First Internet Bancorp — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports unaudited fourth-quarter results. First Internet Bancorp operates First Internet Bank of Indiana, a digital bank with nationwide consumer and deposit activities and commercial lending businesses.
Financial performance and position
| Metric | FY/Q4 2018 | Comparable period |
|---|---|---|
| Net income | FY: $21.9 million | FY2017: $15.2 million |
| Diluted EPS | FY: $2.30; Q4: $0.35 | FY2017: $2.13; Q4 2017: $0.41 |
| Net interest income | FY: $62.3 million | FY2017: $54.0 million |
| Net interest margin | FY: 2.09% | FY2017: 2.39% |
| Total assets / loans / deposits | Year-end: $3.54 billion / $2.72 billion / $2.67 billion | Year-end 2017: $2.77 billion / $2.09 billion / $2.08 billion |
| Shareholders’ equity | Year-end: $288.7 million | Year-end 2017: $224.1 million |
| Operating cash flow | FY: $29.4 million | FY2017: $24.6 million |
FY2018 return on average assets was 0.72% and return on average equity was 8.44%. The allowance for loan losses was $17.9 million, or 0.66% of loans; nonperforming loans were 0.03% of loans and nonperforming assets were 0.10% of assets. Regulatory capital ratios at year-end included a 12.39% consolidated CET1 ratio, 14.53% total risk-based capital ratio and 9.00% leverage ratio.
Year-end funding included $525.2 million of Federal Home Loan Bank advances and $35.0 million of subordinated debt principal. Cash and cash equivalents were $188.7 million. Cash plus available-for-sale securities totaled $670.1 million; management said the company had sufficient liquidity and capital for at least the next 12 months. FY cash flows were $29.4 million from operations, negative $638.7 million from investing and $750.1 million from financing.
Changes versus FY2017
- Net income increased $6.7 million, or 43.8%, while diluted EPS rose from $2.13 to $2.30. Growth in net interest income and lower provision and tax expense were partly offset by higher operating expense and lower noninterest income.
- Assets grew 28.0%, loans 29.9% and deposits 28.1%. Commercial loans were 73.3% of loans; public finance and healthcare finance balances grew to $706.3 million and $117.0 million, respectively.
- Net interest margin fell 30 basis points as funding costs rose faster than asset yields. Interest expense increased 73.2% to $53.2 million.
- Noninterest income declined 16.9% to $8.8 million, primarily as mortgage banking revenue fell to $5.7 million from $7.8 million. Noninterest expense rose 17.6% to $43.2 million.
- Brokered deposits increased to $647.1 million from $76.7 million, representing 24.2% of deposits versus 3.7% a year earlier. The company also completed a common-stock offering, receiving approximately $54.3 million net.
Outlook, risks and unusual items
- Management intends to pursue continued commercial and consumer growth using its technology platform, but the filing provides no specific earnings or revenue guidance.
- A $2.4 million write-down on commercial other real estate owned reduced FY2018 net income by $1.9 million and diluted EPS by $0.20. Management’s adjusted, non-GAAP figures were $23.8 million net income and $2.50 diluted EPS.
- Tax expense was $2.1 million, an 8.6% effective rate, reflecting tax-exempt income and the lower federal tax rate. FY2017 included a $1.8 million deferred-tax-asset revaluation charge.
- Key exposures include commercial real estate and other commercial credit, relatively new commercial lending portfolios, rising deposit costs, interest-rate sensitivity, mortgage-market weakness, and cybersecurity and technology dependence. Management also cited LIBOR transition uncertainty and expected CECL implementation to increase the allowance and potentially reduce equity and regulatory capital.
- The available-for-sale securities portfolio had an $18.5 million pretax net unrealized loss, attributed primarily to interest-rate movements; management said it intended and expected to be able to hold affected securities through recovery or maturity.
- The company approved a $10 million share repurchase program in December 2018. It repurchased 10,897 shares during 2018; subsequent repurchases through March 8, 2019 totaled 61,183 shares for $1.3 million.
Important facts for investors to verify
- Whether loan growth—particularly in public finance, single-tenant lease financing, healthcare finance and CRE—can be maintained without deterioration in credit quality or higher loss provisions.
- Deposit funding costs and the sustainability of the elevated brokered-deposit share as deposits and borrowings reprice.
- Whether margin pressure continues and mortgage banking revenue remains below prior-year levels.
- The valuation, disposition timing and remaining exposure related to the written-down OREO property, and the unrealized securities losses.
- CECL adoption impact, interest-rate sensitivity assumptions, and the company’s transition plans for LIBOR-linked instruments.
- Capital, liquidity and dividend flexibility after growth, share repurchases and scheduled funding maturities; bank dividends to the holding company are subject to regulatory limits.