First Internet Bancorp - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 was a mixed quarter: core revenue and NIM expanded (NIM 1.82%, FTE NIM 1.91%), but elevated credit costs (provision $11.9M; NCOs 0.92%) drove diluted EPS to $0.11 and net income to $0.9M.
• Results missed Wall Street: EPS $0.11 vs consensus $0.74* and revenue $23.59M vs $26.73M*, primarily on higher provision and charge-offs in franchise finance and SBA portfolios; noninterest income also normalized vs 4Q one-time gains.
• Management reiterated a constructive 2025 outlook: loan growth 10–12%, deposit growth 5–7%, full-year NII up ~40%+ YoY, and FTE NIM reaching 2.35–2.45% by 4Q25; Q2 noninterest income expected to dip to $5–6M as SBA loan sales are held longer before normalizing in 2H25.
• Balance sheet trends were favorable: loans +2.0% QoQ, deposits +0.3% QoQ, L/D 86.0%, TCE/TA 6.55% (7.17% ex-AOCI/normalized cash), CET1 9.16%; fintech deposit growth enabled payoff of $200M high-cost brokered deposits late in the quarter, aiding future deposit costs.

Footnote: *Values retrieved from S&P Global.

What Went Well and What Went Wrong

What Went Well

• NIM expansion and core revenue momentum: NIM rose to 1.82% (FTE 1.91%), with NII up 6.6% QoQ as loan yields increased and deposit costs fell 12 bps; management: “We remain confident that net interest income and net interest margin will continue to trend higher throughout 2025”.
• Fintech deposits scaling: non-maturity and fintech deposits grew strongly, enabling lower-cost funding and paying down higher-cost brokered CDs; fintech revenue exceeded $1.1M in Q1 (+30% QoQ).
• Commercial loan growth and mix shift: loans +$83.8M QoQ (+2.0%) led by construction, investor CRE, SBA, and C&I; new funded yield 7.78% (up 50 bps QoQ) supports further NII/NIM improvement.

What Went Wrong

• Credit costs remained elevated: net charge-offs of $9.7M (0.92% of avg loans) and provision of $11.9M, driven by franchise finance and SBA credits placed on nonaccrual; NPLs rose to 0.80%.
• Noninterest income fell sequentially to $10.4M from $15.9M in 4Q (which had $4.7M one-time gains) and saw a negative servicing asset revaluation; management also flagged a temporary Q2 GOS dip from longer SBA hold periods.
• EPS and revenue missed consensus, reflecting the credit and fee headwinds (EPS $0.11 vs $0.74*; revenue $23.59M vs $26.73M*).

Footnote: *Values retrieved from S&P Global.

Transcript

Operator (participant)

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

Ben Brodkowitz (Head of Investor Relations)

Thank you, Andrew. Hello, everyone, and thank you for joining us to discuss First Internet Bancorp's first quarter financial results. The company issued its earnings press release yesterday afternoon, and it is available on the company's website at www.firstinternetbancorp.com. In addition, the company has included a slide presentation that you can refer to during the call. You can also access these slides on the website. Joining us today from the management team are Chairman and CEO David Becker, President and COO Nicole Lorch, and Executive Vice President and CFO Ken Lovik. David and Nicole will provide an overview, and Ken will discuss the financial results. We will open up the call to your questions. Before we begin, I'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of First Internet Bancorp that involve risks and uncertainty.

Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most direct comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP to non-GAAP measures. At this time, I'd like to turn the call over to David.

David Becker (Chairman and CEO)

Thank you, Ben. Good afternoon, everyone, and thanks for joining us to discuss our first quarter 2025 results. Today, Nicole Lorch, our President and COO, will give an overview of the quarter. Many of you on the call have already met her in investor meetings over the past few years. Next, Ken Lovik, our CFO, will walk through the numbers in more detail, and I'll hop back on for the Q&A session at the end. Nicole, over to you.

