First Internet Bancorp — 2017 Form 10-K Summary
Business context and reporting period
First Internet Bancorp is an Indiana bank holding company operating First Internet Bank of Indiana. Its nationwide online consumer and deposit platform is complemented by commercial banking, including commercial real estate (CRE), single-tenant lease financing, public finance and healthcare finance. The filing covers the fiscal year ended December 31, 2017; balance-sheet amounts are as of that date. The company reported one commercial banking segment and had no traditional branch offices.
Financial performance and condition
| Metric | 2017 | 2016 |
|---|---|---|
| Total assets, year-end | $2.768 billion | $1.854 billion |
| Loans, year-end | $2.091 billion | $1.251 billion |
| Deposits, year-end | $2.085 billion | $1.463 billion |
| Net interest income | $54.0 million | $39.7 million |
| Net interest margin | 2.39% | 2.49% |
| Noninterest income | $10.5 million | $14.1 million |
| Noninterest expense | $36.7 million | $31.5 million |
| Provision for loan losses | $4.9 million | $4.3 million |
| Net income | $15.2 million | $12.1 million |
| Diluted EPS | $2.13 | $2.30 |
- Net income rose 26% year over year, while diluted EPS fell as weighted-average shares increased following equity offerings. Return on average assets was 0.66% (0.74% in 2016); return on average equity was 8.54% (9.74%).
- The 2017 income tax provision included a $1.8 million charge to revalue deferred tax assets after the Tax Cuts and Jobs Act lowered the federal corporate rate. Management reported adjusted net income of $17.1 million and adjusted diluted EPS of $2.39 excluding that item; these are non-GAAP measures.
- Net cash provided by operating activities was $24.6 million; investing activities used $908.2 million and financing activities provided $892.1 million. Cash and cash equivalents increased $8.5 million to $48.0 million. Investing outflows principally reflected loan growth.
- Year-end shareholders’ equity was $224.1 million and total liabilities were $2.544 billion. Regulatory capital ratios included a 11.43% common equity Tier 1 ratio and 14.07% total risk-based capital ratio on a consolidated basis. Management said the company and bank met fully phased-in Basel III capital requirements.
- Year-end FHLB advances were $410.2 million, up from $190.0 million. Subordinated debt had $38.0 million principal outstanding ($36.7 million carrying value). Cash, cash equivalents, available-for-sale securities and interest-bearing time deposits totaled approximately $521.3 million; loans held for sale added $51.4 million. The bank reported $551.9 million of additional FHLB and correspondent-bank borrowing capacity.
- Asset quality remained strong by reported measures: nonperforming loans were 0.04% of loans, nonperforming assets 0.21% of assets, and the allowance for loan losses 0.72% of loans. The allowance was $15.0 million; 2017 net charge-offs were $0.9 million.
Material changes versus 2016
- Assets grew 49.3%, loans 67.2% and deposits 42.5%. Commercial loans reached 73.2% of loans, versus 66.6% in 2016. New public finance lending contributed $438.3 million of year-end loans; healthcare finance, launched through a partnership, contributed $31.6 million.
- Net interest income increased 36.0%, primarily due to loan and securities growth. Net interest margin declined 10 basis points to 2.39%, as funding costs rose faster than asset yields; deposit cost increased 17 basis points.
- Noninterest income fell 25.1%, mainly because mortgage banking revenue declined to $7.8 million from $12.4 million as held-for-sale mortgage originations and sales decreased. The company also recorded gains from its first sale of single-tenant lease loans.
- Noninterest expense rose 16.8%, led by salaries and benefits, marketing, premises and equipment, and deposit insurance costs. The allowance-to-loans ratio fell from 0.88%, partly reflecting growth in lower-reserve public finance loans.
- The company raised approximately $51.6 million net through a September 2017 common-stock offering and overallotment. Shares outstanding increased, contributing to the difference between net income growth and lower diluted EPS.
Outlook, commentary, risks and unusual items
- Management intends to pursue continued growth in commercial and consumer banking, expand commercial teams and leverage its technology-based platform. It stated it had sufficient liquidity and capital for at least the next 12 months, while noting that executing its growth strategy may require additional capital. No numerical earnings or growth guidance was provided.
- The company expected to continue quarterly cash dividends, but future declarations depend on board discretion, results, capital needs, regulation and debt covenants. Dividends also depend substantially on distributions from the bank, which are legally and regulatorily constrained.
- Key risks include rapid growth and limited seasoning in commercial portfolios; concentration in CRE and single-tenant lease financing; borrower, regional economic and collateral risks; consumer-loan losses; rising funding costs and interest-rate sensitivity; deposit competition and reliance on brokered deposits and wholesale funding; and mortgage-volume cyclicality.
- Technology dependence exposes the bank to cyberattacks, service interruptions and third-party vendor failures. The company reported no material cyber-related losses to date, but warned that threats are ongoing and could cause operational, financial, regulatory and reputational harm.
- Interest-rate models estimated next-12-month net interest income would decline 1.05% under a +100-basis-point parallel shock and 1.99% under +200 basis points; a -100-basis-point shock showed a 4.63% increase, subject to rate floors. Estimated economic value of equity declined 11.75% and 22.24% under +100 and +200 basis points, respectively. These are model-based estimates sensitive to assumptions.
- Available-for-sale securities had $8.1 million of net unrealized pretax losses at year-end, which management attributed primarily to interest-rate changes and considered temporary. The Tax Act deferred-tax revaluation was a significant one-time 2017 earnings item. The company had no material legal proceedings disclosed.
- The independent auditor issued an unqualified opinion on the financial statements and on internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective at year-end.
Important facts for investors to verify
- Whether rapid loan growth—especially public finance, single-tenant lease financing and CRE—continues without deterioration in credit quality, underwriting or reserve adequacy.
- Deposit retention, certificate maturities, brokered-deposit usage and FHLB borrowing levels, as well as funding costs and available borrowing capacity.
- Whether net interest margin stabilizes as rates and deposit competition change, and how actual results compare with the disclosed interest-rate sensitivity models.
- Mortgage banking volumes and fee income, and whether growth in held-for-investment mortgage lending offsets lower secondary-market production.
- The effect of equity issuance and share-count growth on per-share returns, and the sustainability of dividends under regulatory, capital and debt-covenant constraints.
- Any subsequent credit losses, securities impairments, regulatory actions, cyber incidents, or material changes to Tax Act accounting estimates.