Good day, everyone, and welcome to the First Internet Bancorp Earnings Conference Call for the First Quarter of 2025. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call, you require immediate assistance, please press 0 for the operator. And please note that today's call is being recorded. I would now like to turn the conference over to Ben Brodkowitz, National Profiles Inc. Ben? Please go ahead.

Thank you, Andrew. Hello, everyone, and thank you for joining us to discuss First Internet Bancorp's first quarter financial results. The company issued its earnings press release yesterday afternoon and it is available on the company's website at www.firstinternetbancorp.com. In addition, the company has included a slide presentation that you can refer to during the call. You can also access these slides on the website. Joining us today from the management team are Chairman and CEO, David Becker, President and COO, Nicole Lorch, and Executive Vice President and CFO, Ken Lovick. David and Nicole 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 uncertainty. 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 intended to supplement but not substitute for the most direct 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 to discuss our first quarter 2025 results. Today, Nicole Lorch, our President and COO, will give an overview of the quarter. Many of you on the call have already met her in investor meetings over the past few years. Next, Ken Lovick, our CFO, will walk through the numbers in more detail. And I'll hop back on for the Q&A session at the end. Nicole, over to you.

Thanks, David. The results for the first quarter were mixed. We continue to see strong positive momentum in many key operating trends, which reflects a tremendous effort on the part of our team. Yes, that progress is tempered by credit issues in our small business lending and franchise finance portfolios, which I will address later in my commentary. Let's talk first about the things that are going really well. Net interest income continued to grow, and net interest margin continued to expand. In fact, we achieved our sixth consecutive quarter of net interest income and core revenue growth. Those results were fueled by strong loan growth that drove yields on earning assets higher, while deposit costs continued to decline. Simply put, our revenue performance continues to demonstrate strong improvement across the board. Compared to the prior quarter's adjusted amount, we delivered total operating revenue growth of over 2% and more than 22% year over year. Our teams maintain a keen focus on controlling the controllable. That means winning new relationships with timely follow-up, certainty of execution, at disciplined pricing, and responsibly managing expenses. Starting with the highlights on slide three, I would like to discuss some key themes for the quarter in more detail. As a result of our continued improvement in operating performance and revenue growth, we reported pretax, pre-provision net income of $12 million, which is up 10.8% over the prior quarter's adjusted amount and up almost 50% over the first quarter of 2024. Revenue growth was driven by a 7% increase in net interest income compared to the fourth quarter, and 20% compared to the first quarter of 2024. The yield on the overall loan portfolio increased six basis points from the fourth quarter. Deposit costs declined 12 basis points. The result was a 16 basis point…

Thanks, Nicole. Since Nicole already covered the loan portfolio, let's turn to slides five and six where I will cover deposits in more detail. The average balance of deposits increased by $111 million or over 2% during the first quarter and period-end deposits were up modestly from the prior quarter. Growth in deposits was primarily driven by growth in fintech partnership deposits, reflected in both noninterest-bearing and interest-bearing demand deposits as well as money market accounts. The growth in deposits was partially offset by a decline in higher CDs and brokered deposits. Nonmaturity deposits were up almost $335 million or 50% reflecting the increase in fintech partnership deposits. Total deposits from our fintech partners were up 37% from the fourth quarter and totaled $881 million at quarter end. Additionally, these partners generated almost $23 billion in payments volume, which was up 21% from the volume we processed in the fourth quarter. Total fintech partnership revenue was over $1.1 million in the first quarter, which was up 30% from the fourth quarter as contributions from key partnerships continued to scale up and new pricing terms went into effect. Related to CD activity during the quarter, total balances were down $104 million or 5% from the linked quarter. The strong growth in FinTech deposits allowed us to keep CD pricing lower and manage new production volume. We originated $285 million in new production and renewals during the first quarter at an average cost of 4.07% and a weighted average term of twelve months. These were more than offset by maturities of $414 million with an average cost of 5.06%. Looking forward, we have $355 million of CDs maturing in the second quarter of 2025 with an average cost of 4.87% and $486 million maturing in the third quarter of 2025 with an…

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the number one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the number two. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question is from Tim Switzer from KBW. Please go ahead.