Nicole Lorch (President and COO)

Thanks, David. The results for the first quarter were mixed. We continue to see strong positive momentum in many key operating trends, which reflects a tremendous effort on the part of our teams. Yet that progress is tempered by credit issues in our small business lending and franchise finance portfolios, which I will address later in my commentary. Let's talk first about the things that are going really well. Net interest income continued to grow, and net interest margin continued to expand. In fact, we achieved our sixth consecutive quarter of net interest income and core revenue growth. Those results were fueled by strong loan growth that drove yields on earning assets higher, while deposit costs continued to decline. Simply put, our revenue performance continues to demonstrate strong improvement across the board.

Compared to the prior quarter's adjusted amount, we delivered total operating revenue growth of over 2% and more than 22% year-over-year. Our teams maintain a keen focus on controlling the controllable. That means winning new relationships with timely follow-up, certainty of execution at disciplined pricing, and responsibly managing expenses. Starting with the highlights on slide three, I would like to discuss some key themes for the quarter in more detail. As a result of our continued improvement in operating performance and revenue growth, we reported pre-tax pre-provision net income of $12 million, which is up 10.8% over the prior quarter's adjusted amount and up almost 50% over the first quarter of 2024. Revenue growth was driven by a 7% increase in net interest income compared to the fourth quarter and 20% compared to the first quarter of 2024.

The yield on the overall loan portfolio increased six basis points from the fourth quarter. Deposit costs declined 12 basis points. The result was a 16 basis point improvement in fully tax equivalent net interest margin. We remain confident that net interest income and net interest margin will continue to trend higher throughout 2025 if the Fed takes no additional rate actions or moves rates lower. In either of those two scenarios, deposit costs would decline over the course of the year, driven in part by a significant repricing gap on maturing CDs. Additionally, thanks in part to the success of our embedded finance Fintech partnerships growth, we have been able to pay down higher-cost brokered deposits. Side note, our Fintech partnerships relationships also contribute non-interest income on oversight and transaction fees and, on a limited basis, interest income.

Embedded finance is a complex business, and we are proud of our teams for the collaborative effort it takes to grow meaningful partnerships while maintaining an appropriate risk management framework. Another bright spot in the first quarter was new loan origination yields that continue to remain well above our overall portfolio yield. During the first quarter, our weighted average rate on funded originations was 7.78%, which was up 50 basis points over the prior quarter. Yet another positive trend is the continued strong performance of our small business lending team, which is a key component in our strategy. Originations were down compared to the fourth quarter. That is seasonal and expected. Our pipelines give us confidence we will achieve $600 million of originations over the course of 2025. Solid loan volume and gain on sale revenue were both up over the prior quarter.

To really see the results of the investment we've made in this business, compare the progress we made on a year-over-year basis. Origination and loan sale volume were up 22% and 36%, respectively, over the first quarter of 2024. Through the date of this earnings call, we've remained the eighth largest SBA 7(a) program lender for the SBA's 2025 fiscal year to date. Turning to earnings for the quarter, we reported net income of $900,000 and diluted earnings per share of $0.11. Net income for the quarter was significantly impacted by the elevated provision for loan losses. During the quarter, we took steps to address certain problem loans and recognized $9.7 million of net charge-offs, most of which were related to the franchise finance and small business lending portfolios. As a result, net charge-offs to average loans totaled 92 basis points.

I would note that approximately $5.8 million of these charge-offs were related to loans that had specific reserves existing. Similar to loans we charged off last quarter, the issues with these loans and these credits were borrower-specific, not driven by any particular industry, geography, referral source, or lender, nor are we seeing any significant trends of stress within certain industries or regions. We had certain problem credits in various stages of workout or delinquency where the outlook for a positive outcome was becoming less likely. We made the decision to charge these loans off and recognize the losses now. Overall credit quality remained sound. Non-performing loans to total loans were 80 basis points, and non-performing assets to total assets were 61 basis points at quarter end. The increase in non-performing loans came from franchise finance and small business lending.

