First Internet Bancorp Reports Third Quarter 2014 Financial Results

First Internet Bancorp (NASDAQ: INBK), the parent company of First Internet Bank (www.firstib.com), a premier nationwide provider of online retail banking services and commercial banking services, announced today financial and operational results for the third quarter 2014.

Third quarter net income was $1.3 million and diluted earnings per share were $0.28. This compares with second quarter net income of $1.0 million and diluted earnings per share of $0.22 and third quarter 2013 net income of $0.7 million and diluted earnings per share of $0.25.

• Diluted earnings per share increased $0.06, or 27.3%, compared to the linked quarter
  • Excluding items discussed in the paragraph below, diluted earnings per share increased $0.03, or 14.0%, compared to the linked quarter
  • Net interest income increased $0.3 million, or 5.6%, quarter-over-quarter and $1.3 million, or 30.3%, compared to the third quarter 2013
  • Mortgage banking revenue increased $0.4 million, or 33.3%, compared to the prior quarter
• Total loan growth of $64.3 million, or 10.2%, compared to the linked quarter and $256.3 million, or 58.3%, compared to September 30, 2013
  • Strong performance in credit tenant lease financing with balances increasing 15.5% compared to the prior quarter and 149.3% year-over-year
  • Continued growth in C&I / owner-occupied CRE, increasing on a combined basis 5.2% compared to June 30, 2014 and 65.7% compared to September 30, 2013
  • Excess balance sheet capacity used to acquire high quality mortgage assets
• Net interest margin improved 7 bps to 2.68% compared to the linked quarter
  • Yield on interest-earning assets improved 6 bps driven by strong loan growth
  • Enhanced by redeployment of proceeds from investment portfolio restructuring to support loan growth
• Capital levels continue to support strong loan growth
  • Tangible common equity to tangible assets of 9.77%
  • Tier 1 capital ratio of 13.22%
  • Total risk-based capital ratio of 14.45%
• Improved asset quality as nonperforming loans declined significantly during the quarter
  • Nonperforming loans declined $0.8 million, or 66.0%, with nonperforming loans to total loans declining to 0.06% from 0.19% for the prior quarter
  • The allowance for loan losses to total nonperforming loans increased to 1,366.0% from 436.7% for the linked quarter

During the quarter, the Company recognized a pre-tax recovery of $0.5 million related to the resolution of a nonaccrual commercial real estate credit that experienced significant charge-offs in prior periods. The Company also recognized pre-tax salaries and benefits expenses of $0.1 million associated with staffing-related changes as well as pre-tax gains of $0.1 million resulting from the sales of investment securities. In the aggregate, these items had a positive impact on pre-tax earnings of $0.4 million or $0.05 per diluted share after taxes. During the second quarter, the Company recognized pre-tax gains of $0.1 million resulting from the sales of investment securities, which had a positive impact of $0.02 per diluted share after taxes.

David Becker, Chairman and Chief Executive Officer, commented, “We were very pleased with our performance for the quarter as net interest income continued to grow and our mortgage banking group posted its best results over the last 12 months. Strong revenue growth combined with disciplined expense control drove positive operating leverage and solid growth in earnings.

“Our commercial lending teams had another strong quarter led by outstanding performance in credit tenant lease financing. A significant portion of the production did not close until late in the quarter, so the impact on average loan balances for the quarter was minimal but does leave us well positioned to continue our trend of strong net interest income growth entering the fourth quarter. Furthermore, the pipeline of commercial originations at the end of the third quarter was up substantially over levels as of June 30, 2014.

“We remain committed to driving continued strong and diversified loan growth while focusing on improved profitability and enhanced earnings. Active balance sheet management is expected to result in an improving net interest margin as legacy higher cost funding sources are replaced with more efficient alternatives. Additionally, our strategies to diversify sources of mortgage banking revenue should provide stability, with upside potential, in noninterest income to complement our balance sheet and spread income growth. As we continue to further deploy capital and leverage our operating platform, we feel confident heading into the fourth quarter and are focused on ending the year on a positive note.”

Net Interest Income and Net Interest Margin
Net interest income for the third quarter was $5.7 million compared to $5.4 million for the second quarter and $4.4 million for the third quarter 2013. Compared to the linked quarter, total interest income increased $0.3 million, or 4.4%, and total interest expense increased less than $0.1 million, or 1.6%. The increase in total interest income was driven by a $69.8 million increase, or 12.4%, in average loan balances, partially offset by a decline in the yield earned on the loan portfolio. Additionally, the impact of the loan growth was offset by a decline of $55.1 million, or 28.3%, in the average balance of the investment portfolio. The decline in investment balances was the result of continued efforts to increase the liquidity profile and reduce the interest rate risk and duration of the portfolio. The increase in expense during the quarter was due primarily to an increase of 1.3% in average interest-bearing deposits.

Net interest margin was 2.68% for the third quarter compared to 2.61% for the second quarter and 2.59% for the third quarter 2013. Compared to the prior quarter, the yield on interest-earning assets increased 6 bps to 3.76% due to the migration of interest-earning assets from lower-yielding investment securities to higher-yielding commercial and residential mortgage loans. The cost of interest-bearing liabilities during the quarter remained consistent with the prior quarter at 1.21%.

