First Internet Bancorp Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
April 24, 2025

There are 10 speakers on the call.

Operator

And please note that today's call is being recorded. I would now like to turn the conference over to Ben Brodkowitz from Financial Profiles Inc.

Operator

Ben, please go ahead.

Speaker 1

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.

Speaker 1

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 Lubbock. 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.

Speaker 1

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 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.

Speaker 2

Thank you, Ben. Good afternoon, everyone, and thanks for joining us to discuss our first quarter twenty twenty five 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 Lubbock, our CFO, will walk through the numbers in more detail, and I'll hop back on for the Q and A session at the end.

Speaker 2

Nicole, over to you.

Speaker 3

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.

Speaker 3

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.

Speaker 3

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 pre provision income of $12,000,000 which is up 10.8% over the prior quarter's adjusted amount and up almost 50% over the first quarter of twenty twenty four. 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 twenty twenty four.

Speaker 3

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 improvement in fully tax equivalent net interest margin. We remain confident that net interest income and net interest margin will continue to trend higher throughout 2025 if the Fed takes no additional rate actions or moves rates lower. In either of those two scenarios, deposit costs would decline over the course of the year, driven in part by a significant repricing gap on maturing CDs.

Speaker 3

Additionally, thanks in part to the success of our embedded finance FinTech partnerships growth, we have been able to pay down higher cost brokered deposits. Side note, our FinTech partnerships relationships also contribute noninterest income on oversight and transaction fees and, on a limited basis, interest income. Embedded finance is a complex business, and we are proud of our teams for the collaborative effort it takes to grow meaningful partnerships while maintaining an appropriate risk management framework. Another bright spot in the first quarter was new loan origination yields that continue to remain well above our overall portfolio yield. During the first quarter, our weighted average rate on funded originations was 7.78%, which was up 50 basis points over the prior quarter.

Speaker 3

Yet another positive trend is the continued strong performance of our small business lending team, which is a key component in our strategy. Originations were down compared to the fourth quarter. That is seasonal and expected. Our pipelines give us confidence we will achieve $600,000,000 of originations over the course of 2025. Solid loan volume and gain on sale revenue were both up over the prior quarter.

Speaker 3

But to really see the results of the investment we've made in this business, compare the progress we made on a year over year basis. Origination and loan sale volume were up 2236%, respectively, over the first quarter of twenty twenty four. And through the date of this earnings call, we remain the eighth largest SBA seven program lender for the SBA's twenty twenty five fiscal year to date. Turning to earnings for the quarter, we reported net income of $900,000 and diluted earnings per share of $0.11 Net income for the quarter was significantly impacted by the elevated provision for loan losses. During the quarter, we took steps to address certain problem loans and recognized $9,700,000 of net charge offs, most of which were related to the franchise finance and small business lending portfolios.

Speaker 3

As a result, net charge offs to average loans totaled 92 basis points. I would note that approximately $5,800,000 of these charge offs were related to loans that had specific reserves existing. Similar to loans we charged off last quarter, the issues with these loans and these credits were borrower specific, not driven by any particular industry, geography, referral source or lender, nor are we seeing any significant trends of stress within certain industries or regions. We had certain problem credits in various stages of workout or delinquency where the outlook for a positive outcome was becoming less likely. So we made the decision to charge these loans off and recognize the losses now.

Speaker 3

Overall credit quality remains sound. Nonperforming loans to total loans were 80 basis points, and nonperforming assets to total assets were 61 basis points at quarter end. The increase in nonperforming loans came from franchise finance and small business lending. With the elevated level of economic uncertainty, we felt it prudent to take action and get in front of some potential problem loans. Part of the actions taken included recording specific reserves where we believe impairment may exist, which added a net amount of $3,300,000 to the allowance for credit losses and was recognized in the provision for loan losses.

Speaker 3

At the moment, we have specific reserves on about onethree of the total nonperforming loan balance, while our teams work diligently with these borrowers for positive outcomes. Despite the increase in nonperforming loans, our asset quality metrics remain in line with peers. While we're not pleased with the level of net charge offs and the migration of franchise finance and small business lending loans to nonperforming status, we felt it was prudent to get in front of credits where there was no likely path to success and recognize those losses in the first quarter. Going back to the theme of controlling what we can control, we have adequate resources on our loan servicing and special assets teams as well as processes in place to address any loans showing signs of stress. Our credit teams review data constantly to look for trends and areas to refine our underwriting standards.

