First Internet Bancorp Stock

Thank you. Thank you for standing by. My name is Trevor and I will be your conference operator today. At this time, I would like to welcome everyone to the first Internet Bancorp Earnings Conference call for the second quarter, 2026. All lines have been placed on mute to prevent any background noise. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again.

Please note that this event is being recorded. It is now my pleasure to turn the call over to Julia Ferreira from ICR. You may begin your conference.

Thank you, Operator. Hello, everyone, and thank you for joining us to discuss First Internet Bank Corp's second quarter 2026 financial results. The company issued its earnings press release earlier this afternoon, and it is available on the company's website at www.firstinternetbankcorp.com. In addition, the company has included a slide presentation that you can refer to during the call. You can also access these slides on the website. Joining us from the management team today are Chairman and CEO, David Becker, President and COO, Nicole Lorch, and Executive Vice President and CFO, Ken Lovick. David and Nicole will provide an overview and Ken will discuss the financial results and then we'll open the call up for your questions. Before we begin, I'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of First Internet Bank Corp that involves risks and uncertainties.

Various factors could cause actual results to be materially different from any future or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. The company disclaims any obligation to update any forward-looking statements during the call. Additionally, management may refer to non-GAAP measures which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today, as well as the reconciliation of the.

to non-GAAP measures. At this time, I'd like to turn the call over to David. Thank you, Julia. Good afternoon and thank you for joining us. We're excited to report solid second quarter results with total revenue growing 23% year over year, pre-provision net revenue of 28% and earnings per share of 27 cents, up significantly from the prior year period. More importantly, this quarter marks a meaningful inflection point in our credit trajectory. For the past several quarters, credit has been the primary overhang on our results and on our stock. This quarter, that story began to turn. Over the past 18 months, we took a hard look at the credit outcomes we experienced and made meaningful changes to our underrated writing, servicing, portfolio management, and resolution processes.

Our disciplined actions are now translating into clear, measurable improvement, and we believe the credit trends we are seeing today mark a clear turning point in this cycle. Let me walk through why we feel confident in that conclusion. First, provision for credit losses, while still elevated on a historical basis, declined significantly from the prior quarter. Net charge-offs in our SBA portfolio were down almost 50 percent from the first quarter, reflecting the enhanced underwriting, servicing, and early warning capabilities we built over the past year. Second, non-performing loans declined from the first quarter, and total non-accrual loans declined for the second consecutive quarter, down 19% from year end. Furthermore, non-performing loans, excluding government guaranteed balances, declined to 1.07% of total loans, down from 1.22% in the prior quarter. And third, perhaps most encouraging of all, delinquencies fell significantly during the quarter.

We experienced a sharp drop in early stage delinquencies and total small business lending delinquencies declined to $1.5 million from $13.3 million in the prior quarter. The reduction in provision expense demonstrates that our credit performance is improving today. The decline in non-performing loan formation and delinquency gives us conviction that credit costs will continue to moderate as we move through the second half of the year. At the same time, we continue to optimize the loan portfolio. Continued runoff in existing portfolios, such as healthcare finance and residential mortgage, combined with elevated payoffs in franchise finance is creating capacity that we are redeploying into construction, investor commercial real estate, single tenant lease finance, financing, small business lending, and emerging verticals such as wealth advisory lending and embedded finance, where we see better risk adjusted returns and more efficient use of our balance sheet. A good example is the evolution of our relationship with JARIS, an embedded finance technology partner that helps payment processors ISOs modernize their platforms through capabilities such as digital onboarding, instant payouts, and business financing solutions. Historically, we funded loans originated on JARIS's platform and retained a small portion of that production, selling the majority to a fund managed by JARIS.

Beginning in June, we took that relationship a meaningful step further and are now retaining all originations going forward. The short duration high yielding assets should be accretive to net interest income and the expanded arrangement reflects the trust and depth of collaboration we have built with JARIS over time. Looking ahead, we are navigating the current macro and geopolitical environment with prudent strategy and appropriate discipline. Our credit trends and earnings are moving in the right direction while we continue to deepen high-value fintech partnerships and invest in the technology and talent that differentiate our platform. We believe this combination of improving credit, discipline, capital deployment, and expanding non-interest income positions as well to maximize growth and profitability in future periods. While the financial results speak for themselves, what gives us confidence in the future is the operational progress occurring throughout the company. I will now turn the call over to Nicole for additional effective on the changes we've made and why we believe they position First Internet for continued improvement in the quarters ahead.

