1st 2nd equity home mortgage mortgage

SOUTH BEND, Ind. -- 1st Source Corporation (Nasdaq:SRCE), parent company of 1st Source Bank, today reported net income of $8.72 million for the second quarter of 2004, up 85.88 percent over the $4.69 million reported in the second quarter of 2003. During the first six months of 2004, net income for 1st Source Corporation was $13.80 million, a 50.79 percent increase over the $9.15 million reported for the same period in 2003.

Diluted net income per common share for the second quarter of 2004 amounted to $0.42, up 90.91 percent compared with $0.22 reported in the second quarter of 2003. Diluted net income per share for the first two quarters of 2004 was $0.66, an increase of 53.49 percent over the $0.43 reported in the same period a year ago.

Earnings for the second quarter of 2004 represent a return on average common shareholders' equity of 11.03 percent, as compared to 5.95 percent for the second quarter of 2003. Return on average total assets for the second quarter of 2004 was 1.08 percent versus 0.57 percent reported in the second quarter of 2003.

Christopher J. Murphy III, Chairman and Chief Executive Officer, reported that at the July meeting, the Board of Directors approved an increase in the cash dividend for the second quarter to $0.11 per share from $0.10 per share last quarter. This is a 10.00 percent increase from the previous quarter's dividend and a 22.22 percent increase over the second quarter dividend of 2003. The increased cash dividend is reflective of the improving performance of the company and will be payable on August 16, 2004, to shareholders of record August 9, 2004.

Mr. Murphy commented, "1st Source's financial performance continues to improve. We have worked diligently to strengthen our credit quality which has shown steady progress over the past year. We are still affected by decreased interest margins and volatility in the valuation of our mortgage servicing rights portfolio, but this quarter that volatility had a positive effect."

Murphy concluded, "We have also continued to look for opportunities to grow our customer base and opened a new banking center on South Bend's south side in April. We continue to review and upgrade our systems and processes to help us provide outstanding customer service and better manage our businesses."

1st Source's reserve for loan losses as of June 30, 2004 was 3.14 percent of total loans compared to 3.22 percent at the end of the first quarter of 2004 and 3.01 percent for the second quarter a year ago. 1st Source's provision for loan losses was $0.48 million this quarter compared to $4.90 million for the second quarter of 2003. Net charge-offs were $0.48 million for the second quarter 2004 compared to $6.48 million for the second quarter of 2003. The ratio of nonperforming assets to net loans and leases was 1.22 percent on June 30, 2004, compared to 2.65 percent on June 30, 2003.

Tax-equivalent net interest income was $26.02 million for the second quarter of 2004, down 5.41 percent from 2003's second quarter. The net interest margin was 3.45 percent for the second quarter of 2004 versus 3.66 percent for the same period in 2003. For the first six months of 2004, tax-equivalent interest income was $52.49 million compared to $54.82 million for the first six months of 2003, a decrease of 4.24 percent. The net interest margin was 3.49 percent for the six months ending June 30, 2004, versus 3.69 percent for the same period in 2003.

Noninterest income for the second quarter of 2004 was $20.22 million, down 7.74 percent from the second quarter of 2003. In the second quarter, equipment rental income decreased due to the shrinkage of the operating lease portfolio, while other income decreased with the elimination of securitization income, as 1st Source no longer securitizes any of its loan portfolio. Trading security income also declined in the second quarter. Mortgage banking income increased in the second quarter of 2004 compared to a year ago as mortgage servicing rights impairment recoveries of $3.78 million offset both a reduction in mortgage origination volume and reduced gains on the sale of mortgage loans into the secondary market.

For the first six months of 2004, noninterest income was $34.24 million, down 18.39 percent from 2003. Significant items affecting comparability between six month periods included decreased income from mortgage banking, equipment rental, securitization and securities trading.

Noninterest expense was $31.95 million for the second quarter of 2004, compared with $37.28 million for the second quarter of 2003. For the first six months, noninterest expense was $64.29 million, compared with $72.08 million for the same period in 2003. In general, noninterest expense improvements in 2004 reflect decreases in salaries and employee benefits expense, depreciation on leased equipment, and loan collection and repossession expenses partially offset by an increase in professional fees which are included in other expense.

As of June 30, 2004, the 1st Source common equity-to-assets ratio was 9.50 percent compared to 9.63 percent a year ago. Common shareholders' equity was $314.94 million, down 0.70 percent from the $317.17 million a year ago, due to the repurchase of 103,733 shares of common stock and a decrease of $10.51 million in accumulated other comprehensive income. The decrease in accumulated other comprehensive income was a result of changes in unrealized gain or loss on securities in the available-for-sale portfolio. Total assets at the end of the second quarter of 2004 were $3.32 billion, up 0.63 percent from the same time last year. Total deposits were down 9.79 percent and total loans were up 6.27 percent over the comparable figures at the end of the second quarter of 2003.

1st Source is the largest locally controlled financial institution headquartered in the northern Indiana-southwestern Michigan area. While delivering a comprehensive range of consumer and commercial banking services, 1st Source Bank has distinguished itself with highly personalized services. 1st Source Bank also competes for business nationally by offering specialized financing services for private and cargo aircraft, automobiles for leasing and rental agencies, medium and heavy duty trucks, construction and environmental equipment. The Corporation includes 61 banking centers in 15 counties, 6 Trustcorp Mortgage offices in Indiana, Ohio and Michigan, and 22 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 customers 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 stock 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 Citigroup Global Markets, Inc.; FTN Midwest Research Securities; Goldman, Sachs & Company; Keefe, Bruyette & Woods, Inc.; NatCity Investments, Inc.; Prudential Equity Group, Inc.; RBC Capital Markets; Sandler O'Neill & Partners; Schwab Capital Markets; Stifel, Nicolaus & Company, Incorporated.; and William Blair & Company.

A portion of 1st Source's fixed and floating rate cumulative trust preferred securities are traded on the Nasdaq stock market under the symbols "SRCEP" and "SRCEO," respectively. The rate on the fixed rate securities is 9.0 percent and the rate for the third quarter 2004 on the floating rate securities is 3.63 percent. Marketmakers in those securities are Howe, Barnes Investments, Inc.; Schwab Capital Markets; and Stifel, Nicolaus & Company, Incorporated.