First Internet Bancorp (INBKZ): Diversifying Revenue Streams and Optimizing the Balance Sheet for Sustainable Growth

Published on September 24, 2024 | Ticker: INBKZ

First Internet Bancorp, a leading digital bank, has demonstrated its ability to navigate the challenging interest rate environment and deliver impressive financial results. With a focus on diversifying its revenue streams and optimizing its balance sheet, the company has positioned itself for continued success in the years ahead.

Financials

In the latest quarter, First Internet Bancorp reported net income of $5.8 million, up 11.5% from the previous quarter. This strong performance was driven by a 2.9% increase in net interest income, which reached $21.3 million, and a 32% surge in non-interest income to $11 million. The company's annual net income stood at $8.4 million, while its annual revenue reached $84.4 million. However, the company's annual operating cash flow was negative $2.9 million, and its annual free cash flow was negative $8.2 million.

The bank's loan portfolio continued to evolve, with solid growth in commercial lending, particularly in the areas of investor commercial real estate, small business, and franchise finance. Total loans increased by $51 million, or over 5% on an annualized basis, during the quarter. The yield on the overall loan portfolio increased by 10 basis points from the previous quarter, while deposit costs only increased by 4 basis points, leading to a 2.9% increase in net interest income.

Revenue Diversification

One of the key drivers of the company's success has been its thriving Small Business Administration (SBA) lending business. The SBA team delivered another record quarter, with gain on sale revenue increasing by 27% compared to the previous quarter. Loan sale volume rebounded from the seasonally low first quarter, rising by 19% to $98.6 million. The company's SBA lending business has become a significant contributor to its revenue diversification, with non-interest income now comprising nearly one-third of total revenues for the first half of the year, up from just under one-quarter in the comparable period last year.

The company's fintech partnerships have also been a source of growth, with total revenue for this line of business up 300% for the first half of 2024 compared to the same period last year. The company continues to foster these relationships, developing innovative solutions and enhancing shareholder returns.

Geographic Diversification

In terms of geographic diversification, First Internet Bancorp's loan portfolio is well-diversified across the country, with a focus on the Midwest and Southwest regions. The company's commercial and industrial (C&I) lending team provides credit solutions to commercial borrowers primarily in these regions, while its construction, investor commercial real estate, and single tenant lease financing teams operate on a nationwide basis.

Asset Quality

The company's asset quality remains healthy, with nonperforming loans to total loans at 33 basis points and nonperforming assets to total assets at 24 basis points at the end of the quarter. Net charge-offs were relatively low at 14 basis points, primarily in the franchise finance and small business lending portfolios.

Outlook

Looking ahead, the company remains optimistic about its prospects. Management has provided guidance for the full year 2024, expecting annual earnings per share to be in the range of $3. The company anticipates that net interest income will be up 20% for the year, with fully taxable equivalent margin continuing to increase throughout the year and reaching a range of 1.90% to 2% in the fourth quarter.

The company's focus on improving the composition of its loan portfolio and stabilizing deposit pricing has been a key driver of its success. Management expects loan yields to continue increasing, while interest-bearing deposit costs should be relatively flat for the remainder of the year. With annual loan growth expected to be in the range of 7.5% to 10%, the company is well-positioned to deliver on its financial targets.

Capital Management

In terms of capital management, First Internet Bancorp's capital levels remain solid, with a tangible common equity ratio of 6.88% at the end of the quarter. The company has temporarily paused its share repurchase program as it focuses on rebuilding its Tier 1 capital ratio above 7%, which has been impacted by the markdown on its securities portfolio.

Liquidity

The company's liquidity position also remains strong, with cash and unused borrowing capacity of $1.7 billion at the end of the quarter, representing 150% of total uninsured deposits and 197% of adjusted uninsured deposits. This ample liquidity provides the company with the flexibility to fund future growth and navigate any potential economic headwinds.

Conclusion

Overall, First Internet Bancorp has demonstrated its ability to adapt to the changing market conditions and deliver consistent financial performance. The company's focus on diversifying its revenue streams, optimizing its balance sheet, and fostering strategic partnerships has positioned it for continued success in the years ahead.

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