1st Source Corporation (SRCE) is a leading financial institution that has been serving the northern half of Indiana and southwest Michigan since 1863. The company's unwavering commitment to its clients, communities, and core values has enabled it to navigate through various economic cycles, emerging as a resilient and trusted provider of comprehensive banking, wealth advisory, and insurance services.
Business Overview 1st Source Corporation's history traces back to its founding in 1863 as the First-St. Joseph Loan and Trust Company in South Bend, Indiana. Over the decades, the company has grown to become the largest locally controlled financial institution headquartered in northern Indiana and southwest Michigan. In 1963, the company reorganized as a bank holding company and adopted the name 1st Source Corporation, allowing it to expand its offerings beyond traditional banking services and into areas like trust, wealth management, and insurance.
Throughout the 1970s and 1980s, 1st Source continued to grow its branch network and product suite to better serve its local communities. A key milestone for the company came in 1986 when it launched its Specialty Finance Group, which provides financing for private and cargo aircraft, automobiles for leasing and rental agencies, medium and heavy-duty trucks, and construction equipment. This national lending business has become an important part of 1st Source's overall operations over the years.
The company faced some challenges in the early 2000s when it had to navigate the fallout from the housing crisis and recession. However, 1st Source was able to maintain its financial strength and continue serving its customers through this difficult period. The company also adapted by placing a greater emphasis on commercial and industrial lending to diversify its portfolio.
Today, 1st Source operates a network of 77 banking centers, 18 Specialty Finance Group locations nationwide, nine Wealth Advisory Services offices, 10 Insurance offices, and three loan production offices. The company serves a wide range of customers, including individuals, businesses, and communities, providing a comprehensive suite of financial products and services.
1st Source's core business segments include Commercial and Agricultural Banking, Renewable Energy Financing, Auto and Light Truck Financing, Medium and Heavy Duty Truck Financing, Aircraft Financing, Construction Equipment Financing, Commercial Real Estate Lending, Residential Real Estate and Home Equity Lending, and Consumer Banking. The company's diversified portfolio and specialized expertise in these areas have been instrumental in driving its success.
Financial Performance 1st Source's financial performance has been consistently strong, with the company delivering solid results across key metrics. As of the latest reported quarter in 2024, the company's total assets stood at $8.76 billion, reflecting a slight 0.41% increase from the previous year-end.
The company's loan and lease portfolio has seen steady growth, reaching $6.62 billion as of the end of the third quarter of 2024, up 1.50% from the prior year-end. This expansion was primarily driven by increases in the Renewable Energy, Construction Equipment, Commercial Real Estate, and Residential Real Estate and Home Equity segments, offsetting declines in the Commercial and Agricultural, Auto and Light Truck, Medium and Heavy Duty Truck, and Aircraft portfolios.
1st Source's deposit base has also demonstrated resilience, growing 1.24% to $7.13 billion as of the latest quarter. The company has navigated the challenging deposit rate environment through effective balance sheet management and customer relationship strategies.
Net interest income, a key driver of 1st Source's profitability, has continued to improve, reaching $221.45 million for the first nine months of 2024, up 6.73% from the same period in the previous year. The company's net interest margin, on a fully tax-equivalent basis, expanded to 3.59% during this period, an 8-basis-point improvement year-over-year.
Noninterest income, which includes revenue streams such as trust and wealth advisory fees, service charges, and mortgage banking, decreased 3.86% to $67.83 million for the first nine months of 2024 compared to the same period in 2023. This decline was primarily attributable to lower gains on renewable energy tax equity investments, reduced equipment rental income, and decreased contingent insurance commissions.
On the expense side, 1st Source has maintained disciplined cost management, with noninterest expense remaining relatively flat at $148.52 million for the first nine months of 2024, a slight 0.16% decrease from the prior-year period. The company's efficiency ratio, a measure of its operational efficiency, improved to 51.20% on a tax-equivalent basis for the first nine months of 2024, compared to 53.46% in the same period of 2023.
For the most recent fiscal year (2023), 1st Source reported revenue of $369.27 million, net income of $124.93 million, operating cash flow of $187.94 million, and free cash flow of $181.96 million. In the most recent quarter (Q3 2024), the company achieved revenue of $97.934 million, net income of $34.622 million, operating cash flow of $68.362 million, and free cash flow of $66.69 million. This represents year-over-year revenue growth of 4.52% and net income growth of 5.31%. The increase in revenue and net income was primarily driven by higher interest rates leading to increased net interest income, partially offset by a higher provision for credit losses.
Liquidity and Capital Position 1st Source's strong financial performance is reflected in its robust capital position. As of September 30, 2024, the company's Common Equity Tier 1 ratio, a key regulatory metric, stood at 14.18%, well above the well-capitalized threshold of 6.50%. The company's tangible common equity-to-tangible assets ratio was 11.76%, further underscoring its financial strength and stability.
The company maintains a strong liquidity position with cash and cash equivalents of $169.36 million as of September 30, 2024. Additionally, 1st Source has access to various funding sources, including $1.00 billion in available FHLB advances, $388.58 million in available FRB borrowings, and $410 million in available fed funds purchased. The company also has $310.79 million in available brokered deposits and $437.13 million in available listing services deposits.
