,745          8.00        357,181         10.00
Tier 1 Capital (to
Risk-Weighted
Assets):
1st Source
Corporation               559,456         15.62       143,307          4.00        214,961          6.00
1st Source Bank           524,698         14.69       142,872          4.00        214,309          6.00
Tier 1 Capital (to
Average Assets):
1st Source
Corporation               559,456         12.60       177,600          4.00        220,000          5.00
1st Source Bank           524,698         11.88       176,678          4.00        220,848          5.00

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, Federal Reserve Bank borrowings, and the capability to package loans for sale. Our loan to asset ratio was 69.41% at June 30, 2009 compared to 73.88% at December 31, 2008 and 74.00% at June 30, 2008. Cash and cash equivalents totaled $70.80 million at June 30, 2009 compared to $119.77 million at December 31, 2008 and $126.21 million at June 30, 2008. At June 30, 2009, the consolidated statement of financial condition was rate sensitive by $75.39 million more assets than liabilities scheduled to reprice within one year, or approximately 1.03%. Management believes that the present funding sources provide adequate liquidity to meet our cash flow needs.

Net income for the three and six month periods ended June 30, 2009, was $6.28 million and $12.53 million respectively, compared to $7.25 million and $16.60 million for the same periods in 2008. Diluted net income per common share was $0.19 and $0.39 respectively, for the three and six month periods ended June 30, 2009, compared to $0.30 and $0.68 for the same periods in 2008. Return on average common shareholders' equity was 4.12% for the six months ended June 30, 2009, compared to 7.54% in 2008. The return on total average assets was 0.56% for the six months ended June 30, 2009, compared to 0.76% in 2008.

The decrease in net income for the six months ended June 30, 2009, over the first six months of 2008, was primarily the result of an increase in provision for loan and leases losses. This negative impact to net income was partially offset by a decrease in income taxes. Details of the changes in the various components of net income are discussed further below.

The taxable equivalent net interest income for the three months ended June 30, 2009, was $32.84 million, a decrease of 3.51% over the same period in 2008. The net interest margin on a fully taxable equivalent basis was 3.11% for the three months ended June 30, 2009, compared to 3.38% for the three months ended June 30, 2008. The taxable equivalent net interest income for the six months ended June 30, 2009 was $64.48 million, a decrease of 4.12% over 2008, resulting in a net yield of 3.07%, compared to a net yield of 3.35% for the same period in 2008.

During the three and six month periods ended June 30, 2009, average earning assets increased $176.36 million or 4.35% and $197.71 million or 4.90%, respectively, over the comparable periods in 2008. Average interest-bearing liabilities decreased $24.18 million or 0.69% and increased $5.01 million or 0.14% respectively, for the three and six month periods ended June 30, 2009, over the comparable periods one year ago. The yield on average earning assets decreased 101 basis points to 4.89% for the second quarter of 2009 from 5.90% for the second quarter of 2008. The yield on average earning assets for the six month period ended June 30, 2009 decreased 119 basis points to 4.92% from 6.11% for the six month period ended June 30, 2008. The rate earned on assets decreased due to the reduction in short-term market interest rates from a year ago. Total cost of average interest-bearing liabilities decreased 77 basis points to 2.17% for the second quarter 2009 from 2.94% for the second quarter 2008. Total cost of average interest-bearing liabilities decreased 95 basis points to 2.24% for the six months ended June 30, 2009, from 3.19% for the six months ended June 30, 2008. The cost of interest-bearing liabilities was also affected by short-term market interest rate decreases. The result to the net interest margin, or the difference between interest income on earning assets and interest expense on

The largest contributor to the decrease in the yield on average earning assets for the three and six months ended June 30, 2009, compared to the three and six months ended June 30, 2008, was a decline in the yield on net loans and leases of 74 basis points and 97 basis points respectively. Total average investment securities increased 16.41% and 9.00% respectively, for the three and six month periods over one year ago. Average mortgages held for sale increased 232.96% and 187.46% for the three and six month periods ended June 30, 2009, over comparable periods a year ago primarily due to an increase in refinance activity. Average other investments, which include federal funds sold, time deposits with other banks, Federal Reserve Bank and Federal Home Loan Bank stock and commercial paper, increased 128.83% for the three month period ended June 30, 2009, from the same period a year ago and 194.14% for the six month period ended June 30, 2009, over one year ago as excess funds were invested.

Average interest-bearing deposits increased $162.70 million or 5.41% and $168.06 million or 5.59% respectively, for the second quarter of 2009 and first six months of 2009, over the same periods in 2008. The effective rate paid on average interest-bearing deposits decreased 80 basis points to 2.10% for the second quarter 2009 compared to 2.90% for the second quarter 2008. The effective rate paid on average interest-bearing deposits decreased 96 basis points to 2.17% for the first six months of 2009 compared to 3.13% for the first six months of 2008. The decline in the average cost of interest-bearing deposits during the second quarter and first six months of 2009 as compared to the second quarter and first six months of 2008 was primarily the result of decreases in interest rates offered on deposit products due to decreases in market interest rates.

Average short-term borrowings decreased $171.90 million or 48.45% and $146.92 million or 42.32% respectively, for the second quarter of 2009 and the first six months of 2009, compared to the same periods in 2008. The decrease in average short-term borrowings was primarily due to lower repurchase agreements and lower Federal Home Loan Bank borrowings. Interest paid on short-term borrowings decreased 139 basis points for the second quarter of 2009 and 177 basis points for the first six months of 2009 due to the interest rate decrease on adjustable rate borrowings. Average subordinated notes decreased $2.55 million for the first six months of 2009, compared to the same period in 2008. Average long-term debt decreased $14.89 million or 42.55% during the second quarter of 2009 as compared to the second quarter of 2008 and decreased $13.59 million or 39.33% during the first six months of 2009 as compared to the first six months of 2008. The majority of the decrease in long-term debt consisted of Federal Home Loan Bank borrowings.

Average demand deposits increased $38.64 million and $37.29 million respectively, during the second quarter and first six months of 2009, compared to the same periods one year ago.

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.

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