First Internet Bancorp: Management plans likely to boost revenue (NASDAQ:INBK)

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Earnings of First Internet Bancorp (NASDAQ: INBK) will most likely decline this year compared to last year due to an increase in operating expenses as well as a normalization of provisions. On the other hand, the upcoming acquisition of First Century Bancorp, team expansion and fintech partnerships will likely drive the topline. In addition, upcoming maturities of expensive deposits will likely support net interest income. Overall, I expect First Internet Bancorp to report earnings of $4.42 per share in 2022, down 8% year-over-year. The year-end target price suggests a decent upside from the current market price. Based on the expected total return, I maintain a Buy rating on First Internet Bancorp.

Management efforts to drive balance sheet growth

The upcoming acquisition of First Century Bancorp will provide a much-needed boost to First Internet Bancorp’s balance sheet. As mentioned in the merger presentation, First Internet Bancorp was previously expected to close the transaction in the first quarter of 2022. As no transaction closing announcements were made during the first quarter, I assume the transaction will now close during from the second or third quarter of 2022. The upcoming acquisition will likely add loans totaling $32 million, deposits totaling $330 million, and securities totaling $150 million.

Additionally, First Bancorp continues to work on fintech partnerships that will add low-cost deposits, as mentioned in the conference call. Additionally, First Internet Bancorp hired Small Business (“SBA”) staff last year, which will likely increase the balance sheet. As mentioned during the conference call, the company is planning new hires for this year.

In addition, the economic recovery will boost the balance sheet. First Internet Bancorp is a national lender; therefore, the country’s strong economic growth bodes well for demand for First Internet Bancorp’s products. The country recorded strong GDP growth of 6.9% in the last quarter of 2021 and a low unemployment rate of 3.6% in March 2022.

Given these factors, I expect the loan portfolio to grow by 6%, other earning assets to grow by 19%, and deposits to grow by 10% in 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 3,035
Net loan growth 67.5% 30.0% 9.0% 3.0% (5.6)% 6.1%
Other productive assets 587 704 981 1,018 1,146 1,366
Deposits 2,085 2,671 3,154 3,271 3,179 3,490
Loans and sub-debts 447 559 584 595 619 657
Common equity 224 289 305 331 380 422
Book value per share ($) 31.3 30.4 30.4 33.6 38.1 42.3
Tangible BVPS ($) 30.7 29.9 29.9 33.1 37.7 41.8

Source: SEC Filings, Author’s Estimates

(In millions of dollars, unless otherwise indicated)

Maturity of the CD, acquisition to come to increase the margin

The average yield of the loan portfolio is quite stable, as adjustable rate loans represent only 14.4% of total loans, according to details provided in the 10-K filing. In addition, pre-determined rate loans maturing in less than one year represent only 2.5% of total loans. In December 2021, management’s interest rate sensitivity analysis showed that a 200 basis point increase in interest rates could DECREASE net interest income by 4.86%, as indicated in the 10-K file.

Fortunately, the balance sheet has plenty of room for improvement from its year-end positioning. Certificates of deposit (“CDs”) totaling $713 million are expected to mature in 2022, according to details given on the conference call. These CDs carry a weighted average rate of 1.02%. The cost of replacing CDs was approximately 0.55% at the time of the conference call. Given these factors, the expected maturity can reduce the average funding cost by about nine basis points, according to my calculations. However, as interest rates rise over the coming year, the actual impact will likely be less than nine basis points.

Net interest margin should also benefit from the upcoming acquisition of First Century Bancorp in two ways.

  1. The average cost of deposits will decrease as the acquisition will add $330 million in low-cost deposits with an average funding cost of just six basis points.
  2. The acquisition will improve the asset mix. First Internet Bancorp will pay $80 million in cash consideration for the acquisition, which will reduce the cash downturn. In addition, the acquisition will add $150 million of equity yield of 1.5%, which is greater than the profit earned on cash and cash equivalents.

Given these factors, I expect the average margin in 2022 to be approximately 27 basis points higher than the average margin for 2021. Compared to my last report on First Internet Bancorp, I have modified my margin estimate.

