First Internet Bancorp

Good day, everyone, and welcome to the first Internet Bancorp earnings conference call for the first quarter of 2023. My name is Jason, and I'll be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you'd like to ask a question, please press star one on your telephone keypad. Please note that today's event is being recorded. I would now like to turn the conference over to Larry Clark from Financial Profiles. Please go ahead, Mr. Clark.

Thank you, Jason. Good day, everyone, and thank you for joining us to discuss First Internet Bank Corp's financial results for the first quarter of 2023. The company issued its earnings press release yesterday afternoon, and it's available on the company's website. 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 Executive Vice President and CFO, Ken Lovick. David will provide an overview, and Ken will then discuss the financial results. Then we'll open 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 a reconciliation of the GAAP to non-GAAP 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 as we discuss our first quarter 2023 results. Before we walk through the financial and operating results for the quarter, I would like to start with some comments regarding the sustainability and resilience of our business in light of the stunning external events during March and the challenges faced by the banking system. You'll find these points on slide three in the earnings presentation. First, continued outflows of deposits from the banking sector during the quarter have brought deposit retention and liquidity to the forefront. Of course, Internet Bank increased deposits by $181 million, or 5.3% from year-end. Earlier in the quarter, we took advantage of consumer demand for CDs and brought in over $200 million in new CD volume, allowing us to build liquidity at pricing below forecasted increases in the Fed funds rate. The demand for CDs remained fairly strong later in the quarter as well, and we also had the opportunity to increase certain larger deposit relationships. This calculated growth allowed us to easily absorb a decline in money market balances, some of which was due to outflows to money center banks in the U.S. Treasury market. While we experienced a modest decline in deposits from mid-March to quarter end, balances have rebounded and are up $135 million thus far in the month of April. As of March 31st, nearly 75% of our deposits were covered under FDIC insurance. The percentage increases to over 80% when you exclude public fund deposits that are either insured or collateralized and other deposits under contractual agreements. Despite the volatility in the banking industry during March, on-balance sheet liquidity remained strong, and we did not need to access any additional borrowings from either the Federal Home Loan Bank or any of the new emergency facilities established by the Federal Reserve in response to the events during March. Another hot topic at the moment is office commercial real estate exposure. Within our commercial portfolio, office exposure is limited to suburban and medical offices. There is no central business district exposure. And overall, it represents less than 1% of our total loan portfolio. Our capital levels remain strong, with tangible common equity to tangible assets of 7.47%, and a common equity tier one capital ratio of 10.35% at quarter end. Our securities portfolio has not been immune from the impact of higher interest rates. However, regulatory capital ratios remain well above minimum requirements, even after adjusting for unrealized losses in the securities portfolio. We did not go all in on buying securities back in 2020 and 2021 with excess liquidity when rates were an all-time low. As a result, total unrealized security losses only represent 13.3% of our tangible shareholder equity at quarter end. Furthermore, tangible book value per share was relatively stable at $39.43. This brings me to our financial and operating results, which are highlighted on slide four of the presentation. For the first quarter, 2023, we reported a net loss of 1.3 million and deleted loss per share of 14 cents. The loss for the quarter can be largely attributed to two events. First, we had a partial charge off of a $9.8 million commercial and industrial loan based on events we learned of after the end of the quarter. The partial charge off was $4.7 million, which amounts to a per share impact of $0.41. I will come back to this loan and to credit quality generally in just a moment. Our results for the quarter also include 3.1 million of mortgage operations and exit costs and about 100,000 of mortgage banking revenue. In January, we announced our plan to exit this line of business. We have completed substantially all originations that were in the pipeline and costs associated with winding down the line of business were generally in line with our guidance and had a per share impact of 26 cents. Adjusted for these two discrete items, net income was $4.8 million and earnings per share were $0.53, which was in line with analysts' expectations. In terms of our core operation, the performance for the quarter reflects the execution of our strategy we discussed last quarter. First, we focused on controlling what we can control, and so we looked