First Internet Bancorp — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also provides unaudited quarterly results, including the fourth quarter. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions unless otherwise indicated.
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, residential mortgages and consumer loans, alongside relationship-based commercial real estate, single-tenant lease, public finance, healthcare finance, C&I and SBA lending. The bank has no traditional branch network. It reported one segment: commercial banking.
Key financial metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Interest income | $147.4 million | $115.5 million |
| Interest expense | $84.4 million | $53.2 million |
| Net interest income | $63.0 million | $62.3 million |
| Provision for loan losses | $6.0 million | $3.9 million |
| Noninterest income | $16.8 million | $8.8 million |
| Noninterest expense | $46.6 million | $43.2 million |
| Net income | $25.2 million | $21.9 million |
| Diluted earnings per share | $2.51 | $2.30 |
| Net interest margin | 1.65% | 2.09% |
| Return on average assets | 0.65% | 0.72% |
| Return on average equity | 8.52% | 8.44% |
Fourth-quarter 2019 net income was $7.1 million, or $0.72 per diluted share, versus $3.6 million, or $0.35 per diluted share, in fourth-quarter 2018. Fourth-quarter provision expense was $0.5 million, compared with $1.5 million a year earlier.
Year-end balance sheet and capital: Total assets were $4.10 billion, up 15.8%; loans were $2.96 billion, up 9.1%; deposits were $3.15 billion, up 18.1%; and shareholders’ equity was $304.9 million. Cash and cash equivalents were $327.4 million. FHLB advances were $514.9 million; subordinated debt had $72.0 million principal outstanding and a $69.5 million carrying value. Consolidated CET1 and total risk-based capital ratios were 10.84% and 13.99%, respectively; the company and bank met applicable capital requirements.
Cash flow and liquidity: Operating activities used $43.6 million in cash in 2019, compared with $29.4 million provided in 2018; investing activities used $313.3 million, while financing activities provided $495.5 million. Cash increased $138.6 million to $327.4 million. Management reported $868.2 million of cash and available-for-sale securities, plus $56.1 million of loans held for sale, and said the bank could access a further $530.1 million through FHLB advances and correspondent-bank lines. Management believed liquidity and capital were sufficient for at least the next 12 months.
Asset quality: Nonperforming loans rose to $6.6 million from $0.9 million; nonperforming loans were 0.23% of loans versus 0.03%. Nonperforming assets were 0.22% of assets versus 0.10%. The allowance for loan losses was $21.8 million, or 0.74% of loans, compared with $17.9 million, or 0.66%, in 2018. The increase in problem assets was driven mainly by a $4.7 million single-tenant lease financing relationship placed on nonaccrual.
Material changes versus 2018
- Net income grew 15.2%, supported by higher noninterest income and modestly higher net interest income, partly offset by increased expenses and loan-loss provision.
- Net interest margin contracted 44 basis points. Interest expense rose faster than interest income as deposit balances and funding costs increased; the average cost of interest-bearing deposits rose 49 basis points.
- Noninterest income increased 91.7%, primarily from mortgage banking activity, which rose to $11.5 million from $5.7 million as lower mortgage rates lifted refinancing activity. Loan-sale gains also increased.
- Loan growth was concentrated in healthcare finance, single-tenant lease financing and small-business lending. Commercial loans represented 77.2% of total loans, versus 73.3% in 2018.
- Deposits grew $482.6 million. Brokered deposits declined to $538.4 million from $647.1 million, while certificates of deposit and money-market deposits increased.
- The company issued $37.0 million of 6.0% fixed-to-floating subordinated notes due 2029. It repurchased $10.0 million of common stock under its buyback authorization and declared $0.24 per share in dividends for the year.
Outlook, risks and unusual items
- No quantitative earnings or balance-sheet guidance is provided. Management said it intends to continue expanding commercial banking and develop a nationwide small-business lending platform, including further personnel additions.
- Management attributed the higher 2019 mortgage revenue to refinancing activity after mortgage rates declined. This revenue source is sensitive to rates and housing-market conditions.
- Key exposures include commercial real estate and other commercial-credit risk, loan concentrations and relatively unseasoned commercial portfolios; the filing also highlights consumer-loan credit risk and local economic exposure in Central Indiana and adjacent markets.
- The bank depends on online systems and third-party technology providers, making cyberattacks, outages and data breaches material risks. Management reported no material cyber losses to date but cautioned that threats are ongoing.
- Interest-rate risk, deposit competition, reliance on brokered deposits and wholesale funding, and the scheduled transition away from LIBOR may affect margins, funding costs and debt or hedge benchmarks. The filing reports $72.0 million of subordinated debt, including notes with floating-rate terms tied initially to LIBOR.
- The filing discusses the potential economic effects of a widespread public-health event, including COVID-19, as a risk; it does not quantify an impact on 2019 results. CECL adoption was delayed for smaller reporting companies to fiscal years beginning after December 15, 2022; management was evaluating implementation and possible effects.
- Unusual items include a $0.5 million securities-sale loss in 2019 and a $0.5 million gain on sale of Visa Class B shares. In 2018, a $2.4 million OREO write-down reduced net income by $1.9 million after tax; in 2017, the Tax Act deferred-tax revaluation added $1.8 million of tax expense.
- The company reported $61.3 million of unincurred construction-contract commitments for its future headquarters, due within two years. There were no material legal proceedings reported. The independent auditor issued an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Track whether the decline in net interest margin continues and whether deposit and wholesale funding costs moderate.
- Review subsequent performance, collateral and reserve adequacy for the $4.7 million nonaccrual single-tenant loan and the increase in nonperforming loans.
- Assess the sustainability of mortgage-banking revenue and the extent to which refinancing-driven gains recur.
- Monitor commercial portfolio concentrations, especially single-tenant lease financing, public finance and rapidly expanding healthcare finance.
- Check the maturity, pricing and replacement benchmarks for subordinated debt and interest-rate swaps as LIBOR transition progresses.
- Reconcile small-business acquisition disclosures: the filing gives acquired loan balances of approximately $32.6 million in one section and $32.9 million in another, and servicing-portfolio balances of approximately $94.8 million and $104.0 million, respectively.
- Evaluate liquidity against near-term certificate-of-deposit maturities, outstanding loan commitments of $254.4 million and headquarters construction commitments.