1st source CORPORATION INVESTMENT ADVISORS, INC. About The Investment advisOr

1st Source Corporation ECONOMIC & INVESTMENT Investment Advisors, Inc., SUMMARY a wholly owned subsidiary As of June 30, 2010 Economic Activity of 1st Source Bank. 1st Source • Economic growth continued during the quarter with GDP expected to post a positive number of approximately 3%. However, judging from the action in the and has been managing money bond market, you’d be excused if you thought we had re-entered a recession. To be sure, unemployment remains uncomfortably high at 9.7%, but various leading indicators point to continued growth for the rest of the year. for its clients since 1936 Interest Rates and currently manages • Bond yields plummeted through the quarter as a flight-to-quality trade gripped the market sparked by significant unrest and turmoil in Europe. European markets sold off hard as did the Euro which created a torrent of buying in U.S. Treasuries and the approximately $2.5 billion U.S. dollar. As of quarter-end the on the 10-year Treasury dropped from 3.83% to less than 3.00%. in assets. • Despite the consternation and in the markets, it would be unwise to discount the strength of the global recovery outside of Europe. Economies in Asia and here in the Americas have continued to show decent growth since the Great Recession of 2008 and 2009. Furthermore, companies have record amounts of cash PORTFOLIO MANAGERS and are showing tremendous earnings leverage as profits and profit margins of high quality companies grow nicely. Paul W. Gifford, Jr., CFA • The Federal Reserve, sensing the considerable amount of unease in the markets tried to reassure by again emphasizing their willingness to keep rates low for an Robert W. Nelson, CFA “extended period of time.” An hike this year now appears unlikely Bruno P. Riboni • The stock market had a disappointing second quarter. After reaching a nineteen month high in April, the S&P 500 declined over 15%. For the quarter the S&P 500 was Jason W. Cooper down about 11% and down about 7% year to date. The EAFE index representing the international markets declined about 12% year to date. There were several reasons for the market weakness. As happened in January, again became concerned Scott R. Tapley, CFA about the rising budget deficits in Europe and the negative impact they may have on the already weak global economic recovery. In addition there were signs that China’s economy might finally be slowing. Adding to these concerns, the economic Randall Thornton data reported in the United States was erratic showing the pace of recovery might be slowing. Congress did not help matters. It has not acted to retain the 15% capital gains tax that expires at the end of the year. Additionally the prolonged debate over new banking regulations which will impact bank’s profitability and capital requirements also contributed to the uncertainty in the market place. Until the banks can adjust to the new regulations, they will be hesitant to provide credit which only slows money supply growth and dampens the expansion of the economy. • Although the “sell in May and go away” philosophy seemed to be sound advice, there are numerous positive factors that should move the markets forward over time. Valuations at only 13 times earnings remain below historical averages. Corporate profits continue to exceed estimates. With lean operating structures, profit margins are near all time highs. Manufacturing activity is improving and more companies are slowly beginning to call back workers. And the export markets especially in China and India remain robust. So despite the overall market weakness, the industrial and consumer discretionary sectors of the market actually had positive returns year to date. • We are still constructive on the stock market but realize with a slow economic recovery and periodic negative economic reports the market is going to react erratically. While the temptation is to try to trade these shorter term swings in the market, the intelligent needs to remain focused on the longer term and stay committed to the quality, paying companies that will benefit as the economy recovers. We continue to recommend broad diversification which includes international, emerging market and small capitalized to supplement the core holdings of large capitalized stocks.

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