Q4 2024 First Internet Bancorp Earnings Call

January 23, 2025

We are in a listen only mode.

Following the presentation.

We will conduct a question and answer session.

Speaker Change: Any time Youre going to just call. It require immediate assistance. Please press star zero budget, operator, and pinch note.

Ben: This event is being recorded I would now like to turn the conference over to <unk> Financial Profiles, Inc. Ben. Please go ahead.

Ben: Thank you Johnny Hello, everyone.

Speaker Change: Thank you for joining us to discuss first Internet bancorp's fourth quarter fourth quarter.

Year end 2024 financial results the company issued its earnings press release yesterday afternoon.

Speaker Change: It is available on the company's website at Ww Dot first Internet Bancorp Dot com.

Speaker Change: 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 Change: We will conduct a question and answer session. If at any time during this call. We require immediate assistance. Please press star zero budget, operator, and please note that today's event is being recorded I would now like to turn the conference over to Baghdad College.

Speaker Change: Joining us today from the management team are chairman and CEO, David Becker and.

Ken Lubbock: And executive Vice President and CFO, Ken Lubbock.

Ken Lubbock: David will provide an overview of the quarter and 'twenty 'twenty, four and Ken will discuss the financial results.

Speaker Change: Sure.

Speaker Change: Please go ahead.

Speaker Change: Thank you Jenny Hello, everyone and thank you for joining us to discuss first Internet Bancorp's fourth quarter fourth quarter and year end 2024 financial results. The company issued its earnings press release yesterday afternoon and is available on the company's website at Ww Dot first.

Speaker Change: Then we'll open up the call to your questions.

Speaker Change: 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.

First Internet Bancorp.

Speaker Change: 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.

Speaker Change: Internet Bancorp dotcom and.

Speaker Change: 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 Change: These factors are discussed in the company's SEC filings, which are available on the company's website.

Speaker Change: Joining us today from the management team are chairman and CEO, David Becker and.

Speaker Change: The company disclaims any obligation to update any forward looking statements made during the call.

Ken Lubbock: And executive Vice President and CFO, Ken Lubbock.

Speaker Change: Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures.

Ken Lubbock: <unk> will provide an overview of the quarter and 'twenty 'twenty, four and Ken will discuss the financial results.

Speaker Change: 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.

Ken Lubbock: Then we will open up the call to your questions.

Ken Lubbock: 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.

David Becker: At this time I'd like to turn the call over to David.

First Internet Bancorp.

And involve risks and uncertainties various factors could cause actual results to be materially different.

Speaker Change: Okay.

David Becker: Thank you Ben and good afternoon, everyone. Thanks for joining us today for the fourth quarter and full year 2024 result, our 2024 results reflect a year of remarkable growth. We entered 25, where the strong momentum we produced significantly improved financial results marked by a recovery in net interest income.

Ken Lubbock: From any future results expressed or implied by such forward looking statements. These.

Ken Lubbock: These factors are discussed in the company's SEC filings, which are available on the company's website.

Ken Lubbock: The company disclaims any obligation to update any forward looking statements made during the call.

David Becker: 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 noninterest income substantially higher year over year and allowed us to achieve greater revenue diversification.

Ken Lubbock: Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures.

Ken Lubbock: The press release available on the website contains the financial and other quantitative information to be discussed today.

Ken Lubbock: Well as the reconciliation of the GAAP to non-GAAP measures.

David Becker: 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.

David Becker: At this time I'd like to turn the call over to David.

David Becker: Thank you Ben and good afternoon, everyone and thanks for joining us today for the fourth quarter and full year 2024 result.

David Becker: 2.2 dollars 88, respectively net income of $87 4 million was up 17% gain on sale revenue was up more than 60% fueling noninterest income growth of 81% from 2023.

David Becker: Morning, twenty-four results reflect a year of remarkable growth, we entered 25, where the 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.

David Becker: Total adjusted revenue growth of almost 30% far outpaced the increase in expenses, creating significant annual positive operating leverage.

David Becker: 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.

David Becker: On the balance sheet, we grew balances by $330 million, an increase of 9% over 2023, which we attribute to the strong growth in construction investor commercial real estate and small business lending. We also produce continued strong deposit growth, which allowed us the balance sheet flexibility to pay down.

David Becker: 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 <unk>.

David Becker: And two point.

David Becker: 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.

David Becker: $2.88, respectively, net income of $87 4 million was up 17% gain on sale revenue was up more than 60% fueling noninterest income growth of 81% from 2023.

David Becker: Total adjusted revenue growth of almost 30% far outpaced the increase in expenses, creating significant annual positive operating leverage.

David Becker: 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.

David Becker: And the balance sheet, we grew balances by $330 million, an increase of 9% over 2023, which we attribute the strong growth in construction investor commercial real estate and small business lending.

David Becker: Following along on the presentation quarterly highlights are on slide three.

David Becker: 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 trend. We drove an 8% increase in net interest income, making this our fifth consecutive quarter of growth in net interest income.

David Becker: We also produce 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 is indicative of continued flexibility.

David Becker: Notably a five basis point improvement in net interest margin.

David Becker: Even as the federal reserve rate cuts impacted the yield on new loan origination yields on the overall portfolio increased three basis points from the third quarter.

David Becker: <unk> as we continue to optimize both sides of the balance sheet throughout 2025.

David Becker: 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 on slide three it.

David Becker: 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.

David Becker: It is the only fitting that we would cap off the 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 trend. We drove an 8% increase in net interest income, making this our fifth consecutive quarter of growth in net interest income.

David Becker: Through the fourth quarter 2023.

David Becker: Okay.

David Becker: We remain confident that net interest income and net interest margin will continue to trend higher throughout 2025, as we experienced the full impact of the 2024 fed rate cuts on deposit costs and continue to improve the composition of the loan portfolio.

David Becker: Notably a five basis point improvement in net interest margin.

David Becker: Even as the federal reserve rate cuts impacted the yield on new loan origination yield on the overall portfolio increased three basis points from the third quarter.

David Becker: Additionally, our balance sheet flexibility will allow continued opportunities to optimize our funding cost is higher cost wholesale funding and Cds mature. Another positive trend is the continued strong performance of our small business lending as I noted earlier gain on sale of SBA guaranteed loans is a critical component.

David Becker: 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.

David Becker: <unk> of our noninterest 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 was strong on a historical basis dipped slightly this quarter decline was really more.

Net interest income for the fourth quarter of 2024 was up 17% compared to.

David Becker: The fourth quarter of 2023.

David Becker: We remain confident that net interest income and net interest margin will continue to trend higher throughout 2025, as we experienced the full impact of the 'twenty 'twenty four fed rate cuts on deposit costs and continue to improve the composition of the loan portfolio.

David Becker: 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 alone in being able to sell it in the secondary market in order to compete complete the necessary post closing activities.

David Becker: While we didn't get to record revenue from those loan sales in the fourth quarter the upside as we're very well positioned for a great start to the 2025 for gain on sale revenue.

I noted earlier gain on sale of SBA guaranteed loans is a critical component of our noninterest income.

David Becker: Turning to the earnings for the quarter, we reported net income of $7 3 million up 5% and diluted earnings per share of <unk> 83.

David Becker: One 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 was strong on a historical basis dipped slightly this year.

David Becker: 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.

David Becker: 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 and alone in being able to sell it in the secondary market in order to compete complete the necessary post closing activities. So while we didn't get to record revenue from those loan sales in the fourth quarter.

David Becker: For the quarter totaled $34 8 million, an increase of almost 3% from the third quarter and 28% from the fourth quarter of 2003. This marks the sixth consecutive quarter of increase in total revenue.

David Becker: The upside is we're very well positioned for a great start to the 2025 for gain on sale revenue.

David Becker: 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 exist.

Turning to the earnings for the quarter, we reported net income of $7 3 million up 5% and diluted earnings per share of <unk> 83 up 4% from the third quarter's reported results.

David Becker: 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.

David Becker: Specific reserves.

David Becker: As with most small business loans issues with these credits or borrower precision power to six specific well.

David Becker: <unk> 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 'twenty three this marks the sixth consecutive.

David Becker: And not driven by any particular industrial your 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 work out where the outlook for a positive outcome was becoming less likely so we made the decision to charge these loans off.

David Becker: Quarter of increase in total revenue.

David Becker: During the quarter, we took steps to address certain problem loans and recognized $9 4 million of net charge offs, most of which related to the SBA portfolio. As a result, net charge offs to average loans totaled 91 basis points.

David Becker: And help derisk the portfolio going forward.

David Becker: Our overall credit quality remained sound nonperforming loans to total loans were 68 basis points nonperforming assets total assets were 50 basis points at the end of the quarter. The increase in nonperforming loans was due to additions in franchise finance and small business lending as we took action to get in front of some potential loans.

David Becker: Note that approximately $3 4 million of these charge offs were related to loans that already had existing specific reserves.

David Becker: As with most small business loans issues with these credits were Bauer precision power to set specific well.

David Becker: Despite the increase in nonperforming 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.

David Becker: And that driven by any particular industry or geography, and nor are we seeing any significant trends have stress with certain industries or regions. We had certain problem credits in various stages of work out where the outlet for a positive outcome was becoming less likely so we made the decision to charge for these loans off.

David Becker: Performing loan balance.

David Becker: Another high level point before I move on and that is an update on our Fintech 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 2024th we focus instead on nurturing the relationships we had already entered into the mid challenges in the bank Fintech partner.

To help derisk the portfolio going forward.

David Becker: Our ship space. This turned out to be a prudent decision I am pleased to report we have seen growth on both sides of the balance sheet.

David Becker: The increase in nonperforming 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.

David Becker: In non interest income as well I believe that partnerships between chartered institutions and solution focused innovators is critical to the evolution of financial services without a customers would still be standing in teller lines to cash checks and get their savings passbook updated we are committed to exploring relationships with.

David Becker: Forming loan balance.

David Becker: Another high level point before I move on and that is an update on our Fintech 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 focus instead on nurturing the relationships we had already entered into amid challenges in the bank Fintech partnership.

