Business context and reporting period
First Internet Bancorp is a bank holding company operating First Internet Bank of Indiana, a nationwide internet bank without traditional branch offices. Its businesses include consumer banking and lending, commercial and industrial lending, commercial real estate, and nationwide single-tenant lease financing. This unaudited Form 10-Q covers the three and nine months ended September 30, 2015; balance-sheet comparisons are to December 31, 2014.
Financial performance and condition
- Third-quarter results: Net income was $2.323 million, or $0.51 diluted EPS, versus $1.282 million, or $0.28, in Q3 2014. Net interest income was $7.839 million, up 38.2%; noninterest income was $2.374 million, up 22.2%. Interest income was $10.536 million and interest expense was $2.697 million.
- Nine-month results: Net income was $6.651 million, or $1.46 diluted EPS, versus $2.859 million, or $0.63, in the first nine months of 2014. Net interest income was $22.185 million, up 39.4%; noninterest income was $7.998 million, up 57.6%.
- Margins and returns: Net interest margin was 2.84% in Q3 2015 versus 2.68% a year earlier, and 2.85% for the nine months versus 2.60%. Q3 return on average assets was 0.82% and return on average equity was 9.14% (0.59% and 5.36% in Q3 2014).
- Balance-sheet growth: Total assets were $1.166 billion, up 20.2% from year-end 2014. Loans receivable were $876.6 million, up 19.7%; available-for-sale securities were $202.6 million, up 47.3%. Deposits were $899.8 million, up 18.6%, and shareholders’ equity was $102.9 million.
- Loan mix and credit quality: Commercial loans rose 44.9% to $508.7 million and represented 58.0% of loans, versus 47.9% at year-end; single-tenant lease financing was $329.1 million, or 37.6% of loans. The allowance for loan losses was $7.671 million, or 0.88% of loans, versus $5.800 million and 0.79% at year-end. Nonperforming loans were $206,000 (0.02% of loans); nonperforming assets were $4.724 million (0.41% of assets), including $4.488 million of other real estate owned.
- Cash flow and liquidity: For the nine months, operating activities provided $16.736 million, investing activities used $208.719 million, and financing activities provided $184.339 million. Cash and cash equivalents declined $7.644 million to $20.645 million. Management reported $224.5 million in cash, time deposits, and investment securities generally available for cash needs, plus $27.8 million in loans held for sale and $117.4 million of additional FHLB and correspondent-bank borrowing capacity. Loan commitments, including unused lines, were $151.0 million; certificates of deposit maturing within one year were $269.9 million.
- Debt and capital: At September 30, FHLB advances were $150.946 million and subordinated debt was $2.937 million. Consolidated regulatory capital ratios were 10.74% common equity Tier 1, 11.90% total risk-based capital, and 8.81% leverage. These were lower than year-end 2014 ratios of 12.55%, 13.75%, and 9.87%, respectively.
Material changes versus prior comparable periods
- Q3 net income rose 81.2% year over year, primarily on higher net interest income and mortgage banking income; higher provision expense, taxes, and operating expenses partly offset the increase.
- Nine-month net income more than doubled, supported by higher net interest income and mortgage banking activity. Mortgage banking income increased 91.0% to $7.195 million, attributed to higher origination volume and improved gain-on-sale margin.
- Noninterest expense increased 12.0% for the nine months to $18.791 million, principally reflecting higher salaries and benefits, consulting and professional services, and marketing.
- Loan growth shifted the portfolio toward commercial lending, especially single-tenant lease financing. Consumer loans declined 3.5% from year-end, while commercial loans increased 44.9%.
- Credit indicators improved from year-end: nonperforming loans declined from $296,000 to $206,000 and nonperforming assets from $4.866 million to $4.724 million. The allowance increased as commercial lending grew; the nine-month provision was $1.2 million, compared with a $38,000 credit in 2014.
Outlook, risks, contingencies, and unusual items
- The filing gives no specific earnings or financial guidance. Management said capital resources were sufficient for current and expected needs, while noting additional capital could be needed to support continued growth. The company expects to continue quarterly dividends, subject to board, earnings, financial-condition, and regulatory considerations.
- After quarter-end, the company issued $10.0 million of subordinated notes on October 15, 2015, bearing fixed interest of 6.4375% and maturing in 2025; the notes are intended to qualify as Tier 2 capital. The board also declared a fourth-quarter dividend of $0.06 per share.
- Interest-rate modeling estimated that a parallel +100 basis-point move would increase next-12-month net interest income by 1.15% and reduce economic value of equity by 0.55%; a +200 basis-point move was estimated to increase net interest income by 1.46% and reduce economic value of equity by 3.16%. A 100-basis-point decline was estimated to reduce net interest income by 2.67% and economic value of equity by 5.09%.
- Key stated risks include interest-rate changes, economic conditions, competition, regulation, growth in commercial real estate and C&I lending, and dependence on communications and information systems. Commercial loan repayment can depend on borrower cash flows, collateral values, property performance, and tenant strength.
- Management considered unrealized securities losses primarily interest-rate-related and temporary; it reported no securities classified as other-than-temporarily impaired during the 2015 periods. The company reported no material legal proceedings and no material change in previously disclosed risk factors. Management stated disclosure controls were effective at September 30, 2015.
Most important facts for investors to verify
- Whether rapid commercial loan growth, particularly the 37.6% portfolio share in single-tenant lease financing, changes credit concentration or reserve needs.
- Whether mortgage banking income and origination volumes remain strong, given their substantial contribution to noninterest income growth.
- Deposit retention and funding costs, including the $269.9 million of certificates of deposit due within one year and reliance on FHLB advances.
- Capital and liquidity after the subsequent $10.0 million subordinated-note issuance, continued balance-sheet growth, and dividends; confirm regulatory treatment of the notes.
- Performance of the $4.488 million other-real-estate-owned property, the adequacy of the loan-loss allowance, and the sensitivity of earnings and capital to changing interest rates.