First Internet Bancorp Stock: Topline Growth Buoy Earnings (NASDAQ:INBK)

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Earnings of First Internet Bancorp (NASDAQ: INBK) will likely increase somewhat this year thanks to the recent surge in net interest margin. In addition, the loan portfolio will likely increase over the coming year due to economic factors. The other On the other hand, the provision charge will probably be higher than last year as it tends towards a more normal level. Overall, I expect First Internet Bancorp to report earnings of $4.88 per share for 2022, up 1.2% year-over-year. Compared to my last report on First Internet Bancorp, I have revised my earnings estimate upwards, mainly due to the surprise increase in net interest margin in the first quarter. The year-end target price suggests a strong upside from the current market price. Therefore, I maintain a buy rating on First Internet Bancorp.

Prolonged downtrend in lending likely to reverse soon

First Internet Bancorp’s loan portfolio declined for the fifth consecutive quarter at the end of March 2022. I had previously expected the declining loan trend to reverse in the first quarter, I so was disappointed with the results. Now that the deal to acquire First Century is complete, the balance sheet will grow at a slower pace than expected. In addition, high interest rates can discourage borrowing, especially to purchase a home.

On the other hand, a strong labor market bodes well for credit demand. First Internet Bancorp has a well-diversified loan portfolio in terms of geography and loan types. Therefore, the national unemployment rate is a good indicator of future loan demand. As can be seen below, the unemployment rate is near record lows.

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Data by YCharts

Elsewhere, the outlook for construction loans remains positive. As mentioned on the conference call, unfunded liabilities in the construction sector totaled $183 million at the end of March 2022, which management expects to continue to reduce, leading to healthy growth in outstanding balances. To put that figure into perspective, $183 million represented 6% of total loans outstanding at the end of March 2022.

Overall, I expect the loan portfolio to grow by 2.8% by the end of December 2022 compared to the end of 2021. In my last report on First Internet Bancorp, I estimated loan growth at 6.1% for the year. I have lowered my loan balance estimate due to poor first quarter performance as well as a deteriorating outlook for loan growth.

Meanwhile, deposit growth will likely match loan growth for the last three quarters of 2022. The following table shows my balance sheet estimates.

EX17 EX18 FY19 FY20 FY21 FY22E
Financial situation
Net loans 2,076 2,698 2,942 3,030 2,860 2,939
Net loan growth 67.5% 30.0% 9.0% 3.0% (5.6)% 2.8%
Other productive assets 587 704 981 1,018 1,146 1,194
Deposits 2,085 2,671 3,154 3,271 3,179 3,315
Loans and sub-debts 447 559 584 595 619 638
Common equity 224 289 305 331 380 410
Book value per share ($) 31.3 30.4 30.4 33.6 38.1 41.5
Tangible BVPS ($) 30.7 29.9 29.9 33.1 37.7 41.0

Source: SEC Filings, Author’s Estimates

(In millions of dollars, unless otherwise indicated)

Improved asset mix to counter damage from higher rates

First Internet Bancorp’s net interest margin jumped 26 basis points in the first quarter of 2022, which exceeded my expectations. As mentioned in the presentation of the results, the growth in the margin is partly attributable to tax refund advances. A surge in stock yields also supported the margin.

An improvement in the asset mix can further improve the margin in the coming year. First Internet currently has a large cash balance that can be easily and quickly deployed into higher yielding assets as rates rise. Management mentioned on the conference call that it plans to steadily deploy balance sheet liquidity into commercial and consumer loan growth this year.

On the other hand, the environment of rising interest rates should weigh on the net interest margin. Indeed, the passive side is more sensitive to rate increases than the active side.

Management mentioned on the conference call that it does not believe increases in market interest rates will have a significant impact on the price of deposits due to increased balance sheet liquidity in the industry. However, I think the management is too optimistic. Unfortunately, the deposit mix is ​​heavy on interest-bearing transactional accounts that are quickly repriced after rate changes. About 59% of the deposit portfolio will be revalued soon after the rate hikes, according to details given in the presentation. Therefore, a spike in average deposit costs in a rising rate environment seems imperative to me.

Additionally, now that the acquisition agreement has been terminated, First Internet will no longer receive the previously scheduled $300 million in low-cost deposits from First Century. As a result, the spike in filing costs will be higher than expected.

