Executive Summary / Key Takeaways

• First Internet Bancorp, a pioneering digital-first bank, is executing a strategy focused on optimizing its balance sheet mix towards higher-yielding, variable-rate assets and diversifying revenue streams, particularly through its rapidly growing SBA lending and FinTech partnership businesses.
• Recent financial performance, including six consecutive quarters of net interest income and core revenue growth and significant NIM expansion since Q3 2023, demonstrates the effectiveness of this strategy, although results in Q1 2025 were impacted by elevated credit provisions.
• While asset quality metrics remain generally sound and in line with peers, the company experienced increased net charge-offs and nonperforming loans in Q1 2025 and Q4 2024, primarily in the franchise finance and small business lending portfolios, attributed to borrower-specific issues rather than systemic trends.
• Management guidance for 2025 projects substantial growth in full-year net interest income (40%+ over 2024) and continued NIM expansion, driven by increasing loan yields and declining deposit costs from CD repricing and FinTech deposit growth, with potential upside from Fed rate cuts.
• Strategic investments in technology, particularly within the SBA platform and FinTech partnerships, are aimed at enhancing efficiency and scalability, positioning the company for continued growth in core business lines and further revenue diversification despite increased regulatory scrutiny in the FinTech space.

A Digital Pioneer's Evolution and Strategic Focus

First Internet Bancorp, operating primarily through its subsidiary First Internet Bank of Indiana, carved out a unique space in the financial landscape as the first state-chartered, FDIC-insured Internet bank, commencing operations in 1999. From its inception, the bank embraced a branchless, digital model for consumer and small business deposits and consumer lending, establishing a foundation built on technological efficiency and nationwide reach. This historical emphasis on digital channels continues to define its operational approach and provides a distinct competitive advantage.

The company has evolved into a diversified financial services provider, offering a range of commercial, small business, consumer, and municipal banking products. While consumer and small business deposits remain digitally focused nationwide, commercial services are delivered through a blend of relationship banking and strategic partnerships, targeting specific niches such as commercial real estate (investor and construction), single tenant lease financing, public finance, healthcare finance, small business lending (SBA), and franchise finance. This targeted approach allows INBK to differentiate itself from larger, more generalized financial institutions.

Central to INBK's strategy is the continuous optimization of its balance sheet. This involves shifting the loan portfolio towards higher-yielding, variable-rate assets and actively managing funding costs. The company's digital infrastructure is a core technological differentiator, enabling lower operating costs per unit compared to traditional banks. While precise, directly comparable efficiency metrics for all niche competitors are not publicly detailed, INBK's operational model is designed for streamlined digital processes, contributing to superior margins. The company is also investing in new technologies, particularly within its burgeoning SBA platform, aiming to enhance efficiency and scalability through new tools and systems, with the stated goal of improving processing speed and reducing operational friction. These technological advancements are crucial to maintaining a competitive edge and supporting future growth, forming a key part of INBK's competitive moat.

In the competitive landscape, INBK operates alongside larger digital players like Ally Financial (ALLY) and Discover Financial Services (DFS), as well as consumer finance specialists such as Synchrony Financial (SYF). While these larger entities may possess greater scale, brand recognition, and potentially faster innovation cycles in certain areas (e.g., Ally's speed in auto lending, DFS's credit card transaction speed), INBK distinguishes itself through its diversified niche commercial lending portfolio and its established digital efficiency. Its focus on specific segments like SBA lending and municipal finance provides access to markets less saturated by these larger competitors. Against Synchrony Financial, INBK's online-only model offers lower overhead costs, potentially translating to better margins in digital segments. The company's strategic positioning leverages its digital foundation and niche expertise to compete effectively, although it acknowledges vulnerabilities related to smaller scale (potentially higher customer acquisition costs) and the need for ongoing technological investment to keep pace with larger rivals.

Performance Reflecting Strategic Execution and Credit Headwinds

The strategic focus on portfolio optimization and revenue diversification has translated into a period of notable financial improvement for INBK. The company successfully navigated a challenging interest rate environment, identifying the third quarter of 2023 as the low point for net interest margin and net interest income. Since then, INBK has achieved six consecutive quarters of net interest income and core revenue growth, alongside significant NIM expansion.

