0#)-$1&(23 (4$5'-$6(2&7#$8*)9$%&'#)-' · — For the ﬁfth time since its inception in 1982, the Siena College Research Institute’s (SRI) Survey of U.S. Presidents ﬁnds that

PERSONAL ASSET MANAGEMENT GROUP

GENERATION AFTER GENERATIONS I N C E 1 8 6 3 ��

The Personal Asset Management Groupof 1st Source Bank Presents

Outlook & Issues

2013

U.S. Presidential Rankings and Facts 1 Facts About the Top Ten Presidents 2

Presidential Cycles and the Stock Market 3

Five Years and Counting 4 Congress Facing the Cliff 6 Tax Implications for Investments 6

Outlook 7 Portfolio Positioning 8

Your Investment Management Team 9

1

LOUDONVILLE, N.Y. — For the fifth time since its inception in 1982, the Siena College Research Institute’s (SRI) Survey of U.S. Presidents finds that experts rank Franklin D. Roosevelt as the top all-time chief executive.

The 238 participating presidential scholars round out the top five, in order, with Theodore Roosevelt, Abraham Lincoln, George Washington and Thomas Jefferson.

A complete list of the rankings follows, with first being the best and 43rd worst:

1. Franklin D. Roosevelt (D)

2. Theodore Roosevelt (R)

3. Abraham Lincoln (R)

4. George Washington

(No party affiliation)

5. Thomas Jefferson (D-R)

6. James Madison (D-R)

7. James Monroe (D-R)

8. Woodrow Wilson (D)

9. Harry S. Truman (D)

10. Dwight D. Eisenhower (R)

11. John F. Kennedy (D)

12. James K. Polk (D)

13. Bill Clinton (D)

14. Andrew Jackson (D)

15. Barack Obama (D)

16. Lyndon B. Johnson (D)

17. John Adams (Federalist)

18. Ronald Reagan (R)

19. John Quincy Adams (D-R)

20. Grover Cleveland (D)

21. William McKinley (R)

22. George H. W. Bush (R)

23. Martin Van Buren (D)

24. William Howard Taft (R)

25. Chester A. Arthur (R)

26. Ulysses S. Grant (R)

27. James A. Garfield (R)

28. Gerald R. Ford (R)

29. Calvin Coolidge (R)

30. Richard M. Nixon (R)

31. Rutherford B. Hayes (R)

32. Jimmy Carter (D)

33. Zachary Taylor (Whig)

34. Benjamin Harrison (R)

35. William Henry Harrison (Whig)

36. Herbert Hoover (R)

37. John Tyler (Whig)

38. Millard Fillmore (Whig)

39. George W. Bush (R)

40. Franklin Pierce (D)

41. Warren G. Harding (R)

42. James Buchanan (D)

43. Andrew Johnson (D)

U.S. Presidential Rankings and Facts U.S. Presidential Rankings and Facts U.S. Presidential Rankings and Facts

1

Franklin D. Roosevelt: The Roosevelts hosted the first visit of a reigning British monarch to the U.S. George VI and his wife Elizabeth spent a day and a night at the White House, and were introduced to that great American food, hot dogs, for the first time.

2 Theodore Roosevelt: T.R. was responsible

for Teddy Bears! His refusal to shoot a trapped bear on a presidential hunting expedition received major newspaper coverage, inspiring some savvy marketers to create the stuffed bears to capitalize on Roosevelt’s popularity.

3 Abraham Lincoln:

Lincoln was once challenged

to a duel over a letter his wife

wrote. The duel never took

place due to Abe’s choice of

weapon, the broadsword. Due

to Lincoln’s long arms and his

much smaller opponent, the opponent decided it

best to settle the issue without a fight.

4 George Washington: George Washington is

the only president to be unanimously elected when

he received all 69 electoral votes (1789). Believe it

or not, Washington had to borrow money to attend

his own inauguration.

5 Thomas Jefferson: Jefferson was a gifted

inventor, who devised dozens of handy gadgets for

his personal convenience. Among his noteworthy

inventions are a revolving chair, a hemp machine,

a pedometer to measure the distance of his walks, a

walking stick which unfolded into a chair, a plow that

won a gold medal at a French exhibition, a revolving

music stand, and a letter-copying press. Jefferson

never patented any of his inventions, because he

wanted the people to have free use of them.

