Should I Do It? Banking on 1st Source

1st Source has experienced lower margins in its mortgage lending business and is scaling back its efforts in this space to its core retail banking markets. Management believes this strategy will help keep costs down. The company confirmed it doesn't have any exposure to the embattled subprime category.

In addition to the recent insider-buying, on May 1, the board authorized the repurchase of 2 million 1st Source shares (8.8% of the company) from time to time. The company also returns cash to shareholders in the form of a 14-cent quarterly dividend (2.2% yield).

At current levels, the stock trades at 15.5 times trailing 12-months earnings of $1.66, which values 1st Source at a 22% discount to its peers, according to Bloomberg.

So yes, I do believe 1st Source is an attractive stock at current levels. Despite the fact that economic growth has been decelerating, recent data show that demand for capital goods remains healthy.

The pending acquisition of Fina Bancorp reduces the company's exposure to commercial lending, and management is right to focus its mortgage lending on its core retail markets, where 1st Source can cross-sell its services.

Finally, while insiders are not always perfect with their timing, they generally know more about a company's prospects than the average investor, and this is a case in which I believe investors can benefit by following management's purchases. With that in mind, I believe 1st Source shares can trade back up toward $30 over the coming quarters.

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