Hey. Good afternoon. Hope you guys are doing well. Hi, Tim. I appreciate your commentary on the impact of some of the changes going on at SBA, and I had a few follow-ups on that. One more specifically, I'm sorry if I missed it, but did you quantify or can you quantify the expected one-time impact on fees in Q2?

Yeah. I think probably in terms of just total noninterest income, for the quarter, we're probably gonna be somewhere closer in the range of, say, $5 million to $6 million for the quarter. But then if you think about if you look at the estimates, for the back end of the year, third quarter and fourth quarter, I think we feel we will be back to those levels. It's really just a one-quarter impact as we hold loans longer and then the cycle catches up.

I get you. And that's on the noninterest income, but we also will pick up as Ken mentioned earlier, additional revenue on the loan side. So we'll actually although we're down, you know, four to five, we'll pick up part of that in the loan interest income.

Right. As you hold them on the balance sheet. Makes sense.

Right. Looking further out beyond Q2, SBA, you know, reinstated a lot of the fees for smaller dollar loans, particularly those below a million dollars. Are you able to tell us, you know, like, what your average loan size is and the SBA or, like, what percent of your originations are below a million dollars?

Our average loan size, Tim, is right just north of $1 million. So the fees that, small loan that had been waived on small loans really apply to us. We're not doing volume in the small loan game. So we were passing along to the borrower that SBA guaranteed fee on our seven a loans that we're doing. We don't expect much impact there. And as it relates to the SOP generally, I mean, we're certainly digesting those changes that go into effect on June 1, along with every lender in the space. We have a fantastic pipeline right now. And we are looking at the loans that are in our underwriting phase to ensure that nothing needs to be restructured in response to the changes that are coming.

Okay. Got it. And the last question I have switching topics a little bit. But could you provide some details on just some updated expectations and what the impact of, say, 25 basis point rate cut would be to NII?

Yeah. I you know, if you you know, obviously, we're gonna run this on a static balance sheet. But on a static balance sheet, a 25 basis point rate cut on an annualized basis is about $3.6 million of NII. Again, that's annualized and the way to think about it is it does kind of ramp up on a quarterly basis. You can't just take 3.6 and divide by four. There's kind of a phase-in period. So you know, you're probably ramping up you know, 4 to 500,000 first quarter, then, you know, double that and then just kinda ramp up from there over the course of the twelve-month period.

Got it. Very helpful. Thank you, guys.

Your next question is from Nathan Race from Piper Sandler. Please go ahead.

Everyone. Good afternoon. Thanks for taking the questions.

Hi, Nate. Go back.

Going back to SBA, you know, just curious if kind of the loss assumptions that you guys laid out last quarter have changed much. And if the Fed remains on pause for longer than the market's expecting, you know, how do you kinda think about, you know, SBA loss content, you know, in this kind of current short-term rate environment going forward in relative to last quarter?

Well, maybe we'll address the rate piece of it first. It's yeah, think the higher rate environment certainly makes an interest payment higher. But when you think about a 25 basis or a 50 basis point decrease on a monthly payment on a loan, it's not really significant. You know, it's the the I think the the the higher rate environment probably doesn't play as big a role on on that. I think it's just more the economic uncertainty. You know, we have you know, currently, as I mentioned, we got you know, almost 6% reserved against the unguaranteed balance on our on our loan book. I think we've, you know, we've we've had some some borrowers that that have struggled and and have you know, either working with those borrowers and either addressed you know, either taken action via charge off or reserve or or continue to work with the borrower. But it's it's an uncertain environment, so I I think the the loss history of the past couple of quarters has been elevated. I think we put a big dent in that piece of it and and expect you know, that the that the loss rate should decline. But if you look at the SBA seven a program overall, as a whole, I mean, it's the default rates you know, have been increasing. So there like I said, there's the you know, there's a certain amount of economic uncertainty that's that's kind of affecting the small business community today.

