Good day, everyone, and welcome to the First Internet Bancorp's Fourth Quarter and Full Year 2024 Conference Call. [Operator Instructions] Please note that today's event is being recorded. I would now like to turn the conference over to Ben Brodkowitz, Financial Profiles, Inc. Ben, please go ahead.

Thank you, Jenny. Hello, everyone, and thank you for joining us to discuss First Internet Bancorp's Fourth Quarter and Year-end 2024 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 Lovik. David will provide an overview of the quarter and 2024; 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 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 the GAAP to non-GAAP measures. At this time, I'd like to turn the call over to David.

Thank you, Ben, and good afternoon, everyone. Thanks for joining us today for the fourth quarter and full year 2024 results. Our 2024 results reflect a year of remarkable growth. We entered '25 with a strong momentum. We produced significantly improved financial results, marked by a recovery in net interest income and net interest margin. We generated strong loan growth while we focus on optimizing the composition of our interest-earning assets. Furthermore, our SBA lending business had an outstanding year that drove non-interest income substantially higher year-over-year and allowed us to achieve greater revenue diversification. To summarize some of the key achievements for the year, net income and diluted earnings per share tripled compared to 2023 at $25.3 million versus -- and $2.88, respectively. Net income of $87.4 million was up 17%. Gain on sale revenue was up more than 60%, fueling non-interest income growth of 81% from 2023. Total adjusted revenue growth of almost 30% far outpaced the increase in expenses, creating significant annual positive operating leverage. On the balance sheet, we grew balances by $330 million, an increase of 9% over 2023, which we attribute to strong growth in construction, investor commercial real estate and small business lending. We also produced continued strong deposit growth, which allowed us the balance sheet flexibility to pay down a significant amount of Federal Home Loan Bank borrowings while also maintaining a solid liquidity position. The loans-to-deposit ratio is relatively consistent with the prior quarter and is indicative of continued flexibility as we continue to optimize both sides of the balance sheet throughout 2025. I would note that many of these year-over-year trends were evident in our performance for the fourth quarter, which I'll now discuss in a little more detail. If you're following along in the presentation, quarterly highlights are on…

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 almost $344 million or 8% during the quarter, and period-end deposits were up $135 million or 3% from the prior quarter, driven primarily by growth in fintech partnership deposits. Non-maturity deposits were up $122 million or 6%, reflecting the increase in fintech partnership deposits. Additionally, total deposits from our fintech partners were up 27% from the third quarter and totaled $643 million at quarter end. During the fourth quarter, we submitted a notice of reliance on the primary purpose exemption with the FDIC related to fintech deposits that had been classified as brokered. And as of December 31, we reclassified these deposits to interest-bearing demand deposits. During the fourth quarter, these partners generated almost $16 billion in payments volume, which was up 38% from the volume we processed in the third quarter. Total fintech partnership revenue was $880,000 in the fourth quarter, which was up over 14% from the linked quarter. Related to CD activity during the quarter, CD balances were relatively stable with balances increasing only $22 million over the quarter. Although medium-to-longer-term treasury rates increased during the fourth quarter, we held CD pricing constant through most of the quarter and further lowered CD rates in December following the Fed's rate cut that month. We originated $242 million in new production and renewals during the fourth quarter at an average cost of 4.23% and a weighted average term of 12 months. These were partially offset by maturities of $238 million with an average cost of 5.01%. Similar to last quarter, new CD production is coming on at lower rates than those maturing, which will continue to benefit our cost of…

[Operator Instructions] And your first question is from Brett Rabatin from Hovde Group.

I wanted to start on the asset quality cleanup and then, any color that you can provide on the SBA charge-off and just what you're seeing in the SBA portfolio generally? And your guidance for provisioning to be 15% higher in '25, that's probably 45 basis points, 46 basis points. Are you expecting some continued charge-offs in the SBA portfolio?

