First Internet Bancorp
Q1 2021 Earnings Call Transcript

Published: 23 Apr 2021

[Operator:]

Good day, everyone, and welcome to the First Internet Bancorp Earnings Conference Call for the First Quarter of 2021. . Please note that today's event is being recorded. I would now like to turn the conference over to Larry Clark from Financial Profiles, Inc. Please go ahead, Mr. Clark.

[Larry Clark:]

Thank you, Cary. Good day, everyone, and thank you for joining us to discuss First Internet Bancorp's financial results for the first quarter of 2021. The company issued its earnings press release yesterday afternoon and it's 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.

[David Becker:]

Thank you, Larry, and good afternoon, everyone. Thanks for joining us today. We are very pleased with the first quarter financial performance. We produced strong earnings, solid momentum to start 2021. Driven by net interest margin expansion, continued healthy production in our direct-to-consumer mortgage business and strong credit performance. Growth in net interest income, combined with our strategies to build sustainable fee revenue paid off as we generated an average return on assets of 1.02% for the second straight quarter and strengthened our capital base, increasing our tangible common equity to tangible assets ratio by 43 basis points to just over 8%. We delivered these solid results while the pandemic continued to impact certain sectors of the economy. Families and businesses are gradually returning to the routines, and in many cases, to a new normal way of life. Our unique workplace culture promotes innovation, collaboration and customer focus, collectively guiding us forward. Our technology-enabled workforce was uniquely positioned to adapt to the changes of the past year, while maintaining operations at the highest level, serving our customers and supporting one another. Despite the historically low interest rate environment, we generated a significantly improved net interest margin. This was a key highlight of the quarter. We did this through a combination of higher-than-average loan yields and low average deposit costs. The higher yields were due in part to our ongoing pricing discipline, the benefits of having diversified loan origination channels is that we do not have to chase rates down while we are at the bottom of the interest rate cycle. We do continue to look for growth opportunities to capitalize on, however, any new opportunities we explore must provide a strong risk-adjusted return that enhances profitability and earnings. As you know, we have been proactively managing our deposit costs lower as we allow higher cost CDs and broker deposit balances to decline. We are placing them with much more attractively priced money market accounts and lower rate CDs.

[Kenneth Lovik:]

Thanks, David. As David mentioned, we were very happy with our performance for the first quarter, delivering near record revenue, net income and earnings per share. We generated these strong results with a relatively stable balance sheet during the quarter, which is consistent with our focus on improving profitability through net interest margin expansion, diversified fee income and deploying capital in an efficient manner. Our financial results for the quarter continue to reflect solid execution of this plan.

[Operator:]

. The first question will be from John Rodis with Janney.

[John Rodis:]

The comments on the mortgage business, obviously, you sort of changed the language from strong in the near-term to solid. And I guess my question is, either David or Ken, do you think -- I get mortgage being down year-over-year, but do you think the first quarter is going to be the highest quarter for the year? Or do you think you might see some -- seasonally a little bit stronger in the second quarter?

[David Becker:]

I think it'll run its normal seasonal patterns, John, I think, second quarter and third quarter should be high. Fourth quarter, we could go back to the real seasonal pattern of kind of falling off between Thanksgiving and Christmas. The real issue out of here right now is just availability of housing. A couple of weeks ago, there was an article put out that there are more real estate agents in the United States than there are houses for sale. I mean, it's just -- it's unbelievable. And one of our finance guys here that, back-end, is up for the call, he's scrambled for 3 months to try and find a house and had to actually find a house that was not on the market yet from realtor to be able to buy it. So it's really a focus of the market. As Ken and I both stated, I think the refi game is down, new home activity is up, and actually permits -- and we track it kind of here in our local community, not on a national basis, but I think permits here, Central Indiana, new housing permits were up 33% over what they were at this time last year. So it really is a supply demand issue right now that's impacting the market.

[John Rodis:]

Okay. Makes sense. And then, Ken, one other question on the tax rate, it dipped back down to about 15% this quarter. How should we think about that going forward?

