First Internet Bancorp

Good day, everyone, and welcome to the First Internet Bancorp earnings conference call for the second quarter of 2022. And please note that today's event is being recorded. I would now like to turn the conference over to your host, Larry Clark from Financial Profiles. Please go ahead, Mr. Clark.

Thank you. Good day, everyone, and thank you for joining us to discuss First Internet Bancorp's financial results for the second quarter of 2022. The company issued its earnings press release yesterday afternoon and it's available on the company's website at www.firstinternetbankcorp.com. In addition, the company has included a slide presentation that you can refer to during the call. You can also access these slides on the website. Joining us today from the management team are Chairman and CEO David Becker, Executive Vice President and CFO Ken Lovick. David will provide an overview and Ken will discuss the financial results. Then we'll open the call up to your questions. Before I begin, I'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of First Internet Bancorp that involve risks and uncertainties. Various factors could cause actual results to materially be different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC financial statements. which are available on the company's website. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute the most directly comparable GAAP measures. The press release, available on the website, contains the financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP to non-GAAP measures. This time, I'd like to turn the call over to David.

Thank you, Larry. Good afternoon, everyone, and thanks for joining us today. The First Internet team delivered another strong quarter, highlighted by robust commercial and consumer loan production while maintaining excellent credit quality. Through the first half of 2022, yields on new loan originations were up over 100 basis points compared to this point in time last year. We benefited from the rising rate environment and deployed existing on-balance sheet liquidity to drive growth in net interest margin. Fully taxable equivalent net interest margin increased five basis points to 274. For the second quarter, we are reporting net income of 9.5 million and diluted earnings per share of 99 cents. Excluding non-recurring expenses, which we will cover in just a moment, we recorded adjusted net income of 10.3 million, or $1.06 per diluted share. Adjusted for the non-recurring loans, we generated return on assets of 1% and a return on average tangible common equity of 11.15%. And both tangible book value per share and tangible common equity to tangible assets increased even as we repurchased over $11 million of our common stock during the quarter. Loan production was the highlight of the quarter. Total loan balances increased 201.3 million or 7% from the prior quarter, and now stand at an all-time high of $3.1 billion. Total portfolio originations for the quarter were $333.5 million, up almost 115% over origination volume in the first quarter. Nearly $250 million of that came from our commercial lending line. Our partnership with Apple Pie Capital, a FinTech-oriented specialty lender that focuses on lending to the franchise industry, will continue to be a standout performer in the second quarter. Together, we are providing credit to proven entrepreneurs throughout the country. We funded over $63 million of attractively priced franchise loans during the quarter and now hold nearly $170 million in this portfolio. Our public finance team had an outstanding quarter as well with over 37 million of funded originations during the quarter. The team has intentionally focused on shorter duration loans and with a rise in interest rates has capitalized on a number of opportunities to fund 12 to 18 month term loans at tax exempt spreads well above treasury yields. Singleton and Lease Financing also had a fantastic quarter. We funded over $50 million of new loans during the period. The single-tenant pipeline is approaching an all-time high, and as we neared the end of the quarter, the majority of the new production came in at an interest rate north of 5%. Construction lending continues to be another key line of business for us. Our team sourced over $65 million of new originations during the quarter, which included almost $17 million of funded balances. At the close of the second quarter, unfunded commitments in our construction line of business totaled $211 million, up 15% over the levels at March 31st. Despite the fact that gain-on-sale revenue was down in the second quarter, we remained very bullish on our SBA platform. We finished the quarter on a great note. June production was a year-to-date high for us, and that momentum has carried into July. The second half of the year is seasonally stronger for small business lending, Our pipeline is continuing to grow, and we expect strong originations in the third quarter. That said, the secondary market for the guaranteed portion of these loans has reverted to historical averages following the conclusion of government programs that inflated these premiums over the last two years. Because we have balance sheet capacity, we can and have added SBA loans to our portfolio rather than sell them when the market premiums are soft. After taking into account the lower amount of loan sales in the second quarter, as well as lower gain on sale premium expectations, we now forecast SBA gain on sale revenue to be in the range of $10.5 to $11.5 million per year. Overall, our commercial loan businesses are performing extremely well. The pipeline is up 28% from the end of the first quarter, which leaves us well positioned to capitalize on growth opportunities for the remainder of the year. And as we mentioned on the call in early May, we have additional opportunities in the commercial finance space that we are confident have substantial upside as we pair our balance sheet, capital, and nationwide lending expertise with specialized asset generation