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. [Operator Instructions] Please note that today's event is being recorded. I would now like to turn the conference over to Ben Brodkowitz 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 this 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 Lovik. 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 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 this 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. 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 in 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 is measured by the loan-to-deposit ratio is the strongest it's been in recent history. Starting with the highlights on Slide 3. 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 reported net income of $7 million, up 21% and diluted earnings per share of $0.80, up over 19% from the second quarter's reported results. Compared to the second quarter's adjusted results, net income was up over 12% and earnings per share was up over 11%, which as I noted a moment ago marks the fourth…

Thanks David. As David covered the loan portfolio, let's turn to slides 5 and 6, where I will cover deposits in more detail. The average balance of deposits increased over $211 million, or 5% during the third quarter, and period-end deposits were up almost $524 million, or 12% from the prior quarter driven by growth in CD production and fintech partnership deposits. Non-maturity deposits were up almost $123 million, or 6% which reflects the increase in fintech partnership deposits. Additionally, total deposits from our fintech partners, including those classified as broker deposits were up 35% from the second quarter, and totaled $507 million at quarter end. Additionally, these partners generated almost $11.4 billion in payments volume, which was up 34% from the volume we produced in the second quarter. Total fintech partnership revenue was $771,000 in the third quarter which was up over 30% from the second quarter as contributions from one of our key partnerships began to scale up during the quarter. Related to CD activity during the quarter total balances were up $281 million, or 15% from the linked-quarter, driven by continued strong demand in the consumer channel. We originated $697 million in new production and renewals during the third quarter at an average cost of 4.77%, and a weighted average term of 21 months. These were partially offset by maturities of $391 million, with an average cost of 5.05%. Looking forward, we have $238 million of CDs maturing in the fourth quarter of 2024, with an average cost of 5.01% and $407 million maturing in the first quarter of 2025, with an average cost of 5.08%. CD pricing broke through its inflection point during the third quarter as the weighted average cost of new CDs was 28 basis points lower than the cost of maturing CDs. As…

Thank you, sir. [Operator Instructions] And your first question will be from Brett Rabatin at Hovde Group. Please go ahead.

Hey guys, good afternoon.

Hi, Brett.

Hi. I wanted to start with just the comments or the franchise finance and the small business loans that were either past due or moved to non-accrual. Can you give us some additional color on what components of franchise finance that was? What small business is doing? And then just maybe any comments on the RV portfolio? And I know like Walgreens and CVS have also had some recent mentions of store closures, et cetera?

With regards to like in the franchise and small business, Brett. So on the franchise side, we've just had a handful of delinquencies there mostly having to do with certain brands and closures of units, trying to work with the borrowers to get them to the table to restructure a loan, pay off the loan that we just -- we've had to take some action on and move to non-accrual since they went 90 days past due. Probably not a common theme other than what you're hearing across the industry as far as restaurants and other retail entities struggling a bit. But we just had to take action on a pool of those loans that hit 90 days. On small business, there's really no consistent theme amongst them. In small business it's like every credit is a story. But kind of similar along the lines of franchise just had either businesses closing or struggling. Again, where we've had to kind of take action and maybe where we've offered a deferral or two and the borrower is struggling. So we just have to move it to non-accrual and work with the SBA to repurchase the loan and work with the borrower to finalize an exit strategy.

Yeah. The ApplePie stuff is really our internal policy. When it hits 90 days as Ken said, we move it to non-accrual. We take a specific reserve against it. I don't know that the portfolio as he said, the loans are that bad. It's more an internal policy. We've had a tough time working with --they service the loans or have a third-party servicer work on the loans. They're not really incented to do anything, until the loans hit that 90-day bucket and they get $0.35 on the dollar of everything they recover. So we're coming at this from different viewpoints. They wanted to get delinquent so they can pick up a little income. We want to be at the front of the food chain when things go south. So we're re-negotiating currently a servicing agreement with them. So we're in the deal and have an opportunity to get involved much earlier in the process not waiting until it gets to 90 days. The SBA side of things kind of peaked in July. The outstanding problem loans dropped in August and September, not tremendously, but they're not continuing to climb period-over-period. So SBA as Ken said there is no specific industry or type of loan or location or anything. It's a very diversified nationwide, no real common themes within. On the consumer side of things we have less than 1% delinquency wholesalers RVs are not a problem. The resale value they were selling at a premium during COVID when nobody can get a new one. Resale has come down if we happen to have one come back to us. But outside of that we're not seeing any cracks whatsoever there. The CVS and the Walgreens is kind of the same story that we had with Red Lobster when everybody is…

