First Internet Bancorp

and welcome to the first Internet Bank Corp's fourth quarter and full year 2024 conference call. At this time, all lines are in a 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 star zero for the operator, and please note that today's event is being recorded. I would now like to turn the conference over to Ben Bergkowitz, 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 Lovick. 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 and 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 focused 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 on the presentation, quarterly highlights are on slide three. It is only fitting that we would cap off a year with so much activity with a busy quarter. With a number of moving parts that impacted our results, our core business continued several of its upward trends. We drove an 8% increase in net interest income, making this our fifth consecutive quarter of growth in net interest income, notably a five basis point improvement in net interest margin. Even as the Federal Reserve rate cuts impacted the yield on new loan originations, The yield on the overall portfolio increased three basis points from the third quarter. The impact of the rate cuts was even more pronounced on deposit costs, which declined 17 basis points. At $24.7 million on a FTE basis, net interest income for the fourth quarter of 2024 was up 17% compared to the fourth quarter of 2023. We remain confident that net interest income and net interest margin will continue to trend higher throughout 2025 as we experience the full impact of the 2024 Fed rate cuts on deposit costs and continue to improve the composition of the loan portfolio. Additionally, our balance sheet flexibility will allow continued opportunities to optimize our funding costs as higher cost wholesale funding and CDs mature. Another positive trend is the continued strong performance of our small business lending team. As I noted earlier, gain on sale of SBA guaranteed loans is a critical component of our non-interest income. Loan originations in this line of business were strong, up over 2% compared to the prior quarter, which had previously been a quarterly record for us. Consequently, SBA gain on sale revenue, while strong on a historical basis, dipped slightly this quarter. Decline was really more of a timing issue as a large portion of the originations were closed during the second half of December, and there is a lag between closing the loan and being able to sell it in the secondary market in order to complete the necessary post-closing activities. So while we didn't get to record revenue from those loan sales in the fourth quarter, the upside is we're very well positioned for a great start to the 2025 for gain-on-sale revenues. Turning to the earnings for the quarter, we reported net income of $7.3 million, up 5%, and diluted earnings per share of $0.83, up 4% from the third quarter's reported results. As I mentioned earlier, we had some moving parts that impacted the quarter's results. First, in connection with paying down federal home loan bank borrowings, we recognized $4.7 million of prepayment and terminated interest rate swap gains. When adjusting for this activity, revenue for the quarter totaled $34.8 million, an increase of almost 3% from the third quarter and 28% from the fourth quarter of 23. This marks the sixth consecutive quarter of increase in total revenue. During the quarter, we took steps to address certain problem loans and recognized $9.4 million in net charge-offs, most of which related to the SBA portfolio. As a result, net charge-offs to average loans totaled 91 basis points I would note that approximately 3.4 million of these charge-offs were related to loans that already had existing specific reserves. As with most small business loans, the issues with these credits were borrower-specific and not driven by any particular industrial geography, and nor are we seeing any significant trends of stress with certain industries or regions. We had certain problem credits in various stages of workout where the outlook for a positive outcome was becoming less likely. So we made the decision to charge these loans off and help de-risk the portfolio going forward. Our overall credit quality remained sound. Non-performing loans to total loans were 68 basis points. Non-performing assets to total assets were 50 basis points at the end of the quarter. The increase in non-performing loans was due to additions in franchise financing and small business lending as we took action to get in front of some potential loans. Despite the increase in non-performing loans, our asset quality metrics still compare favorably to all of our peers, and we have adequate resources on our loan servicing and special assets team, as well as the processes in place to address any loans showing a sign of stress. At the moment, we have specific reserves on about 30% of the total non-performing loan balance. Another high-level point before I move on And that is an update on our Pentec partnership business. We told you at this time last year that we did not plan for rapid growth in the number of sponsor programs in 2024. We focused instead on nurturing the relationships