First Internet Bancorp's Q2 Earnings: Can Net Interest Income Growth Weather Credit Storms?

First Internet Bancorp (INBK) just released its Q2 2025 earnings, and the results are a mixed bag. On one hand, the bank showed resilience in its balance sheet and capital ratios. On the other, its revenue and earnings fell short of expectations, raising questions about its ability to sustain net interest income (NII) growth in a credit environment still reeling from past missteps. Let's dig into the numbers to see if this bank's forward guidance justifies a “buy” rating—or if it's a cautionary tale in disguise.

The Good: Liquidity, Capital, and Digital Efficiency

First, the positives. INBK's balance sheet is a fortress. Its 36.1% total liquidity ratio and 8.83% tangible common equity to tangible assets ratio are well above regulatory thresholds, giving it the firepower to weather economic headwinds. This is critical in a credit climate where many banks are tightening belts. Additionally, the bank's 52.3% efficiency ratio—below the industry median of 57.6%—highlights the strength of its digital-first model. With 85,642 digital users and 73% of customers engaged in online or mobile banking, INBK is leveraging low-cost operations to outpace traditional peers.

Loan growth, while modest, is directional. Total loans hit $8.2 billion, up 6.07% annualized for the quarter. More impressively, the loans-to-deposits ratio of 82.3% suggests a healthy, self-sustaining business model. Deposit growth of 3.3% YoY to $10.8 billion, with noninterest-bearing deposits at 33%, further reinforces liquidity. The bank is clearly capitalizing on its fintech-driven deposit base to fund growth without relying on costly wholesale funding.

The Ugly: Earnings Misses and Credit Risks

Now, the red flags. INBK's Q2 revenue of $33.55 million missed estimates by 6.42%, and EPS of $0.02 was a staggering 93.94% below the consensus of $0.33. While net interest income (NII) of $29.15 million shows a 3.7% YoY increase, the net interest margin (NIM) of 2.0%—below the 2.2% estimate—indicates pressure from deposit repricing and loan yield compression. This is a red flag in an environment where NIM expansion is key to profitability.

Credit quality remains a thorn. The bank's 1.47% allowance for credit losses and 0.06% annualized net charge-offs look conservative, but management's guidance for $10–11 million in quarterly credit loss provisions (primarily in small business and franchise finance portfolios) suggests lingering issues. Nonperforming assets (NPAs) at 0.28% of total assets are manageable, but the 1.00% NPAs in the small business lending portfolio highlight a concentration risk.

Forward Guidance: A Ray of Hope or a Hail Mary?

INBK's forward guidance for 2025 and 2026 is cautiously optimistic. For Q3 2025, it expects NII of $33.5 million and a NIM of 2.20–2.25%, with loan growth of 2% (not annualized). By Q4 2025, NIM is projected to expand to 2.30–2.35%, and for FY 2026, the bank aims for $158–163 million in NII with a 2.50–2.60% NIM. These figures hinge on two critical assumptions: 1) deposit repricing and loan origination yields continue to rise, and 2) credit losses stabilize.

The bank is also counting on SBA 7(a) loan sales to normalize its noninterest income. While it's already sold $52 million in guaranteed balances in Q3 2025, generating a $3.7 million gain, this revenue stream is volatile. If economic uncertainty persists, demand for these sales could wane, dashing hopes for a bounce in noninterest income.

Is a “Buy” Rating Justified?

To assess this, we must weigh the bank's strengths against its vulnerabilities. INBK's digital efficiency and robust capital position are major pluses. Its focus on localized commercial lending in Indiana—where it holds $892 million in regional commercial loans—gives it a niche advantage. Moreover, the $5.6 million annual investment in digital infrastructure (including $1.2 million in cybersecurity) ensures it remains competitive in a tech-driven banking landscape.

However, the elevated credit risks and underperformance in core metrics are concerning. The bank's 2.0% NIM is below peers in a high-interest-rate environment, and its $0.02 EPS in Q2 2025—a far cry from $0.72 in Q2 2024—signals operational challenges. While management's guidance for 2026 looks promising, it's contingent on resolving credit issues in its small business and franchise finance portfolios.

The Verdict

For the risk-tolerant investor, INBK offers an intriguing opportunity. Its strong liquidity, digital agility, and forward-looking guidance suggest a path to recovery. However, the elevated credit risks and current underperformance warrant caution. This is not a “buy” for the faint of heart—it's a “buy” for those who believe in the bank's ability to refine its credit processes and capitalize on its fintech-driven deposit base.

If you're on the fence, wait for Q3 2025 results to see if the bank can deliver on its NIM and credit loss projections. In the meantime, keep an eye on SBA 7(a) loan sales and deposit cost trends, as these will be pivotal to its near-term performance.

Final Call: Buy with caution. The road ahead is bumpy, but INBK's digital moat and capital strength make it a compelling long-term play—if it can navigate its credit challenges.