First Internet Bancorp — Q1 2016 Form 10-Q
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 branches. This filing covers the three months ended March 31, 2016; financial results are unaudited. Amounts below are U.S. dollars.
Financial performance and condition
- Profit: Net income was $2.43 million, up 17.9% from $2.06 million in Q1 2015. Diluted EPS rose to $0.53 from $0.46; the quarterly dividend remained $0.06 per share.
- Interest income and margins: Net interest income increased 34.9% to $9.14 million, primarily reflecting growth in average interest-earning assets. Net interest margin was 2.78%, down from 2.84%; the cost of interest-bearing deposits increased 8 basis points year over year.
- Other income and expenses: Noninterest income fell 19.3% to $2.54 million, mainly because mortgage banking income declined 21.9% to $2.25 million amid lower origination volumes. Noninterest expense rose 12.0% to $7.01 million, including higher staffing, premises, and equipment costs. Provision for loan losses increased to $946,000 from $442,000.
- Cash flow: Operating activities provided $8.0 million; investing activities used $179.0 million, including securities purchases and loan growth; financing activities provided $246.8 million, largely from deposit growth. Cash and cash equivalents increased $75.8 million to $100.9 million.
- Balance sheet and funding: Total assets were $1.53 billion, up 20.3% from December 31, 2015. Loans receivable grew 9.1% to $1.04 billion, while available-for-sale securities increased 47.5% to $315.3 million. Deposits rose 30.0% to $1.24 billion, with certificates of deposit up 52.7% to $718.7 million. FHLB advances were $151.0 million, down from $191.0 million; subordinated debt was $12.8 million net of discounts and issuance costs.
- Liquidity and capital: Management reported $417.3 million in cash, time deposits, and available-for-sale securities, plus $29.5 million in loans held for sale. The Bank had access to an additional $167.0 million in FHLB advances and correspondent credit lines. At March 31, consolidated CET1 and total risk-based capital ratios were 9.38% and 11.38%, respectively; the leverage ratio was 7.65%. Tangible common equity to tangible assets was 6.77%, down from 7.88% at year-end.
- Asset quality: Nonperforming loans were $367,000, or 0.04% of loans; nonperforming assets were $4.93 million, or 0.32% of assets, including $4.49 million of other real estate owned. The allowance was $9.22 million, 0.89% of loans, versus $8.35 million and 0.88% at year-end. First-quarter net charge-offs were approximately $77,000.
Material changes versus comparable periods
Year over year, net interest income and net income increased, while mortgage banking revenue declined and operating expenses and loan-loss provision rose. Average interest-earning assets grew 36.8%; average loans grew 30.7% and average securities 55.0%. Compared with December 31, 2015, first-quarter asset expansion was funded principally by deposit growth, alongside increased cash and securities. Commercial loans reached 64.0% of the loan portfolio, up from 61.1% at year-end, led by single-tenant lease financing, which totaled $445.5 million.
Outlook, risks, and unusual items
- Management stated it believes liquidity and capital are adequate for at least the next 12 months, including potential dividends, but continued growth may require additional capital; unfavorable financing terms could constrain growth. The filing gives no quantified earnings or revenue guidance.
- Management expects to continue quarterly cash dividends, subject to Board discretion, performance, capital needs, and regulatory and contractual limits.
- Interest-rate sensitivity modeling estimated that a parallel +100 basis-point shock would increase next-12-month net interest income 3.35% and reduce economic value of equity 3.94%; a +200 basis-point shock would increase NII 7.18% and reduce EVE 5.84%. Estimates depend on modeling assumptions.
- Key exposures include deposit competition and the substantial certificate-of-deposit share, credit and collateral risk as commercial lending expands, interest-rate and securities valuation risk, and reliance on technology systems. The filing says securities unrealized losses were primarily rate-related and management did not consider the securities other-than-temporarily impaired. No material legal proceedings or material changes to previously disclosed risk factors were reported.
- Outstanding loan commitments, including unused lines and standby letters of credit, were $129.3 million; certificates of deposit maturing within one year totaled $341.7 million. Mortgage loan sale commitments were $83.0 million. Management said off-balance-sheet arrangements were not expected to have a material effect.
Important facts for investors to verify
- Whether deposit growth—especially higher-cost, longer-duration certificates of deposit—can be retained at acceptable funding costs and sustain net interest margin.
- Whether growth in single-tenant lease financing and other commercial lending changes portfolio concentration, credit costs, or required loan-loss reserves.
- How mortgage origination volumes and mortgage banking income develop after the year-over-year decline.
- Whether capital ratios and tangible common equity remain adequate as the balance sheet expands and the Basel III capital conservation buffer phases in.
- Whether liquidity remains sufficient given near-term CD maturities, loan commitments, and the company’s dependence on Bank distributions for holding-company funds.