Hi all,
Sharing my notes for First Internet Bank’s (INBK) Q2 2016 earnings release. I think some of the regular visitors own shares in INBK. Happy to discuss INBK.
Cheers,
Anirban
Long INBK
Another very good quarter from First Internet Bank (INBK).
Press release: http://www.firstinternetbancorp.com/Cache/c35169632.html
Let’s dive straight into it.
Loan Portfolio
Q1 Q2 Q3 Q4
2014 $532.2M $631.7M $695.9M $732.4M
2015 $767.7M $814.2M $876.6M $953.9M
2016 $1,040.7M $1,111.6M
Total loans as of June 30th was $1.1 Billion, about 36.5% more than prior corresponding period (Q2 15). That’s similar to the growth observed in Q1 16. It seems like INBK is maintaining its moment on loan growth. 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.
Commercial loans account for about $725M of the loan portfolio, roughly 65% of the loan portfolio. Let’s look at the trajectory of commercial loans:
Q2 2016: $725.0M
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 continues to be solid. This growth has been driven by single tenant lease financing, and construction loan originations.
Consumer loans were at $383M, about 6.2% more than that held on 30 June, 2015.
A few other points, although these are not significant dial movers. The company had recently been pushing some home improvement loans. These ‘other consumer loans’ were at $22.6 M versus $2.7 M a year ago. The RV portfolio grew about 29% YoY and the trailer portfolio grew 13% YoY.
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 and NIM
Let’s take a look at the net interest income trajectory. This is the money made by the bank by lending money to borrowers, which one can argue is the bank’s core business. I like focusing on this for couple of reasons. One, this shows how the core operations are growing. Two, if the bank can grow the core earnings faster than the cost (the non-interest expenses) then we are headed in the right direction.
Now, of course, no metric is perfect as a standalone metric. Banks can juice the net interest income by taking on more leverage. So, we also need to pay attention to the bank’s capital structure and also look at its capital ratios. We will get to these important factors in a bit, but for now let’s just focus on net interest income (Table below is in ‘000’s).
Q1 Q2 Q3 Q4
2014 $4,866 $5,373 $5,673 $6,375
2015 $6,774 $7,572 $7,839 $8,568
2016 $9,141 $9,306
Net interest income grew 22.9% over prior corresponding period. That’s a marked slowdown from the 35-40% growth we have seen in prior periods. For example, in Q1 2016 net interest income grew about 35% over Q1 15. In the time I have been following the bank, this I believe the first time the growth has come in the low 20% range.
What’s going on?
To understand the net interest income dynamics, we need to look into the total interest income and total interest expense dynamics. Total interest income for the second quarter was $14.0 million, increasing 37.9%, compared to the second quarter 2015. However, the company’s interest expenses also grew. Total interest expense for the second quarter was $4.7 million, increasing $2.1 million, or 82.4%, compared to the second quarter 2015. The interest expense growth was driven by an increase in CDs. During the quarter, the company had $168 million of new CDs. These CDs also have longer maturity periods and cost a bit more in terms of interest. Effectively, there was more liquidity this quarter, and having more deposits than loans has the effect of dragging down the bank’s earnings.
Note that the bank also raised equity this quarter.
Net interest margin dropped to 2.39% (again because of the reasons above). Here’s how the bank summarised the NIM drop:
Net interest margin (“NIM”) was 2.39% for the second quarter compared to 2.78% for the first quarter and 2.87% for the second quarter 2015. The effect of the decline in prepayment fees related to commercial real estate loans and accelerated premium amortization related to early payoffs of purchased residential mortgages combined with higher deposit costs contributed significantly to the quarterly decline in NIM, partially offset by the growth in the investment portfolio. Additionally, the Company carried excess liquidity during the quarter as cash inflows generated from year-to-date deposit activity and proceeds from the equity offerings outpaced loan growth and investment purchases, which also negatively impacted NIM.
I ‘m okay with a drop in net interest income growth if it is a temporary pause. We will know more in the next couple quarters, but it seems like INBK was addressing capital requirements and raising funds to push for the next phase of asset (loan) growth.