With the elevated level of economic uncertainty, we felt it was prudent to take action and get in front of some potential problem loans. Part of the actions taken included recording specific reserves where we believe impairment may exist, which added a net amount of $3.3 million to the allowance for credit losses and was recognized in the provision for loan losses. At the moment, we have specific reserves on about a third of the total non-performing loan balance, while our teams work diligently with these borrowers for positive outcomes. Despite the increase in non-performing loans, our asset quality metrics remain in line with peers.

While we're not pleased with the level of net charge-offs and the migration of franchise finance and small business lending loans to non-performing status, we felt it was prudent to get in front of credits where there was no likely path to success and recognize those losses in the first quarter. Going back to the theme of controlling what we can control, we have adequate resources on our loan servicing and special assets teams, as well as processes in place to address any loans showing signs of stress. Our credit teams review data constantly to look for trends and areas to refine our underwriting standards. Turning to slide four, I'd like to take a few moments to highlight our lending activity for the quarter. We're proud of the work our lending teams did over the quarter to produce solid loan growth of 8% on an annualized basis.

Nearly all of our lines of commercial lending experienced growth, with balances up almost $90 million from the fourth quarter of 2024, or 11% on an annualized basis. Our construction and investor commercial real estate team delivered another strong quarter, originating almost $70 million in new commitments. In the aggregate, construction and investor commercial real estate balances increased $86 million. Projects continued to progress, leading to strong draw activity on existing commitments, and certain completed projects transitioned to the investor commercial real estate portfolio. At quarter end, unfunded commitments in our construction portfolio totaled $446 million. Upcoming draws on these loans, along with the option to deploy excess liquidity to retain a portion of SBA originations on our balance sheet, will play a meaningful role in the ongoing shift of our loan portfolio toward higher-yielding variable-rate loans.

Approximately 30% of our loan book is variable rate today compared with 16% three years ago, demonstrating tangible evidence of our commitment to reduce interest rate risk. On the consumer side, total balances were down, with expected declines in residential mortgage and home equity balances, combined with seasonally lower originations in the recreational vehicles and other consumer loans portfolios. We did, however, have solid origination activity in the trailers portfolio. We focus on the superprime borrower in our consumer lending, and rates on new production were in the low 8% range. Furthermore, delinquencies in these portfolios remain extremely low at 10 basis points of total consumer loans. I'm proud of the work that the employees at First Internet Bancorp put in to deliver continued improving performance and a six-quarter streak for growth in revenue and net interest income and strong net interest margin expansion.

Combined with the ongoing investments we've made in small business lending, we remain confident in the earnings momentum we have built. With the ongoing evolution of our loan portfolio, greater revenue diversification, and anticipated reductions in deposit costs, we are well-positioned to drive continued revenue growth and enhanced profitability for the balance of 2025. I will now turn the call over to Ken for more details of our financial results of the quarter.

Ken Lovik (EVP and CFO)

Thanks, Nicole. Since Nicole already covered the loan portfolio, let's turn to slides five and six, where I will cover deposits in more detail. The average balance of deposits increased by $111 million, or over 2% during the first quarter, and period-end deposits were up modestly from the prior quarter. Growth in deposits was primarily driven by growth in Fintech partnership deposits, which are reflected in both non-interest-bearing and interest-bearing demand deposits, as well as money market accounts. The growth in deposits was partially offset by a decline in higher-cost CDs and brokered deposits. Non-maturity deposits were up almost $335 million, or 15%, reflecting the increase in Fintech partnership deposits. Total deposits from our Fintech partners were up 37% from the fourth quarter and totaled $881 million at quarter end.

Additionally, these partners generated almost $23 billion in payments volume, which was up 21% from the volume we processed in the fourth quarter. Total Fintech partnership revenue was over $1.1 million in the first quarter, which was up 30% from the fourth quarter, as contributions from key partnerships continued to scale up and new pricing terms went into effect. Related to CD activity during the quarter, total balances were down $104 million, or 5% from the linked quarter. The strong growth in Fintech deposits allowed us to keep CD pricing lower and manage new production volume. We originated $285 million in new production and renewals during the first quarter at an average cost of 4.07% and a weighted average term of 12 months. These were more than offset by maturities of $414 million, with an average cost of 5.06%.

