First Internet Bancorp

Good day, everyone, and welcome to the first Internet Bancorp earnings conference call for the third quarter of 2022. My name's Drew, and I'll be coordinating your call today. During today's presentation, if you would like to ask a question, you may do so by pressing star followed by one on your telephone keypad. If you change your mind, please press star followed by two. And please note that today's event is being recorded. I would now like to turn the conference over to Larry Clark from Financial Profiles, Inc. Please go ahead, Mr. Clark.

Thank you, Drew. Good day, everyone, and thank you for joining us to discuss First Internet Bancorp's financial results for the third quarter of 2022. The company issued its earnings press release yesterday afternoon, and it's available on the company's website at www.firstinternetbancorp.com. In addition, the company's 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 and Executive Vice President and CFO Ken Levick. David will provide an overview and Ken will discuss the financial results. Then we'll open the call up to your questions. Before we 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 be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, 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 gap to non-gap measures. At this time, I'd like to turn the call over to David.

Thank you, Larry. Good afternoon, everyone, and thanks for joining us today. For the third quarter of 2022, we reported net income of $8.4 million and earnings per share of $0.89. Excluding non-recurring expenses, adjusted net income for the third quarter was $8.5 million, and adjusted diluted earnings per share were $0.90. Adjusted for the non-recurring item, we produced a return on average assets of 0.83% for the third quarter and a return on tangible common equity of 9.24%. As a fellow shareholder of First Internet Bank Corp., I'm disappointed in these results. I would like to use this opportunity to speak openly about what went well in the third quarter, where we were challenged, and what to expect from us in the future periods. To begin, capital levels continued to remain strong. Ending the quarter with a tangible common equity ratio of 8.36% leaves us very well positioned going forward. Additionally, through repurchase activity during the third quarter, we were able to offset the effect of AOCI and maintain a consistent tangible book value per share. which many other banks have not been able to do in the current environment. Loan production was one of the highlights of the quarter. Total loan balances increased to $174 million. This is nearly 6% growth from the prior quarter, puts our loan balances at an all-time high of almost $3.3 billion. Loan originations for the quarter, including unfunded commitments, were $491.3 million. That's a 47% increase of origination volume in the second quarter. New funded originations total 272.5 million, up 9% over volumes in the prior quarter. Our construction lending team had a tremendous quarter, sourcing almost 190 million in new originations. While very little of this new production funded during the quarter, we expect it to draw down over the next 12 to 18 months and the vast majority is variable rate. At the end of the third quarter, unfunded commitments and construction lending totaled $367 million, up over 74% compared to June 30th, 2022, positioning as well to add variable rate assets in the fourth quarter and throughout 2023. Our small business lending team continued its strong performance in the third quarter, with origination volume up 51% over the second quarter. The team at First Internet Bank finished the SBA fiscal year as the 27th most active 7A lender amid a field of over 1,600 lenders. As the second half of the year is seasonally stronger for small business lending, our pipeline is continuing to grow, and we expect originations to increase in the fourth quarter. We anticipate total originations for the year to be in line with our revised expectations in the range of 165 million. However, we have seen lower gain on sale premiums in the second and third quarters of 2022 compared to the previous two years. There are several reasons for this. First, government programs that temporarily increase the guarantee from 75% to 90% have expired. Loans with a 90% guarantee have consistently fetched higher gains on sale than those with 75%. Additionally, rising rates also increase prepayment expectations driving secondary market prices lower. With lower expectations on premium, we are forecasting SBA gain on sale revenue to be in the range of $10.5 to $11 million for the year. Our partnership with Apple Pie Capital, a FinTech-oriented specialty lender that focuses on lending to the franchise industry, was another standout performer in the second quarter. Together, we are providing credit to proven entrepreneurs throughout the country. We funded over $60 million of franchise loans with pricing north of 6% during the quarter and now hold $225 million in this portfolio. Overall, our commercial loan businesses are performing extremely well. Additionally, we also continue to win new business in our consumer lending lines and our horse trailer, recreational vehicles, and other consumer loan portfolios. We originated over $40 million of new loans at yields north of 6%. The limiting factor here has been inventory of new models, which are, like passenger vehicles, challenged by the current chip shortages. As you have come to expect from us, ongoing strong credit quality was a key contributor to our third quarter performance. Our total non-performing assets remain low at 14 basis points of total assets. Net charge-offs to average loans were just two basis points, and delinquencies 30 days or more were just six basis points of total loans, consistent with the prior quarter. Understanding that we are in an uncertain economic environment, we continue to review our loan portfolios for any areas of potential weakness. While we are diligent and thorough in our review, we take comfort in the fact that we have never wavered from our consistent underwriting standards. No matter where we may find ourselves in the credit cycle, As a result, our credit quality has remained strong over the long term, and we expect that trend to continue. Turning to where we saw the