First Internet Bancorp annual report, FY2015

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First Internet Bancorp — 2015 Form 10-K Summary

Business context and reporting period: This annual report covers the year ended December 31, 2015, with comparisons primarily to 2014. First Internet Bancorp is a bank holding company operating through First Internet Bank of Indiana. It gathers deposits and offers consumer and mortgage banking nationally through an online platform, alongside commercial lending and nationwide single-tenant lease financing. The company reported one commercial banking segment.

Financial performance and condition

  • Profit: Net income was $8.9 million, or $1.96 diluted EPS, versus $4.3 million and $0.96 in 2014. Return on average assets was 0.81% (0.50% in 2014); return on average equity was 8.89% (4.61%).
  • Interest income and margins: Net interest income rose 38.0% to $30.8 million. Net interest margin increased to 2.85% from 2.65%; interest income was $41.4 million and interest expense was $10.7 million. Growth in average earning assets and a lower funding cost supported the increase.
  • Other income and expenses: Noninterest income increased 41.4% to $10.1 million, mainly as mortgage banking revenue rose to $9.0 million from $5.6 million on higher origination volumes. Noninterest expense grew 11.6% to $25.3 million, including higher salaries, professional fees, and marketing costs. The efficiency ratio improved to 61.83% from 78.35%.
  • Credit costs and quality: Provision for loan losses rose to $1.9 million from $0.3 million. The allowance was $8.4 million, or 0.88% of loans, compared with $5.8 million, or 0.79%, a year earlier. Nonperforming loans were 0.02% of loans and nonperforming assets were 0.37% of assets, improving from 0.04% and 0.50%, respectively. The company recorded net recoveries of approximately $0.6 million.
  • Balance sheet and growth: Total assets rose 30.8% to $1.27 billion; loans receivable rose 30.2% to $953.9 million; deposits rose 26.0% to $956.1 million. Shareholders’ equity was $104.3 million. Commercial loans represented 61.1% of loans, up from 47.9%; single-tenant lease financing was $374.3 million, or 39.2% of loans.
  • Cash flow: Operating activities provided $10.9 million, investing activities used $304.2 million, and financing activities provided $290.1 million. Cash and cash equivalents ended the year at $25.2 million, down from $28.3 million.
  • Debt and liquidity: Year-end FHLB advances were $191.0 million, up from $106.9 million, and subordinated debt was $12.7 million net of issuance costs, versus $2.9 million. Management reported $239.9 million in cash, time deposits, and available-for-sale securities, plus $36.5 million in loans held for sale; the Bank had an additional $99.0 million of FHLB and correspondent-bank borrowing capacity. Certificates of deposit totaling $287.7 million matured within one year. The company said it believed liquidity and capital were sufficient for at least the next 12 months.
  • Capital and shareholder returns: At year-end, consolidated CET1 and total risk-based capital ratios were 10.11% and 12.25%; the leverage ratio was 8.28%. The company declared $0.24 per share in dividends for 2015, subject to Board discretion and regulatory and contractual limits.

Material changes versus 2014

  • Earnings increased substantially, primarily due to an $8.5 million increase in net interest income and a $3.0 million increase in noninterest income. Higher taxes, operating expenses, and loan-loss provision partly offset the gains.
  • Commercial lending expanded quickly: commercial loans increased 66.0%, led by a 94.4% increase in single-tenant lease financing. Consumer loans declined 2.7%.
  • FHLB advances and subordinated debt increased, while the available-for-sale securities portfolio grew 55.4% to $213.7 million.
  • Unrealized losses on available-for-sale securities increased; the company attributed them to interest-rate changes and said it had the ability and intent to hold affected securities until recovery or maturity.

Outlook, commentary, risks, and unusual items

  • Management intends to pursue continued consumer and commercial growth, expand the commercial platform, and use technology to support operating efficiency. No specific earnings, growth, or margin guidance was provided.
  • Key risks include rapid commercial real estate and commercial-and-industrial growth, concentration in commercial lending, and the limited seasoning of newer commercial portfolios. Management also highlighted interest-rate sensitivity, competition, regulatory and capital requirements, and dependence on the Bank for holding-company funding.
  • The online operating model creates exposure to cyberattacks, information-system outages, and third-party service-provider failures. The company reported no material cyber-related losses to date but warned that threats remain elevated.
  • The company held one commercial property in other real estate owned, carried at $4.5 million. It had a $1.9 million net unrealized holding loss on its securities portfolio; management did not consider the impairment other-than-temporary.
  • Auditors issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded disclosure controls and internal controls were effective at year-end.

Important facts for investors to verify

  • Whether rapid growth in commercial loans—especially single-tenant lease financing—can be sustained without deterioration in credit quality or increased concentration risk.
  • How the $1.9 million securities unrealized loss and the larger securities portfolio respond to interest-rate changes, including potential effects on capital and liquidity.
  • Whether loan-loss reserves remain adequate as commercial portfolios season; review the elevated 2015 provision and the sources of net recoveries.
  • Funding and refinancing exposure: FHLB advances increased, and $287.7 million of certificates of deposit were scheduled to mature within one year.
  • Whether the holding company can maintain dividends given its reliance on Bank distributions, regulatory limits, and subordinated-debt covenants; future dividends are not assured.
  • Quarterly results showed net income of $2.278 million in Q4 2015 versus $1.465 million in Q4 2014; investors should assess the sustainability and mix of earnings, including mortgage banking revenue.