[Kenneth Lovik:]

Yes. There were a couple of factors there. First of all, it's just, pretax income was down quarter-over-quarter and probably one of the factors that drove it up at the end of last year was obviously the strong mortgage revenue and the strong SBA revenue, which carry a fully baked tax rate on that. Those numbers were down a bit. And we've made some adjustments to our state tax accrual as well, the rate for interstate taxes. So I think probably a good number with SBA coming back and mortgage remaining solid is probably somewhere in that 15% to 17% range.

[John Rodis:]

15% to 17%. Okay.

[Operator:]

The next question is from Michael Perito of KBW.

[Michael Perito:]

I wanted to just start -- I was wondering, Ken if maybe -- I appreciate the kind of the broader guidance comments on margin and the ROA, and obviously, we could figure some of the numbers out of ourselves. But I was just wondering if you had a better sense of where kind of the exit NIM was at the end of the first quarter in March, maybe just to kind of give us a sense of the direction that we could possibly be seeing near term here?

[Kenneth Lovik:]

Yes. I'll tell you. In March, it was really strong, but we did -- I will say we did have a fairly high amount of prepayment fees in there as well. So it was probably a little bit higher than kind of what a run rate would look like. But I think by the end of -- by fourth quarter, I think we feel pretty good that we'll probably be in the range of, say, 2.40% on net interest margin. And I think we're probably -- you're probably looking at a 5 to 10 basis point increase on a quarterly basis throughout the end of the year.

[Michael Perito:]

Got it. So certainly, that makes the target of staying above 100 on the ROA, a lot easier to achieve...

[David Becker:]

Yeah, absolutely. Obviously, improving NIM combined again with just the enhanced fee revenue, it creates a very easy pathway for us to maintain that 1% ROA.

[Michael Perito:]

Got it. And then a couple of bigger picture questions. I think we've always been asking you guys about the plan to build capital for the last 2, 3 years now. And I'm glad to ask this question differently now. I mean, as you get towards 9% on the TCE, I guess where is kind of the dam or the breakpoint where maybe the capital posture changes a little bit, whether that's maybe being open to little balance sheet growth or maybe looking at other items like repurchases or what have you? I mean, how do you guys think about this evolving capital story? I mean, clearly, you guys are really making a nice movement here to build. And I'm just curious how you think about that. And at what point do we think -- should we maybe be thinking about you guys doing things a little bit differently versus kind of the capital preservation mode you've been in for the last couple of years here?

[David Becker:]

Everybody is looking at me here, Michael. I would tell you, we're looking at stuff on a daily basis. And right opportunities come along, we definitely take advantage of them. As in the last couple of calls, there's been some question about repurchasing shares, that's not on the horizon. The game plan would be to put the excess capital to work. And we've got a couple 2 or 3 opportunities we're working on, that can do that seriously between here and year-end. So we want to stay -- we've always tried to stay above that 7% range. I think we're getting a little more comfortable trying to hold it into 8% or thereabouts. But yes, definitely, we get up to 9% to 10%, so we're going to put it to work.

[Michael Perito:]

And when you say opportunities, is that -- that hiring people is that, that would drive more balance sheet growth? Is that maybe...

[David Becker:]

Balance sheet growth. Balance sheet growth. We're pretty well set internally. We still have some things to do with the SBA team, but the rest of the organization, we staffed up in the latter half of 2020. So we're pretty solid across the mine with a couple more additions in the SBA team.

[Michael Perito:]

Got it. And then obviously, the first quarter, I think, was, from a valuation perspective, one of the better quarters you guys have seen some time now. And as we think about trying to keep this momentum going here, I feel like the digital disruption in the banking sector continued to be elevated, right? And I mean, I imagine you guys are spending time thinking about how to kind of keep your customers engaged, especially your consumer deposit customers engaged in your mobile app and what have you? And is there any thought being -- or resources being spent to kind of expand the product roadmap on the mobile banking side? I mean, when you see some of these other kind of digital disruption business models adding things like robo-advisers or Nest Egg or stuff like that, I mean, is there any kind of thoughts you're willing to share about how you're thinking about the product roadmap on the consumer deposit banking side at this point?