most disruption during the third quarter, our earnings were impacted by higher funding costs. In our forecast for 2022, we had anticipated rising rates. We have shared with you the strategies we undertook over the past several years to better position our balance sheet for a rising rate environment. One of those initiatives was to improve the composition of our deposits moving toward non-maturity deposits. We have been winning small business and commercial checking account relationships throughout 2022. Account volume is up by about 10%. DDAs make up 15% of our deposits as of September 30th compared to just 8% when we entered the last rising rate cycle. As we look at savings balances, we do see a trend where consumers and business owners are taking down some of their savings after building up account balances during the depths of the pandemic. Average savings balances are down slightly on a year-to-date basis. Additionally, the competitive environment has made it challenging to grow deposits. As reported by the Wall Street Journal in mid-September, there was a record outflow of $370 billion in deposits from the banking system in the second quarter, the first decline since 2018. This intensified the competition for deposits in the third quarter. We have seen an escalation in rates being offered by digital direct banks, local banks in our market, and in the banking as a service and wholesale deposit markets. First Internet Bank does not offer teaser rates or other incentives to new customers that are not available to existing customers, and we have not negotiated rates with individual customers. We believe openness, transparency, and fair pricing for all are key to maintaining strong relationships and a loyal customer base. As a result of acute deposit competition, our cost of interest-bearing deposits increased 56 basis points from the second quarter to 1.41%. An increase in earning asset yields of 26 basis points was a partial offset. Our fully taxable equivalent net interest margin for the third quarter was 2.53%, down 21 basis points from the second quarter. We believe deposit rates will continue to increase through the fourth quarter as the September CPI report leads us to conclude that Fed will continue on its path to a target Fed funds rate of 450 to 475 in an effort to beat down inflation. Throughout 2022, we have increased rates on new loan originations. We will apply even more pricing discipline in the fourth quarter to mitigate the pressure on our net interest margin. Our third quarter funded loan origination yields were up 52 basis points from the second quarter and on a year-to-date basis are up 87 basis points higher than they were for the same period in 2021, setting the stage for higher average loan yields in future periods. The other area where we believe we can meaningfully improve our results is through banking as a service partnerships. We have entered into a partnership with the established platform Treasury Prime, which has placed numerous FinTech relationships across its network of 15 financial institutions. We are currently working through the implementation and are expecting to onboard our first relationship in early 2023. We are discussing both deposit programs with attractive funding costs as well as payment programs, which would be accretive to non-interest income. Additionally, We are in a pilot phase with a vast platform and program manager called Increase. We will be working through the balance of the year to get three programs from pilot to full production. This partnership is expected to drive primarily non-interest income payment programs with significant upside potential. One of the opportunities that we are currently piloting has a projected $1 billion in payment volume over the next 12 months. We expect to announce more on this relationship during our next earnings call. We have carefully curated a pipeline of a dozen or so additional opportunities to include only opportunities that closely align with our high standards for compliance and risk management. We have kissed a lot of frogs over the past two years, but we have a robust pipeline of high quality deposit, payment, and lending opportunities. As we work through the pilot stage and move increase into full production, We expect the throughput of that pipeline to increase exponentially in the coming quarters. Wrapping up my remarks in the quarter, while we were disappointed in the net interest income and net interest margin performance for the quarter, we are very pleased with the growth of our construction lending business, continued strides we are making in SBA lending, both of which will add asset sensitivity to our loan portfolio going forward. Credit quality remains strong. and our capital ratios provide the flexibility to support the balance sheet as well as allocate capital to continue to share repurchases when we believe there is a valuation disconnect in our stock price. To that end, I am pleased to announce that our board of directors this past Monday approved an extension to the current authorized program, including an additional $5 million of repurchase authority. As I outlined above, we have some very exciting things going on with our FinTech and Banking as a Service partnerships that should provide long-term, scalable growth in revenue and lower-cost deposits. While there may be some short-term volatility in earnings until rates stabilize, we believe the strategies and projects we are working on today will provide a far more resilient balance sheet and earnings profile over the long term. Before I turn it over to Ken, I would like to thank the entire First Internet team for the dedication to our customers and our success on behalf of investors. We excel because of innovation and collaboration, and our workplace culture celebrates, develops, and promotes the people who embody these strengths. It's why we were named once again one of the best banks to work for by American Banker for the ninth year in a row. Our team's talent and commitment to constant improvement give me great confidence and the future of First Internet and our long runway of opportunities ahead as a premier technology-forward, growth-oriented digital financial services provider. With that, I'd like to turn it over to Ken to discuss our financial results for the quarter.