First Internet Bancorp: Digital Banking Resilience and Net Interest Income Growth in a Rising Rate Era

The financial sector is navigating a pivotal shift as interest rates climb in response to inflationary pressures and global economic uncertainty. For banks, this environment presents both challenges and opportunities. First Internet Bancorp (INBK) stands out as a case study in how a digital-first strategy can not only weather rising rates but thrive within them. With FY 2026 net interest income guidance of $158–163 million and a projected net interest margin (NIM) of 2.50–2.60%, INBK's trajectory highlights the power of a scalable, low-cost digital model in driving sustainable growth.

Digital Banking as a Strategic Advantage

INBK's digital banking model is the cornerstone of its resilience. As of 2025, the bank boasts 85,642 digital users, with 73% of its customer base engaged in online or mobile banking. This high digital penetration reduces overhead costs—its efficiency ratio of 52.3% is below the industry median of 57.6%—enabling INBK to allocate resources to high-margin activities. The bank's $5.6 million annual IT investment, including $1.2 million in cybersecurity, ensures its platform remains secure and efficient, critical for maintaining customer trust in a digital-first world.

The bank's localized approach in Indiana further amplifies its competitive edge. With 64% of its local market adopting digital banking and $892 million in regional commercial loans, INBK combines hyperlocal knowledge with national scalability. This hybrid model allows it to capture regional customer loyalty while leveraging digital tools to expand its national footprint. For investors, this duality—local relevance and digital agility—positions INBK to outperform traditional banks in both stable and volatile rate environments.

Navigating Rising Rates: Loan Yields and Deposit Cost Management

INBK's FY 2026 guidance reflects its ability to capitalize on higher loan yields. In Q2 2025, its commercial loan portfolio yielded 7.55%, driven by strong demand for small business and construction loans. While this represents a 23-basis-point decline from Q1 2025, it remains 133 basis points above Q2 2024 levels, underscoring the bank's adaptability to rate cycles. The projected FTE NIM of 2.50–2.60% for 2026 (up from 2.04% in Q2 2025) hinges on maintaining these yields while managing deposit costs.

Here, INBK's digital model shines. Its low-cost deposit base—78% of transactions are digital—allows it to reduce funding expenses. For example, noninterest-bearing deposits and money market accounts grew in Q2 2025, partially offsetting declines in time deposits. This flexibility is crucial in a rising rate environment, where banks must balance attracting deposits with preserving margins. INBK's 1.48% cost of funds in Q2 2025, down 29 basis points from the same period in 2024, demonstrates its ability to optimize this balance.

Sustainability Through Innovation and Risk Mitigation

INBK's digital infrastructure isn't just cost-effective—it's also a platform for innovation. The bank's $67.2 million 2022 investment in AI, machine learning, and blockchain has enhanced risk management and customer personalization. Real-time fraud detection covering 100% of transactions and machine learning-driven risk assessment (94.5% accuracy) ensure operational stability. These systems contributed $127.6 million in net interest income in 2022, illustrating the tangible ROI of tech-driven risk mitigation.

Moreover, INBK's 98.6% regulatory compliance rate and $5.4 million in annual penalty savings underscore its ability to navigate complex regulatory landscapes—a critical factor for long-term sustainability. As interest rates rise, regulatory scrutiny often intensifies, but INBK's proactive compliance framework insulates it from potential disruptions.

Investment Implications

For investors, INBK's FY 2026 guidance and digital model present a compelling case. The bank's ability to scale efficiently, maintain low costs, and adapt to rate changes aligns with long-term growth. Its 34.2% year-over-year increase in digital transaction volumes and 5.9% market share in digital banking (up from 3.4% in 2022) suggest strong demand for its services.

However, risks exist. The normalization of SBA 7(a) loan gains in Q3 2025 could temporarily reduce noninterest income, though this is factored into the guidance. Additionally, a prolonged rate hike cycle may pressure deposit costs, though INBK's digital efficiency provides a buffer.

Conclusion: A Digital Banking Powerhouse

First Internet Bancorp's FY 2026 net interest income guidance reflects a company poised for sustained growth in a challenging environment. By combining a low-cost digital model with localized expertise and cutting-edge technology, INBK has created a moat that traditional banks struggle to replicate. For investors seeking exposure to a bank that turns rising rates into a tailwind, INBK's stock offers a rare blend of resilience and innovation.