David Becker: Partners have advanced the financial services landscape and doing so in a way that creates value for our shareholders.

David Becker: 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.

David Becker: Space has turned out to be a prudent decision I am pleased to report we are seeing growth on both sides of the balance sheet.

David Becker: Despite the sizeable 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 opera.

David Becker: Non interest income as well I believe that partnerships between chartered institutions and solution focused innovators is critical to the evolution of financial services without a customers would still be standing in teller lines to cash checks and get their savings passbook update it.

David Becker: <unk> discipline and diligence balance sheet management through some very challenging periods for the industry. We like you are shareholders in person in that day.

David Becker: We're committed to exploring relationships with partners had advanced the financial services landscape and doing so in a way that creates value for our shareholders.

David Becker: Turning to slide four I have already made some high level comments about our lending activity.

David Becker: Proud of the work our lending teams sit over the quarter to produce strong loan growth up 13% on an annualized basis virtually all of our lines of commercial lending experienced growth with balances up almost $140 million from the third quarter or 17% on an annualized basis.

David Becker: Business lending team has been a key driver in our efforts to reposition our loan portfolio and diversify our revenue streams.

David Becker: Full year 2020 for 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.

David Becker: <unk> disciplined and diligent balance sheet management through some very challenging periods for the industry. We like you are shareholders in person or that day.

David Becker: Turning to slide four I have already made some high level comments about our lending activity.

David Becker: Owners across the nation.

David Becker: Proud of the work our lending teams did over the quarter to produce strong loan growth up 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.

David Becker: Following strong production in the fourth quarter retained balances increased 11% compared to the linked quarter.

David Becker: 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 seven lender in the nation for the Sba's 'twenty 'twenty four physical year.

David Becker: Business lending team has been a key driver in our efforts to reposition our loan portfolio and diversify our revenue streams for us.

Full year 2020 for 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.

David Becker: The growth of our SBA business also drove a significant increase in noninterest income for the year, which comprised one third of total adjusted revenue up from 26% in 2023.

David Becker: Our construction and Investor commercial real estate team had another solid quarter originating over $70 million of new commitments in 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.

David Becker: Owners across the nation.

David Becker: Blowing 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 and 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 seven.

David Becker: Our construction line of business were $480 million as these projects progress.

David Becker: Draws on these loans in the upcoming months combined.

David Becker: SBA seven lender in the nation for the Sba's 'twenty 'twenty four physical year.

David Becker: 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.

David Becker: The growth of our SBA business also drove a significant increase in noninterest income for the year, which comprised one third of total adjusted revenue up from 26% in 2023.

David Becker: With a more favorable interest rate environment.

David Becker: 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 one 3 million over the third quarter as a capitalized on some high quality shorter duration.

David Becker: Construction line of business were $480 million.

David Becker: Attunity with attractive tax equivalent yields.

David Becker: As these projects progress.

David Becker: On the consumer side small business.

David Becker: Draws on these loans in the upcoming months combined.

David Becker: 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 were originations were down due to seasonal factors, we focus on the super Prime borrower and our consumer lending and rates on new production when the mid to low eight.

David Becker: With a 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.

David Becker: Percent range more.

David Becker: Or more delinquencies in these portfolios remain extremely low at 10 basis points of total consumer loan.

David Becker: I am proud of the performance of our lending teams turned into finished the year strong and proud of the work that all of the employees that person internet. They put in to deliver 12 months proving performance and a five quarter streak for growth in net interest income and net interest margin expansion.

David Becker: Is it capitalized on some high quality shorter duration opportunities with attractive tax equivalent yields.

David Becker: On the consumer side small business.

David Becker: And bind with the ongoing investments we've made in small business lending we remain confident 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.

David Becker: 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 were originations were down due to seasonal factors, we focus on the super Prime borrower and our consumer lending and rates on new production when the mid to low eight.

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.

David Becker: A cent range.

David Becker: Delinquencies in these portfolios remain extremely low at 10 basis points of total consumer loan.

David Becker: I am proud of the performance of our lending teams turned independent of your strong I'm proud of the work that all of the employees at first Internet Bank put in to deliver 12 months of proving performance and our five quarter streak for growth in net interest income and net interest margin expansion.

Ken Lubbock: Now I'd like to turn the call over to Ken.

Ken Lubbock: Thanks, David as David covered loan portfolio, let's turn to slides five and six where I will cover deposits in more detail.

Ken Lubbock: The average balance of deposits increased almost 300 $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.

David Becker: Bind with the ongoing investments we've made in small business lending we remain confident 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.

Ken Lubbock: Non maturity deposits were up $122 million or 6%, reflecting the increase in fintech partnership deposits. Additionally.

David Becker: 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.

Ken Lubbock: Additionally, total deposits from our Fintech partners were up 27% from the third quarter and totaled $643 million at quarter end.

Ken Lubbock: Now I'd like to turn the call over to Ken.

Ken Lubbock: 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.

Ken Lubbock: Thanks, David as David covered the loan portfolio, let's turn to slides five and six where I will cover deposits in more detail.

Ken Lubbock: 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 880000 in the force in the fourth quarter, which was up over 14% from the linked quarter.

Ken Lubbock: Non maturity deposits were up $122 million or 6%, reflecting the increase in fintech partnership deposits.

Ken Lubbock: 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 <unk>.

Ken Lubbock: Additionally, total deposits from our Fintech partners were up 27% from the third quarter and totaled $643 million at quarter end.

Ken Lubbock: Along the fed's rate cut that month we.

Ken Lubbock: We originated $242 million in new production and renewals during the fourth quarter at an average cost of four 3% 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.

Ken Lubbock: 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.

Ken Lubbock: Total Fintech partnership revenue was 880000 in the force in the fourth quarter, which was up over 14% from the linked quarter.

Ken Lubbock: Action is coming on at lower rates than those maturing, which will continue to benefit our cost of funds going forward.

Ken Lubbock: Looking forward, we have $414 million of Cds maturing in the first quarter of 2025 with an average cost of 5.06% and $351 million maturing in the second quarter of 2025 with an average cost of 495%.

Ken Lubbock: 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 four 3% and a weighted average term of 12 months. These were partially offset by maturities of $238 million with an average cost of 5.01%.

Ken Lubbock: So for the next several quarters, we expect a continued positive pricing gap between new production and maturing Cds for example January month to date, New CD production has been at an average cost of 4%, which is a positive spread of 106 basis points over the weighted average cost of Cds maturing in the.

Ken Lubbock: Similar to last quarter, New CD production is coming on at lower rates than those maturing, which will continue to benefit our cost of funds going forward.

Ken Lubbock: First quarter.

Ken Lubbock: Moving to slide six at quarter end total liquidity remained very strong, reflecting cash and unused borrowing capacity of $2 2 billion.

Ken Lubbock: We deployed a portion of the elevated liquidity, we had at the end of the third quarter supplemented by by continued deposit growth during the quarter to pay off a significant amount of federal home loan bank borrowings and a smaller amount of maturing brokered Cds as well as to fund loan growth and securities purchases as.

Ken Lubbock: As part of paying down certain structured <unk> advances, we were able to capitalized on favorable embedded prepayment features as well as pay down structures hedged with interest rate swaps. We structured these borrowings prior to the fed tightening cycle and as a result, the positions had significant mark to market gains at the time of termination.

First quarter.

Ken Lubbock: Moving to slide six at quarter end total liquidity remained very strong, reflecting cash and unused borrowing capacity of $2 $2 billion. We deployed a portion of the elevated liquidity. We had at the end of the third quarter supplemented by by continued deposit growth during the quarter to pay off a significant amount of fed.

Ken Lubbock: In total we recognized $4 7 million of gains on the repayment of $200 million of FHA advances during the quarter.

Ken Lubbock: With total deposit balances, increasing 3% and loan growth of $135 million or 3% loans to deposits ratio was relatively unchanged at 84, 5% from the end of the third quarter.

Ken Lubbock: Our home loan bank borrowings and a smaller amount of maturing brokered Cds as well as to fund loan growth and securities purchases as part of paying down certain structured <unk> advances, we were able to capitalized on favorable embedded prepayment features as well as pay down structures hedged with interest rate swaps with <unk>.

Ken Lubbock: At quarter end, our cash and unused borrowing capacity represented 173% of total uninsured deposits and 222% of adjusted uninsured deposits.

Ken Lubbock: Turning to slide seven and eight net interest income for the quarter was $23 $6 million and $24 $7 million on a fully taxable equivalent basis up eight 2% and seven 9% respectively from the third quarter the.

Ken Lubbock: <unk> borrowings prior to the fed tightening cycle and as a result, the positions had significant mark to market gains at the time of termination.

Ken Lubbock: In total we recognized $4 $7 million of gains on the repayment of $200 million of FHA advances during the quarter.

Ken Lubbock: The yield on average interest, earning assets declined to five 5% and 2% from $5 five 8% in the linked quarter due primarily to a 54 basis point decrease in the yield earned on other earning assets, which are predominantly cash balances impacted by the fed's rate cuts, but partially offset by a three basis point increase.

Ken Lubbock: With total deposit balances, increasing 3% and loan growth of $135 million or 3% loans to deposits ratio was relatively unchanged at 84, 5% from the end of the third quarter.

Ken Lubbock: At quarter end, our cash and unused borrowing capacity represented 173% of total uninsured deposits and 222% of adjusted uninsured deposits.

Ken Lubbock: And the yield earned on loans.

Ken Lubbock: The higher yield on the loan portfolio combined with higher average loan balances produced solid topline growth in interest income, increasing almost 4% compared to the linked quarter, which far outpaced the increase in interest expense as a result, net interest income was up over eight 2% from during the quarter building on last.

Ken Lubbock: There is increase in further distancing us from the low point in the third quarter of 2023.

Ken Lubbock: The yield on average interest, earning assets declined to five 5% and 2% from 558% in the linked quarter due primarily to a 54 basis point decrease in the yield earned on other earning assets, which are predominantly cash balances impacted by the fed's rate cuts, but partially offset by a three basis point increase.