Management’s interest rate sensitivity analysis presented in File 10-Q shows that a 200 basis point increase in interest rates could REDUCE net interest income of 2.05% over twelve months. Given these factors, I expect the margin to decline by six basis points in the last three quarters of 2022, resulting in a full-year margin increase of 20 basis points. Compared to my last report on First Internet Bancorp, I have revised the margin estimate upwards due to the first quarter surprise.

Provisioning to normalize after remaining subdued last year

The asset quality of First Internet Bancorp’s loan portfolio has continued to improve over the past twelve months. Non-performing loans almost halved to 0.25% of total loans at end-March 2022 from 0.48% at end-March 2021, as mentioned in the presentation. However, there are chances that asset quality will deteriorate in the coming months due to rising interest rates which may adversely affect borrowers’ debt servicing capacity. Additionally, the threat of recession may prompt management to increase its loan loss reserves.

Overall, I expect net provision expense to represent 0.18% of total loans in 2022. In comparison, net provision expense averaged 0.19% of total loans in over the past five years.

Expect flat earnings growth

Weak loan growth and expanding margins will likely boost earnings this year. On the other hand, higher provision charges compared to last year will probably weigh on results. Overall, I expect First Internet Bancorp to report earnings of $4.88 per share for 2022, up 1.2% year-over-year. The following table shows my income statement estimates.

EX17 EX18 FY19 FY20 FY21 FY22E
income statement
Net interest income 54 62 63 65 87 103
Allowance for loan losses 5 4 6 9 1 5
Non-interest income 11 9 17 36 33 31
Non-interest charges 37 43 47 58 62 73
Net income – Common Sh. 15 22 25 29 48 48
EPS – Diluted ($) -Adjusted 2.13 2h30 2.51 2.99 4.82 4.88

Source: SEC filings, earnings releases, author’s estimates

(In millions of dollars, unless otherwise indicated)

In my last report on First Internet Bancorp, I estimated earnings of $4.42 per share for 2022. I increased my earnings estimate as the margin grew more than expected in the first quarter of 2022.

Actual earnings may differ materially from estimates due to the risks and uncertainties associated with inflation and, therefore, the timing and magnitude of interest rate increases. Also, the threat of a recession may increase the provisioning of expected loan losses beyond my expectations.

High Price Rise Warrants Buy Rating

First Internet Bancorp offers a dividend yield of 0.7% at the current quarterly dividend rate of $0.06 per share. Earnings and dividend estimates suggest a payout ratio of 4.9% for 2022, which is close to the five-year average of 8.8%. Also, First Internet Bancorp has maintained its quarterly dividend at $0.06 per share since 2013. Therefore, I do not expect an increase in the level of dividend.

I use historical price/tangible accounting (“P/TB”) and price/earnings (“P/E”) multiples to value First Internet Bancorp. The stock has traded at an average P/TB ratio of 0.97 in the past, as shown below.

Chart
Data by YCharts

Multiplying the average P/TB multiple by the expected tangible book value per share of $41.0 yields a price target of $39.6 for the end of 2022. This price target implies an upside of 8.2% compared to the closing price on July 7. The following table shows the sensitivity of the target price to the P/TB ratio.

Multiple P/TB 0.77x 0.87x 0.97x 1.07x 1.17x
TBVPS – Dec 2022 ($) 41.0 41.0 41.0 41.0 41.0
Target price ($) 31.4 35.5 39.6 43.7 47.8
Market price ($) 36.6 36.6 36.6 36.6 36.6
Up/(down) (14.2)% (3.0)% 8.2% 19.4% 30.7%
Source: Author’s estimates

The stock has traded at an average P/E ratio of around 10.4x in the past, as shown below.

Chart
Data by YCharts

Multiplying the average P/E multiple with the expected earnings per share of $4.88 yields a price target of $50.9 for the end of 2022. This price target implies a 39.1% upside from at the July 7 closing price. The following table shows the sensitivity of the target price to the P/E ratio.

Multiple P/E 8.4x 9.4x 10.4x 11.4x 12.4x
EPS 2022 ($) 4.88 4.88 4.88 4.88 4.88
Target price ($) 41.2 46.0 50.9 55.8 60.7
Market price ($) 36.6 36.6 36.6 36.6 36.6
Up/(down) 12.4% 25.8% 39.1% 52.4% 65.8%
Source: Author’s estimates

Equal weighting of target prices from both valuation methods gives a combined result target price of $45.3, implying a 23.7% upside from the current market price. Adding the forward dividend yield gives an expected total return of 24.3%. Therefore, I maintain a buy rating on First Internet Bancorp.

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