Below is my report on the Q4 2014 earnings. It was a solid quarter. The stock is trading at 16x trailing earnings and 0.7x book value, based on closing price of $14.95 (Jan 22, 2015).
Happy to discuss the report with anyone interested.
Earnings release here: http://www.firstinternetbancorp.com/CorporateProfile.aspx?ii…
- Deposit Growth
- Total deposits increased 15% to $747M at Dec 31, 2014 compared with $647M at Dec 31, 2013. Comparing with Q3 2014, the deposits increased marginally from $740M to $747M.
- Loan Portfolio
Total loans as of September 30, 2014 was $695.9 million. This increased to $732.4M in Q4 2014, which is a 5% sequential increase. With respect to QoQ comparison, the total increase was about $231M in 1-year, or about 46% QoQ growth. That’s pretty handy loan portfolio growth.
The Company’s loan-to-deposit ratio climbed up to 97%, up from 94% in Q3 2014, and the mid 80’s in Q2 2014.
Total commercial loans went up to $351M at Dec 31, 2014, up from $308M at Sept 30, 2014 and $212M at Dec 31, 2013. That’s a 52% growth in commercial lending activities.
Commercial lending now accounts for 48% of the loans. Commercial loans comprised 44% of the loan portfolio at end of Q3 2014. The percentage of commercial loans has been hovering around the mid-40%’s for the past two quarters.
A majority of the commercial loans is in credit tenant lease financing. These accounted for $192M in Q4 2014, versus $165M in Q3 2014, $144M in Q2 2014 and only $84M in Q4 2014.
Commercial and Industrial loans stayed around the $75M level, similar to Q3 2014.
Residential mortgage + home equity loans accounted for $280M, essentially unmoved with respect to Q3 2014. It was $175M in Q4 2013. As a percentage of total loans this segment accounted for 38% 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 12.9% of the loan portfolio. The total value is sitting at $93M, down from $96M in Q3 2014 (when it was 14% of the loan portfolio). These accounted for 20.5% of the loan portfolio in Q4 2013.
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.
- Non-interest income
Noninterest income for Q4 2014 was $2.1M. It was $1.9M in Q3 2014 and $1.2M in Q4 2013. compared to $1.6 million for the second quarter and $1.6 million for the third quarter 2013. It appears mortgage banking revenue is on the mend. Let’s recap what the company has said in the past few quarters:
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.
- Net Interest Income & Net interest margin (NIM)
Net interest income for Q4 2014 was $6.4M, versus $5.7M in Q3 2014, and $5M in Q4 2013. That’s about a 28% increase in net interest income.
The company noted that their sequential increase in net interest income was primarily driven by average loan balance growth, partially offset by a decline in yield earned on loan portfolio and also a decline in their investment portfolio. The bank is conservatively managing prospective interest rate increases and had the following to say with respect to increasing its liquidity profile:
Additionally, the impact of the loan growth was offset by a decline of $9.9 million, or 7.1%, in the average balance of the investment portfolio as well as a decline of 6 bps in the yield earned on investments. The decline in average investment balances was the result of portfolio restructuring efforts made in 2014, which concluded in the third quarter, to increase the liquidity profile and reduce the interest rate risk and duration of the portfolio.
The Company’s net interest margin was 2.78%, up from 2.68% in Q3 2014, 2.61% in Q2 2014, and 2.7% in Q4 2013.
- Asset Quality
Asset quality improved significantly.
*Nonperforming loans declined $0.1 million, or 26.0%, with nonperforming loans to total loans declining 2 bps to 0.04% from 0.06% for Q3 2014.
- Nonperforming assets declined $0.2 million, or 4.0%, compared to Q3 2014 and $2.3 million, or 32.3%, compared to Q4 2013.
- Efficiency Measure
Net Interest income (‘000):
Non-interest income (‘000):
Non-interest expenses (‘000):
Cash efficiency ratios
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)
Last quarter, we had an interesting discussion regarding INBK still working like a refinance shop and that it wasn’t making any monies from it’s real business of making out loans. In one of the posts, I had said the following:
If we just look at the net interest income for the just reported quarter, then it would appear that the bank is mostly earning monies from non-interest income activities because the non-interest expense is just as large as the net interest income. But, if we look at the trend, then we will notice that non-interest expense (“operating expenses”) have been flat-lining at least over the past four quarters. In fact, non-interest expense has grown only by 4% b/w 06/13 and 09/14. In the same time period, however, net interest income (i.e., income from the loans) has grown by 34%. If this trend is to hold, then any additional loan book growth should drop directly into the bottom-line. Increase in non-interest income is just the icing on the cake.
The flat-lining of the expenses seems to be aligning nicely with what management has been doing. The bank raised money by selling shares, used these funds to go on a hiring spree to give a boast to its commercial lending activities. So, I think this strategy is working, and we are probably sitting at a crucial junction. If the loan book growth continues at the rate it is, then we should be seeing a very bright Q4.
Then, I had gone on to make the argument that the costs are likely to be flatlining and this should essentially have a trickle down effect on the earnings. Well, I guess I ‘m happy to see the thesis play out as I was expecting it to play out. This is what I had noted in one of the discussions:
Related to my point above, if the expenses stay relatively flat as they have over the past four quarters, then the increases in the loan book would have trickle down effect on the bottomline, which in turn should bring the efficiency measure down. Is a 65% efficiency measure possible by the end of the year?
INBK didn’t quite get to my ambitious target of hitting 65% efficiency ratio, but it did bring the efficiency ratio down to 69%, with interest income being now greater than non-interest expense, so non-interest income is gravy. I think it’s made very nice progress.
- Earnings and Book Value
Earnings per share:
12/14: $0.32 (shares out: 4,514,505) [Note, share count has marginally increased]
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: 15.7 (using $14.95, closing price as of Jan 22, 2015)
I look at the total shareholder’s equity line which is $95.83M (This is the assets minus liability line on the financials.) Then, I look at the diluted share count, which is 4,514,505. With the share price at $14.95, I get market cap of $67.49M. I calculate P/B as (Market Cap divided by Shareholder’s Equity) and get 0.70.
Well, I think this was a very important quarter, one that 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. Management sounded optimistic for 2015. Some snippets from management’s commentary:
We posted another excellent quarter of loan growth … The level of new business opportunities continues to grow and we remain confident in our asset generating capabilities moving forward.
Our mortgage banking team had another solid quarter … Origination activity constantly improved throughout the year and our improved sales and marketing capabilities combined with the low interest rate environment provide significant momentum heading into 2015.
We were especially pleased with the continued growth in net interest margin which expanded 10 bps during the quarter. We significantly reduced our cost of funds by actively managing the liability side of our balance sheet. (prudent management!)
While we remain focused on continuing to improve net interest margin, we took advantage of low interest rates and converted $40 million of short term borrowings to longer term funding in early 2015. This may negatively impact net interest margin growth in the near term but will leave us well positioned to benefit when rates begin to rise.