First Internet Bancorp Reports Third Quarter 2022 Results

Highlights for the third quarter include:

• Quarterly net income of $8.4 million, compared to $9.5 million for the second quarter of 2022 and $12.1 million for the third quarter of 2021
• Quarterly diluted earnings per share of $0.89, compared to $0.99 for the second quarter of 2022 and $1.21 for the third quarter of 2021
• Quarterly adjusted net income of $8.5 million, or $0.90 adjusted diluted earnings per share, when excluding nonrecurring expenses
• Loan growth of $173.8 million, a 5.6% increase from the second quarter of 2022 and a 10.9% increase from the third quarter of 2021
• Net interest margin of 2.40% and fully-taxable equivalent net interest margin of 2.53%
• Repurchased 120,000 shares at an average price of $36.56; aggregate purchase price under the authorized repurchase program has been increased to $35.0 million

First Internet Bancorp (the “Company”) (Nasdaq: INBK), the parent company of First Internet Bank (the “Bank”), announced today financial and operational results for the third quarter ended September 30, 2022. Net income for the third quarter of 2022 was $8.4 million, or $0.89 diluted earnings per share. This compares to net income of $9.5 million, or $0.99 diluted earnings per share, for the second quarter of 2022, and net income of $12.1 million, or $1.21 diluted earnings per share, for the third quarter of 2021.

“Loan originations were up 47% over the prior quarter, demonstrating continued consumer and business confidence,” said David Becker, Chairman and Chief Executive Officer. “We continue to execute on our lending strategies, including our specialized areas of focus in commercial construction lending, SBA lending, franchise finance, and consumer lending. Given construction and SBA loans are typically variable rate products, and other fixed-rate product is coming on at higher rates, this growth sets the stage for future increases in average loan yields. We are taking a disciplined approach to capital deployment, maintaining our focus on the sound underwriting that has defined our bank for more than 20 years. Consequently, ongoing strong credit quality was a key contributor to our performance this quarter.

“We remain focused on our Fintech and Banking-as-a-Service initiatives as a way to grow lower cost deposit relationships and enhance noninterest income through payments processing. We have entered into agreements with two platforms and are piloting three Fintech partner programs. Altogether, we believe this strategy will drive stronger earnings and profitability while advancing our position as a premier technology-forward digital financial services provider.”

Mr. Becker concluded, “We continue to execute our strategies to bolster resilience in our balance sheet and earnings profile. I thank the entire First Internet team for their dedication to this pursuit and for partnering with our customers for mutual success.”

Net Interest Income and Net Interest Margin

Net interest income for the third quarter of 2022 was $24.0 million, compared to $25.7 million for the second quarter of 2022, and $20.9 million for the third quarter of 2021. On a fully-taxable equivalent basis, net interest income for the third quarter of 2022 was $25.3 million, compared to $27.1 million for the second quarter of 2022, and up from $22.3 million for the third quarter of 2021.

Total interest income for the third quarter of 2022 was $39.1 million, an increase of 8.3% compared to the second quarter of 2022, and an increase of 18.4% compared to the third quarter of 2021. On a fully-taxable equivalent basis, total interest income for the third quarter of 2022 was $40.4 million, an increase of 7.7% compared to the second quarter of 2022, and an increase of 17.4% compared to the third quarter of 2021. The sequential increase was due primarily to growth in interest income earned on the commercial and consumer loan portfolios, the securities portfolio and other earning assets. The yield on average interest-earning assets for the third quarter of 2022 increased to 3.91% from 3.65% in the linked quarter due primarily to a 22 basis point (“bp”) increase in the yield earned on securities and a 167 bp increase in the yield earned on other earning assets. Compared to the linked quarter, average loan balances increased $163.7 million, or 5.5%, while the average balance of securities decreased $14.1 million, or 2.3%, and the average balance of other earning assets decreased $133.8 million, or 41.5%.

Interest income earned on commercial loans was positively impacted by higher rates in the variable rate small business lending, construction and commercial and industrial portfolios as well as strong growth in the franchise finance portfolio. This activity was partially offset by significantly lower prepayment fees in the healthcare finance and single tenant lease financing portfolios. In the consumer portfolio, interest income was up due to the combination of higher new origination yields and growth in the residential mortgage, trailers, RV and other consumer portfolios.

