First Internet Bancorp Reports First 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 first quarter ended March 31, 2023.

Addressing Recent Market Events

• Deposit growth of $181.0 million in the first quarter, a 5.3% increase from the fourth quarter of 2022
• Estimated uninsured deposits represented 26% of total deposits at March 31, 2023, and 19% of total deposits after adjusting for insured/collateralized public funds and contractual deposits
• No additional borrowing from either the FHLB or the Federal Reserve during the first quarter; total borrowing availability of $628 million across all facilities at quarter end
• Office commercial real estate exposure represents less than 1% of total loan balances and is primarily limited to suburban and medical offices
• Total after-tax unrealized securities losses in both the available-for-sale and held-to-maturity portfolios represented 13.3% of tangible shareholders’ equity at quarter end
• Tangible common equity to tangible assets of 7.47%; CET1 ratio of 10.35%; tangible book value per share of $39.43

First Quarter 2023 Financial Highlights

• Net loss of $1.3 million and a diluted loss per share of $0.14
• Net loss was impacted by a partial charge-off of $4.7 million related to one C&I participation loan
• Adjusted net income of $4.8 million, or $0.53 adjusted diluted earnings per share, when excluding (i) net pre-tax costs of $3.0 million incurred as a result of the previously announced exit of the Bank's consumer mortgage operations and (ii) the aforementioned $4.7 million partial charge-off of the C&I participation loan
• Net interest margin of 1.76% and fully-taxable equivalent net interest margin of 1.89%, compared to 2.09% and 2.22%, respectively, for the fourth quarter of 2022
• Repurchased 161,691 shares

“Our active management of liquidity, capital and revenue streams in preparation for a dynamic economic environment positioned us to effectively withstand the recent challenges to the banking system,” said David Becker, Chairman and Chief Executive Officer. “Early in the first quarter, we focused on growing deposits and building liquidity, which we successfully accomplished despite intense competition amid the overall decline in system-wide deposits. While we experienced a modest decline in deposits from mid-March through quarter-end, balances have rebounded and are up $135 million thus far in April.

“We remain focused on our strategies to bolster the resilience of our balance sheet and our revenue channels. We continue to improve the composition of the loan portfolio towards a more favorable mix of variable rate and higher yielding loans. New origination yields were up significantly during the quarter, positioning us to achieve stronger earnings and profitability once deposit costs stabilize. In addition, our SBA lending team generated a very strong quarter with gain on sale revenue up over 40% compared to the fourth quarter.”

Mr. Becker concluded, “Despite an issue late in the quarter on one commercial participation loan, our exposure to similar-type loans is very limited and all others are performing well. Our overall asset quality remains solid, and our capital levels are strong.”

Net Interest Income and Net Interest Margin

Net interest income for the first quarter of 2023 was $19.6 million, compared to $21.7 million for the fourth quarter of 2022, and $25.8 million for the first quarter of 2022. On a fully-taxable equivalent basis, net interest income for the first quarter of 2023 was $21.0 million, compared to $23.1 million for the fourth quarter of 2022, and $27.1 million for the first quarter of 2022.

Total interest income for the first quarter of 2023 was $52.0 million, an increase of 13.9% compared to the fourth quarter of 2022, and an increase of 44.4% compared to the first quarter of 2022. On a fully-taxable equivalent basis, total interest income for the first quarter of 2023 was $53.4 million, an increase of 13.5% compared to the fourth quarter of 2022, and an increase of 43.0% compared to the first quarter of 2022. The increase from the linked quarter was due primarily to growth in interest income earned on loans, other earning assets and securities. The yield on average interest-earning assets for the first quarter of 2023 increased to 4.69% from 4.40% for the fourth quarter of 2022 due primarily to a 24 basis point (“bp”) increase in the average loan yield, a 94 bp increase in the yield earned on other earning assets and a 36 bp increase in the yield earned on securities. Compared to the linked quarter, average loan balances increased $191.9 million, or 5.7%, while the average balance of other earning assets increased $181.4 million, or 121.0%, and the average balance of securities increased $6.7 million, or 1.2%.

Interest income earned on commercial loans was higher due to increased average balances and the positive impact of higher rates in the variable rate SBA, construction and investor commercial real estate portfolios, as well as strong growth and higher new origination yields in the franchise finance portfolio. This was partially offset by lower average balances and prepayment fees in the healthcare finance portfolio, as well as lower prepayment fees in the single tenant lease financing portfolio.

In the consumer portfolio, interest income was up due to higher new origination yields, increases in the average balance of residential mortgage, trailers and recreational vehicles portfolios, and higher rates in the variable rate home equity portfolio.