Lookig forward, we have $355 million of CDs maturing in the second quarter of 2025, with an average cost of 4.87%, and $486 million maturing in the third quarter of 2025, with an average cost of 4.84%. In total, for the remaining of the year, we have $1.1 billion of remaining CD maturities, with an average cost of 4.73%. With current new production rates remaining in the range of 4.05%-4.1%, we expect a continued positive pricing gap between new production and maturing CDs over the next several quarters, giving us confidence that deposit costs will trend lower over the course of the year. Moving to slide six, at quarter end, total liquidity remained very strong, reflecting cash and unused borrowing capacity of $2.1 billion.

On balance sheet, liquidity grew through the quarter as growth in Fintech deposits supplemented with existing cash balances from the end of the fourth quarter. We deployed a portion of this liquidity to pay off a significant amount of higher-cost brokered deposits, in addition to the net decline in CD balances, as well as fund loan growth and securities purchases. With modest deposit growth and loan growth of $84 million, or 2%, our loans-to-deposit ratio increased to 86% from 84.5% at the end of the fourth quarter. At quarter end, our cash and unused borrowing capacity represented 180% of total uninsured deposits and 230% of adjusted uninsured deposits. Turning to slides seven and eight, net interest income for the first quarter was $25.1 million and $26.3 million on a fully tax equivalent basis, up 6.6% and 6.3%, respectively, from the fourth quarter.

The yield on average interest-earning assets increased to 5.57% from 5.52% in the linked quarter, due primarily to a six-basis point increase in the yield earned on loans and a 12-basis point increase in the yield earned on securities, partially offset by a 31-basis point decrease in other earning assets. A full quarter's impact of the Fed's rate cuts in November and December was felt during the first quarter, as higher yields and average balances in the loan and securities portfolio were more than offset by the large decline in both average cash balances and the rate earned on these balances, leading to a 1.2% decrease in total interest income compared to the linked quarter.

However, the impact of the Fed rate cuts was more pronounced on deposit pricing, which, when combined with significantly lower average Federal Home Loan Bank advance balances, resulted in an almost 5% decline in interest expense and drove continued growth in net interest income. Net interest margin for the first quarter was 1.82% and 1.91% on a fully tax equivalent basis, representing increases of 15 and 16 basis points, respectively, compared to the linked quarter. The net interest margin roll forward on slide eight highlights the drivers of change in fully tax equivalent net interest margin during the quarter. The yield on funded portfolio originations was 7.78% in the first quarter, up 50 basis points from the fourth quarter, reflecting the strong growth in construction, investor commercial real estate, small business lending, and C&I.

Pipelines remain solid in these lines of business, giving us further confidence that net interest income will continue to grow in future quarters. Related to deposits, looking at the graph on slide eight that tracks our monthly rate on interest-bearing deposits against the Fed funds rate, you can see that our deposit costs are continuing to trend down, along with the decline in Fed funds. With lower CD pricing across the maturity curve, we anticipate that interest-bearing deposit costs will continue to decline in the second quarter as high-cost CDs mature and are replaced at much lower rates with either Fintech deposits or new CDs. This is expected to help drive continued net interest income growth and net interest margin expansion, even without any further Fed rate cuts.

At quarter end, we had $1.5 billion of deposits indexed to Fed funds, so if the Fed does resume lowering rates later in the year, the potential exists for further deposit cost reductions. Turning to non-interest income on slide nine, non-interest income for the quarter was $10.4 million, down $5.5 million, or 35% from the fourth quarter. As a reminder, the fourth quarter benefited from $4.7 million of prepayment and terminated interest rate swap gains related to the paydown of Federal Home Loan Bank advances. Excluding these gains, the sequential decrease was $800,000, or 7%. Gain on sale of loans totaled $8.7 million for the quarter, up 1% over the fourth quarter, with SBA loan sales driving this increase. SBA loan sale volume was $108.8 million, up 2% quarter-over-quarter, while net gain on sale premiums were down a modest 6 basis points.

