Assessing First Internet Bancorp's Q2 2025 Performance and Strategic Position for Long-Term Growth

In a post-rate-cutting environment where banks grapple with shrinking margins and heightened credit risks, First Internet Bancorp (NASDAQ: INBK) has demonstrated a strategic duality: expanding its net interest margins while proactively managing credit exposure. As the company prepares to release its Q2 2025 earnings on July 24, the question for investors is whether this balance positions INBK for sustainable growth or exposes vulnerabilities in a volatile macroeconomic climate.

Margin Expansion: A Strategic Lever in a Low-Rate World

First Internet Bancorp's net interest margin (NIM) expanded to 1.96% in Q2 2025, up 14 basis points from Q1 2025 and 29 basis points from Q2 2024. This improvement reflects the company's ability to deploy liquidity into higher-yielding assets while reducing funding costs. The fully-taxable equivalent NIM of 2.04% underscores this progress, driven by a 7.1% increase in deposits to $353.2 million for the quarter.

The deposit growth, fueled by fintech-related accounts and noninterest-bearing demand deposits, has been a critical tailwind. These low-cost funds have allowed INBK to maintain a healthy loans-to-deposits ratio of 82.3%, ensuring liquidity while supporting margin expansion. For context, the company's strategic refinancing of $35 million in subordinated debt at a 7.18% coupon—replacing higher-cost debt—is projected to save $240,000 monthly, further bolstering margins.

Credit Risks: A Calculated Challenge

Despite margin gains, credit risks remain a focal point. Nonperforming loans (NPLs) rose to $43.5 million, or 1.00% of total loans, in Q2 2025, driven by issues in franchise finance and small business lending. While this aligns with the industry average, the company's proactive response—including a 75% recovery rate on problem loans and $7.3 million in specific reserves—highlights disciplined risk management.

Delinquencies in the franchise finance portfolio have stabilized, with total delinquencies (30 days or more past due) declining to 0.62% of performing loans in Q2 2025. This improvement, coupled with a reduction in loans on deferral (zero as of June 30, 2025, compared to 22 at year-end 2024), suggests INBK is mitigating early-stage risks effectively. However, elevated net charge-offs of $14.3 million in Q2 2025—$11.9 million in small business lending and $2.4 million in franchise finance—highlight the fragility of certain segments.

Strategic Positioning: Balancing Act for Long-Term Growth

First Internet Bancorp's CET1 ratio of 8.90% and tangible common equity to tangible assets of 6.35% provide a robust buffer against potential losses. These capital metrics, combined with a disciplined efficiency ratio of 56.24%, position the company to absorb credit shocks while investing in growth. The resumption of normalized loan sales in Q3 2025—projected to generate $3.7 million in net gains—further supports earnings resilience.

Yet, the company's full-year 2025 revenue guidance of $122.73 million and EPS of $2.79 reflects a downward revision in earnings estimates compared to earlier forecasts. This softness, coupled with the stock's 20.81% drop following Q1 2025's underperformance, underscores lingering investor skepticism. Analysts remain split, with a “Hold” consensus and price targets ranging from $24 to $35.

Investment Implications: Timing the Opportunity

For long-term investors, INBK presents a compelling case. The company's margin expansion, driven by low-cost deposits and strategic refinancing, offsets credit risks in a manner that aligns with its capital strength. While the near-term outlook is clouded by economic uncertainties and sector-specific challenges, the long-term narrative of a fintech-driven bank with a resilient balance sheet and proactive credit strategies remains intact.

However, timing is critical. With a current price of $27.38 and a 52-week high of $43.26, the stock appears undervalued relative to its intrinsic metrics. GuruFocus' $35.87 one-year GF Value and the 29.68% upside potential suggest a favorable risk-reward profile for those with a 12- to 18-month horizon. That said, investors should monitor the Q2 2025 earnings report closely for signals on credit quality and margin sustainability.

Historical backtesting of INBK's performance around earnings releases from 2022 to the present reveals a moderate likelihood of positive returns. Specifically, the stock has shown a 33.33% win rate over three trading days post-earnings, a 40.00% win rate over 10 trading days, and a 26.67% win rate over 30 trading days. While the maximum observed return of 0.49% occurred within a 25-day window, these figures suggest that a buy-and-hold strategy immediately following earnings announcements carries a probabilistic edge, particularly in the short to medium term. However, the mixed results underscore the need for caution, as historical performance does not guarantee future outcomes.

Conclusion: A Calculated Buy for Patient Investors

First Internet Bancorp's Q2 2025 performance exemplifies the delicate balance between margin expansion and credit risk management in a post-rate-cutting environment. While challenges in its loan portfolios persist, the company's proactive strategies—refinancing, deposit growth, and credit discipline—position it to navigate headwinds. For investors willing to tolerate short-term volatility, INBK offers a compelling entry point to capitalize on its long-term growth trajectory.

Recommendation: Buy INBK for a long-term hold, with a stop-loss at $23 to mitigate downside risk. Monitor Q2 2025 earnings and credit metrics for confirmation of the company's resilience.