First Internet Bancorp

Good day, everyone, and welcome to the first Internet Bancorp Earnings Conference call for the fourth quarter and full year 2022. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star 1 on your telephone keypad. Please note that today's event is being recorded. I would now like to turn the conference over to Nick Tallboys from Financial Profiles, Inc. Please go ahead, Mr. Tallboys.

Thank you, Hannah. Good day, everyone, and thank you for joining us to discuss First Internet Bancorp's financial results for the fourth quarter and full year 2022. The company issued its earnings press release yesterday afternoon, and it is available on the company's website at www.firstinternetbancorp.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 and an Executive Vice President and CFO Ken Lovick. David will provide an overview and Ken will discuss the financial results. Then we'll open up the call 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 GAAP to non-GAAP measures. At this time, I'd like to turn the call over to David.

Thank you, Nick. Good afternoon, everyone, and thanks for joining us today as we discuss our fourth quarter and full year 2022 results. For the fourth quarter of 2022, we reported net income of $6.4 million and earnings per share of 68 cents. For the full year 2022, we reported net income and diluted earnings per share of $35.5 million and $3.70, respectively, compared to $48.1 million and $4.82, respectively, for full year 2021. Most of our lending teams had strong production in 2022. Net interest income for the year was up 12.1% compared to 2021. As we deployed cash balances to fund loan growth, driving average loan balances higher along with higher loan yields from the rise in interest rates throughout the year. Loan demand was particularly strong in the fourth quarter as portfolio balances totaled 3.5 billion at year end, increasing 7.5% compared to the third quarter and 21% compared to one year ago. During the quarter, we posted strong Across-the-board growth, led by our commercial lending areas, where balances were up 184 million, or 7.3%, and were up 350 million, or 15%, for the year. We saw growth in franchise finance, construction, single-tenant leasing, small business lending, and commercial and industrial. Our consumer loan balances increased 61 million, or 9%, compared to the prior quarter, and grew by $263 million for the full year 2022, or 56%, with residential mortgage, trailers, and RVs leading the way. We achieved this exceptional loan growth without sacrificing our proven commitment to credit quality. While the provision for loan losses in the fourth quarter was higher than in our prior quarters, the increase was due primarily to the strong loan growth as net charge-offs remained low. or about three basis points of average loan balances and only 1.1 million throughout all of 2022. Again, only about three basis points for the entire year. In fact, our asset quality improved on a year-over-year basis with non-performing assets representing just 17 basis points of total assets at year-end and non-performing loans representing just 22 basis points of total loans, both of which are well below industry averages. With the increase in interest rates throughout the year, we have been able to increase rates on loans as new portfolio origination yields increased to 84 basis points during the fourth quarter as compared to the prior quarter, resulting in the total portfolio yield increasing 39 basis points quarter over quarter. However, intense competition for deposits through the most rapid set of federal funds rate hikes in decades has also driven interest expense higher. pressuring net interest margin. To defend net interest margin on the asset side, our 2023 loan origination efforts will be focused on variable rate loan products, notably commercial construction and small business lending, and then other high-yielding portfolios such as franchise finance and consumer lending. We believe the increasing mix of variable rate loans combined with new loan production coming on at higher rates will help to offset the pressure of higher deposit costs. If interest rates follow the market's expectations, deposit costs should stabilize later this year and decline thereafter, setting the stage for us to achieve higher earnings and profitability in 2024. Turning to mortgage, while other lending lines have strong demand, the combination of housing prices, housing supply, economic uncertainty, and interest rates have caused mortgage applications nationally to plunge to the lowest level in 26 years. Due to the steep decline in mortgage volume, the unfavorable outlook for mortgage lending over the coming years, we announced yesterday that we are exiting our consumer mortgage business. This includes our direct-to-consumer mortgage business that originates residential loans nationwide for sale in the secondary market, as well as our local traditional consumer mortgage and construction-to-PERM business. This was a difficult but ultimately necessary decision. Given every economic outlook we have reviewed, it points to prolonged sluggishness across mortgage banking. Excluding one-time costs, we estimate we will deliver approximately $2.2 million in higher pre-tax income in 2023, and over a longer horizon, remove an element of volatility from our earnings and be a stronger, more efficient company. I want to thank everyone on the mortgage team for their hard work and dedication to homeowners. We are providing each of them with tools and resources to help them transition into new opportunities. I would also like to note that our commercial construction and land development business will not be affected by this decision and remains an important part of our lending strategy. To wrap up the lending discussion, one final point I want to make. is that we have never wavered from our underwriting and credit standards, regardless of market conditions. We believe our excellent asset quality and strong credit culture, in addition to our strong capital levels, positions us well to weather any economic slowdown that might be on the horizon. Lastly, I want to provide an update on our banking as a service and fintech partnership initiatives. During the fourth quarter, we went live with our platform partner, Increase, and launched our first program through that partnership with RAMP, the corporate card and spend management fintech. We are providing payment services to RAMP's bill payment offering for about 30% of their customers currently and are now processing between $8 to $10 million a day in daily volume. We also have two other fintechs, a payroll provider and a neobank in the pilot phase, and we have four more fintechs that are approaching the pilot phase and one in due diligence. We are also vetting new opportunities with INCREASE on a weekly basis. We also expect our other partnership with the platform Treasury Prime to be fully implemented through the first quarter of 23, with the first FinTech partner to be onboarded in the second quarter. Similar to our partnership with INCREASE, we are looking at new opportunities regularly as we get ready to go live with Treasury Prime. To wrap up my prepared comments, this past year was a mixture of both successes and challenges. I'm proud of the business that we have built over the last two decades, and of course, there is always still work to do. We are focused on controlling what we can control to build an earning stream that is resilient to changes in the economic and interest rate environment. We have a strong balance sheet and are well capitalized, allowing us to withstand whatever challenges the economy may throw at us. Like you, we are shareholders and we are committed to continuous improvement in creating shareholder value. Before I turn it over to Ken, I'd like to thank the entire First Internet team for their hard work and commitment to both our customers and our shareholders. We have developed a culture that fosters and champions teamwork and innovation. That's why we were named one of the best banks to work for by American Banker for the ninth consecutive year And it's why I'm confident in our collective ability to identify compelling new opportunities that will further diversify our business lines, improve our funding profile, and elevate our status as a leading technology forward financial services provider. With that, I'd like to turn the call over to Ken to discuss our financial results for the quarter.