First Internet Bancorp — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. First Internet Bancorp is a digital-focused bank holding company operating through First Internet Bank of Indiana, with commercial, small-business, consumer and municipal lending and deposit businesses.
Financial performance and condition
| Metric | Q1 2022 / March 31, 2022 | Comparable period / prior year-end |
|---|---|---|
| Net income | $11.2 million | $10.5 million in Q1 2021; up 7.3% |
| Diluted EPS | $1.14 | $1.05 in Q1 2021 |
| Net interest income | $25.8 million | $20.5 million in Q1 2021; up 25.5% |
| Net interest margin | 2.56% (2.69% fully taxable equivalent) | 2.04% (2.18% FTE) in Q1 2021 |
| Total assets | $4.23 billion | $4.21 billion at December 31, 2021 |
| Total loans / net loans | $2.88 billion / $2.85 billion | Total loans $2.89 billion at December 31, 2021 |
| Total deposits | $3.22 billion | $3.18 billion at December 31, 2021 |
| Shareholders’ equity | $374.7 million; 8.87% of assets | $380.3 million; 9.03% at December 31, 2021 |
Interest income increased 8.3% year over year to $36.0 million, while interest expense declined 19.4% to $10.3 million. The average cost of interest-bearing liabilities fell to 1.13% from 1.40%; management attributed the improvement chiefly to lower certificate and brokered deposit costs and a shift toward lower-cost deposit accounts. The quarter’s loan interest income included $2.9 million from tax refund advance lending.
Noninterest income was $6.8 million, down 18.6% year over year, mainly because mortgage banking revenue declined to $1.9 million from $5.8 million. Noninterest expense rose 22.6% to $18.8 million, including higher loan servicing, headquarters, consulting and professional costs. The $0.8 million loan-loss provision was lower than the $1.3 million in Q1 2021. The reported effective tax rate was 13.8%.
Operating cash flow was $32.8 million, investing cash flow was $8.5 million and financing cash flow was $33.3 million. Cash and cash equivalents ended the quarter at $517.5 million. The company reported $107.0 million principal amount of subordinated debt, carried at $104.3 million net, and $514.9 million of FHLB advances. Management stated liquidity and capital resources were sufficient for at least the next 12 months; the Bank had $526.5 million of additional stated borrowing capacity. Consolidated cash, available-for-sale securities and loans held for sale were $982.8 million in total, as described by management as generally available for cash needs.
Material changes and notable items
- Net income increased 7.3% year over year, supported by higher net interest income and lower provision expense, partly offset by weaker noninterest income and higher expenses.
- Loans were nearly flat quarter over quarter: commercial loans declined $23.8 million, while consumer loans increased $18.8 million. Franchise finance grew to $107.2 million; healthcare finance balances continued to decline following the 2021 acquisition of its origination partner, Provide.
- Available-for-sale securities fell to $465.3 million from $603.0 million at year-end. The portfolio had $22.3 million of gross unrealized losses at quarter-end, which management attributed primarily to higher market interest rates and considered temporary. Accumulated other comprehensive loss widened to $22.9 million from $11.0 million, reducing equity.
- The company transferred certain mortgage-backed securities from available-for-sale to held-to-maturity, retaining the related after-tax unrealized loss in accumulated other comprehensive loss for amortization over the securities’ lives.
- Nonperforming loans were $7.1 million, or 0.25% of loans, versus $7.4 million and 0.26% at year-end. The allowance for loan losses was $28.3 million, or 0.98% of loans. Q1 included $1.5 million of net charge-offs on tax refund advance loans, partly offset by a $1.2 million recovery on a single-tenant lease-financing relationship.
- Equity also reflected $5.1 million of Q1 share repurchases. The company declared a $0.06 per-share dividend.
Outlook, risks and contingencies
- Management expected deposit costs to remain relatively stable for most of 2022 and said industry liquidity meant market-rate increases were not expected to materially affect deposit pricing in the near term. This is forward-looking and subject to change.
- Interest-rate modeling showed that an instantaneous parallel 200-basis-point increase from the implied forward curve could reduce first-year net interest income by 5.55% and economic value of equity by 9.99%; the filing cautions that the models assume a static balance sheet and actual results may differ.
- On May 1, 2022, First Century Bancorp terminated the previously announced merger agreement after the parties could not agree on an extension. The Federal Reserve had approved the merger, but statutory waiting periods prevented closing by the contractual deadline.
- Commitments to extend credit were approximately $325.7 million; management separately reported $304.8 million of approved outstanding loan commitments, including unused lines and standby letters. Construction-related contracts for the new headquarters totaled $68.7 million, with $8.3 million yet to be incurred.
- Seven loans totaling $9.8 million remained in non-TDR COVID-related modifications. The filing identifies economic conditions, borrower and collateral performance, interest-rate and securities valuation changes, technology and operational risks, and regulatory requirements as material risk factors.
- Management identified $0.9 million of nonrecurring consulting expense and $0.2 million of acquisition-related expense. Excluding these items, the company reported non-GAAP adjusted net income of $12.0 million and adjusted diluted EPS of $1.22.
- The company expected to adopt the current expected credit losses (CECL) standard on January 1, 2023; its impact had not yet been quantified. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether net interest income and margin remain resilient as interest rates, deposit pricing and balance-sheet mix change; assess the contribution and repeatability of tax refund advance income.
- How unrealized securities losses and any further rate movements affect equity, liquidity and the potential need to sell securities.
- Credit quality and reserve adequacy, particularly in tax refund advance, commercial lending and portfolios affected by partner-originated business; monitor nonperforming loans, charge-offs and modified loans.
- The effect of the terminated First Century transaction on strategy, costs and any planned growth or partnership initiatives.
- Execution and funding of headquarters construction, outstanding credit commitments, deposit concentration and the availability and cost of wholesale funding.
- Reconcile the company’s non-GAAP adjusted results to GAAP results and review the eventual CECL adoption impact when disclosed.