Executive Summary / Key Takeaways

• Robust Financial Performance Amidst Headwinds: 1st Source Corporation demonstrated strong financial results for the nine months ended September 30, 2025, with net income available to common shareholders increasing by 15.76% year-over-year to $117.14 million and diluted EPS rising to $4.74. This growth was primarily fueled by a significant expansion in net interest income and a healthy net interest margin.
• Strategic Niche Lending and Deposit Growth: The company's loan and lease portfolio expanded by 1.60% since December 31, 2024, driven by targeted growth in renewable energy, residential real estate, home equity, and commercial real estate. Concurrently, total deposits increased by 2.49%, reflecting successful efforts in attracting savings and time deposits despite intense rate competition.
• Exceptional Capital and Liquidity Position: SRCE maintains a "historically strong and conservative" capital structure, with a shareholders' equity-to-assets ratio of 13.65% and total net available liquidity of $3.48 billion, representing approximately 50% of total deposits. This robust financial foundation provides significant resilience against economic uncertainties.
• Evolving Credit Quality and Macroeconomic Risks: While overall credit quality metrics remained generally stable, nonperforming assets increased notably, primarily in the auto and light truck portfolio. Management remains cautious on the forward outlook, citing an uncertain domestic growth outlook, trade policy unpredictability, elevated inflation, and geopolitical instability as key concerns.
• Leadership Transition and Enduring Strategy: The recent executive succession, with Andrea G. Short assuming the CEO role, marks a new chapter while the company's core strategy of community-focused, relationship-based banking and diversified niche lending continues to underpin its market positioning and long-term value proposition.

A Legacy of Community Banking and Strategic Diversification

1st Source Corporation, founded in 1863 and headquartered in South Bend, Indiana, has cultivated a deep-rooted presence as a bank holding company through its subsidiary, 1st Source Bank. The company's enduring strategy centers on providing a broad array of financial products and services, including commercial and consumer banking, trust and wealth advisory, and insurance, across 78 banking centers in Indiana, Michigan, and Florida. This extensive regional footprint and commitment to personalized service have historically fostered strong community ties and customer loyalty, serving as a foundational strength in a competitive banking landscape.

Over its long history, 1st Source has strategically diversified its lending activities. This includes significant expansion into specialized areas such as renewable energy financing, a growing segment that aligns with broader economic shifts towards sustainable infrastructure. The company also maintains a notable presence in equipment financing for industries like construction, aircraft, and medium and heavy-duty trucks, alongside traditional commercial and residential real estate lending. Furthermore, 1st Source has made targeted investments in Variable Interest Entities (VIEs) focused on affordable housing and community development, which not only generate returns but also support regulatory compliance with the Community Reinvestment Act. This diversified approach to lending and community engagement underpins its resilience and ability to generate consistent earnings.

Operational Excellence and Technological Enablement

As a regional bank, 1st Source Corporation differentiates itself primarily through its relationship-based business model, deep regional expertise, and specialized lending capabilities rather than proprietary technological breakthroughs. While the company does not disclose specific differentiated technologies with quantifiable performance metrics over alternatives, it consistently invests in its operational technology infrastructure. This is evident in data processing expense, which increased during the three and nine months ended September 30, 2025, due to higher computer processing charges and software maintenance expense on technology projects. These investments are crucial for enhancing operational efficiency, streamlining customer experience, and supporting the delivery of its diverse financial products and services.

The strategic intent behind these technology projects is to maintain competitive service levels and operational robustness. For instance, efficient data processing and robust software are vital for managing complex loan portfolios, processing transactions, and delivering digital banking services that meet evolving customer expectations. While not a "core differentiated technology" in the manufacturing sense, these technological investments enable the company to effectively execute its business model, manage risk, and support its growth initiatives across its commercial banking segment. The company's ability to leverage technology for efficient service delivery and risk management contributes to its overall competitive positioning, particularly against larger, more technologically advanced competitors.

