1ST SOURCE CORP - FORM 10-Q

File	Filename
Attached files
EX-31.2 - EXHIBIT 31.2 - 1ST SOURCE CORP	ex31_2.htm
EX-31.1 - EXHIBIT 31.1 - 1ST SOURCE CORP	ex31_1.htm
EX-32.1 - EXHIBIT 32.1 - 1ST SOURCE CORP	ex32_1.htm
EX-32.2 - EXHIBIT 32.2 - 1ST SOURCE CORP	ex32_2.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2011

OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ______________ to ______________

Commission file number 0-6233


(Exact name of registrant as specified in its charter)

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

100 North Michigan Street	South Bend, IN	46614
(Address of principle 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o 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):

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

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 15, 2011 – 24,303,656 shares

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TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements (Unaudited)
	Consolidated statements of financial condition – March 31, 2011 and December 31, 2010	3
	Consolidated statements of income – three months ended March 31, 2011 and 2010	4
	Consolidated statements of shareholders’ equity – three months ended March 31, 2011 and 2010	5
	Consolidated statements of cash flows – three months ended March 31, 2011 and 2010	6
	Notes to the Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	34

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults Upon Senior Securities	35
Item 4.	(Removed and reserved)	35
Item 5.	Other Information	35
Item 6.	Exhibits	35

SIGNATURES		36

CERTIFICATIONS

Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

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1st SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited - Dollars in thousands)
	March 31,			December 31,
	2011			2010
ASSETS
Cash and due from banks	$	57,271		$	62,313
Federal funds sold and
interest bearing deposits with other banks		81,661			34,559
Investment securities available-for-sale
(amortized cost of $927,522 and $952,101
at March 31, 2011 and December 31, 2010, respectively)		942,221			969,018
Other investments		20,503			21,343
Trading account securities		146			138
Mortgages held for sale		5,467			32,599
Loans and leases - net of unearned discount
Commercial and agricultural loans		547,381			530,228
Auto, light truck and environmental equipment		416,957			396,500
Medium and heavy duty truck		156,022			162,824
Aircraft financing		601,480			614,357
Construction equipment financing		271,490			285,634
Commercial real estate		578,648			594,729
Residential real estate		386,290			390,951
Consumer loans		93,450			95,400
Total loans and leases		3,051,718			3,070,623
Reserve for loan and lease losses		(86,160	)		(86,874	)
Net loans and leases		2,965,558			2,983,749
Equipment owned under operating leases, net		81,304			78,138
Net premises and equipment		36,024			33,881
Goodwill and intangible assets		88,650			88,955
Accrued income and other assets		133,571			140,588
Total assets		4,412,376			4,445,281

LIABILITIES
Deposits:
Noninterest bearing	$	513,315		$	524,564
Interest bearing		3,095,692			3,098,181
Total deposits		3,609,007			3,622,745
Short-term borrowings:
Federal funds purchased and securities
sold under agreements to repurchase		112,914			136,028
Other short-term borrowings		19,239			19,961
Total short-term borrowings		132,153			155,989
Long-term debt and mandatorily redeemable securities		26,717			24,816
Subordinated notes		89,692			89,692
Accrued expenses and other liabilities		64,340			65,656
Total liabilities		3,921,909			3,958,898

SHAREHOLDERS' EQUITY
Preferred stock; no par value
Authorized 10,000,000 shares; none issued or outstanding		-			-
Common stock; no par value
Authorized 40,000,000 shares; issued 25,643,506 at March 31, 2011
and December 31, 2010		346,535			350,282
Retained earnings		164,455			157,875
Cost of common stock in treasury (1,339,860 shares at March 31, 2011 and
1,470,696 shares at December 31, 2010)		(29,655	)		(32,284	)
Accumulated other comprehensive income		9,132			10,510
Total shareholders' equity		490,467			486,383
Total liabilities and shareholders' equity	$	4,412,376		$	4,445,281

The accompanying notes are a part of the consolidated financial statements.

