First Internet Bancorp Q3 FY2024 earnings call

• Four consecutive quarters of double-digit earnings growth driven by margin recovery and net interest income growth.
• Strong net interest income due to solid loan growth, larger balance sheet, and higher yields on earning assets, with funding costs stabilizing.
• Non-interest income boosted by record gain on sale revenue from the SBA platform, with SBA 7(a) lending making the company the eighth largest in the country for 2024.
• Solid loan growth of 7.5% annualized, led by commercial lending and construction teams, with construction and investor commercial real estate balances growing $84 million.
• Asset quality remains sound with nonperforming loans to total loans at 56 basis points and net charge-offs to average loans low at 15 basis points.
• Tangible book value per share increased by 3.6% in Q3 and is up almost 11% year-over-year.

Net income for the third quarter was $7 million, up 21% from the prior quarter, and diluted earnings per share were $0.80, up over 19% from the second quarter. Net interest income increased over 2% from the prior quarter and was up 25% year-over-year. Non-interest income was powered by continued expansion of the national SBA platform. Loan growth was solid at 7.5% annualized, led by commercial lending with balances up almost $75 million from the second quarter. Period-end deposits were up almost $524 million, or 12% from the prior quarter, driven by growth in CD production and fintech partnership deposits. Non-maturity deposits were up almost $123 million, or 6%, and total deposits from fintech partners were $507 million at quarter end.

• Expect net interest income to increase 10% to 15% quarter-over-quarter in the fourth quarter, driven by loan growth and expected deposit cost declines from Fed rate cuts.
• Net interest margin is expected to rebound to the range of 1.8% to 1.85% for the fourth quarter as liquidity is deployed.
• SBA origination growth target of 15% to 20% in 2025, with confidence in the team's ability to achieve this growth.
• Anticipate deposit costs to trend downward in the fourth quarter as short-term rates follow Fed cuts.

• Uncertainties in SBA delinquency trends, as seen with other institutions, though First Internet has taken specific provisions and trends are stabilizing.
• Potential impact of market rate fluctuations on deposit costs and the loan portfolio's net interest margin.
• Competition in the lending space, including from other financial institutions affecting SBA and other lending segments.
• Regulatory changes that could impact financial operations and compliance costs.

Q: About franchise finance and small business loans delinquencies, what's the color?

A: On franchise, there were a handful of delinquencies due to brand closures, working with borrowers to restructure; on small business, no consistent theme, but loans moved to non-accrual when past due 90 days. Consumer side has less than 1% delinquency.

Q: About CD production and rate, why was production in the last month of the quarter 4.45%?

A: Rates were lowered anticipating Fed cuts, but deposit inflows were faster than rate cuts could be adjusted, leading to lower rates in the last month.

Q: About SBA origination outlook and NIM trajectory?

A: SBA team is strong with growth potential, and optionality on holding SBA loans could be accretive to NIM. NIM expected to expand next year with Fed rate cuts and loan portfolio composition improvements.

Q: About balance sheet growth and expenses?

A: Balance sheet growth is flexible with optionality on SBA loans, and expenses are expected to grow tied to SBA revenue growth, with a range of 7% to 10% expense growth in 2025 depending on SBA performance.