6 James Madison: Famous quote by President

James Madison: “I always talk better lying down.”

(words said on his deathbed)

7 James Monroe: Monroe was the last U.S.

president who still dressed in the 18th century

fashion of powdered wigs and knee breeches. Also,

Monroe was the first president to live in the

White House when it was actually white (prior to

Monroe’s presidency, the White House was gray).

8 Woodrow Wilson: During his boyhood, he

helped establish the “Lightfoot Baseball Club”

with his friends. Wilson played second base and

was an avid sports fan throughout his adult life.

He was the first president to attend the Major

League Baseball Fall Classic and saw the debut of a

young 20-year-old pitcher by the name of George

Herman “Babe” Ruth.

9 Harry S. Truman:

Harry S. Truman in St. Louis

the morning after defeating

Thomas Dewey in 1948.

10 Dwight D. Eisenhower:

Maryland’s famous Camp David was first

established by Eisenhower as a presidential retreat.

It was named in honor

of Ike’s grandson, David

Eisenhower, the boy who

later married President

Nixon’s daughter Julie.

2

Facts About the Top Ten Presidents

The table below shows the stock market’s median performance during each of the four-year periods between the U.S. Presidential elections held since the Civil War (returns reflect index price changes and do not include dividends):

Presidential Election Cycle DJIA Return

Year 1 3.5%

Year 2 2.7%

Year 3 12.3%

Year 4 6.1%

This pattern—persistently pronounced profits in year 3, followed by strong gains during the “electioneering season” of year 4—has spawned conspiracy theories that government officials are somehow able to manipulate the economy and/or the markets in an attempt to help incumbent presidents get re-elected. We’re not trying to answer the question … just presenting statistics. Not only does the market seem to be affected by the election cycle on an annual return basis, but it also follows an equally curious and persistent trading pattern during the year of the election. Ned Davis Research (NDR) created the following composite graph of the stock market during year 4—the election year—with data going back to 1900.

2012Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2013Jan

105

104

103

102

101

100

99

98

105

104

103

102

101

100

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Plotted Lines Are Average Cycle PatternsBased on Daily Data From 1900 Through 2008

© Copyright 2012 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/

BR36460x01

Dow Industrials – Election-Year Cycle

(Composite of All Elections)

All indices equal-weighted and geometric

All Elections

This year’s (2012) stock market chart on the following page fits quite neatly against NDR’s 100+year composite, including reaching a high point at the end of March, setting its low point in late May/early June, and then rallying during the summer months as the election date neared. The similarity of this year’s trading action to the composite is quite remarkable considering all the noise this year from the slowdown in China to the continuing debt crisis in Europe. Despite the unique happenings during past election years, even those long ago, NDR’s election-year market composite has looked very similar to the charts carved out by the actual stock market trading action during the most recent election years.

3

PRESIDENTIAL CyCLES AND THE STOCK MARKET By Paul W. Gifford, CFA and Scott R. Tapley, CFA

Almost everything in life, including the stock market, seems to move in cycles. Market

cycles most often occur at irregular intervals and it can be difficult to predict a cycle’s duration. For

example, it’s hard to tell how long large-cap stocks will do better than small-cap stocks or growth

stocks will do better than value stocks. Some cycles occur with regularity, such as earnings releases

and annual reports, but one of the more intriguing (but rarely used by professionals despite being

shown to be remarkably reliable) cycles is the United States’ four-year presidential election cycle.

