First Internet Bancorp: The 8% Yielding Baby Bonds Are Attractive On A 3-Year Basis

First Internet Bancorp expects net interest margins to improve sequentially through year-end, alongside declining loan loss provisions in H2. Management projects EPS to rise by over 100% vs. H1, targeting $4+ EPS starting next year. The article reiterates a “Buy” rating on INBK common shares, citing the improving margin and earnings outlook even though the author sold the position for liquidity.

Analysis

For a small bank, the operating leverage is the story: a few basis points of margin recovery can translate into a disproportionate swing in earnings power because the expense base is largely fixed. The market should care less about the headline EPS reset and more about whether funding costs have finally peaked; if that is true, the rerating can be sharp because regional bank multiples remain compressed versus pre-2022 norms.

The key second-order effect is that improving credit costs can compound the margin recovery by lowering the equity risk premium. But this is fragile: if deposit betas re-accelerate, or if the loan book has hidden CRE/consumer stress, the whole thesis can unwind quickly over the next 1-2 quarters. I’d treat the next earnings release as the first real confirmation point, not management commentary alone.

Contrarian view: the stock may be under-owned and under-followed enough that even modest confirmation drives outsized upside, but the sell-side can also be extrapolating from a low H1 base. The market may be discounting that “normalized” earnings are still not stable earnings unless provisions stay subdued for multiple quarters. The right question is whether this is a durable rerate to a cleaner earnings stream or just a temporary rebound off a trough.

Key Decisions for Investors

• Initiate only a small starter long INBK common on weakness, with the position sized for microcap liquidity risk; thesis works if the next 1-2 quarterly prints show continued NIM expansion and stable deposit costs.
• Relative-value expression: long INBK / short KRE or KBWR to isolate idiosyncratic margin repair versus broad regional-bank beta; exit if sector deposit fears or rate cuts compress the whole group.
• If listed options are liquid enough, use a modest call spread into the next earnings date rather than outright stock to define downside while capturing a rerating if management confirms lower provision run-rate.
• Set a hard invalidation on any sequential rise in nonperformers, provisioning, or deposit costs; that would indicate the earnings lift is not durable and the equity should be de-rated.
• Watch for a book-value / tangible-book re-rating opportunity only after two clean quarters; before that, treat the name as a catalyst trade, not a structural compounder.