First Internet Bancorp Reports Fourth Quarter and Full Year 2022 Results

First Internet Bancorp (the “Company”) (Nasdaq: INBK), the parent company of First Internet Bank (the “Bank”), announced today financial and operational results for the fourth quarter and full year ended December 31, 2022.

Fourth Quarter and Full Year 2022 Commentary

Market forces and the economic climate, both driven in part by the post-pandemic recovery, had a significant impact on the Company’s 2022 financial results and frame the Company’s strategy for 2023 and beyond.

Loan demand was strong throughout the year. Total loan portfolio balances increased 7.5% from the third quarter of 2022 and 21.2% from the fourth quarter of 2021. However, intense competition for deposits through the most rapid set of Federal Funds rate hikes since the late 1980s drove interest expense higher and pressured net interest margin. Average loan portfolio yields were up 39 bps in the fourth quarter compared to the linked quarter, while the cost of interest-bearing deposits was up 104 bps. The Company recorded a higher provision for loan loss expense in the fourth quarter based primarily upon loan growth while credit quality remained excellent with nonperforming ratios well below industry averages.

The Company has healthy loan pipelines and will focus its 2023 origination efforts on its floating rate loan products, notably commercial construction and small business lending, as well as its higher-yielding fixed rate programs, such as franchise finance.

While other lending lines have strong demand, the combination of housing prices, housing supply, economic uncertainty and interest rates have caused mortgage applications nationally to plunge to their lowest level in 26 years. Due to the steep decline in mortgage volumes and the negative outlook for mortgage lending over the next several years, the Company decided to exit its consumer mortgage business during the first quarter of 2023. This includes its nationwide digital direct-to-consumer mortgage platform that originates residential loans for sale in the secondary market as well as its local traditional consumer mortgage and construction-to-permanent business. (The Company’s commercial construction and land development business will not be affected by this decision and will remain an important part of the Company’s lending strategy, as noted above.)

This action is expected to reduce total annual noninterest expense by approximately $6.8 million and increase annualized pre-tax income by approximately $2.7 million, with 80% of the benefit realized in 2023 and 100% thereafter. The Company estimates that it will incur total pre-tax expense of approximately $3.3 million in the first and second quarters of 2023 associated with exiting this line of business.

While navigating market headwinds, management remains committed to creating shareholder value. The Company repurchased 284,286 shares in the fourth quarter at an average price of $25.16. For the year, the Company repurchased over 800,000 shares at an average price well below tangible book value. Tangible book value reached its highest value to date, at $39.74 as of December 31, 2022.

Fourth Quarter and Full Year 2022 Financial Highlights

Highlights for the fourth quarter and full year include:

• Annual net income and diluted earnings per share of $35.5 million and $3.70, compared to $48.1 million and $4.82, respectively, for the full year of 2021
• Quarterly net income of $6.4 million and $0.68 diluted earnings per share, compared to $8.4 million and $0.89 diluted earnings per share for the third quarter of 2022, and $12.5 million and $1.25 diluted earnings per share for the fourth quarter of 2021
• Loan growth of $243.5 million in the fourth quarter, a 7.5% increase from the third quarter of 2022 and an increase of $611.7 million, or 21.2%, from the fourth quarter of 2021
• Quarterly net interest margin of 2.09% and fully-taxable equivalent net interest margin of 2.22%

“We satisfied strong, high quality loan demand in our commercial and consumer lending businesses in the fourth quarter, capping off a year of robust loan growth and annual growth in net interest income,” said David Becker, Chairman and Chief Executive Officer. “While higher deposit costs impacted earnings in the fourth quarter, we were pleased with the increase in income generated by our loan portfolio and the strong finish to the year by our small business lending team. As a result of investments we made during 2021 and 2022 in government guaranteed lending talent, we continue to move up the rankings, placing in the top 30 of 7(a) program lenders for the SBA’s 2022 fiscal year, and are in the top 15 for the 2023 fiscal year-to-date.

