First Internet: 3Q Earnings Snapshot | Journal Review

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All participants will be in listen-only mode. Now, I'd like to turn the conference over to Mr. Larry Clark from Financial Profiles Inc.

First Internet Bancorp (INBK) Q3 2020 Earnings Call Transcript

Please go ahead, Mr. Good day everyone and thank you for joining us to discuss First Internet Bancorp's financial results for the third quarter of The company issued its earnings press release yesterday and is available on the company's website at www. 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. David will provide a company update 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 conditions 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.

First internet earnings factors price action in binary options trading discussed in the company's SEC first internet earnings which are available on the company's website.

The company disclaims any obligation to first internet earnings any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures, which are intended to supplement, but not substitute 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. At this time, I'd like to turn the call over to David. David B. Good afternoon everyone and thank you for joining us today. We are very pleased with our third quarter results. Despite the challenges created by the COVID pandemic, we delivered record net income and earnings per share driven by strong revenue growth, net interest margin expansion, and moderate loan growth.

Our significant earnings growth in this low interest rate environment demonstrated the power of our business model and the increasing diversity of our revenue streams. Ongoing favorable deposit repricing opportunities drove our interest costs lower, enabled our fully taxable equivalent net interest margins to expand by 17 basis points this quarter.

Additionally, our asset quality metrics remain strong, among the best in the industry, driven not only by our strong credit culture and disciplined approach to underwriting, but also by our focus on certain specialty lending minds that target lower risk asset classes such as our public finance, single tenant leasing, and healthcare finance businesses.

During the quarter, non-performing loans and net charge-offs remained low and we continue to build reserves. We also continue to see a significant reduction in loan deferrals.

First Internet: 3Q Earnings Snapshot

We are proud to have supported our customers in their time of need and are pleased that nearly all have been able to return to their normal payment schedules in such a short order. Finally, our record earnings allowed us to further strengthen our capital base, which remains one of our near-term strategic priorities.

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Historically, low mortgage rates continue to fuel robust demand in markets across the country and our mortgage banking pipeline remained strong heading into the fourth quarter. Our SBA business gained additional traction during the quarter as the accelerated build-out of our national SBA platform resulted in increased loan production and higher gain on sale revenue.

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Our near-term pipeline is robust and we look forward to further driving revenue in the quarters to come as we continue to grow, this government guaranteed lending business and the economy adapts to and recovers from the pandemic and as more small business and entrepreneurs seek financing to grow. As we have discussed in prior quarters, we are confident there is enormous potential in this phase with attractive opportunities on both sides of our balance sheet.

Over the last couple of quarters, first internet earnings capitalized on disruption among some SBA competitors and added sales and operations personnel to our already strong team of first internet earnings. We brought on talent, expertise, and depth that will help drive originations well beyond our initial forecast for and I am proud to announce that we have exceeded those expectations.

And note that these amounts do not include loans funded under the Paycheck Protection Program. I want to take a moment to recognize that less than two years ago, our SBA operation was in its infancy. Now, we are well on our way to building a leading first internet earnings platform.

I am very proud of what we have achieved so far in the small business lending and look forward to becoming a leader in providing financing for the small business and entrepreneurs across the country. With regard to credit, our asset quality remains strong and we are cautiously optimistic about the remainder of and into next year.

Of course, the pandemic continues to create uncertainty.

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We are monitoring our loan portfolio very closely and working first internet earnings our clients to help them navigate challenges related to this ongoing public health crisis. This is the right thing for us to do and it is also good for the bank as we are deepening our connections with existing clients and creating strong relationships for the long-term.

That being said, we are very encouraged by the fact that nearly all of our borrowers we offered loan deferral programs to have resumed making their normal monthly payments.

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We believe this speaks to the quality of our loan portfolio, particularly our focus on lower risk asset classes and our disciplined underwriting approach.