Speaker 3

Turning to Slide four. I'd like to take a few moments to highlight our lending activity for the quarter. We're proud of the work our lending teams did over the quarter to produce solid loan growth of 8% on an annualized basis. Nearly all of our lines of commercial lending experienced growth with balances up over almost $90,000,000 from the fourth quarter of twenty twenty four or 11% on an annualized basis. Our construction and commercial real estate team delivered another strong quarter, originating almost $70,000,000 in new commitments.

Speaker 3

In the aggregate, construction investor commercial real estate balances increased $86,000,000 Projects continue to progress, leading to strong draw activity on existing commitments. And certain completed projects transitioned to the investor commercial real estate portfolio. At quarter end, unfunded commitments in our construction portfolio totaled $446,000,000 Upcoming draws on these loans, along with the option to deploy excess liquidity to retain a portion of SBA originations on our balance sheet, will play a meaningful role in the ongoing shift of our loan portfolio toward higher yielding variable rate loans. Approximately 30% of our loan book is variable rate today compared with sixteen percent three years ago, demonstrating tangible evidence of our commitment to reduce interest rate risk. On the consumer side, total balances were down with expected declines in residential mortgage and home equity balances, combined with seasonally lower originations in the recreational vehicles and other consumer loans portfolios.

Speaker 3

We did, however, have solid origination activity in the trailers portfolio. We focused on the super prime borrower in our consumer lending, and rates on new production were in the low 8% range. Furthermore, delinquencies in these portfolios remain extremely low at 10 basis points of total consumer loans. I'm proud of the work that the employees of First Internet Bank put in to deliver continued improving performance and a six quarter streak for growth in revenue and net interest income and strong net interest margin expansion. Combined with the ongoing investments we've made in small business lending, we remain confident in the earnings momentum we have built.

Speaker 3

With the ongoing evolution of our loan portfolio, greater revenue diversification and anticipated reductions in deposit costs, we are well positioned to drive continued revenue growth and enhanced profitability for the balance of 2025. I will now turn the call over to Ken for more details of our financial results of the quarter.

Speaker 4

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 $111,000,000 or over 2% during the first quarter and period end deposits were up modestly from the prior quarter. Growth in deposits were primarily driven by growth in FinTech partnership deposits, which are reflected in both non interest bearing and interest bearing demand deposits as well as money market accounts. The growth in deposits was partially offset by a decline in higher cost CDs and broker deposits.

Speaker 4

Non maturity deposits were up almost $335,000,000 or 15%, reflecting the increase in FinTech partnership deposits. Total deposits from our FinTech partners were up 37% from the fourth quarter and totaled $881,000,000 at quarter end. Additionally, these partners generated almost $23,000,000,000 in payments volume, which was up 21% from the volume we processed in the fourth quarter. Total FinTech partnership revenue was over $1,100,000 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 $104,000,000 or 5% from the linked quarter.

Speaker 4

The strong growth in FinTech deposits allowed us to keep CD pricing lower and manage new production volume. We originated $285,000,000 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 four fourteen million dollars with an average cost of 5.06%. Looking forward, we have $355,000,000 of CDs maturing in the second quarter of twenty twenty five with an average cost of four point eight seven percent and $486,000,000 maturing in the third quarter of twenty twenty five with an average cost of 4.84%. In total, for the remaining of the year, we have $1,100,000,000 of remaining CD maturities with an average cost of 4.73%.

Speaker 4

With current new production rates remaining in the range of 4.05% to 4.1%, we expect a continued positive pricing gap between new production and maturing CDs over the next several quarters, giving us confidence that deposit costs will trend lower over the course of the year. Moving to Slide six. At quarter end, total liquidity remained very strong, reflecting cash and unused borrowing capacity of $2,100,000,000 On balance sheet liquidity grew through the quarter as growth in FinTech deposits supplemented with existing cash balances from the end of the fourth quarter. We deployed a portion of this liquidity to pay off a significant amount of higher cost brokered deposits in addition to the net decline in CD balances as well as fund loan growth and securities purchases. With modest deposit growth and loan growth of $84,000,000 or 2%, our loans to deposit ratio increased to 86% from 84.5% at the end of the fourth quarter.