Right. Perfect. I understand it's kinda tough to predict kinda the magnitude of kinda how much lost content goes down. Starting the same quarter? I think you alluded to that dropping even further the back half of the year. But just curious if you can kind of frame up kind of what you're seeing more specifically here in 2Q in terms of SBA charge-offs and then, you know, what that translates into kind of the overall charge-off level as this year progresses.

Well, so far in 2Q, I think we've we've seen activity. I think we've seen delinquencies come down. We've seen so far in 2Q, we've seen charge-off activity you know, or or specific reserve come down. Say, compared to last quarter, You know? But there's there's still a pipeline of loans we're keeping an eye on, but but certainly activity seems a bit lower at least so far through the second quarter. Than what we saw last quarter.

Okay. That helps. And then we'd love to just get kinda your updated thoughts on share buybacks, just given where the stock's trading. And maybe kinda slowing balance sheet growth just to, you know, buy back the stock more so just based on where that's at today.

Yeah. It's will cover balance sheet growth first. I mean, we we do have you know, we had a I think we had a solid quarter of loan production in you know, Nicole talked about the the SBA portfolio or the SBA team continuing to have high pipeline You know, some of the some of our commercial lending verticals still have good pipelines in front of them, good good optimism. And we and we always do this too, but we're certainly looking at ways where we can kind of find, you know, find some balance sheet capacity elsewhere and you know, the loan sale market hasn't you know, other than SBA, the loan sale market starting to come back a bit. So we're looking at some other areas there to free up some balance sheet space. So we're certainly looking to manage capital that way and and kinda manage balance sheet growth overall. And on and on the the buyback, we're certainly getting getting prepared and and getting our ducks in a row to look back at that market.

Yeah. Maybe the it's if the stock price stays below 50% of book, we'll definitely get back into a buyback situation. That's just lower than it should be. So as Ken said, we'll let the dust settle for a few days, but if it hangs here, we'll we'll definitely step back in.

Gotcha. And I'm sorry, Ken. I didn't catch it. Can you remind me what you're thinking for expenses terms of that trajectory over the balance of this year?

I think we we remain pretty confident in the guidance we gave last quarter, about 10% to 15% growth year over year, kind of annual over 2024. So, you know, obviously, kind of in prior years, it's a bit of a ramp. Right, a little bit more higher each quarter. Yeah, that 10 to 15% year over year growth is a good number.

Of $90 million or so in '24? Correct?

Yes.

Okay. Great. I appreciate all the color. Everyone.

Thank you.

Your next question is from Brett Rabatin from

Hey, good afternoon, everyone. Wanted to make sure I I understood understand you know, in the fourth quarter, you know, we had the asset quality cleanup. And then this quarter, you know, it seems like franchise finance in particular was, more problematic. And just wanted to see what, you know, what kinda transpired during one Q that made it obvious that some of these franchise finance loans were stressed. And then I didn't hear a number. I don't know how many of that how much how many specific credits that $5.8 million related to in terms of total total deals.

You know, I think what we saw in there I'll I'll kinda I'll divide it into two buckets. One is what we charged off. And and we had we had loans that we had specific reserves on. At the you know, whether it was sometime in the fourth quarter or prior to then, And we put a reserve on it, move it to nonaccrual, but we obviously continue to work with the borrower trying to get to the best possible outcome And late in the quarter, we just had some had some developments on on a on some of those loans that you know, a guarantor you know, a strong guarantor that we were working with depended, you know, you know, decided to ultimately throw up their arms and file bankruptcy. Just some some others where the the the unit was still open, but struggling and then ultimately closed near the end of the quarter. So so that kinda drove some of the that drove the charge-off activity. And then on the specific reserve side, again, there were some loans that, you know, earlier, you know, go back to fourth quarter were you know, maybe maybe ten days delinquent, something like that, the borrower may maybe have been a loan we identified to keep on keep our eye on, but you know, as we work through the quarter, we just we we had you know, a handful of loans that as we kinda got into really late in the quarter, hit ninety days delinquency. Had you know, whether it was a unit, again, a unit closed or some kind of negative event or perhaps a drink a drop in the guarantor strength Just some credits near the end of the quarter that you know, the prudent course of action I…

