First Internet Bancorp quarterly report, Q2 FY2018

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First Internet Bancorp — Q2 2018 Form 10-Q

Reporting period: Three and six months ended June 30, 2018; balance-sheet comparisons are with December 31, 2017 unless noted. Amounts below are in U.S. dollars; financial statement amounts are generally in millions.

Business context

First Internet Bancorp is a bank holding company operating First Internet Bank of Indiana. It offers nationwide online consumer and small-business banking and commercial, public finance, healthcare finance, mortgage and other lending. It has no traditional branch offices.

Financial performance and condition

  • Q2 earnings: Net income was $6.0 million, up 50.2% from $4.0 million in Q2 2017; diluted EPS was $0.67 versus $0.61. For the first six months, net income was $12.0 million, up 76.1% from $6.8 million; diluted EPS was $1.38 versus $1.04.
  • Interest income and margin: Q2 net interest income increased 19.2% to $15.5 million; six-month net interest income increased 26.4% to $30.9 million. Net interest margin declined to 2.17% from 2.43% in Q2 2017 and to 2.22% from 2.46% for the six-month period. Higher asset balances lifted interest income, but deposit and borrowing costs rose faster.
  • Other income and expenses: Q2 noninterest income fell 20.4% to $2.2 million, principally because mortgage banking revenue declined. Q2 noninterest expense rose 14.1% to $10.2 million, reflecting personnel, software, OREO maintenance and deposit-insurance costs. The six-month effective tax rate was 12.0%, down from 26.7%, primarily following the federal corporate tax-rate reduction and growth in tax-exempt public finance assets.
  • Growth: Total assets reached $3.116 billion, up 12.6% from year-end; loans rose 13.5% to $2.374 billion and deposits increased 14.8% to $2.394 billion. Public finance, single-tenant lease financing and healthcare finance were significant commercial loan growth areas. Public finance and single-tenant lease financing together represented about 60% of total loans.
  • Credit quality: Nonperforming loans were $0.3 million (0.01% of loans), down from $0.8 million at year-end. Nonperforming assets were $5.3 million, including $5.0 million of OREO. The allowance for loan losses was $16.1 million, or 0.68% of loans, versus 0.72% at year-end; six-month net charge-offs were $0.4 million. No new TDRs were recorded in the first half.
  • Cash flow and liquidity: Six-month operating cash flow was $15.9 million; investing activities used $261.0 million and financing activities provided $339.5 million. Cash and cash equivalents were $142.4 million at June 30. Management reported $603.2 million of cash and available-for-sale securities, plus $20.7 million of loans held for sale, generally available for cash needs; the Bank also had $587.6 million of additional borrowing capacity.
  • Funding and debt: Deposits totaled $2.394 billion, including $395.0 million of brokered deposits (16.5% of deposits), up from $76.7 million at year-end. Federal Home Loan Bank advances were $390.2 million. Subordinated debt had a $35.0 million principal balance ($33.8 million carrying amount); the $3.0 million 2021 Debenture was repaid in June.
  • Capital: In June, the company raised approximately $54.3 million net from issuing 1,730,750 common shares. At June 30, consolidated CET1 and total risk-based capital ratios were 13.54% and 15.85%; the Bank’s were 11.81% and 12.56%, respectively. The company declared a $0.06 per-share quarterly dividend.

Material changes, outlook and risks

  • Earnings growth reflected higher net interest income and a lower loan-loss provision and tax expense, partly offset by higher operating expenses and lower noninterest income. The 2018 share offerings materially increased equity and shares outstanding, affecting EPS comparisons.
  • Management said it expects to continue quarterly cash dividends, subject to Board discretion, results, capital needs, regulatory limits and other factors. It believes liquidity and capital are sufficient for at least the next 12 months, while noting that continued growth may require additional capital. No specific earnings or margin guidance was provided.
  • Interest-rate sensitivity modeling estimated that a parallel +100-basis-point move would increase year-one net interest income 2.70%, while reducing economic value of equity 7.16%; a +200-basis-point move was estimated to increase year-one net interest income 5.22% and reduce EVE 14.08%. These are model estimates dependent on assumptions, not forecasts.
  • Key risks include rising funding costs and margin pressure, reliance on brokered deposits and wholesale funding, credit and concentration exposure as commercial portfolios grow, interest-rate and securities valuation changes, liquidity needs, and operational or regulatory risks. Available-for-sale securities had $19.1 million of gross unrealized losses at June 30, primarily attributed to interest-rate changes; management considered the declines temporary and said it did not expect to be forced to sell before recovery.
  • The company was evaluating future lease-accounting and expected-credit-loss standards; the eventual impact of the expected-credit-loss standard was not yet quantifiable. Management stated that ordinary-course legal claims were not expected to have a material adverse effect. Disclosure controls were deemed effective, and no material change in internal control was reported.

Important facts for investors to verify

  • Whether loan and deposit growth can continue without further deterioration in net interest margin or increased dependence on higher-cost funding.
  • Brokered-deposit levels, deposit maturities (including $745.4 million of certificates due within one year), and available borrowing capacity.
  • Credit performance and reserve adequacy as public finance, single-tenant lease, healthcare and consumer portfolios expand; monitor consumer charge-offs and the OREO property.
  • Interest-rate exposure, including the difference between projected near-term net interest income benefits and modeled EVE declines under rising-rate scenarios.
  • Realization of the reported securities values and the company’s liquidity, capital and dividend capacity as growth proceeds.