Greetings, Mr. Bottom,
FCZA made it through the recession in fair shape.
Tangible book value is closer to $7.2 once you strip out the intangibles and preferred. ($55M over 7.7 M shares.)
Unlike the bank in Upper Sandusky, the leverage is quite high. Asset is 1.1 billion.
With PT-PP ROA reaching 2% at one point, circa 2006, without crazy lending, I'd think PT-PP ROA* has the potential to reach 1.8% in the next cycle. Note the 20 to 1 leverage on tangible equity (generally not a good thing, I know), ROE (tangible E) can be as high as 20%.
The bank has a history of paying out dividends, sometimes over half of earnings. This may indicate the lack of growth potential. Indeed, the bank was the result of two mergers, one in 2005 and one in late 2007 for which $45M goodwill was recorded, and later on written off.
There is trust department. Annual revenue is running at $1.8M. (Trust asset--not deposit-- may be around $200M to $300M. It can make make money.). Bank with trust department tend to have some stability of customer base and lower deposit cost.
The $23M preferred was TARP. It does not have the resource to pay TARP off, hence the $25M recapitalization. New preferred converts at $7.8, which seems fair. The 6.5% coupon seems a little high. Upon completion of repurchase TARP the bank will have $103M in equity and tangible book value remains around $7 something.
ALLL seems to be a little high. A small portion of ALLL may be released at some point.
* I have used pretax, pre-provision operating income as a percentage of asset (PT-PP ROA) extensively. With this bank, if PT-PP ROA were to reach 1.8%, take out 0.2% for provision, pretax would be 1.6%. At 37.5% income tax rate, it'll earn 1% on asset. Given the 20:1 leverage, ROE may just hit 20%. Leverage would have to come down somehow, and the 20% ROE may prove illusory.
The ROE discussed above is still pie in the sky. I am not a buyer.
Seems like the bank was sold at so cheap a price only because the major shareholder wants it at that price. Other deal just follows. $0.70 was not a steal due to the fact that huge new capital makes the pro-forma book value only slightly above the $0.7 per share. Legacy shareholders got a raw deal.
Thank you for making the distinction on consumer loans, I stand corrected.
I especially appreciate your observation of the lack of diverse earning stream at BOFI.
If you would, can you comment on the significant lower ROE at INBK? This has puzzled me for some time. TIA.
First Internet Bank's loan to asset was only 65% or so. Equity to capital was 8.32%. It needs capital only if it wants to expand rapidly. Maybe some acquisitions? The lending side is constraint somewhat by equity, but nothing like $25 million. Acquisition would be on the fee based side.
It's hard to compare BOFI with INBK.
Though they both have very high funding cost, lending side is quite different. Real estate lending was 92% of BOFI's loan in 3Q13, it's only 65% of INBK's loan. At INBK, personal loans made up roughly 25% of all loans. This explains its relatively higher overhead costs, but doesn't explain the low loan yield, 3.90% of asset VS 4.31% at banks of similar size. Loan to asset at INBK was 64%, same as peer average of 64%.
What sets BOFI apart is exactly that, the enormous interest income. True, its loan to asset ratio was 77%. As a percentage of asset loan yield was 5.03%.
Banking is inherently competitive, how can it earn 0.72% over the competition's 4.31%?
There is no free lunch. If I have to guess, it's taking a great deal of more risks on those loans.
Back to funding cost, there were banks enjoying low cost funding pre-2006, by as much as one percentage point. That was enormous advantage over peers. Their advantage, with the still low rates, are maybe a quarter of that.
Imagine a time that rates starts to rise, this will cause interest rate spread to contract, maybe substantially. INBK does not have the efficiency to cover that yet, probably won't.
BOFI may, by then, develops indigestion on the some of the loans.
A lesson can be learned from Netbank--took over by FDIC in 2007 before the great recession--is that lending sight-unseen was a recipe for trouble, especially the high interest rate varieties. One may argue that loss history is lower than peers. All I'll say is, there is no free lunch.
That said, I equally dislike the large percentage of personal loans at INBK.
Well said, Mr. Schnider, and thank you.
BOFI is priced as if income is going to continue its 20%, 30% growth year after year.
Traditional banking income can't grow at that pace, that leaves fee income...
BOFI held up really, really well in the face of collapsing refinancing market. Top notch management, no doubt. However, mortgage resell profit is still on the decline.
There are other initiatives. Admittedly, they look sexy, but they are at early stages and tiny at present. Near term, fee income is unlikely to grow, if at all.
Too, most people do not realize how much risk it's taking by making business loans sight unseen. Time will tell if they found a golden goose.
For anyone interested, per FDIC records, the bank started to engage in mortgage banking in 2009. Quarterly resell profit were:
(2009) $0.000M, $0.531M, $0.877M, $0.380M;
(2010) $ 0.070M, $0.424M, $1.342M, $1.594M;
(2011) $0.428M, $1.238M, $4.615M, $4.467M;
(2012) $5.246M, $4.283M, $7.382M, $7.040M;
(2013) $5.757M, $6.661M, $5.132M.
They followed general refinancing activities closely.
Bond yield came down, usually good for mortgage refinance. However, it takes lower low interest rates(from the previous low, like March 2013) to even match the kind of refi activities like what we experienced the year before. Seems to me, this is never.
To make up the generally weakening industry wide volume, BOFI will have to aggressively capture market share. It does have some cost advantage, but if it should pursue such route, I suspect margin will erode further which peaked in 4Q12 and since crashed.