[David Becker:]

Yes. We're quite honestly, looking at all of that stuff. We have some internal things that we're working on, some external partners that we're -- we have conversations with on a daily basis. Our roadmap, if you could get a hold of our CTO, he would tell you he's got 40 more projects than he can handle in the next 12 months, but it keeps him busy and keep him out of trouble. So we're looking at both the consumer side of things as well as small business. There's a lot of things we still think we can do to make our small business product even more attractive than it is today. So we're spending a lot of time and money looking at both sides of that equation.

[Operator:]

Next question is from Nathan Race with Piper Sandler.

[Nathan Race:]

Going back to the kind of outlook for the balance sheet growth over the near term, I understand that's kind of the main avenue you guys are looking to deploy excess capital to some extent over the next few quarters. So just kind of thinking about the margin outlook expanding further from here, how should we kind of think about just the overall earning asset base side? And should we just expect the average balances of excess liquidity to continue to come down over the next few quarters and just see that mix improvement to also support the margin or how should we kind of just be thinking about loan growth and the size of the securities portfolio going forward?

[Kenneth Lovik:]

Well, I think probably from an overall perspective, you probably see mid-single-digit type balance sheet growth. But again, if you look at the balance sheet, you'll see that we have quite a bit of cash on hand. I know a lot of other banks are experiencing the same issue as us. And -- but really, I think we can grow the loan portfolio without necessarily growing the balance sheet at a higher than average rate. It's just putting cash to work, whether it's cash on hand or the securities portfolio continues to spit off a fair amount of cash. So I think we'll continue to see earning asset growth. I would say the one wildcard on that is just the level of prepayment activity. Sometimes that's a little bit hard to project. But as longer rates start to go up a bit, we may see that kind of pull back a little bit. But I think it's a matter of the loan portfolio continuing to increase and maybe the composition in there changing a little bit, maybe you'll see more a little bit higher rate of growth in the construction portfolio, which has been an area of emphasis for us. We have quite a bit of unfunded commitments in there. And obviously, we expect small business to start picking back up here over the remainder of the year. But really, it's going to be putting liquidity to use in kind of a little bit of a shift in the mix and the composition of the loan book.

[David Becker:]

One of the things out here, Nate, as we talked -- Ken just mentioned, a lot of liquidity in the marketplace. A lot of banks are getting squeezed. A lot of banks are doing some pretty silly things, for example, in the healthcare finance area, two big competitors out there are financing 10-years deals on 5-year pricing. And we're just not going to chase it down to keep a volume in a stat up. So there's opportunities for us in different markets, and we've stayed true to the pricing, which has enabled us to, as Ken stated earlier, to keep the expanded NIM on both sides at lower cost of funds and solid interest on the loan side. We're going to continue to stick with that. I think as the year wears on and COVID goes away, and there's more activity in the marketplace, everybody will go back to a little more of a reasonable basis and how their pricing and the covenant structure, et cetera, on loans and get back to what banks should be doing. So probably, as Ken said, for a lot of reasons, and particularly cash on balance sheet, not a lot of growth in the first half of the year, but we could have some pretty solid growth in the second half.

[Kenneth Lovik:]

Yes. And this is the -- and on the other side of the balance sheet, too, I know you were talking about earning asset growth in loans, but always keep in mind as well that excess liquidity can also be put to use just by funding CDs that don't mature. And by not renewing some of those CDs and having some of the historical kind of seasoned higher rate institutional and public fund CDs roll off and not renewed, that's a lift to margin as well through lower -- continued lower deposit costs.

[Nathan Race:]

Yes, absolutely. Makes sense. I appreciate all that color, guys. Maybe changing gears and just thinking about the expense growth for this year. I think in the past, you've kind of talked about mid- to high-single digits. I guess, just as we kind of think about and extrapolate the 1Q run rate, is that still kind of a good target to think about with some of the work that's left on the SBA front that you guys want to accomplish over the next quarter or 2?

