INBK

Interesting to see INBK on your list of recent purchases. You must have put some thought into that since you recently said you were not interested in them. What changed your mind.

Hi tdonb,

First people were discussing it on this board, and then their results came out, which I thought were excellent. Improving in just about every statistic, except earnings which were down because of refinancing drying up, but probably now at a bottom and about to turn up. My hope, of course, is that this could become another BOFI

Here are my notes. NOTE THAT THERE IS VERY LOW VOLUME and WIDE SPREADS BETWEEN BID AND ASKED so it’s hard to take a position.

Saul

Apr 2014 - Mar quarter results

We are off to a strong start in 2014, with net loans receivable increasing 49% over a year ago. Despite increased competition in the marketplace, we have been highly successful in winning new commercial loan relationships which continue to drive increased interest income. We anticipate continued growth in revenue, total assets, and core earnings throughout the remainder of 2014.

Overview for the quarter

Net interest income up 25% to $4.87 million from $3.89 million.

Net income was $0.6 million, or 13 cents per share, down from $1.49 million, or 52 cents per share a year ago. The decline in net income was primarily due to a 70% decrease in mortgage banking income, reflecting the nationwide slowdown of residential mortgage refinancing activity that began in the second half of 2013. Per share net income was also impacted by the 1.62 million increase in diluted shares following our fourth quarter 2013 public offering.

Total assets up 30% to $848 million, from $651 million.

Net loans receivable were up 49% to $527 million from $353 million.

Total commercial loans up 111% to $230 million from $109 million.

Nonperforming assets to total assets declined to 0.81% from 1.57%. The cushion for potential losses to total nonperforming loans increased to 400%, up from 150% in the prior year period.

Total deposits up 33% to $728 million from $547 million.

We have worked to protect shareholder value by addressing interest rate risk. We have maintained a growing and solid base of variable rate loans. We have complemented that initiative by taking actions in our securities portfolio to reduce exposure to longer term investments.

Income Statement Highlights

Net interest income was $4.87 million, up 25% from $3.89 million. The increase reflected greater revenue from mortgage loans as well as a 12% decrease in interest expense. Our cost of funds declined to 1.22% from 1.39% as longer-term maturing CDs were replaced at lower rates.

Our net interest margin was 2.51% in the first quarter 2014 compared to 2.60% in the first quarter 2013. This was because the timing of loans and the repositioning of the securities portfolio to address interest rate risk left above-average cash on the balance sheet, which had a negative impact on net interest margin. We expect net interest margin to improve in future periods.

Total noninterest expense in first quarter 2014 was $5.44 million compared with $4.55 million in first quarter 2013. The increase in noninterest expense reflected the Company’s continued investment in strategic initiatives and hiring of revenue-producing lending teams in key markets. In the past year, the Company added experienced talent in commercial banking and lending and launched loan production offices to support its asset-generating efforts.

Noninterest expense as a percentage of average assets was down 23 basis points, from 2.92% in first quarter 2013 to 2.69% in first quarter 2014.

Asset and loan quality remained strong.

Nonperforming assets as a percentage of total assets decreased to 0.81% from 1.57%.

Nonperforming loans to total loans receivable was 0.26% down from 1.06%.

The allowance for loan loss to total nonperforming loans was 398.52% and the allowance for loan loss to total loans receivable was 1.02%

5 Likes

Saul;

Thank you for the notes. I know nothing about banks. But I did read one of Fletch’s post about INBK. (Sorry that I don’t have the link to the post.) In the post, after a lengthy analysis, Fletch said:

I am not investing in INBK today. However, I will be watching them going forward. Here is what I want to see from them before I put my own money at risk:

1) Continued deposit growth at greater than 20% CAGRs, and continued winding down of CDs and brokered deposits;
2) Loan portfolio growth that matches or exceeds deposit growth, with the growth coming from strong real estate loans (currently can’t analyze the last part);
3) Increasing spreads – I’d like to see spreads at least at 350 basis points given where BOFI is;
4) Less reliance on mortgage banking – I’d like to see total income increasing, but mortgage banking income decreasing as a percent of total income;
5) Efficiency ratio – I think before I invest I’d like to see the efficiency ratio below 50%.
6) Reasonably dilution – dilution is acceptable if the proceeds are used to fund a loan portfolio that is growing at a faster rate than deposits. If deposit growth is matching loan growth, meaning additional capital isn’t being used to grow the loan book, I’d like a very good explanation from management as to what exactly it’s doing with the money being raised through new share issuances (hopefully 2013 was just a quirk somehow relating to the company’s first year being public).

How is INBK today measured against Fletch’s bullet points?

