1st Source: Positive Earnings Outlook Appears Priced In

Core Viewpoint - 1st Source Corporation's earnings are expected to be supported by below-average loan growth until the end of 2025, while upcoming interest rate cuts may negatively impact net interest margins, constraining earnings growth in the near term [2][9]. Loan Growth - Loan growth for 1st Source Corporation improved in Q2 2024 but remains below last year's growth rate, with an annualized growth of 4.1% in the first half of the year compared to a five-year compounded annual growth rate of 6.2% [3]. - The company focuses on equipment financing, which constitutes 53% of total loans, while the community banking segment primarily serves small local businesses [3]. - The Purchasing Managers Index (PMI) indicates a depressed manufacturing sector, which negatively affects demand for credit products [3]. Financial Projections - The loan portfolio is projected to grow by 1.25% quarterly through the end of 2025, resulting in an annualized growth of 5.1%, which is below historical averages [4]. - Deposits are expected to grow in line with loans, reflecting the overall balance sheet estimates [4]. Net Interest Margin - The net interest margin improved by 5 basis points in Q2 2024, following increases in previous quarters, despite a worsening deposit mix that raised funding costs [6]. - Upcoming interest rate cuts are anticipated to negatively impact the net interest margin in the short term, as loan yields have more room to decline compared to deposit costs [7][8]. Earnings Estimates - Earnings per share are projected to be $5.37 for 2024, reflecting a 7% increase, and $5.44 for 2025, with only a 1% year-over-year growth [2][9]. - The provision-expense-to-total-loan ratio is expected to revert to a five-year average of 0.25%, and non-interest income is anticipated to remain stable [9]. Valuation and Target Price - The target price for 1st Source Corporation is estimated at $57.2 for the end of 2024, indicating a 6.9% downside from the current market price [12]. - A combined target price of $57.5 suggests a 6.4% downside, with a total expected return of negative 4.2% when factoring in the forward dividend yield [17].