First Internet Bancorp Q3 FY2025 earnings call

• Revenue engine remains robust with eighth consecutive quarter of net interest income growth and net interest margin expansion.
• Successfully completed sale of $837 million of STL loans, enhancing interest rate risk profile, capital ratios, and interest-earning asset base.
• Took decisive action on credit issues in small business lending and franchise finance portfolios, recognizing $34.8 million provision for credit losses with $21 million net charge-offs. Total delinquencies decreased to 35 basis points as of September 30th.
• Commercial lending teams delivered strong originations; loan pipelines remain strong heading into Q4.
• In SBA business, gain on sale rebounded strongly, pipeline remains robust at $260 million, and strategic investments in technology platforms made.
• In BaaS, sustained growth in deposit balances provided balance sheet liquidity and flexibility, with over $700 million of fintech deposits moved off balance sheet.

The company delivered an eighth consecutive quarter of net interest income growth with net interest margin expansion. Adjusted total revenues reached $43.5 million in the third quarter, a 30% increase over the second quarter. Revenue growth was driven by a significant increase in the gain on sale of SBA guaranteed loan balances. Net interest income increased over 8% compared to the linked quarter and was up 40% compared to Q3 2024. The SBA business contributed $10.6 million in gain on sale revenue in Q3. BaaS total revenue was up 14% compared to the second quarter and 130% from Q3 2024. Net interest margin on a fully tax equivalent basis increased 8 basis points from Q2 to 2.12%.

• Fourth quarter expected loan balances to increase at unannualized rate of 4%-6%.
• Fully taxable equivalent net interest margin expected to range 2.4%-2.5% for Q4, with net interest income in range of $32.75 million-$33.5 million.
• Noninterest income expected to be in range of $10.5 million-$11.5 million for Q4, subject to government shutdown impact on SBA loan sales.
• For 2026, noninterest income modeled to be $41.5 million-$44.5 million, noninterest expense estimated $106 million-$109 million.

• Government shutdown impacting SBA loan sales into secondary market, halting sales during shutdown and potentially delaying loan closings.
• Economic uncertainties affecting small businesses, including impact of tariffs, inflation, and potential consumer slowdown on small business borrowers.
• Staffing issues at SBA potentially delaying loan processing upon government reopening.

Q: What is the credit outlook for the franchise finance portfolio?

A: Delinquencies in franchise finance are down significantly, with only 4 delinquent loans at quarter end. We've seen the worst of problem loans there, and credit outlook should improve. The CECL model was adjusted significantly for SBA, doubling the allowance for credit losses there.

Q: How prepared were the company for the government shutdown?

A: The company had $94 million in pipeline loans with authorization prior to the shutdown, and can continue to close and fund loans with that authorization for several weeks. We had projected $10 million in noninterest income for Q4 but backed it down to $8 million in anticipation of potential shutdown impact.

Q: What's the outlook for the franchise finance portfolio's nonperforming loans?

A: The increase in nonperforming loans this quarter was primarily from franchise finance loans moved to nonaccrual. Delinquencies in franchise finance are down significantly, and we feel we've seen the worst of problem loans there. We expect peak nonperforming assets to be near.

Q: How does the company view the impact of rate cuts on net interest income?

A: While the Fed lowered rates in September, new origination yields remain above current portfolio yield. The sale of lower coupon single-tenant loans will enhance portfolio yield. A 25 basis point rate cut could increase net interest income by $1.4 million annually. For Q4, net interest margin expected to increase due to loan sale and lower funding costs.

Q: How flexible is the company with deposits?

A: The company can move fintech deposits off balance sheet using IntraFi network, picking up fee income. It provides flexibility to manage balance sheet, allowing movement of higher-cost deposits off balance sheet and bringing them back to fund growth. Excess cash provides flexibility for loan growth and CD renewals, with renewal of over $400 million in CDs at lower rates.