Hi all,
You will find my notes on INBK’s Q1 2016 below. Before I say anything else, note that this is really a small bank (~$100 million market cap) and is illiquid. Also note that the shares are volatile and can move a fair bit, and this investment will need time to pan out (if it ever pans out). But I like how they are executing, I like how CEO Becker has a solid stake in the business (around 10%), and I generally like how they are slowly but surely growing the business. And, please note that this is one of my larger positions so watch for those confirmation biases when you read the remainder of the notes.
Anirban
First Internet Bank (INBK) Q1 2016 Earnings Notes
This was yet another solid quarter from INBK. Loan growth was a solid 35%, but deposits grew even faster at around 50%. At a high-level, we should note that 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. This is really the key.
As 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.
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 12x and trailing Price-to-book is 1x. I think the bank can continue to grow earnings at around 25% 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.
Below, we look at the loan portfolio, net interest income, non-interest income, deposit growth, and efficiency ratio.
- Loan Portfolio
INBK has consistently grown its loan portfolio over the past several quarters. Here we are looking at quarter ending numbers:
Q1 2016 $1,040.7M
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
*Loan growth was about 35% in Q1 2016 compared with Q1 2015. This is a bit of an uptick compared to what we have seen in the previous quarters. At Q4 2015, we saw about 30.2% YoY growth in loans.At Q3 2015 loan growth with respect to prior year was 26%. In Q2 2015 the number was 29% whereas in Q1 2015 growth was around 44%. Obviously, the growth in loans has its ups and downs but it is good to see INBK go back to growing the loan book at a faster rate.
- Let’s look at the trajectory of commercial loans:
Q1 2016: $666.3M
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 69% QoQ. This growth has been driven by single tenant lease financing, and construction loan originations.
Consumer loans were at $3700M versus $368M 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.
- Net Interest Income & Net interest margin (NIM)
- Net interest income in Q1 2016 was $9.1 million versus $6.8 million in Q1 2015.That’s a solid 34% growth, consistent with what we saw in Q4 2015.
- 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.
- Non-interest income
Most of this revenue is mortgage banking related and it generally has fluctuated a fair bit depending on origination activity. In Q4 2015, INBK reported lower origination volumes, about $2.1 M in non-interest income for Q4 2015.
Noninterest income for Q1 2016 was $2.5 million compared to $2.1 million for Q4 2015 and $3.1 million for Q1 2015. The increase of $0.4 million, or 18.5%, compared to the linked quarter was driven by an increase of $0.4 million, or 24.9%, in mortgage banking revenue resulting from higher origination volumes.
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.
- Deposit Growth
- Q1 2016 deposits totalled $1243m versus $821m in Q1 2015. That’s a massive 51% growth in deposits. With loans growing at a slower rate this will drag down net interest margin.
- 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.
- 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 0.04% as of March 31, 2016, increasing 2 bps from the prior quarter and 1 bp from March 31, 2015. Nonperforming assets to total assets declined to 0.32% as of March 31, 2016 from 0.37% as of December 31, 2015 and 0.47% as of March 31, 2015. The allowance for loan losses was $9.2 million as of March 31, 2016 compared to $8.4 million as of December 31, 2015 and $6.4 million as of March 31, 2015. The allowance as a percentage of total nonperforming loans was 2,512.3% as of March 31, 2016 compared to 5,000.6% as of December 31, 2015 and 2,592.7% as of March 31, 2015. The allowance as a percentage of total loans receivable was 0.89% as of March 31, 2016 compared to 0.88% as of December 31, 2015 and 0.83% as of March 31, 2015.
- Efficiency Ratio
Net Interest income (‘000):
03/16: 9,141
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 quarter the total interest income grew by 38%, which is a great outcome. 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):
03/16: 2,540
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):
03/16: 7,005
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:
03/16: 0.60 (Q1 16)
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%.
- Earnings Growth and Book Value
Earnings per share:
03/16: $0.53 (shares out: 4.6M): Pretty good outcome. That’s a 15% YoY growth. Note that the comp was difficult because of the strong non-interest income figure. However, as I argued above the key here is to keep focusing on the “core” business, i.e., the loan portfolio growth driven by deposit growth.
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: $2.04
P/E: 11.9 (using $24.25 closing price as of April 21, 2016). PE was 13 when I wrote the Q4 2015 review. 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 $23.98. The P/B is 1.
INBK looks really cheap on both earnings and book value terms.