Speaker 4

At quarter end, our cash and unused borrowing capacity represented 180% of total uninsured deposits and 230% of adjusted uninsured deposits. Turning to Slide seven and eight. Net interest income for the first quarter was $25,100,000 and $26,300,000 on a fully taxable equivalent basis, up 6.66.3% respectively from the fourth quarter. The yield on average interest earning assets increased to 5.57% from 5.52% in the linked quarter due primarily to a six basis point increase in the yield earned on loans and a 12 basis point increase in the yield earned on securities, partially offset by a 31 basis point decrease in other earning assets. A full quarter's impact of the Fed's rate cuts in November and December were felt during the first quarter as higher yields and average balances in the loan and securities portfolio were more than offset by the large decline in both average cash balances and the rate earned on these balances, leading to a 1.2% decrease in total interest income compared to the linked quarter.

Speaker 4

However, the impact of the Fed rate cuts was more pronounced on deposit pricing, which when combined with significantly lower average Federal Home Loan Bank advance balances resulted in an almost 5% decline in interest expense and drove continued growth in net interest income. Net interest margin for the first quarter was 1.821.91% on a fully taxable equivalent basis, representing increases of fifteen and sixteen basis points respectively compared to the linked quarter. The net interest margin roll forward on Slide eight highlights the drivers of change in fully taxable equivalent net interest margin during the quarter. The yield on funded portfolio originations was 7.78% in the first quarter, up 50 basis points from the fourth quarter, reflecting the strong growth in construction, investor commercial real estate, small business lending and C and I. Pipelines remain solid in these lines of business, giving us further confidence that net interest income will continue to grow in future quarters.

Speaker 4

Related to deposits, looking at the graph on Slide eight that tracks our monthly rate on interest bearing deposits against the Fed funds rate, you can see that our deposit costs are continuing to trend down along with the decline in Fed funds. With lower CD pricing across the maturity curve, we anticipate that interest bearing deposit costs will continue to decline in the second quarter as high cost CDs mature and are replaced at much lower rates with either Fintech deposits or new CDs. This is expected to help drive continued net interest income growth and net interest margin expansion even without any further Fed rate cuts. At quarter end, we had $1,500,000,000 of deposits indexed to Fed funds. So if the Fed does resume lowering rates later in the year, the potential exists for further deposit cost reductions.

Speaker 4

Turning to noninterest income on Slide nine. Noninterest income for the quarter was $10,400,000 down $5,500,000 or 35% from the fourth quarter. As a reminder, the fourth quarter benefited from $4,700,000 of prepayment and terminated interest rate swap gains related to the pay down of Federal Home Loan Bank advances. Excluding these gains, the sequential decrease was $800,000 or 7%. Gain on sale of loans totaled $8,700,000 for the quarter, up 1% over the fourth quarter with SBA loan sales driving this increase.

Speaker 4

SBA loan sales volume was $108,800,000 up 2% quarter over quarter, while net gain on sale premiums were down a modest six basis points. The majority of the decrease in non interest income was driven primarily by lower net servicing revenue resulting from a negative fair value adjustment to the loan servicing asset. Moving to slide 10, non interest expense for the quarter was $23,600,000 down $400,000 or 1.7% from the fourth quarter. The main driver was salaries and employee benefits, which decreased $900,000 or 6.7% due primarily to a decrease in incentive compensation. The lower salaries and employee benefits expense was partially offset by seasonally higher consulting and professional fees as well as higher loan expenses due to collection costs.

Speaker 4

Turning to asset quality on Slide 11. Nicole covered the major components of asset quality for the quarter in her comments, so I will just add some commentary around the allowance for credit losses and the provision for credit losses. The allowance for credit losses as a percentage of total loans was 1.11 at the end of the first quarter, up four basis points from the fourth quarter. The increase in the allowance for credit losses reflects specific reserves taken on loan relationships in the franchise finance and small business lending portfolios that were placed on nonaccrual during the quarter as well as growth in the overall loan portfolio, partially offset by the impact of economic metrics and qualitative factors in certain portfolios. At quarter end, the small business lending ACL to unguaranteed SBA loan balances was 5.8%.

Speaker 4

Additionally, at a higher level, if you exclude the balances and reserves on our public finance and residential mortgage portfolios, which have lower coverage ratios given their lower inherent risk, the allowance for credit losses represented 1.32% of loan balances. The provision for credit losses in the first quarter was $11,900,000 compared to $7,200,000 in the fourth quarter. The provision for the quarter was driven primarily by the elevated net charge offs and the increase in specific reserves related to franchise finance and small business lending. Moving to capital on Slide 12. Our overall capital levels of both the company and the bank remain solid.

