First Internet Bancorp — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; balance-sheet comparisons are to December 31, 2018 unless otherwise noted. Amounts are U.S. dollars. First Internet Bancorp is a bank holding company operating First Internet Bank of Indiana, a branchless bank offering nationwide online consumer and small-business banking alongside commercial, public finance, healthcare finance, and mortgage lending.
Financial performance and condition
| Metric | Q2 2019 | Prior-year comparison |
|---|---|---|
| Net interest income | $16.1 million | $15.5 million; up 4.2% |
| Net interest margin | 1.73% | 2.17% |
| Noninterest income | $3.5 million | $2.2 million |
| Noninterest expense | $11.7 million | $10.2 million |
| Provision for loan losses | $1.4 million | $0.7 million |
| Net income / diluted EPS | $6.1 million / $0.60 | $6.0 million / $0.67 |
- For the first six months, net income was $11.8 million, down 1.8% from $12.0 million; diluted EPS was $1.16 versus $1.38. Net interest income increased 4.8% to $32.3 million, while the provision rose 76.3% to $2.7 million and noninterest expense rose 11.9% to $22.8 million.
- Margin pressure reflected funding costs rising faster than asset yields: Q2 interest-bearing liability costs increased 61 basis points year over year, partly offset by a 12-basis-point increase in earning-asset yield. Six-month GAAP NIM was 1.79%, versus 2.22% in 2018.
- Total assets were $4.0 billion, up 11.8% from year-end. Loans were $2.86 billion, up 5.3%; deposits were $3.01 billion, up 12.5%. Commercial loans were 76.3% of loans, including single-tenant lease financing at 35.1%, public finance at 24.7%, and healthcare finance at 7.4%.
- Cash and cash equivalents were $348.3 million. Cash, available-for-sale securities, and loans held for sale totaled approximately $901.2 million; management also reported $553.4 million of additional borrowing capacity. Certificates and brokered deposits totaling $1.05 billion were scheduled to mature within one year.
- Six-month operating cash flow was negative $33.3 million, compared with positive $15.9 million in 2018; investing cash use was $162.0 million and financing provided $354.9 million. Cash and cash equivalents increased $159.6 million from year-end.
- FHLB advances were $514.9 million. The company issued $37 million of 6.0% subordinated notes due 2029 in June; total subordinated debt principal was $72 million. Shareholders’ equity was $296.1 million. Consolidated capital ratios were 11.08% CET1, 11.08% Tier 1, 14.31% total risk-based capital, and 8.06% leverage.
Changes, outlook, and risks
- Growth in interest income and mortgage banking revenue was offset by higher deposit and borrowing costs, loan-loss provision, and operating expenses. Q2 mortgage banking revenue was $2.7 million, up from $1.6 million. Noninterest income included a $0.5 million gain on Visa Class B shares and a $0.5 million loss on securities sales.
- Credit indicators weakened from year-end: nonperforming loans increased to $5.4 million, or 0.19% of loans, from $0.9 million, or 0.03%. The increase primarily reflected a $3.1 million residential mortgage and a commercial relationship placed on nonaccrual. The allowance was $20.0 million, or 0.70% of loans; coverage of nonperforming loans was 370.9%.
- Four commercial and industrial loans were restructured as performing TDRs, totaling about $2.0 million; modifications provided interest-only payments for a period. Management recorded a $0.6 million specific reserve on a commercial loan. Management stated ordinary-course claims and lawsuits were not expected to materially affect the company; no material legal proceedings were reported.
- Management said it may pursue additional loan sales to manage balance-sheet growth and capital, provide liquidity, and improve margin and profitability. No quantified earnings or margin guidance was provided. Management expected quarterly cash dividends to continue, subject to board discretion, financial and capital conditions, and regulatory and contractual limits. A $0.06-per-share dividend was declared.
- Key risks include deposit pricing and retention, interest-rate movements, credit performance and collateral values, concentration and growth in commercial lending, reliance on wholesale funding, operational and information-system disruptions, and regulatory requirements. The filing reports that a 100-basis-point rate decrease would reduce modeled Year 1 net interest income by 5.07%, while a 100-basis-point increase would raise it by 5.11%; modeled economic value of equity would decline 6.87% under the increase scenario. These are estimates dependent on assumptions, not forecasts.
- Available-for-sale securities had $7.1 million of gross unrealized losses at June 30; management attributed declines primarily to interest rates and considered them temporary. Adoption of the expected-credit-loss standard (CECL) was planned for its required effective date; the company said the impact was still being evaluated and could not yet be reasonably quantified.
Important facts for investors to verify
- Whether deposit costs continue to outpace loan and securities yields, and whether NIM stabilizes or contracts further.
- Subsequent performance, collateral support, and reserve adequacy for the newly nonaccrual loans, TDRs, and growing healthcare and single-tenant portfolios.
- Deposit retention and refinancing needs, particularly the $1.05 billion of certificates and brokered deposits maturing within one year, and the cost and availability of wholesale funding.
- The effect of loan sales, the 2029 subordinated notes, and stock repurchases on earnings, liquidity, and regulatory capital; repurchases totaled $4.3 million through June 30 under the $10 million authorization.
- CECL implementation estimates, changes in interest-rate exposure, and the effect of any future rate changes on earnings, securities values, and hedge collateral.