Here’s my quick take on INBK’s third quarter.
My high-level view was that this tiny online bank continues to perform well. Loan portfolio continues to grow at a decent pace, and commercial loans now account for more than 50% of the total loans. The loan portfolio has become diversified. I also like how they are maintaining costs while growing the loan portfolio. This effectively makes the bank’s efficiency ratio go down, which is great.
I also like how the bank has grown without compromising credit quality.
IMO, this was yet another quarter of good performance. 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. I think management might have to work a bit harder on reducing cost of funding but this would seem reasonably feasible. After all, management has been able to improve net interest margin yet again this quarter.
The nitty gritty stuff is below.
1) Loan Portfolio
INBK has consistently grown its loan portfolio over the past several quarters. Here we are looking at quarter ending numbers:
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
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.
Let’s look at the trajectory of commercial loans:
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 65% QoQ. This growth has been driven by single tenant lease financing, and construction loan originations.
Residential mortgage + home equity loans accounted for $257M versus $270M in Q1 2015 and $280M in Q4 2014. Residential mortgage origination appears to have slowed down somewhat. As a percentage of total loans this segment accounted for 32% of the loan book.
Trailers and recreational vehicle loans (which were sort of the bread and butter of the company in its initial days) now account for about 12% of the loan portfolio. The total value is sitting around the $100M level since Q1 2014. These accounted for 19% of the loan portfolio in Q1 2014.
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)
NIM 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.
With respect to the sequential increase in net interest income, the company noted the following:
The increase in total interest income compared to the linked quarter was driven by a $48.6 million, or 6.2%, increase in average loans receivable and a $9.8 million, or 5.4%, increase in average investment balances, partially offset by a decline in average loans held-for-sale balances of $8.9 million, or 23.2%. A decline of 13 bps in the yield earned on the loan portfolio from 4.44% in the second quarter to 4.31% in the third quarter was due primarily to lower prepayment fees related to commercial real estate loans as well as accelerated premium and deferred fee amortization in the residential mortgage and consumer loan portfolios. The yield earned on the investment portfolio during the third quarter rose 9 bps to 2.30% from 2.21% for the linked quarter.
The Company’s net interest margin was 2.84%, 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.
3) Non-interest income
Noninterest income for the third quarter was $2.4 million compared to $2.5 million for the second quarter and $1.9 million for the third quarter 2014. The decrease of $0.1 million, or 4.1%, compared to the linked quarter was driven by a decline of $0.1 million, or 5.4%, in mortgage banking revenue resulting primarily from lower origination volumes, partially offset by higher gain on sale margins.
Non-interest income for Q2 2015 was $2.5 million compared to $3.1 million for Q1 2015 and $1.6 million for Q2 2014. The decrease of $0.7 million, or 21.3%, compared to the linked quarter was driven by a decline of $0.7 million, or 23.3%, in mortgage banking revenue resulting primarily from lower origination volumes.
I like recapping what the company has said in prior quarters as it gives us perspective on how the management team is executing:
In Q2 2014, the company said the following with respect to decline in non-interest income:
The Company experienced a $2.23 million year-over-year decline in income from mortgage banking activities. The Company made adjustments to reduce expenses in the second quarter in the mortgage operations to reflect the lower volumes. The Company continued to invest in this revenue channel, launching a construction lending program in Central Indiana in the second quarter.
Then, in Q3 2104, they said the following, which was reassuring:
Over the last 12 months, the Company has increased its sales and marketing efforts related to purchase mortgage business and has added sales personnel since the second quarter following a restructuring of its mortgage operations earlier in the year. Furthermore, it recently launched an Indianapolis-based origination effort to complement its nationwide online origination platform. As a result, origination activity has increased throughout the year with third quarter originations increasing 23.2% compared to the second quarter.
It seems the Q4 2014 story is similar to Q3 2014. This is what the company noted in the earnings release:
The increase of $0.2 million, or 8.0%, compared to the linked quarter was driven by an increase of $0.2 million, or 12.5%, in mortgage banking revenue. The increase in mortgage banking revenue was primarily a result of higher origination volumes as purchase originations were supplemented by increased refinance activity when interest rates dropped early in the fourth quarter.
Then, in Q1 2015 the following was noted.
Non-interest income for the first quarter was $3.1 million compared to $2.1 million for the fourth quarter 2014 and $1.5 million for the first quarter 2014. The increase of $1.0 million, or 50.0%, compared to the linked quarter was driven by an increase of $1.0 million, or 56.7%, in mortgage banking revenue resulting from an improvement in gain on sale margin and higher origination volumes.
The thing to note here is that management IMO has become better equipped to handle the variations in mortgage banking revenue. David Becker noted the following in the press release:
In spite of an elevated level of early paydowns and a competitive market, our commercial lending teams delivered another solid performance in the second quarter. Going into the third quarter, our commercial pipelines remain strong. Consumer loan activity picked up in the second quarter as well.
The diversification of the loan base is really helping them ride the variability.
4) Deposit Growth
Q3 2015 deposits totalled $900m versus $736M in Q3 2014.
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.
Total interest bearing deposits were $855m, costing 1.05% interest. Majority of this is CDs ($456m) costing 1.38%. It’s been hovering around these levels for some quarters.
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 September 30, 2015, consistent with the prior quarter and down 4 bps from 0.06% as of September 30, 2014. Additionally, nonperforming assets to total assets declined to 0.41% as of September 30, 2015 from 0.43% as of June 30, 2015 and 0.55% as of September 30, 2014. The allowance for loan losses was $7.7 million as of September 30, 2015 compared to $7.1 million as of June 30, 2015 and $5.5 million as of September 30, 2014. The allowance as a percentage of total nonperforming loans was 3,723.8% as of September 30, 2015 compared to 3,762.2% as of June 30, 2015 and 1,366.0% as of September 30, 2014. The allowance as a percentage of total loans receivable increased to 0.88% as of September 30, 2015 compared to 0.87% as of June 30, 2015 and 0.79% as of September 30, 2014.
6) Efficiency Ratio
Net Interest income (‘000):
Non-interest income (‘000):
Non-interest expenses (‘000):
Cash efficiency ratios
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? Low to mid-50%’s would be great.
One important peg in the wheel is the cost of funds. CDs account for about half of the deposits and they cost more than regular savings and money market accounts. Money market accounts are about 35% of the deposits. The distribution of CDs and money market accounts have been more or less steady. I guess INBK could try to attract more money market type funds to lower its cost of funds.
However, I see that ‘Other borrowed funds’ is sitting around $130M (has been so for Q2 & Q3 2015) which is up from $91M at end of Q1 2015. I think (although I ‘m not 100% sure) this refers to funds borrowed from ‘Federal Home Loan Banks’ which are chartered to provide on-demand, low-cost funding to American financial institutions.
- I think INBK’s reliance on CDs need to come down for the Net Interest Margin to go up some more.
- INBK could try to raise some capital through the market, now that the SP has appreciated a fair bit and the discount with respect to the BV has vanished.
7) Earnings Growth and Book Value
Earnings per share:
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)
P/E: 17.8 (using $31.94 closing price as of Oct 22, 2015). It was 17.8 (using $27.83, closing price as of July 23, 2015) when Q2 2015 was released.
Book value reported on the earnings release is $22.95. The P/B is 1.4.