First Internet Bancorp — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. First Internet Bancorp is a digital-first bank holding company operating First Internet Bank, with commercial, consumer, small-business and municipal lending and deposit businesses.
Financial performance
- Net loss: $3.0 million, or $0.33 per diluted share, versus net income of $11.2 million, or $1.14 per diluted share, in Q1 2022. GAAP revenue was $25.0 million.
- Net interest income and margin: Net interest income fell 24.0% to $19.6 million. Net interest margin declined to 1.76% from 2.56% year over year; fully taxable-equivalent margin was 1.89%, down 80 basis points.
- Drivers: Interest income rose 44.4% to $52.0 million, but interest expense more than tripled to $32.5 million as deposit costs rose. Average cost of interest-bearing liabilities increased to 3.19% from 1.13%.
- Credit costs: Provision for credit losses was $9.4 million versus $0.8 million a year earlier. The allowance for loan losses was $36.9 million, or 1.02% of loans, at quarter-end. Net charge-offs were $7.2 million, primarily from a $6.9 million partial charge-off of a commercial and industrial participation loan.
- Other income and expenses: Noninterest income decreased 20.1% to $5.4 million, including mortgage banking revenue of $0.1 million versus $1.9 million. Noninterest expense rose 11.6% to $21.0 million, including $3.1 million of mortgage exit-related costs.
- Cash flows: Operating activities provided $5.9 million; investing activities used $132.6 million; financing activities provided $174.1 million. Cash and cash equivalents increased $47.4 million during the quarter to $304.0 million.
Financial position, liquidity and capital
- Balance sheet: Assets were $4.72 billion at March 31, 2023, up 3.9% from year-end. Loans were $3.61 billion, up 3.1%; deposits were $3.62 billion, up $181.0 million. Shareholders’ equity was $355.6 million, down 2.6% from year-end.
- Funding mix: Deposit growth included higher certificates of deposit and brokered deposits, while money-market and noninterest-bearing balances declined. The reported uninsured deposit measure was 26.2% of deposits; adjusted for specified insured or collateralized public funds and restricted accounts, it was 19.2%.
- Liquidity: The company reported $699.8 million of cash and available-for-sale securities, plus $18.1 million of loans held for sale, as generally available for cash needs. The Bank reported $627.7 million of additional borrowing capacity; combined with cash, this represented 134.1% of adjusted uninsured deposits. Management said liquidity and capital resources were sufficient for needs over the next 12 months and beyond.
- Debt and capital: Federal Home Loan Bank advances were $614.9 million. Subordinated debt had a $107.0 million principal balance and $104.6 million carrying value. Consolidated regulatory ratios were 10.30% common equity Tier 1, 10.30% Tier 1, 14.13% total capital and 8.10% leverage. GAAP equity-to-assets was 7.53%; tangible common equity-to-tangible assets was 7.44%.
- Securities: Available-for-sale securities had $395.8 million fair value against $436.5 million amortized cost, with $41.3 million gross unrealized losses. Management attributed losses primarily to interest rates and market conditions and stated it did not intend, and was unlikely to be required, to sell before recovery.
Material changes and management commentary
- The company decided in Q1 to exit its consumer mortgage business, including its nationwide digital direct-to-consumer platform and local mortgage and construction-to-permanent operations, citing steep volume declines and a negative outlook. It began winding down the pipeline and recorded $3.1 million of exit-related costs.
- Management reported adjusted net income of $4.8 million and adjusted diluted EPS of $0.53 after excluding mortgage-exit effects and the participation-loan charge-off. These are non-GAAP measures and are not a substitute for GAAP results.
- Management highlighted SBA lending growth: more than $73.5 million of SBA 7(a) loans closed in the quarter, and the company stated it ranked among the top 10 SBA 7(a) lenders for 2023. It also described plans to scale small-business banking and grow selected fintech partnerships.
- Q1 loan growth was concentrated in franchise finance, single-tenant lease financing and small-business lending; healthcare finance continued to run off. The participation loan was placed on nonaccrual late in the quarter, and management expected payment of its remaining balance in May 2023.
- The company adopted CECL on January 1, 2023. Adoption reduced retained earnings by $4.5 million, including a $3.0 million increase in the loan allowance, a $2.5 million reserve for unfunded commitments and a $0.3 million reserve for held-to-maturity securities, with related tax effects. Prior-year comparisons use the previous incurred-loss method.
- Management identified elevated deposit competition and costs, interest-rate and balance-sheet sensitivity, potential deposit outflows, credit and collateral risk, regulatory scrutiny, and technology and operational risks. The filing added banking-industry instability as a risk factor, citing possible effects on depositor confidence, funding costs, margins and regulation.
Investor verification points
- Track deposit stability, uninsured and brokered deposit levels, funding costs, and the continued shift into higher-cost certificates of deposit.
- Monitor net interest margin and earnings sensitivity to rates; the filing’s modeled results depend on assumptions, including deposit behavior, and assume a static balance sheet.
- Verify collection and resolution of the nonaccrual participation loan and assess subsequent credit quality, charge-offs and allowance needs.
- Assess execution and remaining costs of the mortgage-business exit, and whether SBA, franchise and fintech activities can replace lost mortgage revenue.
- Review liquidity, capital ratios, securities unrealized losses and the effect of CECL transition adjustments as conditions change.
- Consider the $0.06-per-share dividend and share repurchases alongside earnings, capital needs and regulatory or contractual distribution limits.