The majority of the decrease in non-interest income was driven primarily by lower net servicing revenue, resulting from a negative fair value adjustment to the loan servicing asset. Moving to slide ten, non-interest expense for the quarter was $23.6 million, down $400,000, or 1.7% from the fourth quarter. The main driver was salaries and employee benefits, which decreased $900,000, or 6.7%, due primarily to a decrease in incentive compensation. The lower salaries and employee benefits expense was partially offset by seasonally higher consulting and professional fees, as well as higher loan expenses due to collection costs. Turning to asset quality on slide 11, Nicole covered the major components of asset quality for the quarter in her comments, so I will just add some commentary around the allowance for credit losses and the provision for credit losses.

The allowance for credit losses, as a percentage of total loans, was 1.11% at the end of the first quarter, up 4 basis points from the fourth quarter. The increase in the allowance for credit losses reflects specific reserves taken on loan relationships in the franchise finance and small business lending portfolios that were placed on non-accrual during the quarter, as well as growth in the overall loan portfolio, partially offset by the impact of economic metrics on qualitative factors in certain portfolios. At quarter end, the small business lending ACL to unguaranteed SBA loan balances was 5.8%. Additionally, at a higher level, if you exclude the balances and reserves on, the a public finance and residential mortgage portfolios, which have lower coverage ratios given their lower inherent risk, the allowance for credit losses represented 1.32% of loan balances.

The provision for credit losses in the first quarter was $11.9 million compared to $7.2 million in the fourth quarter. The provision for the quarter was driven primarily by the elevated net charge-offs and the increase in specific reserves related to franchise finance and small business lending. Moving to capital on slide 12, our overall capital levels of both the company and the bank remained solid. The tangible common equity ratio was 6.55%, which declined 7 basis points, as balance sheet growth outweighed the positive impact of lower interest rates on the accumulated other comprehensive loss. If you exclude accumulated other comprehensive loss and adjust for normalized cash balances of $300 million, the adjusted tangible common equity ratio would be 7.17%. From a regulatory capital perspective, the common equity tier one capital ratio remains sound at 9.16%.

Before I wrap up, I would like to provide some updates on our outlook for 2025. We expect loan yields to increase as we continue to originate new production at rates well above the current portfolio yield. We also expect deposit costs to continue declining as, one, we recognize the significant CD repricing gap on over $1 billion of CDs maturing over the next nine months, and, two, we see the benefit of paying down a significant amount of higher-cost brokered deposits at the end of the first quarter.

Assuming loan growth remains in the range of 10%-12% for the year and deposit growth in the range of 5%-7%, we expect that full-year net interest income will increase in the neighborhood of 40% or more over 2024's full-year amount, and fully taxable equivalent net interest margin will increase throughout the year and should be in the range of 2.35%-2.45% by the fourth quarter of 2025. If the Federal Reserve were to resume reducing short-term interest rates, our net interest income and net interest margin would likely exceed these projections. One near-term change to our revenue outlook relates to non-interest income and specifically gain on sale revenue related to SBA loans.

As many of you have probably read, the Small Business Administration is going through a number of changes right now, including elevated repurchase rates across its entire portfolio, as well as fresh amendments to 7(a) program standard operating procedures. Additionally, we have established First Internet Bank as a top 10 7(a) program lender. Our activities are falling under a more watchful eye at the SBA. Therefore, we are making some changes to our loan sale process that align completely with SBA standard operating procedure in order to protect the guarantee on these loans, which will result in a longer hold period before we sell a loan on the secondary market. This process enhancement will cause a temporary one-quarter decline in gain on sale revenue. However, we anticipate we will return to a normalized gain on sale run rate as we approach the second half of the year.

