1st Source (SRCE)

Regional banking company 1st Source (NASDAQ:SRCE) beat Wall Street’s revenue expectations in Q3 CY2025, with sales up 13% year on year to $110.7 million. Its GAAP profit of $1.71 per share was 7.1% above analysts’ consensus estimates.

Company Overview

Tracing its roots back to 1863 during the Civil War era, 1st Source Corporation (NASDAQ:SRCE) is a regional bank holding company that provides commercial, consumer, specialty finance, and wealth management services across Indiana, Michigan, and Florida.

Regional banks, financial institutions operating within specific geographic areas, serve as intermediaries between local depositors and borrowers. They benefit from rising interest rates that improve net interest margins (the difference between loan yields and deposit costs), digital transformation reducing operational expenses, and local economic growth driving loan demand. However, these banks face headwinds from fintech competition, deposit outflows to higher-yielding alternatives, credit deterioration (increasing loan defaults) during economic slowdowns, and regulatory compliance costs. Recent concerns about regional bank stability following high-profile failures and significant commercial real estate exposure present additional challenges.

1st Source competes with larger regional banks like Fifth Third Bancorp (NASDAQ:FITB) and Huntington Bancshares (NASDAQ:HBAN) in its core Midwest markets, as well as with specialized equipment financiers like Enova International (NYSE:ENVA) and specialty lenders in its niche financing segments.

From lending activities to service fees, most banks build their revenue model around two income sources. Interest rate spreads between loans and deposits create the first stream, with the second coming from charges on everything from basic bank accounts to complex investment banking transactions. Over the last five years, 1st Source grew its revenue at a decent 5.5% compounded annual growth rate. Its growth was slightly above the average banking company and shows its offerings resonate with customers.

Long-term growth is the most important, but within financials, a half-decade historical view may miss recent interest rate changes and market returns. 1st Source’s annualized revenue growth of 6.3% over the last two years aligns with its five-year trend, suggesting its demand was stable. Note: Quarters not shown were determined to be outliers, impacted by outsized investment gains/losses that are not indicative of the recurring fundamentals of the business.

This quarter, 1st Source reported year-on-year revenue growth of 13%, and its $110.7 million of revenue exceeded Wall Street’s estimates by 1.3%.

Net interest income made up 74.9% of the company’s total revenue during the last five years, meaning lending operations are 1st Source’s largest source of revenue.

While banks generate revenue from multiple sources, investors view net interest income as the cornerstone - its predictable, recurring characteristics stand in sharp contrast to the volatility of non-interest income.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

1st Source’s EPS grew at an astounding 14.9% compounded annual growth rate over the last five years, higher than its 5.5% annualized revenue growth. However, this alone doesn’t tell us much about its business quality because its efficiency ratio didn’t improve.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For 1st Source, its two-year annual EPS growth of 8.3% was lower than its five-year trend. We still think its growth was good and hope it can accelerate in the future.

In Q3, 1st Source reported EPS of $1.71, up from $1.41 in the same quarter last year. This print beat analysts’ estimates by 7.1%. Over the next 12 months, Wall Street expects 1st Source’s full-year EPS of $6.01 to grow 4.2%.

Banks are balance sheet-driven businesses because they generate earnings primarily through borrowing and lending. They’re also valued based on their balance sheet strength and ability to compound book value (another name for shareholders’ equity) over time.

When analyzing banks, tangible book value per share (TBVPS) takes precedence over many other metrics. This measure isolates genuine per-share value by removing intangible assets of debatable liquidation worth. On the other hand, EPS is often distorted by mergers and flexible loan loss accounting. TBVPS provides clearer performance insights.

1st Source’s TBVPS grew at an excellent 8.7% annual clip over the last five years. TBVPS growth has also accelerated recently, growing by 17.1% annually over the last two years from $34.40 to $47.17 per share.

Over the next 12 months, Consensus estimates call for 1st Source’s TBVPS to grow by 10.5% to $52.11, solid growth rate.

Leverage is core to a financial firm’s business model (loans funded by deposits). To ensure economic stability and avoid a repeat of the 2008 GFC, regulators require certain levels of capital and liquidity, focusing on the Tier 1 capital ratio.

Tier 1 capital is the highest-quality capital that a firm holds, consisting primarily of common stock and retained earnings, but also physical gold. It serves as the primary cushion against losses and is the first line of defense in times of financial distress.

This capital is divided by risk-weighted assets to derive the Tier 1 capital ratio. Risk-weighted means that cash and US treasury securities are assigned little risk while unsecured consumer loans and equity investments get much higher risk weights, for example.

New regulation after the 2008 financial crisis requires that all firms must maintain a Tier 1 capital ratio greater than 4.5%. On top of this, there are additional buffers based on scale, risk profile, and other regulatory classifications, so that at the end of the day, firms generally must maintain a 7-10% ratio at minimum.

Over the last two years, 1st Source has averaged a Tier 1 capital ratio of 14.2%, which is considered safe and well capitalized in the event that macro or market conditions suddenly deteriorate.

Return on equity, or ROE, quantifies bank profitability relative to shareholder equity - an essential capital source for these institutions. Over extended periods, superior ROE performance drives faster shareholder wealth compounding through reinvestment, share repurchases, and dividend growth.

Over the last five years, 1st Source has averaged an ROE of 12.5%, excellent for a company operating in a sector where the average shakes out around 7.5% and those putting up 15%+ are greatly admired. This shows 1st Source has a strong competitive moat.

We enjoyed seeing 1st Source beat analysts’ net interest income expectations this quarter. We were also happy its revenue narrowly outperformed Wall Street’s estimates. On the other hand, its tangible book value per share slightly missed. Overall, this print had some key positives. The stock traded up 1.6% to $59.85 immediately after reporting.

Updated: December 4, 2025 at 11:44 PM EST

Are you wondering whether to buy 1st Source or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

1st Source is a fine business. Although its revenue growth was uninspiring over the last five years, its expanding net interest margin shows its loan book is becoming more profitable. And while its projected EPS for the next year is lacking, its spectacular EPS growth over the last five years shows its profits are trickling down to shareholders.

1st Source’s P/B ratio based on the next 12 months is 1.2x. Looking at the banking space right now, 1st Source trades at a compelling valuation. If you’re a fan of the business and management team, now is a good time to scoop up some shares.

Wall Street analysts have a consensus one-year price target of $72.67 on the company (compared to the current share price of $63.96), implying they see 13.6% upside in buying 1st Source in the short term.