First Internet Bank (NASDAQ: INBK) is an Indiana-based online financial institution that does not operate traditional branches. The bank’s financial performance is quite strong, and although it barely pays dividends on its common stock, the 2029 subordinated notes trader as (NASDAQ:INBKZ) offer good value for income-oriented investors.
Banking activities are doing well
During the second quarter of the year, First Internet saw its interest income increase by approximately 10% compared to Q2 2021 interest income while its interest expense decreased by $11.8 million at $10.4 million. This increased net interest income by approximately 20% to just under $25.7 million.
As the bank operates as a digital bank, operating expenses are relatively low, but this also means that non-interest income is also quite low. Non-interest income of $4.3m was driven primarily by the gain on the sale of loans and the generation of further gains going forward will also depend on the path of interest rates.
The bank also recorded approximately $1.2 million in loan loss provisions, which translated to pre-tax profit of $10.8 million and net profit of $9.5 million on EPS of 0. $.99. As First Internet currently pays a quarterly dividend of $0.06/share, this dividend is obviously extremely well covered. It also means that the vast majority of profits are kept on the balance sheet, which should help INBK continue to grow.
On the asset side of the balance sheet, INBK’s balance sheet shrank slightly, mainly because it was affected by the decline in value of the available-for-sale securities segment. At the end of June, the bank had just under $208 million in cash and just over $610 million in securities, meaning around 20% of its assets were invested in assets. liquid or very liquid.
Looking at the breakdown of the loan portfolio (below), we see that INBK is a fairly large financier of public institutions as it accounts for over 20% of the total loan portfolio. But the largest portion of the loan portfolio, with nearly 30% of loans, is single-tenant lease financing.
The portfolio of single-tenant leases has an average LTV ratio of 47%, which is quite low.
I was surprised at the quality of the loan book. At the end of June, less than $5 million of the loans were on an “unaccounted basis”, while just under $1.7 million had a delinquent status. This means that 99.8% of the total loan portfolio is classified as “current”.
A very good performance indeed, and this explains why the bank is able to keep loan loss provisions relatively low, which obviously helps to improve the net income profile.
I’m intrigued by the notes of 2029
First Internet Bancorp also has a publicly traded debt security with INBKZ as its ticker symbol. It is a fixed-to-float (“FtF”) debt security and although it is a subordinated security, it obviously remains senior to the ordinary shares and is part of the Tier 2 regulatory capital .
The total offer size is only $37, which means it should be very easy for First Internet to simply redeem these notes at maturity. The Notes currently have a yield of 6%, with interest payments of $1.50 payable in four equal quarterly installments of $0.375. From June 2024, the securities will switch to a floating interest rate with a three-month LIBOR interest rate + 411 bps (LIBOR has a floor of 0% but it does not really matter in the current situation). current rate environment). The three-month SOFR currently stands at 3.471%, which means that at the current SOFR rate, the interest rate will drop to 7.58% based on the principal of $25.
INBK also has the right to call INBKZ in June 2024 and given the most recent share price of $24.7 the yield to call is around 6.7% which I think offers a good risk/reward ratio for this bank.
At the end of the second quarter, INK had a tangible book value per share of $38.35. That’s slightly lower than the $38.51/share it reported at the end of 2021, but rising interest rates in the first half of this year had a negative impact on the value of portfolio assets. available-for-sale securities (which had a net impact of around $25 million), but the worst should be behind us and I wouldn’t be surprised to see tangible book value rise above $40/share again by the time end of this year, as an expanding net interest margin should also have a positive contribution to financial performance.
This means that INBK offers the best of both worlds: investors who look at the big picture will appreciate the high rate of earnings retention on common stock, as only a tiny portion of earnings is paid out as a dividend. And investors looking for income security could very well benefit from INBK’s Fixed-to-Float rating maturing in 2029.
I currently have no position in either, but will probably try to get my hands on some of the INBKZ holdings below par.