As we move into the final months of and look ahead towe are confident about our prospects in the strength of the franchise. While the pandemic presented everyone in the banking industry challenges, our digital business model enabled us to serve our customers with minimal interruption and remain focused on our core lines of business as well as earnings growth and profitability.

As always, I'd like to thank the entire First Internet team for their hard work and unwavering dedication to excellent customer service, delivering record revenue and earnings performance during these challenging times. We appreciate their flexibility and cooperation to work remotely over the last several months and we are pleased that as of October 1st, we are able to welcome back the vast majority of our employees who have been working remotely to our corporate headquarters in Fishers.

Finally, First Internet was recently recognized with the seventh consecutive year in The Indianapolis Star's Top Workplaces in Central Indiana list, placing in the top 10 in the medium-sized company category. We're proud of the sound culture and workplace environment that we have created. And with that, I would like to turn the call over to Ken to discuss our financial results for the quarter. Kenneth J. As David mentioned, we were very happy with our results for the third quarter delivering record revenue, net income, and earnings per share.

We generated these strong results on a relatively flat balance sheet during the quarter, which is consistent with our disciplined balance sheet management strategy. Our business model emphasizes capital efficiency in increasingly diverse revenue streams that drive increased profitability and our third quarter results reflect solid execution on this plan. Now, let's turn to details of our performance for the quarter. Profitability improved significantly with return on average assets of 78 basis points and return on average tangible common equity of Adjusting for the writedown of OREO, return on average assets was 93 basis points and return on average tangible common equity was This growth was partially offset by lower public finance and single tenant lease financing balances due to portfolio amortization, decreased origination volumes, and the sale of single tenant lease financing loans during the quarter.

We continue to see healthy demand for our loans and are selling many of them to repeat investors. Moving on to deposits on Slide 6, while overall deposit balances were relatively flat from the end of the second quarter, we saw continued improvement in the composition of the deposit base with growth in money market balances, interest and non-interest bearing demand deposits, and savings accounts, which was first internet earnings offset by a large decline in CDs and brokered deposits.

This activity drove our cost of interest-bearing deposits 43 basis points lower in the quarter and we believe that we still have a long runway ahead to reprice deposits lower. Turning to net interest income and first internet earnings interest margin on Slides 7 and 8, net interest income and net interest margin on both a GAAP and a fully taxable equivalent basis showed strong improvement compared to last first internet earnings with lower deposit costs driving the increase.

Interest income from the loan portfolio was relatively stable as higher average loan balances offset a modest decline in overall loan yields. As you can see from the net interest margin bridge on Slide 8, the securities portfolio had the largest negative impact on margins during the quarter as continued declines in first internet earnings rate indices impacted variable rate securities and increased prepayment speeds resulted in accelerated premium amortization, 100 percent option affected yields on mortgage-backed securities.

With regard to the impact of elevated cash balances on net interest margin, you will see on the roll forward the cash only negatively impacted the quarterly change by 1 basis point.

First Internet Bancorp (INBK) Q3 Earnings and Revenues Surpass Estimates

However, we like many other banks have experienced excess liquidity for several quarters now. In terms of how these balances are truly impacting margin, when we adjust for a more normalized level of cash, we estimate that excess cash is negatively affecting margin by about 13 basis points.

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We are pleased to have reached an inflection point in our net interest margin and expect the upward trend to continue next quarter and throughout The increase was driven primarily by the record revenue for mortgage banking activities and increased gain on sale of loans, which was due mainly to a higher amount of SBA 7 a guaranteed loan sales in the quarter as well as first internet earnings sale of the single tenant lease financing loans that I first internet earnings earlier.

Mortgage banking revenue benefited from strong mandatory lock activity and higher margins as well as increased best efforts revenue unsold production. While we expect mortgage revenue to remain strong in the fourth quarter, we are not first internet earnings it to be at the record level we generated in the third quarter.

These pending sales coupled with new origination and sale activities should drive increased fee revenue on this line of business in the fourth quarter.

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Looking forward intowe are conservatively forecasting lower mortgage revenue as compared to performance thus far.