Description

FINN is a $9.5 billion dollar assets regional commercial bank headquartered in Omaha, Nebraska. It services the Arizona, Colorado, Kansas, Nebraska and South Dakota markets both as a mortgage company and commercial bank. It stands as the 15th largest issuer of bank credit cards and the 9th largest commercial bank issuer of Visa and Master Cards in the US. FINN is also the 11th largest merchant credit card processor and the 19th retail lockbox processor and ranks among the top 20 in processing automated clearinghouse transactions. FINN has earned a 15% or greater return on equity every year since 1973 and has consistently earned a return on average assets of over 1%. FINN has grown assets at a compound annual rate of 13.6% and 10.7% over the last 28 and 4 years, respectively. Net income has grown at 15.3% and 10.7% over the same period of time. FINN has tangible book value of $750 million with only $94 million in long term debt. Insiders own in excess of 40% of the outstanding shares.


Valuation
FINN currently trades at 1.1x its book value of approximately $2,200 per share, mainly due to a lack of liquidity. It has a market capitalization of $820 million on 334,500 outstanding shares, of which $257 million are owned by non-affiliates of FINN. Only 11,000 shares are listed as currently floating ($27.5 million) on Bloomberg. Liquid regional bank stocks, with less stellar performance, currently trade at well over 2x book value. Transactions for companies in this segment of the banking industry tend to average 2.5x book value or greater. FINN traded to over 3.5x book value on take over rumors a few years ago.

Back up for this valuation is as follows: Credit card portfolios have been acquired for approximately 20% of loan balances. This places a value of over $740 million (20% x $3.7 billion in managed loans) for the portfolio. The rest of the asset portfolio would probably sell for between 15x to 20x earnings. Assuming a ROA of .9% on the other $5.7 billion in assets ($51MM in earnings), the remainder would be worth between $765 million and $1,020 million. This places a value of between $1.5 billion and $1.8 billion on the company or 2.0x to 2.4x book value. Based on the Company’s leadership position in its markets, we feel that it could sell for a premium to these values.

Catalyst

Short-term:
Over the next three quarters the company has about $2.8 billion ($966MM Q2, $1,100MM Q3 and $759MM Q4) of 6.33% interest rate liabilities maturing, which will reprice in the 4.5% range, thus increasing potential interest rate spread by up to 183 basis points. At the same time over 70% of FINN’s credit card portfolio has hit its floor on rates. Therefore it is likely that FINN will experience about an 80 to 100 basis point swing in net profits on an asset base of $10.7 billion. That translates into increased earnings share of $255 over and above normal profits. The offset to this pickup will be increased losses on its credit card portfolio as the economy weakens. However, credit card portfolios are decreasing as a percentage of overall assets and FINN has an excellent track record at managing credit in this sector. Any bonus in earnings is likely to trigger increased dividend payments, which currently stands at $46.47 per share (2.1%).

Long-term:
FINN would be an ideal acquisition candidate for either a national or large regional banking institution looking to add mid-western assets and/or a large credit card portfolio. Last time that takeover speculation popped up on FINN in 1995 and 1996, the stock traded to over 3.5x book value. With book value compounding at about 15% or more per year, a deal that occurs 5 years out at a terminal value of 2.5x book and annual dividend income of 2.5% would yield a compound annual return of about 36% (takeout price of $11,067).