Ken Lubbock: Net interest margin for the fourth quarter was 167% and 175% on a fully taxable equivalent basis, both representing five basis point increases compared to the linked quarter.

Ken Lubbock: The net interest margin roll forward on slide eight highlights the drivers of change and fully taxable equivalent net interest margin during the quarter.

Ken Lubbock: And the yield earned on loans.

Ken Lubbock: The higher yield on our loan portfolio combined with higher average loan balances produced solid topline growth in interest income, increasing almost 4% compared to the linked quarter, which far outpaced the increase in interest expense as a result, net interest income was up over eight 2% from during the quarter building on last.

Ken Lubbock: The yield on funded portfolio originations was seven 6% in the fourth quarter down from eight 5% in the third quarter, which reflects the 100 basis points of fed rate cuts in September as well as a larger volume of originations and fixed rate portfolios, which are priced at lower spreads over U S. Treasuries.

Ken Lubbock: There is increase in further distancing us from the low point in the third quarter of 2023.

Ken Lubbock: But are still significantly higher than the current all in yield on our loan portfolio.

Ken Lubbock: Net interest margin for the fourth quarter was 167% and 175% on a fully taxable equivalent basis, both representing five basis point increases compared to the linked quarter. The net interest margin roll forward on slide eight highlights the drivers of change and fully taxable equivalent net interest margin during the quarter.

Ken Lubbock: Pipelines remain solid, especially in the construction and small business lending lines of business and our focus on improving the composition of our loan portfolio gives us further confidence that net interest income will continue to increase in future quarters.

Ken Lubbock: 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 beginning to trend down along with the decline in fed funds at.

Ken Lubbock: <unk>.

Ken Lubbock: The yield unfunded portfolio originations was 726% in the fourth quarter down from 885% in the third quarter, which reflects the 100 basis points of fed rate cuts in September as well as a larger volume of originations and fixed rate portfolios, which are priced at lower spreads over U S. Treasuries.

Ken Lubbock: At quarter end, we had $1 $4 billion of deposits indexed to fed funds, which when combined with the $765 million of Cds maturing over the next two quarters and an additional $200 million of higher cost brokered deposits maturing at the end of the first quarter are expected to drive further net.

Ken Lubbock: But are still significantly higher than the current all in yield on the loan portfolio.

Ken Lubbock: Interest income growth and provide a strong catalyst for net interest margin expansion.

Turning to noninterest income on slide nine noninterest income for the quarter was $16 million up $3 9 million or 32, 5% from the third quarter.

Ken Lubbock: As I previously mentioned noninterest income included $4 $7 million of prepayment and terminated interest rate swap gains related to the pay down of federal home loan bank advances.

Ken Lubbock: Excluding these gains adjusted noninterest income was $11 $2 million down 7% from the third quarter.

Ken Lubbock: Gain on sale of loans totaled $8 6 million for the quarter down from $9 9 million in the prior quarter loan sale volume was $106 7 million down 16% quarter over quarter, while net gain on sale premiums increased 30 basis points from the third quarter as David mentioned in his car.

Ken Lubbock: Interest income growth and provide a strong catalyst for net interest margin expansion.

Ken Lubbock: Turning to noninterest income on slide nine noninterest income for the quarter was $16 million up $3 9 million or 32, 5% from the third quarter.

The decline in loan sales volume was mainly due to timing we originated $167 million of SBA loans during the quarter, an increase of 2% over the linked quarter with over a third of those closing late in the quarter.

Ken Lubbock: As I previously mentioned noninterest income included $4 $7 million of prepayment and terminated interest rate swap gains related to the pay down of federal home loan bank advances.

Ken Lubbock: The decline in gain on sale revenue was partially offset by higher net loan servicing revenue, which totaled $1 $4 million for the quarter due to growth in the servicing portfolio and a lower fair value adjustment to the servicing asset.

Ken Lubbock: Excluding these gains adjusted noninterest income was $11 $2 million down 7% from the third quarter.

Ken Lubbock: Gain on sale of loans totaled $8 $6 million for the quarter down from $9 $9 million in the prior quarter loan sales volume was $106 $7 million down 16% quarter over quarter, while net gain on sale premiums increased 30 basis points from the third quarter as David mentioned in his car.

Ken Lubbock: Moving to slide 10, noninterest expense for the quarter was $24 million up $1 2 million from the third quarter.

Ken Lubbock: The increase was driven in part by higher compensation costs due to staff additions and small business lending risk management and information technology as we continue to invest in key areas of our business. Additionally, Additionally, other noninterest expense was up due to seasonal expenses and deposit insurance premium increased due to year over year.

Ken Lubbock: <unk> the decline in loan sales volume was mainly due to timing we originated $167 million of SBA loans during the quarter, an increase of 2% over the linked quarter with over a third of those closing late in the quarter.

Ken Lubbock: Asset growth.

Ken Lubbock: Turning to asset quality on slide 11, David covered several of the major components of asset quality for the quarter in his comments. So I will just add some commentary around the allowance for credit losses and provision for credit losses.

Ken Lubbock: The allowance for credit losses, as a percentage of total loans was 1.07% at the end of the fourth quarter down six basis points from the third quarter. The decrease in the allowance for credit losses reflects a decline in specific reserves related to charged off SBA loans as well as the net charge off activity David discussed earlier.

Ken Lubbock: Moving to slide 10, noninterest expense for the quarter was $24 million up $1 2 million from the third quarter.

Ken Lubbock: Partially offset by qualitative adjustments to the small business lending ACL and overall loan growth at quarter end, the small business lending ACL to on guaranteed SBA loan balances was five 7%.

Ken Lubbock: <unk> growth.

Ken Lubbock: 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 127% of loan balances.

Ken Lubbock: Okay.

Ken Lubbock: Provision for credit losses in the fourth quarter was $7 2 million compared to $3 4 million in the third quarter the.

Ken Lubbock: The increase in the provision for the fourth quarter reflects the elevated net charge off activity the qualitative adjustments to the small business lending ACL and overall growth in the loan portfolio, partially offset offset by the decline in specific reserves and adjustments to qualitative factors in other portfolio other portfolios.

Ken Lubbock: Moving to capital on Slide 12, our overall capital levels at both the company and the bank remains solid the tangible common equity ratio was 662% an increase of eight basis points from the third quarter as a smaller balance sheet more than offset the impact of higher interest rates on the accumulated other comprehensive.

Ken Lubbock: Yeah.

Ken Lubbock: Provision for credit losses in the fourth quarter was $7 $2 million compared to $3 4 million in the third quarter the.

Ken Lubbock: <unk> loss.

Ken Lubbock: If you exclude other accumulated other comprehensive loss and adjust for normalized cash balances of $300 million the.

Ken Lubbock: The increase in the provision for the fourth quarter reflects the elevated net charge off activity the qualitative adjustments to the small business lending ACL and overall growth in our loan portfolio, partially offset offset by the decline in specific reserves and adjustments to qualitative factors in other portfolio other portfolios.

<unk> tangible common equity ratio would be seven 4%.

Ken Lubbock: From a regulatory capital perspective, the common equity tier one capital ratio remained solid at nine 3%.

Ken Lubbock: Before I wrap up I'd like to provide some commentary on our outlook for 2025, while the market may be pricing in a rate cut or two over the course of the year. We are sticking with our conservative approach and assuming fed funds and other short term rates remain constant through 2025.

Ken Lubbock: When looking at the estimates for full year 2025, I think the consensus earnings per share number is within the range. We are forecasting for next year. However, how we get to that range is a little different than what the current models are projecting.

Ken Lubbock: Loss, if you exclude other accumulated other comprehensive loss and adjust for normalized cash balances of $300 million. The adjusted tangible common equity ratio would be seven 4%.

Ken Lubbock: We expect loan yields to increase as we continue to originate new production at rates well above the current portfolio yield. We also expect deposit costs to continue declining as one the last two fed rate cuts get fully incorporated into quarterly run rates to the significant CD repricing gap on over three <unk>.

Ken Lubbock: From a regulatory capital perspective that the common equity tier one capital ratio remained solid at nine 3%.

Ken Lubbock: Before I wrap up I'd like to provide some commentary on our outlook for 2025.

Ken Lubbock: While the market may be pricing in a rate cut or two over the course of the year. We are sticking with our conservative approach and assuming fed funds and other short term rates remain constant through 2025.

Ken Lubbock: <unk> of $1 billion of Cds maturing over the next six months and three the paydown of higher cost brokered deposits at the end of the first quarter.

Ken Lubbock: Assuming loan growth in the range of 10% to 12% for the year and deposit growth in the range of 5% to 7%. We expect that annual net interest income will increase in a mid 30% range over 2024 and fully taxable equivalent net interest margin will increase throughout the year and should be in the <unk>.

We expect loan yields to increase as we continue to originate new production at rates well above the current portfolio yield. We also expect deposit costs to continue declining as one the last two fed rate cuts get fully incorporated into quarterly run rates to the significant CD repricing gap on over three.

Ken Lubbock: <unk> of 220% to $2 three zero percent by the fourth quarter of 2025 if.

Ken Lubbock: If the federal reserve were to begin reducing short term interest rates, our net interest income and net interest margin would likely exceed these projections.

Ken Lubbock: With regard to noninterest income as our SBA team continues to grow and deliver consistently higher origination activity. We expect annual core noninterest income to be up in the range of 9% to 12% over 2024.

Ken Lubbock: Quarters of $1 billion of Cds maturing over the next six months and three the paydown of higher cost brokered deposits at the end of the first quarter.

Ken Lubbock: A potential risk to this forecast will be loan sale pricing in the secondary market while gain on sale premiums are currently currently attractive if pricing were to soften. It may it may make more economic sense to hold loan, yielding 10% or more versus selling for a premium far below the annual spread income we would earn.

Ken Lubbock: The range of 2.20% to $2 three zero percent by the fourth quarter of 2025.