to expenses. Excluding mortgage costs, operating expenses across the organization declined 3.3% from fourth quarter of 2022. We have also focused on positioning the loan portfolio to generate increased revenue in future periods. With variable rate lending in construction, investor commercial real estate, and SBA. And higher yielding fixed rate lending in franchise finance and consumer lending. During the quarter, the weighted average yield on new fund originations was 7.76%, which was up 161 basis points over the fourth quarter of 2022. As the composition of the loan portfolio continues to migrate towards a more favorable mix of variable rate and new production at higher rates, we continue to believe that we will be well positioned to achieve higher earnings and profitability in future quarters once the Federal Reserve hits its terminal debt funds rate. Commercial loan balances were up $89 million, or 3.3%, compared to the prior quarter as cash flows from longer-term fixed-rate products were redeployed to support growth in franchise finance, small business lending, and construction and investor commercial real estate. Consumer loan balances increased $23.1 million, or 3.1%, compared to the prior quarter as trailers, RV, and other consumer loan production remained solid despite the higher interest rate environment. With regard to asset quality, I would like to provide some more color around the CNI loan that we partially charged off. This particular account is a participation through a program we have been a part of for about nine years that allows smaller banks access to the leveraged loan market. Historically, these loans have performed exceptionally well for us with only about 20 basis points of cumulative losses over the nine-year period up to this point. This loan began to demonstrate some weaknesses and was moved to non-accrual status late in the first quarter. Our credit team is highly engaged with the program manager on resolution strategies the borrower and the lending group are evaluating. Subsequent to quarter end, we were made aware of developments related to these resolution efforts, that made it clear, in our opinion, the loan was impaired, which resulted in a partial charge-off. Through this program, we had only $11.8 million of other loans in addition to this credit outstanding a quarter in, $2 million of which has been paid off in full in April. The remaining credits are performing well, and we see no signs of potential problems on the horizon. Despite the developments on this particular loan, our overall levels of non-performing loans, two total loans, of 32 basis points to non-employment assets to total assets of 24 basis points are still relatively low compared to the rest of the banking industry. Furthermore, delinquencies 30 days or more past due declined during the quarter at 13 basis points, while net charge-offs, excluding the effect of the partial C&I charge-off, remained low at three basis points of average loan balances. To wrap up the credit discussion, I want to emphasize that we believe that participation credit discussed earlier is an isolated incident within our portfolio. The less than $15 million now outstanding loans from this program represent a very small portion of our portfolio and, again, have historically performed extremely well. Speaking to our credit standards generally, our disciplined underwriting standards have remained consistent over time, regardless of market conditions. We remain confident in the high quality of our loan portfolio as evidenced by the continued low levels of delinquency and net charge-off. Turning back to the operating highlights, our SBA team had an outstanding quarter, posting its highest level of quarterly gain on sale revenue to date, which was up over 40% compared to the prior quarter on increases in both sold loan volume and net gain on sale premiums. Our SBA pipeline has continued to build, which is a testament to the high-performing team we have put together, and it leaves us confident that we will achieve the growth targets we have set for them. Lastly, I want to provide an update on our banking as a service and 10-deck partnership initiatives. Programs that were in pilot are now live and gaining momentum. We have a dozen programs either live or preparing to go live when their platform partners increase. From the total deposit standpoint, we now have over $80 million of banking as a service deposit. Program fees contributed $125,000 to non-interest income during the quarter will grow as more programs go live on the platform. Additionally, our partnership with the platform Treasury Prime continues to move forward. 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, I want to reiterate that we are focused on controlling what we can control to build an earnings stream that is resilient to changes in the economic and interest rate environments. We have a strong balance sheet, well capitalized, allowing us to withstand the challenges of an uncertain economy. Like you, members of the board and the bank's senior leadership team are shareholders. We are committed to improvement in our financial performance in order to create shareholder value. With that, I'd like to turn the call over to Kim for more details of our financial results for the quarter.