Tim Eriksen — Tiny Bank. REALLY tiny.

by Travis Johnson, Stock Gumshoe | May 6, 2013 12:44 pm

Special Value Investing Congress Notes for the Irregulars

First Internet Bancorp (INBK) — traditional bank but without traditional branches, so they can offer better rates and lower fees. There are plenty of online banking competitors, but despite the fact that the only growth industry in the town where I live is building new bank branches the preference for internet banking is growing nicely among all age groups.

Went public on Nasdaq in February, they were OTC before — so they’ve uplisted now but they are still absolutely tiny with a market cap of about $45 million. They trade at a solid discount to book value, have very solid earnings (PE is 7.5). Big investors will never be able to own this one, but it would not take much for them to have meaningful growth. Volume is tiny.

Balance sheet is about a third residential mortgages, a third consumer loans, and a quarter commercial real estate. They do a lot of mortgage origination but sell much of them. The consumer banks can cause problems for community banks — First Internet does a lot of RVs and horse trailers, shorter-term. About half of their loans are adjustable rate — most of the fixed ones are short-term consumer loans. The real estate loans they keep on the books are almost all adjustable, which should help them if there’s another crisis or big spike in rates.

Will start putting mortgages on their balance sheet again once rates are more favorable. When they do start booking these mortgages that loan growth will hurt their earnings in the short term — because the loan loss reserve gets put into earnings immediately even though cash earnings will be very solid.

Deposit mix is very appealing — lots of money market and CDs, typical for an internet bank. deposits are growing, including some non-interest bearing commercial deposits now. Taking CDs at less than 1% for two years means they pay more than most competitors, but it gives them a great low cost deposit base.

And, of course, we just learned once again that micro cap stocks make huge moves when people get interested — since the talk began 20 minutes ago, the stock is up 20%. The valuation still looks decent and they can probably grow their asset base very nicely over time without diluting shareholders, but that’s a ridiculous move.

The folks who buy stocks at the Value Investing Congress don’t tend to be flippers who want to sell again moments later, but you’d have to believe that the stock will come back down a bit once this interest wanes. I’m going to watch this one, but I think growth is likely to be modest, bank regulation is a wild card, and they don’t have any real competitive advantage … I’d rather come back and have another look on a day when the stock is suffering a bit.

If you want the optimistic take, look at Bank of Internet (BOFI) — they have grown from being about the same size as First Internet Bancorp a half dozen years or so ago to being much larger and getting both a great valuation multiple and a ramped up asset base, so the potential is there, Eriksen says, for potentially 300%+ gains over time as they grow over the next four or five years. They are still at a discount to book value which means they can’t use it to buy out another bank cheaply, so they’ll probably have to grow internally — which they can do, but the real catalysts are probably either the mortgage rate rising and the increase in their asset value as they start to hold some of those mortgages, or simply the increased exposure and the Nasdaq uplisting giving them perhaps a smaller discount to book value (as we’re seeing so far today).

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