Release Date: October 24, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- First Internet Bancorp (INBK, Financial) reported its fourth consecutive quarter of double-digit earnings growth, with net income up 21% and diluted earnings per share up over 19% from the previous quarter.
- The company experienced strong growth in non-interest income, driven by the expansion of its national SBA platform, resulting in a record gain on sale revenue.
- Net interest income increased by over 2% from the prior quarter, supported by solid loan growth and higher yields on earning assets.
- The company's small business lending team delivered a standout quarter, with SBA loan originations up 35% year-to-date and sold loan volume up almost 60% compared to 2023.
- First Internet Bancorp (INBK) achieved a 3.6% increase in tangible book value per share in the third quarter, marking an almost 11% increase year-over-year.
Negative Points
- The excess liquidity from robust deposit growth caused a short-term drag on net interest margin, impacting profitability.
- There was an increase in non-performing loans during the quarter, particularly in franchise finance, small business lending, and residential mortgage sectors.
- Net interest margin decreased by 5 basis points from the second quarter, partly due to carrying higher cash balances.
- The company faced challenges with certain franchise finance loans, leading to delinquencies and loans moving to nonaccrual status.
- Noninterest expense for the quarter increased by $450,000, primarily due to higher salaries and employee benefits driven by increased small business lending commissions.
Q & A Highlights
Q: Can you provide more details on the franchise finance and small business loans that were past due or moved to nonaccrual?
A: Kenneth Lovik, CFO: On the franchise side, we had a few delinquencies mainly due to certain brands and closures. We are working with borrowers to restructure or pay off loans. In small business, there is no consistent theme; each credit is unique. We have moved some loans to nonaccrual and are working with the SBA to repurchase and finalize exit strategies. David Becker, CEO: Our internal policy moves loans to nonaccrual at 90 days past due. We are renegotiating servicing agreements to address these issues earlier.
Q: Could you clarify if the peak of SBA delinquencies in your portfolio was in July?
A: David Becker, CEO: Yes, the peak was in July, and the outstanding problem loans have decreased since then. We are not experiencing the same issues as some competitors. We have taken specific provisions for loans over 90 days past due and are monitoring the situation closely.
Q: Why did you decide to build liquidity and put on more CDs earlier than expected?
A: David Becker, CEO: It was not intentional. We started lowering rates before the Fed cut, anticipating a 25 basis point cut. However, when the Fed cut by 50 basis points, deposits came in faster than we could lower rates. We have since reduced rates further to manage the inflow.
Q: What factors could drive SBA origination growth to the lower or higher end of your 15% to 25% range for 2025?
A: Kenneth Lovik, CFO: We expect to originate $525 million to $530 million this year and target $600 million next year. The key is our strong team of BDOs and support staff. The sales price in the secondary market is a factor, but we have the flexibility to hold loans on our balance sheet if needed.
Q: How should we think about net interest margin (NIM) trajectory for 2025, especially with Fed rate cuts?
A: Kenneth Lovik, CFO: Last quarter's math was based on a static balance sheet. We have $1.3 billion to $1.4 billion of high beta deposits that reset immediately. We also have $760 million of loans that would reprice quickly. We expect significant net interest income growth next year, with potential for 10 basis points of margin expansion per quarter.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
