First Internet Bank’s Innovation Prize Signals Strategic Edge Amid Mixed Financials

First Internet Bank and its fintech partner Increase have been recognized as winners of the 2025 American Banker’s Innovation of the Year Award in the Payments category for their High-Fidelity ACH solution—a breakthrough that addresses longstanding inefficiencies in automated clearing house (ACH) transactions. This innovation, paired with the bank’s first-quarter financial results, underscores its dual focus on cutting-edge technology and operational resilience, though challenges in credit quality and sector-specific risks remain critical to monitor.

The Innovation: ACH Transparency as a Competitive Differentiator

The High-Fidelity ACH system resolves a core pain point for businesses: the lack of real-time visibility into ACH transfers. By integrating canary transfers—small, test transactions that monitor Federal Reserve processing schedules—the platform enables businesses to track ACH file progress and predict settlement times with precision. Customers access a dashboard that displays network event timelines, showing when payments are submitted, processed, and available.

This technology eliminates the guesswork of batch-processing delays and manual approvals, which previously caused missed settlements and operational friction. For clients like Check and Ramp, the system has reduced manual intervention and enhanced cash flow predictability.

The partnership with Increase, an API-first banking core provider, was pivotal. As Darragh Buckley, CEO of Increase, noted, the innovation focuses on refining foundational banking processes: “Little details, like showing network events in a timeline, give operators end-to-end visibility.” For First Internet Bank, this aligns with its legacy as a digital-first pioneer, dating back to its founding in 1999 as a branchless banking trailblazer.

Financial Results: Strengths and Strains

First Internet Bancorp’s first-quarter 2025 financials reveal a mixed picture of growth and challenges.

Positive Trends:

• Pre-Tax, Pre-Provision Income (PTPP) rose to $12.0 million, a 48.5% increase year-over-year and 10.8% higher sequentially, signaling strong core revenue growth.
• Net Interest Margin (NIM) expanded to 1.82% (+15 bps sequentially), driven by higher-yielding loans (e.g., construction, SBA) and lower deposit costs.
• Deposits grew modestly to $5.0 billion, with fintech partnerships boosting demand.

Areas of Concern:

• Credit quality weakened, with nonperforming loans (NPLs) rising to 0.80% of total loans ($34.2 million), up from 0.68% in Q4 2024. Specific portfolios—small business lending and franchise finance—contributed to elevated delinquencies.
• Net charge-offs hit $9.7 million (0.92% of average loans), prompting an $11.9 million provision for credit losses, a significant increase from $7.2 million in Q4.

The bank’s CET1 ratio remained robust at 9.16%, but management emphasized the need to diversify revenue streams and optimize loan portfolios to mitigate sector-specific risks.

Strategic Priorities and Risks

First Internet Bank is pursuing two key strategies to navigate its challenges:
1. Loan Mix Optimization: Shifting toward higher-yielding variable-rate loans (e.g., construction, SBA 7(a)) to boost NIMs amid uncertain interest rates.
2. Deposit Cost Management: Reducing reliance on high-cost brokered deposits, which fell by $200 million in Q1.

However, risks persist:
- Credit Quality: Elevated NPLs in niche sectors may require further provisions, pressuring near-term earnings.
- Economic Uncertainty: Rising inflation and sector-specific downturns could strain small business and franchise finance portfolios.

Conclusion: A Strategic Bet on Tech and Resilience

First Internet Bank’s High-Fidelity ACH innovation positions it as a leader in modernizing foundational banking services—a competitive edge in an industry increasingly prioritizing transparency and reliability. The bank’s $44.04 tangible book value per share (up 0.6% sequentially) and robust capital ratios highlight its stability, while PTPP growth signals operational strength.

Yet investors must weigh these positives against credit headwinds. While the NIM expansion to 1.82% and loan growth to $4.3 billion reflect strategic execution, the rise in NPLs to 0.80% underscores risks in certain portfolios.

Final Takeaway: First Internet Bank’s innovation and balance sheet resilience make it a compelling long-term play, but investors should monitor credit trends closely. The bank’s ability to stabilize NPLs and sustain margin improvements will determine whether its tech-driven edge translates into consistent profitability.

As the bank prepares for its April 24 conference call, stakeholders await clarity on how it will address these challenges—and whether its innovation prize is a harbinger of sustained growth.