In my previous article on the company I provided in depth analysis on the last five years of the First Internet Bancorp (NASDAQ:INBK), and conservative assumptions on the upcoming five years. I discussed at length the capital raise in 2013 and the disadvantages of it, however when viewed in hindsight it was obviously a good move by a management trying to grow the bank while dealing with a market that was undervaluing the stock. For more background please review the previous article.
If the balance sheet growth continued at half the pace that they have been growing over the last two years, it was evident to me that capital would have to be raised at some point to keep the bank well capitalized and viewed favorably by bank regulators. I was curious how management would accomplish this. In the Q3 earnings release they described an issuance of subordinated debt, which I like to the extent it is acceptable to regulators as a form of capital, there are limitations to how much debt/equity can be used as capital. Subordinated debt is also appealing when the market is assessing a low value to the stock, which is my assessment in this case.
The shelf registration is a positive indicator for several reasons. First, it is only rational that management would start an offering process if they were very confident in producing good earnings results for the near term. I would be surprised if results proved less than satisfactory over the next year. Secondly, to me it is a strong indicator that management sees continued strong growth for the foreseeable future, and they are preparing for it. Thirdly, according to the SEC filing, they can offer smaller amounts of capital, up to an aggregate of $100 million, over the next three years as needed or when valuations rise to a place, i.e. +2.5 price/book, that make it advantageous for the bank to issue common stock and be less dilutive to existing shareholders. However it is INBK's decision on how much they issue at a time, think of it as on-demand capital. And lastly, if the offering size is indicative of what they will need in the next three years, the $100 million coupled with the next three years of my earnings projections would support a $3 billion bank in 2018, my pro forma projection based on organic growth only is $1.9 billion. The point is, I like the size of the offering and it gives management optionality if good growth opportunities, organic or through acquisitions, arise to grow the bank.
Bank of the Internet (NASDAQ:BOFI) while bearing no resemblance to INBK in loan composition or management, does have a similar branchless bank model that allows them to scale new products nationally, which they have done successfully. Outside of any other comparisons of the two banks, they both share the key ability to scale and deliver good products to their customers nationwide. With recent developments at BOFI, I am not making comparisons of INBK management's ethics, although BOFI allegations have yet to be proven. BOFI has done many things right and raising capital is something they have done exceptionally well via "At the Market" (ATM) offerings through a shelf registration like INBK is in the process of filing. It is my belief that it is INBK's intent to raise capital similar to BOFI's ATM offerings, and it is a great model to follow.
You may ask, why didn't they file a shelf registration in 2013, instead of diluting the shareholders all at once with the whole offering. I asked myself that also after reading this offering. To my understanding through my research, INBK was not eligible for an S-3 shelf registration the last time they raised capital in 2013 because they had not been listed on the NASDAQ for over a year. Because of this they had to file an S-1 offering which has to be offered all at once. In the 2013 offering, if a substantial downturn would have materialized in the economy shortly after the offering, INBK could have been subject to being saddled with unused excess capital for several years. The shelf registration eliminates the risk of having substantial excess capital on the balance sheet, and ensures capital is quickly and readily available to capitalize on opportunities as they arise.
I have followed INBK for the past six years and they have executed very well in the actual mechanics of running the bank and growing, while still maintaining a safe and sound loan portfolio, etc. I believe there was a learning curve on the NASDAQ listing and capital raise process for management, but I believe they are getting it right. With valuations where they are, and I expect them to move higher, they have a good tailwind that is only getting stronger, in helping them grow the bank. The market sure has cooperated over the last month in providing a good entry point for anyone not yet involved.
Disclosure: I am/we are long INBK.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The author of this article does not endorse, promote or recommend the purchase or sell of the securities mentioned in this article.