[Kenneth Lovik:]

Yes. It's probably a good run rate. It might pick up a little bit. Obviously, in the first quarter, we have some costs that are seasonal. Those will probably be replaced by continuing to add to some headcount in SBA. And we continue to grow in other areas of the bank as well. So there may be a little bit of offset there. But I think, yes, the first quarter was probably maybe a little bit of growth here and there between -- depending on what quarter it is, but that's probably a good run rate to look at with maybe, again, a little bit of growth off of that for the full year.

[Operator:]

. The next question is from George Sutton of Craig-Hallum.

[George Sutton:]

I wanted to focus a little more on the SBA side. You defined your goal here to become a leading national platform. That's not something I've heard you specifically say in the past. So I wondered if you could give a little bit more of a vision there. And then you also mentioned on the demand side, things started slow in the quarter. I believe they picked up a bit by the end of the quarter, and you're still very encouraged by what you're seeing. I wondered if you could just give us a little bit better sense of what you're seeing to give you that confidence.

[David Becker:]

Sure, George. We -- the SBA runs, the fiscal year closed out on 9/30 last year. We were number 40 in the country in originations in the 7(a) category. We're still in that space, I think as of today or yesterday, we're like number 41. So we've kind of kept our position. We're not growing as fast the SBA gain because of the advent of PPP3 and all the stuff that came out at the beginning of the year, the chaos and confusion there about forms and process, et cetera, just kind of brought SBA in somewhat the marketplace a little bit of a grinding halt what they're going to be. We had a lot of folks hold up deals because they thought they were going to get another 6 months of prepayment, so they didn't move them into closing until March when the payment amounts got cut back. So there's a lot of confusion in the program, solid pop in March. Strong pipelines out here today and new activity coming on. Also, fourth quarter kind of balloons up because of fiscal year-end of 9/30 that pushed the numbers up as anybody does when they're kind of year-end closing. So all of that was sold in the secondary market in the fourth quarter. We hope to get to a point we're in the top 10 producers of 7(a) loans in the country, which would be pretty much a double down of the volume that we did -- well, triple down on the volume we did last year. We still think we can hit the $200 million mark. We'd like to see that over time get up to the $350 million, $400 million range. So we want to be a big player in both SBA, but just a small business industry as a whole, it's been a tremendous opportunity for us over the past year in growth of savings and checking accounts at very low-cost funds for us. We've got some new things we're going to be adding to that platform to make it a more comprehensive product. We got the Newsweek pitch towards the end of the year as the Best Small Business Checking Account in America. We're working on some credit card pieces for them. We're at half a dozen places in the last couple of weeks. At the last 6 months of 2020 and the first 3 months of this year, there are more new companies formed than been in almost the last 2 decades. So small business is getting -- really springing to life. A lot of folks are probably not going to show up when they get the call to come back to the office because they started something else. And we think with our platform, we learned an awful lot in the second half of the year how to better service that small business marketplace. And again, I think we made the comments on the last call that we're one of the banks that really benefited from the pandemic. Millions of small businesses and consumers that would have never gone to online banking in their lifetime had to because they had no choice. Branches were closed and they were shut down. And they realized that

[George Sutton:]

One other thing for me. You mentioned putting the excess capital to work 2 or 3 opportunities to do that by year-end. I know you don't want to go into any specific details, but I'm just curious, are we talking about vertical additions? Or are we talking about these would be within your current specific areas of focus? Just curious from that perspective.

[David Becker:]

A little bit of both, some new channels in areas that we're already in and a couple of verticals that we're not in.

[Operator:]

The next question is from Brett Rabatin of Hovde Group.

[Brett Rabatin:]

I wanted just to follow-up on the SBA. We had talked about the SBA rule changes that are temporary and have been hearing that some players were indicating that the rule change was really driving increased demand. I'm curious if that's changed at all for you guys and if you anticipate that being a part of the opportunity here in the next few months, in particular?