Speaker 4

The tangible common equity ratio was 6.55%, which declined seven basis points as balance sheet growth outweighed the positive impact of lower interest rates on the accumulated other comprehensive loss. If you exclude accumulated other comprehensive loss and adjust for normalized cash balances of $300,000,000 the adjusted tangible common equity ratio would be 7.17%. From a regulatory capital perspective, the common equity Tier one capital ratio remains sound at 9.16%. And before I wrap up, I would like to provide some updates on our outlook for 2025. We expect loan yields to increase as we continue to originate new production at rates well above the current portfolio yield.

Speaker 4

We also expect deposit costs to continue declining as one, we recognize the significant CD repricing gap on over $1,000,000,000 of CDs maturing over the next nine months and two, we see the benefit of paying down a significant amount of higher cost brokered deposits at the end of the second at the end of the first quarter. Assuming loan growth remains in the range of 10% to 12% for the year and deposit growth in the range of 5% to 7%, we expect that full year net interest income will increase in the neighborhood of 40% or more over twenty twenty four's full year amount and fully taxable equivalent net interest margin will increase throughout the year and should be in the range of 2.35% to 2.45% by the fourth quarter of twenty twenty five. If the Federal Reserve were to resume reducing short term interest rates, our net interest income and net interest margin would likely exceed these projections. One near term change to our revenue outlook relates to noninterest income and specifically gain on sale revenue related to SBA loans. As many of you have probably read, the Small Business Administration is going through a number of changes right now, including elevated repurchase rates across its entire portfolio as well as fresh amendments to standard operating procedures.

Speaker 4

Additionally, we have established First Internet Bank as a top ten seven program lender. Our activities are falling under a more watchful eye at the SBA. Therefore, we are making some changes to our loan sale process that align completely with SBA standard operating procedure in order to protect the guarantee on these loans, which will result in a longer hold period before we sell a loan on the secondary market. This process enhancement will cause a temporary one quarter decline in gain on sale revenue. However, we anticipate we will return to a normalized gain on sale run rate as we approach the second half of the year.

Speaker 4

Additionally, the decline in noninterest income during the second quarter will be partially offset by higher interest earned on the loans during the hold period, which will also benefit net interest margin for the quarter. On the expense side, our outlook remains consistent with the guidance we provided on last quarter's call. That is, we expect annual non interest expense to be up in the range of 10% to 15% over the full year 2024 amount with a modest ramp up on a quarterly basis. And finally, with respect to the provision, as Nicole mentioned in her comments, we believe we have made significant progress in identifying and acting on problem loans in the franchise finance and SBA portfolios. We recognized an elevated level of losses this quarter.

Speaker 4

If economic uncertainty is prolonged, we may experience additional losses in the second quarter. However, we are seeing a slowdown in the pace of new delinquencies, which provide some level of optimism that the provision for credit losses will moderate in the second half of the year. With that, I will turn it back to the operator so we can take your questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. You.

Speaker 5

first question is from Tim Switzer from KBW. Please go ahead.

Speaker 6

Hey, good afternoon. Hope you guys are doing well.

Speaker 1

Hi, Tim. Tim.

Speaker 6

I appreciate your commentary on the impact of some of the changes going on with SBA, and I I had a few follow ups on that. One more more specifically, I'm sorry if I missed it, but did you quantify or can you quantify the expected onetime impact on fees in q two?

Speaker 4

Yeah. I I think probably in in terms of just total noninterest income for the quarter, we're probably going to be somewhere closer in the range of, say, 5,000,000 to $6,000,000 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.

Speaker 2

I get you. Okay. And that's on the non interest 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.

Speaker 6

Right. As you hold them on the balance sheet. Makes sense. Right. Looking looking further out beyond q two, SBA, you know, reinstated a lot of the fees, for smaller dollar loans, particularly those below a million dollars.

Speaker 6

Are you able to tell us, you know, like, your average loan size is in the SBA or, like, what percent of your originations are below a million dollars?

Speaker 3

Our average loan size, Tim, is right just north of $1,000,000 So the fees that small loan that had been waived on small loans really didn't apply to us. We're not doing volume in the small loan game. So we were passing along to the borrower the SBA guaranteed fee on our seven 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 this space.

Speaker 3

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.

Speaker 6

Okay. Got it. 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?

Speaker 4

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, the 25 basis point rate cut on an annualized basis is about $3,600,000 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.