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

However, we are seeing a slowdown in the pace of new delinquencies, which provides some level of optimism that the provision for credit losses will moderate in the second half of the year. With that, I will turn it back to the operator so we can take your questions.

Operator (participant)

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

Tim Switzer (VP of Equity Research)

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

Ken Lovik (EVP and CFO)

Hi, Tim.

Tim Switzer (VP of Equity Research)

I appreciate your commentary on the impact of some of the changes going on at SBA, and I had a few follow-ups on that. More specifically, I'm sorry if I missed it, but did you quantify or can you quantify the expected one-time impact on fees in Q2?

Ken Lovik (EVP and CFO)

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

Tim Switzer (VP of Equity Research)

I get you. Okay. That's on the non-interest income, but we also will pick up, as Ken mentioned earlier, additional revenue on the loan side. We'll actually, although we're down four to five, pick up part of that in the loan interest income. Right, as you hold them on the balance sheet. Makes sense. Right. Looking further out beyond Q2, SBA reinstated a lot of the fees for smaller dollar loans, particularly those below $1 million. Are you able to tell us what your average loan size is in the SBA or what percent of your originations are below $1 million?

Nicole Lorch (President and COO)

Our average loan size, Tim, is just north of $1 million. The fees that had been waived on small loans really didn't apply to us. We're not doing volume in the small loan game.

We were passing along to the borrower that SBA guarantee fee on our 7(a) loans that we're doing. We don't expect much impact there. As it relates to the SOP generally, I mean, we're certainly digesting those changes that go into effect on June 1. Along with every lender in this space, we have a fantastic pipeline right now, and we are looking at the loans that are in our underwriting phase to ensure that nothing needs to be restructured in response to the changes that are coming.

Tim Switzer (VP of Equity Research)

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

Ken Lovik (EVP and CFO)

Yeah. If you obviously, we're going to run this on a static balance sheet, but on a static balance sheet, a 25 basis point rate cut on an annualized basis is about $3.6 million of NII. Again, that's annualized, and the way to think about it is it does kind of ramp up on a quarterly basis. You can't just take 3.6 and divide by 4. There's kind of a phase-in period. So you're probably ramping up 400,000-500,000 first quarter, then double that, and then just kind of ramp up from there over the course of a 12-month period.

Tim Switzer (VP of Equity Research)

Got it. Very helpful. Thank you, guys.

Operator (participant)

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

Nathan Race (Managing Director)

Good afternoon. Thanks for taking the questions.

Nicole Lorch (President and COO)

Hi, Nate.

Nathan Race (Managing Director)

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

Ken Lovik (EVP and CFO)

Maybe we'll address the rate piece of it first. Yeah, I think the higher rate environment certainly makes an interest payment higher, but when you think about a 25 or a 50 basis point decrease on a monthly payment on a loan, it's not really significant. I think the higher rate environment probably doesn't play as big a role on that. I think it's just more the economic uncertainty.

We have currently, as I mentioned, we got almost 6% reserved against the unguaranteed balance on our loan book. I think we've had some borrowers that have struggled and have either working with those borrowers and either addressed, either taken action via charge-off or specific reserve or continuing to work with the borrower. It's an uncertain environment. I think the loss history of the past couple of quarters has been elevated. I think we put a big dent in that piece of it and expect that the loss rate should decline. If you look at the SBA 7(a) program overall, as a whole, I mean, the default rates have been increasing. Like I said, there's a certain amount of economic uncertainty that's kind of affecting the small business community today.

Nathan Race (Managing Director)

Right. Perfectly understand. It's kind of tough to predict kind of the magnitude of kind of how much loss content goes down starting the second quarter. I think you alluded to that dropping even further in the back half of the year. Just curious if you can kind of frame up kind of what you're seeing more specifically here in Q2 in terms of SBA charge-offs and then what that translates into kind of the overall charge-off level as this year progresses.

