Hi all,
Below are my notes on INBK’s recently reported fourth quarter 2015 earnings. If you are invested or thinking about investing in this company, consider reading the earnings press release:
http://www.firstinternetbancorp.com/Cache/32616002.pdf?IID=4…
Anirban
Before I delve into the my usual reporting format for INBK(which is borrowed from Fletch’s coverage of BOFI), I wanted to just talk about a few things that jump out of this year’s report.
First, the bank has done a wonderful job of growing and diversifying its loan portfolio. The net result is steady growth in net interest income. Remember, net interest income is essentially the earnings on the spread of interest earned on loans and the interest paid on funds deposited with the bank or borrowed by the bank. The loans are the banks assets and the deposits are the banks liabilities. This core banking platform is working well and growing.
Second, since INBK is such a small bank the money the bank earns from non-interest activities such as originating loans can give a good boast to the earnings. Unfortunately, this non-interest income also bounces around. However, over time I would expect net interest income to dwarf non-interest income. For context, if we look at BOFI, its non-interest income accounted for 13%, 14%, 21%, and 17% of the total revenues before losses (i.e., net interest income + non-interest income) in the FY 2015, 2014, 2013, and 2012, respectively. Contrast that with INBK where its non-interest income has accounted for 25%, 24%, 35%, and 42% of its total revenue before loan losses in FY15, FY14, FY13, and FY12, respectively.
Third, for banks it is useful to look at the Return on Assets (ROA). ROA is a measure of the profits as a function of the bank’s assets. INBK’s ROA for FY2015 was 0.81%, up from 0.5% in FY2014. That’s a fair bit of progress. Some of the best run banks have ROAs around 1.5% (e.g., Wells Fargo’s ROA is around 1.5%, BOFI’s is around 1.6%). INBK’s ROA is certainly inferior compared to these, but it’s improving.
Finally, if one believes that INBK can continue to execute, grow the net interest income component by growing its asset (loan) base, drawing in more low cost funds, etc, then today’s valuation is cheap. Trailing Price-to-earnings is 13x and trailing Price-to-book is 1.1x. It hasn’t been this cheap in sometime. I think the bank can continue to grow earnings at around 25% to 30% for the foreseeable future. The net-interest income component has been growing at around 30+% rate for a while and I think it will continue to grow at that rate for a while. Over time, I think the non-interest income will not be that much of a factor in the earnings. It will simply be the gravy. The bank is doing a good job of managing costs.
CEO Becker has a sizeable stake in the business and that give me confidence that his interests will align with those of shareholders like us. With all key metrics improving this year, I ‘m very happy to continue to hold my shares.
While I really like the bank and ‘m happy with the execution, I 'm fighting the urge to add some more shares. The valuation is pretty good, but it’s important to note that this is a small bank. If there’s a major economic downturn in the US, the bank will hurt. The shares are illiquid so anyone building a big position in this one will likely have to stay with it for a while. As the bank grows, liquidity will improve though.
And now back to the regular format for the remainder of the earnings review.
1. Loan Portfolio Growth
INBK has consistently grown its loan portfolio over the past several quarters. Here we are looking at quarter ending numbers:
Q4 2015 $953.9M
Q3 2015 $876.6M
Q2 2015 $814.2M
Q1 2015 $767.7M
Q4 2014 $732.4M
Q3 2014 $695.9M
Q2 2014 $631.7M
Q1 2014 $532.2M
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At Q4 2014, we had seen a pretty solid QoQ loan growth of 46%. That’s kept pace in Q1 15 versus Q1 14 with growth of 44%. Q2 15 versus Q2 14 cooled down a bit to 29% growth. Growth came in 26% with respect to Q3 2014, which is still pretty solid. At Q4 2015, we have about 30.2% YoY growth in loans, which I think is very good.
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Let’s look at the trajectory of commercial loans:
Q4 2015 $582.9M
Q3 2015 $508.7M
Q2 2015 $488.8M
Q1 2015 $395.0M
Q4 2014 $351.0M
Q3 2014 $308.0M
Q2 2014 $285.0M
Q1 2014 $243.0M
Commercial loan growth has been solid, growing 66% QoQ. This growth has been driven by single tenant lease financing, and construction loan originations.
