First Internet Bancorp

Good day, ladies and gentlemen, and welcome to the first Internet Bancorp Third Quarter 2023 earnings conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded today, October 26, 2023. I will now like to turn the conference over to Larry Clark from Financial Profile, Inc. Please go ahead, Mr. Clark.

Thank you, Sergio. Good day, everyone, and thank you for joining us to discuss First Internet Bank Corp's financial results for the third 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 Levin. 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 four looking statements with respect to the future performance and financial condition of First Internet Bank Corp 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 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 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 as we discuss our third quarter 2023 results. Starting with the highlights on slide three, I would like to discuss some key themes for the quarter. We generated strong deposit growth during the quarter, bolstering our liquidity profile and driving down our loan to deposit ratio below 92%. We also continued to transition the composition of our loan portfolio and optimize our overall balance sheet mix. As new origination yields were up 50 basis points from the second quarter to 8.92%, and they're up over 360 basis points from the third quarter of 2022. At the same time, both the pace of deposit cost increases and the rate of compression in our net interest margin were the slowest they've been in five quarters. Moreover, while one month does not make a trend, we were encouraged by the month-over-month increase in our net interest margin in September. Recognizing that macroeconomic and geopolitical factors remain outside of our control, we continue to believe that our net interest margin and overall net interest income have likely bottomed out and will follow an upward path from here. Another highlight for the quarter was our SBA team's continued outstanding performance. The team again posted its highest level of quarterly gain on sale revenue to date, which was up over 14% from the second quarter, driven primarily by a strong increase in the sold loan volume. Following our exit from the consumer mortgage business earlier this year, our mix in non-interest revenue has shifted from what was an over-reliance on the cyclicality of the low multiple mortgage business to what we believe is a more consistent, reliable, and growth-oriented revenue stream regardless of the interest rate environment in SBA. Our nationwide SBA team is doing a great job of providing growth capital to entrepreneurs and small business owners across the country. With year-to-date originations up 165%, over the first nine months of 2022. I am especially proud to announce that for the SBA's physical year ended September 30th, 2023, we were the ninth largest 7 program lender in the country. This is a notable increase from our ranking of 27th position in the prior physical year. We believe that the combination of our continued loan portfolio repositioning and consistent revenue growth from our SBA business positions as well for higher earnings and profitability as deposit costs stabilize. Our overall credit quality remains strong as non-performing loans to total loans declined to 16 basis points and non-performing assets to total assets declined to 12 basis points. Additionally, delinquencies 30 days or more were 22 basis points of total loans, while net charge-offs to average loans remained low at 16 basis points. And again, I would like to remind everyone that our exposure to office commercial real estate is less than 1% of our total loan balance and does not include any central business district exposure. Our capital levels remain sound with a common equity tier one capital ratio of 9.59% at quarter end. Our deposit growth resulted in carrying above average cash balances, which we think is prudent to do in the current environment. The impact of higher interest rates also contributed to an increase in the accumulated other comprehensive loss that runs through equity. These factors weighed on the tangible common equity ratio. However, our regulatory capital ratios at both the company and bank levels remain well above minimum requirements. Tangible common equity was also affected by our share repurchase activity, as we repurchased nearly 100,000 shares during the quarter. at an average price equating to less than half of our tangible book value per share. I would also like to point out that the prudent, conservative management of our investment portfolio and overall balance sheet has resulted in First Internet being among the few banks to have grown tangible book value per share, a key measure of shareholder value creation from the start of this historic cycle of interest rate hikes at the beginning of last year through the end of the most recent quarter. Now turning to our financial and operating results for the third quarter of 2023, we reported net income of $3.4 million and diluted earnings per share of 39 cents. Despite higher funding costs, total revenue was $24.8 million, up from $24 million in the second quarter as the growth in SBA revenue helped to offset a decline in net interest income. Additionally, operating expenses were in line, With our expectations, given the strong origination and activity at SBA, and our non-interest expense to average assets was relatively flat at 1.53%. We produced a healthy 9.6% annualized rate of overall loan growth, with gains in franchise finance, construction, small business lending, and consumer. These were offset partially by declines in public finance, health care finance, single tenant lease financing, and investor commercial real estate. As a reminder, the shift in loan mix is the result of a strategic initiative to focus on variable rate, higher yielding products during a historic, rapidly rising interest rate. Our construction team had another strong quarter, originating almost 180 million in new commitments and producing growth of nearly 60 million in funded balances. At quarter end, total non-unfunded commitments in our construction line of business increased to $527 million, leaving us well-positioned to continue shifting the composition of the loan portfolio towards higher-yielding variable rate loans. Our consumer lending team also had another solid quarter as the trailers, recreational vehicles, and other consumer loan portfolios were up on a combined basis over $17 million. We remain focused on high-quality borrowers and continue to obtain rates on new production in the mid-8% range. The in these portfolios remain low, as well, at just one basis point. And lastly, I want to provide an update on our banking as a service and FinTech partnership initiatives. In the third quarter, we announced a new relationship with JARIS, a leading financial technology provider of fully managed commercial financial solutions for small businesses. Initially, we will provide loan origination services for a large portion of their short-term working capital lending product offered to the client base. We are very impressed with the JARIS team and excited about the opportunity. This partnership will enable us to further increase our goal of providing small business owners and entrepreneurs access to capital while maintaining the highest compliance and credit quality standards. It is emblematic of the potential we see for banks and fintechs to partner for positive customer outcomes. In conclusion, our third quarter results provide us with optimism regarding the outlook for our business. From a safety and soundness perspective, liquidity and credit quality remain very strong and capital levels are sound. With the Federal Reserve rate hikes likely nearing an end, we expect to see a continued decline in the pace of deposit cost increases and eventually stabilization. This, combined with the strong performance of our SBA team and the continued improvement in our loan product portfolio composition, leaves us well positioned to achieve higher earnings and profitability as we look to 2024 and beyond. With that, I'd like to turn the call over to Ken for more details of our financial results for the quarter.