First Internet Bancorp (INBK) Q1 2026: FinTech Deposit Base Jumps 186%, Fueling Margin Expansion

2026-04-30 | By EarningsIQ Research

First Internet Bancorp’s Q1 2026 results highlight a decisive shift in funding mix, with fintech deposits up 186% year over year, directly supporting margin expansion and balance sheet flexibility. The bank’s proactive credit and underwriting overhaul is yielding tangible improvements, even as charge-offs and non-performing loans remain elevated in legacy portfolios. Management’s focus on technology and banking-as-a-service partnerships is positioning INBK for sustainable profitability, with margin and fee income levers set to drive earnings in a flat or uncertain rate environment.

Summary

• FinTech Deposit Scale: Expanded low-cost fintech deposits are reshaping funding and margin profile.
• Credit Normalization Progress: Underwriting upgrades and portfolio discipline are improving delinquency trends.
• Fee Income Momentum: Banking-as-a-service partnerships are delivering double-digit fee growth and strategic flexibility.

Performance Analysis

INBK delivered a 21% year-over-year revenue increase in Q1 2026, with net interest income up 26% and net interest margin (NIM) expanding 54 basis points to 2.45% (FTE). This margin expansion was driven by a proactive shift in deposit mix, as average fintech deposits surged to $2.4 billion, up 186% from the prior year, allowing the bank to let higher-cost CDs and brokered deposits run off. The result was a 56 basis point decline in funding costs, with fintech deposits averaging 3.19%—well below maturing CDs at 4.19%.

Pre-provision net revenue climbed 51% year over year, reflecting strong operating leverage despite only a 6% rise in non-interest expense. Fee income from fintech partnerships grew over 200% versus Q1 2025, contributing to an 11% overall rise in non-interest income. Credit costs remain a watchpoint, with $16.3 million in provision for credit losses and net charge-offs of $15.8 million, but management highlighted improving delinquency and non-performing loan trends in both SBA and franchise finance portfolios.

• Deposit Funding Shift: Fintech deposits now comprise a significant share, supporting lower-cost funding and margin resilience.
• Loan Growth Moderation: Total loans increased modestly to $3.8 billion, as early payoffs in certain portfolios offset strong commercial origination.
• Expense Discipline: Non-interest expense growth was contained despite ongoing investment in technology and credit resolution.

Management’s ability to control funding costs and drive fee income growth through fintech partnerships is offsetting macro headwinds and positioning the bank for further margin expansion as legacy deposits continue to reprice lower.

Executive Commentary

Strategic Positioning

1. FinTech Deposits as a Funding Engine

INBK’s banking-as-a-service (BaaS, outsourced banking infrastructure for fintechs) strategy is driving a structural shift in deposit funding. Average fintech deposits soared 186% year over year, and the bank moved $1.5 billion of these off balance sheet, maintaining customer relationships and fee streams while optimizing capital usage. This enables INBK to let higher-cost CDs and brokered deposits mature, reducing funding costs and supporting margin expansion even in a flat-rate environment.

2. Credit Normalization and Underwriting Discipline

Leadership has overhauled underwriting standards, especially in SBA (Small Business Administration) and franchise finance portfolios, resulting in improving delinquency and non-performing loan trends. The allowance for credit losses stands at 1.5% of total loans, and the ratio of allowance to non-performing loans is robust at 92% (or 122% excluding fully guaranteed SBA balances), reflecting conservative provisioning as legacy issues are resolved.

3. Technology and AI Investment

Strategic investment in digital and AI capabilities is enhancing both customer experience and operational efficiency. AI-driven fraud detection and virtual customer service agents now handle 45% of inquiries, supporting improved Net Promoter Scores and reducing human agent burden. These investments are also enabling scalable growth and risk management in BaaS and lending platforms.

4. Commercial Lending and Emerging Verticals

Commercial real estate, construction lending, and emerging verticals like wealth advisory lending and equipment finance are showing strong origination pipelines, though total loan growth is being managed conservatively in light of macro uncertainty and early payoffs in legacy portfolios.

