First Internet Bancorp — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. 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.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income | $18.1 million | $25.7 million | $37.7 million | $51.4 million |
| Net interest margin | 1.53% | 2.60% | 1.64% | 2.58% |
| Provision for credit losses | $1.7 million | $1.2 million | $11.1 million | $2.0 million |
| Noninterest income | $5.9 million | $4.3 million | $11.3 million | $11.1 million |
| Noninterest expense | $18.7 million | $18.0 million | $39.6 million | $36.8 million |
| Net income | $3.9 million | $9.5 million | $0.9 million | $20.8 million |
| Diluted EPS | $0.44 | $0.99 | $0.10 | $2.13 |
Q2 total revenue was $24.0 million versus $30.0 million a year earlier. Q2 ROAA was 0.32% and ROAE 4.35%; first-half ROAA was 0.04% and ROAE 0.48%. The company reported no full-year earnings or margin guidance in the provided filing text.
Financial position, funding and capital
- At June 30, 2023, assets were $4.95 billion, loans $3.65 billion, deposits $3.85 billion and shareholders’ equity $354.3 million. Loans rose 4.2% and deposits rose 12.0% from December 31, 2022.
- Cash and cash equivalents were $465.6 million. The company reported $845.0 million of cash and available-for-sale securities, plus $32.0 million of loans held for sale, as generally available liquidity. The Bank had $729.2 million of additional borrowing capacity; combined with cash, this was $1.2 billion, or 127% of adjusted uninsured deposits.
- Uninsured deposits were 24% of total deposits; after excluding specified municipal and contractually restricted balances, adjusted uninsured deposits were 18%. Certificates and brokered deposits increased during the period, supplementing liquidity amid deposit competition.
- FHLB advances were $614.9 million and subordinated debt was $104.7 million net of issuance costs. The company’s consolidated CET1, total capital and leverage ratios were 10.10%, 13.87% and 7.63%, respectively. Shareholders’ equity to assets was 7.16%; tangible common equity to tangible assets was 7.07%.
- Six-month cash flows were $(4.8) million from operations, $(189.1) million from investing and $403.0 million from financing, resulting in a $209.1 million increase in cash and equivalents.
Changes and significant developments
- Earnings weakened sharply year over year: Q2 net income fell 59.3%, while first-half net income fell 95.8%. Interest income grew, but higher funding costs more than offset it: first-half interest expense increased $51.7 million as deposit and borrowing rates repriced. First-half NIM declined 94 basis points.
- The company exited its consumer mortgage business in Q1 2023, citing lower mortgage volumes and a negative outlook. It recorded $3.1 million in mortgage exit costs in the first half; mortgage banking revenue fell to $0.1 million from $3.6 million. The exit costs and a $6.9 million partial charge-off drove the company’s reported first-half pretax loss of $1.7 million.
- The $6.9 million charge-off related to a commercial and industrial participation loan placed on nonaccrual late in Q1; the remaining balance was paid in Q2. First-half net charge-offs were $8.8 million versus $0.7 million a year earlier. Nonperforming loans were $6.2 million, or 0.17% of loans, at quarter-end, down from $7.5 million at year-end.
- The allowance for loan losses was $36.1 million, or 0.99% of loans. Adoption of CECL on January 1 reduced retained earnings by $4.5 million, including a $3.0 million increase in the loan allowance and a $2.5 million reserve for unfunded commitments, partly offset by other adoption effects. The filing reports a $3.5 million reserve for unfunded commitments at June 30.
- Available-for-sale securities had $46.1 million of gross unrealized losses; held-to-maturity securities had a $22.3 million fair-value shortfall to amortized cost. Management attributed the AFS losses primarily to interest rates and market conditions, and said it did not intend, and was unlikely to be required, to sell before recovery.
- Loan growth was led by franchise finance and small-business lending, with additional growth in construction and investor commercial real estate. Healthcare finance continued to run off. Management said it aims to scale small-business lending and pursue selected fintech partnerships.
Outlook, risks and other matters
Management stated it believes liquidity and capital resources are sufficient for cash and capital needs over the next 12 months and beyond. It expects to continue quarterly cash dividends, subject to Board discretion, results, capital needs and regulatory or contractual restrictions. The Board declared a $0.06-per-share dividend payable July 17, 2023. The company also had a stock repurchase authorization expiring December 31, 2023; $7.8 million had been repurchased through June 30.
Key risks include continued deposit-cost and funding pressure, deposit outflows or increased reliance on brokered funding, interest-rate sensitivity, unrealized securities losses, credit deterioration and regulatory scrutiny following banking-industry turmoil. Management’s interest-rate models show higher rates could reduce modeled NII and EVE under specified scenarios; the filing cautions these static-balance-sheet estimates may differ from actual results. The filing reports no material legal proceedings, no material change in internal control, and effective disclosure controls at quarter-end.
Important facts for investors to verify
- Whether deposit pricing, mix and brokered funding stabilize enough to support margins after the substantial year-over-year NIM decline.
- Credit performance and reserve adequacy, especially in small-business, franchise, commercial real estate and construction portfolios, and the evolution of charge-offs and nonperforming loans.
- Liquidity and capital resilience under deposit outflows or further market stress, including uninsured-deposit definitions, borrowing availability and securities-sale assumptions.
- Progress and ongoing costs from the mortgage-business exit, and whether SBA loan-sale and servicing income can offset lost mortgage revenue.
- Whether dividend and repurchase plans remain consistent with capital needs, regulatory requirements and the company’s earnings outlook.