First Internet Bancorp — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. First Internet Bancorp is a bank holding company operating First Internet Bank of Indiana. Its nationwide, primarily online model includes deposits, consumer and residential mortgage lending, commercial lending, and single-tenant lease financing.
Financial performance and condition
| Metric | Q3 2016 | Comparable period / change |
|---|---|---|
| Net income | $3.1 million; diluted EPS $0.55 | Net income $2.3 million; diluted EPS $0.51 in Q3 2015. Net income increased 33.4%. |
| Net interest income | $10.3 million | $7.8 million in Q3 2015, up 31.9%. |
| Provision for loan losses | $2.2 million | $0.5 million in Q3 2015. |
| Noninterest income | $4.9 million | $2.4 million in Q3 2015; mortgage banking was the main driver. |
| Noninterest expense | $8.4 million | $6.2 million in Q3 2015, up 35.5%. |
| Net interest margin | 2.42% | 2.84% in Q3 2015. |
- For the first nine months, net income was $8.4 million versus $6.7 million in 2015, up 25.8%; diluted EPS was $1.65 versus $1.46. Net interest income was $28.8 million, noninterest income $11.2 million, and provision $4.1 million.
- At September 30, total assets were $1.824 billion, up 43.7% from year-end 2015. Loans were $1.199 billion, deposits $1.494 billion, and shareholders’ equity $137.2 million.
- Loans grew 25.7% from year-end, led by single-tenant lease financing, which reached $572.0 million, or 47.7% of loans. Commercial loans were 66.2% of the portfolio.
- Cash and cash equivalents were $67.8 million. Available-for-sale securities were $471.0 million; total deposits increased 56.2% from year-end, with certificates of deposit rising to $970.7 million, or 65.0% of deposits.
- Nine-month cash flows: $15.2 million provided by operations, $512.7 million used in investing, and $540.1 million provided by financing; cash increased $42.7 million to $67.8 million.
- Subordinated debt was $36.5 million net carrying value ($38.0 million principal). The company reported a 7.62% Tier 1 leverage ratio and 13.67% total risk-based capital ratio; the Bank’s respective ratios were 8.59% and 12.17%.
Material changes and management commentary
- Profit growth reflected higher net interest income and mortgage banking revenue, partly offset by higher operating costs and credit provision. Mortgage banking revenue rose to $4.4 million in Q3 from $2.1 million a year earlier, reflecting higher originations and sales and improved gain-on-sale margins.
- Net interest margin contracted year over year as funding costs rose and loan yields declined. Management cited growth in higher-cost, longer-duration certificates of deposit and increased borrowing costs.
- Operating expense growth included personnel and mortgage-production incentives, legal and consulting work, costs associated with the new headquarters and technology investment, and higher FDIC insurance premiums following a methodology change.
- Asset quality remained low by reported nonperforming-loan ratios, but credit costs and charge-offs increased. Q3 net charge-offs were $1.7 million, principally the full charge-off of a commercial and industrial loan previously placed on nonaccrual. The allowance was $10.6 million, or 0.88% of loans.
- Nonperforming loans were $1.1 million (0.09% of loans); nonperforming assets were $5.7 million (0.31% of assets), including $4.5 million of other real estate owned. Two residential mortgage loans totaling about $1.0 million were placed on nonaccrual during 2016.
Outlook, risks and contingencies
- The filing provides no specific earnings or financial guidance. Management said it intends to pursue growth and believes liquidity and capital are sufficient for at least the next 12 months, while noting that growth may require additional capital.
- At quarter-end, reported generally available liquidity included $539.1 million in cash, time deposits and available-for-sale securities, plus $32.5 million in loans held for sale. The Bank had $324.5 million of additional borrowing capacity. Loan commitments were $129.6 million; certificates maturing within one year totaled $401.3 million.
- In September, the company issued $25 million of 6.0% fixed-to-floating subordinated notes due 2026. Its $38 million total subordinated debt principal creates debt-service and refinancing risks; the filing added this as a risk factor, including possible limits on holding-company cash from Bank distributions.
- Management disclosed interest-rate sensitivity: a parallel +100 bp shift was estimated to increase next-12-month net interest income 6.22% but reduce economic value of equity 6.77%; a +200 bp shift was estimated to reduce EVE 14.50%. Models depend on assumptions.
- The company expects quarterly cash dividends to continue, but future declarations are at the Board’s discretion and subject to results, capital needs, regulation and debt terms. Q3 dividend was $0.06 per share.
- Management said ordinary-course claims and lawsuits are not expected to have a material adverse effect; the company reported no material legal proceedings. Forward-looking risks include credit quality, growth in commercial lending, interest rates, funding and liquidity, regulatory requirements, technology disruptions, competition and the ability to service or refinance debt.
Important facts for investors to verify
- Whether higher provision expense and the large C&I charge-off signal further credit deterioration; track delinquencies, nonaccruals, charge-offs and reserve adequacy.
- Whether growth in single-tenant lease financing and other commercial loans is being matched by appropriate underwriting, diversification and capital.
- Whether deposit growth, especially CDs, can be retained at acceptable cost, and how $401.3 million of near-term CD maturities affect funding and margins.
- Whether margin pressure persists as deposit and borrowing costs change, and whether mortgage banking gains and volumes are sustainable.
- Debt-service capacity, refinancing access, regulatory capital headroom, and any restrictions on Bank distributions or shareholder dividends.
- Interest-rate exposure and the assumptions behind reported NII and EVE sensitivity estimates.