8-K: First Internet Bancorp Reports Steep Profit Decline Amid Rising Credit Losses in Q2 2025

First Internet Bancorp announced significantly reduced net income and diluted earnings per share for the second quarter of 2025, primarily due to elevated credit loss provisions and net charge-offs in its small business and franchise finance portfolios, despite improvements in net interest income and margin.

Summary

• Net income for the second quarter of 2025 was $0.2 million, a substantial decrease from $0.943 million in Q1 2025 and $5.775 million in Q2 2024.
• Diluted earnings per share fell to $0.02 in Q2 2025, down from $0.11 in Q1 2025 and $0.67 in Q2 2024.
• Pre-tax, pre-provision income (PTPP) was $11.7 million, a 1.8% decrease from Q1 2025 but a 17.2% increase from Q2 2024.
• Net interest income increased by 11.5% to $28.0 million from Q1 2025, with fully-taxable equivalent net interest income reaching $29.1 million.
• Net interest margin (NIM) improved to 1.96% (up 14 basis points from Q1 2025), and fully-taxable equivalent NIM (FTE NIM) rose to 2.04% (up 13 basis points).
• Loan growth was $108.2 million, a 2.5% increase from Q1 2025, while deposit growth was $353.2 million, a 7.1% increase.
• The loans to deposits ratio stood at a healthy 82.3% as of June 30, 2025.
• Nonperforming loans increased by $9.3 million from Q1 2025 to $43.5 million, representing 1.00% of total loans.
• Net charge-offs were $14.3 million in Q2 2025, resulting in a net charge-offs to average loans ratio of 1.31%, significantly higher than 0.92% in Q1 2025 and 0.14% in Q2 2024.
• The allowance for credit losses to total loans decreased slightly to 1.07% from 1.11% in Q1 2025.
• Noninterest income decreased by 46.7% to $5.6 million from Q1 2025, primarily due to an 80.7% decline in gain on sale of loans.
• Noninterest expense decreased by 7.5% to $21.8 million from Q1 2025, driven by lower salaries, employee benefits, and consulting fees.

Sentiment

Score: 3

Explanation: The significant decline in net income and diluted EPS, coupled with elevated net charge-offs and nonperforming loans, indicates a challenging quarter. While there are positive trends in net interest income and margin expansion, the credit quality issues and the impact on the bottom line are substantial negatives. Management's optimistic outlook for future quarters is noted, but the current results are poor.

Positives

• Achieved seven straight quarters of rising net interest income, demonstrating consistent core earnings growth.
• Experienced continued improvement in net interest margin (NIM and FTE NIM), driven by increased yields on earning assets and lower funding costs.
• Reported robust growth in fintech deposits, which contributed to solid balance sheet liquidity.
• Maintained a healthy loans-to-deposits ratio of 82.3%, indicating efficient asset utilization.
• Overall asset quality and capital levels remain sound, with a Common Equity Tier 1 (CET1) ratio of 8.90%.
• Tangible book value per share increased by 0.5% to $44.25.
• Total delinquencies 30 days or more past due (excluding nonperforming loans) declined to 0.62% from 0.77% as of March 31, 2025.
• The pace of new delinquencies in the franchise finance portfolio has slowed, and no loans in this portfolio were on deferral as of June 30, 2025, down from 22 loans at the end of 2024.
• Demonstrated recent success with workout strategies in franchise finance, achieving a 75% recovery rate on certain problem loans.
• Nonaccrual loans in the small business lending portfolio appear to have plateaued, and delinquencies are significantly down from December 31, 2024, and March 31, 2025.
• Loan sales in the third quarter have resumed at a normalized run rate, with $52 million in guaranteed balances sold quarter-to-date for an anticipated $3.7 million net gain on sale.
• Noninterest expense decreased due to reductions in incentive compensation and consulting and professional fees.

Negatives

• Net income significantly decreased to $0.2 million, representing a substantial decline in profitability.
• Diluted earnings per share dropped to $0.02, reflecting the impact of lower net income on per-share metrics.
• Net charge-offs were elevated at $14.3 million, leading to a high net charge-offs to average loans ratio of 1.31%, primarily driven by small business lending and franchise finance portfolios.
• Nonperforming loans increased by $9.3 million from the prior quarter to $43.5 million, reaching 1.00% of total loans.
• Noninterest income decreased by 46.7% from the prior quarter, largely due to an 80.7% decline in gain on sale of loans.
• Nonaccrual loans and net charge-offs remain elevated in the 2022-2023 vintages of the small business lending portfolio.
• Interest reversals on problem SBA and franchise finance loans negatively impacted the net interest margin by 5 basis points.