That's a lot of great color. And just to clarify if I heard you correctly kind of the peak of SBA delinquencies in your portfolio is in July. There's another competitor that is out today with some adverse migration in their non-guaranteed SBA book and so they made a big provision. I know you can't comment on someone else's portfolio but I think that might be weighing somewhat on your stock as well as theirs.

We had that same thought this morning when we saw the same thing you did. Yes, from our standpoint, we're -- as Ken said, we've taken specific provisions. If we think -- if it's over 90 days past due and we think we're going to have some kind of impairment on that non-guaranteed part we've already taken a provision against it. So, we evaluate them as they kind of break that barrier. But yes, we hit the top and it's come down a little bit. Who knows what we're still early in October here to 15th is kind of a universal payment date so we'll have a better handle in another week to 10 days. But we seem to be headed in the right direction at least stabilizing, I guess, if nothing else. So, yes, we read the same thing you read this morning and that was kind of a shock to us. We're not experiencing anything like they're experiencing.

Okay. So, we're talking about the same institution. Okay. And then the other question I had was just I kind of figured you guys might wait a quarter or two for rates to come down, possibly a little more before you went and maybe built some liquidity and put on more CDs, but you seem to do that a little earlier. And if I heard right the production on CDs in the last month of the quarter was 4.45%. Was that correct? I'm just curious why you guys may be building a little--

Yes, that is correct.

Okay.

It was not intentional. We had been lowering rates. We actually started lowering rates probably about a month before the Fed made a cut anticipating we were thinking it'd be 25 and we had lowered rates about 40 basis points on the 45-day period prior to the cut. But when it hit 50 basis points, the good and bad part about being an Internet institution is experienced by Silicon Valley and First Republic when they started to hit the wall, all the deposits were called in 24 hours, 36 hours. On our side, when the consumers and the business folks thought oh my God the bottom is falling out on the savings rates, they slammed in and bought CDs faster than we could lower the rates. We took them down another 40 basis points on the consumer side and 50 basis points on the commercial. We've cut off the inflow. But in that 24, 36, 48-hour period post the Fed announcement, they were flying through the door faster than we could lower the rate. So, lesson learned that that sword cuts both ways on withdrawals as well as deposits.

Okay, that make sense. Great color guys. Thanks.

Appreciate. Thanks Brett.

Thank you. Next question will be from Tim Switzer at KBW. Please go ahead.

Hey, good afternoon. Thanks for taking my questions.

Hey, Tim.

I wanted to ask about the SBA origination outlook. I think you gave a pretty wide range of 15% to 25% in 2025. What are some of the factors that could drive it to the lower or high end of that range? Is it mostly rate driven? And then what are your expectations for pricing as we get into next year?

Well, our expectation right now is that we'll somewhere be in the range of say $525 million to $530 million of originations for this year. And we're targeting $600 million for next year. So, you do the math on that and you're probably in the range of 15. I think for us I think we've just -- we've put together just a really good team. We have a great team of BDOs out there and we have a great support team behind them on credit, servicing, closing. And it is reflected we've made this comment in the past couple of quarters. We continue to build the bench strength to support that growth and that will be key to achieving it. But I think we feel -- again we feel really good about the folks we have out there sourcing deals for us. And expect I guess if you look at kind of we have grown each quarter this year. So when you look at what we've done in the fourth quarter -- or excuse me the third quarter and what we're looking at for the fourth quarter it's not I don't think it's an unreasonable jump to get to that $600 million target for next year.

