First Internet Bancorp Reports Third Quarter 2023 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 third quarter ended September 30, 2023.

Third Quarter 2023 Financial Highlights

• Net income of $3.4 million and diluted earnings per share of $0.39
• Deposit growth of $229.2 million, a 5.9% increase from the second quarter of 2023
• Loan growth of $88.2 million, a 2.4% increase from the second quarter of 2023
• The loans to deposits ratio was 91.5%, compared to 94.6% at the prior quarter-end
• Net interest margin of 1.39% and fully-taxable equivalent net interest margin of 1.49%, compared to 1.53% and 1.64%, respectively, for the second quarter of 2023
• Nonperforming loans declined to 0.16% of total loans
• Repurchased 97,834 common shares at an average price of $18.29 per share
• Tangible common equity to tangible assets of 6.64%; CET1 ratio of 9.59%
• Tangible book value per share of $39.57, compared to $39.85 at the prior quarter-end

“We experienced strong deposit growth and bolstered our balance sheet liquidity during the third quarter,” said David Becker, Chairman and Chief Executive Officer. “At the same time, we further optimized our loan portfolio composition and overall balance sheet mix as new origination yields continued to improve while the pace of deposit cost increases and the compression in our net interest margin was the slowest it has been in five quarters.

“Growth in noninterest income was fueled by our SBA lending team, which delivered another strong quarter with gain on sale revenue up 14% from the prior quarter. We ended the SBA fiscal year among the top ten most active lenders. I am proud of the continued success of this team.

“Amidst economic and geopolitical uncertainty, our stalwart foundation remains intact. Overall asset quality is sound. Our capital position is strong. Our teams are focused. We believe we are well-positioned to improve our earnings and profitability profile as funding costs stabilize.”

Net Interest Income and Net Interest Margin

Net interest income for the third quarter of 2023 was $17.4 million, compared to $18.1 million for the second quarter of 2023, and $24.0 million for the third quarter of 2022. On a fully-taxable equivalent basis, net interest income for the third quarter of 2023 was $18.6 million, compared to $19.5 million for the second quarter of 2023, and $25.3 million for the third quarter of 2022.

Total interest income for the third quarter of 2023 was $63.0 million, an increase of 8.4% compared to the second quarter of 2023, and an increase of 61.2% compared to the third quarter of 2022. On a fully-taxable equivalent basis, total interest income for the third quarter of 2023 was $64.3 million, an increase of 8.1% compared to the second quarter of 2023, and an increase of 59.2% compared to the third quarter of 2022. The yield on average interest-earning assets for the third quarter of 2023 increased to 5.02% from 4.89% for the second quarter of 2023 due to a 29 basis point (“bp”) increase in the yield earned on other earning assets, a 9 bp increase in the yield earned on loans, and a 20 bp increase in the yield earned on securities. Compared to the linked quarter, the average balance of other earning assets increased $142.1 million, or 27.8%, while average loan balances increased $44.9 million, or 1.2%, and the average balance of securities increased $18.0 million, or 3.0%.

Interest income earned on commercial loans was higher due to increased average balances and the positive impact of higher rates in the variable rate construction and small business lending portfolios, as well as growth and higher yields on new originations in the franchise finance portfolio. This was partially offset by lower average balances in the public finance, healthcare finance, single tenant lease financing and investor commercial real estate portfolios. The shift in loan mix is the result of a strategic initiative to focus on variable rate and higher-yielding products during a historic period of rapidly rising rates.

In the consumer loan portfolio, interest income was up due to higher yields on new originations and growth in the average balances of trailers, recreational vehicles and other consumer loans portfolios.

The yield on funded portfolio loan originations was 8.92% in the third quarter of 2023, an increase of 50 bps compared to the second quarter of 2023, and an increase of 362 bps compared to the third quarter of 2022. Because certain larger portfolios consist of longer duration, fixed rate loans, new origination yields have a gradual effect on the overall loan portfolio.

Interest earned on cash and other earning asset balances increased $2.4 million, or 36.5%, during the quarter due to the impact of higher short-term interest rates on cash balances as well as a $142.1 million, or 29.6%, increase in average cash balances. Furthermore, interest income earned on securities increased $0.5 million, or 11.0%, during the third quarter of 2023 due to an increase in the yield earned on the portfolio and an increase in average balances. The yield on the securities portfolio increased 20 bps to 3.32%, driven primarily by variable rate securities repricing higher and increased yields on new purchases.