Strong Financial Momentum and Strategic Portfolio Shifts

1st Source Corporation delivered a compelling financial performance for the nine months ended September 30, 2025, underscoring its operational effectiveness and strategic focus. Net income available to common shareholders rose to $117.14 million, a significant increase from $101.19 million in the prior year period. Diluted net income per common share followed suit, climbing to $4.74 from $4.09. This robust growth translated into an improved return on average common shareholders' equity of 13.24% and a return on total average assets of 1.75% for the nine-month period.

A primary driver of this performance was the substantial growth in net interest income, which on a taxable-equivalent basis, increased by 15.07% for the nine months ended September 30, 2025, compared to the same period in 2024. The fully taxable-equivalent net interest margin expanded to 4.00% for the nine months, up from 3.59% a year ago. This margin expansion was largely attributable to a 13 basis point increase in the yield on average earning assets to 5.98%, driven by higher average loan and lease balances and increased rates on investment securities. Concurrently, the total cost of average interest-bearing liabilities decreased by 36 basis points to 2.83%, primarily due to the repricing of interest-bearing deposits and lower interest expense on other short-term borrowings, including the maturity and payoff of $100 million from the Federal Reserve's Bank Term Funding Program.

The company's loan and lease portfolio grew by $109.65 million, or 1.60%, to $6.96 billion since December 31, 2024. This growth was notably concentrated in the renewable energy, residential real estate and home equity, and commercial real estate portfolios. Conversely, the aircraft, auto and light truck, and commercial and agricultural portfolios experienced decreases. Total deposits also saw a healthy increase of $179.78 million, or 2.49%, reaching $7.41 billion, primarily from higher savings and time deposits, which offset a slight decrease in noninterest-bearing demand deposits.

Noninterest income presented a mixed picture. Trust and wealth advisory fees increased due to positive equity market returns boosting assets under management. Insurance commissions also saw a significant rise of 18.74%, driven by higher contingent commissions and an expanded book of business. However, mortgage banking income declined due to lower margins and reduced servicing fees, and equipment rental income decreased substantially by 41.73% due to changes in customer preferences and competitive pricing pressures. The company also strategically repositioned its investment securities available-for-sale portfolio, selling lower-yielding securities and reinvesting in higher-yielding alternatives to enhance future interest income.

Noninterest expenses increased, reflecting normal merit increases, higher incentive compensation, and increased group insurance costs. Data processing expenses also rose due to higher computer processing charges and software maintenance for technology projects, indicating ongoing investment in operational infrastructure. A $1 million charitable contribution further contributed to higher business development and marketing expenses.

Capital Strength and Liquidity Resilience

1st Source Corporation maintains a robust capital and liquidity position, providing a strong buffer against economic uncertainties and supporting future growth initiatives. As of September 30, 2025, total shareholders' equity stood at $1.24 billion, an increase of 11.29% from December 31, 2024. This growth was primarily driven by net income and a decrease in accumulated other comprehensive loss, reflecting favorable changes in market conditions affecting the available-for-sale investment portfolio. The shareholders' equity-to-assets ratio improved to 13.65% from 12.44% at year-end 2024.

The company's capital ratios consistently exceed regulatory minimums, remaining at "historically strong and conservative levels." For instance, the Common Equity Tier 1 Capital to Risk-Weighted Assets ratio for 1st Source Corporation was 15.18%, significantly above the 6.50% well-capitalized threshold. This strong capital base provides financial flexibility and demonstrates prudent risk management.

Liquidity is also a key strength, with total net available liquidity reaching $3.48 billion at September 30, 2025, representing approximately 50% of total deposits (net of brokered and listing services certificates of deposit). Cash and cash equivalents increased to $214.26 million, supported by deposit growth and expected redemptions of investment securities.

The reduction in short-term borrowings by 70.48% highlights effective liability management, including the payoff of $100 million from the Federal Reserve's Bank Term Funding Program. These strong liquidity metrics ensure the company can meet its obligations and fund future loan growth.

