First Internet Bancorp — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are to December 31, 2017. Amounts are in U.S. dollars; financial figures are rounded to millions unless otherwise stated.
Business context
First Internet Bancorp is a bank holding company operating through First Internet Bank of Indiana. It offers online consumer and small-business banking and commercial lending, including single-tenant lease financing, public finance, and healthcare finance. The company has no traditional branch offices.
Financial results and position
- Profitability: Net income was $6.0 million, up 112.9% from $2.8 million in Q1 2017. Diluted EPS was $0.71 versus $0.43. Return on average assets was 0.87%; return on average equity was 10.96%.
- Revenue and margins: Net interest income increased 34.5% to $15.4 million. Net interest margin narrowed to 2.26% from 2.50% year over year; fully taxable-equivalent NIM was 2.41% versus 2.57%. Noninterest income rose 19.3% to $2.5 million.
- Costs and credit provision: Noninterest expense increased 17.5% to $10.2 million, including higher compensation, software, marketing, and deposit-insurance costs. Provision for loan losses was $0.85 million, down from $1.04 million.
- Assets and loans: Total assets were $2.86 billion, up 3.4% from year-end. Loans were $2.21 billion, up 5.7%; growth included public finance, single-tenant lease, healthcare finance, and residential mortgage lending. Commercial loans represented 73.3% of the portfolio.
- Credit quality: Nonperforming loans were $0.66 million, or 0.03% of loans, compared with $0.84 million and 0.04% at year-end. Nonperforming assets were $5.71 million, or 0.20% of assets. The allowance was $15.6 million, 0.70% of loans, versus $15.0 million and 0.72% at year-end.
- Deposits, debt, and capital: Deposits grew 4.4% to $2.18 billion. FHLB advances were $413.2 million; subordinated debt had a $36.8 million carrying value and $38.0 million principal balance. Consolidated CET1 and total risk-based capital ratios were 11.42% and 14.01%, respectively; the leverage ratio was 8.17%.
- Liquidity and cash flow: Cash and cash equivalents were $63.7 million. Management reported $527.4 million of cash and available-for-sale securities, plus $17.1 million of loans held for sale, generally available for cash needs, and $534.2 million of additional borrowing capacity. Operating cash flow was $14.9 million; investing used $93.6 million and financing provided $94.5 million. Cash increased $15.8 million during the quarter.
- Shareholders’ equity and securities: Equity was $224.8 million, nearly unchanged from year-end. Other comprehensive loss was $5.2 million for the quarter, largely reflecting interest-rate-related unrealized securities losses; accumulated other comprehensive loss reached $11.3 million.
Material changes versus comparable periods
- Compared with Q1 2017, net interest income increased by $4.0 million, principally from loan growth; average loans rose 62.3%. Interest expense also increased substantially, as deposit and borrowing balances and funding costs rose. The higher funding costs contributed to NIM compression.
- Noninterest expense rose $1.5 million year over year. Compensation included $0.2 million of non-recurring accelerated vesting expense.
- The effective tax rate fell to 12.5% from 26.5%, reflecting the Tax Act’s lower federal corporate rate and growth in tax-exempt public finance assets.
- Compared with December 31, 2017, total loans increased $118.2 million and deposits increased $92.2 million. Certificates of deposit declined while money-market and brokered deposits increased; the filing says $116.3 million of public-fund deposits were reclassified from certificates to brokered deposits following regulatory guidance.
Outlook, commentary, and risks
- The filing provides no numerical earnings or growth guidance. Management said it intends to pursue its growth strategy and believes liquidity and capital resources are sufficient for at least the next 12 months, while noting that growth may require additional capital and unfavorable capital-raising terms could constrain execution.
- Management may sell additional single-tenant lease loans if market conditions remain favorable; two Q1 sales totaled $25.2 million and generated a $0.4 million gain.
- Key risks include credit deterioration, loan and real-estate valuation changes, deposit competition and rising funding costs, interest-rate sensitivity, reliance on wholesale funding and Bank distributions, regulatory or capital changes, and technology-system disruptions. The portfolio’s planned growth in commercial real estate, C&I, public finance, and healthcare finance may carry heightened credit risks.
- Interest-rate modeling estimated that a parallel +100 bp shock would reduce Year 1 net interest income by 3.46% and economic value of equity by 12.10%; a +200 bp shock would reduce them by 7.11% and 22.83%, respectively. These are model estimates and depend on assumptions.
- Management considered unrealized securities losses to be temporary, primarily resulting from interest-rate changes, and said it did not intend or expect to be required to sell the securities before recovery. A material legal proceeding was not reported. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether loan growth and mix—particularly public finance, single-tenant lease, and healthcare finance—can be sustained without weakening underwriting or credit quality.
- Whether deposit pricing, brokered-deposit usage, and FHLB borrowing continue to pressure funding costs and net interest margin.
- The assumptions supporting the allowance for loan losses, the low reported nonperforming-loan ratio, and management’s assessment of securities impairment.
- The sensitivity of earnings, equity, liquidity, and capital to interest-rate changes and the company’s ability to fund planned growth on acceptable terms.
- The durability of Q1 earnings, including the effects of tax-law changes, the portfolio-loan sale gain, and non-recurring accelerated equity-award vesting.