First Internet Bancorp — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. First Internet Bancorp is a digital-focused bank holding company operating through First Internet Bank of Indiana, with commercial, consumer, small-business and municipal lending and deposit businesses. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Financial results and key metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Interest income | $36.1 | $33.4 | $72.1 | $66.7 |
| Net interest income | $25.7 | $21.6 | $51.4 | $42.1 |
| Provision for loan losses | $1.2 | $0.02 | $2.0 | $1.3 |
| Noninterest income | $4.3 | $9.0 | $11.1 | $17.3 |
| Noninterest expense | $18.0 | $15.1 | $36.8 | $30.4 |
| Net income | $9.5 | $13.1 | $20.8 | $23.5 |
| Diluted EPS | $0.99 | $1.31 | $2.13 | $2.36 |
| Net interest margin | 2.60% | 2.11% | 2.58% | 2.08% |
Q2 return on average assets was 0.93%, return on average equity 10.23%, and return on average tangible common equity 10.36%. For the six-month period, these were 1.01%, 11.09% and 11.23%, respectively. Adjusted diluted EPS, a non-GAAP measure, was $1.06 for Q2 and $2.28 for the first half.
- Balance sheet at June 30: Assets $4.10 billion; loans $3.08 billion; deposits $3.15 billion; shareholders’ equity $365.3 million. Total assets declined 2.6% from year-end 2021, while loans increased 6.7%.
- Liquidity and cash flow: Cash and cash equivalents were $208.0 million. Six-month operating cash flow was $52.0 million; investing cash outflow $192.6 million; financing cash outflow $94.4 million. Cash declined $235.0 million over the period. The company reported $633.4 million of cash and available-for-sale securities, $31.6 million of loans held for sale, and $552.2 million of additional borrowing capacity at the Bank.
- Debt and capital: FHLB advances were $464.9 million. Subordinated debt had $107.0 million principal outstanding ($104.4 million net carrying value). Consolidated regulatory capital ratios were 12.46% CET1, 12.46% Tier 1, 16.74% total capital and 9.45% leverage. Tangible common equity to tangible assets was 8.81%.
- Asset quality: Allowance for loan losses was $29.2 million, or 0.95% of loans. Nonperforming loans were $4.5 million (0.15% of loans), down from $7.4 million at year-end; nonperforming assets were $4.6 million. Q2 net charge-offs were $0.3 million, or 0.04% of average loans.
Material changes versus comparable periods
- Q2 net income fell 27.1% year over year; first-half net income fell 11.9%. Higher net interest income and lower interest expense were offset by lower noninterest income, increased operating costs and a higher loan-loss provision.
- Noninterest income declined, in part because Q2 2021 included a $2.5 million gain on sale of the former headquarters. Mortgage banking income also weakened as rate locks, loan-sale volume and margins declined. First-half mortgage banking activities revenue fell 57.5% year over year.
- Net interest margin improved 49 basis points in Q2 and 50 basis points for the first half, reflecting higher earning-asset yields and lower funding costs. The company reduced higher-cost certificate and brokered deposits, though deposits overall declined modestly.
- Loans grew, including consumer loans up 26.4% from year-end and commercial loans up 3.1%. Franchise finance expanded following its 2021 launch; healthcare finance balances continued to decline after the former strategic partner was acquired by another institution.
- Accumulated other comprehensive loss increased to $30.8 million from $11.0 million at year-end, principally reflecting interest-rate-driven declines in available-for-sale securities. Available-for-sale securities’ fair value was $425.5 million versus $462.2 million amortized cost; held-to-maturity fair value was $174.0 million versus $185.1 million amortized cost.
Outlook, management commentary, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management said it expects to have sufficient liquidity and capital for requirements over the next 12 months and beyond, and intends to continue quarterly dividends subject to Board discretion and regulatory and contractual limits.
- Management is pursuing growth in small-business lending and fintech partnerships to diversify revenue, deposits and asset generation. It also stated that growth and profitability depend on execution of these initiatives.
- Q2 included a $0.5 million discretionary inflation bonus, $0.3 million accelerated equity compensation related to retirements and $0.1 million acquisition-related expenses. First-half results also included a $0.9 million special-project consulting fee and $0.3 million of acquisition-related expenses. Adjusted results are non-GAAP and should be considered alongside GAAP results.
- The company expects to adopt CECL on January 1, 2023 and anticipates an increase in the allowance for credit losses, but had not provided an estimate pending model validation and analysis. Model validation was expected in Q3 2022.
- Interest-rate exposure is a material sensitivity: under the standard instantaneous-shock model, a +200 basis-point parallel shift was estimated to reduce year-one net interest income 8.83% and economic value of equity 17.89%. A lower-deposit-beta scenario produced different results; these static-model estimates depend on assumptions and are not forecasts.
- Other exposures include credit quality and collateral values, deposit flows and funding costs, market-rate effects on securities and balance-sheet values, technology and cybersecurity interruptions, competition, regulation, and execution of lending and partnership growth. The filing says there were no material changes to previously disclosed risk factors. Management reported effective disclosure controls; no material legal proceedings were reported.
- Capital commitments related to the new headquarters totaled $69.1 million, with $6.8 million remaining unincurred at June 30 and due within one year. Loan commitments were approximately $349.5 million. The company repurchased 294,464 shares in Q2 for $11.1 million and had $9.3 million remaining under its $30 million authorization.
Important facts for investors to verify
- Whether improved net interest margin persists as market rates, deposit pricing and deposit mix change.
- Whether loan growth—particularly in franchise finance and consumer lending—maintains credit quality, and how CECL adoption affects the allowance and retained earnings.
- The durability of mortgage banking and loan-sale income amid lower origination volumes and margins, and the pace of expense growth.
- The impact of unrealized securities losses on capital and liquidity if securities must be sold, notwithstanding management’s stated intent and ability to hold them through recovery.
- Funding and liquidity trends, including brokered and BaaS deposits, upcoming deposit maturities, available borrowing capacity, and the company’s headquarters spending and capital return plans.