First Internet Bancorp: Q2 2021 Form 10-Q
Business context and reporting period
First Internet Bancorp is a bank holding company operating First Internet Bank of Indiana, a digital-focused bank with no traditional branches. It offers commercial, small-business, consumer, municipal and mortgage banking products. This unaudited filing covers the quarter and six months ended June 30, 2021; balance-sheet comparisons are to December 31, 2020 unless noted. Amounts below are in U.S. dollars.
Financial performance and condition
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net income | $13.1 million | $3.9 million | $23.5 million | $10.0 million |
| Diluted EPS | $1.31 | $0.40 | $2.36 | $1.02 |
| Net interest income | $21.6 million | $14.4 million | $42.1 million | $29.4 million |
| Net interest margin | 2.11% | 1.37% | 2.08% | 1.43% |
| Provision for loan losses | $21 thousand | $2.5 million | $1.3 million | $4.0 million |
| Noninterest income | $9.0 million | $5.0 million | $17.3 million | $11.2 million |
| Noninterest expense | $15.1 million | $13.2 million | $30.4 million | $26.7 million |
- Q2 net income rose 233% year over year; management attributed the improvement chiefly to higher net interest income and noninterest income and lower loan-loss provision. The quarter included a $2.5 million pretax gain on sale of the former headquarters. Excluding that gain, the company reported adjusted net income of $11.1 million and adjusted diluted EPS of $1.11; these are non-GAAP measures.
- Q2 return on average assets was 1.25% and return on average equity was 14.88%. Adjusted Q2 ROAA was 1.06%.
- At June 30, total assets were $4.20 billion; total loans were $2.96 billion, net loans $2.93 billion, and securities $729.2 million. Loans declined 3.3% from year-end, mainly reflecting payoffs in healthcare finance, single-tenant lease financing and public finance.
- Deposits totaled $3.21 billion, down 2.0% from year-end. Certificates of deposit fell $202.0 million, partly offset by growth in money-market and noninterest-bearing deposits.
- Cash and cash equivalents were $328.8 million, versus $419.8 million at year-end. Six-month cash flow was $41.5 million from operating activities, negative $56.4 million from investing and negative $76.1 million from financing, resulting in a $91.0 million decrease in cash.
- Shareholders’ equity was $358.6 million, up 8.4% from year-end. The reported equity-to-assets ratio was 8.53%; tangible common equity to tangible assets was 8.43% (non-GAAP).
- FHLB advances were $514.9 million. Subordinated debt had a $72.0 million principal balance and $69.9 million carrying value, following redemption of the $10 million 2025 note in January. The company also had $27.6 million in loans held for sale.
Material changes versus comparable periods
- Net interest income increased as deposit funding costs fell substantially: Q2 interest expense declined 40.5% year over year, while total interest income declined 2.5%. Q2 cost of interest-bearing liabilities decreased to 1.28% from 2.07%; reported NIM increased 74 basis points.
- Noninterest income growth reflected the headquarters-sale gain and higher gains on SBA loan sales; mortgage banking revenue declined in Q2 versus the prior-year quarter. Noninterest expense rose 13.8% in Q2, driven largely by salaries, staffing and marketing.
- The allowance for loan losses declined to $28.1 million from $29.5 million at year-end. The allowance was 0.95% of loans, or 0.96% excluding PPP loans. Q2 net charge-offs were $2.6 million, including a $2.4 million charge-off related to a single-tenant lease financing relationship.
- Nonperforming loans were $9.0 million, or 0.31% of loans, compared with $10.2 million and 0.33% at year-end. Nonperforming assets were $10.3 million, including $1.3 million of newly recorded OREO.
Outlook, management commentary and risks
- Management said asset yields had largely stabilized and expected deposit funding costs to continue declining in the second half of 2021. About $779 million of CDs and brokered deposits were due to mature within 12 months, with a weighted-average cost of 1.35%.
- The company entered a franchise-finance relationship and expected to begin funding loans in Q3 2021, with up to $100 million of loans over the following 12 months. It expected healthcare-finance balances could decline following Provide’s announced acquisition and amid prepayments.
- Management stated that available liquidity and capital were sufficient for expected needs over at least the next 12 months. At quarter-end, it reported $992.3 million of cash and available-for-sale securities, $27.6 million of loans held for sale, and $636.9 million of additional borrowing capacity at the Bank. Loan commitments were $293.1 million.
- Management said COVID-19 had had little observed effect on asset quality as of quarter-end, but warned that renewed economic deterioration could adversely affect credit quality and results. Eight loans totaling $7.9 million remained under COVID-related non-TDR modifications.
- Interest-rate exposure remains material: under the filing’s instantaneous parallel-rate scenario, a 200-basis-point increase was estimated to reduce Year 1 net interest income 7.00% and economic value of equity 16.58%, based on a static balance sheet and model assumptions. Actual outcomes may differ.
- Other risks include credit losses and collateral values, deposit and liquidity changes, competition, regulatory requirements, interest-rate movements, and operational or information-system disruptions. Management expected CECL adoption on January 1, 2023 and had not yet quantified its impact.
- The company had $25.4 million of unincurred headquarters construction commitments due within 12 months. Its new headquarters was expected to be substantially complete in Q4 2021, with full occupancy anticipated by year-end. The board declared a $0.06-per-share dividend payable July 15, 2021; future dividends remain discretionary.
Most important facts for investors to verify
- Whether earnings growth persists after excluding the $2.5 million headquarters-sale gain, and whether mortgage banking and SBA loan-sale income remain sustainable.
- Deposit pricing, mix and retention, including the runoff or repricing of the $779 million of near-term CD and brokered-deposit maturities, and the effect on net interest margin.
- Credit trends, including the large single-tenant lease and healthcare finance portfolios, the new OREO, charge-offs, COVID-modified loans and the adequacy of the allowance.
- Execution and economics of the new franchise-finance relationship, and the actual effect of Provide’s acquisition on healthcare-finance originations and balances.
- Completion costs and timing for the new headquarters, and the company’s liquidity, capital and interest-rate sensitivity under changing conditions.