New funded portfolio origination yields increased 52 bps compared to the second quarter, and year-to-date 2022 have been approximately 87 bps higher than for the same period in 2021. Because of the fixed rate nature of certain larger portfolios, there is a lagging impact of the higher origination yields on the portfolio. Additionally, the yield earned on the loan portfolio was impacted by the timing of funded loans as over 50% of total funded originations occurred during September.

The Federal Reserve has increased the federal funds (“Fed Funds”) target rate 300 bps year-to-date, with half of the increase coming in the third quarter. To date, the Company has modestly increased the rate paid on consumer, small business and commercial interest-bearing demand deposits. While money market deposit pricing was relatively rational during the second quarter, competition in both the digital banking space and local markets intensified, and deposit betas increased as a result. The cost of the Company’s BaaS brokered deposits, which is tied to Fed Funds, contributed to the overall increase in interest expense as well. Furthermore, the combination of higher interest rates and industry dynamics, including the outflow of deposits from the overall banking system, drove higher pricing in the wholesale deposit market.

The Company also increased its use of advances from the Federal Home Loan Bank to supplement growth and manage long term interest rate risk, borrowing $100.0 million of longer term advances. Total interest expense was impacted by the costs related to other borrowed funds as the rates on these advances, which are now well below market, contributed to higher total funding costs.

As a result, total interest expense for the third quarter of 2022 was $15.1 million, an increase of 44.9% compared to the second quarter of 2022, and an increase of 24.7% compared to the third quarter of 2021.

During the third quarter of 2022, the average balance of interest-bearing deposits decreased $57.1 million, or 1.9%, compared to the second quarter of 2022 while the cost of these deposits increased 56 bps. The decrease in average interest-bearing deposit balances was due to a decline in average certificates and brokered deposit balances, which decreased $66.8 million, or 6.0%, during the quarter while the cost of these deposits increased 31 bps. Additionally, the average balance of money market accounts decreased $57.9 million, or 4.1%, compared to the second quarter of 2022 while the cost of these deposits increased 79 bps. These declines were partially offset by an increase of $82.7 million, or 116.1%, in the average balance of BaaS – brokered deposits.

Net interest margin (“NIM”) was 2.40% for the third quarter of 2022, down from 2.60% for the second quarter of 2022 and up from 2.00% for the third quarter of 2021. Fully-taxable equivalent NIM (“FTE NIM”) was 2.53% for the third quarter of 2022, down from 2.74% for the second quarter of 2022 and up from 2.13% for the third quarter of 2021. The decrease in FTE NIM compared to the linked quarter was driven primarily by the effect of higher interest-bearing deposit costs, partially offset by higher yields on securities, other earning assets and higher average loan balances.

Noninterest Income

Noninterest income for the third quarter of 2022 was $4.3 million, stable with the second quarter of 2022, and down from $7.8 million for the third quarter of 2021. Gain on sale of loans totaled $2.7 million for the third quarter of 2022, up $0.8 million, or 39.0% from the linked quarter. Gain on sale revenue in the quarter consisted entirely of gain on the sales of U.S. Small Business Administration (“SBA”) 7(a) guaranteed loans. The increase in revenue related to SBA loan sales was due to a higher volume of sales, partially offset by lower net gain on sale premiums. Mortgage banking revenue totaled $0.9 million for the third quarter of 2022, down $0.8 million, or 49.1%, from the linked quarter as the continued rise in interest rates negatively impacted interest rate lock and sold loan volume as well as gain on sale margins.

Noninterest Expense

Noninterest expense for the third quarter of 2022 was $18.0 million, stable with the second quarter of 2022 and up from $14.5 million for the third quarter of 2021. Consulting and professional fees and salaries and employee benefits declined from the linked quarter, while loan expenses and premises and equipment costs were higher. The decrease in consulting and professional fees was due primarily to the timing of third party loan review and stress testing. The lower salaries and employee benefits expense was due mainly to discretionary inflation bonuses paid to certain employees and accelerated equity compensation related to retirements in the second quarter and lower incentive compensation in the Company’s mortgage banking division, partially offset by increased headcount as well as higher incentive compensation in SBA and construction lending. The increase in loan expenses was driven primarily by higher servicing costs associated with the growth in our franchise finance loan portfolio as well as risk management vendor costs. The increase in premises and equipment costs was impacted by a $125,000 write-down of software as well as costs related to the buildout of the Company’s small business banking platform.

