First Internet Bancorp — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. First Internet Bancorp is a digital-first bank holding company headquartered in Indiana, operating through First Internet Bank. It offers commercial, small-business, consumer and municipal banking products nationwide.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest income | $17.4 million | $24.0 million | $55.1 million | $75.4 million |
| Provision for credit losses | $1.9 million | $0.9 million | $13.1 million | $2.9 million |
| Noninterest income | $7.4 million | $4.3 million | $18.7 million | $15.5 million |
| Noninterest expense | $19.8 million | $18.0 million | $59.4 million | $54.8 million |
| Net income | $3.4 million | $8.4 million | $4.3 million | $29.2 million |
| Diluted EPS | $0.39 | $0.89 | $0.48 | $3.01 |
| Net interest margin | 1.39% | 2.40% | 1.55% | 2.52% |
Q3 total revenue, defined in the filing as net interest income plus noninterest income, was $24.8 million versus $28.3 million a year earlier. Q3 return on average assets was 0.26% and return on average equity was 3.79%. For the nine-month period, those returns were 0.12% and 1.59%, respectively. Management also presented adjusted nine-month net income of $12.1 million and adjusted diluted EPS of $1.35; these are non-GAAP measures that exclude specified items.
Balance sheet, liquidity and capital
- At September 30, 2023, total assets were $5.17 billion, loans were $3.74 billion, deposits were $4.08 billion and shareholders’ equity was $347.7 million. Since December 31, 2022, assets rose 13.8%, loans 6.7% and deposits 18.7%.
- Cash and cash equivalents totaled $521.2 million. Cash, available-for-sale securities and loans held for sale totaled approximately $972 million. The Bank had stated borrowing capacity of a further $1.2 billion from the FHLB, Federal Reserve and correspondent-bank lines; together with cash, this equaled 182% of adjusted uninsured deposits.
- Deposits included $670.7 million of brokered deposits and $1.62 billion of certificates of deposit. Uninsured deposits were reported at 23% of total deposits, or 17% after excluding specified municipal and contractually restricted balances. Certificates and brokered deposits of $1.4 billion were due within one year.
- FHLB advances were $614.9 million; subordinated debt was $104.8 million net of issuance costs ($107 million principal). Equity-to-assets was 6.73%, down from 8.03% at year-end 2022. The Bank’s CET1 ratio was 11.77%, total capital ratio 12.71% and leverage ratio 8.97% at quarter-end.
- Nine-month cash flow was negative $0.6 million from operations, negative $364.7 million from investing and positive $630.0 million from financing. Cash increased $264.7 million to $521.2 million, largely reflecting deposit growth and financing activity. The filing does not provide a conventional bank free-cash-flow measure.
- Available-for-sale securities had $57.5 million of gross unrealized losses; held-to-maturity securities had $30.6 million. The company attributed AFS losses primarily to interest rates and stated it did not intend, and was unlikely to be required, to sell the securities before recovery. Accumulated other comprehensive loss was $41.2 million.
Material changes versus comparable periods
- Q3 net income fell 59.6% year over year; nine-month net income fell 85.4%. Higher deposit and funding costs drove net interest income down 27.6% for Q3 and 27.0% for nine months, despite higher earning-asset yields and balances.
- Q3 interest expense on deposits was $40.3 million, versus $10.5 million a year earlier. The average cost of interest-bearing liabilities rose to 3.91% from 1.67%. Management said the pace of deposit-cost increases in Q3 was the slowest in five quarters.
- Noninterest income increased, principally from SBA loan sales and servicing. The SBA servicing portfolio grew to $464.8 million from $318.2 million at year-end 2022.
- The company exited its consumer mortgage business in Q1 2023 amid low volumes and a weak outlook, recording $3.1 million of exit costs. Nine-month mortgage banking revenue was $0.1 million versus $4.5 million a year earlier.
- Nine-month credit provision rose to $13.1 million, and net charge-offs rose to $10.2 million from $0.8 million. The main driver was a $6.9 million partial charge-off on a commercial and industrial participation loan; the remaining balance was subsequently paid. Q3 nonperforming loans were $5.9 million, 0.16% of loans, down from $7.5 million at year-end 2022.
- Loans grew in franchise finance, small-business lending, construction and investor CRE, while public finance and single-tenant lease financing declined as planned and healthcare finance continued to run off. Franchise finance balances reached $455.1 million; construction loans were $252.1 million.
Outlook, risks and unusual items
- The filing provides no numerical earnings or margin guidance. Management said it intends to scale SBA lending and pursue selected fintech partnerships to support earnings, diversify revenue and attract deposits. It stated that liquidity and capital resources were sufficient for requirements over the next 12 months and beyond.
- Interest-rate risk is material: under the company’s static-balance-sheet shock analysis, an instantaneous +100 basis-point shift was estimated to reduce Year 1 net interest income by 4.66% and economic value of equity by 9.93%; a gradual +100 basis-point shift indicated reductions of 3.34% and 11.80%, respectively. The filing cautions that actual results may differ and model outcomes depend on assumptions.
- Management identified risks from deposit competition and costs, customer confidence, regulatory scrutiny and potential regulation, interest-rate movements, credit quality and collateral values, CRE exposures, liquidity, technology disruptions and competition. Recent banking-industry events were added as a material risk factor.
- CECL adoption on January 1, 2023 reduced retained earnings by $4.5 million after tax; the opening adjustments included $3.0 million for loan credit losses and $2.5 million for unfunded commitments, plus a securities allowance. Nine-month results also included mortgage exit costs and the C&I loan charge-off. The company reported no borrower financial-difficulty loan modifications in the first nine months of 2023.
- Loan commitments were approximately $668.2 million. The company reported no material legal proceedings and management stated ordinary-course claims were not expected to have a material adverse effect. Controls and procedures were assessed as effective at a reasonable assurance level.
- The Board declared a $0.06-per-share quarterly dividend. The company repurchased 97,834 shares during Q3; $15.4 million remained under the $25 million authorization at September 30, 2023. Future dividends and repurchases remain subject to Board discretion, capital needs and regulatory limits.
Important facts for investors to verify
- Whether deposit pricing and mix stabilize sufficiently to arrest margin compression, especially given brokered funding and near-term certificate maturities.
- Trends in loan-loss provisions, charge-offs and criticized or nonperforming loans, including performance in small-business, construction, franchise and CRE portfolios.
- The extent and potential capital or liquidity effects of unrealized securities losses if funding conditions require asset sales.
- Progress in replacing mortgage-related revenue with SBA sales, servicing and other fee income, and whether management’s adjusted results reconcile to sustainable GAAP earnings.
- Capital, liquidity and regulatory headroom, including the practical availability of stated borrowing capacity and the effect of distributions or repurchases.