First Internet Bancorp 2026 Q3 Earnings Call

Thank you, operator. Good afternoon, everyone, and thank you for joining us to discuss First Internet Bancorp's third quarter 2026 financial results. The company issued its earnings press release earlier this afternoon, and it is available on the company's website at www.firstinternetbancorp.com. In addition, the company has included a slide presentation that you can refer to during the call. You can also access these slides on the website. Joining us from the management team today are Chairman and CEO, David Becker, President and COO, Nicole Lorch, and Executive Vice President and CFO, Ken Lovik. David and Nicole will provide an overview, and Ken will discuss the financial results, and then we'll open up the call for your questions.

Before we begin, I'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial conditions of First Internet Bancorp that involves risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures, which are intended to supplement, but not substitute for, the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP and non-GAAP measures. At this time, I'd like to turn the call over to David.

Thank you, Julia. Good afternoon, everyone, and thank you for joining us. Let me start with a headline. The fundamental earnings power of First Internet Bancorp continues to improve. We generated record revenue in the third quarter. We expanded net interest margin for the fourth consecutive quarter. We grew adjusted pre-provision net revenue 14% from the second quarter. We continue to improve the mix of loans and deposits while deploying capital efficiently. At the same time, the overall credit normalization we discussed last quarter is on track with net charge-offs and delinquencies declining meaningfully. For the third quarter, we are reporting earnings of $0.54 per diluted share. Excluding non-reoccurring expenses, adjusted earnings per share rose to $0.57, more than double what we reported last quarter. We also had one significant credit relationship move against us late in the quarter. I want to address that one directly.

Early in the quarter, we were working with a franchise finance borrower on a forbearance arrangement. It was intended to give the borrower time to refinance with another lender. Late in the quarter, the borrower's financial condition deteriorated, and it became clear that refinancing was no longer viable in the near term. We moved the relationship to non-accrual. We established a $2.6 million specific reserve and reversed $600,000 of interest income. For this relationship, we believe there remains a path to repayment. However, based on what we knew at quarter end, including the delinquent status of the related loans, the prudent course of action was to recognize the deterioration, and we did. That's the bad news in the quarter, but it is important not to lose sight of what happened everywhere else in the business. Provision expense declined sequentially. Net charge-offs fell by more than half.

Delinquencies fell to 48 basis points from 78 in the second quarter. That includes a significant drop in franchise finance delinquencies. Those are meaningful improvements, and they show the broader credit trends are moving in the direction we expected. More importantly, our operating performance gave us the capacity to absorb the impact of this relationship. We produced record revenue, record net interest income, and continued margin expansion, and we still grew adjusted pre-provision earnings by double digits. That's what I mean when I say the fundamental earnings power of this company is improving. We are confident in the direction of the business as we execute on our strategy with foresight and discipline. Nicole will talk about how that strategy is changing the economics of our business for the better, and then Ken will walk through the financial results and what we expect in the fourth quarter.

Nicole. Thanks, David. The way I would characterize this quarter is simple.

The business model is working. We're seeing the benefit of decisions we've made over multiple quarters about where we deploy capital, how we fund the balance sheet, and which businesses can generate attractive returns without requiring traditional balance sheet growth. Start with lending. We continued to move capital out of lower yielding or exited portfolios and into businesses where we see stronger risk-adjusted returns. New funded originations came onto the balance sheet this quarter at a weighted average yield of 7.51%. That is the strategy in action. As lower yielding loans pay down, we redeploy that capital into opportunities with better returns. Quarter by quarter, that is changing the economics of the portfolio. This quarter, the overall portfolio yield increased another 8 basis points to 6.42%.

The point isn't simply that loans grew, it is what is growing and what is shrinking. Construction and investor commercial real estate, single-tenant lease financing, wealth advisory lending, and embedded finance grew during the quarter. At the same time, healthcare finance, franchise finance, and residential mortgage continued to run off. That remixing lets us grow interest income faster than the balance sheet. We don't need outsized balance sheet growth to grow earnings. That's exactly what we've been working toward. Our fintech partnerships business adds another dimension to that model. Fintech deposits increased just over $1 billion during the quarter to $4.7 billion, including $2.9 billion held off balance sheet at quarter end. Average on-balance sheet fintech deposits increased 40%, giving us additional capacity to replace higher cost CDs and brokered deposits with lower cost fintech funding.

But the value of the fintech franchise goes well beyond funding. Fintech fee revenue increased 13% from the second quarter and is up more than 190% on a trailing 12-month basis. We added two partners during the quarter and have additional partners in the onboarding pipeline across payments, deposits, and lending. Fintech is doing multiple jobs for us. It is improving our funding mix. It is generating fee income. And through embedded lending, it is creating another avenue to deploy capital and grow interest income. Those pieces reinforce one another, making the business more valuable as we scale it. Now, SBA. Production here has been softer than we expected. Originations increased 14% sequentially, but overall activity did not reach the level we anticipated. Industry volume has been weaker, and we've also deliberately tightened our own underwriting standards over the past several quarters.

Let me be clear about the trade-off we're making. We are not going to manufacture loan growth by compromising credit discipline. The SBA changes that became effective October 1 reinforced several of the underwriting principles we've been applying for the last year. With industry activity subdued and our underwriting standards tighter, we expect SBA originations and gain on sale revenue to remain lower in the fourth quarter. We can live with that on a short-term basis. Yes, we want the volume, but we want the right volume. And the credit trends David discussed tell us the changes we have made in underwriting, servicing, and portfolio management are having the intended effect. And this quarter illustrates something important about the company we have built. SBA production was below our expectations, and yet we generated record revenue. That does not mean SBA matters less to us.

It demonstrates that our sources of revenue are steadily diversifying. Finally, I want to spend a moment on operating leverage because this is just as central to where we're taking the company. Our technology strategy is not about implementing AI for the sake of AI. The objective is straightforward. Use technology to support more customer activity, more revenue, and more growth without requiring expenses to increase at the same rate. We're beginning to see tangible evidence of that. During the third quarter, we completed a multi-phase project to automate significant portions of SBA origination. At current usage levels, we estimate that work creates approximately 620 hours of annual lender and processor capacity. Manual data entry has been reduced by more than 80%, and median SBA approval time in the measured comparison improved by roughly 10 days. We're now looking at how to apply similar capabilities elsewhere in the company.

Step back and the picture is clear. We're generating higher returns from the loan portfolio. We're lowering our funding costs through fintech deposits. We're growing fee-generating businesses that don't depend entirely on balance sheet growth. And we're creating operating capacity to support growth without a commensurate increase in expense. We have more ways to generate revenue, more ways to fund growth, and more places to put capital to work at attractive returns than we did just a few years ago. That diversification matters. We are building a company with multiple sources of revenue and growth that build on one another. The result is a broader, more durable revenue engine and a business model with more levers for creating value. That is what we mean when we say the business model is working. Ken will now tie these strategies into our financial results and what they mean for the fourth quarter.

Ken? Thanks, Nicole. We reported third quarter net income of $4.8 million, or $0.54 per diluted share.