Consumer loans were at $366.2M versus $376.1M a year ago.
Overall, INBK has steadily grown its loan portfolio and nicely diversified the portfolio b/w commercial and residential loans in the last year or two. They have done some excellent work here.
2. Net Interest Income & Net interest margin (NIM)
- Net interest income for Q4 2015 was $8.6M versus $6.4M in Q4 2014. That’s a solid 34.4% increase, consistent with the trajectory of loan portfolio growth.
- Net interest income for Q3 2015 was $7.8M versus $5.7M in Q3 2014.
- Net interest income for Q2 2015 $7.6M versus $6.8M in Q1 2015 and $5.4M in Q2 2014. That’s a 41% YoY net interest income increase.
- The Company’s net interest margin was 2.85%, up from 2.84% in the prior quarter, but down from 2.87% in Q2 2015. It was 2.84% in Q1 2015, 2.78% in Q4 2014, 2.68% in Q3 2014, 2.61% in Q2 2014, and 2.51% in Q1 2014. Overall, though, the trajectory is good.
3. Non-interest income
Most of this revenue is mortgage banking related and it generally has fluctuated a fair bit depending on origination activity. This quarter INBK said that they saw lower origination volumes. The result was $2.1 M in non-interest income for the forth quarter.
Note that this is down from the third quarter’s $2.4 million. It was $2.5 million for the second quarter and $1.9 million for the third quarter 2014.
Over time, I ‘m expecting their earnings to be mostly driven by net interest income. If the bank can grow loans and deposits at a steady rate, then in due course the non-interest income will become a small piece, just gravy, on top off earnings from the bank’s core activities.
4. Deposit Growth
- Q4 2015 deposits totalled $956m versus $759m in Q4 2014. About 26% YoY growth.
- Out of the $956M in deposits, the majority about $916M were interest bearing. Money market funds accounted for $345m and were costing the bank about 0.7% interest. CDs accounted for about $467m and were costing the bank about 1.4%.
- Q3 2015 deposits totalled $900m versus $736M in Q3 2014. About 22% YoY growth
- Q2 2015 deposits totalled $857m versus $744m in Q2 2014 and $821m in Q1 2015. Deposits grew about 15% YoY. For comparison, total deposits at Q1 2015 and Q1 2014 were $821m and $728m respectively, i.e., a 13% growth.
5. Credit Quality
Credit quality continues to remain strong. The following is from the release -
Credit quality continued to remain strong as nonperforming loans to total loans receivable were 0.02% as of December 31, 2015, consistent with the prior quarter and down 2 bps from 0.04% as of December 31, 2014. Additionally, nonperforming assets to total assets declined to 0.37% as of December 31, 2015 from 0.41% as of September 30, 2015 and 0.50% as of December 31, 2014. The allowance for loan losses was $8.4 million as of December 31, 2015 compared to $7.7 million as of September 30, 2015 and $5.8 million as of December 31, 2014. The allowance as a percentage of total nonperforming loans was 5,000.6% as of December 31, 2015 compared to 3,723.8% as of September 30, 2015 and 1,959.5% as of December 31, 2014. The allowance as a percentage of total loans receivable was 0.88% as of December 31, 2015 compared to 0.88% as of September 30, 2015 and 0.79% as of December 31, 2014.
6. Efficiency Ratio
Net Interest income (‘000):
12/15: 8,568
09/15: 7,839
06/15: 7,572
03/15: 6,774
12/14: 6,375
09/14: 5,673
06/14: 5,373
03/14: 4,866
12/13: 4,964
** Note that for the past several quarters we have seen a steady QoQ increase in net interest income. This is good as it shows healthy functioning of the core banking platform, i.e., earning monies of the spread of interest paid on deposits versus interest earned on loans.
Non-interest income (‘000):
12/15: 2,143
09/15: 2,374
06/15: 2,476
03/15: 3,148
12/14: 2,098
09/14: 1,943
06/14: 1,622
03/14: 1,511
12/13: 1,171
** Note that this is mostly mortgage banking activity. It’s been all over the place and highly variable.
Non-interest expenses (‘000):
12/15: 6,492
09/15: 6,207
06/15: 6,327
03/15: 6,257
12/14: 5,879
09/14: 5,785
06/14: 5,560
03/14: 5,438
12/13: 5,255
** The key point here is that non-interest expenses, i.e., cost of personnel + marketing + premise + equipment etc, are increasing but slowly compared to the growth in net interest income.
