First Internet Bancorp (INBK) Q2 2025: Net Interest Margin Lifts to 2.04% as Deposit Costs Fall

2025-07-25 | By EarningsIQ Research

Net interest margin expansion and disciplined deposit cost control defined First Internet Bancorp’s second quarter, but persistent credit costs in franchise finance and SBA lending continue to weigh on reported earnings. Management’s guidance signals confidence in loan growth and margin improvement, supported by fintech deposit inflows and a cautious stance on provisioning through 2026.

Summary

• Margin Expansion Outpaces Deposit Cost Decline: Net interest margin improvement reflects higher loan yields and fintech-driven funding mix shift.
• Credit Costs Remain Elevated: Conservative provisioning persists as legacy SBA and franchise finance portfolios work through late-cycle stress.
• Guidance Anchored in Cautious Optimism: Management’s outlook calls for continued loan growth and margin gains, with expense discipline and fintech deposits as key levers.

Performance Analysis

First Internet Bancorp’s second quarter demonstrated clear progress in core banking profitability, as net interest income rose 11% sequentially and net interest margin (NIM) crossed the 2% threshold on a tax-equivalent basis. This improvement was driven by higher loan yields (originations above 7.5%) and a nine-basis point reduction in deposit costs, thanks to the repricing of maturing CDs and growth in lower-cost fintech deposits.

Despite these positives, elevated provision expenses and non-performing loans in franchise finance and SBA lending continued to pressure reported earnings. The company’s provision for loan losses remains well above historical norms, reflecting both ongoing stress in the legacy portfolios and a deliberate effort to set conservative reserves. Non-interest income was muted by a temporary slowdown in SBA loan sales, but management expects a rebound in the second half as process changes normalize and secondary market activity resumes.

• Deposit Cost Leverage: Over $800 million in CDs are set to reprice below their current 4.6% weighted average, providing ongoing relief to funding costs.
• Fintech Deposit Growth: Partnerships such as Ramp and JARIS drove fintech deposit balances above $1 billion, supporting both margin and balance sheet flexibility.
• SBA Loan Sale Timing: Temporary holding of SBA loans for process alignment reduced gain on sale income, but July activity already shows a sharp rebound.

While the quarter’s reported earnings per share were subdued, underlying core trends in margin, deposit mix, and loan origination quality are moving in the right direction, positioning INBK for improved profitability as credit costs normalize.

Executive Commentary

Strategic Positioning

1. Margin Expansion Through Funding Mix Shift

INBK’s ability to grow net interest margin above 2% is directly tied to its success in replacing high-cost CDs with fintech-sourced deposits. The bank’s fintech partners now account for more than $1 billion in deposits, and management expects this trend to continue, driving further reductions in funding costs even in a flat rate environment.

2. Conservative Credit Provisioning and Portfolio De-risking

Credit costs remain the primary drag on earnings, especially in the franchise finance and SBA portfolios. Management has responded by maintaining a provision for loan losses at levels consistent with recent quarters, explicitly prioritizing conservatism to avoid future surprises. Delinquencies and deferrals are trending down, and recent underwriting changes have improved new loan quality, but legacy vintages from 2021–2022 continue to require elevated reserves.

3. SBA Origination and Secondary Market Dynamics

INBK’s SBA lending platform remains a growth engine, with origination pipelines strong and gain on sale income set to rebound after a one-time process-driven pause. Recent regulatory changes to SBA standard operating procedures slowed Q2 loan sales, but management has already resumed secondary market activity, with July sales and gains on sale exceeding the entire prior quarter’s total.

4. Loan Growth Focused on High-Quality Segments

Loan growth targets remain robust, with management guiding to 2% sequential growth per quarter through year-end and 5%–7% for 2026. The bank has paused franchise finance originations, focusing instead on SBA, commercial, and super-prime consumer segments, where recent vintages are showing higher credit quality and attractive yields.

5. Expense Discipline and Operating Leverage

Expense control is central to the 2026 outlook, with management projecting flat quarterly expenses through year-end and only modest growth next year. Compensation, particularly tied to SBA and construction commissions, is the main swing factor, but overall operating leverage is expected to improve as revenue growth outpaces expense increases.

