First Internet Bancorp (INBK) Q1 2025: FinTech Deposits Jump 37% as Margin Expansion Outpaces Credit Headwinds

April 25, 2025 | By EarningsIQ Research

First Internet Bancorp’s first quarter saw embedded finance deposits surge 37%, fueling margin expansion and funding growth even as credit costs spiked in small business and franchise portfolios. Management’s proactive loan loss recognition and deposit repricing strategy set the stage for accelerating net interest income and margin gains through 2025.

Summary

• FinTech Deposit Surge: Embedded finance partnerships drove substantial deposit growth, supporting balance sheet strength.
• Margin Expansion Outpaces Credit Drag: Net interest margin improved as deposit costs declined faster than loan yields rose.
• Proactive Credit Cleanup: Management’s swift charge-offs and specific reserves aim to stabilize asset quality and earnings trajectory.

Performance Analysis

First Internet Bancorp’s Q1 2025 results reflected a business model in transition, with strong core revenue growth and margin expansion offset by elevated credit costs in targeted lending segments. Total operating revenue rose over 22% year-over-year, led by a 7% sequential increase in net interest income and a sixth consecutive quarter of core revenue growth. Net interest margin expanded by 16 basis points, benefiting from a six-basis-point rise in loan yields and a 12-basis-point drop in deposit costs. FinTech partnership deposits—embedded finance programs where INBK acts as sponsor bank—jumped 37% sequentially, reaching $881 million and generating $1.1 million in non-interest income, up 30% from Q4.

However, the quarter was marred by a spike in net charge-offs, primarily in the franchise finance and small business lending portfolios. Net charge-offs totaled $9.7 million (92 basis points of average loans), and the provision for loan losses rose to $11.9 million. Despite this, non-performing loans and assets remain in line with peers, and management emphasized that issues were borrower-specific rather than systemic. Operating leverage improved, with non-interest expense down 1.7% from Q4, driven by lower incentive compensation.

• Deposit Mix Shift: Growth in FinTech and non-maturity deposits replaced higher-cost CDs, supporting lower funding costs.
• Loan Portfolio Evolution: Variable-rate loans now represent 30% of the book, up from 16% three years ago, reducing interest rate risk.
• Expense Discipline: Non-interest expense declined despite continued investments in lending and FinTech operations.

Despite credit headwinds, the company’s capital and liquidity positions remain robust, with $2.1 billion in liquidity and strong regulatory capital ratios, giving INBK flexibility to pursue growth and potential share buybacks.

Executive Commentary

Strategic Positioning

1. Embedded Finance as a Growth Engine

FinTech partnerships, where INBK provides banking-as-a-service infrastructure, have become a cornerstone for deposit growth and non-interest income. These relationships contributed $881 million in deposits and $1.1 million in quarterly revenue, with management expecting to exceed its $4 million annual revenue forecast. The pipeline is focused on deepening relationships with current partners rather than rapid expansion, creating a stable and scalable source of low-cost funding.

2. Margin Expansion through Deposit Repricing

INBK’s proactive management of its CD book—replacing maturing high-cost CDs with lower-cost FinTech and new CDs— is driving a persistent decline in deposit costs. With $1.1 billion of CDs maturing at a weighted average cost of 4.73% and new production rates near 4.1%, the bank expects continued net interest margin expansion through 2025, even without Fed rate cuts.

3. Credit Risk Management and Portfolio Rebalancing

Management is aggressively addressing credit issues in franchise finance and small business lending, charging off loans with no path to recovery and building specific reserves where impairment is likely. The bank is shifting its loan mix toward variable-rate and higher-yielding assets, while maintaining disciplined underwriting and monitoring for early signs of borrower stress.

4. Capital Allocation Discipline

With strong liquidity and capital ratios, INBK is positioned to pursue both organic growth and opportunistic share repurchases. Management signaled willingness to resume buybacks if the stock remains below 50% of book value, reflecting confidence in underlying earnings power and capital strength.

