First Internet Bancorp — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Amounts below are in U.S. dollars; financial statement amounts are converted to millions unless otherwise noted.
Business context
First Internet Bancorp is an Indiana bank holding company operating First Internet Bank of Indiana. It offers nationwide online consumer and small-business banking, residential mortgages and consumer loans, and relationship-based commercial, single-tenant lease-financing and public-finance lending. Its public-finance lending operation was established in early 2017.
Financial and operating highlights
| Metric | Q2 2017 / June 30, 2017 | Comparable period or reference |
|---|---|---|
| Net interest income | $13.0 million | Up 39.4% from Q2 2016 |
| Net interest margin | 2.43% | 2.39% in Q2 2016; 2.46% for H1 2017 versus 2.57% in H1 2016 |
| Net income | $4.0 million; diluted EPS $0.61 | Q2 2016: $2.8 million and $0.57 per diluted share |
| H1 net income and diluted EPS | $6.8 million; $1.04 | H1 2016: $5.3 million; $1.10 |
| Total assets | $2.381 billion | Up 28.4% from December 31, 2016 |
| Total loans | $1.698 billion | Up 35.8% from year-end; includes $179.9 million in public-finance loans |
| Total deposits | $1.732 billion | Up 18.4% from year-end; certificates of deposit were 67.9% of deposits |
| Cash and cash equivalents | $66.2 million | $39.5 million at year-end |
| Borrowings and subordinated debt | $435.2 million in FHLB advances; $36.7 million subordinated debt net carrying value | FHLB advances were $190.0 million at year-end; subordinated debt principal was $38.0 million |
| Credit quality | Nonperforming loans: $3.4 million, or 0.20% of loans; allowance: $13.2 million, or 0.78% of loans | At year-end, nonperforming loans were 0.09% and allowance coverage was 0.88% of loans |
| Regulatory capital | Consolidated CET1 9.74%; total risk-based capital 12.68%; leverage 7.50% | Bank CET1 10.84%; total risk-based capital 11.62%; leverage 8.34% |
For H1 2017, operating cash flow was $12.4 million, investing cash flow was negative $499.1 million, and financing cash flow was positive $513.5 million. Cash and cash equivalents increased by $26.8 million. The filing does not present a conventional operating-company revenue figure; for this bank, net interest income and noninterest income are the principal reported income measures.
Material changes versus comparable periods
- Q2 net income rose 41.2% year over year, mainly on higher net interest income; noninterest income declined 27.0%, provision for loan losses rose 43.1%, and noninterest expense rose 13.3%.
- H1 net income increased 29.8%, but diluted EPS fell from $1.10 to $1.04. The company attributed the per-share comparison in part to increased weighted-average shares following 2016 equity offerings.
- Loan growth was driven by single-tenant lease financing, the new public-finance portfolio, residential mortgages and other consumer lending. Loans increased faster than deposits, alongside a substantial increase in FHLB advances.
- H1 net interest margin narrowed year over year as funding costs rose faster than earning-asset yields. Q2 margin, however, was above Q2 2016.
- Mortgage banking income fell to $2.2 million in Q2 from $3.3 million a year earlier, reflecting lower held-for-sale mortgage lock activity. Management cited a shift toward adjustable-rate mortgages retained in the loan portfolio as conventional mortgage rates rose.
- Nonperforming loans increased from 0.09% of loans at year-end to 0.20% at June 30, primarily due to a commercial and industrial credit placed on nonaccrual. The allowance increased in dollars but declined as a percentage of loans, partly because of growth in lower-reserve-factor public-finance and residential mortgage loans.
Outlook, risks and unusual items
- The company gave no numerical earnings or revenue guidance. Management said it believed liquidity and capital resources were sufficient for at least the next 12 months, including potential dividends, but noted that continued growth may require additional capital and that unfavorable capital-raising terms could constrain its strategy.
- Reported available liquidity included $556.0 million in cash, time deposits and available-for-sale securities, plus $27.3 million in loans held for sale. The Bank reported $49.7 million of additional borrowing capacity. Certificates of deposit totaling $619.0 million were due within one year; management expected most maturing deposits to remain.
- Interest-rate sensitivity modeling showed estimated economic value of equity declines of 14.57% and 26.62% under parallel rate increases of 100 and 200 basis points, respectively; a 100-basis-point decrease showed a 6.50% increase. The modeled next-12-month net interest income effects were comparatively small. These estimates depend on modeling assumptions.
- Available-for-sale and held-to-maturity securities had approximately $10.4 million of gross unrealized losses at June 30, primarily attributed to interest-rate changes. Management considered the declines temporary and said it did not intend, nor expect to be required, to sell the securities before recovery of amortized cost.
- Two commercial and industrial loans totaling $1.8 million were newly classified as troubled debt restructurings during the period; the company reported no specific allowance for them at June 30 and no commitment to lend additional amounts. Other real estate owned was $4.5 million.
- Key risks identified include credit losses, loan and deposit competition, interest-rate and liquidity changes, reliance on FHLB funding, regulatory capital requirements, technology and information-system disruptions, and the ability to attract and retain personnel. The filing reported no material change to previously disclosed risk factors, no material legal proceedings, and effective disclosure controls.
- The company declared a $0.06-per-share dividend payable in July. Future dividends remain at the Board’s discretion and are subject to regulatory, contractual, capital and operating considerations.
Important facts for investors to verify
- Whether rapid loan growth—particularly in single-tenant lease financing and the recently launched public-finance portfolio—remains consistent with underwriting standards and adequate reserve coverage.
- Whether nonperforming loans, the new C&I troubled debt restructurings and other impaired credits improve or require additional provisions.
- How the deposit mix, $619.0 million of near-term certificate maturities and increased FHLB borrowing affect funding costs, liquidity and net interest margin.
- Whether mortgage-banking volumes and fee income recover, and how much mortgage production is retained on balance sheet.
- How regulatory capital ratios evolve as assets grow, and whether growth requires additional capital or affects dividend capacity.
- Whether interest-rate sensitivity, including the modeled economic-value-of-equity losses, changes materially as the balance sheet and funding mix shift.