Ken Lovik (EVP and CFO)

So far in 2Q, I think we've seen activity. I think we've seen delinquencies come down. We've seen, so far in Q2, we've seen charge-off activity and/or specific reserve come down, say, compared to last quarter. There is still a pipeline of loans we are keeping an eye on, but certainly activity seems a bit lower, at least so far through the second quarter, than what we saw last quarter.

Nathan Race (Managing Director)

Okay. That helps. We would love to just get kind of your updated thoughts on share buybacks, just given where the stock is trading, and maybe kind of slowing balance sheet growth just to buy back the stock more so just based on where that is at today.

Ken Lovik (EVP and CFO)

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

We always do this too, but we're certainly looking at ways where we can kind of find some balance sheet capacity elsewhere. The loan sale market hasn't, other than SBA, the loan sale market is starting to come back a bit. We're looking at some other areas there to free up some balance sheet space. We're certainly looking to manage capital that way and kind of manage balance sheet growth overall. On the buyback, we're certainly getting prepared and getting our ducks in a row to look back at that market.

David Becker (Chairman and CEO)

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

Nathan Race (Managing Director)

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

Ken Lovik (EVP and CFO)

I think we remain pretty confident in the guidance we gave last quarter about 10%-15% growth year-ove- year, kind of annual over 2024. Obviously, kind of in prior years, it's a bit of a ramp, right? A little bit more higher each quarter. Yeah, that 10%-15% year-over-year growth is a good number.

Nathan Race (Managing Director)

Off $90 million or so in 2024, correct?

Ken Lovik (EVP and CFO)

Yes.

Nathan Race (Managing Director)

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

David Becker (Chairman and CEO)

Thank you.

Operator (participant)

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

Brett Rabatin (Director of Research)

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

Ken Lovik (EVP and CFO)

I think what we saw in there, I'll kind of divide it into two buckets. One is what we charged off. We had loans that we had specific reserves on at the, whether it was sometime in the fourth quarter or prior to then. We put a reserve on it, moved it to non-accrual, but we obviously continue to work with the borrower trying to get to the best possible outcome.

Late in the quarter, we just had some developments on some of those loans that a guarantor, a strong guarantor that we were working with, decided to ultimately throw up their arms and file bankruptcy. There were just some others where the unit was still open but struggling and then ultimately closed near the end of the quarter. That kind of drove the charge-off activity. On the specific reserve side, again, there were some loans that earlier, go back to fourth quarter, were maybe 10 days delinquent, something like that. The borrower maybe had been a loan we identified to keep our eye on, but as we worked through the quarter, we had a handful of loans that as we kind of got into really late in the quarter, hit 90 days delinquency.

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

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

Nicole Lorch (President and COO)

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

David Becker (Chairman and CEO)

Okay. Brett, go ahead, my man.

Brett Rabatin (Director of Research)

Oh, I was just going to ask, Nicole, I think you indicated I'm looking at slide 18 with the detail on the franchise finance portfolio, and I think you indicated that there wasn't any kind of rhyme or reason in terms of concentration. Was it more limited service restaurants? Was there anything in particular that seems to have been an issue from a borrower use perspective?

Nicole Lorch (President and COO)

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

Brett Rabatin (Director of Research)

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

David Becker (Chairman and CEO)

It's $13.8 million loans on the franchise category, and we've reserved 44% against that $13.8 million. One other point on it, Brett, our internal policy, as Ken said, these loans are not as black and white as our consumer loans, as our property loans and stuff. We had an internal policy. It's 90 days. We charge it off, take a specific reserve. We kind of got caught up a little bit here in the first quarter. Kudos to the Apple Pie team. They have switched servicers that we talked about a couple of quarters ago. They're getting in faster, more furious, and pressing. Obviously, some of these folks have been fighting inflation for a long period of time.

