First Internet Bancorp — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a standalone fourth-quarter filing. First Internet Bancorp is a digital-focused bank holding company operating through First Internet Bank of Indiana, with no traditional branch offices. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Financial performance and position
| Metric | FY2021 / Dec. 31, 2021 | FY2020 / Dec. 31, 2020 |
|---|---|---|
| Net interest income | $86.6 million | $64.5 million |
| Total noninterest income | $32.8 million | $36.3 million |
| Total revenue (net interest income plus noninterest income) | $119.4 million | $100.9 million |
| Net income | $48.1 million | $29.5 million |
| Diluted earnings per share | $4.82 | $2.99 |
| Net interest margin | 2.11% | 1.55% |
| Return on average assets | 1.14% | 0.69% |
| Total assets | $4.211 billion | $4.246 billion |
| Total loans | $2.888 billion | $3.059 billion |
| Total deposits | $3.179 billion | $3.271 billion |
| Total shareholders’ equity | $380.3 million | $330.9 million |
- Profitability: Net income rose 63.4%. Higher net interest income and lower loan-loss provision were the principal contributors; increased expenses, higher income taxes and lower noninterest income partly offset the gains.
- Interest and margins: Net interest income increased 34.1%, mainly because interest expense fell $25.0 million as deposit costs declined. Interest income fell $3.0 million. Net interest margin improved 56 basis points; fully taxable equivalent margin was 2.25%, versus 1.68%.
- Noninterest items and expenses: Mortgage banking income decreased to $15.1 million from $24.7 million. A $2.5 million gain on sale of the former headquarters supported noninterest income. Noninterest expense rose 7.2% to $61.8 million, including higher compensation and marketing costs. The company recorded $1.0 million of provision for loan losses, down from $9.3 million.
- Cash flow: Operating activities provided $54.8 million, investing activities provided $43.9 million and financing activities used $75.6 million. Cash and cash equivalents ended the year at $443.0 million, up from $419.8 million. These cash-flow figures reflect substantial loan, securities, deposit and wholesale-funding activity.
- Debt and liquidity: Year-end liabilities included $514.9 million of FHLB advances and $104.2 million of subordinated debt, net of discounts and issuance costs. The company reported $1.0 billion of cash and available-for-sale securities, plus $47.7 million of loans held for sale, as generally available liquidity; the Bank reported capacity for an additional $596.5 million of FHLB and correspondent-bank borrowing. The Bank said it believed liquidity was sufficient for at least 12 months.
- Capital: The Bank was well capitalized and the company reported compliance with the capital conservation buffer. Consolidated common equity Tier 1 and total capital ratios were 12.93% and 17.37%, respectively. Tangible common equity to tangible assets was 8.93%, versus 7.69% a year earlier.
Material changes versus FY2020
- Loans declined 5.6%, while total assets fell 0.8%. Commercial loans were 81.8% of the loan portfolio; declines in healthcare finance, single-tenant lease financing, small business lending and public finance were partly offset by growth in newer or expanding lending categories.
- Deposits declined 2.8%, reflecting lower certificates of deposit as higher-cost balances matured. Money-market and demand deposits grew, and the mix shifted away from certificates of deposit.
- Available-for-sale securities increased to $603.0 million in fair value from $497.6 million. Unrealized losses were attributed primarily to interest-rate movements; management said it intended and expected to be able to hold affected securities until recovery or maturity.
- Asset quality metrics improved overall: nonperforming loans fell to $7.4 million from $10.2 million, and nonperforming loans to total loans declined to 0.26% from 0.33%. The allowance was $27.8 million, or 0.96% of loans; net charge-offs increased to $2.7 million from $1.7 million.
- Shareholders’ equity increased 14.9%, primarily from earnings and a reduction in accumulated other comprehensive loss. The company issued $60 million of subordinated notes due 2031 and redeemed its $25 million 2026 notes; it also recorded $0.8 million of costs associated with the redemption.
Outlook, risks and unusual items
- Management expected loan yields to rise in 2022 with commercial-loan growth, and deposit funding costs to continue declining, but more slowly than in 2021. About $712.8 million of certificates and brokered deposits, with a weighted-average cost of 1.02%, were due to mature over the following 12 months.
- The company established franchise finance in July 2021 and had funded $81.4 million by year-end; it expected to fund approximately $150 million in 2022. Healthcare finance balances were expected to decline following Provide, Inc.’s acquisition by a super-regional bank and ongoing prepayments.
- The pending acquisition of First Century Bancorp was agreed for $80 million in cash, expected to be funded from on-balance-sheet cash. First Century had $486.7 million in assets, $409.4 million in deposits and $25.2 million in loans at year-end. Shareholder and Indiana regulatory approvals had been received; FDIC and Federal Reserve approvals remained outstanding. The transaction was expected to close in the second quarter of 2022, subject to conditions.
- Management declared $0.24 per share in 2021 dividends and said it expected to continue quarterly cash dividends, subject to Board discretion and regulatory, capital and other constraints. A $30 million share-repurchase authorization was approved; 100,000 shares were repurchased in the fourth quarter for $4.4 million. Through March 11, 2022, total repurchases under the program were 200,000 shares for $9.4 million.
- Key risks include commercial-loan and real-estate concentrations, economic and COVID-19 effects on borrowers, interest-rate and securities valuation exposure, deposit competition and funding needs, cybersecurity and third-party service-provider risks, regulatory requirements, and execution, approval and integration risks related to First Century. The filing’s static-balance-sheet model estimated that an immediate parallel 200-basis-point rate increase would reduce year-one net interest income by 4.86% and economic value of equity by 11.71%; actual results may differ.
- Other notable items: the former headquarters was sold in April 2021, generating a $2.5 million gain; the company recorded a $0.5 million IT contract termination fee and $0.2 million of acquisition-related expense. Eleven COVID-related non-TDR loan modifications totaling $10.5 million remained at year-end. CECL adoption was planned for fiscal 2023, with its financial impact not yet quantified.
- The auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded internal control over financial reporting was effective. The allowance for loan losses was identified as a critical audit matter involving significant estimation judgment.
Important facts for investors to verify
- Whether First Century received all required regulatory approvals and closed on the expected terms and timetable, and whether projected strategic benefits justify the purchase price and integration costs.
- Whether deposit repricing, loan growth and the changing deposit mix support management’s 2022 margin expectations, particularly as interest rates change.
- Credit performance and reserve adequacy in commercial real estate, single-tenant lease, public finance, healthcare finance and newer franchise-finance portfolios; also monitor charge-offs, criticized loans and COVID-related modifications.
- The size and duration of unrealized securities losses, and whether liquidity or funding needs could require sales before recovery or maturity.
- Progress toward CECL implementation and the resulting effect on the allowance, retained earnings and regulatory capital.
- Actual cash use for the acquisition, dividends and share repurchases, together with capital levels and the Bank’s capacity to distribute funds to the holding company.