First Internet Bancorp (INBK): A Digital Banking Undervalued Gem with Growing Income Potential

Amid a challenging environment for financial stocks, First Internet Bancorp (NASDAQ: INBK) stands out as a compelling opportunity for investors seeking both income and innovation. The bank's strategic capital allocation—marked by an inaugural dividend, an extended buyback program, and robust capital ratios—aligns with its growth catalysts in digital banking. Despite recent share price declines, INBK's fundamentals and valuation suggest a favorable risk-reward profile for long-term investors.

The Inaugural Dividend: A Strategic Shift

INBK's first-ever quarterly dividend, initiated in early 2025 at $0.06 per share, marks a pivotal shift toward shareholder returns. With an annualized yield of approximately 1.02%—based on recent stock prices—this dividend offers modest income potential while maintaining a conservative payout ratio of just 4.8% of projected 2025 earnings of $4.95 per share. This signals strong earnings stability, even as nonperforming loans (NPLs) edged up to 0.80% of total loans in Q1 2025. The allowance for credit losses, at 1.11% of total loans, remains sufficient to cover these risks.

Buyback Program: Flexibility Amid Growth

INBK's stock repurchase program, initially authorized in December 2022 with a $25 million cap, was extended through December 2024. While no new authorization has been announced for 2025, the existing program underscores management's confidence in the stock's undervaluation. With shares trading at a 0.8x price-to-book ratio—below its five-year average of 1.2x—the buyback program serves as a catalyst to boost earnings per share (EPS) and reduce dilution.

The stock's recent dip to near $20—below its 200-day moving average of $29.41—creates an entry point for investors, especially given its strong asset growth (22% over three years) and niche strengths in SBA lending and commercial real estate.

Capital Strength: A Fortress Balance Sheet

INBK's capital ratios are a pillar of its resilience. As of March 2025, its CET1 ratio stood at 9.16%, well above regulatory minimums, while tangible common equity to tangible assets was 6.55%. These metrics, combined with a $5.9 billion asset base, reflect a prudent risk management approach. Even as NPLs rose modestly, the bank's focus on diversifying revenue streams—such as fintech deposits and construction lending—supports stability.

Growth Catalysts: Digital Banking and Loan Momentum

INBK's branchless model has been a key driver of efficiency, enabling a lean overhead structure and a 2.0% quarterly loan growth rate to $4.3 billion. Key growth areas include:
- SBA and franchise financing: $1.3 billion in commercial and SBA loan originations in Q1 2025.
- Commercial real estate and C&I lending: Reflecting demand from small businesses and investors.

The bank's digital platform, which now accounts for 85% of total deposits, reduces costs and enhances scalability. Management's focus on optimizing the balance sheet—such as lowering funding costs and expanding net interest margins to 1.82%—further supports profitability.

Valuation: A Discounted Growth Story

At a market cap of $204 million, INBK trades at a P/E ratio of 9.73—a stark contrast to the sector average of ~14x. The stock's price-to-book discount and a consensus price target of $31.75 (vs. recent lows near $20) suggest significant upside potential. Institutional ownership at 65.46%—with recent buying from Empowered Funds LLC and Royal Bank of Canada—adds credibility to its undervalued status.

Risks to Consider

• Interest rate sensitivity: A prolonged Fed rate hike cycle could compress net interest margins.
• Credit quality: Rising NPLs in small business and franchise finance portfolios require monitoring.
• Regulatory pressures: Compliance costs could strain margins.

Conclusion: A Compelling Long-Term Play

INBK's blend of income, growth, and valuation makes it an attractive pick for investors balancing safety and innovation. The dividend and buyback program signal management's confidence in capital strength, while digital banking and SBA lending offer secular tailwinds. With shares trading at a deep discount to peers and a risk-reward profile skewed toward the upside, INBK deserves a place in patient investors' portfolios.

Investment Recommendation:
- Hold for income and growth investors.
- Buy on dips below $25, targeting the $30 price target.
- Monitor NPL trends and interest rate developments for potential catalysts.

In a sector where undervalued gems are scarce, INBK's strategic capital allocation and digital banking moat position it as a standout opportunity. The path to higher valuation is clear—if investors can stomach short-term volatility for long-term gains.