Non-interest income
Most of this revenue is mortgage banking related and it generally has fluctuated a fair bit depending on origination activity. This was a good quarter for non-interest income (Table below has data in ‘000).
Q1 Q2 Q3 Q4
2014 $1,511 $1,622 $1,943 $2,098
2015 $3,148 $2,476 $2,374 $2,143
2016 $2,540 $3,748
The commentary from the bank says it all.
Noninterest income for the second quarter was $3.7 million compared to $2.5 million for the first quarter and $2.5 million for the second quarter 2015. Excluding the gain on sale of securities of $177,000 and the loss on fixed assets of $45,000 related to the former headquarters location, the increase of $1.1 million, or 42.4%, compared to the linked quarter was driven by an increase of $1.0 million, or 46.2%, in mortgage banking revenue resulting from higher origination volumes and an improvement in gain on sale margin.
As I have said before, with the passage of 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
- Another quarter of big growth in deposits. Q2 2016 deposits totalled $1,389m versus $857m in Q2 2015. That’s at a 62% clip. The very fast paced growth in deposits versus loans has the effect of dragging down net interest margin (as discussed above).
- 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 -
Overall credit quality continued to remain strong as total delinquencies 30 days or more past due as a percent of total loans receivable dropped to 0.09% as of June 30, 2016 from 0.12% as of March 31, 2016. During the quarter, a commercial and industrial loan with an outstanding balance of $4.7 million was placed on nonaccrual status and a specific allowance of $0.5 million was added to the allowance for loan losses. As a result, nonperforming loans to loans receivable increased to 0.51% as of June 30, 2016 from 0.04% as of March 31, 2016 and 0.02% as of June 30, 2015. Additionally, nonperforming assets to total assets increased to 0.60% as of June 30, 2016 from 0.32% as of March 31, 2016 and 0.43% as of June 30, 2015.
Efficiency Ratio
We should note that the net interest income is increasing much faster than non-interest expense. The latter is growing but slowly. And interest income is small enough that fluctuations in non-interest income is still having meaningful impact on efficiency & earnings. Over time, as the bank continues to grow, this should sort itself out.
Cash efficiency ratios:
Q1 Q2 Q3 Q4
2014 0.85 0.79 0.76 0.69
2015 0.63 0.63 0.61 0.61
2016 0.60 0.60
Earnings & Valuation
Earnings per share ($):
Q1 Q2 Q3 Q4
2014 0.13 0.22 0.28 0.32
2015 0.46 0.50 0.51 0.50
2016 0.53 0.57
Comments on earnings:
06/16: $0.57 (shares out:5.5M): Again, a good outcome considering the equity raising done by INBK. In this quarter, they had a lease impairment and a loss on fixed assets, both arising from moving HQ’s. This had a negative $0.02. In this quarter, the provision for loan losses included a specific allowance of $0.5 million related to a commercial and industrial loan that was placed on nonaccrual status. Net of the impact of transferring the loan from the general reserve, this item negatively impacted pre-tax income by $0.4 million, or $0.05 per diluted share. The cumulative negative impact of $0.07 was offset by $0.02 gain from sale of securities.
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.
TTM: $2.11 (up from $1.56 at Q2 2015)
Tangible Book Value: $23.67 (up from $21.23 at Q2 2015)
P/E: 11.5 (using $24.37 closing price as of July 20, 2016).
P/TBV: 1x (I would say this is cheap for a young a growing bank).
Return on Assets: 0.7% (versus 0.8% in Q2 15)
Return on Equity: 9.3% (versus 9.1% in Q1 15)
INBK looks really cheap on both earnings and book value terms. This bank is still very much under the radar. There’s no coverage by analysts, no estimates etc. And for most institutional buyers this is a tiny, illiquid, micro-cap. However, management is executing well, and if they continue executing this bank could potentially be 10x its current size. But that’s not going to happen quickly (like we have seen say for some technology companies) … so this holding requires lots of patience.