First Internet Bancorp — Q1 2021 Form 10-Q
Business context and reporting period
First Internet Bancorp is a digital-focused bank holding company operating through First Internet Bank of Indiana. Its lending activities include commercial real estate, commercial and industrial, public finance, healthcare finance, small business, mortgage and consumer lending. This unaudited report covers the three months ended March 31, 2021; balance-sheet comparisons are to December 31, 2020, and operating results are compared with Q1 2020. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2021 / March 31, 2021 | Comparable period / prior year-end |
|---|---|---|
| Net income | $10.5; diluted EPS $1.05 | $6.0; diluted EPS $0.62 in Q1 2020 |
| Net interest income | $20.5 | $15.0 in Q1 2020 |
| Net interest margin | 2.04%; 2.18% fully taxable equivalent (non-GAAP) | 1.50%; 1.65% fully taxable equivalent in Q1 2020 |
| Provision for loan losses | $1.3 | $1.5 in Q1 2020 |
| Noninterest income / expense | $8.4 / $15.3 | $6.2 / $13.5 in Q1 2020 |
| Cash flow from operations | $31.1 provided | $25.8 used in Q1 2020 |
| Cash and cash equivalents | $416.2 | $419.8 at December 31, 2020 |
| Total assets / deposits | $4,188.6 / $3,217.6 | $4,246.2 / $3,270.9 at December 31, 2020 |
| Total loans / allowance for loan losses | $3,058.7 / $30.6; allowance-to-loans ratio 1.00% | $3,059.2 / $29.5; ratio 0.96% at December 31, 2020 |
| Federal Home Loan Bank advances / subordinated debt | $514.9 / $69.8 carrying value; $72.0 debt principal | $514.9 / $79.6 carrying value at December 31, 2020 |
Return on average assets was 1.02%, return on average equity 12.61%, and return on average tangible common equity 12.79%. Shareholders’ equity was $344.6 million; the company reported an 8.23% equity-to-assets ratio and an 8.12% tangible common equity-to-tangible assets ratio. Consolidated capital ratios were 11.81% common equity Tier 1, 11.81% Tier 1, 15.18% total capital, and 8.46% leverage.
Material changes and management commentary
- Net income rose 73.6% year over year. Net interest income increased 36.7%, chiefly because interest expense declined 39.9%, more than offsetting an 8.2% decline in interest income. Deposit repricing and a shift away from higher-cost certificates and brokered deposits supported the margin improvement.
- Mortgage banking revenue increased to $5.8 million from $3.7 million, mainly due to higher gain-on-sale margins. Total noninterest income rose 34.8%. Noninterest expense increased 13.6%, principally from higher staffing, lending incentives and digital marketing.
- Deposits fell $53.3 million quarter over quarter, with certificates of deposit down $114.6 million and money-market balances up $46.9 million. Management noted approximately $807 million of certificates and brokered deposits mature within twelve months, at a weighted-average cost of 1.58%; it expects deposit funding costs to continue declining in 2021. Management also said asset yields had largely stabilized.
- Loans were broadly flat from year-end. Commercial loan growth in public finance, construction and small business was largely offset by healthcare finance and single-tenant lease financing prepayments. The allowance increased to $30.6 million, including qualitative-factor adjustments and specific reserves on two commercial relationships.
- Nonperforming loans increased to $14.6 million from $10.2 million at year-end, primarily due to one commercial relationship placed on nonaccrual. Nonperforming loans were 0.48% of loans; allowance coverage of nonperforming loans was 209.2%, down from 289.5%. The company reported 37 COVID-related non-TDR modifications totaling $14.3 million.
Liquidity, outlook, risks and unusual items
- Management stated that capital and liquidity resources should be sufficient for at least the next twelve months. It reported $878.6 million in cash, cash equivalents and available-for-sale securities, plus $30.2 million in loans held for sale; the Bank had $451.1 million of additional borrowing capacity. Outstanding loan commitments were approximately $261 million.
- Management was optimistic that vaccinations and government stimulus would mitigate pandemic effects, but warned that worsening economic conditions could adversely affect credit quality and business performance. No quantified earnings or revenue guidance was provided.
- Interest-rate sensitivity modeling showed estimated Year 1 net interest income declines of 1.79% and 5.69% under parallel rate increases of 100 and 200 basis points, respectively; estimated economic value of equity declined 4.81% and 12.45% in those scenarios. Results depend on model assumptions.
- The company redeemed a $10 million subordinated term note in January, funded with proceeds from $10 million of 2030 notes issued in October 2020. It terminated $38.2 million of fair-value hedge relationships in March, paying counterparties $1.9 million; the related securities adjustment will be amortized over the securities’ remaining lives.
- Construction of the planned headquarters continued. At quarter-end, $32.9 million of contracted construction commitments remained unincurred and were due within twelve months. The company sold its current headquarters on April 16, 2021 for $8.9 million cash and agreed to lease it back through year-end, with a possible extension.
- The company reported no material legal proceedings, no material change in previously disclosed risk factors, and effective disclosure controls. It expects to adopt the CECL credit-loss standard in 2023 and was still evaluating its impact.
Important facts for investors to verify
- Whether the rise in nonperforming loans and the specific commercial credits produce further deterioration, provisions or charge-offs.
- Deposit retention and pricing, including the runoff and renewal costs of the $807 million of near-term certificate and brokered deposit maturities.
- Sustainability of mortgage banking revenue and gains, given the reported volatility in mortgage volumes, margins and hedging values.
- Progress, total cost and timing of the headquarters project, including remaining construction commitments and the effect of the completed headquarters sale and leaseback.
- Actual credit performance of COVID-modified and PPP loans, and the future allowance impact as the economy and applicable relief programs change.
- Interest-rate exposure and the assumptions underlying management’s sensitivity estimates; the filing cautions that actual results may differ materially from forward-looking statements.