Ken Lubbock: Looking at the provision for credit losses with quarterly provisions higher than what we have experienced on a historical basis. We are taking a conservative approach in our forecast for 2025, and our modeling and annual provision that is in the range of 15% to 20% higher than what we recognized in 2024.

Ken Lubbock: The federal reserve were to begin reducing short term interest rates, our net interest income and net interest margin would likely exceed these projections.

Ken Lubbock: And finally from a noninterest expense perspective, we added a number of personnel throughout 2020 forward to support growth in small business lending as well as in risk management and information technology and with the planned growth in SBA originations and the continued investments in key areas of our business, we do expect compensation expense.

Ken Lubbock: A potential risk to this forecast will be loan sale pricing in the secondary market while gain on sale premiums are currently currently attractive if pricing were to soften it may make more economic sense to hold loan, yielding 10% or more versus selling for a premium far below the annual spread income we would earn.

Ken Lubbock: To increase in 2025.

Ken Lubbock: All in we expect annual noninterest expense to be up in the range of 10% to 15%.

Ken Lubbock: One additional point I would like to make when looking at the quarterly earnings per share estimates for 2025, I think the distribution might be off a little while the total for the year is in the range due to seasonal factors and the time that it takes CD repricing to work its way through our Fort.

Ken Lubbock: To work its way through our forecast is a little lighter in the first and second quarters of the year and a little higher in the back end of the year.

Ken Lubbock: And finally from a noninterest expense perspective, we added a number of personnel throughout 2020 forward to support growth in small business lending as well as in risk management and the information technology and with the planned growth in SBA originations and the continued investments in key areas of our business, we do expect compensation expense.

Speaker Change: With that I will turn it back to the operator, so we can take your questions Jenny.

Speaker Change: Thank you.

Speaker Change: Ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the wondering if that stockpiling questions will be taken in the order received should you wish to cancel your request. Please press the star followed by the tail if you will.

Ken Lubbock: To increase in 2025.

Ken Lubbock: All in we expect annual noninterest expense to be up in the range of 10% to 15%.

One additional point I would like to make when looking at the quarterly earnings per share estimates for 2025, I think the distribution might be off a little while the total for the year is in the range due to seasonal factors and the time that it takes CD repricing to work its way through our Fort.

Speaker Change: Using a speaker phone please lift the handset before question any case.

Speaker Change: Once again that is star one should you wish to ask a question.

Speaker Change: And your first question is from Brett Robinson from <unk>. Your line is now open.

Ken Lubbock: To work its way through our forecast is a little lighter in the first and second quarters of the year and a little higher in the back end of the year.

Brett Robinson: Hey, good afternoon guys.

Speaker Change: <unk>.

Speaker Change: Wanted to start on.

Speaker Change: The asset quality clean up and then.

Speaker Change: With that I will turn it back to the operator, so we can take your questions Jenny.

Speaker Change: Any color that you can provide on <unk>.

Speaker Change: The SBA charge off and just what youre seeing in the SBA portfolio generally and.

Speaker Change: Thank you.

Speaker Change: Ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the one you touched on following questions will be taken in the order received should you wish to cancel your request. Please press the star followed by the table.

Speaker Change: Your guidance for provisioning to be 15% higher.

Speaker Change: 25% probably.

Speaker Change: 45, 46 basis points.

Speaker Change: Are you expecting from continued.

Speaker Change: Using a speakerphone please lift the handset before question any case.

Speaker Change: Charge offs in the SBA portfolio.

Speaker Change: Once again that is star one should you wish to ask a question.

Speaker Change: And your first question is from Brett Robinson from <unk>. Your line is now open.

Speaker Change: I guess, maybe let's just start with the our assumption on increased provisioning for the year I mean I think is.

Brett Robinson: Hey, good afternoon guys.

Speaker Change: Over over the last several years as the SBA business is growing.

Great.

Brett Robinson: Wanted to start on.

Brett Robinson: The asset quality clean up and then.

Speaker Change: There have been more charge offs in more provisioning certainly you have just growth in the overall portfolio.

Brett Robinson: Any color that you can provide on <unk>.

Brett Robinson: The SBA charge off and just what youre seeing in the SBA portfolio generally and.

Speaker Change: We are reserving at a higher rate on those loans.

Brett Robinson: Your guidance for provisioning to be 15% higher.

Speaker Change: And the charge offs are certainly higher than those than say a single tenant or others. So I think we've just seen a higher run rate over the last couple of years over the last four to six quarters of that.

Brett Robinson: 25% probably.

Brett Robinson: <unk> 45 46 basis points.

Brett Robinson: Are you expecting from continued.

Charge offs in the SBA portfolio.

Speaker Change: And I think we're just kind of going to taken it take a conservative approach than in.

Brett Robinson: I guess, maybe let's just start with the <unk>.

Speaker Change: Hopefully, we're provisioning more than what we need but I think we'd rather just be conservative in our forecast in and add a little bit to that is again keep in mind that the 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.

Our assumption on increased provisioning for this year I mean, I think is.

Over over the last several years as the SBA business has grown.

Brett Robinson: There have been more charge offs in more provisioning certainly you have just growth in the overall portfolio were.

Speaker Change: Okay.

We are reserving at a higher rate on those loans.

Speaker Change: And then on the cleanup.

Speaker Change: What that entailed.

And the charge offs are certainly higher than those than say a single tenant or others. So I think we've just seen a higher run rate over the last couple of years over the last four to six quarters of that.

Speaker Change: You had the one specific charge off that had allocated reserves, but was just trying to get a little more color on.

Speaker Change: What you were seeing in the SBA portfolio.

Speaker Change: I know that.

Speaker Change: Credit trends and SBA for the industry.

Brett Robinson: And I think we're just kind of going to take a take a conservative approach in.

Speaker Change: <unk> been a little softer, but I know everybody kind of does things differently in the rules changed.

Brett Robinson: And.

Brett Robinson: Hopefully we are provisioning more than what we need but I think we'd rather just be conservative in our forecast in and add a little bit to that is again keep in mind that the 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.

Speaker Change: Two years ago on underwriting.

Speaker Change: And any thoughts on ESP.

The SBA portfolio.

Speaker Change: As you see it from a credit perspective.

Brett Robinson: 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.

Brett Robinson: Okay.

Brett Robinson: And then on the cleanup.

Speaker Change: As you just stated the SBA World is a little tougher right now.

Brett Robinson: Entailed them.

The one specific charge offs that had allocated reserves, but was just trying to get a little more color on.

Speaker Change: We've analyzed it top to bottom underwriting loan issues looked at everything they only real is Nicole.

Brett Robinson: What you were seeing in the SBA portfolio.

Speaker Change: Continually say every loan is a snowflake its one of a kind there is no seem we don't have any concentration in our state and our 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 tied to the hurricanes.

Brett Robinson: I know that the credit trends and SBA for the industry have been a little softer, but I know everybody kind of does things differently in the rules changed.

Two years ago on underwriting just any any thoughts on ESP.

Speaker Change: The SBA portfolio.

Brett Robinson: As you see it from a credit perspective.

Speaker Change: Blew through the country last year through Florida and up.

Brett Robinson: 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.

Speaker Change: North Carolina.

Speaker Change: Having problems getting things rebuild restructured catching up for losing two to three months of income et cetera, as you well know too in the SBA world.

Brett Robinson: As you just stated the SBA World is a little tougher right now.

Speaker Change: Bend over backwards to assist the small business owners so.

Brett Robinson: We've analyzed it top to bottom underwrite a loan issues looked at everything they only real is nicole likes to continually say every loan is a snowflake. Its one of a kind there is no seem we don't have any concentration in our state and our product and anything out there is just kind of one off.

Speaker Change: He does a lot of things can take some of those mechanics that were not as familiar with some of the processes as Ken said it takes longer to get two things to both on the sales side as well as recovery side and as well as the collection. So we took advantage in the fourth quarter looking.

Brett Robinson: Only thing that is somewhat of a common denominator about half of our delinquent accounts have some kind of tied to the hurricanes blew through the country last year through Florida and up to North Carolina.

Speaker Change: We're 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 'twenty.

Speaker Change: Ken said, we bumped up reserves a little bit because.

Brett Robinson: Problems getting things rebuild restructured.

Speaker Change: If you looked at our credit history for the last five years, we've done more outside of the Wahoo experience. We had in early 'twenty three we charge off more loans over the past year, then we probably have in the last three or four years put together outside of Wahoo, but the bottomline is the SBA, even with those charge offs during the fourth quarter we may.

Brett Robinson: Catching up for losing two to three months of income et cetera, as you well know too in the SBA world.

Brett Robinson: Bend over backwards to assist the small business owners so.

Brett Robinson: He does a lot of things working.

Brett Robinson: Some of those mechanics, who are not as familiar with some of the processes as Ken said it takes longer to get two 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.

Speaker Change: Eight 4 million more in SBA at the bottom line than we did a year ago and I think that's kind of watching the market reaction to today.

Speaker Change: Get a little perturbed when peers are out here selling hundreds of millions of.

Brett Robinson: 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 'twenty.

Speaker Change: That's not bad security solid security the low rate securities taking millions of dollars of pit getting a three to four year payback, we get a little aggressive knocked down a few loans to really set the stage for a great 2025, and we get beat up in the marketplace and their stock goes up.

Brett Robinson: Ken said, we bumped up reserves a little bit because.

Speaker Change: It doesn't make a lot of sense to me, what's going on out here, but yes.

Speaker Change: Yes.

Speaker Change: There is nothing fundamentally wrong, we have some of the best.

Speaker Change: Bottomline is the SBA, even with those charge offs during the fourth quarter, we made $4 million more in SBA at the bottom line than we did a year ago and I think that's kind of watching the market reaction to today I get a little perturbed when peers are out here selling hundreds of millions of.

Speaker Change: And people in the country in the SBA World, we built out our nominal team over the last three or four years and we think it's just a hell of a great opportunity for us going forward, there will be more losses than we're used to seeing.

