1st Source ( SRCE) is a stock that's been bashed lately by the market, along with many other lenders. The company has about 70 branches in Michigan and Indiana, but more than half of the bank's loans are in the form of financing offered to buyers of aircraft, autos, trucks and construction equipment. 1st Source is attempting to boost its retail presence through the proposed $135 million acquisition of Fina Bancorp, announced Feb. 20. The deal, which is expected to close by the end of the second quarter, will add 26 branches and $600 million of assets to the company's coffers.
1st Source shares are down 20.1% year to date, closing Tuesday at $25.69. But a group of six company insiders, led by Chairman Christopher J. Murphy III, whose family owns about 38% of 1st Source, have not taken the fall lightly, spending about $575,000 to buy nearly 23,000 shares since February. With that in mind, I'm here to answer readers' questions: Should I do it? Is 1st Source a buy at current levels, or should investors look at other alternatives? The company posted solid first-quarter results April 26, led by 11% year-over-year loan growth and improving credit quality. 1st Source earned 37 cents a share, compared with 34 cents in the previous year (excluding one-time gains). These solid trends in the company's core capital finance business could continue into the second half of the year, based on last week's strong monthly factory orders and Institute of Supply Management manufacturing data. Before the scheduled closing of the Fina acquisition, about 54% of 1st Source's loans were capital leases, while 23% were mortgages. Another 18% were commercial and agricultural business loans, while the remaining 5% were consumer loans. By shifting its focus toward the consumer side with Fina, 1st Source can diversify its $2.7 billion loan book, should capital spending decline and overall economic growth continue to slow down. To watch David Peltier's video take of this column, click here .
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. (For a free trial to Dave Peltier's Value Investor newsletter,
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