First Internet Bancorp 3rd Quarter Earnings Conference Call - FIRST INTERNET BANCORP

Explicit Guidance:

• Q4 2026 Net Interest Margin (NIM): Fully taxable equivalent NIM expected to be 2.75% to 2.80%, assuming a 25 basis point increase in the Fed funds rate in December.
• Q4 2026 Net Interest Income (NII): Projected at approximately $38.5 million (fully taxable equivalent), driven by portfolio optimization and stable deposit costs.
• Q4 2026 Non-Interest Income: Forecast at approximately $7.5 million, incorporating revised lower SBA originations/gain-on-sale revenue but offset by continued growth in FinTech fee revenue.
• Q4 2026 Non-Interest Expense: Expected to be around $26.5 million, reflecting operating leverage and disciplined cost management.
• Q4 2026 Provision Expense: Projected between $7.5 million and $8.0 million, based on improving delinquency trends and specific reserve actions taken in Q3.
• Q4 2026 Earnings Per Share (EPS): Diluted EPS guidance of approximately $1.02 to $1.07.
• 2027 Outlook: Management anticipates a "run-rate" conservative model based on Q4 guidance for 2027, with expectations to perform better; NII expected to grow substantially over 2026.

Business-Segment Outlook:

• FinTech Partnerships: Deposits increased to $4.7 billion (including $2.9 billion off-balance sheet); fee revenue up 190% over trailing 12 months. Two new partners added in Q3 with additional pipeline across payments, deposits, and lending; expected to continue growing.
• Lending Portfolio Mix: Ongoing redeployment of capital from exiting portfolios (healthcare finance, franchise finance, residential mortgage) into higher-yielding areas (construction, investor commercial real estate, single-tenant lease financing, wealth advisory, embedded finance).
• SBA Lending: Originations increased 14% sequentially but remain below expectations due to tighter underwriting standards and industry softness. Management expects SBA production and gain-on-sale revenue to remain lower in Q4 2026 but anticipates 2027 will see stronger origination volume than 2026.
• Loan Growth Expectations: Q4 2026 average loan balances expected to grow low-to-mid single digits; 2027 loan growth projected at approximately 10%, though NII expected to grow significantly higher due to yield expansion and asset redeployment.

Market and Competitive Outlook:

• Credit Quality: Net charge-offs and delinquencies trending down (delinquencies fell to 48 bps from 78 bps in Q2); franchise finance delinquencies declining significantly. Management views Q3 credit normalization as "on track" despite one significant specific reserve ($2.6 million) for a franchise finance relationship.
• Operational Efficiency: Automation of SBA origination expected to create ~620 hours of annual capacity and reduce manual data entry by >80%; similar capabilities planned for expansion across the company to support revenue growth without commensurate expense increases.
• Fee Income: FinTech fee revenue expected to drive growth independent of balance sheet expansion.

Macro / Industry Outlook:

• Interest Rate Sensitivity: Company is modestly liability-sensitive but "materially less so" than two years ago; 57% of loan portfolio is now fixed rate vs. 75% in Sept 2024.
• Rate Hike Scenarios: Modeled scenarios assuming two additional Fed rate hikes (December 2026, March 2027) indicate a potential negative impact of 2.5% to 3% on 2027 forecasted NII if balance sheet remains static.
• Repricing Dynamics: Continued redeployment of cash flows from lower-yielding assets (4-4.5% yield) into variable-rate channels (3-3.5% yield spread) expected to drive NIM expansion even without rate hikes; a rate hike scenario would amplify this.
• 2027 NIM Trajectory: Expect NIM expansion in Q4 2027 vs. Q4 2026; without rate hikes, NIM might rise 20 bps, while rate hikes could result in a ~10 bps increase due to deposit leverage constraints.

Strategic Initiatives:

• Balance Sheet Expansion: Management prefers growing the balance sheet and deploying capital into loans over share buybacks; excess cash ($100M+) expected to be redeployed into loans.
• Technology & AI: Implementation of AI to automate manual processes (e.g., SBA origination) to support higher customer activity and revenue without proportional expense growth; no new headcount planned for 2027 beyond merit/bonus adjustments.
• Deposit Management: Continued use of FinTech funding to replace higher-cost CDs and brokered deposits; expecting excess cash balances to decline ~$100M in Q4 as payments normalize.

Risks and Headwinds to Outlook:

• Credit Events: Single significant relationship deterioration in franchise finance (specific reserve of $2.6M, $600k interest reversal) could recur; specific reserve levels are sensitive to borrower refinancing viability.
• Regulatory Changes: SBA SOPs effective October 1 introduced new parameters (e.g., quality of earnings reports) which have already been aligned with company standards but may limit volume.
• Construction/Creative Weather: Construction projects delayed due to weather or slow lease-up could trigger rating downgrades or non-performing status, though management currently expects recovery.
• Rate Cycle Impact: Further rate hikes could mute NIM growth if deposit costs rise faster than asset yields due to the "baked-in" nature of previous hikes and deposit repricing lags.

Management Tone on the Future:

• Confidence Level: Highly confident and "optimistic" regarding Q4 2026 and 2027; characterizes the business model as "working" with improved fundamental earnings power.
• Strategic Confidence: Emphasis on "foresight and discipline"; management believes they have more levers to create value than in prior years.
• Guidance Adjustment: Q4 EPS guidance ($1.02–$1.07) represents a near-doubling of Q3 operating earnings ($0.54), signaling a strong inflection point in earnings trajectory.
• Capital Allocation: Clear preference for organic balance sheet growth over capital returns via buybacks; capital ratios considered healthy.

Miscellaneous:

• Specific Reserve Impact: The franchise finance relationship move to non-accrual reduced pre-tax earnings by ~$3.2 million ($0.29 per diluted share).
• Loan Yield Dynamics: Overall portfolio yield increased 8 bps sequentially to 6.42%; Q4 yield growth is expected to be strong when adjusting for Q3 reversals which impacted yields by 12 bps in that quarter.
• Asset Sensitivity: ~$2.1 billion in assets (loans and securities) are expected to reprice immediately or within three months, providing protection in a tightening rate cycle.