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1st SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - Dollars in thousands, except per share amounts)
	Three Months Ended
	March 31,
	2011		2010
Interest income:
Loans and leases	$	41,299	$	42,270
Investment securities, taxable		4,482		5,401
Investment securities, tax-exempt		1,186		1,467
Other		243		274
Total interest income		47,210		49,412

Interest expense:
Deposits		8,355		12,405
Short-term borrowings		89		188
Subordinated notes		1,647		1,647
Long-term debt and mandatorily redeemable securities		259		270
Total interest expense		10,350		14,510

Net interest income		36,860		34,902
Provision for loan and lease losses		2,198		4,388
Net interest income after provision for
loan and lease losses		34,662		30,514

Noninterest income:
Trust fees		3,992		3,745
Service charges on deposit accounts		4,236		4,620
Mortgage banking income		444		777
Insurance commissions		1,142		1,465
Equipment rental income		6,038		6,745
Other income		2,971		2,689
Investment securities and other investment gains		130		881
Total noninterest income		18,953		20,922

Noninterest expense:
Salaries and employee benefits		18,638		18,810
Net occupancy expense		2,320		2,487
Furniture and equipment expense		3,349		2,800
Depreciation - leased equipment		4,805		5,364
Professional fees		1,096		1,514
Supplies and communication		1,394		1,369
FDIC and other insurance		1,676		1,674
Business development and marketing expense		622		567
Loan and lease collection and repossession expense		1,324		1,106
Other expense		3,252		1,419
Total noninterest expense		38,476		37,110

Income before income taxes		15,139		14,326
Income tax expense		4,531		4,647

Net income		10,608		9,679
Preferred stock dividends and discount accretion		-		(1,711	)
Net income available to common shareholders	$	10,608	$	7,968

Per common share
Basic net income per common share	$	0.43	$	0.33
Diluted net income per common share	$	0.43	$	0.33
Dividends	$	0.16	$	0.15
Basic weighted average common shares outstanding		24,271,366		24,210,242
Diluted weighted average common shares outstanding		24,279,517		24,215,506

The accompanying notes are a part of the consolidated financial statements.

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1st SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited - Dollars in thousands, except per share amounts)

												Cost of			Accumulated
												Common			Other
				Preferred		Common			Retained			Stock			Comprehensive
	Total			Stock		Stock			Earnings			in Treasury			Income (Loss), Net
Balance at January 1, 2010	$	570,320		$	104,930	$	350,269		$	142,407		$	(32,380	)	$	5,094
Comprehensive Income, net of tax:
Net Income		9,679			-		-			9,679			-			-
Change in unrealized appreciation
of available-for-sale securities, net of tax		1,578			-		-			-			-			1,578
Reclassification adjustment for gains
included in net income, net of tax		(174	)		-		-			-			-			(174	)
Total Comprehensive Income		11,083			-		-			-			-			-
Issuance of 182,934 common shares
under stock based compensation awards,
including related tax effects		2,778			-		-			632			2,146			-
Cost of 7,269 shares of common
stock acquired for treasury		(114	)		-		-			-			(114	)		-
Preferred stock discount accretion		-			324		-			(324	)		-			-
Preferred stock dividend (paid and/or accrued)		(1,387	)		-		-			(1,387	)		-			-
Common stock dividend ($0.15 per share)		(3,626	)		-		-			(3,626	)		-			-
Stock based compensation		3			-		3			-			-			-
Balance at March 31, 2010	$	579,057		$	105,254	$	350,272		$	147,381		$	(30,348	)	$	6,498

Balance at January 1, 2011	$	486,383		$	-	$	350,282		$	157,875		$	(32,284	)	$	10,510
Comprehensive Income, net of tax:
Net Income		10,608			-		-			10,608			-			-
Change in unrealized appreciation
of available-for-sale securities, net of tax		(1,250	)		-		-			-			-			(1,250	)
Reclassification adjustment for gains
included in net income, net of tax		(128	)		-		-			-			-			(128	)
Total Comprehensive Income		9,230			-		-			-			-			-
Issuance of 139,736 common shares
under stock based compensation awards,
including related tax effects		2,666			-		-			(126	)		2,792			-
Cost of 8,900 shares of common
stock acquired for treasury		(163	)		-		-			-			(163	)		-
Repurchase of common stock warrant		(3,750	)		-		(3,750	)		-			-			-
Common stock dividend ($0.16 per share)		(3,902	)		-		-			(3,902	)		-			-
Stock based compensation		3			-		3			-			-			-
Balance at March 31, 2011	$	490,467		$	-	$	346,535		$	164,455		$	(29,655	)	$	9,132

The accompanying notes are a part of the consolidated financial statements.

