First Internet Bancorp — Q3 2021 Form 10-Q
Business and period. First Internet Bancorp is a digital-focused bank holding company operating through First Internet Bank of Indiana, with commercial, consumer, small-business, public-finance and mortgage businesses. This unaudited report covers the quarter and nine months ended September 30, 2021; balance-sheet comparisons are to December 31, 2020. Amounts below are U.S. dollars.
Financial performance and condition
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $20.9 million | $16.2 million | $63.1 million | $45.7 million |
| Net interest margin | 2.00% | 1.53% | 2.05% | 1.47% |
| Net income | $12.1 million | $8.4 million | $35.6 million | $18.4 million |
| Diluted EPS | $1.21 | $0.86 | $3.57 | $1.87 |
| Provision (benefit) for loan losses | $(0.03) million | $2.5 million | $1.3 million | $6.5 million |
| Noninterest income | $7.8 million | $12.5 million | $25.2 million | $23.7 million |
| Noninterest expense | $14.5 million | $16.4 million | $44.8 million | $43.1 million |
Q3 diluted EPS and net income rose year over year, primarily from higher net interest income, lower credit provision and lower expenses; weaker mortgage banking income partly offset those gains. Nine-month net income increased 94.1%. Management reported Q3 returns on average assets/equity of 1.12%/13.10% and nine-month returns of 1.13%/13.54%.
- Revenue and margins: Q3 net interest income rose 28.9%; nine-month net interest income rose 38.0%. Lower deposit costs and a shift away from higher-cost certificates and brokered deposits supported margin expansion. Q3 mortgage banking revenue fell to $3.9 million from $9.6 million, reflecting lower lock and sold-loan volume and narrower gain-on-sale margins.
- Assets and loans: Total assets were $4.25 billion, broadly flat from year-end. Loans were $2.94 billion, down 4.0%; net loans were $2.91 billion. Commercial loans declined 4.4%, including continued payoffs in healthcare finance and single-tenant lease financing. Franchise finance began in Q3.
- Credit: Allowance for loan losses was $28.0 million, or 0.95% of loans (0.96% excluding PPP loans). Nonperforming loans were $7.9 million, 0.27% of loans, versus $10.2 million and 0.33% at year-end. Nonperforming assets were $9.0 million, including $1.2 million of OREO. The quarter recorded net charge-offs below $0.1 million.
- Deposits and liquidity: Deposits totaled $3.22 billion, down 1.4% from year-end. Cash and cash equivalents were $407.5 million. Management reported $1.0 billion of cash and available-for-sale securities, plus $44.0 million of loans held for sale, as generally available for cash needs; the Bank had $597.9 million of additional borrowing capacity. Holding-company cash was $58.8 million.
- Cash flow: Nine-month operating cash flow was $42.9 million, versus cash used of $35.0 million in 2020; investing activities used $30.6 million and financing activities used $24.6 million. Cash and equivalents declined $12.3 million during the period to $407.5 million.
- Debt and capital: Subordinated debt was $104.2 million net of issuance costs at quarter-end ($107.0 million principal). The company issued $60 million of 3.75% subordinated notes due 2031 and redeemed $25 million of 6.0% notes due 2026. Consolidated regulatory capital ratios included 12.62% CET1, 17.04% total capital and an 8.86% leverage ratio. Shareholders’ equity was $370.4 million; tangible common equity to tangible assets was 8.61%.
Material changes, outlook and risks
- Q3 results included $0.8 million of pretax costs to redeem the 2026 subordinated notes. The company sold its former headquarters in April for $8.9 million cash and recognized a $2.5 million gain in Q2. Management’s non-GAAP adjusted diluted EPS was $1.27 for Q3 and $3.44 for the first nine months; these measures exclude specified unusual items.
- Management expected asset yields to move closer to Q2 2021 levels and then increase as commercial lending grows. It also expected deposit funding costs to decline: about $787 million of certificates and brokered deposits were scheduled to mature within 12 months at a 1.22% weighted-average cost.
- The company expected to fund up to $100 million in franchise loans by year-end 2021 and an additional $150 million during 2022. It anticipated healthcare finance balances could decline following Provide’s acquisition and potential further payoffs.
- After quarter-end, First Internet agreed to acquire First Century Bancorp for $80 million cash, subject to shareholder and regulatory approvals, with closing expected in Q1 2022. Management expected the transaction to be accretive to 2023 EPS but initially dilutive to tangible book value per share. The company also authorized up to $30 million of share repurchases through December 31, 2022.
- Key risks include uncertainty from COVID-19 and economic conditions, credit losses in commercial lending, interest-rate and funding sensitivity, reliance on capital distributions from the Bank, and execution, approval, integration and cost risks related to the pending acquisition. The filing reports 13 COVID-related non-TDR loan modifications totaling $3.0 million. The CECL standard was expected to be adopted January 1, 2023; its impact had not yet been quantified.
- Interest-rate sensitivity modeling showed that an instantaneous +200-basis-point shock would reduce modeled year-one net interest income by 7.04% and economic value of equity by 16.44%, under a static-balance-sheet assumption. Management cautioned that actual results may differ.
Investor verification priorities
- Track whether margin gains persist as deposit repricing benefits roll off and market rates change, and whether management’s deposit-cost and asset-yield outlook is realized.
- Monitor mortgage banking revenue, loan growth and mix, including franchise finance production and the expected decline in healthcare finance.
- Review credit quality, reserve adequacy, OREO resolution and the performance of modified, nonaccrual and PPP loans.
- Verify First Century transaction approvals, timing, funding, integration costs and realized EPS and tangible-book-value effects.
- Assess liquidity and capital after the acquisition, headquarters construction spending and any share repurchases; verify the remaining $20.4 million of headquarters construction commitments.
- Consider the comparability of management’s non-GAAP adjusted results with GAAP results, particularly the note-redemption cost and headquarters-sale gain.