10-Q: First Internet Bancorp Reports Q3 Loss Amid Loan Sale

First Internet Bancorp reported a significant net loss for the third quarter and year-to-date 2025, primarily driven by a substantial loss on the sale of single tenant lease financing loans and increased credit loss provisions.

Summary

• First Internet Bancorp recorded a net loss of $41.6 million, or $4.76 diluted loss per share, for the third quarter ended September 30, 2025, a significant decline from a net income of $7.0 million, or $0.80 diluted earnings per share, in the prior year period.
• Year-to-date net loss for September 30, 2025, was $40.5 million, or $4.63 diluted loss per share, compared to a net income of $17.9 million, or $2.05 diluted earnings per share, for the same period in 2024.
• The company sold $836.9 million of single tenant lease financing loans during Q3 2025, recognizing a pre-tax loss of $37.8 million on the transaction, aimed at strengthening regulatory capital and improving interest rate risk.
• Provision for credit losses on loans surged to $34.4 million in Q3 2025 from $3.9 million in Q3 2024, and to $60.1 million year-to-date 2025 from $10.4 million year-to-date 2024.
• Net charge-offs increased to $21.0 million in Q3 2025 from $1.5 million in Q3 2024, and to $45.0 million year-to-date 2025 from $3.4 million year-to-date 2024, primarily in small business lending and franchise finance portfolios.
• Nonperforming loans increased by 87.4% to $53.3 million as of September 30, 2025, from $28.4 million at December 31, 2024.
• Net interest income increased by 39.5% to $30.4 million in Q3 2025 and by 30.7% to $83.4 million year-to-date 2025, driven by higher loan and securities yields and improved cost of funds.
• Net interest margin (NIM) improved to 2.04% in Q3 2025 from 1.62% in Q3 2024, and to 1.94% year-to-date 2025 from 1.65% year-to-date 2024.
• Total assets decreased by $98.7 million to $5.6 billion, and total loans decreased by $567.1 million to $3.6 billion as of September 30, 2025, compared to December 31, 2024.
• Total shareholders' equity decreased by $31.9 million to $352.2 million as of September 30, 2025, from $384.1 million at December 31, 2024.

Sentiment

Score: 2

Explanation: The sentiment is highly negative due to a substantial net loss, significant increase in credit loss provisions and net charge-offs, and a large loss incurred from a strategic loan sale. While net interest income improved, the overall financial performance and asset quality deterioration are major concerns.

Positives

• Net Interest Income (NII) saw a substantial increase of 39.5% to $30.4 million in Q3 2025 and 30.7% to $83.4 million year-to-date 2025.
• Net Interest Margin (NIM) improved by 42 basis points to 2.04% in Q3 2025 and by 29 basis points to 1.94% year-to-date 2025.
• The cost of total interest-bearing liabilities decreased by 33 basis points to 3.90% in Q3 2025 and by 18 basis points to 3.96% year-to-date 2025.
• Growth in fintech partnership deposits provided increased liquidity, enabling the company to pay down higher-cost brokered deposits and Federal Home Loan Bank (FHLB) advances.
• Regulatory capital ratios (Common Equity Tier 1, Tier 1 Capital, Total Capital, and Leverage Ratio) remain well above minimum requirements as of September 30, 2025.
• The Board of Directors authorized a new stock repurchase program of up to $25.0 million, expiring September 30, 2027.
• The servicing asset, at fair value, increased to $22.1 million as of September 30, 2025, from $16.4 million at December 31, 2024.

Negatives

• Reported a significant net loss of $41.6 million in Q3 2025 and $40.5 million year-to-date 2025, a sharp reversal from net income in the prior year.
• Diluted earnings per share turned negative, reporting $(4.76) in Q3 2025 and $(4.63) year-to-date 2025.
• Incurred a substantial pre-tax loss of $37.8 million on the sale of $836.9 million of single tenant lease financing loans.
• Provision for credit losses on loans increased dramatically by 926.2% in Q3 2025 and 511.3% year-to-date 2025.
• Net charge-offs surged to $21.0 million in Q3 2025 and $45.0 million year-to-date 2025, primarily in small business lending and franchise finance portfolios.
• Nonperforming loans increased by 87.4% to $53.3 million, and total nonperforming assets increased by 91.1% to $55.2 million as of September 30, 2025.
• The ratio of allowance for credit losses to nonaccrual loans decreased to 114.4% at September 30, 2025, from 172.5% at December 31, 2024, indicating less coverage for nonaccrual loans.
• Total assets decreased by 1.7% to $5.6 billion, and total loans decreased by 13.6% to $3.6 billion as of September 30, 2025.
• Total shareholders' equity decreased by 8.3% to $352.2 million, and book value per common share decreased by 8.8% to $40.42.
• The healthcare finance portfolio continued its runoff, contributing to the overall decline in loan balances.