More work that goes with it because of all the rules and regulations that SBA, but it's.

Speaker Change: It's a very diversified solid portfolio.

Speaker Change: Bad not bad security solid security below rate securities, taking millions of dollars of pit getting a three to four year payback, we get a little aggressive knocked down a few loans too.

Speaker Change: Going to keep the pedal to the metal and keep moving forward.

Speaker Change: Okay, and I Didnt hear lastly for me.

Speaker Change: Really set the stage for a great 2025, and we get beat up in the marketplace and their stock goes up it does.

Speaker Change: I've got a bunch of questions, but I'll just ask this last one I'll hop back in queue.

Speaker Change: You did $540 million of SBA in 'twenty, four and I heard I think I heard the fee income guidance for 9% to 12%.

Speaker Change: To make a lot of sense to me, what's going on out here, but yes.

Yes.

Speaker Change: There is nothing fundamentally wrong, we have some of the best videos and people in the country in the SBA World, We built out a phenomenal team over the last three or four years, and we think it's a hell of a great opportunity for us going forward, there will be more losses than we're used to seeing and there is more work that goes with it because.

Speaker Change: What are you assuming for production for SBA for 25, and then I didn't quite understand.

Speaker Change: Which you you were implying that gain on sale can create some variability in that but didn't quite get what you were assuming for sale margins, yeah, well two things Brett.

Speaker Change: We're assuming $600 million of originations next year.

Speaker Change: Of all the rules and regulations and SBA, but it's it's.

Speaker Change: It's a very diversified solid portfolio.

Speaker Change: Our right now our gain on sale net premiums had been in the range of say, one Oh wait on average probably maybe a little bit higher but in our forecast we're assuming 108.

Speaker Change: To keep the pedal to the metal and keep moving forward.

Speaker Change: Okay, and I Didnt hear lastly for me.

Speaker Change: I've got a bunch of questions, but I'll just ask this last one I'll hop back in the queue.

Speaker Change: And then the one the one very the one piece I said that could be variable Brett is that if.

Speaker Change: You did $540 million of SBA in 'twenty, four 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.

Speaker Change: Gain on sale premiums have.

Speaker Change: <unk> been a little we've seen volatility in those over the past 18 months.

Speaker Change: Again, if you say gain on sale premiums dropped to say 106, and we got a loan that is prime plus 275 that solid loan. We may just elect to keep that on the balance sheet versus selling it so that would be again the volatility in gain on sale premiums could could be a risk to gain on sale income should we choose to hold that.

Speaker Change: 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.

Speaker Change: Well two things Brett.

Brett Robinson: We're assuming $600 million of originations next year.

Our right now our gain on sale net premiums had been in the range of say, one Oh wait on average probably maybe a little bit higher but in our forecast, we're assuming one oh wait.

Speaker Change: Loan.

Speaker Change: Yes, David we carried forward into January.

Speaker Change: $60 million in production.

Speaker Change: From December so that here over the last couple of weeks and we again did net debt went away. We had one loan that came in at a 106 and we just kept it on the books. There is no reason to sell it in the market so and all of that appears to be stable as we well know.

Brett Robinson: And then the one the one very the one piece I said that could be variable Brett is that if.

Gain on sale premiums.

Brett Robinson: It had been a little we've seen volatility in those over the past 18 months.

Brett Robinson: Again, if you say gain on sale premiums dropped to say 106, and we got a loan that's prime plus 275, 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 could be a risk to gain on sale income should we choose to hold there.

Speaker Change: Stating today that is kind of forces to drop interest rates and blow everything up.

Speaker Change: It could change at a moment's notice but.

Speaker Change: We're pretty comfortable that this is.

Speaker Change: Ken stated we are not forecasting any additional rate decreases so that should stabilize somewhere in that low <unk> range.

Brett Robinson: Alone.

Brett Robinson: Yes, David we carried forward into January.

Speaker Change: Carry forward for the balance of the year, that's what we built into our budget.

Brett Robinson: $60 million in production.

Speaker Change: Okay.

Speaker Change: Appreciate all the color guys.

Brett Robinson: From December so that here over the last couple of weeks and we again did net debt went away. We had one loan that came in at a 106 and we just kept it on the books. There is no reason to sell it in the market so and all of that appears to be stable as we well know.

Speaker Change: Thank you alright, thanks, Brett.

Speaker Change: Thank you.

Speaker Change: Next question is from Kevin Switzer, Tom K B W. Your line is now open.

Kevin Switzer: Hey, good afternoon, and thank you for taking my questions.

Speaker Change: Yes.

Speaker Change: Residents, stating today that is kind of forces to drop interest rates and blow everything up.

Okay.

Speaker Change: To follow up on.

Speaker Change: The commentary around.

Speaker Change: Credit performance, particularly for the SBA.

Brett Robinson: Change at a moment's notice but.

Speaker Change: We're pretty comfortable that as.

Are there any specific industry that youre seeing a little bit more pressure.

Speaker Change: As Ken stated, we are not forecasting any additional rate decreases so that should stabilize somewhere in that low 108 range.

Speaker Change: We're types of borrowers at all.

Speaker Change: No not at all.

As I stated a minute ago, we've analyzed that portfolio six ways to Sunday.

Speaker Change: Carry forward for the balance of the year, that's what we built into our budget.

Speaker Change: Okay.

Speaker Change: Trying to see if theres a common theme if there is a common broker if there is a common BDO if theres a common underwriting if theres, a common anything and outside of about half of our loans, having some kind of a.

Speaker Change: I appreciate all the color guys.

Speaker Change: Thank you alright, thanks, Brett.

Thank you.

Speaker Change: Our next question is from Tim Switzer from K B W. Your line is now open.

Speaker Change: Impact due to the hurricane issues there is no common denominator so.

Tim Switzer: Hey, good afternoon, and thank you for taking my questions.

Speaker Change: Hey, Tim.

Speaker Change: I'll take it back one thing that did kind of show up for the loans, we originated during COVID-19 that were either.

Tim Switzer: Okay.

Tim Switzer: I have a follow up on that.

Commentary.

Speaker Change: Credit performance, particularly for the SBA or are there any specific industry that youre seeing a little bit more pressure.

Speaker Change: Had real estate components are pretty heavy buildout or they got delayed they couldnt get supplies. They couldnt get team they ate up a lot of their excess working capital and cash with that 12 to 18 month delay.

Tim Switzer: We're types of borrowers at all.

Speaker Change: No not at all.

Speaker Change: As I stated a minute ago, we've analyzed that portfolio six ways to Sunday.

Speaker Change: So some of those folks were working with today to try and help them get back on their feet, but outside of the hurricane and outside of the.

Speaker Change: Trying to see if theres a common theme if there is a common broker if theres a common BDO if theres a common underwriting if theres, a common anything and outside of about half of the loans, having some kind of a.

Speaker Change: 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.

Speaker Change: Impact due to the hurricane issues there is no common denominator so.

Speaker Change: There is we can find no common denominator. So it really is just the business.

Speaker Change: Well I'll take it back one thing that did kind of show up for the loans we originated during COVID-19.

Nicole: As Nicole said snowflakes that.

Speaker Change: Sometimes it works and sometimes they milk so.

Speaker Change: That were either.

Speaker Change: Right now it seems to be stabilizing we're not seeing anything really crazy going on.

Speaker Change: <unk> real estate components are pretty heavy build out or they got delayed they couldnt get supplies. They couldnt get team they ate up a lot of their excess working capital and cash with that 12 to 18 month delay.

Speaker Change: Time will tell.

Speaker Change: That's why we're being conservative.

Speaker Change: Reserves a little bit.

Speaker Change: Okay. Okay.

Speaker Change: And so some of those folks were working with today to try and help them get back on their feet, but outside of the hurricane and outside of the.

Speaker Change: What.

Speaker Change: Okay.

Speaker Change: 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.

Speaker Change: 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.

Speaker Change: Yes.

Speaker Change: There is we can find no common denominator. So it really is just.

Speaker Change: We've looked at that in terms of the rate environment. If you. If you think about like when we've gotten into SBA right. I mean, we've really experienced our strong growth.

Speaker Change: As Nicole said snowflakes that some.

Speaker Change: Sometimes they work and sometimes they milk so.

Speaker Change: Right now it seems to be stabilizing we're not seeing anything really crazy going on.

Speaker Change: Beginning in 2000, a little bit 21, and more 'twenty two 'twenty three 'twenty four we've been originating in a high rate environment to begin with.

Speaker Change: Time will tell.

Speaker Change: That's why we're being conservative.

Speaker Change: We're doing credit, we do interest rate stress testing and underwriting where youre a shocking rates up 200 300 basis points to make sure. There is good debt service coverage and there is still working capital. So a lot of our loans have been enriched needed in the high rate environment to begin with so we have gotten 100 basis.

Speaker Change: Reserves a little bit.

Speaker Change: Okay. Okay.

Speaker Change: What.

Speaker Change: What impact do you see looking forward on the outlook from like the rate environment as 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.

Speaker Change: <unk> points of relief thus far.

Speaker Change: Yeah.

Speaker Change: It's not when you do the math on an average loan balance.

Speaker Change: Yes.

Speaker Change: We've looked at that in terms of the rate environment. If you. If you think about like when we've gotten into SBA right. I mean, we've really experienced our strong growth.

Speaker Change: You look at what a 25 basis point decrease or a 50 basis point decrease is.

Speaker Change: 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 none of the I.

Speaker Change: Beginning in 2000, and a little bit 21, and more 'twenty two 'twenty three 'twenty four we've been originating in a high rate environment to begin with.

Speaker Change: I would say any of the charge offs, we experienced have been due to high rates.

Speaker Change: We're doing credit we do interest rate stress testing and underwriting where would your shocking rates up 200 300 basis points to make sure. There is good debt service coverage and Theyre still working capital. So a lot of our loans had been enrich unaided and the high rate environment to begin with so we have gotten 100 base.

Speaker Change: I don't think that its going to be any impact.

