First Internet Bancorp — Q2 2016 Form 10-Q
Business context and reporting period
Quarterly period ended June 30, 2016. First Internet Bancorp operates First Internet Bank of Indiana, a nationwide internet bank without traditional branch offices. Its businesses include deposits, residential and consumer lending, commercial lending, and mortgage banking.
Financial performance and condition
| Metric | Q2 2016 / June 30, 2016 | Comparison |
|---|---|---|
| Net income | $2.8 million; diluted EPS $0.57 | Q2 2015: $2.3 million; $0.50 |
| Net interest income | $9.3 million | Up 22.9% year over year |
| Net interest margin | 2.39% | 2.87% in Q2 2015 |
| Noninterest income / expense | $3.7 million / $7.9 million | Income up 51.4%; expense up 24.5% year over year |
| Total assets / loans | $1.70 billion / $1.11 billion | Assets up 34.1% and loans up 16.5% from Dec. 31, 2015 |
| Deposits | $1.39 billion | Up 45.3% from Dec. 31, 2015 |
| Cash and cash equivalents | $70.0 million | $25.2 million at Dec. 31, 2015 |
| Allowance for loan losses | $10.0 million; 0.90% of loans | $8.4 million; 0.88% at Dec. 31, 2015 |
| Borrowings and subordinated debt | $148.0 million FHLB advances; $12.8 million subordinated debt | FHLB advances were $191.0 million at Dec. 31, 2015 |
For the first six months, net income was $5.3 million, or $1.10 diluted EPS, versus $4.3 million, or $0.95, in 2015. Net interest income was $18.4 million, provision for loan losses $1.9 million, and noninterest expense $14.9 million. Six-month operating cash flow was negative $1.9 million; investing cash flow was negative $365.3 million and financing cash flow was positive $412.1 million.
Material changes and management commentary
- Growth in loans and securities drove higher interest income, but higher deposit and borrowing costs and lower loan yields compressed net interest margin. Management attributed the decline partly to fewer commercial real estate prepayment fees and excess liquidity.
- Commercial loans rose 24.4% from year-end, led by single-tenant lease financing, which reached $500.9 million, or 45.1% of loans. Management said deposit growth funded both loan growth and securities purchases.
- Certificates of deposit were $862.2 million, or 62.1% of deposits; their growth reflected the bank’s focus on longer-duration deposit products. The company reported $382.8 million of CDs maturing within one year.
- The company raised $22.8 million net through an underwritten stock offering and ATM sales during the period. Approximately $21.6 million remained available under the ATM program at June 30.
- Available-for-sale securities totaled $433.8 million, up 103.0% from year-end. Unrealized losses were attributed primarily to interest-rate changes; management said it did not intend, and was not likely to be required, to sell affected securities before recovery.
Asset quality, capital, liquidity, and risks
- Nonperforming loans increased to $5.6 million, or 0.51% of loans, from $0.2 million at year-end. The increase included a $4.7 million commercial and industrial loan and a $0.8 million residential mortgage placed on nonaccrual. Nonperforming assets were $10.2 million, including $4.5 million of other real estate owned.
- The allowance covered 177.6% of nonperforming loans. Six-month net charge-offs were $0.2 million, compared with net recoveries of $0.5 million in the prior-year period.
- Consolidated regulatory capital ratios were 10.66% Common Equity Tier 1, 10.66% Tier 1, 12.54% total risk-based capital, and 8.08% leverage. The bank’s corresponding ratios were 10.75%, 10.75%, 11.58%, and 8.15%.
- Management stated it believed liquidity and capital resources were sufficient for at least 12 months, while noting growth may require additional capital. The bank had $170.0 million of additional FHLB and correspondent-bank borrowing capacity; outstanding loan commitments were $145.8 million.
- Interest-rate sensitivity modeling estimated next-12-month net interest income changes of -1.44% under a 100-basis-point decline, +2.91% under a 100-basis-point increase, and +5.98% under a 200-basis-point increase. Estimated economic value of equity fell 4.64% and 8.82% in the respective +100- and +200-basis-point scenarios.
- Principal risks include credit deterioration, interest-rate and liquidity exposure, deposit competition and funding costs, technology and communications disruptions, regulatory changes, and execution of commercial-loan growth. Management reported no material changes to previously disclosed risk factors, no material legal proceedings, and effective disclosure controls.
- No specific earnings or financial guidance was provided. The company expected to continue quarterly dividends but said future declarations depend on Board discretion, results, capital needs, and regulatory and contractual restrictions.
Most important facts for investors to verify
- Performance and credit trends in the $500.9 million single-tenant lease portfolio, and the status and resolution prospects of the newly nonaccrual $4.7 million C&I loan.
- Whether deposit growth and funding mix remain sustainable, including the cost and renewal rate of the large certificate-of-deposit base and near-term maturities.
- Whether net interest margin stabilizes as excess liquidity is deployed and funding costs and asset yields change.
- Whether allowance levels remain adequate as commercial lending grows and nonperforming loans increase.
- Use of remaining ATM capacity, potential shareholder dilution, and capital needs associated with the growth strategy.