First Internet Bancorp — Q3 2017 Form 10-Q
Business context and period. First Internet Bancorp is an Indiana bank holding company operating First Internet Bank of Indiana. Its online banking model has no traditional branches; lending includes commercial, public finance, healthcare finance, mortgage and consumer businesses. This unaudited filing covers the three and nine months ended September 30, 2017, with balance-sheet comparisons primarily against December 31, 2016.
Financial performance and position
| Metric | Q3 2017 | Comparable period | Nine months 2017 | Comparable period |
|---|---|---|---|---|
| Net interest income | $14.2 million | $10.3 million, Q3 2016 | $38.6 million | $28.8 million, 2016 |
| Provision for loan losses | $1.3 million | $2.2 million, Q3 2016 | $3.7 million | $4.1 million, 2016 |
| Noninterest income | $3.1 million | $4.9 million, Q3 2016 | $8.0 million | $11.2 million, 2016 |
| Noninterest expense | $9.4 million | $8.4 million, Q3 2016 | $27.0 million | $23.3 million, 2016 |
| Net income | $4.9 million | $3.1 million, Q3 2016 | $11.7 million | $8.4 million, 2016 |
| Diluted EPS | $0.71 | $0.55, Q3 2016 | $1.75 | $1.65, 2016 |
| Net interest margin | 2.31% | 2.42%, Q3 2016 | 2.41% | 2.51%, 2016 |
Net income rose 58.0% year over year in Q3 and 40.2% for the nine-month period. Growth in net interest income and lower loan-loss provision supported earnings, partly offset by lower mortgage banking income and higher operating expenses. Average funding costs rose as deposits and borrowings expanded. Fully taxable equivalent net interest margin was 2.52% for Q3 and 2.57% for the nine months.
- Balance sheet, September 30: Total assets were $2.63 billion, up 42.0% from year-end 2016. Loans were $1.87 billion, up 49.4%; deposits were $2.00 billion, up 36.5%. Shareholders’ equity was $220.9 million.
- Funding and debt: Federal Home Loan Bank advances were $365.2 million, versus $190.0 million at year-end. Subordinated debt had $38.0 million principal outstanding and a $36.7 million carrying value. Certificates of deposit made up 65.1% of deposits.
- Liquidity and cash flow: Cash and cash equivalents were $125.7 million. Management reported $618.2 million of cash, time deposits and available-for-sale securities, plus $45.5 million of loans held for sale, as generally available for cash needs. The Bank had $152.8 million of additional borrowing capacity. Nine-month operating cash flow was $26.6 million; investing cash outflow was $699.9 million and financing cash inflow was $759.5 million.
- Credit quality: Allowance for loan losses was $14.1 million, or 0.75% of loans, compared with 0.88% at year-end. Nonperforming loans were $2.7 million (0.14% of loans); nonperforming assets were $7.9 million (0.30% of assets). The allowance covered 529.2% of nonperforming loans.
- Capital: Consolidated CET1 and Tier 1 risk-based capital ratios were each 11.93%; total risk-based capital was 14.67% and leverage was 8.86%. The Bank’s ratios were 11.83%, 11.83%, 12.59% and 8.78%, respectively.
Material changes and management commentary
- Loan growth was concentrated in commercial lending, including $269.3 million in the newly established public finance portfolio, $12.4 million in healthcare finance and $783.9 million in single-tenant lease financing. Management cited strong production in single-tenant financing and growth in adjustable-rate residential mortgages.
- Mortgage banking revenue fell 42.9% in Q3 and 36.9% for the nine months, mainly because of lower held-for-sale mortgage origination and sales volumes. Management attributed the shift partly to higher conventional mortgage rates and increased customer preference for adjustable-rate mortgages retained in the portfolio.
- Operating expenses increased 11.7% in Q3 and 16.0% year to date, mainly from personnel growth, digital marketing and mortgage lead-generation costs; software expense and deposit insurance costs also contributed year to date.
- In September, the company completed a public offering of 1,897,500 shares, receiving approximately $51.6 million net. It also reported $51.6 million in net proceeds from common stock issuance in the nine-month equity rollforward.
- The company sold $26.4 million of portfolio mortgage loans in Q3, recognizing a $0.3 million gain. Approximately $26.3 million of single-tenant lease loans had been transferred to held-for-sale in anticipation of a sale expected to close in Q4; completion was not reported in this filing.
Outlook, risks and contingencies
The filing gives no quantitative earnings or growth guidance. Management said it believes liquidity and capital are sufficient for at least the next 12 months, while noting that continued growth may require additional capital and that unfavorable capital terms could constrain its strategy. The company expects to continue quarterly cash dividends, but future declarations and amounts remain at the board’s discretion and are subject to financial, capital, regulatory and contractual considerations.
Key exposures include credit deterioration, rapid growth in commercial and other loan portfolios, deposit pricing and funding availability, interest-rate and securities valuation changes, regulatory capital requirements, competition, and operational or information-system disruptions. Interest-rate modeling estimated that a parallel +100 basis-point move would increase next-12-month net interest income by 1.46% but reduce economic value of equity by 12.68%; a +200 basis-point move reduced modeled economic value of equity by 22.48%. Management described securities fair-value declines as primarily rate-driven and temporary, and said it did not expect to be required to sell affected securities before recovery. The company reported no material legal proceedings and no material changes to previously disclosed risk factors. Disclosure controls were deemed effective.
Accounting items to monitor include the expected adoption of the expected-credit-loss standard, whose impact the company said it could not yet quantify, and planned early adoption of the targeted hedge-accounting update. The company said the revenue-recognition standard was not expected to have a material impact; the lease-standard impact remained under evaluation.
Investor verification priorities
- Track whether rapid loan growth—especially public finance and single-tenant lease lending—maintains credit quality and adequate allowance coverage.
- Verify completion, proceeds and any gain or loss from the anticipated single-tenant loan sale, and assess the effect of continued loan sales on growth, liquidity and capital.
- Monitor net interest margin and deposit costs, including the high certificate-of-deposit concentration and reliance on FHLB advances.
- Assess mortgage banking volumes and profitability as customers shift toward adjustable-rate loans held in portfolio.
- Confirm capital and liquidity remain adequate as the company pursues growth, and review the sensitivity of earnings and economic value to interest-rate changes.