Tim one of the uncertainties is the sales price in the secondary market that I think Ken made a comment that it had dropped 65 basis points third quarter over second quarter. As people try to get comfortable with what the Fed is going to do, we do two more 0.25 point drops in this quarter? The excess liquidity that we have on the balance sheet as I stated in my comments gives us a position if the bottom falls out in the secondary market we have cash and liquidity rather than sell a 10.5%, 11% yielding loan in the secondary market for 5.5%, 6% carry it on the books and we'll make up that difference in a 5, 6-month window of time. So we got a lot of optionality and a lot of flexibility going into 2025 and we can handle kind of whatever the market gives us on the SBA side. As Ken said we've got a team and an organization out here now that is just a pretty well-oiled machine that can produce the product and the volume we're looking for. I think I made a comment in the last call probably somewhere in that $600 million range might be kind of our cap looking at annual sales growth. But if we get it we can hold it on the books we can sell it in the secondary market. We'll do whatever is in the best interest of the institution. The good part about the excess cash is it gives us an awful lot of flexibility.

Okay. Great. Yes, that was really helpful. And then I wanted to ask about the NIM trajectory obviously pretty good expansion expected in Q4. How should we think about 2025 particularly the Fed cutting rates? I think last quarter you guys said each 25 basis points is about a $2.8 million annual benefit. Is that still the right range and with the loan growth you're expecting to put on? how should we expect the NIM to move next year?

Well, I think, last quarter that math was based on a static balance sheet. I think the wildcard for this is just the cash balance that we have and how that's deployed. I mean I think about -- if you just -- I'm going to give you some numbers here to think about that you can run some math on. But we got about $1.3 billion to $1.4 billion of what I'd call high beta or 100% beta deposits that are a combination of some brokered and some of our own deposits that are higher balance. But those reset immediately. So for every -- you can do the math on every 50 – 100, 25 basis points, 50 basis points, 75 basis points of cuts. Really offsetting that we probably got about $760 million of loans that would reprice either immediately or within three months in the case of SBA loans. We do have more variable rate loans on our balance sheet, but some are at price ceilings already. So you have that going one direction. But then we also have $1.4 billion of CDs with an average cost of close to 5% that mature over the next 12 months. And new production right now coming in the door in the month of October is 4.19%, 4.2%. So there's a lot of dollars of NII that we expect that we will pick up over the course of next year. How that translates exactly into margin is a little bit hard to project in terms -- because of the excess liquidity and what you're going to run it off at. But I -- just sitting here thinking about it I mean I would think that we would be able to at least expect perhaps 10 basis points of margin expansion a quarter just depending on how we get the liquidity out the door. And as David said too if there's optionality for holding SBA loans for example that would be incredibly accretive to net interest margin and net interest income. So we're still working on our forecast for next year. It's hard to -- you got the long rates that are doing something different than the short rates right now, and we got an election to get through. So I guess we'll see what rates happens to long rates after that. But I think all-in-all, just doing math and what we have today for just dollars of net interest income, I think we see a significant pickup next year.

We still think we're going to hit the $3 mark that we had forecasted for this year. Closing out here in the fourth quarter, we'll be pretty close to almost $1 in income. We had forecasted $4 for next year. Obviously, with the Fed starting to move, that's a lock on our side. And it could -- depending on, as Ken just outlined for you, how the Fed rates move over the course of the year, that could move from 4 up to 5 pretty quickly. So we think we're going to finish strong here for this year and 2025 looks real, real good. Political and third world or overseas worlds off the table, if everything stays fairly stable in the political arena, in the world arena, we should have one bang up year in 2025.

Yes. We'll all pray for that. But thank you guys for the color. Appreciate it. Thank you.

Thanks, Tim.

Next question will be from Nathan Race at Piper Sandler. Please go ahead.

Hey, guys. Good afternoon. Thanks for taking my questions.

Hey, Nate.

Ken, I just want to clarify on the loan growth expectations for 4Q. Did you mention 1% to 2%? And then also be curious to get your preliminary thoughts on overall balance sheet growth expectations next year as well?

Yes. I think I said 1.5% to 2%, which probably is kind of in the range of where we were in the second -- or excuse me, the third quarter for loan growth.