Competitive Landscape and Strategic Positioning

1st Source operates within a dynamic banking sector, competing with a diverse array of financial institutions. Its primary direct competitors include larger regional banks such as Fifth Third Bancorp (FITB), Huntington Bancshares (HBAN), KeyCorp (KEY), and PNC Financial Services Group (PNC). These competitors often possess greater scale, broader geographic footprints, and more extensive digital innovation capabilities. For instance, while SRCE benefits from deeper community ties and personalized service in its core markets of Indiana and Michigan, larger players like FITB and PNC leverage their scale for wider market reach and more aggressive digital transformation.

SRCE's competitive advantage lies in its strong community brand, long history, and relationship-based banking model, particularly in niche lending segments. This fosters superior customer loyalty and allows for effective operational execution in localized markets. For example, SRCE's expertise in agricultural and equipment financing provides a qualitative edge over competitors who may have a more generalized lending approach. However, SRCE faces vulnerabilities due to its limited geographic scale, which can restrict revenue growth and market share compared to its larger rivals. Its pace of technological adoption, while supporting operations, may also lag behind competitors like FITB and KEY, who are more aggressively investing in digital platforms and product innovation.

Indirect competition comes from fintech companies and neobanks, which offer digital payment solutions and online banking alternatives. These players can erode market share in consumer banking by providing lower fees and faster, more user-friendly digital experiences. While SRCE's physical branch network serves as a differentiated distribution channel, appealing to certain demographics and fostering in-person relationships, it must continuously adapt to evolving customer preferences for digital interactions to remain competitive.

Outlook and Risk Considerations

Management maintains a cautious outlook on the forward economic environment, anticipating "weakness in growth expectations during the two-year forecast time horizon and continued uncertainty in the macro environment stemming from a lack of predictability of domestic trade policies." Key macroeconomic risks include elevated inflation and interest rates, a weakening labor market, increased consumer stressors, and ongoing geopolitical instability. The potential for restrictive trade policies to increase asset price volatility, particularly for collateralized loans, is a significant concern.

Credit quality, while generally stable across most portfolios, shows areas of elevated risk. Nonperforming assets increased significantly to $63.19 million at September 30, 2025, primarily driven by higher nonaccrual loans in the auto and light truck portfolio. This segment, along with medium and heavy-duty trucks, faces challenges from overcapacity, higher vehicle costs, and softening demand. The agricultural portfolio remains under stress due to lower commodity prices, and the consumer portfolio exhibits increasing delinquency rates. The aircraft portfolio, with its foreign exposure, carries inherent collateral risk due to value volatility and maintenance concerns, although credit quality has remained stable.

Despite these headwinds, the company's forecast assumes inflation will slowly move back towards the Federal Reserve's target rate, which could still adversely impact the loan and lease portfolio. Analyst estimates project a 2025 EPS of $5.97, representing an 8.74% increase from the prior year, while the Zacks Consensus Estimate for 2025 EPS is $6.13, indicating no year-over-year change. These projections, alongside the company's strong capital and liquidity, suggest a resilient financial position despite the challenging operating environment. The recent executive succession is expected to maintain strategic continuity, with Andrea G. Short now leading the company as President and CEO.

Conclusion

1st Source Corporation stands as a resilient regional banking institution, leveraging its deep historical roots, strong community brand, and specialized lending expertise to drive consistent financial performance. The company's robust capital position and ample liquidity provide a solid foundation to withstand macroeconomic uncertainties, including an unpredictable trade environment, elevated inflation, and geopolitical instability. While facing competitive pressures from larger, more technologically advanced banks and agile fintechs, SRCE's focus on relationship-based banking and strategic niche markets, such as renewable energy and equipment financing, remains a core differentiator.

The recent leadership transition to Andrea G. Short as President and CEO signals a continuation of the company's established strategic direction. Investors should recognize SRCE's ability to generate strong net interest income and maintain healthy margins, even as it manages evolving credit quality in certain portfolios. The company's prudent risk management, coupled with its commitment to operational efficiency through ongoing technology investments, positions it to navigate the complex economic landscape and sustain its value proposition for discerning investors.