I guess maybe, let's just start with our assumption on increased provisioning for the year. I mean, I think over the last several years, as the SBA business has grown, there have been more charge-offs and more provisioning. Certainly, you have just growth in the overall portfolio. We're reserving at a higher rate on those loans, and the charge-offs are certainly higher in those than, say, single tenant or others. So, I think we've just seen a higher run rate over the last couple -- over the last 4 to 6 quarters of that. And I think we're just kind of going to take a conservative approach and hopefully, we're provisioning more than what we need, but I think we'd rather just be conservative in our forecast and add a little bit to that as -- again, keep in mind that the portfolio is going to continue to grow, and we have bumped up just the overall ACL coverage there. So, there's a piece of that driving that as well.

Okay. And then on the cleanup, what that entailed, and you had the one specific charge-off that had allocated reserves, but was just trying to get a little more color on what you were seeing in the SBA portfolio? I know that the credit trends in SBA for the industry have been a little softer, but I know everybody kind of does things differently and the rules changed 2 years ago on underwriting. Just any thoughts on the SBA portfolio as you see it from a credit perspective?

I'll take that one, Brett. In the SBA portfolio, actually in the bank in total, there is absolutely nothing going on that causes me to lose any sleep at night. As you just stated, the SBA world is a little tougher right now. We've analyzed the top to bottom underwriting loan issues, looked at everything. The only real -- as Nicole likes to continually say, every loan is a snowflake. It's one of a kind. There is no seam. We don't have any concentration in a state and a product and anything out there. It's just kind of one-off. The only thing that is somewhat of a common denominator, about half of our delinquent accounts have some kind of tie to the hurricanes that blew through the country last year, through Florida and up through to North Carolina. They're having problems getting things rebuild, restructured, catching up for losing 2 to 3 months of income, et cetera. As you well know too, in the SBA world, they bend over backwards to assist the small business owners. So, SBA does a lot of things, and we're working through some of those mechanics. We're not as familiar as some of the processes, as Ken said, it takes longer to get through things to -- both on the sales side as well as recovery side as well as the collection. So, we took advantage in the fourth quarter of looking at some of the loans. We might get some recovery, we might not get recovery. We were doing okay on earnings, and we just wanted to set a clean stage for going into '25. As Ken said, we bumped up reserves a little bit, because if you looked at our credit history for the last 5 years, we've done more outside of the…

Okay. And I didn't hear -- lastly from me, I just -- I've got a bunch of questions, but I'll just ask this last one and hop back in the queue. You did $540 million of SBA in '24, and I heard -- I think I heard the fee income guidance for 9% to 12%. What are you assuming for production for SBA for '25? And then I didn't quite understand what -- you were implying that gain on sale could create some variability in that, but didn't quite get what you were assuming for gain on sale margins.

Yes. Well, two things, Brett. We're assuming $600 million of originations next year. We're -- right now, our gain on sale net premiums have been in the range of, say, 1.08% on average, probably maybe a little bit higher. But in our forecast, we're assuming 1.08%. And then the one piece I said that could be variable, Brett, is that if -- the gain on sale premiums have been a little -- we've seen volatility in those over the past 18 months. And, again, if, say, gain on sale premiums dropped to say, 1.06% and we got a loan that's prime plus 2.75%, that's a solid loan, we may just elect to keep that on the balance sheet versus selling it. So that would be -- again, it's -- the volatility in gain on sale premiums could be a risk to gain on sale income should we choose to hold the loan.

So, as Ken stated, we carried forward into January were $60 million in production from December, sold that here over the last couple of weeks, and we again did net that 1.08%. We had one loan that came in at a 1.06%, and we just kept it on the books. There was no reason to sell it in the market. So -- and all of that appears to be stable. As we well know, President stating today that he's going to force us to drop interest rates and blow everything up. It could change in a moment's notice, but we're pretty comfortable that -- as Ken stated, we are not forecasting any additional rate decreases. So that should stabilize somewhere in that low 1.08% range and carry forward for the balance of the year. That's what we built into our budget.