In the first quarter of 2025, net income was $0.9 million, or $0.11 diluted earnings per share, a decrease from $5.2 million, or $0.59 diluted earnings per share, in the first quarter of 2024. This decline was primarily driven by a substantial increase in the provision for credit losses. However, underlying operating performance remained strong, with pre-tax, pre-provision net income (PTPP) reaching $12.0 million, up 10.8% from the prior quarter's adjusted amount and a robust 48.5% increase over the first quarter of 2024. Total revenue growth in Q1 2025 was 2.0% compared to Q4 2024 and over 22% year-over-year.

Net interest income in Q1 2025 was $25.1 million, up 21.0% from $20.7 million in Q1 2024. This growth was fueled by an increase in total interest income (up 12.7% year-over-year) driven by higher loan yields (up 26 bps year-over-year) and increased average loan balances (up 9.0% year-over-year), as well as growth in the securities portfolio. The yield on the overall loan portfolio increased 6 basis points from the prior quarter, while deposit costs declined 12 basis points. The net interest margin (NIM) expanded by 16 basis points year-over-year to 1.82% (1.91% on a fully-taxable equivalent basis) in Q1 2025. New loan origination yields in Q1 2025 were 7.78%, significantly contributing to the upward trend in the overall portfolio yield.

Full-year 2024 results demonstrated remarkable growth, with net income and diluted earnings per share tripling compared to 2023. Total adjusted revenue growth of almost 30% in 2024 significantly outpaced expense increases, resulting in positive operating leverage. Gain on sale revenue, primarily from SBA loans, was a key driver, increasing over 60% year-over-year and fueling an 81% rise in noninterest income.

The growth in the loan portfolio has been concentrated in strategic areas. In Q1 2025, commercial loan balances increased by $89.5 million (2.7%) from Q4 2024, driven by growth in construction, investor commercial real estate, small business lending, and commercial and industrial loans. The construction portfolio ended Q1 2025 with $446 million in unfunded commitments, representing a pipeline for future draws and balance growth. Consumer loan balances saw a slight decrease in Q1 2025, primarily due to a decline in residential mortgages, although origination activity in other consumer loans provided a partial offset. The company focuses on super prime borrowers in its consumer portfolio, where delinquencies remain extremely low (10 basis points).

A significant contributor to both balance sheet growth and revenue diversification is the FinTech partnership business. Total FinTech deposits reached $881 million by the end of Q1 2025, up 37% from Q4 2024, and these partners generated $23 billion in payments volume during the quarter. Total FinTech partnership revenue exceeded $1.1 million in Q1 2025, a 30% increase from Q4 2024. Management expects this revenue stream to exceed its initial $4 million forecast for 2025.

Despite the positive operational and revenue trends, asset quality presented a challenge in recent quarters. The provision for credit losses on loans was $12.1 million in Q1 2025, a significant increase from $2.6 million in Q1 2024. This was primarily driven by elevated net charge-offs of $9.7 million (92 basis points of average loans) in Q1 2025, mostly concentrated in the franchise finance ($5.8 million) and small business lending ($3.7 million) portfolios. Net charge-offs in Q4 2024 were also elevated at $9.4 million. Management characterized these issues as borrower-specific, not indicative of systemic stress across industries or geographies. Some issues were linked to hurricane impacts or delays from pandemic-era build-outs. The company has taken action to address these, including increasing specific reserves (adding $3.3 million in Q1 2025, primarily for franchise finance and SBA) and working with borrowers and partners. The allowance for credit losses (ACL) on loans was $47.2 million, or 1.11% of total loans, at March 31, 2025, up from 1.07% at December 31, 2024. The ACL as a percentage of nonaccrual loans decreased to 142.2% from 172.5% over the same period as nonperforming loans increased. Nonperforming loans rose to $34.2 million (0.80% of total loans) at March 31, 2025, from $28.4 million (0.68%) at December 31, 2024, driven by increases in franchise finance and small business lending. Nonperforming assets also increased to $35.9 million (0.61% of total assets) from $28.9 million (0.50%). Despite these increases, management maintains that overall credit quality remains sound and metrics are in line with peers. The company is also monitoring exposure to specific situations like the Red Lobster bankruptcy, noting low LTVs and no delinquencies on related properties. Office CRE exposure remains minimal (less than 1%).

