Internet Banking with INBK

07/21/2014 7:00 am EST

Focus: STOCKS

Carlton Delfeld

Editor, The La Jolla Letter and Pacific Gains

My first real job was in the international banking group of the First National Bank of Boston; as befitting the second-oldest bank in America, it had its headquarters in a stately buildingin the heart of Boston’s financial district, recalls Carl Delfeld in Wealth Daily.

The psychological signal sent by an imposing bank building is still important to traditionalists like me, but technology and time has weakened its potency for many. My guess is the millennial generation could care less.

Some banks are dispensing with the bricks and mortar altogether. This trend is called “Internet banking,” and it often includes no-fee checking, unlimited check use, a VISA check/ATM card, and 24-hour Internet access to your account.

The use of mobile phones to check accounts, transfer funds, and make payments has fueled interest in this area. As one might expect, the heaviest mobile users are younger: 43% of mobile banking users were under age 35.

Every so often, I find a stock trading at great value and earnings prospects rising sharply. And I've found some hidden value in this sector with a relatively unknown play.

First Internet Bancorp (INBK) is now trading at book value and only slightly above tangible book value of $19.54. But the market is simply treating this stock as a stagnant community bank with declining earnings.

A number of analysts expect earnings to rise at an 80% clip. Moreover, if net interest income growth comes in better than 25%, the numbers could be even better.

INBK grew total assets by 26% last year and over 30% in the first quarter of this year. If it succeeds in growing another 25% this year, its total assets will top $1 billion by the end of the year.

Online banking has developed and evolved for about two decades now. It's now customers' overwhelmingly preferred method of banking, with 63% of adults preferring to bank online, according to a 2011 study.

INBK is on track for strong growth in its assets, loans, deposits, and net interest income. It is benefiting from a secular online banking trend that helps it to grow nationally, maintain customer loyalty, and boost profitable growth. This allows it to grow deposits as well as consumer and residential mortgage loans cost effectively.

The company is also well positioned to benefit from a rising-rate or inflationary environment. It has a broad and deep base of adjustable-rate loans in its portfolio. In particular, rates on about 92% of residential real estate loans were adjustable.

Based on a conservative price to book of 1.5 times, the stock could trade at $34 or higher by the end of 2015, representing at least a nice upside from the current price.

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