First Internet Bancorp Q1 FY2025 earnings call

• Net interest income and margin: Net interest income grew 7% quarter over quarter and 20% year over year, with net interest margin expanding 16 basis points, driven by loan growth and declining deposit costs.
• Loan portfolio: Solid loan growth of 8% annualized. New loan origination yields were 7.78%, up 50 basis points quarter over quarter. Small business lending origination and loan sale volume up 223% and 236% year over year.
• Deposits: Average deposits increased $111 million, driven by fintech partnership deposits. Fintech partners had $881 million in deposits and $23 billion in payments volume.
• Credit issues: Elevated provision for loan losses due to $9.7 million net charge-offs in franchise finance and small business lending, with nonperforming loans up but asset quality metrics in line with peers.
• Fintech partnerships: Fintech deposits grew, contributing $1.1 million in revenue in Q1, up 30% quarter over quarter, with $23 billion in payments volume.

Net interest income continued to grow, with a 7% increase compared to the fourth quarter and 20% year over year. Loan growth drove yields on earning assets higher. Deposits grew, primarily from fintech partnership deposits, with the average balance of deposits increasing by $111 million or over 2% during the first quarter. Net income was impacted by an elevated provision for loan losses, with $9.7 million of net charge-offs related to the franchise finance and small business lending portfolios. Nonperforming loans to total loans were 80 basis points at quarter end.

• Net interest income: Expect loan yields to increase, deposit costs to continue declining. Full-year net interest income expected to increase ~40% over 2024, net interest margin to be 2.35%-2.45% by Q4 2025.
• SBA impact: Temporary one-quarter decline in gain on sale revenue due to SBA process changes, but expect to return to normalized run rate by H2 2025.
• Expenses: Noninterest expense expected to be up 10%-15% year over year over 2024, with modest quarterly ramp-up.
• Provision: Anticipate provision for credit losses to moderate in H2 2025 as new delinquencies slow.

• Credit risks: Problem loans in franchise finance and small business lending, with borrower-specific issues, not industry-wide. Economic uncertainty could lead to additional losses.
• SBA changes: Impact on gain on sale revenue due to SBA process enhancements requiring longer loan hold periods.
• Interest rate risks: Dependence on Fed rate actions for deposit cost declines and net interest income growth.

Q: Quantify expected one-time impact on fees in Q2?

A: Ken Lovick said noninterest income likely $5-6 million in Q2, returning to normal levels by H2 2025.

Q: Impact of 25 basis point rate cut on NII?

A: Ken Lovick said annualized impact on static balance sheet is ~$3.6 million.

Q: SBA loan size and fee impact?

A: Nicole Lorch said average loan size north of $1 million, small loan fees not impacting much as they don't do volume below $1 million.

Q: Franchise finance loan issues?

A: Ken Lovick and Nicole Lorch discussed borrower-specific issues, not industry concentration, with some loans in workout or delinquency, and credit teams seeing positive trends in borrower interaction.

Q: Fintech pipeline and share gain?

A: Nicole Lorch said fintech partnerships are strong with new prospects, winning good looks, and expanding relationships with existing partners.