Key Considerations

INBK’s strategic priorities are increasingly clear: margin expansion through funding cost control, disciplined loan growth in targeted verticals, and a conservative approach to credit provisioning. The bank’s fintech deposit platform is now a material contributor to both funding and fee income, while legacy credit costs are being addressed through both active portfolio management and tighter underwriting standards.

Key Considerations:

• Fintech Deposit Scale: Fintech partnerships are now a core funding advantage, supporting both margin and balance sheet flexibility.
• Provisioning Philosophy Shift: Management is deliberately over-reserving to restore credibility and avoid further negative surprises in credit costs.
• SBA Platform as Growth Driver: SBA originations and gain on sale income are expected to rebound sharply, with process improvements now in place.
• Expense Baseline Stability: Flat expense guidance underpins operating leverage, with only variable compensation tied to originations as a source of volatility.
• Capital Allocation Caution: Buybacks remain off the table unless valuation falls further, as management prioritizes capital ratio rebuilding.

Risks

Persistent credit risk in legacy SBA and franchise finance portfolios remains the key overhang, with management acknowledging the potential for continued elevated provision expense. Any macroeconomic deterioration or renewed pressure on small business borrowers could delay normalization, while fintech deposit concentration introduces a new funding risk profile that must be monitored as those relationships scale. Regulatory changes to SBA programs and secondary market dynamics also add unpredictability to non-interest income streams.

Forward Outlook

For Q3 and Q4 2025, INBK guided to:

• Loan portfolio growth of 2% per quarter (unannualized)
• Net interest margin rising to 2.20%–2.25% in Q3 and 2.30%–2.35% in Q4
• Non-interest income rebounding to $13.3 million per quarter, driven by SBA loan sales
• Expenses stable at $27 million per quarter
• Provision for loan losses of $10–11 million per quarter

For full-year 2026, management projects:

• Loan growth of 5%–7%
• Net interest margin of 2.5%–2.6%
• Non-interest income of $51–54 million
• Expenses of $108–112 million
• Provision for loan losses of $37–40 million
• EPS range of $5.20–$6.30

Management cited fintech deposit growth, lower deposit costs, and SBA platform strength as drivers, with credit normalization as a key watchpoint.

• Fintech deposits expected to provide further funding cost relief
• SBA gain on sale income to rebound as process delays resolve

Takeaways

INBK’s core banking engine is gaining momentum, but legacy credit costs remain a drag on reported earnings. Margin expansion and fintech deposit growth are material positive drivers, while expense discipline and conservative provisioning signal a prudent approach to risk management.

• Credit Normalization Remains the Key Swing Factor: Progress in reducing delinquencies and deferrals is encouraging, but legacy SBA and franchise portfolios require continued vigilance.
• Fintech Partnerships Now a Strategic Funding Lever: These relationships are driving both deposit growth and margin improvement, but introduce new risk considerations as they scale.
• Watch for SBA Gain on Sale Recovery: Rebound in non-interest income from resumed SBA loan sales is a near-term catalyst, with pipeline strength supporting management’s guidance.

Conclusion

First Internet Bancorp is executing on margin and funding strategy, leveraging fintech partnerships and disciplined expense control to offset the drag from persistent credit costs. Conservative provisioning and a clear focus on high-quality loan growth put the bank in a stronger position for 2026, but investors should continue to monitor credit normalization and fintech funding concentration as key variables.

Industry Read-Through

INBK’s quarter highlights the growing importance of fintech partnerships for regional banks, both as a source of low-cost deposits and as a platform for fee income diversification. The challenges in SBA and franchise finance portfolios mirror broader industry trends, as banks work through late-cycle credit stress in small business lending. Expense discipline and conservative provisioning are increasingly common themes, with management teams across the sector prioritizing margin expansion and risk control over aggressive growth. Investors should watch for further shifts in deposit mix and SBA secondary market dynamics, as these will shape both earnings power and risk profiles for regional banks in the coming quarters.

INBK Financials Regional Banks Fintech Net Interest Margin SBA Lending Provisioning Deposit Growth