Noninterest Income
Noninterest income for the third quarter was $1.9 million compared to $1.6 million for the second quarter and $1.6 million for the third quarter 2013. The increase of $0.3 million, or 19.8%, compared to the linked quarter was driven by an increase of $0.4 million, or 33.3%, in mortgage banking revenue. Over the last 12 months, the Company has increased its sales and marketing efforts related to purchase mortgage business and has added sales personnel since the second quarter following a restructuring of its mortgage operations earlier in the year. Furthermore, it recently launched an Indianapolis-based origination effort to complement its nationwide online origination platform. As a result, origination activity has increased throughout the year with third quarter originations increasing 23.2% compared to the second quarter.

Noninterest Expense
Noninterest expense for the third quarter was $5.8 million compared to $5.6 million for the second quarter and $5.1 million for the third quarter 2013. The increase of $0.2 million, or 4.0%, was due to higher salaries and employee benefits and loan expenses, offset by lower premises and equipment costs and consulting and professional fees. Excluding the salaries and benefits expenses associated with staffing-related changes discussed above, total noninterest expenses increased $0.1 million, or 1.4%.

Income Taxes
Income tax expense was $0.7 million for the third quarter, resulting in an effective tax rate of 34.0%, compared to $0.5 million and an effective tax rate of 35.2% for the second quarter and $0.2 million and an effective tax rate of 20.4% for the third quarter 2013. The increase in the effective tax rate compared to the third quarter 2013 was due primarily to the restructuring of the investment portfolio earlier in 2014 during which the Company liquidated its entire portfolio of odd lot and long duration municipal securities.

Loans and Credit Quality
Total loans as of September 30, 2014 were $695.9 million, increasing $64.3 million, or 10.2%, compared to the second quarter and $256.3 million, or 58.3%, compared to September 30, 2013. Total commercial loans increased $23.0 million, or 8.1%, compared to the linked quarter driven by continued strong production in credit tenant lease financing as well as solid growth in the owner-occupied and investor commercial real estate portfolios. In connection with the repositioning of the investment portfolio to provide increased liquidity, the Company deployed excess balance sheet capacity to acquire approximately $48.3 million of high quality adjustable rate residential mortgage assets during the quarter to complement its organic loan growth capabilities.

Credit quality continues to remain strong as nonperforming loans to total loans receivable declined to 0.06% from 0.19% as of June 30, 2014 and 0.61% as of September 30, 2013. Additionally, nonperforming assets to total assets declined to 0.55% from 0.69% as of June 30, 2014 and 1.23% as of September 30, 2013. Compared to the linked quarter, total nonperforming loans declined $0.8 million, or 66.0%, due primarily to the resolution of a nonaccrual commercial real estate credit with a recorded value of $1.0 million. The Company recovered 100% of the unpaid principal balance, resulting in a recovery of $0.5 million which drove the negative provision of $0.1 million for the quarter.

The allowance for loan losses was $5.5 million as of September 30, 2014 compared to $5.1 million as of June 30, 2014 and $5.5 million as of September 30, 2013. The allowance as a percentage of total nonperforming loans increased to 1,366.0% as of September 30, 2014 from 436.7% as of June 30, 2014 and 204.9% as of September 30, 2013.

Capital
During the third quarter, total shareholders’ equity increased $0.2 million due to net income earned for the quarter, partially offset by the change in the unrealized gain/loss related to the investment portfolio and declared dividends. During the quarter, the Company’s tier 1 and total capital ratios declined to 13.22% and 14.45% from 14.03% and 15.30% as of June 30, 2014, respectively, due to an increase in risk-weighted assets resulting from the strong loan growth for the quarter and the migration of assets from investment securities to loans. Tangible common equity to tangible assets declined 64 bps during the quarter to 9.77% due to strong asset growth while tangible book value per share increased to $20.29 from $20.19 as of June 30, 2014.

About First Internet Bancorp
First Internet Bancorp is the parent company of First Internet Bank, which opened for business in 1999 as the nation’s first state-chartered, FDIC-insured institution to operate solely via the Internet. With customers in all 50 states, First Internet Bank offers consumers services including checking, savings, money market, certificates of deposit and IRA accounts as well as consumer loans, residential mortgages, residential construction loans and home equity products. For commercial clients, it provides commercial real estate loans, commercial and industrial loans, asset-based lending and treasury management services. First Internet Bank has been recognized as one of the “Best Banks to Work For” by American Banker Magazine as well as a “Top Workplace” by The Indianapolis Star. Additional information about the Company, including its products and services, is available at www.firstib.com.

Safe Harbor Statement
This press release may contain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance or business of the Company. Forward-looking statements are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” 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. Factors that may cause such differences include: failures of or interruptions in the communications and information systems on which we rely to conduct our business; our plans to grow our commercial real estate and commercial and industrial loan portfolios; competition with national, regional and community financial institutions; the loss of any key members of senior management; fluctuations in interest rates; general economic conditions; risks relating to the regulation of financial institutions; and other factors identified in reports we file with the SEC. 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, return on average tangible common equity and tangible common equity to tangible assets are used by the Company’s management to measure the strength of its capital and its ability to generate earnings on tangible capital invested by its shareholders. Although management believes these non-GAAP measures provide 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.”