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1st SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - Dollars in thousands)
	Three Months Ended March 31,
	2011			2010
Operating activities:
Net income	$	10,608		$	9,679
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan and lease losses		2,198			4,388
Depreciation of premises and equipment		873			1,182
Depreciation of equipment owned and leased to others		4,805			5,364
Amortization of investment security premiums
and accretion of discounts, net		485			668
Amortization of mortgage servicing rights		734			761
Mortgage servicing asset impairment (recovery)		5			(1	)
Deferred income taxes		(297	)		948
Investment securities and other investment gains		(130	)		(881	)
Originations/purchases of loans held for sale, net of principal collected		(25,343	)		(50,208	)
Proceeds from the sales of loans held for sale		52,560			54,303
Net gain on sale of loans held for sale		(85	)		(512	)
Change in trading account securities		(8	)		(5	)
Change in interest receivable		(116	)		75
Change in interest payable		1,905			1,110
Change in other assets		6,701			(1,337	)
Change in other liabilities		(2,083	)		8,573
Other		1,696			15
Net change in operating activities		54,508			34,122

Investing activities:
Proceeds from sales of investment securities		66,989			71,579
Proceeds from maturities of investment securities		67,756			123,734
Purchases of investment securities		(110,522	)		(180,063	)
Net change in other investments		840			1,403
Loans sold or participated to others		4,010			4,586
Net change in loans and leases		11,983			(22,348	)
Net change in equipment owned under operating leases		(7,971	)		(586	)
Purchases of premises and equipment		(3,047	)		(857	)
Net change in investing activities		30,038			(2,552	)

Financing activities:
Net change in demand deposits, NOW
accounts and savings accounts		(33,730	)		(69,419	)
Net change in certificates of deposit		19,992			(43,915	)
Net change in short-term borrowings		(23,836	)		(8,964	)
Proceeds from issuance of long-term debt		417			5,303
Payments on long-term debt		(114	)		(139	)
Net proceeds from issuance of treasury stock		2,666			2,778
Acquisition of treasury stock		(163	)		(114	)
Repurchase of common stock warrant		(3,750	)		-
Cash dividends paid on preferred stock		-			(1,387	)
Cash dividends paid on common stock		(3,968	)		(3,690	)
Net change in financing activities		(42,486	)		(119,547	)

Net change in cash and cash equivalents		42,060			(87,977	)

Cash and cash equivalents, beginning of year		96,872			210,102

Cash and cash equivalents, end of period	$	138,932		$	122,125

Non-cash transactions:
Loans transferred to other real estate and repossessed assets	$	3,931		$	4,242
Common stock matching contribution to KSOP plan		2,420			2,545

The accompanying notes are a part of the consolidated financial statements.

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1ST SOURCE CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

The accompanying unaudited consolidated financial statements reflect all adjustments (all of which are normal and recurring in nature) which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position, the results of operations, changes in shareholders’ equity, and cash flows for the periods presented. These unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission (SEC) and, therefore, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been omitted. The Notes to the Consolidated Financial Statements appearing in 1st Source Corporation’s Annual Report on Form 10-K (2010 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, 2010 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.

Cash Flow – For purposes of the consolidated statements of cash flow, we consider cash and due from banks, federal funds sold and interest bearing deposits with other banks with original maturities of three months or less as cash and cash equivalents.

Note 2. Recent Accounting Pronouncements

Receivables: In April 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-02 “Receivables (Topic 310) – A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring.” ASU 2011-02 clarifies whether loan modifications constitute troubled debt restructuring. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. ASU 2011-02 is effective for the first interim and annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. We are assessing the impact of ASU 2011-02 on our financial condition, results of operations, and disclosures.

