First Internet Bancorp — Q2 2020 Form 10-Q
Business context and period. First Internet Bancorp is a bank holding company whose primary business is online banking through First Internet Bank of Indiana, alongside commercial, consumer, public finance, healthcare finance and small-business lending. This unaudited report covers the quarter and six months ended June 30, 2020; comparisons below are to the corresponding 2019 periods unless otherwise noted. Amounts are in U.S. dollars.
Financial performance and position
| Metric | Q2 2020 | Six months 2020 |
|---|---|---|
| Net interest income | $14.4 million, down 10.4% | $29.4 million, down 9.0% |
| Provision for loan losses | $2.5 million | $4.0 million |
| Noninterest income | $5.0 million, up 44.0% | $11.2 million, up 92.0% |
| Noninterest expense | $13.2 million, up 13.1% | $26.7 million, up 17.1% |
| Net income | $3.9 million; diluted EPS $0.40 | $10.0 million; diluted EPS $1.02 |
| Net interest margin | 1.37%; 1.50% on an FTE basis | 1.43%; 1.58% on an FTE basis |
| Return on average assets / equity | 0.37% / 5.15% | 0.47% / 6.48% |
At June 30, total assets were $4.32 billion, loans $2.97 billion, deposits $3.38 billion, and shareholders’ equity $307.7 million. Cash and cash equivalents were $498.6 million. Total deposits increased 7.2% from year-end 2019, while loans grew 0.3%; the loans-to-deposits ratio declined to 88.0% from 94.0%. The allowance for loan losses was $24.5 million, or 0.82% of loans (0.84% excluding PPP loans). Nonperforming loans were $8.2 million, 0.28% of loans.
For the first six months, operating cash flow was negative $14.2 million, investing cash flow negative $40.1 million, and financing cash flow positive $225.6 million. Cash and cash equivalents increased $171.3 million to $498.6 million. The operating cash-flow figure includes $46.1 million of swap termination settlements. Total subordinated debt was $72.0 million principal ($69.7 million net carrying amount); FHLB advances were $514.9 million. June 30 consolidated CET1 and total risk-based capital ratios were 10.94% and 14.13%, respectively.
Material changes and notable items
- Quarterly net income fell 35.8%; six-month net income fell 15.8%. Lower asset yields and margin, increased credit-loss provisioning, and higher expenses outweighed stronger fee and mortgage-related income.
- Q2 mortgage banking income was $3.4 million, supported by increased origination and secondary-market sales activity. Six-month mortgage banking income was $7.1 million. The company also reported gains on loan sales, including SBA 7(a) guaranteed loans.
- Average yields on interest-earning assets declined as market rates fell, while deposit repricing reduced funding costs less quickly. Management said asset yields had largely stabilized by the end of Q2 and expected deposit funding costs to continue declining as approximately $1.0 billion of certificates and brokered deposits matured over the next 12 months.
- In June, the company terminated all fair-value hedges associated with loans and paid counterparties $46.1 million. The related loan fair-value adjustment is to be amortized over the remaining lives of the designated loans. Cash-flow hedge losses also contributed to accumulated other comprehensive loss, which stood at $21.1 million.
- The company funded 449 PPP loans totaling $58.9 million. SBA fees of approximately $2.3 million are deferred and recognized as interest income over the loans’ lives. The PPP loans bear 1% interest and are federally guaranteed.
Outlook, risks and contingencies
- Management described COVID-19’s operating impact through June 30 as minimal, but emphasized that the pandemic’s future effects on borrowers, credit quality, markets, liquidity and results remain uncertain. The company warned that a prolonged downturn could increase delinquencies, nonperforming loans and losses.
- COVID-19 payment deferrals granted through July 31 totaled $323.3 million, or 11.1% of loans, based on June 30 balances. Single-tenant lease financing and healthcare finance accounted for approximately 92% of deferrals. Management reported that deferrals had declined from their late-May peak and that borrowers coming off deferrals had resumed scheduled payments; continued performance remains an important uncertainty.
- Exposure to identified industries included $221.1 million in full-service restaurants, $229.8 million in quick-service restaurants and $16.8 million in hotels and accommodations. The company noted that the effects of the pandemic on these borrowers were uncertain.
- Management said it expected to reduce balance-sheet size in the second half of 2020 through deposit repricing, while retaining higher cash balances than historically because of COVID-19 uncertainty. It reported $1.1 billion of cash and available-for-sale securities, $38.8 million of loans held for sale, and $558.4 million of additional borrowing capacity at June 30. It believed liquidity and capital were sufficient for at least 12 months. No earnings or revenue guidance was provided.
- Capital commitments for the future headquarters construction totaled $65.1 million, of which $51.6 million remained unincurred at June 30 and was due within two years. Management estimated substantial completion by October 2021.
- The board declared a $0.06 per-share quarterly dividend. Future dividends remain discretionary and subject to capital, regulatory, contractual and COVID-19 considerations. Management reported no material legal proceedings and no material change in previously disclosed risk factors other than the updated COVID-19 risk.
Important facts for investors to verify
- Whether COVID-19 deferral borrowers, particularly in single-tenant lease and healthcare finance, resume regular payments and whether credit losses or nonperforming assets rise.
- Whether the allowance for loan losses remains adequate as economic conditions and borrower performance evolve.
- Whether margin stabilizes and deposit costs fall as management expected, and how that compares with ongoing pressure on asset yields.
- The continuing cash, earnings and capital effects of the $46.1 million loan-hedge termination, related amortization and other derivative exposures.
- PPP fee recognition, loan forgiveness and repayment timing, and progress and remaining funding needs for headquarters construction.