Speaker 4

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 of a twelve month period.

Speaker 6

Got it. Very helpful. Thank you, guys.

Speaker 5

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

Speaker 7

Hey, everyone. Good afternoon. Thanks for taking the questions.

Speaker 3

Hi, Nate.

Speaker 7

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

Speaker 4

Well, maybe we'll address the rate piece of it first. It's yes, I think the higher rate environment certainly makes an interest payment higher. But when you think about a '25 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.

Speaker 4

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, you know, working with those borrowers and either addressed you know, either taken action via charge off or specific reserve or or continue to work with the borrower. But it's it's an uncertain environment. So I I think the the, you know, loss history of the past couple 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.

Speaker 4

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.

Speaker 7

Right. Perfect. I understand it's kinda tough to predict kind of the magnitude of kinda how much lost content goes down during the second quarter and kind of I think you alluded to that dropping even further in 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 what that translates into kind of the overall charge off level as this year progresses?

Speaker 4

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

Speaker 7

Okay. That helps. And then we'd love to just get kind of your updated thoughts on share buybacks, just given where the stock's trading and maybe kind of slowing balance sheet growth just to buyback the stock more so just based on where that's at today?

Speaker 4

Yes. I will cover balance sheet growth first. I mean, we do have we had a I think we had a solid quarter of loan production. And Nicole talked about the SBA portfolio or the SBA team continuing to have high pipeline. Some of our commercial lending verticals still have good pipelines in front of them, good optimism.

Speaker 4

And we always do this too, but we're certainly looking at ways where we can kind of find some balance sheet capacity elsewhere. And the loan sale market hasn't other than SBA, the loan sale market is 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. You know, 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.

Speaker 2

Yeah. Maybe if the if 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.

Speaker 7

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

Speaker 4

I think 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 obviously, kind of in prior years, it's a bit of a ramp, right, a little bit more higher But yes, that 10% to 15% year over year growth is a good number.

Speaker 7

Of $90,000,000 or so in 2024, correct?

Speaker 4

Yes. Okay.

Speaker 7

Great. I appreciate all the color. Thanks, everyone.

Speaker 2

Thank you.

Speaker 5

Your next question is from Brett Rabatin from Hovde Group. Please go ahead.

Speaker 8

Hey, good afternoon, everyone. Wanted to make sure I 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 kind of transpired during 1Q that made it obvious that some of these franchise finance loans, were stressed. And then I didn't hear a number.

Speaker 8

I don't know how many of that how much how many specific credits that 5,800,000.0 related to in terms of total deals?

Speaker 4

I think what we saw in there, I'll I'll kind of I'll divide it into two buckets. One is what we charged off, and and we had loans that we had specific reserves on at the 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 developments on some of those loans that you know, a guarantor, you know, a strong guarantor that we were working with dependent 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.

Speaker 4

So so that kind of drove some of the that drove the charge off activity. And and then on the specific reserve side, again, there were some loans that, you know, earlier, you know, go back to fourth quarter were maybe ten days delinquent, something like that. The borrower maybe have been a loan we identified to keep our eye on. But as we work through the quarter, we just we had a handful of loans that as we kinda got into really late in the quarter, hit ninety days delinquency. Had whether it was a unit, again, a unit closed or some kind of negative event or perhaps a a drink a a drop in the guarantor strength.

Speaker 4

Just a a a you know, some credits near the end of the quarter that, you know, the prudent course of action I mean, again, we're still continuing to work with these borrowers towards a an optimal outcome, but decide but, you know, elected the prudent thing to do was put a put a specific reserve on on these. Now the the one thing about these franchise loans in particular is it does take a while sometimes to kinda work through the collection process and work through the legal process. It's, a little bit different than a piece of real estate. There's options you have as you work through these, whether through legal proceedings, percentual refis, franchisors stepping in to find a stronger franchisee to buy the unit. That is a course of action on some of these, and it just take but it just takes a while to get there.

Speaker 4

Or another you know, we've had some success with structured settlements on some of these where, you know, the borrower, you might have one guarantor who's willing to pay off 85 percent of the loans, and we're starting to get some success working on those. But it just takes a while to work through some of those, but the most prudent course of action is put a reserve on it. And when we collect recoveries, if at all down the road, we'll recognize them then.

Speaker 3

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

Speaker 1

trend. Okay.

Speaker 2

And Brett is and I and it's a ahead, my man.

Speaker 8

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 kind of 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 borrower use perspective?