And I would also note just our anecdotally, Brett, our credit teams are noting that recent trends were getting better rates better better rate of callback from our borrowers and more interaction with them. So we're cautiously optimistic that that showing some positive trend.

Okay. And Brett is and I and it's go ahead, my man. Oh, I was I was just gonna ask. Nicole, I think you indicated I'm I'm looking at slide 18 with the detail on the franchise finance portfolio, and I I think you indicated that there wasn't any kinda rhyme or reason in terms of concentration. But you know, was it more limited service restaurants? Was there anything in particular that that seems to have been an issue from a from a borrower use perspective?

I I would say, Bret, that we're not necessarily seeing a category that is problematic on both a retrospective and a prospective basis, there may be some brands that we feel are not gonna be a good match for our portfolio. But, categorically, on the franchise finance There's nothing that it it we we talk about it with SBA, and we're seeing it in franchise as well that these are very borrower-specific situations.

Okay. And, Nicole, would you happen to have the total criticized number for the end of the quarter?

It's $13.8 million loans on the franchise category, and we reserve 44% against that 13.81 other point on it, Brett. The our internal policy is as Ken said, these loans are not as black and white as our consumer loans, as our property loans and stuff. And we had an internal policy. It's ninety days. We charge it off, take a specific reserve. So we kinda got caught up a little bit here in the first quarter. Kudos to the Apple Pie team. They have switched servicers that we talked about a couple quarters ago. They're getting in faster more furious in in pressing. Obviously, some of these folks have been fighting inflation for a long period of time. I think if there's anything that caused a little bit of a a blip up here in the first quarter and the threat of potential tariffs on top and cost of goods going up. So if somebody was kinda on the border, as Ken said, we out of the blue, somebody just say, hey. I'm done, and we're gone. But we're much better on getting in contact, getting in front of them. It takes a longer workout cycle, so some of the reserves that we took and some of the charge-offs we had during the first quarter, we anticipate getting some that money back. And as we stated time and again here, the SBA and the Apple pie and the franchise loans. It's the what is in that $30.60 category right now is is down over what what's at this time in the first quarter. So hopefully, headed in the right direction, but economic factors could blow it up again.

Okay. If I could ask one last quick one just around deposits. You know, you had a nice shift towards interest-bearing deposits and maybe away from what you might call hot hotter money. What was the you know, I guess, kinda get stuck in that bucket, which increased the linked quarter interest-bearing deposit number What, what what's the rate on those? And, Ken, it sounds like with all these CDs repricing, it sound I I got the impression that maybe there wouldn't be more mix shift change, but just wanna make sure I understood that correctly.

Well, what's really driving the interest-bearing demand in in the noninterest-bearing demand as well is is just growth in fintech relationships. Those are all classified in bearing demand. So obviously, with the strength in those, I kinda talked about the growth in quarter over quarter there. So those certainly were more than able to replace some of the CD funding. So and and we continue to experience growth in CDs. So I expect you know, our expectation is that CD balances will continue to decline to a limited extent by Now some of those some of those maturities will be replaced new new production and renewals. But, really, the bulk of what's gonna backfill it and and even grow the deposit is gonna be on the fintech side.

Okay. Great. Appreciate the color.

Great. Thanks, Brett.

Your next question is from George Sutton from Craig Hallum. Please go ahead.

