Fintech Partnerships And Loan Origination Will Secure Stability

Key Takeaways

• Robust loan growth in key sectors and fintech partnerships enhance net interest income and reduce funding costs, boosting profitability.
  
• Strategic deposit cost management and improved credit management stabilize net income, augmenting sustained revenue growth.
  
• Elevated credit issues in small business and franchise finance portfolios, alongside economic uncertainty, threaten net income and overall financial health if not managed.

Catalysts

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

• Strong loan growth, particularly in construction, investor commercial real estate, and small business lending, is expected to drive higher yields on earning assets, positively impacting revenue and net interest income.
  
• Expansion of fintech partnerships is contributing significant growth in non-maturity deposits, reducing reliance on higher-cost funding sources and aiding a decrease in deposit costs, thus improving net interest margins.
  
• Strategic repricing of maturing CDs, coupled with reduced higher-cost broker deposits, is expected to lead to a favorable deposit cost environment, positively influencing net interest margins and profitability.
  
• Anticipated continuation of the favorable loan origination environment with new loan origination yields above the current portfolio average is expected to sustain revenue growth and profitability.
  
• Expected moderation of credit losses in the second half of the year due to improved credit management and reduced borrower-specific stress in the franchise finance and small business lending portfolios is poised to stabilize or improve net income and earnings.

First Internet Bancorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming First Internet Bancorp's revenue will grow by 13.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 18.4% today to 36.0% in 3 years time.
• Analysts expect earnings to reach $59.6 million (and earnings per share of $6.74) by about May 2028, up from $21.0 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 4.8x on those 2028 earnings, down from 8.6x today. This future PE is lower than the current PE for the US Banks industry at 11.0x.
• Analysts expect the number of shares outstanding to grow by 0.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.6%, as per the Simply Wall St company report.

First Internet Bancorp Future Earnings Per Share Growth

Risks

• The credit issues in the small business lending and franchise finance portfolios were noted, which significantly impacted the net income for the quarter through an elevated provision for loan losses. This situation poses a risk to future earnings if the trend continues.
  
• The company recognized $9.7 million in net charge-offs, primarily related to the franchise finance and small business lending portfolios, which could impose further pressure on net earnings if not adequately controlled.
  
• There's a rising level of nonperforming loans, particularly in the franchise finance and small business lending domains. This trend can put a damper on net margins and overall profitability.
  
• Significant economic uncertainty and elevated provision for credit losses might result in additional loan-related losses, affecting net income and overall financial health.
  
• Changes related to SBA loans and amendments to the 7(a) program pose a temporary one-quarter decline in gain on sale revenue, impacting noninterest income and potentially reducing net earnings.

Valuation

• The analysts have a consensus price target of $28.2 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 $35.0, and the most bearish reporting a price target of just $24.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $165.4 million, earnings will come to $59.6 million, and it would be trading on a PE ratio of 4.8x, assuming you use a discount rate of 8.6%.
  
• Given the current share price of $20.85, the analyst price target of $28.2 is 26.1% 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.