First Internet Bancorp

Good day, everyone, and welcome to the first Internet Bancorp earnings conference call for the first quarter of 2024. At this time, note that all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. And if at any time during this call you require immediate assistance, please press star zero for the operator. And I would like to turn the conference over to Larry Clark from Prevention 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 first quarter of 2024. 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 discuss the financial results. Then we'll open the call to your questions. However, 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 in the 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 measure. 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 first quarter 24 results. Those of you who regularly attend these meetings will recall that two quarters ago, we called the bottom. In late October, we predicted the third quarter of 2023 would mark a low point for net interest margin and net interest income. We also estimated net interest margin would turn higher from there, regardless of whether or not and at what pace the Federal Reserve chose to start reducing short-term interest rates. Since then, and despite ongoing uncertainty around the future monetary policy and continued volatility in long-term rates, we have now reported two consecutive quarters of strong earnings growth and improved profitability, driven in a large part by the recovery in our margin and growth in net interest income that we had projected. This quarter's results continue to demonstrate the meaningful progress we've made repositioning the loan portfolio and optimizing our overall balance sheet mix while keeping deposit costs in check and improving our interest rate risk profile. Starting with the highlights on slide three, I'd like to discuss some of the key themes for the quarter. As I just noted, we continue to transition the composition of our loan portfolio and optimize both sides of the balance sheet. We experienced strong deposit growth during the quarter and deployed a portion of the liquidity to drive net loan growth of $70 million, or over 7% on an annualized basis. New funded loan origination yields were 8.84%, consistent with the fourth quarter of 2023, and up 108 basis points from the first quarter of 2023. The yield on the overall loan portfolio increased 23 basis points, From the fourth quarter of 2023, deposit costs only increased 11 basis points. As a result, net interest income was up almost 5%, and fully taxable equivalent net interest margin expanded by 7 basis points over the prior quarter. Since the third quarter of last year, when we believe those metrics hit their low, net interest income has increased by 19%, and net interest margin has expanded by 27 basis points. With our emphasis on improving the composition of the loan portfolio and stabilizing deposit prices, we remain confident that net interest income and net interest margin will trend higher for the remainder of this year, which is consistent with the guidance we issued in January. Notably, as a reminder, Our estimates do not reflect any expectation for short-term rate cuts by the Federal Reserve this year. Another highlight for the quarter was the performance of our SBA business. Despite the seasonally lower SBA activity in the first quarter of the year, the team continued to perform exceptionally well, delivering solid production and another record quarter of gain on sale revenue. Compared to the first quarter one year ago, SBA originations and sold loan volume were up 27% and 55%, respectively, demonstrating the tangible results of the investment we have made in providing growth capital to entrepreneurs and small business owners throughout the country. Our small business pipeline continues to flourish, and we remain among the top 10 most active SBA 7a lenders in the country. Congratulations to our SBA team on another standout quarter. It is the combination of all of these efforts, solid loan growth, net interest margin expansion, net interest income growth, and non-interest income powered by record gain on sale revenue that drove a nearly 7% increase in our total revenue over the prior quarter. For revenue expansion, and only moderate expense growth, generally driven by the typical annual reset on employee benefit costs and merit pay increases, we delivered a second consecutive quarter of positive operating leverage and continued improvement in operating efficiency. Credit quality remains healthy overall, with non-performing loans to total loans at 33 basis points and non-performing assets to total assets at 25 basis points at quarter end. Non-performing loans did increase from the fourth quarter, due primarily to additions in small business lending and, to a lesser extent, legacy residential mortgage. But our ratios continue to compare favorably to the rest of the industry. Furthermore, net charge-off to average loans remained low at just five basis points. We also saw an increase in delinquencies 30 days or more past due, which totaled 53 basis points of total loans a quarter in. The increase during the quarter is due primarily to an increase in delinquencies in small business lending and franchise finance portfolios. Some of this was simply due to the timing of payments. Subsequent to quarter end, a number of these borrowers have become concurrent on their payments, and as of today, those delinquencies have declined to 32 basis points in total loans. As it relates to current industry concerns around office real estate, I'd just like to remind everyone that our exposure to office commercial real estate remains at less than 1% of our 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 9.52%. Tangible common equity ratio of 6.79% at quarter end. Tangible book value per share, a key measure of Shareholder value creation increased 1% during the quarter and is up 6.6% year over year. As a further example of the value we