Cash efficiency ratios
12/15: 0.61 (Q4 15)
09/15: 0.61 (Q3 15)
06/15: 0.63 (Q2 15)
03/15: 0.63 (Q1 15)
12/14: 0.69 (Q4 14)
09/14: 0.76 (Q3 14)
06/14: 0.79 (Q2 14)
03/14: 0.85 (Q1 14)
12/13: 0.86 (Q4 13)
INBK’s efficiency ratios has been steadily coming down. Efficiency ratio is a measure of the bank’s overhead (think of this as fixed costs such as people, IT, building, etc) as a percentage of its total income. Of course, lower is better and we would expect efficiency ratios to be better for online banks versus brick and mortar ones. BOFI, INBK’s big brother, has industry leading efficiency ratios in the low 30%’s. What’s going on here with INBK? INBK has spent a lot to scale up its operations. We are now starting to see the benefits. In the past few quarters, interest income has outpaced the non-interest expense. The non-interest income is the gravy. It’s pleasing to see the costs (non-interest expenses) stabilise, i.e., tick up slowly compared to the net interest income growth. If we hadn’t seen a slowdown in the non-interest income, INBK would have achieved a much better efficiency ratio.
So, the question remains — can INBK get the efficiency ratio below the 60% mark? I think we should see INBK’s efficiency ratio get to the high 50%’s in 2016. Here’s how I arrive at this number. Let’s assume that net interest income growth slows to 25% by Q4 2016. Then we should hit roughly $10.7M in net interest income in Q4 2016. Let’s conservatively assume that non-interest income is flat at $2M. Non-interest expense has grown slowly, so I ‘m looking at past data and giving it a 10% growth for a non-interest expense of $7.1M in Q4 2016. If it does follow this script then we see efficiency ratio in the vicinity of 55%.
7. Earnings Growth and Book Value
Earnings per share:
12/15: $0.50 (shares out:4.6M); the company noted the following "During the fourth quarter, the Company recognized $0.12 million of pre-tax compensation expenses associated with a discretionary bonus award and staffing-related changes which negatively impacted diluted earnings per share by $0.02”. I will also note that non-interest income was down, which also contributed to the earnings being flat with respect to the prior quarter.
09/15: $0.51 (shares out: 4.6M)
06/15: $0.50 (shares out: 4.5M)
03/15: $0.46 (shares out: 4,523,246) [Some dilution owing to issuance of RSUs]
12/14: $0.32 (shares out: 4,514,505)
09/14: 0.28 (shares out: 4,511,291)
06/14: $0.22 (shares out: 4.45M) —> Significant increase in earnings with respect to 03/14 quarter; driven by strong increases in interest income.
03/14: $0.13 (shares out: 4.45M)
12/13: $0.19 (shares out: 4.45M) → Note the dilution following the bank’s secondary offering.
09/13: $0.25 (shares out: 2.86M)
06/13: $0.59 (shares out: 2.82M)
TTM: $1.96
P/E: 13.1 (using $25.64 closing price as of Jan 22, 2016). PE was 17.8 when I wrote my Q3 analysis in Oct 2015. It was 17.8 (using $27.83, closing price as of July 23, 2015) when Q2 2015 was released.
Book value per common share was $22.3. The P/B is 1.1.
INBK looks really cheap on both earnings and book value terms.
Valuation and Concluding Remarks
This was yet another good quarter. It shows that management’s investments in people, processes, and IT is paying off. Expenses have flatlined. If loan book growth continues, the bank is well positioned to keep growing. Management is taking a cautious approach to growth, carefully balancing assets and liabilities. It’s positioning the bank to adapt to interest rate increases.
On the surface, the earnings might seem to flatline but that’s because non-interest income is still a significant portion of the total income. As the bank continues to grow its net interest income I would expect the non-interest income to become a much smaller portion of the overall net income. And the good thing is net interest income is growing at a pretty healthy 30% clip, pretty much inline with the growth in the loan book.