I think if there's anything that caused a little bit of a blip up here in the first quarter is the threat of potential tariffs on top and cost of goods going up. If somebody was kind of on the border, as Ken said, out of the blue, somebody would just say, "Hey, I'm done," and we're gone. We are much better on getting in contact, getting in front of them. It takes a longer workout cycle. Some of the reserves that we took and some of the charge-offs we had during the first quarter, we anticipate getting some of that money back. As we've stated time and again here, both the SBA and the Apple Pie and the franchise loans, what is in that 30/60 category right now is down over what it was at this time in the first quarter.

Hopefully headed in the right direction, but economic factors could blow it up again.

Brett Rabatin (Director of Research)

Okay. If I could ask one last quick one just around deposits. You had a nice shift towards interest-bearing deposits and maybe away from what you might call hotter money. What was the, it just kind of gets stuck in that bucket, which increased the link quarter interest-bearing deposit number. What's the rate on those? Ken, it sounds like with all these CDs or pricing, I got the impression that maybe there wouldn't be more makeshift change, but just wanted to make sure I understood that correctly.

Ken Lovik (EVP and CFO)

What's really driving the interest-bearing demand and the non-interest-bearing demand as well is just growth in fintech relationships. Those are all classified in interest-bearing demand. Obviously, with the strength in those, I kind of talked about the growth in quarter-over-quarter there.

Those certainly were more than able to replace some of the CD funding. We continue to experience growth in CDs. I expect our expectation is that CD balances will continue to decline. Some of those maturities will be replaced to a limited extent by new production and renewals. Really, the bulk of what is going to backfill it and even grow the deposits is going to be on the fintech side.

Brett Rabatin (Director of Research)

Okay. Great. Appreciate all the color.

Ken Lovik (EVP and CFO)

Great. Thanks, Brett.

Operator (participant)

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

Logan Lillehaug (Equity Research Associate)

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

Nicole Lorch (President and COO)

Sure. I'll take that. Thanks, Logan, for the question. Our fintech partnerships and embedded finance team is doing really well with managing our relationships that we have. We have a couple of new prospects in the pipeline. As things have evolved over time, we are seeing better quality, more mature programs that are coming in looking for a bank partner.

Because of our success and reputation in the space as being a solid, reliable bank sponsor, we're winning good looks. I would say that the outlook there is strong. We expect to keep the numbers somewhat moderate in terms of programs that we sponsor. Right now, it's less than two dozen. There is no reason for us to go nuts in that space because, as you've seen, we're having good growth in deposits and in transaction volume with the partners that we have. We're expanding the relationships with partners that we have. A partner where we've been doing only a deposit program, now we're talking about some lending opportunities. I'd always love to talk about growing programs and relationships with our existing partners because that's just going to bring success for everyone.

I do not expect us to go nuts in terms of growing the number of programs and relationships that we have, but certainly expanding the ones that we do have. I am grateful for the relationships that we have been able to forge there. We have seen some movement in the sponsor bank space overall, but I would say that we try to stay focused on what we do well. When they come knocking, we have a good story to tell.

David Becker (Chairman and CEO)

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

Logan Lillehaug (Equity Research Associate)

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

Ken Lovik (EVP and CFO)

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

David Becker (Chairman and CEO)

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

Logan Lillehaug (Equity Research Associate)

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

Ken Lovik (EVP and CFO)

All right. Thanks, Logan.

Operator (participant)

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

David Becker (Chairman and CEO)

Thanks, everybody. We appreciate you joining on today's call. First Internet has consistently produced improving revenue. Net interest income for the macro environment remains uncertain. We're excited about the future. Our lending teams have continued to deliver very strong performance, particularly in the small business and construction lending.

Furthermore, emerging growth opportunities with key fintech partnerships, as I just discussed, are expected to further diversify and drive revenue growth. Given our ongoing effort to improve our loan mix and anticipated reduction in deposit costs, we're confident that we are well-positioned to achieve stronger earnings in the coming quarters. As fellow shareholders, we remain committed to driving improved profitability and enhanced value. We thank you for your support and wish you a good afternoon. Thanks.

Operator (participant)

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