have created for shareholders since 2018, First Internet has grown tangible book value per share by nearly 50% compared to an average of 33% for all publicly traded banks during that time period. We are among just a small handful of banks that have grown tangible book value per share in each of the past five years, which is also in part a testament to our prudent balance sheet management and operational discipline through a very challenging period for the banking industry. As a result of our continued improvement and operating performance, we reported net income of $5.2 million, up 25%. and diluted earnings per share of 59 cents, up 23% from the fourth quarter of 2023. This was the second consecutive quarter of earnings growth in excess of 20%. Let me now take a couple minutes to discuss our lending activity during the quarter. Turning to slide four, we produced solid loan growth during the quarter, led by our commercial lending teams, where balances were up 75 million from year end or 10% on an annualized basis. We generated growth in construction, small business lending, and franchise finance. This was partially offset by declines in the fixed rate public finance and the healthcare finance portfolios. Our construction team had another solid quarter originating 90 million in new commitments. Additionally, funding construction loans increased 24% on a late quarter basis as borrowers drew on existing lines to fund their projects. At quarter end, total unfunded commitments in our construction line of business increased to $552 million, up from $540 million at the end of the fourth quarter, leaving us very well positioned to continue shifting the composition of the loan portfolio towards higher yielding variable rate loans. On the consumer side, balances were down modestly as expected declines in residential mortgages were partially offset by production in our specialty consumer channels, which is traditionally lower during the winter months. We focused on the super prime borrower in our consumer lending, and rates on new production were consistent with the prior quarter and in the mid-8% range. Furthermore, delinquencies in these portfolios remain low at just eight basis points of the total loans. Before I turn the call over to Kidd to cover deposits and more detail, I want to provide an update on our FinTech partnerships. Not long after I launched First Internet Bank 25 years ago, we entered into our first partnership program, recreational vehicle lending, a channel that continues to grow long-term customer relationships with outstanding credit quality and favorable yield. Over the years, we forged additional partnerships. Some of our initiatives, like the one delivering on-demand payments to workers in the gig economy drove innovation, while others helped establish entities like our home state's Department of Revenue, lower processing costs, and build out online delivery channels. Still other partnerships have provided necessary growth capital to underserved markets with niche partners that know their target audience well, bringing to us loan growth with acceptable yields and excellent credit quality. without the cost of supporting in-house origination teams. As anyone who has ever paid for coffee with an online wallet, or used a P2P app to split the dinner bill, or carried an affinity card to earn miles or reward points will tell you, partnerships are vital to the evolution of financial services. And First Internet Bank is proud of the role we have played in this financial services arena for the past 25 years. As I noted last quarter, we currently have a dozen live programs of varying purpose and scope and several other programs that are in various stages of implementation. As our attention is focused on bringing these programs live, we did not add any new programs during the quarter. However, we did activate a new service channel for one of our more significant partners, which provided a sizable increase in quarterly FinTech revenue. Ken will provide more details on that in just a moment. I want to temper your expectation. We are not forecasting revenue to continue to grow at that same rate in the remaining quarters of this year. However, the additional reoccurring revenue from this service channel will enable us to hit our forecasted FinTech revenue for the year, which we expect will be almost three times the amount we recognized last year. To wrap up on my comments, we delivered improved performance in the first quarter and look forward to the rest of the year with confidence. Furthermore, liquidity and credit quality remain strong and capital levels are sound. With the continued evolution of our loan portfolio mix, the positive outlook for our SBA team, and stabilized deposit pricing, we believe we are well positioned to continue to achieve higher earnings and improve profitability for the remainder of 2024 and beyond. To touch on a topic I covered last quarter, many of you recall that First Internet Bank stock along with many other stocks, fell out of the Russell 2000 Index around the same time as the regional bank failures in the spring. As we head into the reconstitution of the Russell Index later this quarter, we are keeping an eye on where the estimates of minimum market capitalization are being reported. While there are certainly no guarantees with a recovery in the stock price over the last six months, especially relative to the small-cap universe as a whole, We remain optimistic that First Internet stock might again qualify for inclusion in the index. Finally, I want to personally thank the entire First Internet team for the dedication to our clients and their contributions to our strong results. Our team's talent and commitment to constant improvement give me great confidence in the future of First Internet and our long runway of opportunities ahead as a premier technology-forward digital financial services provider. With that, I'd like to turn the call over to Ken for more details on the financial results.