First Internet Bancorp

at any time. And please note that today's conference is being recorded. I would now like to turn the conference over to Larry Clark from Financial Profiles Incorporated. Please go ahead, Mr. Clark.

Thank you, Jenny. Good day, everyone, and thank you for joining us to discuss First Internet Bancorp's financial results for the fourth quarter and full year 2023. The company issued its earnings press release yesterday afternoon, and it's available on the company's website. at www.firstinternetbankcorp.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 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 Bank Corp. 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 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 fourth quarter and full year 2023 results. The fourth quarter was notable for a multitude of reasons, but most importantly, because it showed the meaningful progress and early signs of the tangible financial benefits resulting from our efforts to transform our company and balance sheet over the past few years in order to improve returns for our shareholders. We are a little less than a month away from our 25th anniversary. And while each year brings both triumphs and setbacks, I can honestly say that 2023 was peppered with a greater variety of challenges than the rest. It was this time one year ago that we announced our decision to exit the residential mortgage business a cyclical, transactional, low multiple business. Also in 23, we managed successfully through a very challenging interest rate cycle while also navigating an industry liquidity scare. We now stand poised to benefit as Fed policy looks set to provide a helpful tailwind rather than a headwind to our business. We also effectively turned a battleship and transitioned our loan composition in favor of variable rate and higher-yielding loan products, which have helped to diversify our loan portfolio and significantly improve our interest rate risk profile. Necessary but never easy, these actions have, in the aggregate, improved our balance sheet positioning and financial results and will enable us to continue to drive improvement in our earnings and profitability. Starting with the highlights on slide three, I'd like to discuss some key themes for the quarter. As I said, we continue to transition the composition of our loan portfolio and optimize our overall balance sheet mix. We deployed some of the liquidity we had built up in the previous quarter to drive loan growth of $105 million or 2.8% during the fourth quarter. New funded loan origination yields were 8.85%, relatively consistent with the third quarter and up over 275 basis points from the fourth quarter of 2022. Additionally, deposit costs increased at the slowest pace by far in the past six quarters at just five basis points. As a result, net interest income was up 14%, and net interest margin expanded by 19 basis points relative to the prior quarter. We told you on the last quarterly earnings call that we believed net income and net interest margin had bottomed out in the third quarter, and that has proven to be the case. With our continued focus on improving the loan composition and stabilization and deposit pricing, we are confident that net interest income and net interest margin will continue to trend higher in this calendar year. Another highlight for the quarter was the performance of our SBA business. The team delivered another quarterly record of gain on sale revenue, which was up 8% from the third quarter, driven by another strong increase in both origination and sole loan volume. Our nationwide platform continues to provide growth capital to entrepreneurs and small business owners across the country, with the year-over-year SBA loan originations increasing by almost 140% from the 2022 levels. We generated over 20 million of gain on sale revenue in 2023 from our SBA loan sales, which was up 9 million or more than 80% from 2022. This increased more than offset the 5.5 million of mortgage banking revenue we earned in 2022 from our former direct to consumer mortgage business. We successfully moved away from, again, an over reliance on the cyclicality of the low multiple mortgage business in favor of a more consistent, reliable, and growth-oriented revenue stream that can deliver regardless of the interest rate environment. Our small business pipeline continues to flourish, and we remain among the top 10 most active SBA 7 lenders in the country. Solid loan growth, net interest margin expansion, net interest income growth, and non-interest income powered by record gain on sale revenue drove a nearly 10% increase in total revenues related to the prior quarter. While revenue surged, costs were held mostly in check as non-interest expense increased by less than 2% compared to the third quarter. As a result, we delivered positive operating leverage and a significant improvement in operating efficiency. Credit quality remains healthy overall with non-performing loans to total loans of 26 basis points and non-performing assets to total assets of 20 basis points a year in. Non-performing loans did increase from the third quarter due to additions in small business lending, franchise finance, and residential mortgage, but our ratios still remain well below industry averages. Additionally, delinquencies 30 days or more past due were 31 basis points of total loans, while net charge-offs to average loans remain low at 12 basis points. I would also like to remind everyone that our exposure to office commercial real estate is less than 1% of total loan balances and does not include any central business district exposure. Our capital levels remain sound with a common equity tier one capital ratio of 9.6% and the tangible common equity ratio increasing 30 basis points to 6.94% at year end. Tangible book value per share, a key measure of shareholder value creation, increased 4.7 during the quarter and is up 4.2% year over year. 