platforms. Our consumer lines of business also performed well during the quarter with higher balances in residential mortgage, recreational vehicles, and trailer loan portfolios. While rising interest rates and inflationary pressures may inevitably impact consumer demand, particularly in the residential mortgage, we experienced strong origination growth in our specialty consumer lines, which were up 72% over the first quarter. Our credit quality, meanwhile, remains excellent and among the best in the industry. During the quarter, our ratio of non-performing loans to total loans improved by 10 basis points instead of just 0.15% as we continue to resolve problem credits in a very positive manner. The last line of business I want to discuss is our ongoing strategy around FinTech partnerships and banking as a service. We have spent the last 12 months building out a robust risk management and compliance infrastructure to support this strategy. In my 40-year career, most of that in technology and software as a service, I have seen time and time again that you have to have the back of the house ready before you turn on the sales picket. We have brought on new talent with deep risk management experience in the banking as a service space. We have reallocated internal resources to ensure that we are building the appropriate policies and procedures to review, onboard, and monitor FinTech partners in a scalable manner. As FinTechs and bank partnerships with FinTechs are coming under increasing scrutiny from the regulatory world. Our goal is to ensure that we have a best-in-class risk management platform to support our banking as a service strategy. Furthermore, as many of you are aware, the fintech space is currently experiencing upheaval. Venture capital firms are focusing more on long-term viability and profitability as opposed to simply customer or revenue growth. We have a similar view and are approaching these potential partnerships methodically with rigorous due diligence to ensure that they have compelling unit economics, which will be accretive to earnings and are scalable across our platform. With these objectives in mind, we do have a number of initiatives in motion to help drive higher financial performance over the next several years. We are currently working towards finalizing agreements with two leading banking as a service platforms that are expected to both increase the number of FinTech partnership opportunities and make it easier for us to bring the partnerships to market faster. We are also actively sourcing and evaluating our own direct FinTech partnership opportunities. Since launching our FinTech partnership effort, we have reviewed over 100 opportunities. However, and to my comments earlier on the long-term viability of FinTechs, the funnel is very steep. Most of them have been of low or average quality that do not meet our organizational objectives or quality standards. In just the last two quarters alone, we have evaluated over 80 opportunities. While we are in various stages of evaluation with several of these FinTechs, we have only moved on to further due diligence with three of them. And with only one have we elected to move on to implementation. We went into this with our eyes open about the state of the FinTech space and the patience to search for the right partnerships. So to wrap up the FinTech discussion, we remain committed to building a strong presence in the banking as a service and FinTech partnership space and remain optimistic that over the long run, it will provide new channels for lower cost deposits, fee revenue, and lending capabilities. However, we only do so in a manner that has a rigorous risk management framework and with partnerships that meet our organizational and financial objectives. Before I turn it over to Ken, I would like to recognize the entire First Internet team for their commitment to our customers and the company's success. In the second quarter, we said goodbye to three senior leaders who retired. Associated with their departures, we incurred an expense of $300,000 in accelerated equity compensation. of expenses one time, their legacy will be long-lasting. I wouldn't be surprised if they're listening to this presentation, and so I thank each of them for their enduring contribution to our organization. I hope the fish are biting and the fairways are rising up to meet them. I believe First Internet has been able to attract and retain talent of their caliber because we foster a workplace culture that encourages innovation, collaboration, and customer focus while supporting work-life balance. We also champion diversity as evidenced by the composition of new hires we brought aboard in the first half of 2022. A broader spectrum of backgrounds and experiences produces more ideas and creativity and ultimately better results for all of our stakeholders. It was gratifying to see these attributes recognized when our employees voted us one of the top workplaces in central Indiana by the Indy Star for the ninth consecutive year. As an employer of choice, we felt the responsibility to address the rapid rise in transportation, housing, and food costs in order to allow our employees to devote their best mental energy to serving our customers. In the second quarter, we implemented a $20 minimum hourly wage for full-time employees across the company. Additionally, we paid a bonus to those employees most impacted by the current inflationary environment. The bonus amounted to $500,000 as a one-time expense, one I was very proud to support. For more than two years, we have been living in extraordinary times. We intend to stand behind our professionals who have stood with us and our customers through it all. I would like to thank the entire First Internet Bank team for their consistent execution of our strategies and for delivering solid operating and financial performance. while providing an exceptional experience for our customers. With that, I'd like to turn the call over to Ken to discuss our financial results for the quarter.