First Internet Bancorp (INBK) — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Financial statements are unaudited; amounts below are in U.S. dollars unless stated otherwise.
Business context
First Internet Bancorp is a bank holding company operating First Internet Bank of Indiana, a digital-focused bank without traditional branch offices. Its lending includes commercial real estate, public finance, healthcare finance, small business, residential mortgage and consumer loans. The pandemic and Federal Reserve rate cuts shaped the period: lower deposit costs helped net interest income in Q3, while low mortgage rates supported mortgage production.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $16.2 million | $15.2 million | $45.7 million | $47.6 million |
| Provision for loan losses | $2.5 million | $2.8 million | $6.5 million | $5.5 million |
| Noninterest income | $12.5 million | $5.6 million | $23.7 million | $11.4 million |
| Noninterest expense | $16.4 million | $11.2 million | $43.1 million | $34.0 million |
| Net income | $8.4 million | $6.3 million | $18.4 million | $18.1 million |
| Diluted earnings per share | $0.86 | $0.63 | $1.87 | $1.79 |
| Net interest margin | 1.53% | 1.54% | 1.47% | 1.70% |
- Q3 net income rose 33.0% year over year, primarily on higher mortgage banking revenue and loan-sale gains, plus lower loan-loss provision. Nine-month net income increased 1.2%.
- Mortgage banking revenue was $9.6 million in Q3, versus $4.3 million a year earlier. The filing attributes the increase to mortgage volume and higher gain-on-sale margins. Nine-month mortgage banking revenue was $16.7 million versus $8.6 million.
- Q3 noninterest expense included a $2.1 million write-down of legacy other real estate owned (OREO). Management’s non-GAAP adjusted Q3 diluted EPS, excluding the after-tax write-down, was $1.03; GAAP diluted EPS was $0.86.
- Q3 net interest margin was nearly flat year over year; the nine-month decline reflects asset yields falling faster than funding costs. Management said asset yields had largely stabilized and expected deposit funding costs to continue declining as higher-cost certificates mature.
Financial position, liquidity and capital
- At September 30, total assets were $4.33 billion, total loans were $3.01 billion, deposits were $3.37 billion and shareholders’ equity was $318.1 million. Assets grew 5.7% and deposits 6.9% from December 31, 2019.
- Cash and cash equivalents were $488.5 million, up from $327.4 million at year-end. The loan-to-deposit ratio declined to 89.3% from 94.0%. The company reported $1.1 billion of cash and available-for-sale securities, $76.2 million of loans held for sale, and $558.4 million of additional Bank borrowing capacity from the FHLB, Federal Reserve and correspondent Fed Funds lines.
- Cash flow for the first nine months: operating activities used $35.0 million; investing activities used $20.4 million; financing activities provided $216.6 million. Cash increased $161.1 million. Financing included $218.4 million of net deposit growth. Operating cash flow included mortgage loan origination and sale activity and $46.1 million of swap termination settlements.
- At September 30, subordinated debt principal was $72.0 million, with a $69.8 million net carrying value. On October 26, the company issued $10.0 million of 6.0% subordinated notes due 2030, intending to use proceeds to redeem the 2025 note, subject to regulatory approval.
- Consolidated capital ratios included common equity Tier 1 of 11.13%, total risk-based capital of 14.38% and leverage of 7.72%. The company stated it believed liquidity and capital were sufficient for at least the next 12 months.
Material changes and credit quality
- Commercial loans increased 6.8% from year-end to $2.44 billion, led by healthcare finance, small business and construction. Consumer loans declined 19.9% to $507.7 million, mainly following the sale of $90.8 million of residential mortgage loans and elevated prepayments.
- The allowance for loan losses increased to $26.9 million from $21.8 million at year-end, or 0.89% of loans (0.91% excluding PPP loans). Management cited added qualitative reserves for COVID-related economic uncertainty.
- Nonaccrual loans rose to $9.8 million from $6.2 million at year-end; nonperforming loans were 0.32% of total loans versus 0.23%. Allowance coverage of nonperforming loans was 275.4%, down from 324.4%.
- COVID-related deferrals had fallen to $19.9 million, or 0.7% of loans, as of October 30, based on September 30 balances. Management said less than 1% of loans remained in deferral and borrowers coming off deferrals had resumed scheduled payments. PPP loans totaled $58.3 million across 447 loans; management anticipated most would ultimately be forgiven, but no formal forgiveness applications had been received by September 30.
Outlook, risks and unusual items
- No specific earnings or full-year financial guidance was provided. Management expected deposit repricing benefits to continue into Q4 2020 and 2021, while noting that the pandemic’s duration and economic effects remained uncertain.
- The company planned to modestly reduce balance-sheet size in Q4 through deposit repricing, including reducing cash from September levels, while maintaining more cash than historically because of COVID-19 uncertainty.
- Interest-rate risk is material. The company terminated all fair-value hedges associated with loans in June and paid counterparties $46.1 million; the related $44.3 million remaining loan fair-value adjustment is being amortized over the loans’ remaining lives. Its sensitivity model showed estimated Year 1 net interest income declines of 1.50% and 4.95% under parallel rate increases of 100 and 200 basis points, respectively; results depend on modeling assumptions.
- Construction of the future headquarters was estimated to be substantially complete in Q4 2021. Of $65.1 million of construction-related contracts, $44.7 million remained unincurred at September 30 and was due within two years.
- Key risks include COVID-related deterioration in borrower cash flows and asset values, interest-rate and liquidity changes, higher credit losses, concentration and growth risks in commercial lending, and operational or third-party disruptions. The filing reported no material legal proceedings and no material change to previously disclosed risk factors other than its COVID-19 update.
Important facts for investors to verify
- Whether mortgage banking revenue and loan-sale gains remain strong if low-rate-driven mortgage volume or gain margins normalize.
- Whether credit quality, nonperforming loans, deferrals and the allowance develop as pandemic-related relief and economic conditions change.
- How quickly deposit costs reprice relative to asset yields, and the effects on net interest margin and earnings.
- Use of the 2030 note proceeds, regulatory approval and completion of the intended 2025 note redemption.
- Remaining headquarters project costs and commitments, and the liquidity and capital effects of the planned balance-sheet management.