4

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan

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107

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101

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111

110

109

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106

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102

101

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Dow Industrials -- Election-Year Cycle:

All Elections Composite & Current Case Updated to 9/18/2012


BR36460x04



2012 2013

All Elections

This Year

The chart below shows the impact the election results seem to have on the market:

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan

111 -

112 -

110 -

109 -

108 -

107 -

106 -

105 -

104 -

103 -

102 -

101 -

100 -

99 -

98 -

97 -

96 -

95 -

94 -

Dow Industrials — Election-Year Cycle:

Incumbent Party Wins vs. Loses – Updated to 9/18/2012


BR36460x03



2012 2013

- 111

- 112

- 110

- 109

- 108

- 107

- 106

- 105

- 104

- 103

- 102

- 101

- 100

- 99

- 98

- 97

- 96

- 95

- 94

All Elections

Incumbent Loses

This Year

Incumbent Wins

As you can see, in the years that an incumbent was re-elected, the market fared much better than it did in the years in which the incumbent President (or his political party) lost the election. The incumbent’s prospects for re-election are more likely the cart—not the horse—i.e., the economic conditions are likely responsible for an

incumbent’s popularity, the market’s rise/fall doesn’t cause the incumbent to win or lose. As James Carville so bluntly told Bill Clinton, “It’s the economy, stupid!”

Regardless of whether the incumbent wins or loses, NDR’s research shows that the stock market’s return in the second half of the year is usually positive. In fact, the stock market has produced a gain in the final two quarters in 17 of the past 21 election cycles, with the average gain being about 6%. The four times the return was negative involved unique extenuating circumstances:

1948 -9.2% (surprise Truman victory and recession began in November 1948)

1956 -0.6% (steel workers strike, Egypt seized Suez Canal)

2000 -9.2% (tech bubble bursting and Gore challenge of election results)

2008 -29.4% (global financial crisis)

NDR’s research also shows that the stock market usually rises between Election Day and the end of the year, too. While we have avoided trying to explain the other election-related market patterns, we will take a stab at this one. After an election, by definition, a majority of the public is happy with the results, and that may explain the positive post-election market mood.

Five years and Counting

As we are discussing the election cycle, it is appropriate to review the market cycle of the last five years. In October of 2007, when the S&P 500 closed at an all-time high of 1565.15, the signs of the impending financial crisis were just emerging. Mortgage delinquencies were rising quickly and two Bear Stearns hedge funds tied to mortgage-backed securities had collapsed. The S&P 500 then proceeded to fall 57% by March of 2009. Since the intraday low of March 9, 2009 (666.79), the S&P is up more than 100% and has rallied to within 10% of its high-water mark in terms of price and has produced a positive return even for investors who bought at the peak (including dividends). On a global basis, the U.S. stock market has been one of the best performers in a low return environment for equities (see Five Year Index Returns chart).

5

In the fixed income markets, we have seen winners and losers as interest rates in several countries hit record lows. Winners, clearly, are the debtors with good credit. At times this summer a handful of countries experienced negative yields for their short-term bonds as investors piled into safety and some hedge funds bought securities expected to appreciate in (currency) value if the Euro ceased to exist. The U.S. federal debt has benefited by hundreds of billions per annum in lower interest payments even though we have $7 trillion more debt. Households with mortgage debt to refinance have enjoyed rates last seen in the 1960s.

The losers in this low interest rate environment are the savers. Those who accumulated assets and expected to live on the interest earnings are now struggling to do so.

$1.20

$1.10

$1.00

$0.90

$0.80

$0.70

$0.60

$0.50

— NKY — SPX — DAX — HIS — IBEX

Five Year Index Returns

$0.40

09/07 03/08 09/08 03/09 09/09 03/10 09/10 03/11 09/11 03/12

Source: Bloomberg

Spain Stock Index

Japan Stock Index

China Hang Stock Index

German Stock Index

Standard & Poor’s 500

Even though the stock markets have nearly recovered their losses since 2007, many sectors continue to struggle in the recovery. Housing starts and sales are still down 40% and 30%, respectively, and remain below prior recession trough levels. Auto sales that had approached 18 million cars in 2007 are now in the range of 14 million cars on an annual basis. A larger aftershock is still being felt in the labor markets as unemployment has been above 8% for 44 months. The long-term unemployed, those out of work more than two years, has never been higher. These statistics could well have a much longer impact on our society via lost economic activity.

Economic growth over the past five years has been around 2%, consistent with the “new normal” paradigm we discussed at last year’s seminar. Current conditions seem to be set for a continuation of slow, weak growth accompanied by increasing government debt.