Hey. Good afternoon, guys. This is Logan on for George. Maybe just kinda following up there on k, on some of the the deposit benefit you're seeing on the fintech side, can you just give us an update on sort of the pipeline there, both from a new partner perspective and the partners that you're kinda trying to ramp? Are things going as you'd expect? And then it seems like we've kinda continued to see attrition in in the space more broadly Are you seeing anything change in terms of your opportunities to maybe take more share? Just just an update there would be appreciated.

Sure, I'll take that. Thanks, Logan, for the question. Our fintech partners partnerships and embedded finance team is doing really well with managing our relationships that we have. We have a couple of new prospects in the pipeline As as things have evolved over time, we are seeing better quality, more mature programs that are coming in looking for a a bank partner. And because of our success and reputation in the space as being a solid, reliable bank, sponsor. We are we're winning good looks. So I would say that the outlook there is strong. What we we expect to keep the numbers somewhat moderate in terms of programs that we sponsor. Right now, it's less than two dozen, and there's no reason for us to go nuts in that space because as you've seen, we're we're having good growth in deposits. And in transaction volume with the partners that we have we're expanding the relationship with partners that we have. So a partner where we've been doing a only a deposit program, now we're talking about some lending opportunities I'd always love to talk about growing programs and and relationships with our existing partners because that's just going to bring success for everyone. So don't expect us to go nuts in terms of growing the number of programs and relationships that we have, but certainly expanding the ones that we do have. So grateful for the relationships that we've been able to forge there. We have seen some movement in the sponsor banks space overall, but I would say that, you know, we try to stay focused on on what we do well. And you know, when when they come knocking, we have a good story to tell.

Logan, real quick. George always Yeah. Ask me what's going on on the revenue side so you can fill them in on the other part. We bottom line on the fintech space is $1.1 million in the first quarter. Compared to $2 million for all of last calendar year. And it continues to grow quarter over quarter. We had forecasted $4 million in revenue for this year, and it all indications are we'll gonna blow through that. So as Nicole said, we have great partners today that are getting bigger and growing. We're adding on a judicious basis new partners and it's going it's pretty solid and going pretty smooth for us right now.

Got it. Well, that's great to hear. Maybe just a quick follow-up. You guys got the 15 basis points of expansion on the NIM this quarter. Think the full year guide implies you do, on average, just a little bit more than that. Is there anything you'd that we should be aware of in terms of the cadence? I mean, it would would 2Q see a little better given that you're gonna hold some of the SBA on the balance sheet? Or Or should that be kind of a good baseline for the rest of the year? On a quarter to quarter basis?

Yes. I think we'll probably see a bigger benefit in the second quarter, again, going back to the SBA and the hold period on that. And then kind of kind of maybe ramping I mean, I think we'll see some we'll continue to see some nice growth in the third quarter, albeit maybe not as much as second quarter and then fourth quarter probably not as much as as as third quarter.

Logan, we also had $200 million in high-cost deposits that we paid off right at quarter end. Brokered stuff that we've done back from the SVB bank days. So that had no impact on the first quarter, and that'll show up here in the second quarter. So both sides of the equation yield should go up and because of the SBA side as well as the cost of funds continue to decline both for the payoff we did at the end of the quarter and the the recycling of the CDs.

Okay. That's helpful. Thanks for taking my questions.

Alright. Thanks, Logan.

There are no further questions at this time. Please proceed with closing remarks.

Thanks, everybody. We appreciate joining today's call. First Internet Bancorp has consistently produced improving revenue net interest income, while the macro environment remains uncertain, we're excited about the future. Our lending teams have continued to deliver very strong performance. Particularly in the small business and construction lending. Furthermore, emerging growth opportunities with key fintech partners as I just discussed, are expected to further diversify and drive revenue growth. Given our ongoing efforts to improve our loan mix and anticipated reduction in deposit cost, we are confident that we are well positioned to achieve stronger earnings in the coming quarters. As fellow shareholders, we remain committed to driving improved profitability and enhanced value. We thank you for your support. And wish you a good afternoon. Thanks.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.