Your next question is from Tim Switzer from KBW.

I have a follow-up on the commentary around credit performance, particularly for the SBA. Are there any specific industries that you're seeing a little bit more pressure or types of borrowers at all?

No, not at all. As I stated a minute ago, we've analyzed that portfolio 6 ways to Sunday and trying to see if there's a common theme, if there's a common broker, if there's a common BDO, if there's a common underwriter, if there's a common anything. And outside of about half of the loans having some kind of an impact due to the hurricane issues, there is no common denominator. So I'll take it back. One thing that did kind of show up for the loans we originated during COVID that were either had real estate components or pretty heavy build-outs where they got delayed. They couldn't get supplies, they couldn't get team. They ate up a lot of their excess working capital and cash with that 12, 18 month delay. And -- so, some of those folks we're working with today to try and help them get back on their feet. But outside of the hurricane and outside of the issues related to the pandemic, and most of those were people that had significant build -outs or physical building construction in order to get open. There is -- we can find no common denominator. So it really is just, as Nicole says, snowflakes that sometimes they work and sometimes they melt. So, right now, it seems to be stabilizing. We're not seeing anything really crazy going on, but time will tell. That's why we're being conservative in upping the reserves a little bit.

Okay. Okay. And what -- I guess, what impact do you see looking forward on the outlook from like the rate environment, if rates are higher for longer, how do you see that impacting your SBA borrowers and I guess the rest of your credit portfolio as well?

We've looked at that in terms of the rate environment. If you think about like when we've gotten into SBA, right, I mean, we've really experienced our strong growth in -- beginning in '20, a little bit '21 and more '22, '23, '24. We've been originating in a high rate environment to begin with. We're doing credit, we do interest rate stress testing and underwriting where you're shocking rates up 200 basis points, 300 basis points to make sure there's good debt service coverage and there's still working capital. So a lot of our loans have been originated in the high rate environment to begin with. So, we've gotten 100 basis points of relief thus far. It's not -- when you do the math on an average loan balance and you look at what a 25 basis point decrease or a 50 basis point decrease is, it's not on a monthly basis, on a monthly P&I basis, it's not really a significant amount. So, I mean, we haven't really -- none of the -- I would say, any of the charge-offs we've experienced have been due to high rates.

I don't think there's going to be any impact in our client base and/or our numbers, if it holds steady. What would impact us and I think would totally demoralize a lot of our commercial accounts is if the rates start to go up. If inflation blows up for whatever reason and the Fed makes a move the other way, that could have some significant impact. It's not us, it's going to be the whole industry. But I think as long as it stays stable, there's kind of a light at the end of the tunnel. As Ken said, a 100 point decrease last year is a couple of hundred bucks a month maybe on a loan payment, but it was positive news, inflation is coming down, employment is going up, consumers still spending. Day in and day out, the real economic news is pretty solid and folks think there's a chance. Nobody is losing hope today. But I would tell you, the one to watch is if it turns and the Fed has to bump rates, then that could be a different story, but not only for us, for everybody in the industry.

Okay. Great. And the last question I had was in regards to your fintech deposits. Obviously, very good trends this quarter and the last few quarters. Can you provide some commentary on like how much of that deposit growth in some of the revenue is being driven by current customers you've had versus new onboardings? And then, can you give us an update on kind of the pipeline you see and what kind of customers you're looking to bring on board?