Speaker Change: Our client base into our numbers if it holds steady what would impact us and I think would totally demoralized a lot of our commercial accounts as the rates start to go up.

This points of relief thus far.

Speaker Change: Inflation blows up.

Speaker Change: It's not when you do the math on an average loan balance and you you.

Speaker Change: For whatever reason and the fed makes a move the other way that could have some significant impact.

Speaker Change: You look at what a 25 basis point decrease or a 50 basis point decrease is.

Speaker Change: That's going to be the whole industry, but I think as long as it stays stable.

Speaker Change: 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 none of the.

Speaker Change: Kind of a light at the end of the tunnel as Ken said, a 100 point decrease last year.

Speaker Change: Couple of hundred Bucks, a month, maybe on a loan payment, but it was positive news inflation's coming down employment is going up consumers still spending there.

Speaker Change: I would say any of the charge offs, we should experience have been due to high rates.

Speaker Change: In and day out that real economic news is pretty solid and folks. Thanks Joseph.

Speaker Change: I don't think that its going to be any impact.

Speaker Change: Our client base into our numbers if it holds steady.

Speaker Change: Nobody is losing hope today, but I would tell you the one to watch as it turns into fed bump rates, then that could be a different story, but not only for us for everybody in the industry.

Speaker Change: It would impact us and I think would totally demoralized a lot of our commercial accounts as the rates start to go up.

Speaker Change: Inflation blows up.

Speaker Change: Okay, great. Thank you.

Speaker Change: For whatever reason and the fed makes a move the other way that could have some significant impact.

Speaker Change: Last question I had was in.

Speaker Change: In regards to your Gen Tech deposits, obviously very good trends this quarter in 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.

Speaker Change: It's going to be the whole industry, but I think as long as it stays stable.

Ken Lubbock: Kind of a light at the end of the tunnel as Ken said, a 100 point decrease last year.

Ken Lubbock: Couple of hundred Bucks, a month, maybe on a loan payment, but it was positive news inflation is coming down employments going up consumers still spending there.

Speaker Change: New on boardings and then can.

Can you give us an update on kind of the pipeline you see and what kind of customers you are looking to bring on board.

Ken Lubbock: In and day out the real economic news is pretty solid and folks think theres a chance nobody is losing hope today, but I would tell you. The one to watch as it turns into fed bump rates, then that could be a different story, but not only for us for everybody in the industry.

Speaker Change: Yes, I think.

Speaker Change: On the Fintech space a.

Speaker Change: Couple of things out there.

Speaker Change: <unk> several times here.

We had a good core component of Fintech customers.

Speaker Change: We have some folks a little irritated with us that the onboarding process instead of being 60 days has been six months yes.

Speaker Change: Okay, great. Thank you.

Ken Lubbock: Last question I had was in.

Speaker Change: So 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 a BSA whatever it is AML something or the other nowadays.

Ken Lubbock: New on boardings and then can.

Ken Lubbock: Can you give us an update on kind of the pipeline you see and what kind of customers you are looking to bring onboard.

Speaker Change: We've got great customers that are growing significantly literally all of the growth here over the past year. For example in 'twenty three we finished the year $1 million in the hole on the bass Division.

Ken Lubbock: Yes, I think.

Ken Lubbock: On the Fintech space a.

Ken Lubbock: Couple of things out there.

Ken Lubbock: Several times here.

Speaker Change: We added expenses and staff.

Ken Lubbock: We had a good core component of Fintech customers.

Speaker Change: <unk> some of the staff almost $1 million increase in expenses related to past this year, yet the earnings flipped to 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.

Ken Lubbock: We have some folks a little irritated with us that the onboarding process instead of being 60 days has been six months to get.

Ken Lubbock: So 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 a BSA whatever it is AML something or the other nowadays.

Speaker Change: <unk> got some really solid client set of really starting to grow we've got to.

Speaker Change: Lady on the West Coast, we just double down her card opportunities.

Ken Lubbock: We've got great customers that are growing significantly literally all of the growth here over the past year. For example in 'twenty three we finished the year $1 million in the hole on the bass Division.

Speaker Change: We should see some.

Speaker Change: I would be remiss, if we don't wanted 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.

Ken Lubbock: We added.

Ken Lubbock: Expenses and staff quadrupled some of the staff almost $1 million increase in expenses related to past this year, yet the earnings flipped to 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.

Speaker Change: Good opportunities out here, but with all the noise in the industry from synapse and all the problems. There we're being extremely cautious are a lot of people running for the hills in.

Speaker Change: 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.

<unk>.

Ken Lubbock: Got some really solid clients that are really starting to grow we've got a young.

Ken Lubbock: The Lady on the West Coast, we just double down her card opportunities.

Ken Lubbock: We should see some.

Speaker Change: Potential growth in 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.

Ken Lubbock: 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.

Speaker Change: We're in it we're going to stay in it and we're going to grow it and we think there is a heck of a future for us in the Fintech space.

Ken Lubbock: Good opportunities out here, but with all the noise in the industry from synapse and all the problems. There we're being extremely cautious are a lot of people running for the hills in.

Speaker Change: Yes that sounds great. Thank you for all the color.

Speaker Change: I appreciate it.

Speaker Change: Thank you. Our next question is from Nathan race from Piper Sandler Your line is now open.

Ken Lubbock: 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.

Nathan Race: Hey, guys.

Speaker Change: Good afternoon.

Speaker Change: Not to beat a dead horse on the SBA front.

Speaker Change: But just thinking back to.

Speaker Change: The call in October it seemed like SBA delinquencies 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.

Ken Lubbock: Financial growth in 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.

Ken Lubbock: We're in it we're going to stay in it and we're going to grow it and we think there is a heck of a future for us in the Fintech space.

Speaker Change: Again, some updated financials from clients or any other light on there.

Speaker Change: Yes that sounds great. Thank you for all the color.

Speaker Change: You can shed on that would.

Speaker Change: It would be appreciated.

Speaker Change: I appreciate it.

Speaker Change: Well part of it yes, I mean part of it was like as we referenced we.

Speaker Change: Thank you Nick.

Next question is from Nathan race from Piper Sandler Your line is now open.

Speaker Change: Yes.

Speaker Change: The large charge offs $3 4 million of that had to do with loans, we'd already had reserves on weather in full or in part.

Speaker Change: Hey, guys.

Speaker Change: Good afternoon.

Speaker Change: Not to beat a dead horse on the SBA front.

Speaker Change: Some of those where borrowers that were we're trying to work towards some kind of resolution.

Speaker Change: Just thinking back to.

Speaker Change: There is a sale of the business pending or we're 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've liked so I think we just decided let's just charge the loans off removed the specific reserve and move on.

Speaker Change: Some updated financials from clients or any other light on any other law.

Speaker Change: We have.

Speaker Change: Sometimes it's hard to tell we had probably maybe a little bit higher than usual number of or maybe perhaps a borrower who was had a deferral and a lot of time to come off a deferral in the business is back and they get back to making payments.

Speaker Change: You can shed on that.

Speaker Change: It would be appreciated.

Speaker Change: Well part of it yes, I mean part of it was like as we referenced we are.

Speaker Change: Of the of the large charge offs $3 4 million of that had to do with loans, we'd already had reserves on weather in full or in part.

Speaker Change: Probably had a little bit higher number than one would expect this quarter, where they came off deferral and just really business was struggling.

Speaker Change: Some of those where borrowers that where we're trying to work towards some kind of resolution, whether it's a sale of the business pending or we're 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've liked so I think we just decided let's just charge the loans.

And it's all as David mentioned before he used the term snowflake. So a lot of it is just really everything is borrower specific.

Speaker Change: No no common theme no geography no industry.

Speaker Change: It really just seem like just kind of more than what we usually seen in the past.

Speaker Change: Off removed the specific reserve and move on.

Speaker Change: We have.

Speaker Change: Sometimes it's hard to tell we had probably maybe a little bit higher than usual number of or maybe perhaps a borrower who was had it had a deferral and a lot of times they come off a deferral in their businesses back in and they get back to making payments and probably had a little bit higher number than one would expect.

Speaker Change: One of the things we did over the last few months and like et.

Speaker Change: I said earlier, we analyze that portfolio to that we've had outside reviews of the portfolio.

Speaker Change: I wanted to make sure we had missed something that we didn't have fundamentally.

Speaker Change: A bad decision maker of that referral source, a bad BDO and it all came out spotless and clean. So it is just a factor of the industrial right. Now is one of our peers are much larger SBA shop than us announce some pretty tough.

Speaker Change: Spec this quarter, where they came off deferral and just really business was struggling.

Speaker Change: And it's all as David mentioned before he used the term snowflakes a lot of it is just really everything is borrower specific.

Speaker Change: No common theme no geography no industry.

Speaker Change: <unk> numbers last night this morning.

Speaker Change: It really just seem like Theyre, just kind of more than what we usually seen in the past.

Speaker Change: It is what it is in the industry.

Speaker Change: We were on the right path everything was smooth for months and months on end.

Speaker Change: One of the things we did over the last few months and like I said earlier, we analyze that portfolio to that we've had outside reviews of the portfolio. We wanted to make sure. We had missed something that we didn't have fundamentally.

Speaker Change: And.

Speaker Change: Got a little bit sideways.

Speaker Change: <unk> earnings component, that's coming with this product on.

Speaker Change: Gain on sale on servicing.

All the revenue and the interest side of things, even taking that pop.

Speaker Change: A bad decision maker of bad a referral source, a bad BDO and it all came out spotless and clean. So it is just a factor of the industrial right. Now is one of our peers are much larger SBA shop that has announced some pretty.

Speaker Change: If you remember back in early <unk>, when we took a $9 million hit we ended up the quarter with a $5 million loss.

Speaker Change: Sucked up this.

Speaker Change: Hit an improved earnings fourth quarter over third quarter. So we had the luxury.

Speaker Change: Taking getting a little aggressive on calling some of this stuff and just getting it out of the way.

Speaker Change: <unk> numbers last night this morning.