Business Combinations: In December 2010, the FASB issued ASU No. 2010-29 "Business Combinations (Topic 805) - Disclosure of Supplementary Pro Forma Information for Business Combinations." If a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. ASU 2010-29 also expands the supplementary pro forma disclosures. ASU 2010-29 was effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. ASU 2010-29 will only affect us if there are future business combinations.

Intangibles - Goodwill and Other: In December 2010, the FASB issued ASU No. 2010-28 "Intangibles - Goodwill and Other (Topic 350) - When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts." ASU 2010-28 affects all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative. ASU 2010-28 was effective for fiscal years and interim periods within those years, beginning after December 15, 2010. ASU 2010-28 did not have an impact on our financial condition, results of operations, or disclosures.

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Note 3. Investment Securities

Investment securities available-for-sale were as follows:

(Dollars in thousands)	Amortized		Gross		Gross
	Cost		Unrealized Gains		Unrealized Losses			Fair Value
March 31, 2011
U.S. Treasury and Federal agencies securities	$	434,510	$	4,461	$	(1,328	)	$	437,643
U.S. States and political subdivisions securities		120,814		4,153		(1,103	)		123,864
Mortgage-backed securities – Federal agencies		327,458		6,741		(441	)		333,758
Corporate debt securities		35,677		167		(249	)		35,595
Foreign government and other securities		6,717		23		(51	)		6,689
Total debt securities		925,176		15,545		(3,172	)		937,549
Marketable equity securities		2,346		2,329		(3	)		4,672
Total investment securities available-for-sale	$	927,522	$	17,874	$	(3,175	)	$	942,221

December 31, 2010
U.S. Treasury and Federal agencies securities	$	442,612	$	5,546	$	(849	)	$	447,309
U.S. States and political subdivisions securities		147,679		4,381		(1,753	)		150,307
Mortgage-backed securities – Federal agencies		309,046		7,854		(232	)		316,668
Corporate debt securities		45,778		182		(345	)		45,615
Foreign government and other securities		5,732		18		(34	)		5,716
Total debt securities		950,847		17,981		(3,213	)		965,615
Marketable equity securities		1,254		2,152		(3	)		3,403
Total investment securities available-for-sale	$	952,101	$	20,133	$	(3,216	)	$	969,018

At March 31, 2011, the residential mortgage-backed securities we held consisted primarily of GNMA, FNMA and FHLMC pass-through certificates which are guaranteed by those respective agencies of the United States government (or Government Sponsored Enterprise, GSEs).

The contractual maturities of debt securities available-for-sale at March 31, 2011 are shown below. Expected maturities will differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

(Dollars in thousands)
	Amortized Cost		Fair Value
Due in one year or less	$	40,341	$	40,737
Due after one year through five years		437,823		442,361
Due after five years through ten years		108,324		110,481
Due after ten years		11,230		10,212
Mortgage-backed securities		327,458		333,758
Total debt securities available-for-sale	$	925,176	$	937,549

The following table shows the gross realized gains and losses on sale of securities from the securities available-for-sale portfolio, including marketable equity securities. Realized gains and losses on the sales of all securities are computed using the specific identification cost basis. The gross gains and losses in the first three months of 2011 primarily reflect the sale of municipal, FHLB and FFCB debt securities. The sale of municipal securities was to reduce credit risk exposure in certain states. The action to sell agency securities was to improve future yield. There was no impact to other than temporary impairment (OTTI) as a result of the first quarter 2011 sales. The gross gains and losses in the first three months of 2010 reflect the disposition of FNMA and FHLMC debt securities. There were no OTTI write-downs in 2011.

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(Dollars in thousands)	Three Months Ended
	March 31,
	2011			2010
Gross realized gains	$	445		$	292
Gross realized losses		(238	)		(12	)
Net realized gains (losses)	$	207		$	280

There were net gains of $8 thousand for the three months ended March 31, 2011 and net gains of $5 thousand recorded for the three months ended March 31, 2010 on $0.15 million in trading securities outstanding at March 31, 2011 and $0.14 million at December 31, 2010.