Key Considerations

The quarter demonstrated INBK’s ability to leverage embedded finance for funding and revenue diversification, while also highlighting the need for vigilance on credit risk and expense management in a still-uncertain macro environment.

Key Considerations:

• FinTech Deposit Traction: Embedded finance relationships are driving sustainable growth in low-cost deposits, supporting both funding and fee income.
• Margin Upside from CD Repricing: The repricing gap on maturing CDs is expected to lower funding costs and lift margins throughout 2025.
• Credit Cleanup Creates Earnings Headwind: Elevated charge-offs and provisions in targeted portfolios may persist if economic uncertainty lingers, but management’s swift action should limit future surprises.
• Expense Management Remains Key: Operating leverage improved as incentive compensation declined, but ongoing investments in FinTech and lending require continued discipline.
• Shareholder Return Optionality: Strong capital and liquidity open the door to share buybacks if valuation remains depressed, adding a potential catalyst for upside.

Risks

INBK faces ongoing credit risk in its franchise finance and small business lending portfolios, where borrower-specific issues and broader economic uncertainty could drive further losses. Regulatory changes in SBA programs and competitive pressures in embedded finance could affect fee income and deposit growth. Management’s proactive stance on charge-offs and reserves reduces tail risk, but investors should monitor for signs of asset quality deterioration or margin compression if rate dynamics shift.

Forward Outlook

For Q2 2025, INBK expects:

• Non-interest income temporarily lower due to SBA loan sale process changes, partially offset by higher interest income on held loans.
• Continued net interest margin expansion as lower-cost deposits replace maturing CDs and high-cost brokered funds.

For full-year 2025, management guided:

• Net interest income growth of 40% or more over 2024.
• Net interest margin reaching 2.35% to 2.45% by Q4 2025.
• Annual non-interest expense up 10% to 15% year-over-year, with a gradual quarterly ramp.

Management highlighted that further Fed rate cuts would provide incremental margin upside, while credit provisions are expected to moderate in the second half as delinquency trends improve.

• Loan growth expected at 10% to 12% for the year, with deposit growth at 5% to 7%.
• FinTech deposit and fee income momentum expected to accelerate as existing partnerships deepen.

Takeaways

INBK’s Q1 results mark a turning point in funding and margin dynamics, with embedded finance deposits and disciplined cost management creating a foundation for earnings growth despite credit volatility.

• Embedded Finance Drives Funding Advantage: FinTech partnerships are now a primary lever for deposit growth and margin expansion, with revenue and payment volumes scaling rapidly.
• Credit Headwinds Being Addressed: Management’s willingness to recognize losses and reserve aggressively should limit future surprises, though franchise and small business lending remain watchpoints.
• Margin and Capital Optionality: Deposit repricing and strong liquidity provide flexibility for both growth and capital return, with buybacks likely if valuation remains depressed.

Conclusion

First Internet Bancorp is leveraging its embedded finance platform to transform its funding base and expand margins, while proactively tackling credit issues in targeted portfolios. The bank’s margin trajectory and capital flexibility position it for stronger profitability in the coming quarters, though investors should monitor asset quality trends and the evolving regulatory landscape.

Industry Read-Through

INBK’s results highlight the growing importance of embedded finance and sponsor bank models as a source of stable, low-cost funding in the mid-sized banking sector. As more banks seek to diversify beyond traditional CDs and brokered deposits, those with scalable FinTech partnerships will be better positioned to manage funding costs and support balance sheet growth. The quarter also underscores the persistent credit risk in small business and franchise lending, a theme likely to impact peers as economic uncertainty lingers. Finally, the willingness to recognize losses and manage capital dynamically may set a new standard for transparency and discipline in the sector.

INBK Financials Banking Embedded Finance FinTech Partnerships Net Interest Margin Credit Risk Deposits