1st Source's financial strength is further evidenced by its low debt-to-equity ratio of 0.18 and impressive liquidity ratios, with both the current ratio and quick ratio standing at 16.29 as of September 30, 2024. These figures indicate the company's strong ability to meet its short-term obligations and navigate potential economic challenges.
Shareholder Returns and Dividends 1st Source has a long-standing commitment to rewarding its shareholders through consistent dividend payments. The company recently announced a quarterly cash dividend of $0.36 per common share, representing a 12.50% increase from the prior-year period. This dividend, payable on November 15, 2024, to shareholders of record on November 5, 2024, reflects the company's strong financial position and confidence in its future prospects.
Over the past five years, 1st Source has increased its dividend seven times, demonstrating its dedication to delivering value to its shareholders. The company's dividend payout ratio for the trailing 12 months stood at 26.34%, suggesting ample capacity for future dividend growth and capital allocation flexibility.
Risks and Challenges While 1st Source has demonstrated resilience, the company is not immune to the various risks and challenges facing the financial services industry. Some of the key risks include:
1. Interest Rate Risk: The company's net interest income and margins are susceptible to changes in interest rates, which could impact its profitability.
2. Credit Risk: 1st Source's loan and lease portfolios, particularly in sectors such as commercial and agricultural, renewable energy, and aircraft financing, are exposed to credit risk, which could lead to increased provisions for credit losses.
3. Competitive Landscape: The company operates in a highly competitive environment, with intense competition from both traditional and non-traditional financial service providers, which could put pressure on its market share and pricing.
4. Regulatory Changes: The financial services industry is subject to a complex and evolving regulatory landscape, which could introduce new compliance requirements and constrain the company's operations.
5. Cybersecurity Threats: Like many financial institutions, 1st Source is vulnerable to cyber threats, which could result in data breaches, operational disruptions, and reputational damage.
1st Source's management team is well-aware of these risks and has implemented robust risk management frameworks to mitigate them. The company's diversified business model, strong capital position, and disciplined approach to underwriting and cost control have been instrumental in navigating these challenges.
Product Segments and Geographic Markets 1st Source Corporation operates through several major product segments, each catering to specific customer needs and market segments:
Commercial and Agricultural Loans: This segment provides loans and leases to entities within 1st Source's local market communities for business or agricultural purposes. These loans include working capital lines of credit, term loans secured by equipment, and loans secured by accounts receivable and inventory, typically supported by personal guarantees.
Renewable Energy Loans: Focused on financing solar-related projects, this segment offers construction draw notes, operating loans, letters of credit, and tax equity structures. The company provides financing to qualified borrowers across the continental U.S., with an emphasis on the region east of the Rocky Mountains.
Auto and Light Truck Loans: This nationwide segment includes loans secured by vehicles, predominantly to auto rental and commercial auto leasing businesses. Loan amortizations are generally short, up to 4 years.
Medium and Heavy Duty Truck Loans: This segment offers loans and leases secured by heavy-duty trucks, commonly Class 8 trucks, with loans generally personally guaranteed.
Aircraft Loans: Providing loans to domestic and foreign borrowers, this segment primarily focuses on financing new and used business jets and helicopters. The domestic segment is divided into personal/business use and dealer/operator pools, while the foreign focus is on Latin America, particularly Mexico and Brazil.
Construction Equipment Loans: This segment includes loans secured by specific construction equipment to borrowers across the country, including highway/road builders, aggregate suppliers, site developers, and crane rental entities.
Commercial Real Estate Loans: Primarily serving entities within 1st Source's local markets, this segment has historically focused on the less risky owner-occupied segment, with the non-owner-occupied segment including hotels, apartment complexes, and warehousing facilities.
Residential Real Estate and Home Equity Loans: This segment offers one-to-four family mortgages and home equity loans to borrowers in 1st Source's local markets.
Consumer Loans: Providing loans to individuals in 1st Source's local markets, primarily secured by personal vehicles.
Geographically, 1st Source operates primarily in the northern half of Indiana and southwest Michigan. However, the company's specialty finance segments, such as aircraft and construction equipment financing, have a national reach. Additionally, the company has some exposure to international markets, particularly in Latin America, with loans and leases to borrowers in Mexico and Brazil accounting for $304 million or 4.6% of the total loan and lease portfolio as of September 30, 2024.
Outlook and Conclusion 1st Source Corporation has demonstrated its ability to consistently deliver solid financial performance, even in the face of a challenging economic environment. The company's diversified business model, specialized expertise, and strong commitment to its clients and communities have been the foundation of its success.
Looking ahead, 1st Source remains focused on further strengthening its market position, enhancing its operational efficiency, and prudently managing risks. The company's ongoing investments in technology, talent, and customer experience are expected to drive continued growth and solidify its position as a trusted financial partner in its regional markets and beyond.
With its robust capital position, disciplined credit underwriting, and shareholder-friendly capital allocation strategy, 1st Source is well-positioned to capitalize on future opportunities and deliver long-term value to its stakeholders. As the company navigates the evolving financial services landscape, investors can take comfort in 1st Source's proven track record of resilience and its unwavering commitment to sustainable growth.