First Internet Bancorp's Q2 Earnings Disappointment: A Test of Resilience in a Shifting Banking Landscape

First Internet Bancorp (INBK) has long positioned itself as a fintech-driven challenger in the regional banking space, leveraging digital tools to attract deposits and expand its lending footprint. However, its Q2 2025 earnings report—marked by a net income of $0.2 million and diluted earnings per share (EPS) of just $0.02—has raised questions about the sustainability of its business model. The results fell far below analyst estimates of $0.29 per share and highlighted persistent challenges in its small business and franchise finance portfolios. Yet, amid these headwinds, the company's strategic moves to strengthen capital, control costs, and pivot toward higher-margin opportunities may yet justify long-term optimism for investors willing to navigate short-term volatility.

A Q2 of Contrasts: Weak Earnings vs. Strong Balance Sheet Metrics

The disconnect between First Internet's earnings performance and its balance sheet strength is striking. While the company reported a significant decline in net income compared to its Q1 2025 results ($0.943 million, or $0.11 per share), its net interest margin (NIM) expanded to 1.96% (1.82% in Q1), driven by higher loan yields and lower deposit costs. This improvement underscores the effectiveness of its deposit strategy, which saw noninterest-bearing demand deposits grow to 19% of total deposits—a 200-basis-point increase over the prior year. Such a shift not only reduces funding costs but also aligns with broader industry trends where liquidity management has become a lifeline for banks navigating rate volatility.

However, the company's credit quality remains a concern. Nonperforming loans rose to $43.5 million (1.00% of total loans) in Q2, up from $34.2 million in Q1, with franchise finance and small business loans contributing disproportionately to delinquencies. While management cited a 75% recovery rate on problem loans, the elevated provision for credit losses ($10–$11 million in Q3/Q4 2025) signals ongoing pressure in these segments. For investors, the key question is whether First Internet's disciplined expense management—evidenced by a 56.24% efficiency ratio—can offset these credit costs and stabilize profitability.

Strategic Moves to Weather the Storm

First Internet's leadership has not stood idle in the face of these challenges. The company's recent $35 million subordinated debt offering at a 7.18% coupon—replacing higher-cost debt—provides a clear example of its capital management prowess. This move is expected to generate $240,000 in monthly savings starting in September 2025, directly boosting net interest margins and profitability. Additionally, the bank's focus on expanding its branch network (including a new de novo branch in Summit, New Jersey) and deepening commercial relationships positions it to capitalize on the underserved small business market, a trend highlighted in the Q2 2025 State of Commercial Banking Report as a growth opportunity for digital banks.

The company's deposit growth, which accelerated to 7.1% annualized in Q2, further insulates it from the broader credit risks. With a loan-to-deposit ratio of 82.3%, First Internet maintains ample liquidity to fund organic growth without overleveraging its balance sheet. This flexibility is critical in a sector where liquidity constraints have forced smaller banks to curtail lending.

Navigating Industry-Wide Tailwinds and Headwinds

First Internet's challenges are not unique. The 2025 banking sector is grappling with a dual threat: rising delinquencies in consumer and commercial real estate (CRE) loans and the competitive disruption caused by fintechs securing banking charters. For example, Stripe's recent acquisition of a Merchant Acquirer Limited-Purpose Bank charter and Wise's push for a national trust bank charter illustrate how fintechs are encroaching on traditional banking turf. These developments could pressure First Internet to accelerate its digital innovation or risk losing market share to more agile competitors.

Yet, the company's fintech-driven deposit growth and focus on relationship banking offer a counterbalance. Its ability to attract noninterest-bearing deposits—now 19% of total deposits—positions it to compete with larger banks that rely on costly retail accounts. Furthermore, the normalization of SBA 7(a) loan sales in Q3 2025 is expected to provide a much-needed boost to noninterest income, offsetting some of the credit-related headwinds.

Long-Term Viability: A Model of Prudence or a House of Cards?

First Internet's long-term viability hinges on its ability to execute its capital and credit strategies. The company's CET1 ratio of 8.90% and tangible common equity to tangible assets of 6.35% provide a robust buffer against potential losses, particularly in the CRE sector, where midsize banks are most vulnerable. Additionally, its plans to reduce the loan-to-deposit ratio to more sustainable levels by year-end demonstrate a commitment to liquidity management—a critical factor in avoiding the pitfalls that have plagued other regional banks in 2025.

However, the path to profitability is not without risks. The company's guidance for 5%–7% loan growth in 2026 assumes a return to normalized credit conditions, which may not materialize if the CRE downturn deepens. Moreover, the fintech sector's rapid expansion could erode First Internet's market share in small business lending, where it has traditionally held an edge.

Investment Implications: Caution and Opportunity

For investors, First Internet presents a classic case of a business in transition. The Q2 earnings miss is a red flag, but it is not a death knell. The company's strong capital position, deposit growth, and strategic refinancing efforts suggest it is well-equipped to withstand the current volatility. However, the credit risks in its loan portfolios and the intensifying fintech competition warrant a cautious approach.

A potential investment thesis could focus on the company's ability to leverage its digital infrastructure to expand into adjacent markets, such as embedded finance or asset-based lending, while maintaining its disciplined expense structure. The normalization of SBA loan sales and the expected improvement in net interest margins by late 2025 could also create catalysts for a rebound in earnings.

In the short term, investors should monitor key metrics: the pace of problem loan resolution, the stability of noninterest-bearing deposits, and the success of its branch expansion. In the long term, the company's ability to adapt to the fintech-driven shift in banking—whether through partnerships or innovation—will determine its place in the evolving financial ecosystem.

In conclusion, First Internet Bancorp's Q2 earnings disappointment is a test of its resilience, not a definitive verdict on its future. While the current challenges are real, the company's strategic strengths and the broader industry tailwinds suggest that it has the tools to navigate this period of turbulence. For investors with a long-term horizon and a tolerance for volatility, the key will be to balance skepticism with an appreciation for the company's potential to reinvent itself in an increasingly digital world."""