1st Source (SRCE)

Regional banking company 1st Source (NASDAQ:SRCE) met Wall Streets revenue expectations in Q4 CY2025, with sales up 13.1% year on year to $110.8 million. Its non-GAAP profit of $1.87 per share was 16.1% 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.

Net interest income and and fee-based revenue are the two pillars supporting bank earnings. The former captures profit from the gap between lending rates and deposit costs, while the latter encompasses charges for banking services, credit products, wealth management, and trading activities. Unfortunately, 1st Source’s 5.6% annualized revenue growth over the last five years was sluggish. This wasn’t a great result compared to the rest of the banking sector, but there are still things to like about 1st Source.

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 8.3% over the last two years is above its five-year trend, but we were still disappointed by the results. 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’s year-on-year revenue growth was 13.1%, and its $110.8 million of revenue was in line with Wall Street’s estimates.

Net interest income made up 75.5% of the company’s total revenue during the last five years, meaning lending operations are 1st Source’s largest source of revenue.

Net interest income commands greater market attention due to its reliability and consistency, whereas non-interest income is often seen as lower-quality revenue that lacks the same dependable characteristics.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

1st Source’s EPS grew at a remarkable 15.2% compounded annual growth rate over the last five years, higher than its 5.6% 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 shorter period to see if we are missing a change in the business.

For 1st Source, its two-year annual EPS growth of 15.2% is similar to its five-year trend, implying strong and stable earnings power.

In Q4, 1st Source reported adjusted EPS of $1.87, up from $1.41 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects 1st Source’s full-year EPS of $6.73 to shrink by 5.1%.

The balance sheet drives banking profitability since earnings flow from the spread between borrowing and lending rates. As such, valuations for these companies concentrate on capital strength and sustainable equity accumulation potential.

This is why we consider tangible book value per share (TBVPS) the most important metric to track for banks. TBVPS represents the real, liquid net worth per share of a bank, excluding intangible assets that have debatable value upon liquidation. Other (and more commonly known) per-share metrics like EPS can sometimes be murky due to M&A or accounting rules allowing for loan losses to be spread out.

1st Source’s TBVPS grew at an exceptional 9.1% annual clip over the last five years. TBVPS growth has also accelerated recently, growing by 14.8% annually over the last two years from $37.06 to $48.88 per share.

Over the next 12 months, Consensus estimates call for 1st Source’s TBVPS to grow by 10.1% to $53.81, mediocre 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 14.5%, which is considered safe and well capitalized in the event that macro or market conditions suddenly deteriorate.

Return on equity (ROE) reveals the profit generated per dollar of shareholder equity, which represents a key source of bank funding. Banks maintaining elevated ROE levels tend to accelerate wealth creation for shareholders via earnings retention, buybacks, and distributions.

Over the last five years, 1st Source has averaged an ROE of 12.6%, healthy 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 decent competitive moat.

We were impressed by how significantly 1st Source blew past analysts’ net interest income expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates. Overall, we think this was a decent quarter with some key metrics above expectations. The stock remained flat at $66.33 immediately after reporting.

Updated: January 23, 2026 at 4:09 PM EST

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own 1st Source, you should also grasp the company’s longer-term business quality and valuation.

In our opinion, 1st Source is a good company. Although its revenue growth was uninspiring over the last five years and analysts expect growth to slow over the next 12 months, its expanding net interest margin shows its loan book is becoming more profitable. Tread carefully with this one, however, as its projected EPS for the next year is lacking.

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 believe in the company and its growth potential, now is an opportune time to buy shares.

Wall Street analysts have a consensus one-year price target of $72.67 on the company (compared to the current share price of $66.33), implying they see 9.6% upside in buying 1st Source in the short term.