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 from the start of this historic cycle of interest rate hikes that began in early 2022. We did slow the pace of share buybacks during the fourth quarter, repurchasing 40,000 shares at an average price of $18.78 per share. For the full year, we repurchased just over 500,000 shares, or approximately 5.5% of our total common shares outstanding at the start of 2023, at an average price of $18.40 per share, a discount of over 30% relative to the current stock price. Now turning to our financial and operating results for the fourth quarter of 23, we reported net income of 4.1 million and a diluted earnings per share of 48 cents in the fourth quarter, increases of 22 percent and 23 percent, respectively, from the third quarter. Total revenue was 27.2 million, up almost 10 percent from the third quarter, driven by the expansion in net interest income. Operating expenses were in line with our expectations, and non-interest expense to average assets remain low at 1.54%. We produced solid loan growth during the quarter, led by our commercial lending areas, where balances were up $98 million, or 13% on an annualized basis, and were up $287 million, or almost 11% for the year. During the quarter, we experienced growth in franchise finance, small business lending, commercial and industrial, and construction lending. This was partially offset by declines in the fixed rate public finance and the healthcare finance portfolio. Our construction team had another great quarter, originating $69 million in new commitments. At quarter end, total unfunded commitments in our construction line of business increased to $540 million, nearly double the $275 million year-end 2022, leaving us well positioned to continue shifting the composition of the loan portfolio towards higher yielding variable rate loans. Our consumer loan balances increased $10 million or 5.3% on an annualized basis compared to the prior quarter and grew by 64 million or 9% on a year-over-year basis. We remain focused on high quality borrowers while rates on new production were consistent with the third quarter and in the mid 8% range. Furthermore, the delinquencies in these portfolios remain very low at just seven basis points. And lastly, I want to provide some commentary on our FinTech partnerships program. In many respects, First Internet Bank was a FinTech itself when we launched in 1999. With a 25-year track record of innovation in financial services that has included partnerships over the years, it was out of our enduring passion to nurture new ideas that we launched our FinTech Partnership Program two years ago. The program is a source of inspiration and energy to all of us at First Internet Bank, and importantly, to our shareholders. It will be accretive to earnings in 2024. Ken will provide some more details here in just a moment. We have a dozen live programs of varying purpose and scope against the backdrop of a $5 billion balance sheet. The FinTech Partnership Program does not amount to a material part of our business today, but we intend for it to be one component of a well-diversified portfolio of business lines, many of which I have already highlighted for you today. I am a lifelong entrepreneur, and one thing I learned from my years as a tech CEO is not to oversell the pipeline. We have a healthy queue of new programs already in various stages of implementation, and our intention is to stay focused there. If some of the programs are not able to meet the requirements to go live, we may bring in a new program. But overall, we expect the number of programs to be pretty flat over the next few quarters. To wrap up my comments, we performed well in the fourth quarter and entered 2024 with momentum and confidence. From a safety and soundness perspective, liquidity and credit quality remain very strong, and the capital levels are sound. With interest rate hikes by the Federal Reserve likely now behind us, we expect deposit costs to stabilize. Combined with the continued improvement in our loan portfolio mix, the positive outlook for our SBA team, and favorable asset pricing, we should be well-positioned to achieve higher earnings and improve profitability in 2024 and beyond. A couple of final thoughts before I turn the call over to Ken. Many of you will recall that First Internet Stock, along with many other bank stocks, fell out of the Russell 2000 Index around the same time of the regional bank failures in the spring. We are keeping an eye out as we head into the reconstitution of the Russell Index this year. Of course, there are certainly no guarantees. But it is possible, given the recovery in the stock price, especially relative to the small-cap universe as a whole, that First Internet stock might again qualify for inclusion in the index. Finally, I want to personally thank our clients and the entire First Internet team, without whom our achievements this quarter and over the past 25 years would not have been possible. And with that, I'd like to turn the call over to Ken for more details on our financial results for the quarter.