“We are also beginning to realize the rewards from important investments in our Banking-as-a-Service efforts. We made significant progress in the fourth quarter, going live with our platform partner, Increase, and providing payments services to power the small business bill pay product from Ramp, a leading corporate card and spend management platform. We have two additional fintech partners in the pilot phase, another four approaching the pilot phase and one in due diligence. We also expect our partnership with the platform Treasury Prime to be fully implemented during the first quarter of 2023 with the first associated fintech program to be on-boarded in the second quarter.

“As we enter 2023, we believe our increasing mix of variable rate loans, combined with new loan production coming on at higher rates, will help to offset the pressure of higher deposit costs. If interest rates follow the market’s expectations, deposit costs should stabilize later this year and decline thereafter, setting the stage to achieve higher earnings and profitability in 2024. Furthermore, our balance sheet and capital levels are strong and asset quality remains high, leaving us well-positioned for any changes in the broader economic environment.”

Mr. Becker concluded, “I want to thank the entire First Internet team for their hard work and unwavering commitment to client service throughout 2022, which are the keys to our ongoing success and the reason we are confident in our future.”

Net Interest Income and Net Interest Margin

Net interest income for the fourth quarter of 2022 was $21.7 million, compared to $24.0 million for the third quarter of 2022, and $23.5 million for the fourth quarter of 2021. On a fully-taxable equivalent basis, net interest income for the fourth quarter of 2022 was $23.1 million, compared to $25.3 million for the third quarter of 2022, and $24.9 million for the fourth quarter of 2021.

Total interest income for the fourth quarter of 2022 was $45.7 million, an increase of 16.8% compared to the third quarter of 2022, and an increase of 33.6% compared to the fourth quarter of 2021. On a fully-taxable equivalent basis, total interest income for the fourth quarter of 2022 was $47.1 million, an increase of 16.5% compared to the third quarter of 2022, and an increase of 32.4% compared to the fourth quarter of 2021. The sequential increase was due primarily to growth in interest income earned on the commercial and consumer loan portfolios as well as from the securities portfolio and other earning assets. The yield on average interest-earning assets for the fourth quarter of 2022 increased to 4.40% from 3.91% in the linked quarter due primarily to a 39 basis point (“bp”) increase in the average loan yield, a 60 bp increase in the yield earned on securities and a 103 bp increase in the yield earned on other earning assets. Compared to the linked quarter, average loan balances increased $215.5 million, or 6.8%, while the average balance of securities decreased $27.7 million, or 4.6%, and the average balance of other earning assets decreased $38.6 million, or 20.5%.

Interest income earned on commercial loans was positively impacted by higher rates and average balances in the variable rate small business lending, construction and commercial and industrial portfolios as well as strong growth and higher new origination yields in the franchise finance portfolio. Other portfolios also benefitted from higher average balances and increases in new origination yields as well as higher prepayment fees. In the consumer portfolio, interest income was up due to the combination of higher new origination yields and growth in the residential mortgage, trailers and recreational vehicles portfolios.

New funded portfolio origination yields increased 84 bps compared to the third quarter, and for the full year 2022 were approximately 118 bps higher than for 2021. Because of the fixed rate nature of certain larger portfolios, there is a lagging impact of the higher origination yields on the portfolio.

The Federal Reserve increased the federal funds (“Fed Funds”) target rate 425 bps in 2022. During the course of the year, the Company increased the rates paid on consumer, small business and commercial interest-bearing demand deposits. While money market deposit pricing was relatively rational during the first half of the year, competition in both the digital banking space and local markets intensified in the third quarter and continued into the fourth quarter, and deposit betas increased as a result.

Total interest expense for the fourth quarter of 2022 was $24.0 million, an increase of 58.9% compared to the third quarter of 2022, and an increase of 124.6% compared to the fourth quarter of 2021. During the fourth quarter of 2022, the average balance of interest-bearing deposits increased $79.7 million, or 2.7%, compared to the third quarter of 2022 and the cost of these deposits increased 104 bps. The increase in average interest-bearing deposit balances was due to an increase in average certificates and brokered deposit balances, which increased $183.2 million, or 17.7%, during the quarter while the cost of these deposits increased 76 bps. Additionally, the average balance of money market accounts increased $71.8 million, or 5.2%, compared to the third quarter of 2022 while the cost of these deposits increased 156 bps.

