$76.16
$127.39
bear $76.16
base $105.82
bull $127.39
margin of safety $63.00
market price* $85.91
1st Source Corporation is the holding company for 1st Source Bank of South Bend, Indiana: 78 banking centers in 19 counties in Indiana and Michigan plus Sarasota County, Florida, and a Specialty Finance Group with 15 locations nationwide that lends against construction equipment, private and cargo aircraft and fleet vehicles. At December 31, 2025 it had $9.06 billion of assets, $7.05 billion of loans and leases, $7.23 billion of deposits and $1.27 billion of shareholders' equity. It is a bank, so deposits and other funding are the raw material of the business and interest is an ordinary operating cost. We value the earnings left after interest directly and subtract no debt; leverage is charged in the bear case instead. How we measured earnings. Owner earnings are operating cash flow less the timing swings in working capital, less stock compensation, less capital spending. For this bank the working-capital items are the changes in interest receivable, interest payable, other assets and other liabilities. In 2025 they added $38.4 million to operating cash flow, mostly a $51.0 million rise in other liabilities, and we removed it rather than count it as earnings; we could not confirm from the filing what drove that rise. Stock compensation ($6.2 million in 2025) is treated as a real cost. All premises-and-equipment spending ($10.1 million) is treated as maintenance. Because a provision for credit losses is a non-cash charge that operating cash flow adds back, we also deduct a normal level of actual loan losses: net charge-offs averaged about $4.5 million a year over 2020-2025 ($9.2 million in 2020, $8.9 million in 2021, $1.5 million in 2022, a net recovery of $2.4 million in 2023, $5.7 million in 2024, $4.2 million in 2025), or about $0.15 per share after tax. For 2023-2025 we confirmed that net income plus non-cash items reconciles exactly to operating cash flow less the working-capital items. Owner earnings per diluted share ran $3.25 (2016), $4.33, $5.28, $4.86, $5.34, $6.25, $6.08, $5.57, $6.20 and $6.88 (2025). Starting level. We use the median of the seven most recent years, 2019-2025, which is $6.08, less the $0.15 loan-loss deduction, so $5.93. That window spans the 2020 pandemic year, the 2022-2023 rate shock and the recent strong years; a longer one would reach back to 2016-2017, when owner earnings were $3.25 and $4.33, before the 2018 cut in the federal corporate tax rate. The starting level sits below 2025's actual $6.88. Recent quarters are consistent with the level holding: first-half 2026 net income was $87.5 million against $74.8 million a year earlier (up 17%), but we did not lift the starting level on that. Growth credited. Last year's actual owner-earnings growth was 10.9% ($6.20 to $6.88). The base case assumes 3.0% in year one, below that, on a lower starting level. Owner earnings per share grew 6.0% a year over 2019-2025 and 8.7% a year over 2016-2025, and the bank funds its growth from its own retained earnings (dividends of $38.4 million and buybacks of $13.9 million took about 31% of 2025 owner earnings). We credit growth below the demonstrated rate, tapering in a straight line to zero by year ten, and we charge for it: added earnings require retained capital, sized on owner earnings of about 11.6% of tangible equity ($5.93 against tangible book value of about $50.93 per share at June 30, 2026). After year ten we assume earnings simply continue at the year-ten level with no further growth; the evidence for that is a deposit-funded lending franchise that produced positive owner earnings in each of the ten years we examined, rising from $3.25 to $6.88 per share. We left out margin expansion, new markets and share gains, and we did not count buybacks as extra growth because they are paid out of the same earnings. Base case, $105.82 per share. Owner earnings start at $5.93, grow 3.0% tapering to zero, and reach about $6.88 in year ten and then hold. The first ten years are worth $41.79 per share and the years beyond are worth $64.03. The business is worth $105.82 per share; there is no separate debt to subtract for a bank, so shareholders' value is the same $105.82. Bear case, $76.16 per share. Two things go wrong at once: (1) credit losses. The Specialty Finance book is concentrated in aircraft, construction equipment and trucking. The company says aircraft losses have come in 'short intervals of high losses', has $320 million of foreign aircraft exposure, primarily in Mexico and Brazil, and booked a $36.0 million loan-loss provision in 2020, its largest of the decade. We assume losses at that scale in each of two years, about $1.00 per share a year above normal; and (2) earnings power drifts back to the 2019 level ($4.86, less the loan-loss deduction, so $4.70). That gives $3.70 in years one and two, $4.30 in year three and $4.70 thereafter with no growth. Business value is $76.16 per share (about $32.42 from the first ten years and $43.74 after); nothing is subtracted for debt, so shareholders' value is $76.16. Equity is about 14% of assets, so a credit shock hits hard, but this case still has the bank earning its way through it and keeping its deposit base. Short-term borrowings were $199 million at June 30, 2026 against $1.3 billion of equity. Bull case, $127.39 per share. The bank's own levers keep working: it starts from 2025's actual $6.88 (less $0.15, so $6.73), credit stays as benign as the last three years (net charge-offs of 0.06% of loans in 2025 and 0.09% in 2024), and growth runs at 5.0% tapering to zero by year ten, still below the demonstrated 6.0% and 8.7% rates and again charged for the capital retained. Owner earnings reach about $8.60 in year ten and then hold. The first ten years are worth $47.34 per share, the years beyond $80.05; shareholders' value is $127.39 with no debt to subtract. What we tested. The main risk is credit in the specialty portfolios; the record shows net charge-offs of only 0.06% of average loans in 2025 and even in 2020 only $9.2 million, so the bear case, which assumes about four times that each year, is a deliberately hard test, not a forecast. The second test was whether owner earnings overstate profits: they exceeded net income by 6% to 15% in 2023-2025 because operating cash flow adds back the loan-loss provision and depreciation on leased equipment, which is why we removed working-capital swings and deducted normal loan losses. More than half of every case's value (about 60% in the base case) comes from earnings continuing beyond year ten. If the deposit and lending franchise were to shrink instead of holding steady, all three values would be materially lower. What changed since our last review. Our August 2026 review put the three cases at $39.50, $69.00 and $89.00, built on a capitalized return on tangible book value with discount rates of 10% to 11%. We now value every company at the same 6% required return and build the cases from named earnings drivers, which is the main reason the figures are higher. The operating picture is broadly unchanged: credit remains benign and first-half 2026 earnings are running ahead of a year earlier. The margin-of-safety price is $63.00, about 17% below the bear case and about 40% below the base case, a wide cushion because a bank carries about seven dollars of assets for each dollar of equity and its equipment and aircraft lending is cyclical.