Yes. I think that on the fintech space, a couple of things out there. As we discussed several times here, we had a good core component of fintech customers. We have some folks a little irritated with us that the onboarding process instead of being 60 days has been 6 months to get through all the regulatory issues and stuff. I think we discussed a couple of calls back that after our spring exam last year, we finally got the working guidelines from the regulators of what they want us to do and how they interpret, I still call it BSA, whatever it is, AML, something or the other nowadays. We've got great customers that are growing significantly, literally, all the growth here over the past year. For example, in '23, we finished the year $1 million in the whole, on the BaaS division. We added expenses and staff, quadrupled some of the staff. Almost $1 million increase in expenses related to BaaS this year, yet the earnings flipped to a positive $1.2 million at the end of the year. So we made a $2.5 million swing in earnings, and we added up staff. We've got a great team. We've got some really solid clients that are really starting to grow. We've got a young lady on the West Coast. We just doubled down her card opportunities. So we should see some -- I would be remiss if we don't wind up doubling, tripling, even quadrupling that $1 million earnings could end up being $4 million in earnings by the end of this year, just with the folks we have. We have a good pipeline. We have good opportunities out here. But with all the noise in the industry from Synapse and all the problems there, we're being extremely cautious. There are a lot of people running for the hills in the banking world as well as the fintech world. So we want to make sure we're not taking on somebody else's problem. So our due diligence, which was very tough, everybody tells us, compared to peers to begin with, has gotten even tougher. So, we think we're going to have significant growth, and we could have exponential growth on a couple of them, but we're not going to go out just because the market is frothy now and sign up somebody else's problem. So, we're in it. We're going to stay in it, and we're going to grow it. And we think there's a heck of a future for us in the fintech space.

Your next question is from Nathan Race from Piper Sandler.

Not to beat a dead horse on the SBA front, but just thinking back to the call in October, it seemed like SBA delinquencies kind of peaked over the course of the summer. So, some of the charge-offs that we saw this quarter, a little surprising. So, just curious if you can shed any additional light in terms of what occurred between now and then to necessitate these charge-offs and the elevated provisioning. Was it more so just around getting some updated financials from clients? Or any other light you can shed on that would be appreciated.

Well, part of it -- yes, I mean, part of it was like, as we referenced, we -- of the large charge-offs, $3.4 million of that had to do with loans we already had reserves on, whether in full or in part. Some of those were borrowers that were trying to work towards some kind of resolution, help whether it was a sale of the business pending or trying to get something like that done, where it just became evident that the outlook wasn't going to be as optimistic as we would have liked. So I think we just decided let's just charge the loans off, remove the specific reserve and move on. We have -- sometimes it's hard to tell, we had probably maybe a little bit higher than usual, a number of, maybe perhaps a borrower who had a deferral and a lot of times, they come off a deferral and their business is back and they get back to making payments and probably had a little bit higher number than one would expect this quarter where they came off deferral and just really business was struggling. And it's all, as David mentioned before, he used the term snowflakes. A lot of it is just really everything is borrower specific. No common theme, no geography, no industry. It really just seemed like there's just kind of -- more than what we had usually seen in the past.

One of the things we did, Nate, over the last few months and like I said earlier, we analyzed that portfolio to death. We've had outside reviews of the portfolio. We wanted to make sure we hadn't missed something that we didn't have fundamentally a bad decision-maker, a bad referral source, a bad BDO, and it all came out spotless and clean. So, it is just a factor of the industry right now as one of our peers, a much larger SBA shop than us announced some pretty tough numbers last night, this morning. It is what it is, and the industry -- we were on the right path. Everything was smooth for months and months on end, and it got a little bit sideways. But with the earnings component that's coming with this product on gain on sale, on servicing, on all the revenue, and the interest side of things, even taking that pop. If you remember back in early '23, when we took a $9 million hit, we ended up the quarter with a $5 million loss. We sucked up this hit and improved earnings fourth quarter over third quarter. So we had the luxury of taking -- getting a little aggressive on calling some of this stuff and just getting it out of the way. And that's what we opted to do. And we will have -- I can guarantee you, we will have more SBA losses over the course of the next year. I hope they're not $9 million every quarter, but I will tell you with the growth play, if it turned out to be $9 million every quarter next year, we're still going to put another $10 million to $15 million to the bottom line. So, it's built into the pricing, it's built into the structure, and as I said earlier, I'm not losing any sleep that there's anything fundamentally wrong with SBA or any of the other assets we have on the books.

