First Internet Bancorp(INBK) - 2023 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Unaudited financial statements show decreased net income from compressed margins and higher credit loss provisions, with asset growth funded by deposits and a $4.5 million CECL impact Financial Statements Unaudited financials show decreased net income from compressed margins and higher credit loss provisions, with asset growth funded by deposits and a $4.5 million CECL impact - The company adopted the new CECL accounting standard (ASU 2016-13) on January 1, 2023, which replaced the incurred loss methodology with an expected credit loss model, resulting in a net decrease to retained earnings of $4.5 million[31][32] Condensed Consolidated Balance Sheets Balance Sheet Summary (as of September 30, 2023 vs. December 31, 2022) | Metric | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Total Assets | $5,169,023 | $4,543,104 | +13.8% | | Net Loans | $3,698,616 | $3,467,664 | +6.7% | | Total Securities (AFS & HTM) | $682,755 | $579,552 | +17.8% | | Total Deposits | $4,083,545 | $3,441,245 | +18.7% | | Total Liabilities | $4,821,279 | $4,178,130 | +15.4% | | Total Shareholders' Equity | $347,744 | $364,974 | -4.7% | Condensed Consolidated Statements of Income Income Statement Highlights (Unaudited) | Metric (in thousands) | Q3 2023 | Q3 2022 | YoY Change (%) | Nine Months 2023 | Nine Months 2022 | YoY Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $17,378 | $23,994 | -27.6% | $55,097 | $75,424 | -27.0% | | Provision for credit losses | $1,850 | $892 | +107.4% | $11,976 | $2,868 | +317.6% | | Total noninterest income | $7,407 | $4,316 | +71.6% | $18,724 | $15,450 | +21.2% | | Total noninterest expense | $19,756 | $17,995 | +9.8% | $59,380 | $54,760 | +8.4% | | Net Income | $3,409 | $8,436 | -59.6% | $4,274 | $29,190 | -85.4% | Earnings Per Share (Diluted) | Period | Diluted EPS 2023 | Diluted EPS 2022 | YoY Change (%) | | :--- | :--- | :--- | :--- | | Three Months Ended Sep 30 | $0.39 | $0.89 | -56.2% | | Nine Months Ended Sep 30 | $0.48 | $3.01 | -84.1% | Condensed Consolidated Statements of Changes in Shareholders' Equity - Shareholders' equity decreased from $365.0 million at the start of 2023 to $347.7 million at September 30, 2023, driven by a $4.5 million impact from adopting new accounting standards (CECL), $7.6 million in other comprehensive loss, $1.6 million in dividends, and $8.5 million in common stock repurchases, partially offset by $4.3 million in net income[18] Condensed Consolidated Statements of Cash Flows Cash Flow Summary (Nine Months Ended Sep 30) | Activity (in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $(624) | $73,776 | | Net cash used in investing activities | $(364,744) | $(361,831) | | Net cash provided by financing activities | $630,021 | $66,147 | | Net Increase (Decrease) in Cash | $264,653 | $(221,908) | - The significant increase in cash for the first nine months of 2023 was primarily driven by a $640.4 million net increase in deposits, reflected in financing activities[25] Notes to Condensed Consolidated Financial Statements - The company's loan portfolio grew to $3.74 billion as of September 30, 2023, up from $3.50 billion at year-end 2022, with commercial loans constituting the majority at $2.91 billion[70] - The Allowance for Credit Losses (ACL) increased to $36.5 million from $31.7 million at year-end 2022, reflecting CECL adoption, loan growth, and a $6.9 million partial charge-off on a commercial and industrial loan in Q1 2023[93][239] - Nonperforming loans decreased to $5.9 million (0.16% of total loans) as of September 30, 2023, from $7.5 million (0.22% of total loans) at year-end 2022[273] Management's Discussion and Analysis (MD&A) MD&A attributes net income decline to margin compression, higher credit losses, and mortgage exit costs; assets grew 13.8% from deposits - The company exited its consumer mortgage business in Q1 2023 due to declining volumes and a negative outlook, incurring $3.1 million in exit costs[237] - A significant driver of the increased provision for credit losses was a $6.9 million partial charge-off related to a single commercial and industrial participation loan during the first nine months of 2023[239] - The company is a fast-growing SBA 7(a) program lender, closing over $308.5 million in loans during the first nine months of 2023 and ranking as the 9th largest lender for the SBA's 2023 fiscal year[231] Results of Operations Key Performance Ratios | Metric | Q3 2023 | Q3 2022 | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Return on Average Assets (ROAA) | 0.26% | 0.82% | 0.12% | 0.94% | | Return on Average Equity (ROAE) | 3.79% | 9.01% | 1.59% | 10.40% | | Net Interest Margin (NIM) | 1.39% | 2.40% | 1.55% | 2.52% | - Net interest income for Q3 2023 decreased 27.6% YoY to $17.4 million, caused by a 202.1% increase in interest expense outpacing the 61.2% increase in interest income, reflecting the rapid rise in interest rates[249] - Noninterest income in Q3 2023 increased 71.6% YoY to $7.4 million, primarily due to a $2.9 million increase in gain on sale of loans from higher SBA 7(a) loan sale volumes[259] Financial Condition - Total assets grew by $625.9 million (13.8%) to $5.2 billion since year-end 2022, primarily funded by a $642.3 million (18.7%) increase in total deposits[266] - Tangible book value per share decreased slightly by 0.4% to $39.57 as of September 30, 2023, from $39.74 at year-end 2022, reflecting declines in equity partially offset by stock repurchases[268] - Uninsured deposit balances decreased to 23% of total deposits at September 30, 2023, down from 33% at December 31, 2022, with the ratio falling to 17% when adjusting for certain secured municipal deposits[291] Regulatory Capital Requirements Consolidated Capital Ratios (as of September 30, 2023) | Ratio | Actual | Minimum Required (with buffer) | | :--- | :--- | :--- | | Common equity tier 1 capital | 9.56% | 7.00% | | Tier 1 capital | 9.56% | 8.50% | | Total capital | 13.13% | 10.50% | | Leverage ratio | 7.32% | 4.00% | - The company and the bank remain well-capitalized, with all regulatory capital ratios exceeding the minimum requirements under Basel III rules as of September 30, 2023[297][299] Liquidity - As of September 30, 2023, the company had total available liquidity of $1.7 billion, comprising cash balances and additional borrowing capacity from the FHLB and other sources, representing 182% of adjusted uninsured deposit balances[308] PART II - OTHER INFORMATION Risk Factors New material risk factors include market volatility, decreased customer confidence, increased deposit costs, and heightened regulatory scrutiny - The company identified a new material risk factor related to recent bank failures and negative media attention, which has caused market volatility and could negatively impact customer confidence, deposit costs, and lead to increased regulatory scrutiny[333][334] Share Repurchases The company repurchased 97,834 shares in Q3 2023 under its $25.0 million program, with $15.4 million remaining available Common Stock Repurchases (Q3 2023) | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | July 2023 | 55,100 | $17.34 | | August 2023 | 23,000 | $21.00 | | September 2023 | 19,734 | $17.77 | | Total Q3 2023 | 97,834 | - | - Through September 30, 2023, the company has repurchased a total of 509,022 shares for $9.6 million under its current $25.0 million repurchase program, which expires December 31, 2023[335]