First Internet Bancorp

Good day, everyone, and welcome to the first Internet Bancorp Earnings Conference call for the second quarter of 2023. Be advised that all participant lines have been muted to prevent any background noise. After the presentation, we will conduct a question and answer session. And please note that today's conference is being recorded. I will now turn the conference over to Larry Clark from Financial Profiles, Inc. Please go ahead, Mr. Clark.

Thank you, Sylvie. Good day, everyone, and thank you for joining us to discuss First Internet Bancorp's financial results for the second quarter of 2023. 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 has included a slide presentation that you can refer to during this 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 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 for 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 the 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 second quarter 2023 results. Starting with the highlights on slide three, I would like to take a few minutes to discuss some of the key themes for the quarter. Following events that occurred in March, we responded quickly to further enhance our balance sheet liquidity. We produced strong deposit growth during the quarter, which far outpaced loan growth and drove our loan-to-deposit ratio down to below 95%. While these actions resulted in higher deposit costs and cash balances, which impacted net interest margin during the quarter, the pace of increase in deposit costs slowed to its lowest point in four quarters. and loan portfolio yields continue to rise. The yield on the new loan originations increased to 8.42% during the quarter, up 66 basis points from the first quarter. We continue to execute our strategy of optimizing loan portfolio composition through funding growth in higher yielding and variable rate lines of business with cash flows from longer term fixed rate portfolios. A notable highlight of the quarter was the performance of our SBA team which posted its highest level of quarterly gain on sale revenue to date, up 20% over the prior quarter. The team is firing on all cylinders as year-to-date originations are up 216% over the same period of 2022. For the SBA's 2023 fiscal year to date, we remain a top 10 7 program lender. The combination of repositioning the loan portfolio and delivering consistently higher revenue from our SBA business provides a foundation for us to achieve stronger earnings and profitability once deposit costs stabilize. Our capital levels remain solid with tangible common equity to tangible assets of 7.07 and a common equity tier one capital ratio of 10.10%. While we are in a much better position than many other banks related to the impact of unrealized security losses on tangible common equity, it does have an effect on the ratio. Furthermore, carrying above average cash balances, essentially an inflated balance sheet, also affects the tangible common equity ratio with no real impact to most regulatory capital ratios. Tangible common equity was also affected by our share repurchase activity as we purchased over 200,000 shares during the quarter, which allowed us to once again deliver an increase in our tangible book value per share. And finally, related to credit, I would like to remind everyone that our exposure to the office commercial real estate market is less than 1% of our total loan balances. This extremely small amount does not include any central business district exposure and is limited to suburban and medical office space. Now turning to our financial and operating results for the second quarter of 2023, we reported net income of 3.9 million and diluted earnings per share of 44 cents. Despite higher funding costs, total revenue was 24 million, down modestly from 25 million in the first quarter as the growth in SBA revenue helped to offset a decline in net interest income. Additionally, operating expenses were relatively in line with our expectations given the strong origination activity in SBA, and you can see the impact of the cost savings from existing mortgage from exiting mortgage as non-interest expense to average assets declined to 1.52%. Overall loan growth was relatively modest as growth in construction, small business lending, and consumer was offset by declines in public finance, healthcare, and single-tenant lease financing. Our construction team had another excellent quarter, originating over $115 million in new commitments and growth of over $34 million in funded balances. At quarter end, total unfunded commitments rose to $450 million, leaving us well-positioned to continue optimizing the composition of the loan portfolio. Consumer lending team also had a great quarter as the trailers, recreational vehicles, and consumer loans portfolio were up, On a combined basis, almost $14 million. We remain focused on the super prime market and have increased rates with new production coming in well above 8%. Delinquency in these portfolios remains very low as well at just four basis points. Overall credit quality remains strong as non-performing loans to total loans declined to 17 basis points. Non-performing loans declined 3 million in the second quarter due primarily to the resolution of the CNI participation loan that was partially charged off in the first quarter. In late May, we received a payoff of our remaining balance and recognized a recovery of about $200,000. With a decline in non-performing loans, non-performing assets to total assets improved to 13 basis points down from 20 basis points last quarter. Additionally, delinquencies 30 days or more were just nine basis points of total loans down from 13 basis points in March 31. Lastly, I want to provide an update on our Banking as a Service and FinDebt partnership initiatives. We are encouraged by the growth we are seeing from our existing programs. Total deposits from our Banking as a Service partners were up 86% from the first quarter and totaled $154.5 million at quarter end. Additionally, these partners generated almost $3 billion in payments volume which was just about triple the volume we processed in the first quarter. From a revenue perspective, total banking as a service fees were up 34% quarter over quarter. But more importantly, the revenue channel is becoming more durable with reoccurring revenue from oversight and transaction fees up almost 180% from the prior quarter. Our banking as a service channel is more than a promising opportunity for diversified revenue streams. We view our FinTech relationships as a vital resource for expanding our capabilities for our consumer and small business banking customers. In the second quarter, we began testing payments through the RTP network from the regional clearing house. And this month, First Internet Bank was proud to participate in the first ever transactions process through the long awaited FedNow service. These are just the latest evidence of our 25 year commitment to delivering leading edge financial solutions. Our capabilities and our entrepreneurial spirit ensure we will continue to be the bank of choice for consumers, small business, and fintech partners alike. To recap my prepared comments, there were several good things about the quarter that leave us very optimistic regarding the outlook for First Internet. From a safety and soundness perspective, liquidity is very robust, credit quality remains strong, and capital levels are solid. With the pace of the Federal Reserve rate hikes declining and perhaps nearing the terminal rate, we experienced a corresponding decline in the pace of the increase of deposit costs. This, combined with the strong and still growing performance of our SBA team and the continued improvement in our loan portfolio composition, leave us feeling very confident that once the Federal Reserve hits its terminal rate, revenue will rebound. with growth and profitability accelerating quickly once interest rates start coming down. With that, I'd like to turn the call over to Ken for more details of our financial results for the quarter.