First Internet Bancorp — Q3 2022 Form 10-Q
Business context and reporting period. 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 businesses. This unaudited filing covers the quarter and nine months ended September 30, 2022; comparisons below are with Q3 and the first nine months of 2021 unless otherwise stated. Dollar amounts are in millions unless noted.
Financial performance and position
- Q3 earnings: Net income was $8.4 million, or $0.89 diluted EPS, down 30.2% and 26.4%, respectively. Net interest income was $24.0 million, up 14.7%; noninterest income was $4.3 million, down 44.8%. Net interest income plus noninterest income totaled $28.3 million, versus $28.7 million a year earlier. Provision for loan losses was $0.9 million, compared with a $29,000 credit in Q3 2021.
- Nine-month earnings: Net income was $29.2 million, or $3.01 diluted EPS, down 18.1% and 15.7%. Net interest income increased 19.6% to $75.4 million, while noninterest income fell 38.6% to $15.5 million. Provision expense was $2.9 million, versus $1.3 million.
- Margins and returns: Q3 net interest margin was 2.40%, up from 2.00%; fully taxable equivalent (FTE) margin was 2.53%, up from 2.13%. Nine-month NIM was 2.52% versus 2.05%. Q3 return on average assets was 0.82% versus 1.12%; return on average equity was 9.01% versus 13.10%.
- Costs and unusual items: Q3 noninterest expense increased 24.5% to $18.0 million, reflecting higher compensation, headquarters and technology costs, and loan servicing expenses. Nine-month expense rose 22.1% to $54.8 million. The company reported $0.1 million of Q3 software write-down expense. Nine-month items included a $0.9 million special-project consulting fee, $0.5 million discretionary inflation bonus, $0.3 million accelerated equity compensation, $0.3 million acquisition expenses and a $0.1 million software write-down. Management’s non-GAAP adjusted nine-month net income was $30.8 million, or $3.17 diluted EPS; these measures are not GAAP results.
- Balance sheet and lending: Total assets were $4.26 billion at September 30, up 1.3% from year-end 2021. Loans were $3.26 billion, up 12.8%; growth included residential mortgages, franchise finance and investor commercial real estate. Deposits were $3.19 billion, up 0.4%. Commercial lending represented 77.7% of the reported loan portfolio; single-tenant lease financing and public finance were the largest listed commercial categories.
- Credit quality: Nonperforming loans were $6.0 million, or 0.18% of loans, versus $7.4 million, or 0.26%, at year-end 2021. The allowance for loan losses was $29.9 million, or 0.92% of loans; allowance coverage of nonperforming loans was 497.3%. Management attributed Q3 provision expense mainly to portfolio growth, partly offset by reduced specific reserves. There were no COVID-related non-TDR modifications outstanding.
- Cash flow and liquidity: For the first nine months, operating cash flow was $73.8 million, investing cash outflow was $361.8 million, and financing cash inflow was $66.1 million. Cash and cash equivalents declined $221.9 million to $221.1 million. At quarter-end, cash and available-for-sale securities totaled $614.6 million; the Bank had stated additional borrowing capacity of $473.7 million across FHLB, Federal Reserve and correspondent lines. Outstanding loan commitments were $508.6 million; certificates and brokered deposits maturing within one year totaled $549.5 million.
- Funding, debt and capital: FHLB advances were $589.9 million; subordinated debt had $107.0 million principal outstanding ($104.5 million carrying value). Total shareholders’ equity was $360.9 million, down 5.1% from year-end, primarily from share repurchases and accumulated other comprehensive losses. Consolidated CET1, Tier 1 and total capital ratios were 11.72%, 11.72% and 15.73%; the Bank’s ratios were 13.87%, 13.87% and 14.77%. The quarterly dividend was $0.06 per share.
Material changes versus comparable periods
- Higher loan and securities yields supported net interest income and margin, but rising deposit costs reduced some of the benefit. Q3 cost of interest-bearing liabilities increased to 1.67% from 1.28% a year earlier.
- Mortgage banking revenue weakened as higher interest rates reduced rate locks, loan-sale volumes and gain-on-sale margins. Q3 mortgage banking activities revenue was $0.9 million versus $3.9 million; nine-month revenue was $4.5 million versus $12.3 million.
- Loan growth was partly offset by contraction in healthcare finance and owner-occupied commercial real estate. Franchise finance loans grew to $225.0 million from $81.4 million at year-end 2021; healthcare finance declined to $293.7 million from $387.9 million.
- Available-for-sale securities fair value fell to $393.6 million from $603.0 million at year-end 2021. Gross unrealized losses were $55.4 million on available-for-sale and $21.1 million on held-to-maturity securities. AOCI loss widened to $39.1 million from $11.0 million, largely reflecting higher interest rates; management considered the declines temporary and stated it did not expect to need to sell the securities before recovery. The company transferred $96.2 million of mortgage-backed securities from available-for-sale to held-to-maturity during Q1.
- The company repurchased 618,167 shares for a total cost of $20.6 million through September 30. It reported $9.9 million remaining under its then-current repurchase authorization; the Board increased the program authorization to $35.0 million in October 2022.
Outlook, risks and contingencies
- No specific earnings or growth guidance was provided. Management stated it believed liquidity and capital resources were sufficient for cash and capital expenditure needs over the next 12 months and longer, and described plans to grow small-business lending and pursue fintech partnerships.
- The company expected to adopt CECL on January 1, 2023 and anticipated an increase in the allowance for credit losses, but had not provided an estimate pending model validation and analysis.
- Interest-rate exposure is material. Under the company’s standard static-balance-sheet model, an instantaneous +200 basis-point shock was estimated to reduce Year 1 NII by 13.46% and EVE by 35.55%; a supplementary model using different deposit-beta assumptions estimated reductions of 10.55% and 31.78%. These are model scenarios, not forecasts, and results depend on assumptions and future balance-sheet actions.
- Key disclosed risks include deposit pricing and liquidity, changes in market rates and securities values, credit losses and collateral values, economic conditions, competition, regulatory requirements, and operational or information-system disruptions. Management reported no material change to previously disclosed risk factors and no material legal proceedings.
- Capital commitments for the new headquarters and attached parking garage totaled $69.2 million, of which $6.1 million remained unincurred at quarter-end and was due within one year. Management said ordinary-course claims and lawsuits were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether deposit costs and wholesale funding needs continue to rise, and how that affects NIM and liquidity.
- Whether loan growth, especially in franchise finance, residential mortgages and commercial real estate, is accompanied by stable delinquency, nonaccrual and charge-off trends.
- The magnitude and capital effects of the CECL adoption adjustment, once management completes model validation.
- How securities unrealized losses, interest-rate sensitivity and any future funding or asset-liability actions affect equity and earnings.
- Execution and cost trends for the headquarters project, growth initiatives, and the announced share-repurchase authorization and dividend plans.