Liquidity and capital levels remain solid. Total assets were $5.9 billion at March 31, 2025. Total deposits increased slightly to $4.9 billion, with significant growth in interest-bearing demand deposits and money market accounts, largely attributable to FinTech partnerships, which provided liquidity to pay down higher-cost funding. Uninsured deposits were 27% of the total (22% adjusted). The company and the bank continue to exceed regulatory capital requirements, with the bank considered well capitalized. Tangible common equity was $383.1 million, or 6.55% of tangible assets, at March 31, 2025. The company believes it has sufficient liquidity for the next twelve months and beyond, with $2.1 billion in cash and unused borrowing capacity at the bank level, representing 194% of adjusted uninsured deposits.

Outlook: Momentum, Strategic Growth, and Moderating Credit

Management's outlook for 2025 is characterized by confidence in continued earnings momentum, driven by strategic growth initiatives and anticipated improvements in funding costs. The core investment thesis hinges on the ongoing benefits of balance sheet optimization and revenue diversification.

Assuming loan growth in the range of 10% to 12% and deposit growth between 5% and 7% for the full year 2025, management expects full-year net interest income to increase by 40% or more over 2024. This significant growth is projected even under the conservative assumption of no additional Federal Reserve rate actions or only modest rate cuts. The NII expansion is expected to be driven by increasing loan yields as new production continues to price above the portfolio average, and importantly, by declining deposit costs. Over $1 billion of CDs are scheduled to mature in the remaining nine months of 2025 at costs significantly higher than current new production rates (e.g., Q1 2025 new production at 4.07% vs. Q2 maturities at 4.87% and Q3 maturities at 4.84%), creating a substantial repricing opportunity. Growth in FinTech deposits also provides lower-cost funding to replace maturing higher-cost brokered deposits. Management explicitly states that if the Fed were to resume lowering rates, NII and NIM would likely exceed these projections, estimating a $3.6 million annualized benefit to NII from a 25 basis point rate cut, which would ramp up quarterly as CDs reprice. Fully taxable equivalent net interest margin is expected to increase throughout the year, reaching a range of 2.35% to 2.45% by the fourth quarter of 2025.

Revenue diversification is expected to continue, primarily through the robust performance of the SBA lending and FinTech partnership businesses. Management targets $600 million in SBA loan originations for 2025, building on the strong growth in 2024. Annual core non-interest income is expected to be up in the range of 9% to 12% over 2024, fueled by higher gain on sale revenue from increased SBA volume. However, management notes a temporary, one-quarter decline in gain on sale revenue expected in Q2 2025 due to changes in SBA procedures requiring a longer hold period before selling loans. This impact is expected to be partially offset by higher interest income earned on these loans during the hold period, benefiting NIM in Q2, and gain on sale revenue is anticipated to return to a normalized run rate in the second half of the year. The FinTech partnership revenue is also expected to continue scaling, exceeding prior forecasts.

Operating expenses are projected to increase, reflecting strategic investments. Annual noninterest expense is expected to be up in the range of 10% to 15% over the full year 2024, with a modest ramp-up quarterly. This increase is attributed to staffing additions in small business lending (including incentive compensation tied to origination volume), risk management, and information technology, aimed at supporting growth and enhancing infrastructure.

Regarding credit quality, management anticipates that the provision for credit losses will moderate in the second half of 2025, although they are modeling an annual provision that is 15% to 20% higher than 2024, reflecting a conservative approach given ongoing economic uncertainty and portfolio growth. They note a slowdown in the pace of new delinquencies and believe significant progress has been made in addressing problem loans in the franchise finance and SBA portfolios, despite the elevated charge-offs in recent quarters.

Conclusion

First Internet Bancorp is a digitally native institution leveraging its historical foundation and strategic investments to drive profitability and enhance shareholder value. The core investment thesis is centered on the successful execution of a strategy to optimize the balance sheet towards higher-yielding assets and diversify revenue streams through high-growth niche businesses like SBA lending and FinTech partnerships. Recent financial performance underscores the effectiveness of this approach, demonstrating consistent growth in key revenue and margin metrics.

While the company has faced recent headwinds from elevated credit provisions and charge-offs, particularly within the franchise finance and small business lending portfolios, management views these issues as largely borrower-specific and is actively implementing mitigation strategies. The outlook for 2025 remains optimistic, with clear guidance for substantial net interest income growth and continued margin expansion, supported by favorable deposit repricing dynamics and robust loan pipelines. Strategic investments in technology and personnel are expected to fuel further growth and efficiency, reinforcing the company's competitive position as a digitally adept, niche-focused lender. For discerning investors, INBK presents a compelling story of a digital pioneer executing a focused strategy to deliver enhanced profitability and value, even as it navigates credit cycles and invests for future growth.