First Internet Bancorp Q1 FY2024 earnings call

Management Statement and Operational Highlights

• Loan Portfolio Transition: The company continued to transition the loan portfolio composition, achieving net loan growth of $70 million. New funded loan origination yields were 8.84%, and the overall loan portfolio yield increased 23 basis points.
• SBA Performance: SBA originations and sold loan volume were up 27% and 55% respectively compared to Q1 2023, with gain on sale revenue setting a quarterly record.
• Deposit Growth: Strong deposit growth was observed, with non-maturity deposits up over $66 million, driven by fintech partnership deposits and money market balances.
• Net Interest Income: Net interest income was $20.7 million, up 4.7%, and fully-taxable equivalent net interest income was $21.9 million, up 4.2%. Net interest margin was 1.66% fully-taxable equivalent, up 7 basis points.
• Noninterest Income: Noninterest income was $8.3 million, up from the prior quarter, with gain on sale of loans totaling $6.5 million, a quarterly record.
• Asset Quality: Nonperforming loans were 33 basis points of total loans, with net charge-offs to average loans at 5 basis points. Delinquencies 30+ days past due were 53 basis points at quarter-end but declined post-quarter.
• Capital Levels: Common equity tier 1 capital ratio was 9.52%, tangible common equity ratio was 6.79%, and tangible book value per share increased 1% QoQ and 6.6% YoY.

Segment Performance

• Loans: Commercial lending balances grew by $75 million (10% annualized) led by construction, small business, and franchise finance. Consumer balances were modestly down. New funded loan origination yields were 8.84%, and the overall loan portfolio yield increased 23 basis points. Net loan growth was $70 million, or over 7% annualized.
• Deposits: Deposit balances grew by $206.8 million (5.1%) from the prior quarter. Non-maturity deposits were up over $66 million, with fintech partnership deposits up 32% and payments volume from fintech partners up 29%.

Guidance

• Net Interest Income: Expect loan yields to continue increasing, with deposit costs modestly up. Anticipate NII to be up 20% for 2024, and fully-taxable equivalent net interest margin to be in the 1.9%-2% range by Q4.
• Fintech Revenue: Fintech partnership revenue is expected to be 3x the amount recognized in 2023, with significant recurring revenue components.
• Loan Growth: Forecasted loan growth for 2024 is in the range of 5%-10%.

Risks

• Interest Rate Risks: Impact of Federal Reserve rate cuts on net interest income and deposit betas, with some deposits tied directly to Fed Funds having 100% beta.
• Credit Risks: Exposure to office real estate (less than 1% of loan balances) and specific borrowers like Red Lobster, but collateral and underwriting mitigate risks.
• Regulatory Risks: Impact of regulatory requirements on capital ratios and liquidity, though the company's safety and soundness exam in 2023 had no concerns.

Question and Answer

Q: Impact of rate cuts on NII and NIM, deposit betas?

A: A 25 basis point rate cut is roughly $1 million annualized NII. Deposit betas: Fed Funds tied deposits have 100% beta, CDs ~100%, others 50%-60%.

Q: Red Lobster bankruptcy impact?

A: Exposure ~$40M, loan to value under 50%, history of repositioning, low loss rate with only 1 loan loss in 12 years.

Q: SBA guidance, fee income, expenses?

A: SBA fee income growth higher, expenses expected in 10%-12% range, but exact numbers not specified.

Q: Fintech pipeline, vision?

A: 10+ live, 10+ testing, 20+ in negotiation, focus on cleaning pipeline, revenue expected to triple YoY.

Q: CD maturing, margin guidance?

A: CDs maturing, replacement cost cheaper, industry dropping rates, margin expected to improve.

Q: Tax rate, fee income to revenue?

A: Effective tax rate ~7.5% near term, fee income to revenue likely high 25% to approaching 30%.