Speaker 3

I would say, Brett, 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 going to be a good match for our portfolio. But categorically on the franchise finance, there's nothing that we we talk about it with SBA, and we're seeing it in franchise as well, that these are very borrower specific situations.

Speaker 8

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

Speaker 2

It's 13,800,000.0 loans on the franchise category, and we've reserved 44% against that 13.8. One other point on it, Brett, 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.

Speaker 2

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.

Speaker 2

I think if there's anything that caused a little bit of a a blip up here in the first quarter is the threat of potential tariffs on top and cost of goods going up. So if somebody was kinda on the border, and 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.

Speaker 2

So some of the reserves that we took and some of the charge offs we had during the first quarter, we anticipate getting some of that money back. And as we stated time and again here in both 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 it was at this time in the first quarter. So hopefully headed in the right direction, but economic factors could blow it up again.

Speaker 8

Okay. If I could ask one last quick one just around deposits. You had a nice shift towards interest bearing deposits and maybe away from what you might call hot hotter money.

Speaker 1

What was the you know, it

Speaker 8

just kinda gets stuck in that bucket, which increased the linked quarter interest bearing deposit number. What, what's the rate on those? And 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 wanted to make sure I understood that correctly.

Speaker 4

Well, what's really driving the interest bearing demand and and the noninterest bearing demand as well is just growth in fintech relationships. Those are all classified in interest bearing demand. So obviously, the strength in those, I kind of 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 we continue to experience growth in CD.

Speaker 4

So I expect our expectation is that CD balances will continue to decline. Now some of those some of those maturities will be replaced to a limited extent by new new production and renewals. But really, the bulk of what's gonna backfill it and and even grow the deposits is gonna be on the fintech side.

Speaker 1

Okay. Great. Appreciate the color.

Speaker 4

Great. Thanks, Brett.

Speaker 5

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

Speaker 9

Hey. Good afternoon, guys. This is Logan on for George. Maybe just kinda following up there on, hey, 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 kind of trying to ramp?

Speaker 9

Are things going as you'd expect? And then it seems like we've kind of 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? Or just an update there would be appreciated.

Speaker 3

Sure. I'll take that. Thanks, Logan, for the question. Our fintech 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.

Speaker 3

As things have evolved over time, we are seeing better quality, more mature programs that are coming in looking for a bank partner. And because of our success and reputation in this 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.

Speaker 3

And there's no reason for us to go nuts in that space because as you've seen, we're having good growth in deposits and in transaction volume with the partners that we have, and we're expanding the relationships with partners that we have. So a partner where we've been doing only a deposit program, now we're talking about some lending opportunities. I'd always love to talk about growing programs and relationships with our existing partners because that's just going to bring success for everyone. So I 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.

Speaker 3

We have seen some movement in the sponsor bank space overall, but I would say that we try to stay focused on what we do well. And you know, when when they come knocking, we have a good story to tell.

Speaker 2

Logan, real quick. George always asks 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 1,100,000.0 in the first quarter compared to 2,000,000 for all of last calendar year, and it continues to grow quarter over quarter. We had forecasted 4,000,000 in revenue for this year and it's all indications are we're gonna blow through that. So as Nicole said, we have great partners today that are getting bigger and growing.

Speaker 2

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.

Speaker 9

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. I think the full year guide implies you do on average just a little bit more than that.

Speaker 9

Is there anything you'd that we should be aware of in terms of the cadence? I mean, 2Q see a little better given that you're going to hold some of the SBA on the balance sheet? Or should that be kind of a good baseline for the rest of the year on a quarter to quarter basis?

Speaker 4

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

Speaker 8

third quarter.

Speaker 2

Logan, we also had 200,000,000 in high cost deposits that we paid off right at quarter end, brokered stuff that we've done back from the SBB bank days. So that had no impact on the first quarter and that will show up here in the second quarter. So both sides of the equation, the 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 recycling of the CDs.

Speaker 9

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

Speaker 4

All right. Thanks, Logan.

Speaker 5

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

Speaker 2

Thanks, everybody. We appreciate you joining on today's call. First Internet 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.

Speaker 2

Furthermore, emerging growth opportunities with key fintech partnerships, as I just discussed, are expected to further diversify and drive revenue growth. So given our ongoing effort to improve our loan mix and anticipated reduction in deposit costs, 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.

Speaker 5

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

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Earnings Conference Call
First Internet Bancorp Q1 2025
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