[David Becker:]

Well, it's definitely a part of the opportunity. The -- I think within the SBA organization and in getting us back to all the chaos last summer, they did more PPP loans in a matter of 45, 60 days than they've done total loans in like the last 15 years. So I think SBA itself has a little different mindset. They plugged in some new technologies that make things a little easier to play in their field and I think some of the technologies that we've plugged into place. One of the biggest issues in the small business person working with the SBA is the timing from the request to the loan can actually close. And we're doing a lot of things with automation and tools to make the underwriting, the processing to the SBA system much faster, more efficient. And I think -- yes, I think there's going to be really, really strong demand for the SBA products out here, particularly as businesses start to come out of the pandemic and reopen. The restaurant industry, there's a lot of grants and gifts coming from a federal and a state level to help them get back on their feet. So as things reopen in the second half of the year, I think we're going to see a pretty good size book.

[Brett Rabatin:]

Okay. That's helpful. And then the other thing I'm just curious about was we look at the fintech space, in particular, and the valuations are a lot different than where you guys are. And I'm sure that puts somewhat of a chip on your shoulder. I'm curious as your capital builds, is there any conceptual thought to maybe pairing up with a fintech partner, adding one on to the platform, any kind of partnerships that you might do that would be fintech-oriented that would maybe improve the valuation?

[David Becker:]

Yes. And the comment we made earlier, we're continually looking at opportunities out here. A lot of the fintech play -- obviously, the organizations that are out there with a huge and multiple deal, right? The only time I'm happy about our stock price is the last day of the month when our employee purchase plan buy shares. It's tough to think about what we've done and kind of the position we're in is really probably the first true fintech and financial space to not get the valuations they are. We look at them consistently. We've looked at several opportunities to be a service provider to them, kind of banking as a service. When it gets down to the bottom line to return on it, in that space, there's a lot of volume, and there's a lot of activity. When you have 35,000 accounts with a balance of $300, that doesn't really gain you a lot. A lot of overhead, a lot of expense, a lot of headaches, and it's real hard to justify on the bottom line. So we're judiciously looking at opportunities every week, something crosses the paths with us, we'll find one or 2, or more, no question asked. And we're also looking, as Ken pointed out, we discussed we're working with a lot of fintechs to improve our services and programs internally. We just made an investment in kind of a bank-backed VC fund that is going to work with fintech start-ups and kind of early-stage seed capital all across the country. So we'll get a first crack at not only being an investment, but a first crack at looking at their software or their products and services and see how they might apply to our banks. So yes, we're focused on it continually.

[Brett Rabatin:]

Okay. And then I'm curious -- and just lastly for me, you can add to the 1% ROA target, and just given the path that you're on, I'm just curious if there's any reason you didn't want to update that or give maybe a longer-term goal, it seems like you're going to be able to easily be above that level for the foreseeable future.

[Kenneth Lovik:]

Yes. Longer term, it's -- our goal is to be well above 1% and be 1.10% or 1.15%. Hard to tell what the long-term was going to be without knowing what the long-term tax rate is going to be. But I certainly -- and we all foresee the ability to provide -- produce an ROA above 1% over the long term as we, again, continue to build out the SBA. And as David talked about, the aspiration to be a nationwide platform in SBA and you think about just the revenue lift between just, say, going from $50 million to $100 million of originations to $200 million and beyond that, the revenue and the profitability lift from that certainly provides a clear pathway to a solid 1%-plus ROA. So that is our goal, and we feel that, that's achievable.

[David Becker:]

We're still investing -- yes, I was going to say, just to back that one up on Ken's part, we're still investing a lot to get to that level. So investments we make today will definitely start -- you'll see some, hopefully, pop towards the end of this year, definitely in the first half of next year.

[Operator:]

And this concludes our question-and-answer session. I would now like to turn the conference back over to David Becker for any closing remarks.

[David Becker:]

Guys, we appreciate all of you joining us today. We hope you have a nice day. Some parts of the country have jumped back into winter instead of springtime and summer here, but stay safe and enjoy it. And we'll continue to push the success forward here in 2021. Thank you very much for your time.

[Operator:]

Thank you. The conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines. Have a great day.