Total interest expense for the third quarter of 2023 was $45.6 million, an increase of $5.7 million, or 14.2%, compared to the linked quarter, due to increases in both deposit rates and average interest-bearing deposit balances throughout the quarter. Interest expense related to interest-bearing deposits increased $5.7 million, or 16.3%, driven primarily by higher costs on CDs, interest-bearing demand deposits and money market accounts. The cost of interest-bearing deposits was 4.09% for the third quarter of 2023, compared to 3.75% for the second quarter of 2023. The pace of increase in deposit costs during the third quarter was the slowest experienced by the Company in the past five quarters.

Average CD balances increased $273.1 million, or 21.2%, while the cost of funds increased 53 bps. Early in the quarter, the Company strategically bolstered its liquidity position ahead of the anticipated Fed Funds rate increase in late July. The average balance of interest-bearing demand deposits increased $27.5 million, or 7.7%, due to higher average Banking-as-a-Service balances, while the cost of funds increased 50 bps.

These increases were partially offset by lower average brokered deposit balances, which decreased $63.6 million, or 8.6%, from the second quarter of 2023, as the Company reduced the balance of higher cost brokered funding over the last two quarters.

Net interest margin (“NIM”) was 1.39% for the third quarter of 2023, down from 1.53% for the second quarter of 2023, and 2.40% for the third quarter of 2022. Fully-taxable equivalent NIM (“FTE NIM”) was 1.49% for the third quarter of 2023, down from 1.64% for the second quarter of 2023, and 2.53% for the third quarter of 2022. 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, other earning assets and securities. Higher cash balances, which the Company continued to carry given the volatility in the banking industry over the last several months, were estimated to have negatively impacted both NIM and FTE NIM by 10 to 12 bps.

Noninterest Income

Noninterest income for the third quarter of 2023 was $7.4 million, up $1.5 million, or 26.2%, from the second quarter of 2023, and up $3.1 million, or 71.6%, from the third quarter of 2022. Gain on sale of loans totaled $5.6 million for the third quarter of 2023, up $0.7 million, or 14.4%, from the linked quarter. Gain on sale revenue in the quarter, which consisted entirely of sales of U.S. Small Business Administration (“SBA”) 7(a) guaranteed loans, increased due to a higher volume of loan sales, partially offset by modestly lower net premiums. The Company’s SBA lending team closed out the SBA fiscal year ended September 30, 2023 as the ninth most active 7(a) lender in the nation by loan dollars. Net loan servicing revenue increased $0.3 million during the quarter due to growth in the servicing portfolio as well as a lower fair value adjustment to the loan servicing asset. Other income increased $0.5 million from the prior quarter due primarily to income from fund investments.

Noninterest Expense

Noninterest expense for the third quarter of 2023 was $19.8 million, up $1.1 million, or 5.8%, from the second quarter of 2023, and up $1.8 million, or 9.8%, from the third quarter of 2022. Salaries and employee benefits expense increased $1.1 million, or 9.9%, compared to the second quarter of 2023 due mainly to higher benefit plan costs as well as higher incentive compensation in SBA and construction lending. Loan expenses increased from the linked quarter due to higher third party loan servicing fees and other miscellaneous lending costs. Data processing costs increased due to variable deposit activity-based expenses. These increases were partially offset by declines in premises and equipment, marketing expenses and consulting and professional fees.

Income Taxes

The Company recognized an income tax benefit of $0.3 million for the third quarter of 2023, compared to an income tax benefit of $0.2 million for the second quarter of 2023, and an income tax expense of $1.0 million and an effective tax rate of 10.5% for the third quarter of 2022. The income tax benefit in the third quarter of 2023 reflects the benefit of tax-exempt income relative to the amount of stated pre-tax income.