Risks

• General economic conditions, including inflationary pressures, changes in interest rates, and economic slowdowns, may adversely affect loan demand and credit quality.
• Credit quality and related levels of nonperforming assets and loan losses, as well as the value and salability of collateral for loans, pose significant risks.
• Failures or breaches of, or interruptions in, 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 require increased allowance for credit losses or asset write-downs.
• Changing bank regulatory conditions, policies, or programs could lead to restrictions on bank 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 other financial instruments.
• Liquidity requirements could be adversely affected by changes in assets and liabilities.
• Legislative or regulatory developments concerning taxes, banking, securities, and other financial services aspects could impact operations.
• Adverse developments in the banking industry, including impacts on customer confidence, deposit outflows, and liquidity, pose systemic risks.
• Inaccuracies or failures from the use of models, including assumptions and estimates, could lead to incorrect financial assessments.
• Potential claims, damages, penalties, fines, costs, and reputational damage from pending or future 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.
• Growth and profitability of noninterest or fee income may be less than expected.
• Loss of any key members of senior management could disrupt operations.
• Changes in accounting policies and practices, as adopted by regulatory agencies, could impact financial reporting.
• The effect of fiscal and governmental policies of the United States federal government.
• 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 the recent loan sale to have a beneficial impact on key profitability metrics, such as net interest margin and return on average assets, in future periods. It also anticipates continued growth in fintech partnership deposits to positively impact deposit costs. The company believes it has sufficient liquidity and capital resources for the next twelve months and longer, and may explore strategic alternatives that could require additional capital.

Management Comments

• The transaction (single tenant lease financing loan sale) was executed as part of an initiative to strengthen the Company's regulatory capital ratios and improve its interest rate risk position.
• While the loss on the transaction negatively impacted shareholders' equity and regulatory capital, the transaction significantly reduced risk-weighted assets, resulting in a net positive effect on regulatory capital ratios.
• The loan sale reduced the Company's interest rate risk profile by reducing exposure to longer-duration assets.
• The Company expects the transaction to have a beneficial impact on key profitability metrics, such as net interest margin and return on average assets, in future periods.
• Net charge-offs in the third quarter 2025 were elevated as the Company continued to take action to resolve problem loans in the small business lending and franchise finance portfolios.
• The increase in noninterest-bearing deposits and interest-bearing demand deposits, driven by growth in fintech partnership deposits, provided the ability to pay down maturing higher-cost brokered deposits and certificates of deposits.

Industry Context

First Internet Bancorp operates in a challenging banking environment characterized by fluctuating interest rates and evolving regulatory landscapes. The company's strategy to partner with fintechs for payment, deposit, card, and lending products aligns with broader industry trends of digital transformation and leveraging technology to address growing customer expectations, particularly among small businesses. The sale of single tenant lease financing loans reflects a strategic repositioning to manage interest rate risk and capital, a common theme among financial institutions adapting to market conditions. The elevated credit losses in small business and franchise lending may indicate sector-specific or broader economic pressures affecting these segments, which could be a concern across the industry.

Legal Proceedings

• Neither the company nor 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: Experienced a significant net loss and a decrease in book value and tangible book value per common share. The new stock repurchase program could provide some support, but the dividend policy remains subject to Board discretion and debt covenants.
• Employees: No direct impact mentioned, but changes in incentive compensation were noted as a driver of increased salaries and employee benefits.
• Customers: The company continues to offer a wide range of commercial, small business, consumer, and municipal banking products and services, with a focus on digital channels and fintech partnerships.
• Creditors: The company's subordinated debt agreements contain covenants that could restrict dividend payments or other distributions if an event of default occurs.

Next Steps

• Continue to monitor the impact of current economic conditions and other events on the company's business, operating results, cash flows, and financial condition.
• The company expects to continue to pay cash dividends on a quarterly basis, subject to Board discretion and various factors.
• The new stock repurchase authorization allows for repurchases of up to $25.0 million of common stock until September 30, 2027.
• Management will continue to evaluate operations and financial performance on a Company-wide basis and use key metrics to evaluate overall performance and make resource allocation decisions.

Key Dates

Recommendation

The company reported a substantial net loss for the quarter and year-to-date, driven by a significant loss on a strategic loan sale and a dramatic increase in credit loss provisions and net charge-offs. This indicates severe asset quality deterioration, particularly in the small business lending and franchise finance portfolios. While net interest income improved, the overall financial performance is deeply negative, and the increase in nonperforming loans is alarming. The strategic repositioning, while intended to improve future metrics, comes at a very high immediate cost. Investors should be highly concerned about the current financial health and credit risk profile, warranting a strong sell recommendation.

Keywords

First Internet Bancorp, INBK, 10-Q, Quarterly Report, Net Loss, Loan Sale, Credit Losses, Nonperforming Loans, Net Interest Income, Net Interest Margin, SBA Lending, Franchise Finance, Fintech Partnerships, Regulatory Capital, Stock Repurchase, Banking, Financial Services