Digital Banking And Fintech Alliances Will Shape Future Success

Key Takeaways

• Emphasis on digital banking and branchless operations is lowering costs and driving scalable growth in deposits, loans, and overall profitability.
  
• Enhanced credit quality and improved loan sales are set to reduce credit costs and boost noninterest income, supporting future earnings growth.
  
• Ongoing credit quality issues, volatile noninterest income, intense competition, rising technology and compliance costs, and industry risks threaten long-term profitability and market position.

Catalysts

About First Internet Bancorp

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.

What are the underlying business or industry changes driving this perspective?

• Expansion of fintech deposit partnerships and the ongoing shift to digital banking are driving lower deposit costs and scalable growth without branch expenses, supporting future increases in net interest margin and overall profitability.
  
• Younger demographics' preference for digital-first banking, combined with ramped-up marketing and proprietary technology enhancements, are expected to fuel deposit and loan growth, expanding the company's addressable market and supporting revenue growth.
  
• The company's fully branchless and automated operating model continues to generate positive operating leverage, allowing expense growth to be kept below revenue growth as loan originations and fee income scale, improving net margins and long-term earnings.
  
• Improving credit quality in core lending portfolios (notably SBA and franchise finance), with more stringent underwriting and active management, is expected to reduce elevated provision expenses, boosting future net income as credit costs normalize.
  
• Resumption of strong SBA originations and an improved pipeline, combined with increased gain-on-sale activity in secondary markets and stable or rising loan yields, are set to increase noninterest income, supporting both revenue and earnings growth in 2025 and 2026.

First Internet Bancorp Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming First Internet Bancorp's revenue will grow by 26.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.6% today to 42.3% in 3 years time.
• Analysts expect earnings to reach $91.8 million (and earnings per share of $10.42) by about September 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 analysts price target, the company would need to trade at a PE ratio of 3.1x on those 2028 earnings, down from 13.6x today. This future PE is lower than the current PE for the US Banks industry at 11.9x.
• 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 8.26%, as per the Simply Wall St company report.

First Internet Bancorp Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?

• Persistently elevated provision for loan losses and reliance on conservative provisioning indicate ongoing credit quality challenges in key loan portfolios (franchise finance and SBA), which could continue to pressure net margins and earnings if credit issues do not fully subside as forecasted.
  
• The company's dependence on robust SBA originations and gain-on-sale income introduces revenue volatility, as demonstrated by regulatory changes or softened secondary market demand (lower loan sale premiums), both of which may suppress noninterest income and ultimately reduce profitability if trends persist or intensify.
  
• Competitive pressure from alternative lenders, fintechs, and larger institutions with more resources and stronger brand recognition could erode First Internet Bancorp's deposit and lending base, potentially driving up customer acquisition costs and limiting sustainable revenue growth over the long term.
  
• Ongoing high technology and compliance costs (necessary to scale the digital business, manage partnerships with fintechs, and meet evolving regulatory demands) could outpace revenue growth if the company's expansion or efficiency initiatives underperform, compressing net margins and suppressing earnings.
  
• Increased industry consolidation, rapid advancements in banking technology, and rising cyber threats all pose outsized risks to smaller digital-first banks; these secular trends may strain First Internet Bancorp's ability to maintain market share, require costly investments, or expose the bank to reputational and financial losses, adversely affecting long-term earnings and shareholder value.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $28.4 for First Internet Bancorp based on their expectations of its future earnings growth, profit margins and other risk factors. 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 analyst's consensus, you'd need to believe that by 2028, revenues will be $217.1 million, earnings will come to $91.8 million, and it would be trading on a PE ratio of 3.1x, assuming you use a discount rate of 8.3%.
• Given the current share price of $24.13, the analyst price target of $28.4 is 15.0% 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.