Description

IBTN is an illiquid micro-cap bank based in Nashville trading at 80% of tangible book value with pristine credit quality, a decent growth outlook, solid management, and a consistent low to mid double-digit ROE. The stock price has taken a hit in sympathy with the broader space and has not recovered; however, IBTN has a small securities book and their net interest margin has remained solid as loans have repriced in line with their deposits. Undemanding assumptions imply a 15% to 25% IRR over the next 3 years. This opportunity exists because of extreme illiquidity (~$10k/d). 

IBTN was founded in 2000 and has ~$813mm in assets and $67mm of tangible book equity as of 9/30/23. Total assets have been growing at ~10% CAGR over the past few years. AFS securities account for ~7% of assets. No securities are classified as HTM. 

Being based in Nashville is a boon for several reasons. Not only are Nashville’s demographic and economic trends strong, but IBTN has been able to build a strong medical-related banking business due to the high concentration of medical businesses in the area. TMA Medical Banking is a division of IBTN that has partnered with the Tennessee Medical Association to provide loans and deposit products to Tennessee’s physicians, medical practices, healthcare companies, and medical real estate investors. Building on this niche medical industry expertise, in 2020 IBTN launched Medquity. Under the Medquity brand, IBTN is building a nationwide banking business to serve “doctors from residency to retirement as well as the healthcare companies that support those physicians”. Although it is not broken out in their filings or in their call report, as of year end 2022, I estimate that IBTN’s healthcare loan book accounts for ~27% of their total loans and is growing significantly faster than the overall loan book. The IBTN team continues to innovate in this healthcare niche. As one example, they recently created a web-based platform for delivery of physician loans for financing JV investments. Product innovation like this is coordinated through the guidance of an advisory board of 15 physicians and healthcare leaders. Beyond providing a robust growth platform, IBTN’s healthcare book should have a much lower risk correlation to a general economic downturn than general CRE and C&I loans. 

IBTN has a branch light model that keeps expenses low. IBTN’s efficiency ratio is ~50% which is very solid for a bank their size. As IBTN continues to scale, that ratio should continue to decrease which will be a tailwind for ROE. 

The flip side to the branch light model and the strongest knock on the IBTN thesis is that their deposit franchise is weak. Since the Fed started hiking interest rates, IBTN has consistently lost core deposits and replaced them with CDs. Time Deposits <$250k have increased from 18% to 45% of total deposits and average interest expense has increased from 0.5% to 2.75%, although the rate of change slowed dramatically from Q2 to Q3. To bolster their deposit gathering, IBTN recently launched a fully digital platform for gathering deposits nationwide. 

Offsetting the weak deposit franchise is a management team that set up their loan book for just such a situation. IBTN’s CEO commented in their Q223 press release: “our existing deposit customers are who we thought they were: informed businesses and consumers who will logically seek to increase their earnings on bank accounts when market rates merit the effort. By anticipating customer behaviors, we positioned our balance sheet accordingly." Since bottoming in Q122, IBTN’s average yield has increased from 3.4% to 6.02%, outpacing the increase in IBTN’s cost of deposits. In short, despite their lack of deposit franchise, IBTN has been able to maintain their net interest margin and profitability in a rapidly increasing interest rate environment. 

IBTN’s credit quality is pristine. Nonperforming loans are low (~0.2%) and trending lower. They have not had a net charge off in 2 years. With a history of conservative underwriting, concentration in the strong Nashville market, a reasonable leverage profile (12% CET1 at the bank level + $20mm of debt at the Holdco), and a large + growing exposure to the healthcare industry, IBTN is well situated for the credit cycle.

Over the past three years, IBTNs ROE have been very solid. Given their credit quality and growth outlook, there is no reason to think that these types of returns are not sustainable going forward. 

Management has proven themselves to be solid operators. The current CEO, James Rieniets, joined the bank at its formation in 2000 as Chief Credit Officer and became CEO in 2007. James and his team have avoided value destroying acquisitions and focused on profitable, organic growth while maintaining credit quality. They also avoided piling into long duration fixed rate securities when it was fashionable to do so. They have even bought back ~1% of shares outstanding this year. Leveraging their niche healthcare expertise derived from two decades in Nashville into a national platform should provide a growth platform for years to come. As IBTN continues to scale, their already low efficiency ratio should continue to decline, which will further increase corporate returns. 

IBTN’s valuation is undemanding. At $18.67/share, IBTN trades at 80% of book value and 6x Q323 annualized earnings. Over the next 3 years, with no improvement to its multiple, IBTN is poised to deliver a low to mid double-digit IRR. If IBTN trades back to book value (or above) as Medquity scales, credit remains solid, sentiment changes etc., the IRR improves to >20%. 

Risks:

- extremely illiquid

- credit quality deteriorates in a recession

Catalyst

Continued execution of Medquity roll out

Broader banking stock sentiment change