First Internet Bancorp — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are with December 31, 2018 unless noted. First Internet Bancorp is a bank holding company operating First Internet Bank of Indiana, an online-focused bank with commercial, consumer, public finance and healthcare lending businesses. Amounts below are in U.S. dollars.
Financial performance and position
- Earnings: Net income was $5.7 million, down 5.5% from $6.0 million in Q1 2018. Diluted EPS was $0.56 versus $0.71; the comparison was affected by the 2018 share offering, which increased average diluted shares. Pretax income was $6.2 million; income tax expense was $0.5 million, an 8.5% effective rate.
- Revenue and margin: Net interest income rose 5.4% to $16.2 million year over year. Interest income increased to $35.0 million, but interest expense rose faster, up 77.5% to $18.8 million. Net interest margin fell to 1.86% from 2.26% (FTE margin: 2.04% from 2.41%). Management attributed pressure mainly to higher deposit and borrowing costs.
- Credit costs and expenses: Provision for loan losses increased to $1.3 million from $0.9 million. Noninterest income declined 6.7% to $2.4 million, including a $0.1 million loss on loan sales. Noninterest expense increased 8.7% to $11.1 million, chiefly from compensation, premises/software, other costs and deposit insurance.
- Profitability ratios: Return on average assets was 0.64%, versus 0.87% in Q1 2018; return on average equity was 7.91%, versus 10.96%. Management linked the declines partly to growth in average assets and equity, and lower net income.
- Balance-sheet growth: Total assets were $3.67 billion, up 3.6% since year-end. Loans were $2.84 billion, up 4.6%; total deposits were $2.81 billion, up 5.2%. Shareholders’ equity was $294.0 million. Total securities were approximately $551.6 million at fair value.
- Funding and debt: Deposits included $573.2 million of brokered deposits (20.4% of deposits) and $1.46 billion of certificates of deposit. FHLB advances were $495.1 million; subordinated debt carrying value was $33.9 million, with $35.0 million principal outstanding. The filing reports interest-bearing deposit cost of 2.29% and other borrowed-funds cost of 2.53% for the quarter.
- Cash flow and liquidity: Cash and cash equivalents ended at $130.5 million, down $58.2 million during the quarter. Operating cash flow was negative $5.3 million and investing cash flow negative $160.2 million, partly offset by $107.3 million of financing cash flow, including deposit growth and net FHLB repayments. Management reported $650.9 million in cash and available-for-sale securities, plus $13.7 million in loans held for sale, and $594.2 million of additional borrowing capacity. Outstanding loan commitments were $228.0 million; CDs and brokered deposits maturing within one year totaled $835.0 million.
- Capital: At March 31, consolidated CET1 and Tier 1 risk-based ratios were each 11.66%, total risk-based capital was 13.68%, and the leverage ratio was 8.34%. The Bank’s respective ratios were 11.42%, 11.42%, 12.15% and 8.17%. These exceeded the stated minimum requirements, including the applicable capital conservation buffer.
Material changes and notable items
- Year over year, loan interest income grew with higher average loan balances and yields, while higher deposit balances and funding costs absorbed much of the increase. Average loans rose 27.7% and average interest-bearing deposits rose 29.6% year over year.
- Loan growth was concentrated in single-tenant lease financing and healthcare finance. Healthcare finance loans increased to $158.8 million from $117.0 million at year-end; single-tenant lease financing reached $975.8 million. Commercial loans were 73.8% of total loans.
- Nonaccrual loans increased to $3.4 million from $0.8 million, principally after a $3.1 million residential mortgage became delinquent and was placed on nonaccrual. The company reported sufficient collateral and no impairment on that loan. Nonperforming assets were $6.1 million, or 0.17% of assets. The allowance for loan losses was $18.8 million, 0.66% of loans, versus $17.9 million and 0.66% at year-end; quarterly net charge-offs were $0.3 million.
- Accumulated other comprehensive loss improved by $2.4 million during the quarter, reflecting $6.9 million of pretax unrealized securities gains partly offset by $3.6 million of pretax cash-flow-hedge losses. The filing states the securities’ unrealized losses were primarily rate-related and management considered them temporary.
- The company repurchased 85,286 shares during Q1 for approximately $1.7 million. Under its $10 million authorization, approximately $8.0 million remained at March 31; the program was scheduled to expire December 31, 2019.
- Adoption of the lease accounting standard added approximately $1.9 million to assets and liabilities and was not material to the financial statements. The company was evaluating the forthcoming expected-credit-loss standard and did not quantify its expected impact.
Outlook, risks and contingencies
The filing provides no quantitative earnings or growth guidance. Management said it expected to continue quarterly cash dividends, subject to Board discretion, results, capital needs, regulatory limits and other factors, and believed liquidity and capital resources were sufficient for at least the next 12 months. The Board declared a $0.06-per-share dividend payable April 15, 2019.
Key disclosed risks include rising funding costs and interest-rate sensitivity; credit quality, loan losses and collateral values; concentration and growth in commercial, public finance, healthcare and single-tenant lending; reliance on deposits, wholesale funding and Bank distributions; competition; technology and information-system disruptions; and regulatory or capital changes. Rate-shock modeling showed Year 1 NII sensitivity of -6.28% at -100 basis points and +8.09% at +200 basis points; Year 2 sensitivity was -3.37% and -1.01%, respectively. EVE sensitivity was -21.03% at +200 basis points. These are model estimates dependent on assumptions, not forecasts. Management reported no material legal proceedings, no material change in previously disclosed risk factors, and effective disclosure controls as of March 31, 2019.
Investor verification priorities
- Track deposit pricing, brokered-deposit dependence, deposit maturities and the impact of funding costs on net interest margin.
- Monitor delinquency and nonaccrual trends, especially the $3.1 million residential mortgage, and assess reserve adequacy as commercial and healthcare portfolios expand.
- Verify loan growth, portfolio mix and credit performance in single-tenant lease financing, public finance and healthcare finance.
- Assess liquidity against $835.0 million of deposits due within one year, commitments to borrowers and available borrowing capacity.
- Review capital headroom, repurchases and dividends alongside balance-sheet growth and the rate-sensitivity assumptions.
- Follow adoption planning and eventual quantified effects of the expected-credit-loss accounting standard.