First Internet Bancorp — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are to December 31, 2016 unless stated otherwise. Financial statements are unaudited. Dollar figures are in millions unless noted.
Business context
First Internet Bancorp is a bank holding company operating First Internet Bank of Indiana. Its branchless, online-based business offers commercial, consumer, municipal and mortgage products. The company expanded public-finance lending in early 2017 and originates loans nationwide as well as in selected regional markets.
Financial performance and condition
| Metric | Q1 2017 | Comparable period / change |
|---|---|---|
| Net interest income | $11.5 | Up 25.3% from $9.1 in Q1 2016 |
| Net interest margin | 2.50% | 2.78% in Q1 2016; 2.42% in Q4 2016 |
| Provision for loan losses | $1.0 | $0.9 in Q1 2016 |
| Noninterest income | $2.1 | Down 16.1% from $2.5 in Q1 2016 |
| Noninterest expense | $8.7 | Up 24.2% from $7.0 in Q1 2016 |
| Net income | $2.8 | Up 16.4% from $2.4 in Q1 2016 |
| Diluted earnings per share | $0.43 | $0.53 in Q1 2016 |
| Return on average assets / equity | 0.60% / 7.42% | 0.72% / 9.20% in Q1 2016 |
Interest income rose 37.0% year over year, led by loan and securities growth; interest expense rose 67.0% as deposit and borrowing balances and funding costs increased. Higher average assets and equity outpaced earnings growth, weighing on returns. Per-share comparisons also reflect equity issuance in May and December 2016, which increased average diluted shares.
Mortgage banking revenue declined 28.3% year over year to $1.6 million. Management cited lower held-for-sale mortgage activity and gain-on-sale margins, a greater share of best-efforts sales, and a shift toward adjustable-rate mortgages held in the loan portfolio. Staff growth, higher employee benefit claims, headquarters and technology investments, and FDIC insurance costs contributed to higher expenses. The effective tax rate was 26.5%, down from 34.8%, reflecting more tax-exempt assets and a $0.1 million share-compensation tax benefit.
| Balance-sheet metric | March 31, 2017 | Change from December 31, 2016 |
|---|---|---|
| Total assets | $2,052.8 | Up $198.5, or 10.7% |
| Total loans | $1,433.2 | Up $182.4, or 14.6% |
| Total deposits | $1,557.1 | Up $94.3, or 6.4% |
| FHLB advances | $290.0 | Up $100.0 |
| Subordinated debt, carrying value | $36.6 | Principal outstanding was $38.0 |
| Shareholders’ equity | $157.5 | Up from $153.9 |
Loan growth included $78.0 million in new public-finance balances, $58.8 million in single-tenant lease financing, and growth in residential mortgages. Single-tenant lease financing represented 46.4% of loans. Cash and cash equivalents were $53.1 million. Management reported $523.4 million in cash, time deposits and available-for-sale securities generally available for liquidity needs, plus $13.2 million in loans held for sale and $172.3 million of additional borrowing capacity. Certificates of deposit maturing within one year totaled $485.5 million.
Operating cash flow was $20.2 million; investing cash flow was negative $200.3 million, primarily reflecting loan growth and securities purchases; financing cash flow was positive $193.7 million, including deposit growth and net FHLB borrowings. Cash and cash equivalents increased $13.6 million to $53.1 million.
At quarter end, regulatory capital ratios included a consolidated Common Equity Tier 1 ratio of 10.88%, total risk-based capital ratio of 14.16%, and leverage ratio of 8.41%. The Bank’s corresponding ratios were 11.27%, 12.08%, and 8.69%.
Asset quality, risks and unusual items
- Nonperforming loans rose to $3.4 million from $1.1 million, principally after a $1.9 million commercial and industrial loan was placed on nonaccrual. Nonperforming assets were $8.0 million, or 0.39% of assets.
- The allowance for loan losses increased to $11.9 million, but declined to 0.83% of loans from 0.88%. Net charge-offs were $0.1 million. The filing attributes the lower reserve ratio partly to growth in loan categories with lower reserve factors.
- Available-for-sale securities had $13.7 million of gross unrealized losses. Management attributed declines primarily to interest-rate changes and considered them temporary; it stated it did not intend, and was not likely to be required, to sell affected securities before recovery.
- The portfolio is exposed to interest-rate risk. Model estimates for a parallel +100 basis-point move showed next-12-month net interest income up 0.49% but economic value of equity down 9.60%; results depend on model assumptions.
- The company reported $38.0 million principal amount of subordinated debt, including 2026 notes that pay a fixed 6.00% rate through September 2021 and then float at three-month LIBOR plus 485 basis points. The notes began trading on Nasdaq after quarter end.
- Management said it expects to continue quarterly cash dividends, but future declarations are at the board’s discretion and subject to financial, capital, regulatory and contractual considerations. It believes liquidity and capital are sufficient for at least 12 months, while noting growth may require additional capital.
- No specific earnings or financial guidance was provided. Forward-looking statements identify risks including credit quality, loan growth, funding and liquidity, interest rates, regulatory changes, technology interruptions, competition and personnel.
- Management reported effective disclosure controls as of March 31, 2017, no material change in internal control over financial reporting, and no material legal proceedings. Adoption of the share-based compensation update reduced Q1 tax provision by $0.1 million.
Important facts for investors to verify
- Whether rapid loan growth—particularly in single-tenant lease financing and new public finance—continues without further deterioration in credit quality or a lower reserve cushion.
- Whether deposit pricing, certificates of deposit maturities and increased FHLB reliance pressure funding costs and net interest margin.
- Whether mortgage banking activity and fee income recover, given the reported shift toward portfolio adjustable-rate mortgages.
- How unrealized securities losses and the modeled decline in economic value of equity under rising rates evolve.
- Whether stated capital and liquidity resources remain adequate to support growth, near-term deposit maturities, commitments and dividends.