The yield on funded portfolio originations was 7.76% in the first quarter, an increase of 161 bps compared to the fourth quarter of 2022 and an increase of 297 basis points compared to the first quarter of 2022. Because of the fixed-rate nature of certain larger portfolios, there is a lagging impact of origination yields on the portfolio, which are expected to increase over time.

Interest earned on cash and other interest-earning balances increased $2.4 million, or 171.6%, during the quarter due to the impact of higher short-term interest rates on cash balances as well as a $181.4 million increase, or 152.5%, in average cash balances. Furthermore, interest income earned on securities increased $0.5 million, or 12.3%, during the first quarter of 2023 as the yield on the portfolio increased 36 bps to 3.05% driven primarily by variable rate securities resetting higher, slower prepayment speeds and an increase in the average balance of the portfolio.

Total interest expense for the first quarter was $32.5 million, an increase of $8.5 million, or 35.2%, compared to the linked quarter, due to increases in both market interest rates and average interest-bearing deposit balances throughout the quarter. Interest expense related to interest-bearing deposits increased $8.5 million, or 45.0%, driven primarily by higher costs on CD and brokered deposits and money market accounts. Average CD balances increased $261.4 million, or 32.9%, while the cost of funds increased 108 bps, as the Company took advantage of strong consumer and small business demand during the quarter and pulled forward origination activity planned for later in the year. The average balance of brokered deposits increased $165.1 million, or 38.6%, driven by a full quarter’s impact of brokered CD issuances in late 2022, and the cost of funds increased 71 bps. Additionally, while average money market balances decreased $64.0 million, or 4.4%, during the quarter, the cost of these deposits increased 73 bps due to the impact of continued Federal Reserve rate increases.

The average balance of BaaS – brokered deposits increased by $10.2 million, reaching $25.7 million by quarter-end. In total, BaaS deposits were $82.4 million as of March 31, 2023 as Fintech programs were onboarded and existing programs grew during the quarter.

Net interest margin (“NIM”) was 1.76% for the first quarter of 2023, down from 2.09% for the fourth quarter of 2022 and 2.56% for the first quarter of 2022. Fully-taxable equivalent NIM (“FTE NIM”) was 1.89% for the first quarter of 2023, down from 2.22% for the fourth quarter of 2022 and 2.69% for the first 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.

Noninterest Income

Noninterest income for the first quarter of 2023 was $5.4 million, down $0.4 million, or 6.2%, from the fourth quarter of 2022, and down $1.4 million, or 20.1%, from the first quarter of 2022. Gain on sale of loans totaled $4.1 million for the first quarter of 2023, up $1.2 million, or 41.9%, 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, which increased due to a higher volume of loan sales, as well as higher net premiums. Other income totaled $0.4 million for the first quarter of 2023, down $1.2 million compared to the linked quarter due to distributions received on certain Small Business Investment Company and venture capital fund investments in the fourth quarter. Mortgage banking revenue totaled only $0.1 million for the first quarter as the Company immediately began winding down its existing pipeline following its announced exit from the consumer mortgage business in January 2023.

Noninterest Expense

Noninterest expense for the first quarter of 2023 was $21.0 million, up $2.4 million, or 13.2%, from the fourth quarter of 2022 and up $2.2 million, or 11.6%, from the first quarter of 2022. Excluding $3.1 million of mortgage operations and exit costs, adjusted noninterest expense totaled $17.9 million for the first quarter, declining $0.6 million, or 3.3%, compared to the linked quarter. Excluding the mortgage operations and exit costs, salaries and employee benefits expense decreased by $0.8 million compared to the linked quarter due to lower incentive compensation and bonus accruals. Also, marketing, advertising and promotion expense, consulting and professional fees, premises and equipment costs and other expenses decreased from the linked quarter, while loan expenses and deposit insurance premiums were higher. The increase in loan expenses reflects higher third party loan servicing costs related to franchise finance loan volume. The increase in deposit insurance premium was due primarily to asset growth, as well as the composition of loans and deposits.

Income Taxes

The Company recognized an income tax benefit of $1.8 million for the first quarter of 2023, compared to an income tax expense of $0.5 million and an effective tax rate of 7.3% for the fourth quarter of 2022 and an income tax expense of $1.8 million and an effective tax rate of 13.8% for the first quarter of 2022. The income tax benefit in the first quarter of 2023 reflects the net loss resulting from the partial charge-off of the participation loan and the recognition of mortgage exit costs described above.