Got it. That's really helpful. I'm familiar with some other SBA lenders and typically, normalized charge-offs for them in this business is anywhere between 30 basis points to 40 basis points a quarter. Is that how you guys are thinking about the future charge-off trajectory?

Yes. The same on us. As Ken said, we had already reserved $3 million in the second and third quarter on a couple of loans. Again, trying to -- this is our first experience on the bad side of the SBA, figured it out. We should have just popped some of those earlier on. And that's exactly what I think is going to happen is, be in that 30 basis point, 40 basis point range going forward. We might -- we got one guy that has a couple of 2, 3 businesses. We could be steep. I don't think we're going to be $9 million here in the first quarter. But yes, we anticipate leveling off spot on in that 30, 40 basis point. We've taken a little extra provision on our numbers going forward, just to be safe. But yes, we think that's a good play to work with.

And that's just 30 basis points to 40 basis points off the SBA portfolio itself, not the entire portfolio?

Right, exactly. Exactly.

Okay. Got you. Just changing gears, thinking about the margin trajectory for this year. I appreciate the guide around 220 to 230 coming out by the fourth quarter. Just curious, in terms of kind of the cadence to get to that margin, do you think it's more kind of first half loaded just given some of the CD repricing that Ken described earlier? Just any thoughts on kind of the progression of the margin over the course of this year?

Yes. Well, it's -- I think the first quarter is going to be a little tricky to see that because what we really get a nice pop is in the second quarter when we pay down some very expensive brokered and start getting -- again it's some of the timing of the CD maturities. Well those will start to kick in more in the second quarter and certainly in the back end of the year. Like I said, first quarter, I mean, we're expecting a nice increase in the first quarter, but sometimes that's a little bit tricky to pin down. That range is a little bit wider. But I really think we'll get a nice one in the second quarter and then kind of in the back end of the year.

As Ken said earlier, and I think all of you guys have us averaged out somewhere around $4.20 in earnings for next year. We think that's a very achievable number, probably starting somewhere in that low-mid-$0.80 range here in the first quarter and working up in calendar year 2025, we're going to be -- we're going to pop it by another $13 million, $14 million in earnings over '24. So, we're not changing anything on the overall side. We did not expect to have interest rate decreases last year. That's helping us. So we're more than confident we can keep the earnings trajectory as we thought it was going to be in 2025. If we don't have the losses that we think we might have in SBA, then the bottom line gets even better. So, being from the Midwest, we're a little more conservative than most folks. We're not going to sit here and tell you we're going to whack $5 a share, but I can tell you with the 4 bucket kind of where you guys have us today. As Ken said, some of the parts in between are moving a little, maybe from what your model showed at the beginning of '23, but it's -- '25 is going to be a great year for us -- '25.

Your next question is from George Sutton from Craig Hallum.

You did call out franchise finance in terms of the provisions or at least the delinquencies. Can you just give us a little bit more of a picture there? Is that still a program you're planning to continue to grow quite a bit?

No. I mean we're -- we, obviously, we got about a $500 million portfolio there. It has grown quite a bit over the last several years. I think we've -- with other -- when you think about allocating capital and growth in SBA and some other things going on, our growth there is -- will probably be pulled back significantly from what you've seen in prior years. I mean, I think year-over-year balances were actually down. We've probably seen a little bit -- we've certainly seen a little bit of increase in the non-performers there as we've tried to get in front of certain franchisees that have been struggling, and our team is working very closely with our partner on that. But I mean, we're probably doing, I don't know, call it, maybe $6 million to $8 million a month of new originations there, probably the amount of originations that are offsetting paydowns in the portfolio. But just -- again, it's nice yields, it's been a nice earnings contributor to us, but it's obviously one part of a much bigger pie.