Speaker Change: It's it is what it is in the industry.

Speaker Change: And Thats why we opted to do.

Speaker Change: And we have I can guarantee you we will have more SBA losses.

Speaker Change: We were on the right path everything was smooth four months of months on end.

Speaker Change: For the course.

Speaker Change: And.

Speaker Change: Next year I hope, they're not 9 million every quarter, but I will tell you with a growth play as 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 is built into the structure.

Speaker Change: Got a little bit sideways, but with the earnings.

Speaker Change: Component, that's coming with this product on.

Gain on sale on servicing.

Speaker Change: All the revenue and the interest side of things, even taking that path.

Speaker Change: If you remember back in early <unk>, when we took a $9 million hit we ended up the quarter with a $5 million loss.

Speaker Change: 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.

Speaker Change: Sucked up this.

Speaker Change: Hit an improved earnings fourth quarter over third quarter. So we had the luxury of <unk>.

Speaker Change: Got it that's really helpful.

Speaker Change: I'm familiar with some other SBA lenders.

Speaker Change: Taking getting a little aggressive on calling some of this stuff and just getting it out of the way.

Speaker Change: Typically normalized charge offs for them.

Speaker Change: And Thats why we opted to do.

Speaker Change: <unk> anywhere between 30 to 40 basis points a quarter is that how you guys are thinking about the future charge off trajectory.

Speaker Change: And we have I can guarantee you we will have more SBA losses.

Speaker Change: For the course.

Speaker Change: Yes.

Ken Lubbock: Same on us as Ken said, we had already reserved $3 million in the second and third quarter on a couple of loans and trying to.

Speaker Change: The next year I hope, they're not 9 million every quarter, but I will tell you with a 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.

Ken Lubbock: Our first experience on the bad side of the SBA figure it out we should've just pop some of those earlier on and that's exactly what I think is going to happen is being that $30 40.

Speaker Change: But 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.

Ken Lubbock: <unk> point range going forward, we might.

Ken Lubbock: We got one guy that has a couple of two three businesses, we could be steep I don't think we're going to be $9 million.

Speaker Change: Got it that's really helpful.

Speaker Change: I'm familiar with some other SBA lenders.

Ken Lubbock: In the first quarter, but yeah, we anticipate leveling off spot on in that 30 to 40 basis point, we've taken a little extra provision on our numbers going forward just to be safe.

Speaker Change: Typically normalized charge offs for them in this business as you know anywhere between 30 to 40 basis points a quarter is that how you guys are thinking about the future charge off trajectory.

Ken Lubbock: But yes, we think thats a good play to work with.

Speaker Change: Shame on us as Ken said, we had already reserved for.

Ken Lubbock: Versus 30 to 40 basis points.

Speaker Change: $3 million in the second and third quarter on a couple of loans and trying to.

Ken Lubbock: The portfolio itself.

Ken Lubbock: Our portfolio et cetera.

Speaker Change: Our first experience on the bad side of the SBA figure it out we should've just pop some of those earlier on and that's exactly what I think is going to happen is being that $30 40.

Ken Lubbock: Exactly.

Ken Lubbock: Gotcha.

Ken Lubbock: Just changing.

Ken Lubbock: Changing gears thinking about the margin trajectory for this year I appreciate the guide around $222 30 coming out.

Speaker Change: Basis point range going forward, we might.

Ken Lubbock: By the fourth quarter, just curious in terms of the.

Speaker Change: We got one guy that has a couple of two three businesses, we could be steep I don't think were going to be $9 million.

Ken Lubbock: 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 that.

Speaker Change: Here in the first quarter, but yes, we anticipate leveling off spot on in that 30 to 40 basis point, we've taken a little extra provision on our numbers going forward just to be safe.

Ken Lubbock: <unk>.

Ken Lubbock: Margin over the course of this year.

Yeah.

Ken Lubbock: <unk>.

Ken Lubbock: 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.

Speaker Change: But yes, we think thats a good play to work with.

Speaker Change: 30 to 40 basis points.

Speaker Change: SBA portfolio itself not the entire portfolio.

Ken Lubbock: And start getting again some of the timing of the CD maturities.

Speaker Change: Okay.

Speaker Change: Gotcha.

Speaker Change: Just.

Ken Lubbock: Those will start to kick in more in the second quarter and certainly in the back end of the year.

Speaker Change: Changing gears thinking about the margin trajectory for this year I appreciate the guide around through 'twenty $2 30 coming out.

Ken Lubbock: 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.

Speaker Change: By the fourth quarter I'm, just curious in terms of kind of.

Speaker Change: 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.

Ken Lubbock: 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.

Speaker Change: The progression.

Speaker Change: Margin over the course of this year.

Speaker Change: Ken said earlier and I think all of you guys have is averaged out somewhere around $4 20.

Speaker Change: Yeah, well it's.

Speaker Change: It's.

Ken Lubbock: Earnings for next year, we think that's a very achievable number.

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.

Ken Lubbock: Starting somewhere in that low mid 80% range here in the first quarter and working up in calendar year 2025, we're going to be we're going to pop up by another $13 million to $14 million in earnings over 24. So.

Speaker Change: And start getting again as some of the timing of the CD maturities.

Those will start to kick in more in the second quarter and certainly in the back end of the year.

Ken Lubbock: We're not changing anything on the overall side.

Ken Lubbock: We did not expect to have interest rate decreases last year, that's helping us.

Speaker Change: 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.

Ken Lubbock: We're more than confident we can keep the earnings trajectory.

Ken Lubbock: As we thought it was going to be in 2025, if we don't have with the losses that we think we might have an SBA than the bottomline gets even better so.

Speaker Change: 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.

Speaker Change: Ken said earlier and I. Thank all of you guys have is averaged out somewhere around $4 20.

Ken Lubbock: Being from the Midwest, who are a little more conservative than the most folks were.

Speaker Change: Earnings for next year, we think that's a very achievable number.

Speaker Change: Not going to sit here and tell you, we're going to whack $5 a share but I can tell you. The four bucket kind of where you guys have as today as Ken said some of the parts in between are moving a little maybe from what your model showed at the beginning of.

Speaker Change: Starting somewhere in that low mid 80 cent range here in the first quarter and working up in calendar year 2025, we're going to be we're going to pop up by another $13 $14 million in earnings over 24. So.

Speaker Change: 'twenty three but it's 24 is going to be a great year for us.

Speaker Change: We're not changing anything on the overall side the.

Speaker Change: Okay.

Yes.

Speaker Change: Really appreciate the color guys. Thank you alright.

Speaker Change: We did not expect to have interest rate decreases last year, that's helping us.

Speaker Change: Alright, Thanks Nate.

Speaker Change: Okay.

Speaker Change: We're more than confident we can keep the earnings trajectory.

Speaker Change: Thank you.

Speaker Change: Question is from George Sutton from Craig Hallum. Your line is now open.

Speaker Change: As we thought it was going to be in 2025, if we don't have with the losses that we think we might have an SBA than the bottomline gets even better so.

Speaker Change: Thank you.

Speaker Change: You did call out franchise finance in terms of the provisions or at least those delinquencies can you just give us a little bit more of a picture. There is that still a program you were planning to continue to grow quite a bit.

Being from the Midwest, who are a little more conservative than the most folks were not going to sit here and tell you we're going to whack $5 a share but I can tell you.

Speaker Change: Four bucket kind of where you guys have as today as Ken said some of the parts in between are moving a little maybe from what your model showed at the beginning of.

Speaker Change: Hum.

Speaker Change: No I mean, we are we obviously, we got about a $500 million portfolio there.

Speaker Change: 'twenty three but its 24 is going to be a great year for us.

Speaker Change: It has grown quite a bit over the last several years.

Speaker Change: Okay.

Speaker Change: 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 <unk> seen in prior years, I mean, I think year over year balances were actually down.

Speaker Change: Hi.

Speaker Change: Really appreciate the color guys. Thank you.

Speaker Change: Alright, Thanks Nate.

Speaker Change: Okay.

Speaker Change: Thank you.

Speaker Change: Question is from George Sutton from Craig Hallum. Your line is now open.

Speaker Change: Okay.

Speaker Change: Thank you.

Speaker Change: We've probably seen a little bit we certainly seen a little bit of increase in the non performers there as we've tried to get in front of certain.

Speaker Change: You did call out franchise finance in terms of the provisions.

Speaker Change: Or at least those delinquencies can you just give us a little bit more of a picture. There is that still a program you were planning to continue to grow quite a bit.

Speaker Change: Franchisees that have been struggling.

And our teams working very closely with our partner.

Speaker Change: On that but I mean, we're probably doing I don't.

Speaker Change: Hum.

Speaker Change: No I mean, we are we obviously, we got about a $500 million portfolio there.

Speaker Change: No.

Speaker Change: So call it maybe $6 million to $8 million a month of new originations. They are probably the amount of originations that are offsetting paydowns in the portfolio.

Speaker Change: It has grown quite a bit over the last several years.

Speaker Change: But just again.

Speaker Change: Nice yields has been a nice earnings contributor to us.

Speaker Change: But its obviously one part of a much bigger pie.

Speaker Change: I will tell you George the folks at Apple Pie and working with our team they changed and 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 teams in constant contact with them.

Speaker Change:

Speaker Change: We've probably seen a little bit we certainly seen a little bit of increase in the non performers there as we've tried to get in front of certain yoon franchisees that have been struggling.

Speaker Change: Our teams working very closely with our partner.

Starting to see a light at the end of the tunnel on that one as Ken said their volumes off a little bit.

Speaker Change: On that but I mean, we're probably doing.

Speaker Change: 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 Apple pie.

Speaker Change: I don't know.

Speaker Change: Maybe $6 million to $8 million, a month of new originations, they're probably the amount of originations to that are offsetting paydowns in the portfolio.

Speaker Change: Their customer base has really come a long ways in the last 90 days.

Speaker Change: But just again it's.

Speaker Change: Nice yields has been a nice earnings contributor to us.