Income Taxes

The Company reported an income tax expense of $1.0 million for the third quarter of 2022 and an effective tax rate of 10.5%, compared to an income tax expense of $1.3 million and an effective tax rate of 11.8% for the second quarter of 2022 and an income tax expense of $2.2 million and an effective tax rate of 15.5% for the third quarter of 2021. The lower effective tax rate reflects a higher proportion of tax exempt income relative to total pre-tax income.

Loans and Credit Quality

Total loans as of September 30, 2022 were $3.3 billion, an increase of $173.8 million, or 5.6%, compared to June 30, 2022, and an increase of $319.8 million, or 10.9%, compared to September 30, 2021. Total commercial loan balances were $2.5 billion as of September 30, 2022, an increase of $97.3 million, or 4.0%, compared to June 30, 2022 and an increase of $129.6 million, or 5.4%, compared to September 30, 2021. Compared to the linked quarter, the increase in commercial loan balances was driven primarily by growth in franchise finance, investor commercial real estate and single tenant lease financing loan balances. These items were partially offset by net payoffs in healthcare finance and commercial and industrial.

Total consumer loan balances were $672.2 million as of September 30, 2022, an increase of $78.2 million, or 13.2%, compared to June 30, 2022, and an increase of $197.1 million, or 41.5%, compared to September 30, 2021. The increase compared to the linked quarter was due to higher balances in the residential mortgage, recreational vehicles and trailers loan portfolios.

Total delinquencies 30 days or more past due were 0.06% of total loans as of September 30, 2022, consistent with both June 30, 2022 and September 30, 2021. Overall credit quality remained strong during the quarter as nonperforming loans to total loans was 0.18% as of September 30, 2022, compared to 0.15% at June 30, 2022 and 0.27% as of September 30, 2021. Nonperforming loans totaled $6.0 million at quarter end, up from $4.5 million at June 30, 2022.

The allowance for loan losses as a percentage of total loans was 0.92% as of September 30, 2022, both in total and when excluding PPP loans, compared to 0.95% in both categories as of June 30, 2022 and 0.95% and 0.96%, respectively, as of September 30, 2021. The decline in the allowance coverage ratio reflects growth in certain portfolios with lower coverage ratios as well as the continued decline in healthcare finance balances that have a higher coverage ratio.

Net charge-offs of $0.2 million were recognized during the third quarter of 2022, resulting in net charge-offs to average loans of 0.02%, compared to net charge-offs to average loans of 0.04% for the second quarter of 2022 and net charge-offs to average loans of 0.01% for the third quarter of 2021.

The provision for loan losses in the third quarter of 2022 was $0.9 million, compared to a provision of $1.2 million for the second quarter of 2022 and a credit for loan losses of $29,000 for the third quarter of 2021. The provision for the quarter was driven by the overall growth in the loan portfolio, partially offset by reductions in specific reserves as there were positive developments on certain monitored loans.

Capital

As of September 30, 2022, total shareholders’ equity was $360.9 million, a decrease of $4.5 million, or 1.2%, compared to June 30, 2022 and a decrease of $9.6 million, or 2.6%, compared to September 30, 2021. The decline in shareholders’ equity during the third quarter of 2022 was due primarily to an increase in accumulated other comprehensive loss resulting from a decline in the value of the available-for-sale securities portfolio caused by the continued rise in interest rates during the quarter and stock repurchase activity. This was partially offset by the net income earned during the quarter and an increase in the value of interest rate swaps classified as cash flow hedges. Book value per common share increased to $38.84 as of September 30, 2022, relatively stable with June 30, 2022 and up from $37.59 as of September 30, 2021. Tangible book value per share was $38.34, also relatively stable with June 30, 2022 and up from $37.12 as of September 30, 2021.

In connection with its previously announced stock repurchase program, which has been increased to a total aggregate purchase price of $35.0 million, the Company repurchased 120,000 shares of its common stock during the third quarter of 2022 at an average price of $36.56 per share. Including shares repurchased since the fourth quarter of 2021, the Company has repurchased $25.1 million of stock under the total upsized authorization of $35.0 million.

The following table presents the Company’s and the Bank’s regulatory and other capital ratios as of September 30, 2022.

Conference Call and Webcast

The Company will host a conference call and webcast at 12:00 p.m. Eastern Time on Thursday, October 20, 2022 to discuss its quarterly financial results. The call can be accessed via telephone at (844) 200-6205; access code: 136923. A recorded replay can be accessed through November 19, 2022 by dialing (866) 813-9403; access code: 630846.

