First Internet Bancorp's Valuation Outlook: Navigating Strategic Shifts and Tax Tailwinds

The recent revision of Hovde Group's price target for First Internet Bancorp (INBK) from $32.00 to $29.00, while retaining an "outperform" rating, underscores a nuanced valuation debate. This adjustment reflects both the company's strategic pivot toward commercial and residential lending and lingering concerns over consumer credit health, particularly in Puerto Rico. As the stock trades at a discount to its peers, investors must weigh near-term challenges against long-term structural opportunities.

Strategic Rebalancing and Tax Tailwinds

Hovde Group's revised target appears anchored to management's acknowledgment of shifting dynamics in First Internet's business model. During the Q3 2025 earnings call, executives highlighted a deliberate pivot away from consumer lending-where demand has slowed due to sector-specific tariffs and declining retail sales-to commercial and residential segments, as noted in a Seeking Alpha article. This reallocation is critical: commercial loan growth and stable residential mortgage production are expected to offset weaker auto lending performance.

A key near-term catalyst is the $16.6 million reversal of deferred tax assets in Q3 2025, which boosted earnings but is unlikely to recur at the same scale, as noted in that Seeking Alpha article. While tax benefits remain a tailwind, their diminishing magnitude suggests that future profitability will depend more on organic growth in higher-margin segments. This transition aligns with broader industry trends, as regional banks increasingly focus on commercial lending to diversify revenue streams.

Earnings Volatility and Balance Sheet Cleanup

First Internet's Q3 2025 results revealed a $41.6 million net loss, driven by a $37.8 million one-time loss from the sale of $837 million in single-tenant lease financing loans and a 156% sequential increase in credit loss provisions, according to a Panabee analysis. However, these charges masked underlying operational improvements. Adjusted pre-tax, pre-provision income surged 54% to $18.1 million, fueled by a 2.12% fully taxable equivalent net interest margin (FTE NIM)-a 8 basis point expansion, as detailed in the Panabee analysis.

The balance sheet cleanup reduced the loan-to-deposit ratio to 73.9% from 82.3%, stabilizing capital ratios and enabling a $25 million stock repurchase program, as noted in the Panabee analysis. Yet, asset quality remains a concern: nonperforming loans (NPLs) rose to 1.47% of total loans, and the net charge-off rate climbed to 1.89%, according to that same Panabee analysis. These metrics highlight the tension between short-term deleveraging and long-term growth.

Valuation Implications and Market Sentiment

Hovde Group's $29.00 target, though lower than its previous $32.00 estimate, still outpaces the current average analyst price target of $27.33 and "Hold" consensus rating, a divergence discussed in the Seeking Alpha article. This divergence suggests that Hovde's analysts see untapped value in First Internet's strategic rebalancing and improved capital position. However, the stock's 10% drop in tangible book value per share to $39.88 raises questions about near-term earnings sustainability, as highlighted in the Panabee analysis.

The company's fintech initiatives, which contributed to a 14% sequential revenue increase in Q3 2025, were highlighted in a Yahoo Finance recap and could provide a growth edge. Yet, with Puerto Rico's economy facing external headwinds-including a slowdown in consumer credit demand-investors must remain cautious. The success of First Internet's pivot will hinge on its ability to scale commercial lending without compromising asset quality.

Conclusion: A Calculated Bet on Transformation

First Internet Bancorp's valuation outlook is a study in contrasts. While the Q3 losses and elevated credit risks temper optimism, the strategic shift toward commercial and residential lending, coupled with a cleaner balance sheet, offers a path to recovery. Hovde Group's revised target reflects confidence in this transformation but also acknowledges the challenges of replacing one-time tax benefits with sustainable organic growth. For investors, the key question is whether the company can execute its strategy without repeating past missteps.