10-Q: First Internet Bancorp Q2 Profit Plunges on Loan Losses

First Internet Bancorp reported a sharp decline in second-quarter net income, primarily due to a significant increase in provisions for credit losses and higher loan charge-offs.

Summary

• Net income for Q2 2025 plummeted to $0.2 million, a 96.7% decrease from $5.8 million in Q2 2024.
• Diluted earnings per share fell to $0.02 in Q2 2025, down from $0.67 in Q2 2024.
• For the six months ended June 30, 2025, net income was $1.1 million, an 89.6% decrease from $11.0 million in the prior year period.
• The provision for credit losses on loans surged to $13.6 million in Q2 2025, a 237.6% increase from $3.9 million in Q2 2024.
• Net charge-offs reached $14.3 million in Q2 2025, or 1.31% of average loans, a substantial increase from $1.4 million, or 0.14%, in Q2 2024.
• Net interest income increased by 31.2% to $28.0 million in Q2 2025, driven by higher loan and securities yields and improved cost of funds.
• Total assets grew by 5.8% to $6.1 billion as of June 30, 2025, compared to $5.7 billion at December 31, 2024.
• Total loans increased by 4.6% to $4.4 billion, with commercial loans up 5.9% and consumer loans down 0.5%.
• Total deposits rose by 7.4% to $5.3 billion, primarily due to growth in fintech partnership deposits and a reduction in higher-cost brokered deposits.
• Nonperforming loans increased by 53.2% to $43.5 million as of June 30, 2025, mainly in franchise finance, single tenant lease financing, and small business lending portfolios.
• The allowance for credit losses as a percentage of nonperforming loans decreased to 106.8% from 157.5%, indicating reduced coverage.
• The company remains 'well capitalized' under Basel III capital rules, with all capital ratios exceeding minimum requirements.

Sentiment

Score: 3

Explanation: The significant decline in net income and diluted EPS, coupled with a substantial increase in loan loss provisions and net charge-offs, particularly in key lending segments like small business and franchise finance, indicates a challenging period for asset quality. While net interest income and deposits showed growth, the deterioration in credit quality metrics overshadows these positives, leading to a negative outlook on profitability and asset risk.

Positives

• Net interest income increased by 31.2% in Q2 2025 and 26.2% for the six months ended June 30, 2025, driven by higher loan and securities yields.
• Pre-tax, pre-provision income increased by 17.2% in Q2 2025 and 31.1% for the six months ended June 30, 2025, reflecting improved operational efficiency before credit losses.
• Total assets grew by 5.8% to $6.1 billion, supported by strong deposit growth from fintech partnerships.
• Total deposits increased by 7.4% to $5.3 billion, with a significant reduction in higher-cost brokered deposits by $245.7 million.
• Commercial loan balances increased by 5.9%, with growth in investor commercial real estate, commercial and industrial, small business lending, and single tenant lease financing.
• The company maintains strong liquidity, with $2.3 billion in available funds (cash, AFS securities, FHLB/Fed lines) representing 200% of adjusted uninsured deposits.
• The company and its bank subsidiary remain 'well capitalized' under regulatory guidelines, exceeding all minimum capital ratios.
• Book value per common share and tangible book value per share both increased by 1.1%.

Negatives

• Net income decreased by 96.7% in Q2 2025 and 89.6% for the six months ended June 30, 2025, compared to the prior year periods.
• Diluted earnings per share significantly declined to $0.02 in Q2 2025 and $0.13 for the six months ended June 30, 2025.
• Return on average assets (ROAA), return on average shareholders equity (ROAE), and return on average tangible common equity (ROATCE) all saw substantial decreases.
• Provision for credit losses on loans increased by 237.6% in Q2 2025 and 294.2% for the six months ended June 30, 2025.
• Net charge-offs were significantly elevated, reaching $14.3 million in Q2 2025 and $24.0 million for the six months ended June 30, 2025, primarily from small business lending and franchise finance portfolios.
• Nonperforming loans increased by 53.2% to $43.5 million, and total nonperforming assets increased by 57.6% to $45.5 million.
• The allowance for credit losses as a percentage of nonperforming loans decreased from 157.5% to 106.8%, indicating lower coverage for problem loans.
• Noninterest income decreased by 49.6% in Q2 2025 and 17.5% for the six months ended June 30, 2025, mainly due to lower gain on sale of loans.

