First Internet Bancorp

Good day, everyone, and welcome to the first Internet Bancorp earnings conference call for the third quarter of 2024. At this time, 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 please note that today's event is being recorded. I would now like to turn the conference over to Ben Rutkovitz from Financial Profiles, Inc. Ben, please go ahead.

Thank you, Sylvie. Hello everyone, and thank you for joining us to discuss First Internet Bancorp's third quarter financial results. The company issued its earnings press release yesterday afternoon, and it is 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 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 Bancorp that involves 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 GAAP to non-GAAP measures. At this time, I'd like to turn the call over to David.

Thank you, Ben. Good afternoon, everyone, and thanks for joining us today as we discuss our third quarter 2024 results. We have turned in four consecutive quarters of double-digit earnings growth. and improved profitability for the company, driven in large part by the recovery in our margin and the growth in net interest income that we projected at this time last year. Our third quarter results were strong in virtually all areas. Increase in net interest income was driven by solid loan growth, a larger balance sheet, and higher yields on our earning assets, anchored by continued stabilization in funding costs. Strong growth and non-interest income was powered by continued expansion of our national SBA platform with a record gain on sale revenue. In short, the revenue side of the equation is firing on all cylinders with total operating revenue growth of over 4% compared to the prior quarter and up over 36% year over year. At the same time, our efforts to improve the risk profile of the company are also bearing fruit. The exceptionally strong deposit growth in conjunction with the ongoing and deliberate shift in our loan mix have increased our balance sheet flexibility. Our balance sheet liquidity, as measured by the loan-to-deposit ratio, is the strongest it's been in recent history. Starting with the highlights on slide three, I would like to discuss some key themes for the quarter in more detail. As a result of our continued improvement in operating performance, we report a net income of $7 million up 21 percent, and diluted earnings per share of 80 cents, up over 19 percent from the second quarter's reported results. Compared to the second quarter's adjusted results, net income was up over 12 percent and earnings per share was up over 11 percent, which, as I noted a moment ago, marks the fourth consecutive quarter of double digits earnings growth. Our earnings growth was driven by continued expansion of non-interest income and gain-on-sale revenue to complement our sustained growth in net interest income. The excess liquidity created by the robust deposit growth caused a short-term drag on net interest margin, but it provides us a great deal of balance sheet flexibility that will be useful to us over the next two quarters. On the lending side, new funded loan origination yields were 8.85%, consistent with the prior quarter. The yield on overall loan portfolio increased seven basis points from the second quarter, with deposit costs increased only one basis point. As a result, net interest income was up over 2% from the prior quarter. Furthermore, compared to the third quarter of 2023, net interest income was up 25%, and net interest margin expanded by 21 basis points on a fully taxable equivalent basis. We remain confident that net income will continue to trend higher in the fourth quarter as we experience a full quarter's impact of the September Fed rate cut on deposit costs, and we continue to improve the composition of the loan portfolio. We also expect that net interest margin will rebound as we deploy liquidity to fund both loan growth and maturing higher-cost CDs and wholesale funding. A key driver in our efforts to reposition the loan portfolio and diversify our revenue is our small business lending team, which delivered another standout quarter. The team continues to perform remarkably well, delivering strong production volume and another record quarter of gain-on-sale revenue. Compared to 20, 23 year-to-date SBA loan originations are up 35%, and sold loan volume is up almost 60%. 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 are proud to announce that we were the eighth largest SBA 7a lender in the country for the SBA's 2024 fiscal year, which ended on September 30th. Congratulations to our SBA team on another impressive quarter. The growth of our SBA business propels non-interest income, which now comprises one-third of total revenue year-to-date, compared to 25% for the comparable period last year. Bank-wide, we drove a 4% increase in total revenue over the prior quarter, our fifth consecutive quarter of revenue growth and continued improved profitability. Moving to the asset quality, our overall credit quality remains sound. despite an increase in non-performing loans during the quarter. Non-performing loans to total loans were 56 basis points, and non-performing assets to total assets were 39 basis points at quarter end. The increase in non-performers due to additions in franchise finance, small business lending, and residential mortgage. Our metrics still compare favorably to similar-sized banks. Furthermore, we have specific reserves on about 45% of the total non-performing loan balance. Net charge-offs to average loans remain low at 15 basis points and were driven primarily by SBA charge-offs. A key measure of our focus on shareholder value creation is growth in the tangible book value per share, which increased by 3.6% in the third quarter and is up almost 11% year over year. Since 2018, First Internet has grown tangible book value per share by more than 55%. We are among just a handful of banks that have grown tangible book value per share in each of the past five years, which is a testament to our prudent balance sheet management and operational discipline through some very challenging periods for the industry. Turning now to slide four, I'll spend a couple minutes discussing our lending activity during the quarter. We produced solid loan growth of 7.5% on an annualized basis for the quarter. Growth was led by our commercial lending teams, where balances were up almost 75 million from the second quarter, or 9.6% on an annualized basis. Our construction team had another solid quarter, originating over 94 million in new commitments, Late in the third quarter, 71 million of construction balances converted to investor commercial real estate due to the projects being substantially complete. And the aggregate construction and investor commercial real estate balances grew $84 million. At the quarter end, total unfunded commitments in our construction line of businesses were $515 million. As those projects progress, draws on these loans in the upcoming months, combined with the optionality to deploy excess liquidity to hold a portion of our SBA originations on our balance sheet, will play a meaningful role in the continued shift of our loan portfolio towards higher yielding variable rate loans. On the consumer side, balances were up modestly as new originations in our specialty consumer channels were offset by declines in the residential mortgage and home equity balances. We focus on the super prime borrower and our consumer lending and rates on new production remained in the mid 8% range consistent with the second quarter. Furthermore, delinquencies in these portfolios remain extremely low at under one basis points of total loans. To wrap up my comments, we continue to build off the last nine months of improving performance and delivered another solid quarter. We remain confident in the earnings momentum we have built and are excited at the end of the year on a high note. Liquidity, asset quality, and capital levels remain sound. With a continued evolution of our loan portfolio and greater revenue diversification, combined with expected declines in deposit costs following the first wave of Fed rate cuts, we believe we are well positioned to continue to achieve higher earnings and improve profitability in the fourth quarter and into 2025. Now I'd like to turn the call over to Ken, for more details on our financial results for the quarter.