Credit Challenges Will Limit Digital Banking But Bring Hope

Key Takeaways

• Overdependence on an online-only platform and limited geographic reach may constrain customer growth and revenue potential relative to competitors with broader scale.
  
• Rising technology and credit costs, combined with intensifying competition, threaten to erode margin improvement and limit sustainable earnings growth.
  
• Ongoing credit quality issues, regulatory shifts, and execution risks threaten earnings stability, noninterest income, and hamper both profitability and margin improvement prospects.

Catalysts

Operates as the bank holding company for First Internet Bank of Indiana that provides various commercial, small business, consumer, and municipal banking products and services to individuals and commercial customers in the United States.

• While accelerating digital adoption and fintech partnerships position First Internet Bancorp to capture a greater share of the growing demand for online banking and remote financial services, the bank's reliance on its online-only platform without significant geographic diversification could limit customer acquisition in less digitally mature markets, continuing to constrain top-line revenue growth and expansion of the addressable market.
  
• Although investments in technology infrastructure and innovation are aimed at delivering operational efficiencies and enhancing the customer experience-which should help improve the cost-to-income ratio and support margin expansion-rising fixed costs of technology upgrades and cybersecurity may outpace these benefits, particularly given the smaller scale of the bank, leading to pressure on net margins over time.
  
• Despite the growing trend of small business owners and younger generations seeking digital-first, branchless banking options, First Internet Bancorp's recent credit issues in its franchise finance and SBA portfolios highlight the challenge of sustaining strong asset quality in targeted lending niches, increasing the risk of elevated provision expense and earnings volatility that can offset benefits from secular digital banking growth.
  
• While consolidation in the banking sector and regulatory shifts toward a level playing field present opportunities for digital-first banks to achieve scale or become more attractive as acquisition targets, larger banks and fintechs with greater resources may capture more market share and economies of scale, eroding First Internet Bancorp's pricing power and ability to meaningfully grow earnings relative to competitors.
  
• The expansion of fintech partnerships has driven strong deposit growth and reduced funding costs, directly supporting net interest margin improvement; however, as competition from non-bank lenders and alternative financing platforms intensifies, the bank faces ongoing pressure to differentiate and protect high-margin lending segments, which could cap long-term growth in both net interest income and fee-based revenue.

First Internet Bancorp Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on First Internet Bancorp compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming First Internet Bancorp's revenue will grow by 26.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 14.6% today to 43.3% in 3 years time.
• The bearish analysts expect earnings to reach $92.6 million (and earnings per share of $10.31) by about August 2028, up from $15.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 2.8x on those 2028 earnings, down from 12.4x today. This future PE is lower than the current PE for the US Banks industry at 11.2x.
• Analysts expect the number of shares outstanding to grow by 0.52% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.67%, as per the Simply Wall St company report.

First Internet Bancorp Future Earnings Per Share Growth

Risks

• Persistent credit quality issues, especially in franchise finance and SBA portfolios, have resulted in elevated provision expenses and significant charge-offs over multiple quarters; this ongoing trend may continue to pressure earnings and limit net income growth.
  
• Elevated provision for loan losses is expected to remain materially higher than historical levels (with management guiding $37 million to $40 million for 2026), which could restrict growth in bottom-line profitability and suppress earnings per share.
  
• Regulatory and procedural changes in the SBA loan sales and secondary market have already led to lower gain on sale income and temporarily reduced noninterest income, a risk that could resurface with future regulatory adjustments, directly impacting revenues from fee generation.
  
• Declining SBA loan sale premiums and softer investor demand in the secondary market have resulted in the bank choosing to retain certain loans rather than sell them, which could reduce immediate noninterest income and create additional balance sheet risk, ultimately impacting both revenues and net margins.
  
• Slower than anticipated growth, or execution risk with emerging fintech deposit and lending partnerships, may limit deposit cost reductions and balance sheet efficiency gains, potentially eroding projected improvements in net interest margin and overall earnings.

Valuation

• The assumed bearish price target for First Internet Bancorp is $25.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of First Internet Bancorp's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $35.0, and the most bearish reporting a price target of just $25.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $213.9 million, earnings will come to $92.6 million, and it would be trading on a PE ratio of 2.8x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of $21.92, the bearish analyst price target of $25.0 is 12.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.