Bank Plans To Diversify Revenue With SBA Loans And Fintech Partnerships In 2025

Key Takeaways

• Enhanced focus on fintech partnerships is expected to grow deposits, stabilize earnings, and diversify revenue streams.
  
• Shifting to high-yield variable-rate loans and optimizing funding costs are projected to significantly boost net interest margins.
  
• Challenges in small business lending and potential increases in non-performing loans threaten asset quality, while staffing costs could impact operating leverage and earnings.

Catalysts

Operates as the bank holding company for First Internet Bank of Indiana that provides commercial, small business, consumer, and municipal banking products and services to individuals and commercial customers in the United States.

• First Internet Bancorp anticipates strong growth potential from its small business lending strategies, with SBA loan originations projected to increase significantly in 2025. This is expected to bolster non-interest income, further diversifying revenue streams.
  
• The bank continues to optimize its loan portfolio, shifting towards higher-yielding variable-rate loans in the construction and investor commercial real estate sectors. This is likely to enhance net interest income and improve overall net interest margins.
  
• Efforts to reduce funding costs through repricing maturing CDs and paying down high-cost borrowings, combined with strengthened deposit growth from fintech partnerships, are expected to positively impact net interest income and margins in 2025.
  
• The focus on improving and expanding fintech partnerships is enhancing deposit growth and revenue, contributing to more predictable and stable earnings. This growth in fintech partnerships is expected to increase deposit-related revenue.
  
• With an outlook of mid-30% growth in annual net interest income for 2025, driven largely by anticipated loan growth and improved deposit cost management, the bank is positioned for substantial earnings expansion over the next year.

First Internet Bancorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming First Internet Bancorp's revenue will grow by 8.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 21.5% today to 38.4% in 3 years time.
• Analysts expect earnings to reach $57.6 million (and earnings per share of $6.45) by about January 2028, up from $25.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.0x on those 2028 earnings, down from 11.5x today. This future PE is lower than the current PE for the US Banks industry at 12.3x.
• Analysts expect the number of shares outstanding to grow by 0.98% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.3%, as per the Simply Wall St company report.

First Internet Bancorp Future Earnings Per Share Growth

Risks

• The small business lending (SBA) sector faced notable challenges, including $9.4 million in net charge-offs, primarily in the SBA portfolio, which could affect net margins and provision for credit losses.
  
• Non-performing loans increased to 68 basis points of total loans, and non-performing assets to total assets were 50 basis points, indicating potential risks to the company's asset quality and provision expenses.
  
• Higher net interest margin expectations rely on interest rate environment stability; unexpected rate hikes could negatively impact deposit costs and net interest income.
  
• Expected 10% to 12% loan growth and reliance on favorable loan sale pricing could face market volatility, impacting revenue and gain on sale revenue projections.
  
• A commitment to increased staffing and potential compensation expenses to support growth could raise non-interest expenses, potentially affecting operating leverage and net earnings.

Valuation

• The analysts have a consensus price target of $40.8 for First Internet Bancorp based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $45.0, and the most bearish reporting a price target of just $37.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $149.7 million, earnings will come to $57.6 million, and it would be trading on a PE ratio of 7.0x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $33.53, the analyst's price target of $40.8 is 17.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.