The following tables summarize our gross unrealized losses and fair value by investment category and age:

	Less than 12 Months					12 months or Longer					Total
(Dollars in thousands)	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
March 31, 2011
U.S. Treasury and Federal agencies securities	$	156,626	$	(1,328	)	$	-	$	-		$	156,626	$	(1,328	)
U.S. States and political subdivisions securities		7,447		(132	)		9,591		(971	)		17,038		(1,103	)
Mortgage-backed securities - Federal agencies		36,872		(408	)		4,450		(33	)		41,322		(441	)
Corporate debt securities		26,398		(249	)		-		-			26,398		(249	)
Foreign government and other securities		2,962		(51	)		-		-			2,962		(51	)
Total debt securities		230,305		(2,168	)		14,041		(1,004	)		244,346		(3,172	)
Marketable equity securities		-		-			5		(3	)		5		(3	)
Total investment securities available-for-sale	$	230,305	$	(2,168	)	$	14,046	$	(1,007	)	$	244,351	$	(3,175	)

December 31, 2010
U.S. Treasury and Federal agencies securities	$	158,497	$	(849	)	$	-	$	-		$	158,497	$	(849	)
U.S. States and political subdivisions securities		9,226		(246	)		9,055		(1,507	)		18,281		(1,753	)
Mortgage-backed securities - Federal agencies		23,351		(213	)		4,887		(19	)		28,238		(232	)
Corporate debt securities		26,407		(345	)		-		-			26,407		(345	)
Foreign government and other securities		3,015		(34	)		-		-			3,015		(34	)
Total debt securities		220,496		(1,687	)		13,942		(1,526	)		234,438		(3,213	)
Marketable equity securities		-		-			5		(3	)		5		(3	)
Total investment securities available-for-sale	$	220,496	$	(1,687	)	$	13,947	$	(1,529	)	$	234,443	$	(3,216	)

The initial indication of OTTI for both debt and equity securities is a decline in fair value below amortized cost. Quarterly, the impaired securities are analyzed on a qualitative and quantitative basis in determining OTTI. Declines in the fair value of available-for-sale debt 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. In estimating OTTI impairment losses, we consider among other things, (i) the length of time and the extent to which fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) whether it is more likely than not that we will not have to sell any such securities before a recovery of cost.

At March 31, 2011, we do not have the intent to sell any of the available-for-sale securities in the table above and believe that it is more likely than not that we will not have to sell any such securities before an anticipated recovery of cost. The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased and market illiquidity on auction rate securities which are reflected in U.S. States and Political subdivisions securities. The fair value is expected to recover on all debt securities as they approach their maturity date or repricing date or if market yields for such investments decline.

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We do not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of March 31, 2011, we believe the impairments detailed in the table above are temporary and no impairment loss has been realized in our consolidated statements of income.

At March 31, 2011 and December 31, 2010, investment securities with carrying values of $256.64 million and $299.88 million, respectively, were pledged as collateral to secure government deposits, security repurchase agreements, and for other purposes.

Note 4. Loan and Lease Financings

We evaluate loans and leases for credit quality on a monthly basis. All loans and leases, except residential real estate loans and consumer loans, are assigned credit quality ratings on a scale from 1 to 12 with grade 1 representing superior credit quality. The criteria used to assign quality ratings to extensions of credit that exhibit potential problems or well-defined weaknesses are primarily based upon the degree of risk and the likelihood of orderly repayment, and their effect on the Bank's safety and soundness. Loans graded 7 or weaker are considered "special attention" credits and, as such, relationships in excess of $100,000 are reviewed quarterly as part of management's evaluation of the adequacy of the reserve for loan and lease losses. Grade 7 credits are defined as "watch" and contain greater than average credit risk and thus warrant timely follow-up to limit the Bank's exposure to increased risk; grade 8 credits are "special mention" and, following regulatory guidelines, are defined as having potential weaknesses that deserve management's close attention. Credits that exhibit well-defined weaknesses and a distinct possibility of loss are considered ''classified'' and are graded 9 through 12 corresponding to the regulatory definitions of "substandard" (grades 9 and 10) and the more severe ''doubtful'' (grade 11) and ''loss'' (grade 12).

The table below presents the credit quality category of the recorded investment in loans and leases, segregated by class.