Management’s plans to increase operating expenses

First Internet Bancorp’s non-interest expense jump in the last quarter of 2021 surprised me. As mentioned during the conference call, management expects these expenses to increase further by 15% to 17% in 2022, excluding the effect of the acquisition of First Century Bancorp. The expected increase in non-interest expense is due to the following factors.

  • Investment in SBA staff hired throughout 2021. Management expects last year’s hiring to have a full-year impact in 2022.
  • Management expects new hires for 2022.
  • Premises and equipment costs will increase as First Internet Bancorp recently moved to new headquarters.

Given these factors, I expect non-interest expense to grow 20% year-over-year to $74 million in 2022. In my latest report on First Internet Bancorp, I estimated operating expenses at $64 million for this year. I increased my estimate because last quarter’s expenses surprised me. It is obvious that I underestimated the management plans before.

Expect earnings to drop 8%

Earnings are likely to decline in 2022 year-over-year, primarily due to higher non-interest expenses. Moreover, the provision charge will probably return to a normal level in 2022 after a year of provision reversals. In my view, decent loan growth will likely ensure normalization of provisions for this year.

Overall, I expect First Internet Bancorp to report earnings of $4.42 per share in 2022, down 8% year-over-year. For the first quarter of 2022, I expect the company to report earnings of $1.03 per share. First Internet Bancorp is expected to announce first quarter results on April 20, 2022. The following table shows my income statement estimates.

EX17 EX18 FY19 FY20 FY21 FY22E
income statement
Net interest income 54 62 63 65 87 101
Allowance for loan losses 5 4 6 9 1 6
Non-interest income 11 9 17 36 33 31
Non-interest charges 37 43 47 58 62 74
Net income – Common Sh. 15 22 25 29 48 44
EPS – Diluted ($) -Adjusted 2.13 2h30 2.51 2.99 4.82 4.42

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

(In millions of dollars, unless otherwise indicated)

My profit estimate is almost unchanged from the previous profit estimate given in my last report on First Internet Bancorp, as the increase in the margin estimate offsets the increase in the non-cost estimate. ‘interests.

Actual earnings may differ materially from estimates due to risks and uncertainties related to the COVID-19 pandemic and the timing and magnitude of interest rate increases.

A decent expected total return warrants a buy rating

First Internet Bancorp offers a dividend yield of 0.6% at the current quarterly dividend rate of $0.06 per share. Earnings and dividend estimates suggest a payout ratio of just 5% for 2022. First Internet Bancorp has maintained its quarterly dividend at $0.06 per share since 2013. Therefore, I do not expect an increase in the dividend level despite the low payout ratio.

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 0.974x 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 $41.8 yields a target price of $40.7 for the end of 2022. This price target implies an upside of 2.6% compared to the April 8 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.

Multiple P/TB 0.8x 0.9x 0.97x 1.1x 1.2x
TBVPS – Dec 2022 ($) 41.8 41.8 41.8 41.8 41.8
Target price ($) 32.3 36.5 40.7 44.9 49.1
Market price ($) 39.7 39.7 39.7 39.7 39.7
Up/(down) (18.5)% (8.0)% 2.6% 13.1% 23.6%
Source: Author’s estimates

The stock has traded at an average P/E ratio of around 10.7x in the past, as shown below.

Chart
Data by YCharts

Multiplying the average P/E multiple by the expected earnings per share of $4.42 yields a price target of $47.1 for the end of 2022. This price target implies an 18.8% upside from at the April 8 closing price. The following table shows the sensitivity of the target price to the P/E ratio.

Multiple P/E 8.7x 9.7x 10.7x 11.7x 12.7x
EPS 2022 ($) 4.42 4.42 4.42 4.42 4.42
Target price ($) 38.3 42.7 47.1 51.6 56.0
Market price ($) 39.7 39.7 39.7 39.7 39.7
Up/(down) (3.5)% 7.7% 18.8% 30.0% 41.1%
Source: Author’s estimates

Equal weighting of target prices from both valuation methods gives a combined result target price of $43.9, implying a 10.7% upside from the current market price. Adding the forward dividend yield gives an expected total return of 11.3%. Therefore, I maintain a buy rating on First Internet Bancorp.

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