we had already entered into amid challenges in the bank Pentec partnership space. This turned out to be a prudent decision. I'm pleased to report we have seen growth on both sides of the balance sheet and in non-interest income as well. I believe the partnerships between chartered institutions and solution-focused innovators is critical to the evolution of financial services. Without it, customers would still be standing in teller lines to cash checks and get their savings passbooks updated. We are committed to exploring relationships with partners that advance the financial services landscape and doing so in a way that creates value for our shareholders. On the topic of shareholder value, I'll make one last point on this slide, and that is how keenly we monitor tangible book value per share as a key measure of our focus on shareholder value. Despite the sizable increase in intermediate and long-term interest rates during the quarter, tangible book value per share only experienced a slight decline, and it's up nearly 6% on a year-over-year. Since 2018, our tangible book value per share is up more than 55%. which reflects our commitment to operational discipline, diligent balance sheet management through some very challenging periods for the industry. We, like you, are shareholders in Perse Internet Bank. Turning to slide four, I've already made some high-level comments about our lending activity. I'm proud of the work our lending teams did over the quarter to produce strong loan growth of 13% on an annualized basis. Virtually all of our lines of commercial lending experience growth, with balances up almost $140 million from the third quarter, or 17% on an annualized basis. Our small business lending team has been a key driver in our efforts to reposition the loan portfolio and diversify our revenue streams. For the full year 2024, SBA loan originations totaled almost $540 million, up 45% over 2023, with solid loan volume also up 45% year over year. demonstrating the measurable impact we can make by providing growth capital to entrepreneurs and small business owners across the nation. Following strong production in the fourth quarter, retained balances increased 11% compared to the linked quarter. Our small business pipeline remains robust, and with the staffing investments we have made, we are targeting $600 million of SBA loan originations for 2025. and we are proud to be ranked as the eighth largest SBA 7A lender in the nation for the SBA's 2024 fiscal year. The growth of our SBA business also drove a significant increase in non-interest income for the year, which comprised one-third of the total adjusted revenue, up from 26% in 2023. Our construction and investor commercial real estate team had another solid quarter, originating over 70 million of new commitments, and the aggregate construction and investor commercial real estate balances increased 81 million as we experienced strong growth activity on existing commitments. At quarter end, total unfunded commitments on our construction line of business were $480 million. As these projects progress, draws on these loans in the upcoming months, combined with the optionality to deploy excess liquidity to hold a portion of our SBA originations on our balance sheet that will play a meaningful role in the continued shift of our loan portfolio towards higher-yielding variable rate loans. For the more favorable interest rate environment, our single-tenant lease financing team had an active quarter originating almost $40 million of new loans, which translated into solid loan growth of $18 million over the linked quarter. Additionally, our public finance team had a solid quarter with balances up $23 million over the third quarter as it capitalized on some high-quality, shorter-duration opportunities with attractive tax-equivalent yields. On the consumer side, small business, the consumer side total balances were down as expected as declines in residential mortgage and home equity balances more than offset growth in our specialty consumer lines. where originations were down due to seasonal factors. We focused on the super prime borrower and our consumer lending and rates on new production were in the mid to low 8% range. The more delinquencies in these portfolios remained extremely low at 10 basis points of total consumer loan. I'm proud of the performance our lending teams turned in to finish the year strong. I'm proud of the work that all of the employees at First Internet Bank put in to deliver 12 months improving performance, and a five-quarter streak for growth in net interest income and net interest margin expansion. Combined with the ongoing investments we've made in small business lending, we remain competent in the earnings momentum we have built. Entering 2025, we are well-positioned with solid liquidity and capital levels and asset quality metrics that compare favorably to peer institutions, all the while continuing to optimize both sides of the balance sheet and further diversifying our revenue streams. Our team is committed to delivering strong earnings, growth, and net interest margin expansion that will create meaningful value for our shareholders in the years ahead. Now I'd like to turn the call over to Ken.