Risks

• General economic conditions, including inflationary pressures, changes in interest rates, and economic slowdowns, could adversely affect loan demand and credit quality.
• Credit quality and related levels of nonperforming assets and loan losses, particularly in the small business lending and franchise finance portfolios, pose a significant risk.
• The value and salability of collateral for loans may fluctuate, impacting recovery rates on defaulted loans.
• Failures or breaches of communication and information systems could reduce revenues, increase costs, or disrupt business operations.
• Dependence on capital distributions from First Internet Bank of Indiana for holding company liquidity.
• Regulatory examinations may result in requirements to increase allowance for credit losses or write-down assets.
• Changing bank regulatory conditions, policies, or programs could lead to restrictions on activities or more restrictive capital requirements.
• Increased costs, including deposit insurance premiums, could impact profitability.
• Regulation or prohibition of government-guaranteed lending or changes in the secondary market for loans could affect income-producing activities.
• Changes in market rates and prices may adversely impact the value of securities, loans, deposits, and the interest rate sensitivity of the balance sheet.
• Liquidity requirements could be adversely affected by changes in assets and liabilities.
• Potential impacts of adverse developments in the broader banking industry, including effects on customer confidence and deposit outflows.
• Inaccuracies or failures from the use of financial models, including assumptions and estimates, could lead to misjudgments.
• Potential claims, damages, penalties, fines, costs, and reputational damage from litigation, regulatory proceedings, and enforcement actions.
• Competitive factors among financial services organizations, including product and pricing pressures, and the ability to attract and retain qualified banking professionals.
• Noninterest or fee income growth and profitability may be less than expected.
• Loss of key members of senior management could disrupt operations.
• Changes in accounting policies and practices could affect financial reporting.
• Fiscal and governmental policies of the U.S. federal government could impact financial performance.
• Risk of goodwill impairment in the event of declines in general economic, market, or business conditions, or significant unfavorable changes in forecasted operations, particularly from elevated net charge-offs in franchise finance and small business lending portfolios.

Future Outlook

The company expects to continue paying cash dividends quarterly, subject to Board discretion and financial performance. It may explore strategic alternatives, including additional asset, deposit, or revenue generation channels, which could require additional capital. The company's interest rate risk modeling indicates potential impacts on Net Interest Income (NII) and Economic Value of Equity (EVE) from instantaneous and gradual shifts in interest rates, with NII showing sensitivity to rate changes over the next two years. Management aims to increase net interest income while managing volatility through strategies like increasing variable-rate loans, selling longer-term fixed-rate loans, increasing lower-cost deposits, extending wholesale funding duration, executing derivative strategies, and repositioning the investment portfolio.

Management Comments

• Implemented a process change to hold SBA 7(a) guaranteed loans for a longer period of time before selling them in the secondary market.
• Continued to take action to resolve problem loans in the small business lending and franchise finance portfolios, which contributed to elevated net charge-offs.

Industry Context

The company operates as a digital-first bank with no traditional branch offices, focusing on commercial, small business, consumer, and municipal banking products nationwide. It leverages strategic partnerships with financial technology (fintech) companies to enhance its digital offerings, diversify revenue, acquire deposits, and generate assets, addressing the growing market for digital financial management for small businesses. The company is a significant player in the SBA 7(a) loan program, ranking as the 7th largest lender for the SBA's year-to-date 2025 fiscal year.

Comparison to Industry Standards

• The company is one of the fastest-growing lenders in the U.S. Small Business Administration (SBA) 7(a) program, closing $282.8 million in SBA 7(a) loans during the six months ended June 30, 2025.
• Currently ranks as the 7th largest SBA 7(a) lender for the SBA's year-to-date 2025 fiscal year, indicating strong performance in this niche compared to other lenders.
• Offers a 'top-ranked' small business checking account product, suggesting competitive strength in attracting small business clients.

Legal Proceedings

• Neither the company nor any of its subsidiaries are party to any material legal proceedings.
• From time to time, the Bank is a party to legal actions arising from its normal business activities.

Stakeholder Impact

• Shareholders: Impacted by significantly lower net income and diluted EPS, and a reduced allowance for credit losses coverage for nonperforming loans. Future dividends are expected but subject to discretion.
• Employees: Salaries and employee benefits decreased, driven primarily by a reduction in incentive compensation.
• Customers: Benefit from continued loan growth in certain commercial segments and strong digital banking offerings, including a top-ranked small business checking account.
• Creditors: Subordinated debt holders are subject to terms that prohibit dividend payments or distributions if an event of default occurs and is not cured.

Next Steps

• Continue to pay cash dividends on a quarterly basis, subject to Board discretion and financial factors.
• Explore strategic alternatives, including additional asset, deposit, or revenue generation channels.
• Implement balance sheet strategies to manage interest rate risk, such as increasing variable-rate loans, selling longer-term fixed-rate loans, increasing lower-cost non-maturity deposits, extending wholesale funding duration, executing derivative strategies, and repositioning the investment portfolio.
• Continue efforts to resolve problem loans in the small business lending and franchise finance portfolios.

Key Dates

Recommendation

The substantial decline in net income and diluted EPS, driven by a massive increase in loan loss provisions and net charge-offs, particularly in the small business lending and franchise finance portfolios, signals significant asset quality deterioration. While net interest income and deposits show growth, the sharp increase in nonperforming loans and the decrease in ACL coverage for these loans indicate underlying credit issues that could persist. The elevated charge-offs suggest that the company is actively addressing problem loans, but the magnitude of these losses is concerning. Given the significant profitability decline and the worsening credit risk profile, a seasoned investor would likely consider selling or avoiding the stock until there is clear evidence of stabilization and improvement in asset quality metrics.

Keywords

Banking, Financial Services, SEC Filing, 10-Q, Quarterly Report, Net Income, Earnings Per Share, Credit Losses, Loan Portfolio, Nonperforming Loans, Net Interest Income, Deposits, Capital Ratios, SBA Lending, Fintech Partnerships, Asset Quality, Charge-offs, Subordinated Debt