The average balance of noninterest-bearing deposits increased $11.6 million, or 9.4%, during the fourth quarter compared to the linked quarter, driven by deposits related to growth in construction lending. The average balance of BaaS – brokered deposits declined significantly as a large relationship was exited early in the quarter. However, deposits related to the program with Ramp on-boarded during the quarter began to see deposit inflows in December, which totaled $13.6 million at year end and are priced significantly lower than the exited relationship.

Additionally, with the inverted yield curve, the Company used medium- and longer-term brokered deposits, as well as longer-term FHLB advances, to supplement funding needs, manage long term interest rate risk and offset the impact of further increases in Fed Funds and other short term interest rates.

Net interest margin (“NIM”) was 2.09% for the fourth quarter of 2022, down from 2.40% for the third quarter of 2022 and 2.30% for the fourth quarter of 2021. Fully-taxable equivalent NIM (“FTE NIM”) was 2.22% for the fourth quarter of 2022, down from 2.53% for the third quarter of 2022 and 2.43% for the fourth quarter of 2021. The decreases in NIM and FTE NIM compared to the linked quarter were driven primarily by the effect of higher interest-bearing deposit costs, partially offset by higher yields on loans, securities and other earning assets and higher average loan balances.

Noninterest Income

Noninterest income for the fourth quarter of 2022 was $5.8 million, up $1.5 million, or 34.5%, from the third quarter of 2022, and down $1.9 million, or 24.5%, from the fourth quarter of 2021. Gain on sale of loans totaled $2.9 million for the fourth quarter of 2022, up $0.1 million, or 5.5%, 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. Other income totaled $1.5 million for the fourth quarter of 2022, increasing $1.4 million compared to the linked quarter due to distributions received on certain Small Business Investment Company and venture capital fund investments. Mortgage banking revenue totaled $1.0 million for the fourth quarter of 2022 as the higher interest rate environment and other economic factors continued to impact interest rate lock and sold loan volume as well as gain on sale margins.

Noninterest Expense

Noninterest expense for the fourth quarter of 2022 was $18.5 million, up $0.5 million, or 2.9%, from the third quarter of 2022 and up $1.6 million, or 9.2%, from the fourth quarter of 2021. Other expense, consulting and professional fees, deposit insurance premium and premises and equipment costs increased from the linked quarter, while marketing, advertising and promotion costs and loan expenses were lower. The increases in other expense and premises and equipment were due to several items, none of which were individually significant. The increase in consulting and professional fees was due primarily to the timing of third party loan review. The increase in deposit insurance premium was due primarily to year-over-year asset growth as well as the composition of loans and deposits. The decreases in marketing costs and loan expenses were due primarily to lower mortgage origination activity.

Income Taxes

The Company reported an income tax expense of $0.5 million for the fourth quarter of 2022 and an effective tax rate of 7.3%, compared to an income tax expense of $1.0 million and an effective tax rate of 10.5% for the third quarter of 2022 and an income tax expense of $2.0 million and an effective tax rate of 13.8% for the fourth quarter of 2021. The lower effective tax rate for the fourth quarter of 2022 reflects the impact of the decline in taxable income during the second half of the year compared to estimates earlier in the year.

Loans and Credit Quality

Total loans as of December 31, 2022 were $3.5 billion, an increase of $243.5 million, or 7.5%, compared to September 30, 2022, and an increase of $611.7 million, or 21.2%, compared to December 31, 2021. Total commercial loan balances were $2.7 billion as of December 31, 2022, an increase of $184.3 million, or 7.3%, compared to September 30, 2022, and an increase of $355.5 million, or 15.0%, compared to December 31, 2021. Compared to the linked quarter, the increase in commercial loan balances was driven primarily by growth in franchise finance, single tenant lease financing, construction, commercial and industrial and small business lending balances. These items were partially offset by continued runoff in the healthcare finance portfolio.

Total consumer loan balances were $733.3 million as of December 31, 2022, an increase of $61.1 million, or 9.1%, compared to September 30, 2022, and an increase of $263.3 million, or 56.0%, compared to December 31, 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 0.17% of total loans as of December 31, 2022, compared to 0.06% at September 30, 2022 and 0.04% as of December 31, 2022. The increase in delinquencies during the fourth quarter of 2022 was due to one construction loan that was brought current subsequent to year end. Overall credit quality remained strong during the quarter as nonperforming loans to total loans was 0.22% as of December 31, 2022, compared to 0.18% at September 30, 2022 and 0.26% as of December 31, 2021. Nonperforming loans totaled $7.5 million at December 31, 2022, up from $6.0 million at September 30, 2022.