The three main drivers of our economy historically have been U.S. consumers, corporations and government. Consumers have been reducing their debt burdens and corporations are reluctant to take on more debt or employees. This “deleveraging” by the private sector is being offset by the government sector through trillion dollar deficits.

Today, those three drivers still exist but have expanded to include international consumers, corporations and governments. As we have written over the last several years, what occurs in international economies can significantly impact us inside our own borders.

Consumers have been working over the past several years to improve their balance sheets by paying down debt and/or filing bankruptcy. Either way, the average consumer today is paying the lowest percentage of their income for debt service in 18 years (see Consumer Debt Payments chart). The deleveraging done by the consumer has greatly improved their financial positions. Without persistent unemployment of 8% consumers would be in an even stronger position. The type of debt garnering the most attention in the consumer sector is moving from mortgages to the ballooning student loans that have saddled college students and graduates with mortgage-sized payments whether or not they have a job. The total outstanding debt for student loans topped $1 trillion and now is larger than the amount outstanding in credit card debt. The situation is exacerbated by the fact that nearly 50% of recent college graduates are not employed in the field they studied and are typically underemployed in another field.

82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

14.50% -

14.00% -

13.50% -

13.00% -

12.50% -

12.00% -

11.50% -

11.00% -

10.50% -

10.00% -

Consumer Debt Payments

Percentage of Debt Payments to Income9/30/1982 — 9/30/2012

Source: Bloomberg

10.98

6

Corporations are experiencing the international impact right now. While large U.S. companies with strong international sales have benefited in the past from demand overseas, they are also quickly finding out how that can change. The current Chinese economic slowdown is showing up in our dampened export numbers which had been rising dramatically. Caterpillar has seen a precipitous decline in excavator orders in the region and sees that trend continuing. Caterpillar plants in Iowa will feel the effect. The European crisis is even more pronounced, causing many U.S. corporations to forecast losses in that region in terms of sales and earnings. Both regions of the globe are reducing profit and employment opportunities here at home.

The U.S. federal government in many ways seems to be in its own world more than ever. After completing a fourth consecutive year of trillion dollar deficits and structuring multiple tax and spending laws to expire on December 31, 2012, we continue to “advise” other nations on how to manage their own budgets and economies. At the same time, the U.S. has not approved its own budget in three years. Congress has been less active in passing legislation with 147 bills approved, the lowest total in decades. In some ways it may be comforting to have so little (damage) done by our elected officials, but when the stakes for our future seem so high, it is also somewhat discouraging that no solutions to our obvious problems are being enacted. Yet even with this dysfunction, the world’s investors afford the U.S. some of the lowest interest rates in the world and, so far, are willing to fund our trillion dollar deficits.

Congress Facing the Cliff

Two years ago at this time we faced many of the same challenges: tax laws expiring, slowing economic activity and impending elections. The market pundits have coined a term for the tax laws expiring this year, the “fiscal cliff.” Today, slow economic activity is about as normal as holding periodic elections. The impact of new taxes, budget cuts and expiring tax breaks would be roughly $600 billion or 4% of gross domestic product (see Fiscal Drag table). While we prognosticated in 2010 on the outcome of tax law changes, the legislators not only extended the

Bush tax breaks for two years as they were written but ended up adding another one to the list, the 2% payroll tax reduction. An extra $2 trillion dollars of new government debt since 2010 is how we paid for the tax breaks. Today, we still have the same tax laws expiring as two years ago plus the 2% payroll holiday, mandated budget cuts and lastly a 3.8% healthcare surtax that will begin in January of 2013 for certain wage earners and specific types of trust accounts. Each of these can impact the after-tax return on your investments.

Fiscal Drag Threatens Growth

Source: Congressional Budget Office

and tax hikes scheduled for year end

equal to 4% of gross

$ Billion

Total 606

Tax Implications for Investments

There are some steps that can be taken prior to year-end in anticipation of the tax law changes. For example, realizing discretionary capital gains and accelerating income makes sense if tax rates are headed higher next year. Changes to your investment portfolio should only be made if a better solution is available or a transaction is imminent, not just to save a few tax dollars.