I will tell you, George, the folks at ApplePie, been working with our team, they changed. I made some comments, I think, in the last earnings call or the call before about servicer and having some of the issues. They have a new servicer. Our team is in constant contact with them. We're starting to see a light at the end of the tunnel on that one. And as Ken said, their volume is off a little bit. We're still buying. We won't see tremendous growth. And quite honestly, we have some better channels right now, but the relationship between us and ApplePie and their customer base has really come a long ways in the last 90 days. So, we're not really worried about the portfolio. There are things there. You've got a store that's operating, particularly some of these smaller coffee shops, and you got an owner that thought they were going to make $0.25 million a year working 6 hours a day, and they're slugging it out at 12, 14 hours a day and making $40,000 and they just give it up. So, that's a little bit on human nature, but we've reserved for it. We're working with them, and we just have -- we're getting to the table with people that are going south much earlier in the game, and we're able to help them. And I will tell you, the franchisors are stepping up as well. They don't want a bad reputation in the market, so they're finding other servicers and players and people to help or take over stores. And when we're in there early on, we can do that before it becomes a crisis and everybody wins in the end.

So David, just one other question. If you've been paying attention to the news, we days ago entered a new golden age. I'm curious what you think that means broadly defined for your opportunities. Are you seeing a legitimate increase in enthusiasm, demand for growing businesses and loans? Just curious your thoughts there.

I haven't seen any impact from the golden age yet. But what I can tell you -- and again, maybe it's just back to kind of being in the Midwest, you're located here in the Midwest. Hopefully, you're seeing the same thing. What I love about being part of the Midwest and that being our home base, we don't go to extremes one way or the other. We don't get appreciation in property values and prices like other areas of the country do, but we don't get the depreciation. When things fall apart, it's not as tough. We don't get the upside, but we don't have the wild crazy downside. So I think we and all of our businesses across the line outside of SBA and the super growth that's going on in SBA is over the last 2 or 3 years. We just put a hell of a team of people together there. We have some of the best, highest producing BDOs in the country that because of our consistency and our focus on the market and, call it Midwest values that we do what we say we're going to do and we get it done timely. Our business is just pretty rock solid and consistent. We're not expecting any massive spikes, nor are we expecting any massive problems. So, yes, we had that discussion a little earlier this morning. If you heard the some of the stuff that was being discussed in Davos this morning that the world is -- oil is going to go down. We just -- that's noise. We don't pay much attention to it.

Your next question is from John Rodis from Janney.

Hey. Ken, first off, just the tax rate we should use for now -- for '25?

Yes. I think as you -- if you think about the earnings trajectory on a quarterly basis for next year, we have nice -- kind of similar to this past year in '24, kind of a nice stair step up in terms of earnings, except we're at a much higher level. So, from our perspective, on a quarterly basis, looking at a tax rate of, say, maybe somewhere in the first quarter of 9%, ranging up to about 16%, 17% at the end -- by fourth quarter. That's the way we're looking at it. So I guess, on average, you're 13% to 14% for the year. So that's kind of the way that we're modeling it right now.

Okay. And then, Ken, just to clarify, I think you said on fee income year-over-year growth of 9% to 12%. Would that -- as far as the base for '24, is the base with or without the gains in the fourth quarter of $4.7 million?

It's without the gains. So back out the gains that gets you to, say $42.6 million and then go off of that.

There are no further questions at this time. I will now hand the call back to David Becker for the closing remarks.

Thank you, Jenny, and thanks, everybody, for joining us on today's call. As I said, we wrapped up '24 with some strong performance. We're entering '25 with a lot of great momentum and a lot of backlog and business and opportunity. We're highly optimistic about the future. Outstanding performance of the lending teams, along with emerging opportunities through the fintech and other partnerships positions us to a greater, more diversified revenue growth. We have the wind at our backs with a more favorable interest rate environment and an improving business climate. Adding all that together creates a great foundation to build on and deliver stronger earnings and profitability in 2025 and going forward. As fellow shareholders, we remain dedicated to maximizing shareholder value. We appreciate all your ongoing support and wish you a pleasant afternoon. Thank you.

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect your lines.