Regards.
-M

There’s been a fair amount of discussion on INBK on these boards. Here are some links to peruse:
http://discussion.fool.com/first-internet-bancorp-inbk-vs-bofi-3…

http://discussion.fool.com/inbk-annual-report-is-out-31197969.as…

Anirban

Hi mview,

I will take a stab at answering some of the questions above. Note that many of these were addressed in the earnings release and Saul’s notes up board.

1) Continued deposit growth at greater than 20% CAGRs, and continued winding down of CDs and brokered deposits;

Deposit growth has picked up in past year or so. Have a look at my post #731 on this board. FY 2012 deposits were about $530M ;FY13 deposits were about $673M. That’s about 26% YoY growth. According to the most recent earnings release:
http://online.wsj.com/article/PR-CO-20140424-910960.html
Total deposits increased 33% to $727.65 million at March 31, 2014 compared with $546.67 million at March 31, 2013.
so, compared to year ago quarter the growth was 33%.

Result: Pass

2) Loan portfolio growth that matches or exceeds deposit growth, with the growth coming from strong real estate loans (currently can’t analyze the last part);

Again, from the earnings release
Total commercial loans were $230.17 million at March 31, 2014 compared with $109.09 million at March 31, 2013, reflecting growth in both Commercial Real Estate and Commercial and Industrial lending.
That’s a 100% increase over past year (same quarter). I 'm focusing on the commercial lending aspect because this was one of INBK’s weak links. INBK has been growing its commercial lending and to make this happen they hired specialised teams to make this happen.

I like the outlook noted by CEO Becker:
Becker concluded: “Our strategic initiatives in diversifying our revenue streams and asset-generating capabilities are driving increasingly visible returns for our shareholders, and we expect to build on this momentum. With a healthy commercial loan pipeline and our commitment to a strong credit culture, we will continue to grow the First Internet Bank franchise to be a leader in web-based retail banking and commercial banking. We are dedicated to building the Company’s value for our shareholders.”

Result: Pass

3) Increasing spreads – I’d like to see spreads at least at 350 basis points given where BOFI is;

The spreads are lower for INBK, I believe mostly because of INBK’s efforts at growing the bank. Here’s the relevant comment from the earning release:
The Company’s net interest margin was 2.51% in the first quarter 2014 compared to 2.60% in the first quarter 2013. During the quarter, the timing of loans funded and the repositioning of the securities portfolio to address interest rate risk left above-average cash on the balance sheet, which had a negative impact on net interest margin. The Company’s initiatives to expand the net interest margin are expected to have a positive impact in future periods.

Result: Fail (but getting there, I think!).

4) Less reliance on mortgage banking – I’d like to see total income increasing, but mortgage banking income decreasing as a percent of total income;

As I noted above, the loan portfolio is changing fast. If you rewind back to 2010, it looked like INBK was writing a lot of loans for RVs and horse trailers. Here’s the relevant bit from the recent earnings:
Commercial loans comprised 44% of the loan portfolio excluding mortgages held for sale at March 31, 2014 compared with 31% at March 31, 2013.

Result: Pass

5) Efficiency ratio – I think before I invest I’d like to see the efficiency ratio below 50%.

I haven’t dug into the efficiency ratio for the most recent quarter. Efficiency ratio is a measure of a bank’s overhead as a percentage of its revenue, commonly defined as the ratio of expenses (excluding interest expense) to revenue. For an Internet only bank, INBK’s efficiency ratio is not that great, sitting somewhere in the high 60%s or so, but INBK’s efficiency ratio has increased because of CRE and C&I lending additions. They also hired experienced bankers, so that added to the cost base but will likely pay off in the long run. I 'm thinking the efficiency ratio will come down to mid-40%'s as operations scale up and new initiatives take hold. See earlier posts.

Result: Fail (but I think its getting there!).

6) Reasonably dilution – dilution is acceptable if the proceeds are used to fund a loan portfolio that is growing at a faster rate than deposits. If deposit growth is matching loan growth, meaning additional capital isn’t being used to grow the loan book, I’d like a very good explanation from management as to what exactly it’s doing with the money being raised through new share issuances (hopefully 2013 was just a quirk somehow relating to the company’s first year being public).

Well, this one we don’t know, do we. They added the 1.62 million
shares in the fourth quarter of 2013. I should, however, note that Becker owns about 10% of the company, so his interests are aligned with those of the shareholders like us. I would think he would look hard and close at any shareholder dilution.

Result: It’s up in the air, but I 'm inclined to give them a pass!

Overall, I like founder led companies that have strong insider ownerships. I think these guys are running a solid operation and they are trying to grow at a measured pace. They were around during GFC and manages to come out unscathed. Today, more and more people are wanting to do things online and banking is getting there. My home loan in Australia is with an online bank … they give me a great deal and are always available online to answer questions. I 'm not thinking of this as the next BOFI. BOFI has a crazy valuation in terms of Price over Book Value, currently somewhere in the 3x range. INBK is trading close to its book value and paying a 1% dividend. If it sticks to its trajectory, it will grow both via earnings and multiple expansion.

