1st Source Corp (SRCE): what the price assumes

In the published model solve dated 2026-Q2, anchored at $89.96, 1st Source Corp (SRCE) is priced for 12.4% return on equity. boothcheck publishes no house fair value, target price, or buy/sell rating; individual model outputs and user-controlled scenarios are analytical inputs, not Boothcheck targets. Narrative composed 2026-07-11.

Generated: 2026-08-10 · Exported: 2026-08-12 · Source: https://boothcheck.com/report/SRCE

Headline

What The Price Assumes (Inversion)

The assumption today's price embeds, recovered by inverting the valuation.

Solve inputs: computed at a 9.1% cost of equity; ROE searched up to the 11.7% ROE ceiling.

How unusual the bet is: elevated

Valuation X-Ray

The price is supported by asset-based and earnings-power value. A value/asset-supported name, not a pure growth bet.

How the valuation models price the stock relative to the market price. Price/FV above 1.0 means the market pays more than that lens defends (expensive); at or below 1.0 the lens can defend the price.

Families that justify the price: Asset, Earnings

The models below discount at their own flat-beta convention rates (cost of equity 9.3%, WACC 8.8%); the inversion above states its own rate.

Per-Model Detail (n=4)

Economic-Unit Decomposition (Sum Of The Parts)

The issuer is a funded financial business. Debt, interest, and cash flows are operating inputs, so industrial EV, net-debt, WACC, and free-cash-flow lenses do not apply; value the common-equity claim with book, earnings, capital, and payout economics.

No unit-level total common-equity value is stated. Each financial unit requires supported standalone common equity, normalized earnings, capital adequacy, and payout capacity. Consolidated debt, interest, and cash are operating balances, not an enterprise-to-equity bridge; company-level book, earnings, capital, and payout lenses remain the coherent cross-checks.

Solvency

Deposit/float-funded balance sheet: debt is funding, not corporate leverage, and GAAP operating cash flow follows loan flows. Net-debt, interest-coverage, and cash-burn lenses do not apply. The solvency frame for a financial is regulatory capital and payout capacity (CET1, stress buffer, dividends plus buybacks against earnings).

Bullet Takeaways

• 1st Source runs a $7 billion Indiana community bank with a national specialty-finance book attached: aircraft, construction equipment, and auto and truck fleets, a niche mix the FY2025 10-K describes with lease terms of "three to seven years" against liens on the underlying vehicles.
• The biggest risk is the price itself: at $81.48 the market is paying roughly 1.5x book for a return on equity of about 11.8%, well above the roughly 9.5% the bank has recently earned, and the specialty portfolios are already showing cyclical wear.
• Watch the Q2 2026 print for two things: whether the loan-loss allowance keeps climbing past the 2.33% of loans reported at March 31, and whether average deposits, down modestly in Q1, stabilize.

Bull Case

Start with what management is doing with its own capital, because a bank's balance sheet is a running statement of its confidence. 1st Source holds a CET1 ratio of about 15.5% as filed at year-end 2025, far above what a regional bank needs to operate, and it is spending the surplus: roughly 30% of earnings went back to shareholders as dividends plus buybacks in the latest fiscal year, the board raised the quarterly dividend three cents to $0.43 in April 2026 (a 13% increase over a year ago), and the company repurchased 338,356 shares for $23.35 million in the first quarter alone. A management team that doubted its credit book would be hoarding that capital, not returning it.

The balance sheet is also being actively repositioned rather than passively held. The FY2025 10-K describes selling low-yield securities to purchase "approximately $40 million of securities with a weighted average yield of 4.80%", swapping out paper yielding 1.10%, the kind of unglamorous housekeeping that compounds into net interest margin. It shows up in the numbers: net interest income of $90.14 million in the March quarter was up 11.4% year over year, average loans and leases grew 3.3% to $7.02 billion led by commercial portfolios, and quarterly operating cash flow has risen four quarters straight, from $44.85 million to $59.14 million. The company has been profitable in all four trailing quarters with cash flow running ahead of net income each time, debt declining, and the share count shrinking rather than diluting.

What makes the franchise more than a generic Midwest bank is the specialty-finance overlay. The 10-K details a lending model built on collateral control: in auto leasing "the Company takes assignment of the lease stream and places its lien on the vehicles", with terms structured deliberately longer than the rental cycle. Aircraft, construction equipment, and fleet finance are businesses most $2 billion banks cannot underwrite, they carry pricing power that plain commercial real estate lending does not, and they are the reason a bank this size earns a 44% net margin on its revenue base. The bull case is that a conservatively capitalized bank with a defensible national niche keeps compounding book value while paying you a rising dividend to wait.

Bear Case

The uncomfortable truth for a holder is that the multiple is paying for a bank that has not shown up yet. At roughly 1.5x book, today's price assumes 1st Source sustains a return on equity of about 11.8%; it has recently been earning about 9.5%. That gap is the whole bet. If the return on equity the price needs does not materialize, the price-to-book the market will pay compresses toward what the demonstrated economics support, and history is not generous here: only about 70% of firms earning at the assumed level sustained it for a decade. The premium sits in the upper half of the peer group's price-to-book, so this is not a case of a cheap bank being ignored.