One investment seems a clear winner in terms of after-tax returns as we go into 2013, and that is municipal bonds. Even with the spate of credit issues in certain parts of the country, these securities continue to maintain high credit quality and are historically a bargain relative to Treasuries. Municipal bonds would become more attractive as income tax brackets rise in 2013 (see Power of Tax Exempt Income). Also, municipal bond interest is excluded from the 3.8% healthcare surtax, so you could easily see a 0.15% to 0.25% benefit depending on the maturity and interest rate.

7

Source: Bloomberg

For illustrative purposes only. Yield as of 7/30/2012. Based on Barclays Capital U.S. Aggregate Bond Index and Barclays Capital Municipal Bond Index. Yield to worst is the lowest yield that a buyer can expect among the reasonable alternatives, such as yield to maturity, yield to call, and yield to refunding.

*Tax-equivalent yield is used by investors to compare yields on taxable and tax-exempt securities after accounting for federal taxes (excluding AMT). Taxable –equivalent yield represents the yield a taxable bond would have to earn in order to match –after taxes—the yield available on a tax-exempt municipal bond. Taxable-equivalent Yield = Tax Free Municipal Bond Yield/(1-Tax Rate).

Tax equivalent yield calculated based on federal income tax rate. State, local and alterative minimum taxes have not been considered in the analysis. Please note that depending on your tax bracket the potential tax equivalent returns may be higher or lower.

Power of Tax-Exempt Income

Tax-exempt yield may potentially provide a compelling income opportunity.

U.S. Treasuries U.S. Investment Municipal Investment Grade Bonds Grade Bonds

4.00%

3.50%

3.00%

2.50%

2.00%

1.50%

1.00%

0.00%

1.84% Index Yield

25% Tax Bracket

28% Tax Bracket33% Tax Bracket35% Tax Bracket

0.92%

3.59%

3.36%3.12%3.03%

2.82%

2.71%

2.03%

39.6% Tax Bracket43.4% Tax Bracket

Tax-

Equi

vale

ntY

ield

*

In this low-yield environment there are other options to raise income, but with some additional risk. The use of high-yield bonds in either the taxable and tax-free securities can enhance your income. We have added investments in these market sectors through the use of exchange traded funds and mutual funds. Another opportunity to increase income comes from owning dividend-paying stocks.

The use of dividend-paying stocks in a portfolio is nothing new and has seen a resurgence in the past few years as interest rates have fallen and stock prices have grown slowly. In the “new normal” of slow growth, dividend income can provide greater total return, with a potential to increase income and lower volatility. The challenge investors face is the taxation of dividends as we enter 2013. Dividends could become subject to the largest change in taxation, going from a tax advantaged 10-15% rate to being taxed as current income with a rate as high as 43.4% (including the new healthcare surtax).

We have increased the use of dividend-paying securities and funds over the past years to supplement current income in this low rate environment. So how does that impact you?

If all of the tax changes go through, most investors will experience a slight reduction in the after-tax yield of their dividend-paying stocks. The reduction, while not being something to be overjoyed about, is far from calamitous. In the middle income tax brackets (15%-28%) the after tax returns on dividends would drop the average portfolios after tax yield by 0.25% to 0.50% depending on the dividend yield. The impact, though, is much larger as you move into higher tax brackets. With that said, the stock market has had much higher tax rates before and performed well.

O U T L O O K “I�m all in” is a phrase you may associate with no-limit Texas hold ’em poker tournaments, but is apropos for recent actions by the U.S. Federal Reserve and the European Central Bank. In September, the Federal Reserve announced a third round of quantitative easing (buying U.S. Treasuries and mortgages). They will purchase $40 billion worth of mortgage-backed securities per month until further notice. The intent is to support the housing market by keeping mortgage rates incredibly low. The European Central Bank President, Mario Draghi, announced a plan to purchase an unlimited amount of bonds issued by countries in the European currency. “Until further notice” and “unlimited amounts of bonds” are terms seldom-used by Central Bankers, but their use demonstrates the depth of their concern for further economic problems and the extent to which they are willing to fight the issues head on. Now if we could get the various elected government officials to work that hard, we would have a good story to tell. In fact, here is a quote from Dallas Fed President Richard Fisher emphasizing the need for Congressional action: “One of the most important lessons learned during the economic recovery is that there is a limit to what monetary policy alone can achieve. The responsibility for stimulating economic growth must be shared with fiscal policy. Ironically, and sadly, Congress is

8

doing nothing to incent [sic] job creators to use the copious liquidity the Federal Reserve has provided. Indeed, it is doing everything to discourage job creation.” It sure seems to us the Federal Reserve is doing all the heavy lifting and it is Congress’ turn to step forward and help.