(Dollars in thousands)	Grade:
		1-6		7-12	Total
March 31, 2011
Commercial and agricultural loans	$	504,137	$	43,244	$	547,381
Auto, light truck,
and environmental equipment		412,155		4,802		416,957
Medium and heavy duty truck		135,750		20,272		156,022
Aircraft financing		546,740		54,740		601,480
Construction equipment financing		240,214		31,276		271,490
Commercial real estate		518,801		59,847		578,648
Total	$	2,357,797	$	214,181	$	2,571,978

December 31, 2010
Commercial and agricultural loans	$	483,603	$	46,625	$	530,228
Auto, light truck,
and environmental equipment		389,774		6,726		396,500
Medium and heavy duty truck		143,431		19,393		162,824
Aircraft financing		555,106		59,251		614,357
Construction equipment financing		246,644		38,990		285,634
Commercial real estate		532,581		62,148		594,729
Total	$	2,351,139	$	233,133	$	2,584,272

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The table below presents the recorded investment in residential real estate and consumer loans by performing or non-performing status. Non-performing loans are those loans which are on nonaccrual status or are 90 days or more past due.

(Dollars in thousands)
	Performing		Nonperforming		Total
March 31, 2011
Residential real estate	$	380,796	$	5,494	$	386,290
Consumer		92,882		568		93,450
Total	$	473,678	$	6,062	$	479,740

December 31, 2010
Residential real estate	$	385,729	$	5,222	$	390,951
Consumer		94,973		427		95,400
Total	$	480,702	$	5,649	$	486,351

The table below presents the recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status.

															Recorded
					90 Days								Total		Investment
(Dollars in thousands)	30-59 Days		60-89 Days		or More		Total Past						Financing		> 90 Days
	Past Due		Past Due		Past Due		Due		Nonaccrual		Current		Receivables		and Accruing
March 31, 2011
Commercial and agricultural loans	$	498	$	202	$	-	$	700	$	7,987	$	538,694	$	547,381	$	-
Auto, light truck and
environmental equipment		726		216		-		942		2,825		413,190		416,957		-
Medium and heavy duty truck		51		-		-		51		4,662		151,309		156,022		-
Aircraft financing		5,297		713		-		6,010		15,945		579,525		601,480		-
Construction equipment financing		3,463		29		-		3,492		8,077		259,921		271,490		-
Commercial real estate		328		943		-		1,271		28,995		548,382		578,648		-
Residential real estate		2,477		595		434		3,506		5,060		377,724		386,290		434
Consumer		859		341		81		1,281		487		91,682		93,450		81
Total	$	13,699	$	3,039	$	515	$	17,253	$	74,038	$	2,960,427	$	3,051,718	$	515

December 31, 2010
Commercial and agricultural loans	$	760	$	22	$	-	$	782	$	8,083	$	521,363	$	530,228	$	-
Auto, light truck and
environmental equipment		528		715		-		1,243		3,332		391,925		396,500		-
Medium and heavy duty truck		33		-		-		33		5,068		157,723		162,824		-
Aircraft financing		16,097		188		-		16,285		17,898		580,174		614,357		-
Construction equipment financing		1,254		601		-		1,855		8,575		275,204		285,634		-
Commercial real estate		759		94		-		853		26,622		567,254		594,729		-
Residential real estate		3,781		580		264		4,625		4,958		381,368		390,951		264
Consumer		1,152		531		98		1,781		329		93,290		95,400		98
Total	$	24,364	$	2,731	$	362	$	27,457	$	74,865	$	2,968,301	$	3,070,623	$	362

As of March 31, 2011 and December 31, 2010, we had $7.36 million and $7.31 million, respectively of performing loans classified as troubled debt restructuring.