Okay. So that's not annualized?

I think as we said, maybe the wildcard for that could be if we don't like what we see in the secondary market for SBA, retaining some SBA loans, that could boost that a bit. But yes, probably in the range of growth that we saw this quarter.

Okay. So that's 1% to 2% not annualized?

No, no, no, no. Yes, that's not annualized. That's just gross for the quarter.

And then just any thoughts on how you see organic balance sheet growth in terms of both loans and deposits playing out next year as well, just given the fluid curve as well?

I think, yes, again, it kind of come back to with the liquidity we have on the balance sheet. And I guess I'll go back to my comments earlier about over $600 million of -- well, you got $600 million of CDs maturing in the next six months, $1.4 billion maturing next year, $250 million of higher cost brokered deposits maturing over the next six months. I mean, I expect that our balance sheet will be down in the fourth quarter at the end of the year relative to where we were at the end of the third quarter as we deploy some of that cash to just, again, pay down higher cost deposits. I think year-over-year, we're -- our total loan growth for this year, 2024 will probably be somewhere in the range of 7% to 9%. I think if we're doing what we're doing today, that number might be still the same. But again, I'll come back to what David said with the optionality we have on SBA loans and some other initiatives that we're working on that could drive further growth beyond that.

We've been working with some of our fintechs. We have jaris in particular, that we kept thinking we would get the loan program up and running during the third quarter. We just made a small purchase here in October just to kind of validate and test everything to make sure all the mechanics and stuff are in play. They've got a couple of new clients coming their way. That one could jump up pretty quickly. We brought on two new programs here in the last 30 to 45 days in the fintech space that could have some opportunities for us. So as Ken said, there's a lot of options and a lot of play, and we're just kind of taking stuff day by day, but it's -- everything really does look good for us going forward.

Got it. That's helpful. And then just within that context, a high-level strategic question. Just with the momentum you're seeing on the SBA side of things and with some of the partnerships, just curious if it makes sense to maybe slow balance sheet growth, particularly just given coming out of 3Q, it seems like the loan and deposit growth is margin dilutive, and that may change and should change with Fed cuts and depending on the forward curve or depending on how the yield curve plays out. But just curious on your thoughts around slowing balance sheet growth and just leaning on some of those more profitable lines of business. And then just build capital and perhaps resume buying back the stock just given where it's trading relative to tangible book?

Well, hopefully you're spot on. We have a lot of flexibility without growing the balance sheet to remix things and get higher earnings and higher yield. We can get that 10% growth technically right now with the cash we have on the balance sheet. So there's no need to bring in deposits for the sake of deposits or grow the balance sheet. So we agree with you 100%. It's kind of remix things a little bit maximize earnings and not necessarily pump up the balance sheet. And we're spot on. I would hope that the stock appreciates quickly as we add better earnings to the bottom line and gets back towards that book value plus. But I don't think being real honest in 2025 that I don't want to set the stage that we're going to go back and do a big stock repurchase, because if we get into that 40 range it doesn't make a lot of sense. I'd rather build capital and save that for a rainy day or save it for a position. We got a couple of sub debt items coming up. We could take the extra capital and pay down some sub debt and get the stability in the capital network. So we might have other options for it versus buying back stock.

Understood. Very helpful. And Ken I think you mentioned expenses should be up a little bit just based on some commission costs tied to the similar SBA revenue expectations and some other investments. But just curious how you're preliminary thinking about expense growth in 2025. I know it's going to be contingent on the SBA revenue side of things, but assuming SBA revenue continues to ramp up by maybe at least 5%. Just curious how you're thinking about the overall expense trajectory within that context?

Yeah. Well I think we're we've done quite a bit of hiring this year to build out the SBA platform and enhance risk management and add some positions around the country as I like to say add bench strength. So we'll have a full year's run rate of folks there. But if I'm thinking about next year, you're probably 7% to 8% expense growth for next year for the year.

I was going to guess 9% to 10%, so blend this together…

You get the ball out of the park on SBA then we'll be closer to that 9% to 10%.