The reasons the requirement might not be met are visible in the specialty portfolios that make the franchise distinctive. The FY2025 10-K reports that auto and light truck loans "decreased $60.56 million or 6.39% in 2025 over 2024", to $887.88 million, attributed to vehicle rental clients reacting to cyclical market adjustments. The same filing discloses "$320 million of foreign exposure, primarily domiciled in Mexico and Brazil" in the aircraft portfolio, noting Brazil's economy remains burdened by high sovereign debt and high interest rates. And the risk-factor language is candid about what happens when specialty collateral goes bad: "any repossessed collateral may not provide an adequate source of repayment of the outstanding loan balance". Niche lending earns its premium yield precisely because the losses, when they come, come in lumps.

The near-term tape already shows softening at the margins. Revenue fell 3.4% quarter over quarter, earnings per share slipped 2.4% from the December quarter, average deposits declined modestly, and the allowance for loan losses ratcheted up to 2.33% of loans at March 31 from 2.29% a year earlier. None of these is alarming in isolation; a 2.3% allowance is a thick cushion. But a stock priced for above-demonstrated returns has no room for a credit cycle in trucks, construction equipment, or Brazilian aviation, and those are exactly the cycles this bank is built to ride.

Valuation

A bank is read off its book value and the return it earns on that book, so start there. At $81.48 (July 11, 2026), the market pays roughly 1.5x book value and, working the price backward, is assuming 1st Source sustains a return on equity of about 11.8%. The bank has recently been earning about 9.5%. On a trailing basis the return runs higher (about 12.2% for the trailing twelve months), so the assumption is not outlandish, but the price requires the stronger version of the bank to be the permanent one. That is an elevated bet against its own record, and against the base rate: only about 70% of companies earning at that level have sustained it for ten years.

The methods disagree in an unusual and mostly reassuring way. The earnings-power and peer-multiple lenses both land above today's price, the growth-oriented methods land roughly at it, and only the asset-value lens finds the price rich, sitting about 20% above what tangible book alone supports. That pattern describes a bank whose earnings currently outrun its balance sheet: the price is defensible if the earnings hold, and exposed to the extent they mean-revert toward book. The earnings themselves lean on the specialty mix, where the FY2025 10-K shows the moving parts plainly, auto and light truck outstandings at $887.88 million after a 6.39% decline, and a lending book whose "primary source of earnings is net interest income, the difference between income on earning assets and the cost of funds supporting those assets".

The solvency frame for a bank is capital and payout, and here the picture is strong: a CET1 ratio of about 15.5% at year-end 2025 and roughly 30% of earnings returned through dividends and buybacks, with room to do more. Trailing capital return ran $76.2 million ($39.4 million of dividends plus $36.8 million of buybacks) against about $160 million of trailing net income, on a share count of 24.3 million that is shrinking. The price is not stretched against any single method; it is stretched against the bank's own demonstrated return, and the capital cushion buys time for that return to either persist or fade.

Catalysts

The first quarter of 2026 was a record: net income of $39.96 million, up 6.5% from a year earlier, with diluted earnings per share of $1.63 against $1.52 in the prior-year quarter. Average loans and leases reached $7.02 billion, up 3.3% year over year and 1.0% sequentially, led by several commercial portfolios, while average deposits of $7.19 billion were down modestly overall (deposits excluding brokered balances grew year over year). The sequential dip in net interest income and EPS from the December quarter is the number to watch into the next print.

Capital returns are accelerating. The board raised the quarterly cash dividend to $0.43 per share at its April 2026 meeting, up five cents or 13.2% from a year ago, and the company repurchased 338,356 shares for $23.35 million during the quarter. On the credit side, the allowance for loan and lease losses rose to 2.33% of total loans at March 31, 2026, up from 2.29% a year earlier and 2.30% at year-end, a slow build worth tracking given the cyclical pressure the company has flagged in its vehicle-rental and foreign aircraft exposures. The Q2 2026 earnings report, expected in late July based on the company's usual cadence, is the next scheduled information event.

Peer Cohorts (Per Segment, With Filing Citations)

Commercial Banking (reported)

