First Internet Bancorp — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Comparative operating results are for Q1 2019; balance-sheet changes are generally versus December 31, 2019. First Internet Bancorp is a bank holding company operating First Internet Bank of Indiana, a digitally focused bank with commercial, consumer, mortgage, public finance, healthcare finance and small-business lending businesses.
Financial performance and condition
| Metric | Q1 2020 / March 31, 2020 | Comparison |
|---|---|---|
| Net income; diluted EPS | $6.0 million; $0.62 | Net income up 5.7% from $5.7 million; EPS was $0.56 in Q1 2019 |
| Net interest income; net interest margin | $15.0 million; 1.50% (1.65% fully taxable equivalent) | Net interest income down 7.5%; NIM was 1.86% (2.04% FTE) in Q1 2019 |
| Provision for loan losses | $1.5 million | $1.3 million in Q1 2019; allowance rose to $22.9 million from $21.8 million at year-end |
| Noninterest income / expense | $6.2 million / $13.5 million | Income rose from $2.4 million; expense rose from $11.1 million, year over year |
| Assets; loans; deposits | $4.17 billion; $2.89 billion; $3.18 billion | Assets up 1.7%; loans down 2.4%; deposits up 0.8% from December 31, 2019 |
| Cash and cash equivalents | $351.3 million | Up from $327.4 million at year-end |
| Debt and liquidity | $514.9 million FHLB advances; $69.6 million subordinated debt, net | $960.0 million cash and AFS securities, plus $52.4 million loans held for sale; $602.2 million additional borrowing capacity reported |
| Capital | Consolidated CET1 10.76%; total risk-based capital 13.87%; leverage 7.82% | All above stated Basel III minimums |
| Operating cash flow | $(25.8) million | $(5.3) million in Q1 2019; investing cash flow was $25.9 million and financing cash flow was $23.9 million |
Material changes and key drivers
- Net income increased despite lower net interest income. Higher mortgage banking and loan-sale income, along with a lower tax provision, more than offset higher credit provision and operating expenses.
- Interest income rose 3.6% year over year, but interest expense increased 13.2%. Lower market rates reduced asset yields; average interest-earning asset yield fell to 3.62% from 4.00%.
- Noninterest income benefited from $3.7 million of mortgage banking revenue and $1.8 million net gains on loan sales. The company sold loans across several portfolios, including $90.8 million of residential mortgages; these sales contributed to the decline in reported loans and supported liquidity.
- Commercial loans were broadly stable quarter over quarter, with healthcare finance growing to $372.3 million. Consumer loans fell 14.9%, mainly following residential mortgage sales. Securities increased to $675.0 million at amortized cost.
- Nonperforming loans rose to $7.4 million from $6.7 million at year-end; nonperforming assets were $9.6 million. The allowance was 0.79% of total loans, versus 0.74% at year-end.
Outlook, risks and unusual items
- Management said COVID-19 had not materially affected operating results through March 31, but the eventual impact remained highly uncertain. The filing identifies risks to borrower cash flows, credit quality, funding, asset values, interest income and margins.
- By May 1, 2020, the company reported $616.0 million of loan balances with payment deferrals, equal to 21.8% of March 31 loan balances. Healthcare finance deferrals were $296.5 million (79.6% of that portfolio); single-tenant lease financing deferrals were $244.7 million. Management noted that the two portfolios represented about 88% of deferrals.
- By May 1, the bank had originated 437 PPP loans totaling $59.6 million. The company estimated approximately $2.3 million of related fees, to be deferred over the loans’ lives and recognized as interest income; this is not Q1 recognized revenue.
- The Q1 allowance increase reflected adjustments to qualitative economic factors for COVID-19 uncertainty. Management warned that prolonged disruption could worsen nonperforming loans and assets. Healthcare finance and restaurant exposures were specifically identified as potentially affected.
- Net interest margin may face further pressure from interest-rate volatility and economic conditions. The filing gives no specific earnings or margin guidance; management stated it believed liquidity and capital resources were sufficient for at least the next 12 months.
- Other items to monitor include a $5.7 million Q1 other comprehensive loss, driven principally by unrealized cash-flow-hedge losses, and $58.9 million of unincurred construction commitments for the future headquarters. Management considered securities fair-value declines to be temporary and reported no goodwill impairment triggering event.
Important facts for investors to verify
- Track subsequent credit performance, charge-offs and allowance adequacy as COVID-related deferrals expire, particularly in healthcare finance and single-tenant lease financing.
- Assess the conversion and repayment outcomes of the $616.0 million of reported deferrals and the accounting, fee recognition and forgiveness of PPP loans.
- Monitor net interest margin, deposit pricing and mix, interest-rate sensitivity, and the effects of swaps and collateral requirements.
- Review liquidity and funding needs, including the $1.18 billion of certificates and brokered deposits scheduled to mature within one year and construction commitments.
- Confirm future dividend decisions and capital ratios; the $0.06 quarterly dividend is subject to board discretion, regulatory limits and COVID-19 effects.