1st Source Jumps 12% as Q3 Beats on Strong NIM Surprise And May Be The Trend For Banks This Season

Shares of Indiana and Michigan based regional bank, 1st Source (US:SRCE) led the small-cap banking sector higher on Friday, rising 12% after the bank released third quarter results to investors showing encouraging performance.

The stock has been a strong performer over 2022, with the latest rally pushing the bank’s total gain to about 13% for the year compared to major US equity indexes that are trading 20-30% lower.

Despite the strong outperformance, the bank continues to trade on an undemanding 12x price-to-earnings ratio and pays a healthy 2.3% annual dividend after increasing its quarterly dividend to 32 cents per share this year.

A chart included from the Fintel financial metrics and ratios page shows the SRCE PE ratio valuation over the last 5 years and how it has fallen over time.

During the third quarter, SRCE’s net interest income grew 8.7% over the year to $69.1 million and increased $6.8 million or 10.9% above the prior quarter. The result also beat analyst forecasts which were expecting around $65 million.

The growth in interest income over the quarter was a direct result of SRCE’s net interest margin expansion to 3.59%, growing 26 basis points over the year and 28 basis points over the quarter. The margin was well above consensus forecasts of 3.37%.

As a result of the widening spreads and growth in income, SRCE was able to report strong 12% EPS growth over the year to $1.32 per share. The reported EPS beat estimates by ~14%.

The  bank was able to grow total loans and leases by $177 million over the third quarter and now has a total of $5.63 billion.

1st Source’s Chairman and CEO Christopher Murphy III discussed how, “The expansion in our net interest margin over the last two quarters has been largely the result of numerous Federal Reserve rate increases during the first nine months of this year”

The positive trends of net interest margin and profitability growth may be a recurring theme this earnings season from other peer regional banks.

Analysts from Piper Sandler discussed how the quarter was solid for SRCE with the result driven by core NIM expansion, aided by LQA average loan growth and continued strong cost control by management.

Piper Sandler continues to remain ‘overweight’ on SRCE with a $57 target and suggests there may be upside to 2023 consensus forecasts.

Manuel Navas from DA Davidson explained that he believes the NIM expansion should be sustainable in the near term which resulted in raising 2022 year end estimates while giving confidence in 2023/24. However, as the company is growing below its peers, the firm remains ‘neutral’ on the stock.

1st Source has a consensus ‘overweight’ rating and a $54 average target with one firm positive and two firms neutral on the stock.

The Fintel platform suggests SRCE stacks up well on the QVM screen (quality, value, momentum screen). SRCE ranks in 353rd rank with a score of 67.97 when screened against 230,132 other companies.

This score is made up of SRCE’s 74.67 quality score which is based on its cash generating efficiencies which are healthy as the company continues to generate strong interest.

On the value factor, SRCE excels with its PE Ratio of 11.94 which is well below the US market average.

On a momentum view, SRCE has a score of 69.25. While the stock has not experienced significant gains, it has outperformed broader equity markets with strength over the last 6 months.

This article originally appeared on Fintel

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