First Internet Bancorp (INBK) Q2 2025 Earnings Call Transcript

First Internet Bancorp (INBK) reported Q2 2025 diluted EPS of $0.02, significantly impacted by elevated provision expenses and nonperforming loans, primarily within its franchise finance and small business lending (SBA) portfolios, despite a rising net interest margin. Management highlighted proactive steps, including ceasing new franchise finance originations and adjusting SBA processes, which are yielding early signs of credit stabilization. Looking ahead, the bank projects substantial improvements in profitability, with net interest margin expected to reach 2.30-2.35% by Q4 2025 and 2026 EPS forecasted between $5.20 and $6.30, driven by continued loan growth, declining deposit costs from maturing CDs and robust fintech partnerships, and a rebound in noninterest income from increased SBA loan sales.

Analysis

First Internet Bancorp reported a significant earnings miss for Q2 2025, with diluted EPS of just $0.02, driven by elevated provision expenses stemming from persistent credit quality issues in its franchise finance and SBA loan portfolios. This marks the third consecutive quarter impacted by these specific segments. The bank moved $12.6 million of franchise finance loans to nonperforming status and experienced a temporary $7 million sequential decline in gain-on-sale income from SBA loans due to a one-time process change. Despite these headwinds, core profitability metrics are improving substantially. Tax-equivalent net interest margin (NIM) expanded by 13 basis points to 2.04%, fueled by rising loan yields on new originations exceeding 7.5% and a decline in deposit costs as over $800 million in high-cost CDs are set to reprice. Management has taken clear de-risking actions, including halting all new franchise finance originations since January and tightening SBA underwriting. The bank issued a highly optimistic outlook, forecasting NIM to reach 2.30%-2.35% by Q4 2025 and projecting a powerful 2026 EPS range of $5.20 to $6.30, suggesting the current quarter may represent an earnings trough before a significant recovery.

Key Decisions for Investors

• Investors should assess if the current quarter's near-zero EPS marks a trough, weighing the ongoing credit issues in franchise and SBA lending against a powerful forward guidance projecting significant NIM expansion and a 2026 EPS of $5.20-$6.30.
• Monitor the provision expense and net charge-offs in H2 2025 to validate that credit costs are stabilizing as projected; the credibility of the bank's earnings recovery story hinges on containing losses within the guided $10-$11 million quarterly provision.
• Acknowledge the deep valuation discount with a stock price near half its stated $44 book value, but temper expectations for share buybacks as management is explicitly prioritizing rebuilding capital ratios over buybacks at current price levels.