- Net Loan Growth: $51 million, over 5% on an annualized basis.
- New Funded Loan Origination Yields: 8.88%, up 4 basis points from Q1 and 46 basis points from Q2 2023.
- Net Interest Income: Up almost 3% from the prior quarter, up 23% from Q3 2023.
- Net Interest Margin: Up 1 basis point over the prior quarter, expanded by 27 basis points from Q3 2023.
- Total Revenue: Up 11% over the prior quarter.
- Nonperforming Loans to Total Loans: 33 basis points.
- Nonperforming Assets to Total Assets: 24 basis points.
- Net Charge-Offs: 14 basis points.
- Net Income: $5.8 million, up 11.5% from Q1.
- Diluted Earnings Per Share: $0.67, up 11.7% from Q1.
- Adjusted Net Income: $6.2 million.
- Adjusted Diluted Earnings Per Share: $0.72.
- Commercial Lending Growth: Balances up $47 million from Q1, over 6% on an annualized basis.
- Construction Loan Balances: Up 16% compared to Q1.
- Deposits: Average balance increased by over $185 million, or 4.7% during Q2.
- FinTech Partnership Deposits: Up 34% from Q1, totaling $375 million at quarter-end.
- FinTech Partnership Revenue: $582,000 in Q2.
- Net Interest Income (Fully Taxable Equivalent Basis): $22.5 million, up 2.6% from Q1.
- Non-Interest Income: $11 million, up 32% from Q1.
- Gain on Sale of Loans: $8.3 million, up 27% from Q1.
- Non-Interest Expense: $22.3 million, up $1.3 million from Q1.
- Allowance for Credit Losses: 1.10% of total loans, up 5 basis points from Q1.
- Tangible Common Equity Ratio: 6.88%, up 9 basis points from Q1.
- Common Equity Tier 1 Capital Ratio: 9.47%.
Release Date: July 25, 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 three consecutive quarters of double-digit earnings growth and improved profitability.
- Strong deposit growth through the first half of the year, allowing the company to pay down higher-cost broker deposits.
- Net interest income increased by almost 3%, and net interest margin expanded by 1 basis point over the prior quarter.
- SBA business continues to perform exceptionally well, with year-to-date SBA originations up 15% and solid loan volume up 58%.
- Credit quality remains healthy, with nonperforming loans to total loans at 33 basis points and nonperforming assets to total assets at 24 basis points.
Negative Points
- Provision for credit losses increased to $4 million in the second quarter, driven by loan growth and changes in the composition of the loan portfolio.
- Exposure to Red Lobster's Chapter 11 bankruptcy filing, although balances have been reduced by $3 million.
- Net charge-offs remain relatively low but are mostly from the franchise finance and small business portfolios.
- Non-interest expense for the quarter was $22.3 million, up $1.3 million from the first quarter, including $600,000 of non-recurring expenses.
- Continued regulatory scrutiny in the fintech BaaS space, requiring increased due diligence and adjustments in operations.
Q & A Highlights
Q: My first question is related to the reserve build this quarter. Could you provide more color on what you're seeing underlying all that? Was this driven by loan growth or some qualitative reserves you decided to take?
A: It was a bit of both. We had growth to begin with, and some of it is the migration of the portfolio. Some portfolios with lower coverage ratios are being replaced by those with higher coverage ratios. Additionally, we adjusted some Q factors upward to build extra reserve.
Q: With your fintech BaaS initiative, how has the more intense regulatory environment changed how you run the business? Has it altered your investment plans or caused more caution among customers?
A: Regulatory scrutiny is high, but we were already compliant with most guidelines. Our due diligence has stepped up, and we are digging deeper into potential pitfalls. We are also seeing inquiries from clients looking for backup sources or new vendors due to industry changes.
Q: Ken, you still seem comfortable with the $3 EPS for the year, even with a zero rate change environment. Is there anything different in the second half expectations?
A: Not really. The SBA business is tracking and exceeding forecasts, and non-interest income continues to grow. We expect this trend to continue through the rest of the year.
Q: How much bigger do you envision SBA could be for you?
A: We can easily reach $500 million this year and foresee possibilities of moving up to $1 billion a year in the next 18-24 months. We are investing in technology to improve efficiency, which will allow us to continue pushing those numbers up.
Q: Can you give us a sense of what kind of technology contracts were terminated and if you are reducing or changing capabilities?
A: These were related to a fintech partnership where the company changed its business model. We exited the agreement and wrote off some software investments. It does not affect our internal bank tech or investments in account opening or small lending.
Q: How are you thinking about SBA revenue trajectory in the back half of the year?
A: We had a strong second quarter and expect the third quarter to be even better. The fourth quarter might be slightly softer but still higher than the second quarter. We are maintaining a consistently higher level of originations.
Q: How do you see expenses trending in the third and fourth quarters?
A: As SBA continues to grow, there will be costs associated with commissions. We expect expenses to be around $22 million, possibly a bit higher in the fourth quarter.
Q: Any updated thoughts on the buyback?
A: We are focused on getting tier 1 capital back above 7%. Unless rates plummet, we probably won't be doing any share buybacks in the third quarter. We will reevaluate in the fourth quarter.
Q: Can you remind us of the margin impact with each 25 basis point cut from the Fed?
A: On the deposit side, $1.1 billion will have a 100% beta with a Fed rate cut, and another $800-$900 million will have a 40-50% beta. Over a 12-month period, a 25 basis point cut could benefit net interest income by approximately $2.8 million.
Q: What are your updated thoughts on the tax rate going forward?
A: We expect the tax rate to be around 4-5% in the next quarter, moving up as earnings increase. By the fourth quarter, it might be around 8%.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