BOFI continues to lead the on-line mortgage banking and will lead for some time. Internet allows easy entry, if BOFI were successful, INBK and the like will raise capital to increase competition. If it's not so successful...Tail, it loses; head, it could eventually lose too. This is down the road, for now the head wind is strong.
My posts got deleted twice.
1Q13 quarterly from the bank's website showed the blended dilution being at $0.27 per share, half now and half in three years. So share count would increase another 5.1 million by 1Q2016.
With tax asset included, per share value maybe slightly over $1. The $0.45 per share price tag is not as cheap as I'd like. I'll pass.
Along the same line of reasoning,I shorted BOFI.
Just a few shares. One, if I were wrong, my potential loss is unlimited. Two, the upside is not significant.
Why did I short at all? The case to short seemed plausible.
(For the record, I shorted CATY at $9 about three years ago and promptly covered with a small loss.)
INBK will adjust its overhead, it's the mortgage revenue that I am worried about.
Doing business over the internet means that it's exposed to the entire mortgage market. The down trend will not reverse for some time, can it take businesses from other players?
I chickened out after our earlier conversations and is now shorting BOFI.
Just a little. Not expecting large gains like going long on some other issues but BOFI is frothy and ripe for correction.
I am surprised that CLBH held up this well.
Credit worsened in 2Q, again in 3Q. This is of no long term consequence.
Again, I'd like to know the strategy going forward in regard to its mortgage operation. Braswell was light on foot, adjusting to the changes (on mtge side) pretty well. Good man.
I have a problem.
I said the provision on tax asset was $11 million earlier. Well... based on 35% income tax rate, it's more like $5.84 million. Adding to the equity of 4.67 million and the $0.2 million it'll receive once the warrants are exercised I get $10.71 million. On 14.6 million fully diluted shares, adjusted per share "book value" is $0.73.
Whether it's worth your investment depend more on the management and the locations.
The bank earned a bit over $0.2 million in 3Q13. Half of that was one time in nature.
Too, notice that the MBank loaned out more than 9 times of its equity which included the subordinated debt. Peer banks loans lout 575% of equity.
Precisely because of the leverage from the sub. debt, if the bank can earn a higher return over its carrying cost earnings would be magnified.
Thank you for the insistence. 1Q13 report explained that that 5.1 million shares was issued with 5.1million at $0.49 per share, with 5.1 warrants to exercise in three years, at $0.04 per share. The proceeds was $2.5 million. $2.45 million was down streamed to MBank.
Given that, fully diluted share count is 14.6 million.
It's unrealistic to reference the 40% Y/Y when the whole shebang tanked by half Y/Y.
What drove the earnings were two, increased volume and abnormally high resell margin. Both are now in reverse.
If you can't make inference from INBK's numbers, just wait for the 3Q report. It may save you some grievance.
There are times to be hero, that's when you know better than the market. The situation is so murky now, you are shooting darts blindfolded.
As far as the business is concerned you are onto something.
But do you know how much dilution that $2.5 million it raised in 1Q13 has cost?
There are large rewards, but suppose the new capital was sold at $0.10 per share, this would dilute legacy shareholding to maybe 1.7%. At $0.20 per share, 3.4%, etc. etc.
Even now capital is thin. Maybe it's counting on getting the $11 million allowance on tax asset back, I would. But dilution is still the biggest determining factor. You'll probably have to call the bank for update.
3Q13 is out.
Quarter vs the preceding quarter:
pretax $1.378 million VS $2.162 million;
OREO cost $0.084 million VS $0.547 million;
provision $0.600 million VS $0.100 million;
Pretax, pre-prvision operating income adjusted for OREO expenses (there maybe other costs),
$2.062 million VS $2.807 million.
Annualized, 1.25% on asset VS ~1.67% on asset. This 1.25% is near peer average.
I beg to differ. BCAR is nothing like CLBH.
CLBH had a huge credit problem too. It obtained TARP and expanded loan port with much better quality. It got into mortgage business in a big way and di very well with it. The combination of improved interest income and the huge fee income allowed it to did itself out of the trouble. Too, all along, its common equity never got much below 4% of asset.
BCAR has negative equity of roughly $3 million. There could be some ALLL available for further release. ($0.9 million was released in 34Q13, thus produced a profit.) Won't be much left to release.
The root of the problem with BCAR is the lack of operating income. Loan yield is 0.5% below peers, funding cost 0.5% higher then peers. Overhead is 0.5% higher too. As a percentage of average asset, pretax, pre-provision operating income was consistently at around negative 0.5%. It's bleeding to death.
There is, however, allowance on asset that is around $14 million. Normally a business would eventually recover that tax asset once it demonstrate consistent positive earnings. With BCAR, this is not not the case. Since it can't earn its way out, it'll need fresh capital.
If it's new capital, they'll try to savage the tax asset. It's common that the new group would leave legacy shareholders 2% to 5% of the new recapped bank. Given that BCAR has negative equity, the percentage would probably be much smaller.
If it's a buy out or FDIC foreclosure, then tax asset would be lost and shareholder would be left with little or nothing.
Why would anyone be interested in a chronicle bleeding bank? BCAR has shrank asset and loan port and interest income was severely pinched. On top of that, with the same foot print, each branch is doing less business but had to keep up with personnel and other overhead. Both are reversible. Maybe with fresh capital it can invest into gathering low/no cost deposit too. BCAR has some value in someone else's hand.
Earning side was strong. Even interest income, aided by increased loan port, held up well.
It's good to see provision coming down, but that's largely offset by other credit related cost/loss.
A couple more quarters, earning power should show through.
Then, TARP dividends is coming up for reset. It'll be a while to see clear sky.