5. Fee Income Diversification

Fee income from fintech partnerships and loan servicing is now a material contributor, with fintech-related fee income up 50% year over year and total BaaS-related fee income up over 200%. This diversification reduces reliance on traditional spread income and supports earnings stability.

Key Considerations

INBK’s Q1 2026 results reflect a business model in active transition, with the funding base, credit risk profile, and revenue streams all evolving as management executes its strategy.

Key Considerations:

• Funding Cost Leverage: The ongoing replacement of high-cost CDs with fintech deposits is structurally lowering funding costs and supporting margin expansion.
• Credit Risk Transition: While credit normalization is progressing, legacy SBA and franchise portfolios remain a source of elevated charge-offs and require continued vigilance.
• Fee Income Runway: BaaS and fintech partnership fees are scaling rapidly, but the pipeline for new partnerships is subject to rigorous due diligence, moderating near-term acceleration.
• Expense Flexibility: Management is holding full-year expense guidance steady for conservatism, with incentive compensation and other costs able to flex if origination volumes soften.
• Technology ROI: Early returns from AI and automation investments are visible in customer satisfaction and efficiency metrics, but long-term impact will depend on scaling these tools across more processes.

Risks

INBK faces ongoing macroeconomic uncertainty, including volatile energy prices, potential further tightening of underwriting standards, and elevated legacy credit costs. While fintech partnerships provide funding and fee upside, they also introduce new compliance and operational risks that require sustained oversight. A slower ramp in new lending or BaaS onboarding could moderate growth expectations, and non-performing loan resolution remains a watchpoint through 2026.

Forward Outlook

For Q2 2026, INBK guided to:

• Continued net interest margin expansion of 10 to 15 basis points per quarter, even in a flat-rate scenario.
• Elevated provision for credit losses in Q2, with improvement expected in the second half of the year.

For full-year 2026, management maintained guidance:

• Net interest income of $155 to $160 million.
• Total fee income of $33 to $35 million, with BaaS and fintech partnership fees expected to continue double-digit growth.
• Expense guidance held at $111 to $112 million.

Management highlighted that loan growth targets may prove ambitious due to higher-than-expected payoffs and macro headwinds, but BaaS fee income and funding cost reductions provide offsetting levers.

• Fintech partnership pipeline remains healthy, with onboarding of new programs expected in Q2 and Q3.
• Credit costs and non-performing loan resolution remain key drivers of earnings trajectory into the back half of 2026.

Takeaways

INBK’s business model is shifting rapidly toward fee-driven, technology-enabled banking-as-a-service, with fintech deposits and partnerships now central to both funding and revenue strategy.

• Margin Expansion Engine: The 186% surge in fintech deposits is structurally lowering funding costs, supporting sustained margin growth even as the rate environment stays flat.
• Credit Overhaul Impact: Enhanced underwriting and portfolio monitoring are beginning to reduce credit volatility, though legacy portfolios still require active management.
• Profitability Path: Fee income momentum and expense discipline position INBK for accelerating profitability in the second half, with a clear path to 1% return on assets by 2027 if execution remains disciplined.

Conclusion

First Internet Bancorp’s Q1 2026 results reinforce a structural pivot toward fintech-driven funding and fee income, with margin expansion and technology investment offsetting legacy credit headwinds. Execution on credit normalization and disciplined onboarding of new fintech partners will be decisive for sustaining the current trajectory.

Industry Read-Through

INBK’s results provide a clear signal to regional and digital banks: scalable fintech partnerships and BaaS models can structurally reduce funding costs and diversify revenue, but require rigorous risk and compliance frameworks. The rapid growth in fintech deposits and associated fee income highlights a path to margin resilience in a challenging rate environment, while also underscoring the need for disciplined credit management as legacy portfolios are worked down. Other banks pursuing similar models should note the importance of balancing growth with risk oversight, as well as the operational benefits of early investment in AI and digital infrastructure.

INBK Financials Banking Fintech Deposits Credit Banking-as-a-Service Margin