The allowance for loan losses as a percentage of total loans was 0.91% as of December 31, 2022, compared to 0.92% as of September 30, 2022 and 0.96% as of December 31, 2021. While growth in the allowance for loan losses was generally in-line with overall loan portfolio growth, the slight decline in the allowance coverage ratio compared to the linked quarter reflects the removal of a specific reserve due to positive developments on a certain monitored loan, growth in certain portfolios with lower coverage ratios and the continued decline in healthcare finance balances that have a higher coverage ratio.

Net charge-offs of $0.2 million were recognized during the fourth quarter of 2022, resulting in net charge-offs to average loans of 0.03%, compared to net charge-offs to average loans of 0.02% for the third quarter of 2022 and net recoveries to average loans of 0.01% for the fourth quarter of 2021.

The provision for loan losses in the fourth quarter of 2022 was $2.1 million, compared to a provision of $0.9 million for the third quarter of 2022 and a benefit of $0.2 million for the fourth quarter of 2021. The provision for the quarter was driven by the overall growth in the loan portfolio, partially offset by the reduction in specific reserves mentioned above.

During the first quarter of 2023, the Company will be replacing its incurred loss model for recognizing credit losses with an expected loss model referred to as the current expected credit losses (“CECL”) model. As a result, the Company expects its initial adjustment to the allowance for credit losses to be in the range of $2.5 million to $3.0 million.

Capital

As of December 31, 2022, total shareholders’ equity was $365.0 million, an increase of $4.1 million, or 1.1%, compared to September 30, 2022, and a decrease of $15.4 million, or 4.0%, compared to December 31, 2021. The increase in shareholders’ equity during the fourth quarter of 2022 was due primarily to the net income earned during the quarter and a decrease in accumulated other comprehensive loss resulting from an increase in the value of the available-for-sale securities portfolio caused by the decline in long-term interest rates during the quarter. This was partially offset by a decrease in the fair value of interest rate swaps classified as cash flow hedges and stock repurchase activity. Book value per common share increased to $40.26 as of December 31, 2022, up from $38.84 as of September 30, 2022 and $38.99 as of December 31, 2021. Tangible book value per share was $39.74, up from $38.34 as of September 30, 2022 and $38.51 as of December 31, 2021.

In connection with its previously announced stock repurchase program, the Company repurchased 284,286 shares of its common stock during the fourth quarter of 2022 at an average price of $25.16 per share. Including shares repurchased during the fourth quarter of 2021, the Company has repurchased $32.2 million of stock under its authorized programs.

The following table presents the Company’s and the Bank’s regulatory and other capital ratios as of December 31, 2022.

Conference Call and Webcast

The Company will host a conference call and webcast at 2:00 p.m. Eastern Time on Thursday, January 26, 2023 to discuss its quarterly financial results. The call can be accessed via telephone at (844) 200-6205; access code: 960605. A recorded replay can be accessed through February 25, 2023 by dialing (866) 813-9403; access code: 361353.

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 $4.5 billion as of December 31, 2022. The Company’s subsidiary, First Internet Bank, opened for business in 1999 as an industry pioneer in the branchless delivery of banking services. First Internet Bank provides consumer and small business deposit, SBA financing, franchise finance, 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 within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, 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 “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “growth,” “help,” “may,” “opportunities,” “pending,” “plan,” “position,” “preliminary,” “remain,” “should,” “thereafter,” “well-positioned,” “will,” 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: 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 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 and industrial, construction, SBA, and franchise finance loan portfolios; competition with national, regional and community financial institutions; the loss of any key members of senior management; the anticipated impacts of inflation and rising interest rates on the general economy; 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 charge-offs (recoveries) to average loans, excluding tax refund advance loans, allowance for loan losses to loans, excluding PPP loans, adjusted total revenue, adjusted noninterest income, 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.”