First Internet Bancorp — Q3 2019 Form 10-Q
Business context and period. Unaudited results cover the quarter and nine months ended September 30, 2019. First Internet Bancorp is a bank holding company operating an online-focused bank, with commercial, public finance, healthcare finance, mortgage and consumer lending businesses.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $15.2 million | $16.0 million | $47.6 million | $46.8 million |
| Provision for loan losses | $2.8 million | $0.9 million | $5.5 million | $2.4 million |
| Noninterest income | $5.6 million | $2.0 million | $11.4 million | $6.7 million |
| Noninterest expense | $11.2 million | $10.0 million | $34.0 million | $30.4 million |
| Net income | $6.3 million | $6.3 million | $18.1 million | $18.3 million |
| Diluted EPS | $0.63 | $0.61 | $1.79 | $1.98 |
| Net interest margin | 1.54% | 2.06% | 1.70% | 2.16% |
Q3 net income increased 0.6% year over year; nine-month net income declined 1.0%. Nine-month EPS also reflected the higher average share count following the June 2018 equity offering, partly offset by 2019 repurchases. Q3 return on average assets was 0.63% and return on average equity was 8.40%, versus 0.79% and 8.75% a year earlier.
- Balance sheet at September 30: Assets were $4.10 billion, up 15.6% from December 31, 2018. Loans were $2.88 billion, up 6.1%; deposits were $3.15 billion, up 17.9%; and shareholders’ equity was $295.1 million.
- Funding and debt: Cash and cash equivalents were $416.4 million. FHLB advances totaled $514.9 million. Subordinated debt had $72.0 million principal outstanding, including $37.0 million of 6.0% notes issued in June 2019.
- Liquidity and cash flow: Nine-month operating cash flow was negative $40.9 million, investing cash flow negative $222.1 million, and financing cash flow positive $490.6 million; cash increased $227.7 million to $416.4 million. Management reported $961.1 million of cash and available-for-sale securities, $41.1 million of loans held for sale, and $568.5 million of additional borrowing capacity. Certificates and brokered deposits due within one year totaled $1.10 billion.
- Capital: At September 30, consolidated CET1 and total risk-based capital ratios were 10.93% and 14.17%; the Bank’s ratios were 11.84% and 12.62%. These exceeded stated minimum requirements.
Changes, outlook and risks
- Net interest margin compressed as funding costs rose faster than asset yields. Q3 interest expense increased 57.5% year over year, while interest income rose 24.7%. Management cited deposit competition, higher certificate and money-market costs, FHLB funding, and the 2029 Notes. Falling market rates may further pressure asset yields.
- Mortgage banking income increased to $4.3 million in Q3 from $1.4 million, supported by higher mortgage pipeline activity as rates declined. For the nine months, it was $8.6 million versus $4.6 million.
- Credit costs rose: the allowance for loan losses was $21.7 million, or 0.75% of loans, versus $17.9 million, or 0.66%, at year-end. Nonperforming loans increased to $5.8 million, 0.20% of loans, largely due to a $4.7 million single-tenant lease financing loan and a commercial relationship. Q3 net charge-offs were about $1.1 million.
- Commercial lending growth was led by healthcare finance, up 115.0% from year-end to $251.5 million, and single-tenant lease financing, up 9.7% to $1.01 billion. Management said it may continue loan sales to manage growth, capital, liquidity and profitability.
- No specific earnings or margin guidance is provided. Management said it believes liquidity and capital are sufficient for at least the next 12 months, while noting that future strategic opportunities may require additional capital. Risks include credit quality, deposit competition and liquidity, interest-rate movements, regulatory requirements, and reliance on technology and information systems.
- After quarter-end, the company completed an acquisition from First Colorado National Bank on November 1: approximately $38 million of loans, primarily SBA 7(a), a $102 million SBA servicing portfolio, and an experienced SBA team. The company was still evaluating transaction accounting. The City of Fishers also paid $11.1 million on October 25 for specified land acquisition costs; construction of a development including the future headquarters began October 7.
- Management is evaluating CECL implementation and said the impact could not yet be reasonably quantified. The filing notes an October 2019 effective-date delay for smaller reporting companies. Securities fair-value declines were primarily attributed to interest rates and management considered them temporary.
Investor verification priorities
- Track whether deposit costs moderate enough to stabilize net interest margin and whether deposit growth remains durable.
- Review performance, delinquency and reserve adequacy for the new nonaccrual commercial exposures and broader loan portfolio.
- Assess the acquired SBA loans and servicing portfolio, including integration, returns and accounting treatment.
- Monitor liquidity needs, the $1.10 billion of deposits due within one year, wholesale funding, and interest-rate swap collateral requirements.
- Verify the impact of CECL adoption, capital ratios after balance-sheet growth, and the completion and economics of the Fishers development.