First Internet Bancorp — 2016 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2016; quarterly figures are also disclosed for Q4. First Internet Bancorp operates First Internet Bank of Indiana, a branchless online bank offering nationwide consumer deposits, mortgage and consumer lending, alongside commercial banking concentrated in Central Indiana and adjacent markets. Single-tenant lease financing is offered nationally. The filing reports one commercial banking segment.
Financial performance and condition
| Metric | 2016 | 2015 |
|---|---|---|
| Total assets, year-end | $1.854 billion | $1.270 billion |
| Total loans, year-end | $1.251 billion | $954 million |
| Total deposits, year-end | $1.463 billion | $956 million |
| Total shareholders’ equity, year-end | $153.9 million | $104.3 million |
| Net interest income | $39.7 million | $30.8 million |
| Noninterest income | $14.1 million | $10.1 million |
| Net income | $12.1 million | $8.9 million |
| Diluted EPS | $2.30 | $1.96 |
| Net interest margin | 2.49% | 2.85% |
| Return on average assets | 0.74% | 0.81% |
| Allowance for loan losses / loans | 0.88% | 0.88% |
Total operating revenue, comprising net interest income and noninterest income, was approximately $53.8 million. Q4 net income was $3.7 million, or $0.64 diluted EPS, versus $2.3 million and $0.50 in Q4 2015. The filing does not provide a clear standalone quarterly cash-flow value.
2016 operating cash flow was $26.5 million; investing cash flow was negative $586.7 million and financing cash flow was positive $574.6 million. Cash and cash equivalents ended the year at $39.5 million. Consolidated liquid assets available for general cash needs, including available-for-sale securities and loans held for sale, were reported at $496.4 million; the Bank also had $273.6 million of additional FHLB and correspondent-line borrowing capacity.
At year-end, FHLB advances were $190.0 million and subordinated debt had $38.0 million principal outstanding ($36.6 million carrying value). The Bank’s deposits were the principal funding source. The company reported a 8.65% consolidated Tier 1 leverage ratio, 11.54% CET1 ratio and 15.01% total risk-based capital ratio.
Material changes versus the prior year
- Net income increased $3.1 million, or about 35%, primarily from higher net interest income and mortgage banking revenue; higher expenses, loan-loss provision and taxes partly offset the gains.
- Assets grew 46.0%, loans 31.1% and deposits 53.0%. Single-tenant lease financing rose 62.0% to $606.6 million, or 48.5% of total loans.
- Mortgage banking income rose to $12.4 million from $9.0 million, reflecting higher originations and gain-on-sale margins.
- Net interest margin fell 36 basis points to 2.49%, as funding costs rose and asset yields declined. Interest expense increased 79.6% to $19.2 million.
- Provision for loan losses increased to $4.3 million from $1.9 million. Net charge-offs were $1.7 million, including a $1.6 million charge-off on one C&I loan; 2015 had net recoveries of $0.6 million.
- Nonperforming loans rose to $1.1 million from $0.2 million, while nonperforming assets as a share of assets improved to 0.31% from 0.37% amid rapid asset growth.
- The company raised $46.2 million net from common stock offerings and issued $25 million of subordinated notes. Shares outstanding increased substantially during the year.
- Available-for-sale securities reached $456.7 million and carried $14.4 million in net unrealized pre-tax losses, primarily attributed to interest-rate changes. These losses reduced comprehensive income and accumulated equity.
Outlook, risks and unusual items
Management plans to pursue continued growth in commercial and consumer banking, expand public finance, and invest in technology and scalable operations. It expects quarterly cash dividends to continue, subject to Board discretion, financial and regulatory conditions, and debt covenants. The filing provides no quantitative earnings or growth guidance. Management stated it believed liquidity and capital were adequate for at least the next 12 months, while noting growth may require additional capital.
- Credit and concentration risk: Commercial loans were 66.6% of loans; CRE exposure and the rapidly growing single-tenant lease portfolio are significant. Management noted that commercial loan growth is relatively recent and not fully seasoned. Consumer lending includes horse-trailer, recreational-vehicle and home-improvement loans.
- Funding and rate risk: Certificates of deposit comprised 65.9% of deposits, and $387.7 million were scheduled to mature within one year. A 100-basis-point rate increase was modeled to raise next-12-month net interest income 0.50%, but reduce economic value of equity 7.26%; a 200-basis-point increase modeled a 14.99% EVE decline. These are scenario estimates, not forecasts.
- Securities and capital: Further rate-related declines or credit impairment could affect earnings or equity. Management said it had the ability and intent to hold securities with interest-rate-related unrealized losses until recovery or maturity. Additional capital needs or regulatory constraints could limit growth or distributions.
- Technology and regulation: The online operating model depends on internal and third-party systems and is exposed to cyberattacks, outages, fraud and regulatory compliance costs. The company said it had experienced no material cyber losses to date but identified continuing exposure.
- Other items: The Bank committed up to $4.0 million to an SBIC fund. The company’s $3.3 million net deferred tax asset could be affected by a future corporate tax-rate reduction. The filing reports no material legal proceedings.
BKD, LLP issued an unqualified opinion on the consolidated financial statements and internal controls over financial reporting; management also concluded controls were effective at year-end.
Most important facts for investors to verify
- Whether growth in single-tenant lease financing and other commercial lending is matched by sustained underwriting quality, diversification and adequate loan-loss reserves.
- Performance of the charged-off C&I exposure, emerging delinquencies and the elevated nonaccrual residential mortgage balance.
- Deposit retention, renewal pricing and liquidity as large certificates of deposit mature, and the cost and availability of wholesale funding.
- Sensitivity of net interest margin, securities values and capital to changing interest rates, including the assumptions behind management’s modeled scenarios.
- Impact of 2016 equity issuance and share-count growth on per-share returns, and the sustainability of dividends given regulatory and debt restrictions.
- Execution and funding of the stated growth plans, including public finance, technology investment and the SBIC commitment; the filing contains no quantitative forward guidance.