Loans and Credit Quality

Total loans as of March 31, 2023 were $3.6 billion, an increase of $110.1 million, or 3.1%, compared to December 31, 2022, and an increase of $728.7 million, or 25.3%, compared to March 31, 2022. Total commercial loan balances were $2.8 billion as of March 31, 2023, an increase of $88.7 million, or 3.3%, compared to December 31, 2022, and an increase of $468.0 million, or 20.0%, compared to March 31, 2022. Compared to the linked quarter, the increase in commercial loan balances was driven primarily by growth in franchise finance, single tenant lease financing and small business lending balances, as well as combined growth in investor commercial real estate and construction balances. These items were partially offset by a decrease in the public finance portfolio as well as continued runoff in the healthcare finance portfolio.

Total consumer loan balances were $756.4 million as of March 31, 2023, an increase of $23.1 million, or 3.1%, compared to December 31, 2022, and an increase of $267.6 million, or 54.7%, compared to March 31, 2022. The increase compared to the linked quarter was due primarily to higher balances in the recreational vehicles and trailers loan portfolios as well as funded residential mortgages that were in the pipeline prior to the announced exiting of the business.

Total delinquencies 30 days or more past due were 0.13% of total loans as of March 31, 2023, compared to 0.17% at December 31, 2022 and 0.03% as of March 31, 2022. The decrease in delinquencies during the first quarter of 2023 was due primarily to a construction loan that became current in the first quarter of 2023. Nonperforming loans to total loans was 0.32% as of March 31, 2023, compared to 0.22% at December 31, 2022 and 0.25% as of March 31, 2022. Nonperforming loans totaled $11.4 million at March 31, 2023, up from $7.5 million at December 31, 2022. The increase was due primarily to one commercial and industrial (“C&I”) credit with a balance of $9.8 million that was moved to nonaccrual status late in the quarter. The Company subsequently recognized a partial charge-off of $4.7 million related to this loan due to negative developments following quarter end.

The allowance for credit losses (“ACL”) as a percentage of total loans was 1.02% as of March 31, 2023, compared to 0.91% as of December 31, 2022 and 0.98% as of March 31, 2022. The increase in the ACL reflects the day one Current Expected Credit Losses (“CECL”) adjustment of $3.0 million, as well as overall growth in the loan portfolio and changes in certain economic forecasts that impacted quantitative factors for certain portfolios.

Net charge-offs were $5.0 million in the first quarter of 2023, compared to net charge-offs of $0.2 million in the fourth quarter 2022. The increase was due almost wholly to the C&I participation loan discussed above. Net charge-offs to average loans totaled 57 bps in the first quarter.

The provision for loan losses in the first quarter was $7.2 million, compared to $2.1 million for the fourth quarter of 2022. The increase in provision for the quarter reflects the partial charge-off of the C&I participation loan discussed above as well as growth in the loan portfolio and the impact of economic forecasts on certain portfolios mentioned above.

Capital

As of March 31, 2023, total shareholders’ equity was $357.3 million, a decrease of $7.7 million, or 2.1%, compared to December 31, 2022, and a decrease of $17.4 million, or 4.6%, compared to March 31, 2022. The decrease in shareholders’ equity during the first quarter of 2023 was due primarily to stock repurchase activity, the day one CECL adjustment and the net loss during the quarter, partially offset by a decrease in accumulated other comprehensive loss. Book value per common share was $39.95 as of March 31, 2023, down from $40.26 as of December 31, 2022 and up from $38.69 as of March 31, 2022. Tangible book value per share was $39.43, down from $39.74 as of December 31, 2022 and up from $38.21 as of March 31, 2022.

In connection with its previously announced stock repurchase program, the Company repurchased 161,691 shares of its common stock during the first quarter of 2023 at an average price of $24.50 per share. The Company has repurchased $36.2 million of stock under its authorized programs to-date.

The following table presents the Company’s and the Bank’s regulatory and other capital ratios as of March 31, 2023.

Conference Call and Webcast

The Company will host a conference call and webcast at 2:00 p.m. Eastern Time on Thursday, April 27, 2023 to discuss its quarterly financial results. The call can be accessed via telephone at (833) 470-1428; access code: 192191. A recorded replay can be accessed through May 27, 2023 by dialing (866) 813-9403; access code: 451912.

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 $4.7 billion as of March 31, 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” 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 “achieve,” “anticipate,” “believe,” “build,” “continue,” “could,” “estimate,” “expect,” “growth,” “help,” “improve,” “may,” “opportunities,” “pending,” “plan,” “position,” “preliminary,” “remain,” “should,” “stabilize,” “strategies,” “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, adjusted return on average tangible common equity and adjusted effective income tax rate 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.”