Anirban

7 Likes

Great post Anirban! Thanks!

Saul

Anirban;

thank you. Greatly appreciated.

-M

As I said before I don’t know anything about bank. but I did find the following info about INBK’s loan portfolio

Total real estate loans as a percent of total loans
2013 2012 2011 2010 2009
67.2 60.29 56.35 41.77 32.53

Total commercial loans as a percent of total loans
2013 2012 2011 2010 2009
11.12 4.03 .62 1.63 1.22

Total Consumer loans as a percent of total loans
2013 2012 2011 2010 2009
21.68 35.68 43.03 56.6 66.25

  1. INBK is steadily increasing real estate loans
  2. it is dramatically increasing commercial loans
  3. it is steadily decreasing consumer loans

What is the rational behind trends? Can Saul/Anirban or anyone else comment on it in terms of risk in an environment of rising interest rate?

Thanks in advance.

-M

1 Like

It looks like INBK’s asset quality is steadily improving since 2009.

Nonperforming loans as a percentage of total loans
2013 2012 2011 2010 2009
0.37 1.23 2.64 3.17 3.36

Nonperforming assets as a percentage of total assets
2013 2012 2011 2010 2009
0.9 1.62 2.29 3.36 2.52

But its performance ratio from return on average assets to efficiency ratio all deteriorate throughout the entire period since 2009. Is it due to its heavy investment into the staff and technology?

Full-time equivalent employees
2013 2012 2011 2010 2009
130 97 74 52 50

Number of offices
2013 2012 2011 2010 2009
4 1 1 1 2

Comments please.
Regards.
-M

1) INBK is steadily increasing real estate loans
2) it is dramatically increasing commercial loans
3) it is steadily decreasing consumer loans

What is the rational behind trends? Can Saul/Anirban or anyone else comment on it in terms of risk in an environment of rising interest rate?

In general, real estate loans are considered safer than consumer loans because the loans are backed by stronger collateral, with a lower historical default rate. INBK’s consumer loans are mostly for RVs and horse trailers. The rationale is that in a struggling economic environment when people are forced to make difficult decisions, borrowers are more likely to continue paying real estate loans (i.e. their mortgage) as opposed to a loan for a horse trailer or RV. So, in general, I prefer to see more real estate loans and less consumer loans on a bank’s balance sheet. Commercial loans are generally a subset of real estate loans, so it probably makes sense that as real estate loans are increasing a percentage of the total loan portfolio, commercial loans are increasing as well.

Unfortunately, management provides very little detail of the characteristic of the loan portfolio, so meaningful analysis is difficult. What kind of real estate loans? Single family, multi-family? What is the average LTV? What is the geographical concentration? What is the average borrowers FICO score? For the commercial portfolio, what is the real estate? Office? Class A, B, or C? Primary, secondary, or tertiary markets? Suburban strip malls or CBD? Retail - big box or shopping centers? What is the economic occupancy and weighted average debt service coverage ratio of the portfolio? What is the credit rating of the anchor tenants?

BOFI’s financial statements break all of this out. INBK gives us none of these details. It’s probably the single most important reason for me personally for why I will not yet invest in INBK. Management is giving me virtually no information on the single most important part of its business: its loan portfolio. Management is basically saying, “Trust us, our loans are good.” Call me cynical, but I have a hard time putting my money behind that. Understand that I am not placing a value judgement on the loans. INBK may have the best loan portfolio in the history of real estate. I have no idea; and that’s the point.

So I think the shift towards real estate loans and away from consumer loans is a good thing. I just wish I had more detail behind the loan portfolio.

Regarding interest rate risk, that’s more of an issue with how well management has matched up its funding sources with its loans. When do the liabilities reprice vs. when do the loans reprice? If you follow the BOFI board, my article on the recent Seeking Alpha short attack goes into some detail about interest rate gap analysis and hedging against interest rate risk. I don’t think I’ve looked at that for INBK, so I’m not sure how it’s positioned. Without more detail behind the loans themselves, I don’t think we can make any meaningful conclusions regarding INBK’s readiness for rising interest rates either for its real estate loans or its consumer loans.

Hope that helps!

Fletch
BOFI ticker guide
Long BOFI

7 Likes

But its performance ratio from return on average assets to efficiency ratio all deteriorate throughout the entire period since 2009. Is it due to its heavy investment into the staff and technology?