• FFIN (First Financial Bankshares, Inc.)
• FY2025 10-K: …nonaffiliated third parties. Under the final rule the regulators adopted, all banks must develop initial and annual privacy notices which describe in general terms the bank's information sharing practices. Banks that share nonpublic personal information about customers with nonaffiliated third parties must also…
• FY2025 10-K: …operate in a similar manner, have similar customers and report to the same regulatory authority, and therefore operate one line of business (community banking) located in a single geographic area (Texas). The Company's Chief Executive Officer has been identified as the chief operating decision maker ("CODM"). The…
• UBSI (UNITED BANKSHARES INC/WV)
• FY2025 10-K: …and commercial customers. Digital Banking is available on a multitude of devices to include a browser-based experience, mobile (Apple, Android) and tablet applications. Digital Banking allows customers to manage their financial lives from any place they can access the internet (cellular or Wi-Fi). Customers can…
• FY2025 10-K: …District of Columbia. United categorizes these commercial loans by industry according to the North American Industry Classification System ("NAICS") to monitor the portfolio for possible concentrations in one or more industries. As of the most recent fiscal year-end, United has one such industry classification that…
• SYBT (STOCK YARDS BANCORP, INC.)
• FY2025 10-K: …Provision for credit losses can be subject to volatility as ACL calculations and the resulting expense are significantly impacted by changes in CECL model assumptions, such as macroeconomic factors and conditions, credit quality and loan portfolio composition and growth. 31 Table of Contents Business Segment Overview…
• FY2025 10-K: December 31, 2025, compared to 27% for both the years ended December 31, 2024 and 2023, respectively, demonstrating the value of the diversified revenue streams created by our broad product offerings in addition to income provided by the principal banking activities described above. Our non-interest income is driven…
• NBTB (NBT BANCORP INC)
• FY2025 10-K: …a community bank with local decision-making, providing a broad array of banking and financial services to retail, commercial and municipal customers. The financial condition and operating results of the Company are dependent on its net interest income, which is the difference between the interest and dividend income…
• FY2025 10-K: …operating income in the consolidated statements of income. The Company is subject to over-the-counter derivative clearing requirements, which require certain derivatives to be cleared through central clearing houses. Accordingly, the Company clears certain derivative transactions through the Chicago Mercantile…
• FBNC (FIRST BANCORP)
• FY2025 10-K: …residential real estate construction and mortgage loans, revolving lines of credit, letters of credit, and loans for personal uses, such as home improvement, and automobiles. Commercial real estate loans include loans secured by owner-occupied and non-owner occupied commercial buildings for improved commercial,…
• FY2025 10-K: …to approve mergers and assumptions of deposit liability transactions by member banks, and to prevent capital or surplus diminution in such transactions if the resulting, continuing, or assumed bank is an insured member bank. The Bank is a member of the Federal Reserve, and accordingly the Federal Reserve also…
• FCF (FIRST COMMONWEALTH FINANCIAL CORP /PA/)
• FY2025 10-K: …estimate an amount of future trailing commissions for which collection is probable. Commissions from the third-party service provider are received on a monthly basis based upon customer activity for the month. The fees are recognized monthly with a receivable until commissions are received from the third-party…
• FY2025 10-K: LoanMember fcf:ContractualInterestRateReductionTermExtensionAndPaymentDeferralMember 2023-01-01 2023-12-31 0000712537 us-gaap:CommercialLoanMember 2023-01-01 2023-12-31 0000712537 fcf:TimeAndDemandLoansMember us-gaap:ContractualInterestRateReductionMember us-gaap:CommercialLoanMember 2023-01-01 2023-12-31 0000712537…
• NIC (NICOLET BANKSHARES, INC)
• FY2025 10-K: …well secured and / or in process of collection or renewal. When interest accrual is discontinued, all previously accrued but uncollected interest is reversed against current period interest income. Except in very limited circumstances, cash collections on nonaccrual loans are credited to the loan receivable balance…
• FY2025 10-K: …chief operating decision maker ("CODM"). The CODM regularly assesses performance of the aggregated single banking segment in determining how to allocate resources. The banking segment derives revenue from customers by providing a broad array of loan and deposit products to businesses, consumers and government…
• INDB (Independent Bank Corp.)
• FY2025 10-K: …its exposure to commercial customer derivatives is limited because these contracts are simultaneously matched at inception with an offsetting dealer transaction. Derivatives with dealer counterparties are then either cleared through a clearinghouse or settled directly with a single counterparty. The commercial…
• FY2025 10-K: ,917 Largest individual commercial real estate mortgage outstanding $ 59,366 Commercial real estate non-performing loans/commercial real estate loans 0.56 % Commercial and industrial loans consist of both term loans and revolving or non-revolving lines of credit. Term loans generally have a repayment schedule of five…

Methodology Note

• Priced-in inversion: the valuation is inverted on the current price to recover the operating-income growth, duration, and steady-state margin the price embeds (ROE for financials, FFO growth for REITs).
• Valuation x-ray: the valuation models, grouped into four families (asset, earnings, relative, growth). Each model is expressed as a price/FV ratio (distance from price), not a point fair-value estimate. The spread across families is the disagreement.
• Economic-unit decomposition (SOTP): each disclosed business unit is assigned its native valuation basis before any multiple is applied. Operating units are valued on enterprise value; funded financial units are valued on their own common equity, because their borrowings fund earning assets rather than levering the parent. A company total is stated only once every material unit carries a supported value and the parent capital bridge reconciles.
• Solvency: net cash/debt, net-debt-to-NOPAT, interest coverage, and share-count CAGR from EDGAR financials (net debt / FFO and fixed-charge coverage for REITs; regulatory-capital framing for financials).
• Peer cohorts: per-segment comparables with deep-linkable SEC filing citations.

Fundamentals sourced from SEC EDGAR filings. Current price from Databento. The priced-in inversion and valuation x-ray are computed by the boothcheck engine; narrative composed by AI from the structured data.