Yeah.

And it's in the ballpark out on SBA is that growing SBA revenue 5% 10% next year? Or how do you quantify that I guess?

Well, I guess on the sales volume side of things as Ken said we're going to end up a little over $500 million probably this year and we're looking at $600 million next year. So we got a nice bump up, which also if you take a look where we're at this quarter, it's only going to get bigger through the course of the year as long as premiums don't fall apart on us. And as they start to or we take that excess growth into next year and put it on the balance sheet, we got a real chance of picking up a nice uptick in earnings out of SBA either way it goes in the secondary market or on the balance sheet. So it will compensate for the growth in the expense side.

Got it. And then just one last one just from a housekeeping perspective, any thoughts on the tax rate going forward?

Depends on who wins the election.

You know, what I think right now we're probably thinking that probably like fourth quarter will be in the same tax rate area as it was in the third quarter. With higher earnings we do get a very strong benefit from our public finance portfolio. But as our -- just our pre-tax earnings continue to grow that benefit on a percentage basis is less. So I would think our tax rate for next year with higher earnings is probably going to migrate over the course of the year from maybe ranging from anywhere from call it a high 8% to somewhere perhaps as high as 11% to 12% by the end of the year. It's kind of the way I would look at it.

Got it. Very helpful. I appreciate all the color. Thanks guys.

Thank you.

Thanks, Nate.

Next question will be from George Sutton at Craig-Hallum. Please go ahead.

Thank you. David, I wanted to test one statement you made in your prepared comments you mentioned we in Q3 were firing on all cylinders. I think if you really thought about it that you might say firing on many cylinders. I'm just curious what you think firing on all cylinders should look like?

I think it's the bump up, George, so we have coming here for the fourth quarter. And then, if the Fed continues to drop rates significantly through the course of 2025, we're going to just kind of blow the roof off in earnings and structure here in the institution. We're taking it back to the racing analogy. We'll set a track record by the end of the year. So, we've just got a lot of good things going every place. And we got it for us and our balance sheet historically has been unbelievably pristine. We've got a bump or two on the -- a little bit on the SBA side and a little bit on the franchise end but that's all manageable. We'll get a handle on it. So I think the future is really, really looking good for us. The gentleman you headed my way, we've had a good conversation. I think there might be some opportunities there. We're getting a lot of good inquiries from people kind of the dust is just settling. The FinTech space, we wound down a client here over the last quarter, who just cannot raise any additional capital. They had a great program. They had a great product but they just couldn't get the capital to get there. And as the institutions kind of pull back on some of the BC stuff, there might be opportunities to actually pick up a FinTech or two and put that product into our mix. There are other very solid programs that are looking for solid players that understand and can provide the services they're looking for. So, I just think we have an awful lot of good things going on within our product mix and good things coming to us from the outside world. So 2025 looks really strong.

Fabulous. I did want to say congratulations to Ken and Nicole and Ann and Tim and Nick and Dustin and Maris fellow, Indiana graduates on the seven and will start to the year.

Yes. Believe me they had their first sellout football game last year in like 50 years. So, it's -- yes it's a very -- a lot of cheering for basketball over the years but it's been very rare. A lot of good tailgating but most people just tailgate and pass on the games. They got a full house now. So that's great. Thank you.

Thanks guys.

Thanks George.

At this time, I would like to turn the call back over to David Becker for closing remarks.

Thank you, Sylvie. Thanks everybody for joining us today. As I said we've kind of produced some really consistent improving results throughout 2024. We're extremely confident in our ability to deliver a strong finish to the year. And as we look to 2025 and beyond we're extremely excited about what the future holds. Strong performance of the lending teams, including continued execution in the SBA and construction area, emerging growth opportunities with key FinTech partnerships are expected to drive greater more diversified revenue growth. We combine that with the prospects for a more favorable interest rate environment and the positive impact that will have on deposit costs. We believe we are very well positioned to achieve stronger earnings over the next several quarters. As fellow shareholders, we remain committed to driving improved profitability and enhanced shareholder value. We thank you for your support and wish you a good afternoon.

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.