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Table of Contents

Note 5. Reserve for Loan and Lease Losses

The reserve for loan and lease loss methodology has been consistently applied for several years, with enhancements instituted periodically. Reserve ratios are reviewed quarterly and revised periodically to reflect recent loss history and to incorporate current risks and trends which may not be recognized in historical data. As we update our historical charge-off analysis, we review the look-back periods for each business loan portfolio. Furthermore, we perform a thorough analysis of charge-offs, non-performing asset levels, special attention outstandings and delinquency in order to review portfolio trends and other factors, including specific industry risks and economic conditions, which may have an impact on the reserves and reserve ratios applied to various portfolios. We adjust the calculated historical based ratio as a result of our analysis of environmental factors, principally economic risk and concentration risk. Key economic factors affecting our portfolios are growth in gross domestic product, unemployment rates, housing market trends, commodity prices and inflation. Concentration risk is impacted primarily by geographic concentration in Northern Indiana and Southwestern Lower Michigan in our business banking and commercial real estate portfolios and by collateral concentration in our specialty finance portfolios.

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. For purposes of determining the reserve, we have segmented our loans and leases into classes based on the associated risks within these segments. We have determined that eight classes exist within our loan and lease portfolio. The methodology for assessing the appropriateness of the reserve consists of several key elements, which include: specific reserves for impaired loans, 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.

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Table of Contents

Changes in the reserve for loan and lease losses, segregated by class, for the three months ended March 31, 2011 and 2010 are shown below.

	Commercial			Auto, light			Medium
	and			truck and			and						Construction
(Dollars in thousands)	agricultural			environmental			heavy duty			Aircraft			equipment			Commercial		Residential		Consumer
	loans			equipment			truck			financing			financing			real estate		real estate		loans			Total
March 31, 2011
Reserve for loan and lease losses
Balance, beginning of period	$	20,544		$	7,542		$	5,768		$	29,811		$	8,439		$	11,177	$	2,518	$	1,075		$	86,874
Charge-offs		422			68			-			1,098			585			1,231		34		595			4,033
Recoveries		124			45			1			674			35			105		3		134			1,121
Net charge-offs (recoveries)		298			23			(1	)		424			550			1,126		31		461			2,912
Provision (recovery of provision)		(3,941	)		405			(704	)		1,516			(1,091	)		5,484		55		474			2,198
Balance, end of period	$	16,305		$	7,924		$	5,065		$	30,903		$	6,798		$	15,535	$	2,542	$	1,088		$	86,160
Ending balance: individually
evaluated for impairment	$	4,025		$	308		$	171		$	2,174		$	47		$	1,348	$	-	$	-		$	8,073
Ending balance: collectively
evaluated for impairment	$	12,280		$	7,616		$	4,894		$	28,729		$	6,751		$	14,187	$	2,542	$	1,088		$	78,087

Financing receivables:
Ending balance	$	547,381		$	416,957		$	156,022		$	601,480		$	271,490		$	578,648	$	386,290	$	93,450		$	3,051,718
Ending balance: individually
evaluated for impairment	$	12,769		$	1,993		$	4,692		$	16,462		$	8,065		$	31,489	$	-	$	-		$	75,470
Ending balance: collectively
evaluated for impairment	$	534,612		$	414,964		$	151,330		$	585,018		$	263,425		$	547,159	$	386,290	$	93,450		$	2,976,248

March 31, 2010
Reserve for loan and lease losses
Balance, beginning of period	$	24,017		$	9,630		$	6,186		$	24,807		$	8,875		$	10,453	$	880	$	3,388		$	88,236
Charge-offs		348			472			601			2,567			509			340		165		377			5,379
Recoveries		245			34			39			72			42			-		1		149			582
Net charge-offs (recoveries)		103			438			562			2,495			467			340		164		228			4,797
Provision (recovery of provision)		(2,798	)		(28	)		1,745			(615	)		982			4,649		1,834		(1,381	)		4,388
Balance, end of period	$	21,116		$	9,164		$	7,369		$	21,697		$	9,390		$	14,762	$	2,550	$	1,779		$	87,827
Ending balance: individually
evaluated for impairment	$	1,357		$	543		$	2,134		$	75		$	1,731		$	4,232	$	-	$	-		$	10,072
Ending balance: collectively
evaluated for impairment	$	19,759		$	8,621		$	5,235		$	21,622		$	7,659		$	10,530	$	2,550	$	1,779		$	77,755

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1ST SOURCE CORP - FORM 10-Q - April 21, 2011