That’s the million dollar question. The positive spin is that, like you write, management is investing heavily in growth and that everything is scalable. So you pay a new loan production guy a bunch of money today to hire him, but it could be two or three years before his book really starts producing. From here on out the expense is basically flat with the future revenue at almost a 100% pure profit margin. Same thing with IT systems.

I don’t think we’ll be able to tell immediately. We’ll have to analyze future results and see if ROA, efficiency ratio, etc. start trending in the right direction. In my initial analysis of INBK, a compared it to where BOFI was in 2008. It’s only been the last several years that BOFI’s efficiency ratio has been around 40%. If INBK follows the same path, management may be making all of the right investments, but we’ll need patience as it could still be several years before the investment starts really paying off in terms of scale.

Fletch

1 Like

Fletch

Thank u for your response to both of my Inbk posts. Yes, it helps a lot. I will keep studying and learning.

Regards.
-M

R u guys still in ELLI?

Latest 1/4ly results seem weak.

Elli

pe 58

rev up 4.2% for the 1/4 to 32.20 ml

eps .16 vs .27 yr ago 1/4

Hi Fletch,

Unfortunately, management provides very little detail of the characteristic of the loan portfolio, so meaningful analysis is difficult. What kind of real estate loans? Single family, multi-family? What is the average LTV? What is the geographical concentration? What is the average borrowers FICO score? For the commercial portfolio, what is the real estate? Office? Class A, B, or C? Primary, secondary, or tertiary markets? Suburban strip malls or CBD? Retail - big box or shopping centers? What is the economic occupancy and weighted average debt service coverage ratio of the portfolio? What is the credit rating of the anchor tenants?

Some of the above re. LTV, lending practices, FICO scores are noted in the 10-K. Below are some snippets regarding their lending practices and loan portfolio, from the most recent 10-K:

About Residential Mortgage Lending

  • Page 5: “We offer first-lien residential mortgage loans in 49 states and second-lien (home equity) loans as well as home equity lines of credit in 44 states. We offer loans for homebuyers (purchase money) as well as existing homeowners who wish to refinance
    their current loans.”

  • Page 5: “We attract creditworthy loan applicants through disciplined online lead generation efforts and through repeat business from past
    customers. We track our acquisition costs vigilantly and discontinue any lead sources that are not contributing to a positive margin. We use
    customer relationship management tools to track prospects and identify the most likely sales opportunities on which to focus our efforts. For 2012, the weighted average credit score of our mortgage customer was 775 at time of origination.”

About CRE lending

  • Page 5: “We expect that the majority of our CRE loans will be in office, retail, industrial, and multifamily loans in the Midwest, with credit tenant lease financing on a nationwide basis. While many banks in Central Indiana must address legacy problem CRE loans in their portfolios, we are in a position to meet pent-up demand from qualified borrowers.”

Underwriting Procedures

  • About residential real-estate loans, Page 11: "Additionally, our residential mortgage underwriters use a third party product to assess the risk of the loan transaction for both the collateral and applicant. The product helps us identify suspicious mortgage loans and analyzes the property and neighborhood characteristics for each transaction. From the date of application to the date of closing all of an applicant’s credit activity is monitored.

All appraisals are reviewed by our collateral underwriter, who is an Indiana state certified appraiser. The collateral underwriter has several third party products that help assess the quality of the appraisal, the comparables chosen, and the value determination. Loans secured by first liens on residential real estate held
in the portfolio typically do not exceed 80% of the value of the collateral, are adjustable rate and have amortization periods of thirty years or less."

About CRE loans on page 11: “For the various types of commercial real estate loans, minimum criteria have been established within our loan policy regarding debt service coverage while maximum limits on loan-to-value and amortization periods have been defined. Maximum loan-to-value ratios range from 65% to 80% depending upon the type of real estate collateral, while the desired minimum debt coverage ratio is 1.20x. Amortization periods for commercial real estate loans are generally limited to twenty years.”

About Commercial & Industrial loans, on page 12: “C&I loans focus on the entire business relationship and consist of loans for business expansion as well as working capital loans used to purchase inventory and fund accounts receivable that are secured by business assets other than real
estate. These loans are generally written for three years or less. Also, new equipment financing is provided to businesses with these loans
generally limited to 90% of the value of the collateral and amortization periods limited to seven years. C&I loans are often accompanied by a
personal guaranty of the principal owners of a business. As with CRE loans, the underlying cash flow on a historic and projected basis of the
business is the primary consideration in the underwriting process, with a desired minimum debt coverage ratio of 1.20x.”

Anirban

1 Like

Anirban,

Thanks! When I did my initial research, the 10-K had not yet been filed. Now that it’s available, I’ll go through it and see what kind of information management provides for the loan portfolio.

Fletch

Fletch,

Thanks so much for helping out with those questions on INBK. I really couldn’t answer them. I really appreciate it.

Saul