First Internet Bancorp — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed March 15, 2021. First Internet Bancorp is a digital-focused bank holding company operating through First Internet Bank of Indiana. The company reported one reportable segment: commercial banking.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net income | $29.5 million | $25.2 million |
| Diluted EPS | $2.99 | $2.51 |
| Net interest income | $64.5 million | $63.0 million |
| Net interest margin | 1.55% | 1.65% |
| Provision for loan losses | $9.3 million | $6.0 million |
| Noninterest income | $36.3 million | $16.8 million |
| Noninterest expense | $57.7 million | $46.6 million |
| Operating cash flow | $13.1 million provided | $43.6 million used |
Net income rose 16.7%; management attributed the increase mainly to higher mortgage banking income and loan-sale gains, plus modestly higher net interest income. These gains more than offset increased expenses, loan-loss provision and taxes. Return on average assets was 0.69% (0.65% in 2019); return on average equity was 9.39% (8.52%). The effective tax rate increased to 13.1% from 7.1%.
Fourth-quarter 2020 net income was $11.1 million, or $1.12 per diluted share, versus $7.1 million, or $0.72 per diluted share, in fourth-quarter 2019.
Balance sheet, funding and capital
- Total assets were $4.246 billion, up 3.6% year over year; loans were $3.059 billion, up 3.2%.
- Deposits reached $3.271 billion, up 3.7%. Growth in money-market and noninterest-bearing accounts was partly offset by declines in certificates of deposit and brokered deposits.
- Cash and cash equivalents were $419.8 million; available-for-sale securities were $497.6 million; loans held for sale were $39.6 million. The company reported $917.4 million in cash and available-for-sale securities and access to additional borrowing capacity.
- FHLB advances were $514.9 million. Subordinated debt had $82.0 million principal outstanding and a $79.6 million carrying value. In October 2020, the company issued a $10 million subordinated note due 2030; it redeemed its $10 million 2025 note on January 4, 2021.
- Total shareholders’ equity was $330.9 million; the equity-to-assets ratio was 7.79%. The Bank was well capitalized, with a 12.49% CET1 ratio, 13.47% total capital ratio and 8.78% leverage ratio.
- FY2020 cash flow was $13.1 million from operations, negative $44.8 million from investing activities and positive $124.2 million from financing activities; cash increased $92.4 million.
Credit quality and notable developments
- Commercial loans grew 10.0%, led by healthcare finance, small-business lending and construction. Healthcare finance balances increased to $528.2 million; CRE represented a substantial part of the loan portfolio.
- Nonperforming loans rose to $10.2 million, or 0.33% of loans, from $6.6 million, or 0.23%. The allowance for loan losses increased to $29.5 million, or 0.96% of loans (0.98% excluding PPP loans), reflecting COVID-19-related qualitative adjustments. Net charge-offs were $1.7 million.
- At year-end, $11.9 million of loans remained in COVID-related non-TDR modification programs. The company had 376 PPP loans totaling $50.6 million outstanding and expected most to be forgiven; PPP loans carry a 1% rate and fees are recognized over their lives.
- Mortgage banking revenue increased with historically low mortgage rates and higher originations. The company originated $878.2 million in mortgage loans for sale during 2020.
- The company terminated loan-related fair-value hedges in June 2020, paying $46.1 million to counterparties; related loan basis adjustments are being amortized over the remaining loan lives.
- After year-end, the company agreed to sell its current headquarters for $8.9 million cash, subject to customary closing conditions, and lease it back through year-end 2021. Construction of a future headquarters was underway; $37.9 million of contracted construction commitments remained unincurred at year-end.
Outlook, risks and contingencies
The filing gives no specific earnings or growth guidance. Management said the pandemic’s ultimate effects remained uncertain, but expected lower deposit funding costs to benefit 2021 results as approximately $917 million of certificates and brokered deposits matured within the next year at a weighted average cost above current new-production costs. Management also cited historically low rates as supporting mortgage activity and said it intended to maintain higher cash balances amid continued uncertainty. The company stated it had sufficient liquidity and capital for at least the next twelve months.
Key risks include pandemic-related borrower stress and asset-value changes; commercial, CRE and healthcare loan concentration and seasoning; interest-rate sensitivity and margin pressure; the allowance estimate and upcoming CECL adoption; cyber and third-party technology disruption; competition; regulatory and capital constraints; and the transition from LIBOR. The 2026 subordinated notes reference LIBOR after September 2021 and do not specify a replacement benchmark in the filing; the 2029 notes provide for a replacement process. The company reported no material legal proceedings and received unqualified audit opinions, including on internal control over financial reporting. The allowance for loan losses was identified as a critical audit matter.
Important facts for investors to verify
- Whether credit quality and pandemic-related modifications worsen, particularly in commercial, CRE, healthcare and small-business portfolios; monitor the allowance and nonperforming loans.
- Whether mortgage banking and loan-sale income remain strong enough to offset margin compression and rising operating expenses.
- Deposit mix, renewal pricing and liquidity as large certificates mature; confirm the availability and cost of wholesale funding.
- Execution and total cost of the new headquarters project, remaining construction commitments and completion of the existing-property sale and leaseback.
- CECL implementation effects, the LIBOR transition for subordinated debt and derivatives, and any implications for capital, earnings or dividends.