As we mentioned last year, the current environment of slow economic growth and low interest rates appears to be here for a while, leaving little room for error in staving off recessions, even with the efforts of global central banks. The stagnating economy in Europe and the dramatic slowdown in China might be enough to push us into recession in 2013, let alone the fiscal cliff we discussed could potentially cut up to 5% out of GDP. The President and Congress are well aware of these facts and it would seem that after the election during the lame-duck session both will be focused on addressing the issues.

Portfolio Positioning

Even with this less-than-stellar economic outlook, stocks continue be attractive on the basis of solid earnings, strong balance sheets and dividend paying capacity. Certain international markets, such as Europe look even more attractive on several market indicators — if we can gain some comfort that plans will be implemented and stability can be regained. The chart (see Stock Market Indicators) below shows the equity market indicators and whether they are positive or negative.

Stock Market Indicators

Bullish Neutral Bearish

Earnings Momentum X

Interest Rates X

Stock Supply/Demand X

Investor Psychololgy X

Market Valuation X

The low interest rate environment has caused us to look at alternative ways to generate current income besides high-quality taxable and tax-exempt bonds. Many of these investments have focused on international, corporate and

mortgage debt. The Federal Reserve’s intent to keep rates low until mid-2015 will challenge the income needs for many clients. As we have discussed over the past year, there are investments in the fixed income market that can provide more income but they do come with some additional risk.

Source: Bloomberg

10 – Year U.S. Treasury Yield

9/30/07 9/30/08 9/30/09 9/30/10 9/30/11

5.00

4.50

4.00

3.50

3.00

2.50

2.00

1.50

1.00

0.50

0.00

This past year, we have been reviewing additional investment strategies that were historically only available to the most wealthy investors. The strategies have become more available because of lower cost and liquid exchange traded funds or mutual funds. We look forward to discussing how these types of investments might benefit your portfolio in the coming year.

As you can see, challenges lie ahead as we work our way through the “new normal” economy, but opportunities do exist and a carefully built, diversified portfolio is important. We can help you with your financial needs.

1 s t S ou r c e c o r p o r at i o n i n v e S t m e n t a d v i S o r S, i nc . (Left to Right) Bruno Riboni, MBA; Marie G. Alvarez; Jason Cooper, MBA; Paul Gifford, CFA; Michael Spencer;

Randy Thornton, MBA; Suzi Hill; Rob Nelson, CFA; Rob Romano, CFA; Tamara Simon, IACCP®; Scott Tapley, CFA

9

South Bend Elkhart Lafayette St. Joseph100 North Michigan Street 131 East Franklin Street 401 North Main Street, Suite 1B 1600 Hilltop RoadSouth Bend, Indiana 46601 Elkhart, Indiana 46516 Lafayette, Indiana 47901 St. Joseph, Michigan 49085574-235-2790 574-295-4392 765-807-2593 269-982-2806

Warsaw Valparaiso Niles Fort Wayne120 South Lake Street 14 Indiana Avenue 306 East Main Street, Suite 100 200 East Main StreetWarsaw, Indiana 46580 Valparaiso, Indiana 46383 Niles, Michigan 49120 Fort Wayne, Indiana 46802574-268-1207 219-476-2935 269-687-6808 260-969-2273

P e r s o n a l A s s e t M a n a g e m e n t G r o u p1 800 882-6935 1stsource.com

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0#)-$1&(23 (4$5'-$6(2&7#$8*)9$%&'#)-' · — For the ﬁfth time since its inception in 1982, the Siena College Research Institute’s (SRI) Survey of U.S. Presidents ﬁnds that