Loans and Credit Quality

Total loans as of September 30, 2023 were $3.7 billion, an increase of $88.2 million, or 2.4%, compared to June 30, 2023, and an increase of $479.2 million, or 14.7%, compared to September 30, 2022. Total commercial loan balances were $2.9 billion as of September 30, 2023, an increase of $77.2 million, or 2.7%, compared to June 30, 2023, and an increase of $373.2 million, or 14.7%, compared to September 30, 2022. Compared to the linked quarter, the increase in commercial loan balances was driven primarily by strategic growth in higher yielding franchise finance, construction and small business lending balances. These items were partially offset by planned decreases in the fixed-rate public finance, single tenant lease financing and investor commercial real estate portfolios as well as continued runoff in the healthcare finance portfolio.

Total consumer loan balances were $786.5 million as of September 30, 2023, an increase of $13.8 million, or 1.8%, compared to June 30, 2023, and an increase of $114.3 million, or 17.0%, compared to September 30, 2022. The increase compared to the linked quarter was due primarily to higher balances in the trailers, recreational vehicles and other consumer loans portfolios.

Total delinquencies 30 days or more past due were 0.22% of total loans as of September 30, 2023, compared to 0.09% at June 30, 2023, and 0.06% as of September 30, 2022. Nonperforming loans were 0.16% of total loans as of September 30, 2023, compared to 0.17% as of June 30, 2023, and 0.18% as of September 30, 2022. Nonperforming loans totaled $5.9 million at September 30, 2023, down from $6.2 million at June 30, 2023. The decrease was due primarily to an owner-occupied commercial real estate relationship that was returned to accrual status during the third quarter of 2023.

The allowance for credit losses (“ACL”) as a percentage of total loans was 0.98% as of September 30, 2023, compared to 0.99% as of June 30, 2023, and 0.92% as of September 30, 2022. The slight decrease in the ACL reflects the positive impact of economic data on forecasted loss rates and adjustments to qualitative factors on certain portfolios, partially offset by specific reserves placed on certain loans.

Net charge-offs of $1.5 million were recognized during the third quarter of 2023, resulting in net charge-offs to average loans of 0.16%, compared to $1.6 million, or 0.17%, for the second quarter of 2023 and $0.2 million, or 0.02%, for the third quarter of 2022. Net charge-offs during the third quarter of 2023 were driven primarily by small business lending as well as a loss on the sale of a commercial and industrial participation loan executed by the lead bank.

The provision for credit losses in the third quarter was $1.9 million, compared to $1.7 million for the second quarter of 2023 and $0.9 million for the third quarter of 2022. The provision for the quarter was driven primarily by net charge-offs as well as increases in specific reserves and unfunded commitments, partially offset by the positive impact of economic forecasts on certain portfolios.

Capital

As of September 30, 2023, total shareholders’ equity was $347.7 million, a decrease of $6.6 million, or 1.9%, compared to June 30, 2023, and a decrease of $13.1 million, or 3.6%, compared to September 30, 2022. The decrease in shareholders’ equity during the third quarter of 2023 was due primarily to an increase in accumulated other comprehensive loss and stock repurchase activity, partially offset by net income earned during the quarter. Book value per common share was $40.11 as of September 30, 2023, compared to $40.38 as of June 30, 2023, and $38.84 as of September 30, 2022. Tangible book value per share was $39.57, compared to $39.85 as of June 30, 2023 and $38.34 as of September 30, 2022.

In connection with its previously announced stock repurchase program, the Company repurchased 97,834 shares of its common stock during the third quarter of 2023 at an average price of $18.29 per share. The Company has repurchased $40.7 million of stock under its authorized programs since November of 2021.

The following table presents the Company’s and the Bank’s regulatory and other capital ratios as of September 30, 2023.

Conference Call and Webcast

The Company will host a conference call and webcast at 2:00 p.m. Eastern Time on Thursday, October 26, 2023 to discuss its quarterly financial results. The call can be accessed via telephone at (888) 259-6580; access code: 53091613. A recorded replay can be accessed through November 24, 2023 by dialing (877) 674-7070; access code: 091613.

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 $5.2 billion as of September 30, 2023. 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”. 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, net interest income – FTE, net interest margin – FTE, adjusted total revenue, adjusted noninterest income, adjusted noninterest expense, adjusted income before income taxes, adjusted income tax (benefit) provision, adjusted net income, adjusted diluted earnings per share, adjusted return on average assets, adjusted return on average shareholders’ equity, and adjusted return on average tangible common equity 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.”