Additionally, interested parties can listen to a live webcast of the call on the Company's website at www.firstinternetbancorp.com. An archived version of the webcast will be available in the same location shortly after the live call has ended.

About First Internet Bancorp

First Internet Bancorp is a financial holding company with assets of $4.3 billion as of September 30, 2022. The Company’s subsidiary, First Internet Bank, opened for business in 1999 as an industry pioneer in the branchless delivery of banking services. The First Internet Bank provides consumer and small business deposit, SBA financing, franchise finance, residential mortgage loans, consumer loans, and specialty finance services nationally as well as commercial real estate loans, construction loans, commercial and industrial loans, and treasury management services on a regional basis. First Internet Bancorp’s common stock trades on the Nasdaq Global Select Market under the symbol “INBK” and is a component of the Russell 2000® Index. Additional information about the Company is available at www.firstinternetbancorp.com and additional information about First Internet Bank, including its products and services, is available at www.firstib.com.

Forward-Looking Statements

This press release contains forward-looking statements, including statements with respect to the financial condition, results of operations, trends in lending policies and loan programs, plans and prospective business partnerships, objectives, future performance and business of the Company. Forward-looking statements are generally identifiable by the use of words such as “ahead,” “anticipate,” “believe,” “capitalize,” “confidence in,” “continue,” “could,” “designed,” “effort,” “estimate,” “expect,” “growth,” “help,” “hope,” “intend,” “looking forward,” “may,” “opportunities,” “optimistic,” “pending,” “plan,” “position,” “preliminary,” “remain,” “should,” “waiting on,” “well-positioned,” “will,” “working on,” “would” or other similar expressions. Forward-looking statements are not a guarantee of future performance or results, are based on information available at the time the statements are made and involve known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the information in the forward-looking statements. Such statements are subject to certain risks and uncertainties including: adverse public health developments on the economy, our business and operations and the business and operations of our vendors and customers: general economic conditions, whether national or regional, and conditions in the lending markets in which we participate that may have an adverse effect on the demand for our loans and other products; our credit quality and related levels of nonperforming assets and loan losses, and the value and salability of the real estate that we own or that is the collateral for our loans. Other factors that may cause such differences include: failures or breaches of or interruptions in the communications and information systems on which we rely to conduct our business; failure of our plans to grow our commercial real estate, commercial and industrial, public finance, SBA, and franchise finance loan portfolios; competition with national, regional and community financial institutions; the loss of any key members of senior management; execution of pending and future acquisition, reorganization or disposition transactions, including without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings and other anticipated benefits from such transactions; fluctuations in interest rates; risks relating to the regulation of financial institutions; and other factors identified in reports we file with the U.S. Securities and Exchange Commission. All statements in this press release, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.

Non-GAAP Financial Measures

This press release contains financial information determined by methods other than in accordance with U.S. generally accepted accounting principles (“GAAP”). Non-GAAP financial measures, specifically tangible common equity, tangible assets, tangible book value per common share, tangible common equity to tangible assets, average tangible common equity, return on average tangible common equity, total interest income – FTE, adjusted total interest income - FTE, net interest income – FTE, adjusted net interest income, adjusted net interest income – FTE, net interest margin – FTE, adjusted net interest margin, adjusted net interest margin – FTE, provision (benefit) for loan losses, excluding tax refund advance loans, average loans, excluding tax refund advance loans, net (recoveries) charge-offs to average loans, excluding tax refund advance loans, allowance for loan losses to loans, excluding PPP loans, adjusted noninterest expense, adjusted income before income taxes, adjusted income tax provision, adjusted net income, adjusted diluted earnings per share, adjusted return on average assets, adjusted return on average shareholders’ equity, adjusted return on average tangible common equity, adjusted effective income tax rate, income before income taxes, excluding tax refund advance loans, income tax provision, excluding tax refund advance loans and net income, excluding tax refund advance loans are used by the Company’s management to measure the strength of its capital and analyze profitability, including its ability to generate earnings on tangible capital invested by its shareholders. Although management believes these non-GAAP measures are useful to investors by providing a greater understanding of its business, they should not be considered a substitute for financial measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the table at the end of this release under the caption “Reconciliation of Non-GAAP Financial Measures.”