Speaker Change: We're not really worried about the portfolio.

Speaker Change: There are things there you got a store that's operating.

Speaker Change: But it's so obviously one part of a much bigger pie.

Speaker Change: Particularly some of the smaller coffee shops.

George Sutton: I will tell you George.

George Sutton: That Apple pie and working with our team they changed and 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 teams in constant contact with them.

Speaker Change: You've got an owner that thought they were going to make a quarter million dollars a year were six hours a day.

Speaker Change: Again, it out at 12 to 14 hours, a day and making 40 granted this.

Speaker Change: Give it up so.

Speaker Change: That's a little bit on human nature, but we reserve for it we're working with them and we just have we're getting to the table with people that are going SaaS much earlier in the game and we're able to help them.

George Sutton: We're starting to see a light at the end of the tunnel on that one as Ken said their volumes off a little bit.

George Sutton: We're still buying.

George Sutton: We won't see tremendous growth and quite honestly, we have some better channels right now, but the relationship between us and Apple pie and their customer base has really come a long ways in the last 90 days.

Speaker Change: I will tell you the franchise ores are stepping up as well.

Speaker Change: Don't want a bad reputation in the market so they're finding other servicers and players and people to help our takeover.

George Sutton: <unk>.

George Sutton: We're not really worried about the portfolio.

Speaker Change: Doors.

Speaker Change: And their early on we can do that before it becomes a crisis and everybody wins in the Ed.

George Sutton: There are things there you got a store thats operating.

George Sutton: Particularly some of the smaller coffee shops.

David Becker: So David just one other question.

George Sutton: Okay.

George Sutton: Got an owner that they were going to make a quarter million dollars a year working six hours a day they are.

David Becker: Been paying attention to the news we days ago entered a new Golden age.

George Sutton: Slugging it out at 12 to 14 hours, a day and making 40 granted they just give it up.

Speaker Change: I'm curious what you think that means broadly defined for your opportunities are you seeing a.

George Sutton: That's a little bit on human nature, but.

George Sutton: We've reserved for and we're working with them and we just yet, but we're getting to the table with people that are going to <unk> much earlier in the game and we're able to help them.

David Becker: A legitimate increase in.

David Becker: Enthusiasm demand for growing businesses in loans, just curious your thoughts there.

Speaker Change: I will tell you the franchise ores are stepping up as well.

David Becker: I haven't seen any impact from the Golden age yet but.

Speaker Change: They don't want a bad reputation in the market. So theyre, finding other servicers and players and people to help our takeover stores.

David Becker: What I can tell you and again, maybe it's back to kind of being in the Midwest here located here in the Midwest. Hopefully you are seeing the same thing what I love about being part of the Midwest and that would be in our Homebase. We don't go to extremes, one way or the other or we don't get appreciation in property values and prices like other areas of the country, but we.

And their early on we can do that before it becomes the crisis and everybody wins in the year.

David Becker: So David just one other question <unk>.

David Becker: <unk> been paying attention to the news we days ago entered a new Golden age.

David Becker: Don't get the depreciation when things fall apart.

Speaker Change: I'm curious.

Speaker Change: <unk>, what you think that means broadly defined for your opportunities are you seeing a.

David Becker: It is 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 <unk>.

Speaker Change: A legitimate increase in.

Speaker Change: Enthusiasm demand for growing businesses in loans, just curious your thoughts there.

David Becker: Super growth that's going on in SBA is over the last two years or three years. So we just put a hell of a team of people together there we have some of the best highest producing videos in the country that because of our consistency and our focus on the market.

Speaker Change: I haven't seen any impact from the Golden age yet but.

Speaker Change: What I can tell you and again, maybe it's just back to kind of being in the Midwest here located here in the Midwest. Hopefully you are seeing the same thing what I love about being part of the Midwest and that would be in our Homebase. We don't go to extremes, one way or the other or we don't get appreciation in property values and prices like other areas of the country, but.

David Becker: <unk>.

David Becker: Karl with Midwest values that we do what we say, we're going to do and we'll get it done timely our business is pretty rock solid and consistent we're not expecting any massive spikes nor are we expecting any massive problems.

David Becker: Yes.

Speaker Change: We don't get the depreciation when things fall apart.

David Becker: We had that discussion a little earlier this morning.

Speaker Change: That is 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.

Speaker Change: Have you heard the some of the stuff that was being discussed in Davos. This morning that the world is.

Speaker Change: Outside of SBA and the Super growth that's going on in SBA is over the last two years or three years. So we just put a hell of a team of people together there we have some of the best highest producing videos in the country that because of our consistency and our focus on the market.

David Becker: Oil is going to go down that up.

David Becker: We just that's noise, we don't pay much attention to it.

Speaker Change: Got you thanks for the thoughts.

David Becker: Thank you.

David Becker: Okay.

Speaker Change: Thank you. Your next question is from John Rowan from Janney. Your line is now open.

Speaker Change: <unk>.

Speaker Change: All of the Midwest values that we do what we say, we're going to do and we'll get it done timely our business is pretty rock solid and consistent we're not expecting any massive spikes nor are we expecting any massive problems.

John Rowan: Hey, good afternoon guys.

David Becker: Hey, John.

John Rowan: Okay.

John Rowan: First off just the tax rate, we should use for now for 25.

John Rowan: Okay.

John Rowan: Yes, I think as you think about that.

Speaker Change: Yes.

John Rowan: The earnings trajectory on a quarterly basis for next year, we have nice kind.

Speaker Change: We had that discussion a little earlier this morning.

Speaker Change: If you heard the some of the stuff that was being discussed in Davos. This morning that the world is oil.

John Rowan: Kind of similar to this past year in 'twenty for kind of a nice stair step up in terms of earnings except where at a much higher level. So from our perspective on a quarterly basis looking at a tax rate of say may be somewhere in the first quarter of 9% ranging up to about 16 and 17.

Speaker Change: Oil is going to go down.

Speaker Change: <unk>.

Speaker Change: We just that's noise, we don't pay much attention to it.

Speaker Change: Got you thanks for the thoughts.

Speaker Change: Thank you.

Speaker Change: Okay.

Speaker Change: Thank you. Our next question is from John Rowan from Janney. Your line is now open.

John Rowan: <unk> at the end of by fourth quarter, that's the way we're looking at it.

John Rowan: Hey, good afternoon guys.

John Rowan: So I guess on average your 13% to 14% for the year.

Speaker Change: Hey, John.

John Rowan: Okay.

John Rowan: First off just the tax rate, we should use for now for 25.

John Rowan: So thats kind of the way that we're modeling it right now.

Speaker Change: Okay. Thanks, Ken and then Ken just to <unk>.

Speaker Change: Yes, I think as you think about.

John Rowan: Clarify I think you said on.

Speaker Change: The earnings trajectory on a quarterly basis for next year, we have nice.

Speaker Change: Fee income year over year growth of 9% to 12%.

John Rowan: With that.

Speaker Change: Kind of similar to this past year in 'twenty for kind of a nice stair step up in terms of earnings except where at a much higher level. So from our perspective on a quarterly basis looking at a tax rate of say may be somewhere in the first quarter of 9% ranging up to about 16 17.

John Rowan: As far as the base for 'twenty for US is the base with or without the gains in the fourth quarter of $4 7 million.

John Rowan: It's without the gains so back out the gain that gets you to save 42, six and then and then go off of that.

John Rowan: Okay.

John Rowan: Thanks, guys.

Were sent at the end by fourth quarter, that's the way we're looking at it.

John Rowan: Alright, Thanks, John questions Jeff.

Yes.

John Rowan: Okay.

Speaker Change: So I guess on average your 13% to 14% for the year.

John Rowan: Thank you there are no further questions at this time I will now hand, the call back over to David Becker for any closing remarks.

Speaker Change: So that's kind of the way that we're modeling it right now.

Speaker Change: Okay. Thanks, Ken and then Ken just to <unk>.

David Becker: Thank you Jenny and thanks, everybody for joining us on today's call as said, we wrapped up 24 with some strong performance. We're entering 25 with a lot of great momentum.

Ken Lubbock: Clarify I think you said on.

Ken Lubbock: Fee income year over year growth of 9% to 12%.

Ken Lubbock: Would that shoot as far as the base for 'twenty for US is the base with or without the gains in the fourth quarter of $4 7 million.

David Becker: And a lot of backlog in business and opportunity.

David Becker: We are highly optimistic about the future outstanding performance of the lending teams along with emerging opportunities through the fintech and other partnerships positions us to greater more diversified revenue growth, we have the wind at our backs with a more favorable interest rate environment, and an improving business climate and all of that.

Ken Lubbock: It's without the gains so back out the gain that gets you to say 42, six and then and then go off of that.

Ken Lubbock: Okay.

Ken Lubbock: Thanks, guys.

Ken Lubbock: Alright, Thanks, John questions Jeff.

Ken Lubbock: Yes.

David Becker: Together creates a great from a great foundation to build on and deliver stronger earnings and profitability in 2025.

Ken Lubbock: Okay.

Speaker Change: Thank you there are no further questions at this time I will now hand, the call back over to David Becker for any closing remarks.

David Becker: 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.

David Becker: Thank you Jenny and thanks, everybody for joining us on today's call as said, we wrapped up 24 with some strong performance. We're entering 25 with a lot of great momentum.

David Becker: Thank you ladies and gentlemen, the conference has now ended thank you all for joining and you may all disconnect your lines.

David Becker: And a lot of backlog in business and opportunity.

We are highly optimistic about the future outstanding performance of the lending teams along with emerging opportunities through the fintech and other partnerships positions us to greater more diversified revenue growth, we have the wind at our backs with a more favorable interest rate environment, and an improving business climate and in all of that together creates a great.

David Becker: <unk>, a great foundation to build on and deliver stronger earnings and profitability in 2025.

David Becker: 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.

Speaker Change: Thank you ladies and gentlemen, the conference has now ended thank you all for joining and you may all disconnect your lines.

Q4 2024 First Internet Bancorp Earnings Call

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