1st Source Corporation: A Resilient Bank for Income Investors in a Challenging Credit Climate

The second quarter of 2025 brought a mixed bag of results for regional banks, but 1st Source Corporation (SRCE) emerged as a standout performer. Despite rising credit risks and economic uncertainties, the company demonstrated its ability to grow earnings while maintaining a strong balance sheet and a compelling dividend profile. For income-focused investors, SRCE's Q2 performance offers a compelling case for long-term value.

Resilience in a Credit-Contested Environment

SRCE's Q2 earnings report revealed a 15.03% year-over-year increase in tax-equivalent net interest income to $85.35 million, driven by a 3.5% growth in its loan portfolio to $6.93 billion. The net interest margin expanded to 4.01%, a 42-basis-point improvement from Q2 2024, reflecting effective management of deposit costs and asset yields. This margin expansion was a key driver of profitability, with net income rising to $37.3 million—a 1.43% increase year-over-year.

However, the credit environment posed challenges. The provision for credit losses surged to $7.69 million in Q2, up from $3.27 million in Q1 and a negative $0.31 million in Q2 2024. Nonperforming assets increased to 1.06% of total loans, a jump from 0.63% in the prior quarter. While these figures highlight rising credit risks, they also underscore SRCE's proactive risk management: the allowance for credit losses now stands at 2.30% of total loans, up from 2.26% a year ago. This buffer suggests the bank is prepared for potential downturns.

A Strong Balance Sheet and Conservative Capital Structure

SRCE's balance sheet remains a fortress of stability. Total assets grew to $9.09 billion, with deposits rising 2.9% to $7.44 billion—a sign of customer trust and low reliance on volatile wholesale funding (short-term borrowings fell 56% to $110 million). Shareholders' equity climbed 7.9% to $1.2 billion, and capital ratios remain robust. The common equity-to-assets ratio stands at 13.19%, while the tangible common equity-to-tangible assets ratio is 12.38%. The Common Equity Tier 1 ratio of 14.60% further highlights SRCE's conservative capital management.

Liquidity is another strength. The company holds $149 million in cash and equivalents and $1.46 billion in available-for-sale securities, even after accounting for a $79 million unrealized loss. This liquidity provides flexibility to navigate rate volatility or credit stress without compromising operational needs.

A Rising Dividend and Attractive Yield

For income investors, SRCE's dividend policy is a major draw. The board declared a $0.38 per-share dividend in Q2, a 5.56% increase from the prior year. With a stock price range of $52.14 to $63.90, the yield currently sits between 0.59% and 0.73%. While this may seem modest compared to high-yield alternatives, it's a reliable and growing payout.

The dividend's sustainability is supported by strong earnings retention and capital generation. ROAA (return on average assets) was 1.67%, and ROACE (return on average common equity) reached 12.61%, indicating efficient asset utilization. The company also repurchased 54,982 shares year-to-date, reducing common shareholders' equity by $3.3 million—another signal of management's confidence in the stock's intrinsic value.

Strategic Positioning for the Future

SRCE's focus on niche markets—such as renewable energy, commercial lending, and specialty finance (construction equipment, aircraft, fleet vehicles)—has insulated it from broader economic volatility. These segments grew 18% and 8% year-over-year, respectively, outpacing the overall loan portfolio's 3.5% increase. This diversification reduces concentration risk and opens avenues for future growth.

The company's leadership emphasized its “resilience and strategic growth” in Q2 earnings calls, noting that the net interest margin expansion was fueled by higher investment yields and lower deposit costs. While credit risks remain a watch item, the allowance for losses is well above historical averages, providing a buffer against unexpected defaults.

Verdict: A Buy for Income Investors

1st Source Corporation's Q2 performance underscores its ability to navigate a challenging credit environment while delivering growing earnings and dividends. For income-focused investors, the combination of a conservative balance sheet, rising dividends, and a diversified loan portfolio makes SRCE an attractive candidate.

The risks are not negligible—rising credit losses and nonperforming assets require close monitoring—but the company's proactive risk management and strong capital position provide a safety net. Given its resilience and income appeal, SRCE deserves a place in a diversified portfolio for investors seeking stable, growing yields in a volatile market.