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First Internet Bancorp: 10%+ Yield To Maturity On The Subordinated Notes

Published Wed, 25 Mar 2020 13:51:54 -0400 on Seeking Alpha

First Internet Bancorp's shares have declined with the broader banking sector which has also taken down the company's exchange traded subordinated notes.
First Internet should benefit from lower short term interest rates due to the company's reliance on higher cost brokered deposits and online certificates of deposit.
The company's subordinated notes have relatively short terms to maturity and/or redemption and, notably, a floor on their floating interest rates.
The subordinated notes, at the current quotations, provide a 10%+ yield to maturity assuming no default event in the interim, depending on the acquisition price.
First Internet Bancorp (INBK) is an internet-based bank with a significant retail operation. The bank provides a variety of traditional consumer and commercial banking services, leveraging the internet to minimize operating costs with a branchless bank operation. The company has experienced significant loan growth over the last few years due to an increasing focus on health care and single tenant lease lending.
First Internet has several appealing features despite its rather unusual nature, including a high rate of growth in deposits and loans. The valuation is notably modest with shares, after the recent declines, trading at a mere 60% of book value and 7.5 times trailing earnings which reflects, in part, the company’s comparatively low profitability with a return on assets of 0.6% and a return on equity of 8.2%, the difference driven by an equity-to-assets ratio also towards the low end of the banking sector at 7.4%.
The bank’s net interest margin, and thus profitability, is quite sensitive to changes in benchmark interest rates. In the short term, the company expects this sensitivity to be negative, subsequently reversing in the following year, as reflected by the following table (which assumes a parallel shift in the yield curve):
Source: First Internal Bancorp 10-K (2019)
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