Risks

• General economic conditions, whether national or regional, and conditions in the lending markets may adversely affect the demand for loans and other products.
• Credit quality and related levels of nonperforming assets and loan losses, and the value and salability of real estate that is collateral for loans.
• Failures or breaches of or interruptions in the communications and information systems relied upon to conduct business.
• Failure of plans to grow commercial and industrial, construction, and SBA loan portfolios.
• Competition with national, regional, and community financial institutions.
• The loss of key members of senior management.
• The anticipated impacts of inflation and rising interest rates on the general economy.
• Risks relating to the regulation of financial institutions.
• Continued uncertainty around global and domestic economic policy may impact the financial outlook.

Future Outlook

Expects continued net interest income and net interest margin expansion through a combination of higher loan origination yields and deposit repricing. Gain on sale of SBA 7(a) loans is projected to revert to normalized levels as significant loan sale activity resumes in the third quarter of 2025. The company provided specific outlooks for Q3 2025, Q4 2025, and FY 2026, including loan growth targets of ~2% (not annualized) for Q3 and Q4 2025, and 5%-7% for FY 2026. Net interest income (FTE) is projected to be ~$33.5 million in Q3 2025 and ~$35.5 million in Q4 2025, reaching $158-$163 million for FY 2026. Net interest margin (FTE) is expected to expand to 2.20%-2.25% in Q3 2025, 2.30%-2.35% in Q4 2025, and 2.50%-2.60% in FY 2026. Noninterest income is anticipated to be ~$13.25 million for both Q3 and Q4 2025, and $51-$54 million for FY 2026. Noninterest expense is forecast at ~$27 million for Q3 and Q4 2025, and $108-$112 million for FY 2026. Provision for credit losses is estimated at $10-$11 million for Q3 and Q4 2025, and $37-$40 million for FY 2026. The outlook acknowledges continued uncertainty around global and domestic economic policy.

Management Comments

• "In the second quarter, we continued to address credit issues in our franchise finance and our small business loan portfolios; the work we did here is evident in our provision expense as well as our bottom line results."
• "Entering the third quarter, we see encouraging signs in both portfolios. Further, our overall asset quality and capital levels remain sound."
• "Core banking metric continue to improve, with our second quarter results reflecting strong growth in net interest income and continued improvement in our net interest margin. We have now delivered seven straight quarters of rising net interest income, driven by increased yields on our earning assets and lower funding costs, which have significantly improved our operating efficiency."
• "We also experienced robust growth in fintech deposits, which allowed us to maintain solid balance sheet liquidity, as shown by our healthy loans-to-deposits ratio. We are in a great position to grow earnings and profitability from here. I deeply appreciate our teams dedication and hard work in creating lasting value for our stakeholders."

Industry Context

The banking sector is currently navigating a complex interest rate environment and ongoing credit quality challenges. First Internet Bancorp's ability to expand its net interest margin through higher loan yields and lower funding costs, despite a challenging credit environment, reflects a strategic focus on optimizing its balance sheet. The robust growth in fintech deposits aligns with a broader industry trend of digital banking and partnership models gaining traction. The elevated nonperforming loans and net charge-offs in specific portfolios (small business lending, franchise finance) indicate ongoing credit quality challenges that some niche lenders may face, contrasting with the overall banking industry's nonperforming loan average.

Comparison to Industry Standards

• Nonperforming loans to total loans of 1.00% as of June 30, 2025, is in line with the banking industry-wide 1.00% nonperforming loans as published by the Federal Reserve.
• The credit experience in the Company's small business lending portfolio is consistent with publicly disclosed data regarding the SBA 7(a) program portfolio for all lenders.

Stakeholder Impact

• Shareholders: Significantly lower earnings per share and net income could negatively impact investor confidence and share price, despite an increase in tangible book value per share.
• Customers: The company's continued focus on credit quality and loan growth suggests ongoing lending activities, but issues in specific portfolios might lead to tighter lending criteria in those areas.
• Employees: A reduction in incentive compensation was noted, which could potentially impact employee morale.

Next Steps

• Host a conference call and webcast on July 24, 2025, at 2:00 p.m. Eastern Time to discuss the quarterly financial results.
• Anticipate gain on sale of SBA 7(a) loans to revert to normalized levels in Q3 2025 as significant loan sale activity resumes.
• Continue actively working on resolution strategies with identified problem loans in franchise finance.
• Continue successive refinements to credit approval criteria and processes, particularly in small business lending.

Key Dates

Recommendation

The substantial decline in net income and diluted EPS, driven by elevated credit losses and a significant drop in noninterest income from deferred loan sales, signals underlying operational and credit quality challenges. While net interest income and margin show improvement, the magnitude of the credit issues, particularly the high net charge-offs and increase in nonperforming loans, outweighs these positives. The outlook for future quarters projects recovery, but the current quarter's performance indicates a deterioration in profitability and asset quality that warrants caution. An investor would likely consider reducing exposure given the current financial strain and the need for the company to resolve ongoing credit issues.

Keywords

Banking, Financial Results, Credit Quality, Net Interest Margin, Loan Growth, Deposit Growth, Nonperforming Loans, Net Charge-offs, SBA Loans, Franchise Finance, Fintech Deposits, Earnings, Q2 2025, INBK