Thank you, David. One of the most encouraging takeaways from this quarter is that the improvement we're seeing across the business is the result of a sustained organizational effort over the last several quarters. We challenged longstanding processes, invested in new capabilities, and asked teams across the company to work differently. The numerical improvement in credit is evident in our results, and the strength of the underlying processes producing those results lays the groundwork for improved performance in the future. Over the past 18 months, we've strengthened underwriting standards, enhanced portfolio monitoring, expanded special assets capabilities, and invested in predictive analytics and early warning tools that allow us to identify borrower stress sooner and engage customers earlier. We also created greater special assets capabilities. separation and specialization between portfolio management and problem loan resolution, allowing both teams to operate more effectively. In small business lending, net charge-offs declined significantly from the first quarter, delinquency trends improved meaningfully, and new delinquency formations slowed during the quarter. That reinforces our view that the portfolios we're originating today are performing in line with expectations and that our actions are producing durable improvements in credit quality.

In Franchise Finance, our focus remains on disciplined execution and timely resolution of legacy problem credits. During the quarter, our Special Assets team took action on several relationships that drove elevated charge-off activity. However, the pace of loans moving to non-accrual status slowed dramatically, and early-stage delinquencies have declined over 85% since year-end. I want to thank our Credit Administration and Portfolio Management teams for their tireless execution. While work remains, the evidence suggests the remaining issues are manageable and increasingly concentrated. We've also become more deliberate about how and where we deploy capital. Over the last year, we evaluated major business lines through the lens of risk-adjusted returns, capital efficiency, and long-term growth potential.

That process led us to lean more heavily into businesses where we believe we possess durable competitive advantages, including banking as a service, embedded finance partnerships, and select commercial lending verticals. The expanded JARIS relationship is a good example of that approach in practice. We continue to see opportunities to deepen relationships with partners that value our compliance expertise. technical capabilities and ability to operate at scale. In many cases, those opportunities allow us to generate attractive returns while using capital more efficiently than traditional balance sheet growth alone. Another area where we continue to invest is technology and automation. As pioneers in branchless banking, technology has been central to our business model from the beginning. But our technology strategy is grounded in business outcomes, not in chasing what is novel or interesting.

Every investment is evaluated based on its ability to improve the customer experience, strengthen risk management, enhance efficiency, and generate an appropriate return on capital. Looking ahead, what excites me most is not any single business line or individual metric. It is that we are seeing progress across multiple dimensions of the company simultaneously. Credit trends are improving. Our funding profile continues to strengthen. FinTech and fee-based revenue streams are growing, and our team are exiting with discipline. There is no finish line when it comes to building a better bank, but the operational foundation we have built over the last several years positions us well for continued improvement in profitability and long-term shareholder value creation. And now I'll turn it over to Ken for additional insight into our second quarter performance and 2026 outlook.

Thanks, Nicole. As David mentioned, we delivered solid second quarter results with net income of $2.4 million, or 27 cents per diluted share, both up significantly from the prior year period. Before discussing operating trends, I want to provide additional color on credit. Provision for credit losses was $13.4 million in the second quarter, down from $16.3 million in the first quarter. Net charge-offs totaled $16.9 million, up modestly from the prior quarter, but with important positive trends beneath the headline number. Net charge-offs and small business lending totaled $4.8 million, down significantly from $9.1 million in the first quarter. Franchise finance net charge-offs totaled $11.6 million, $6.7 million of which were covered under specific reserves previously applied to these loans, and as Nicole noted, the pace of franchise finance loans moving to non-accrual status slowed dramatically. Non-performing loans were $60.1 million, or 1.58% of total loans, down from $61.6 million, or 1.63%, in the linked quarter, the first sequential decline we have reported in several quarters.

Total non-accrual loans declined for the second consecutive quarter, which was partially offset by an increase in franchise finance loans 90 days past due as certain loans worked through the resolution process. We expect our efforts to ultimately result in the full collection of principal and interest related to these loans. The most encouraging data point was delinquencies, which declined to 78 basis points of total performing loans as of June 30th, down from 106 basis points at the end of the first quarter and 101 basis points at year end. In dollars, total delinquencies declined 26% from the first quarter to $29.1 million, and early-stage delinquencies declined significantly. Taken together, lower provision for credit losses, the continued decline in non-accrual loans, and the significant drop in delinquencies support our expectation for continued improvement in credit costs throughout the remainder of 2026. Turning to operating trends, total revenue was $41.1 million, a 23% increase over the prior period. When combined with well-managed expenses, pre-provision net revenue totaled $15 million, up 28% year over year, driving continued positive operating leverage.

Lint quarter revenue was down primarily due to lower gain on sale revenue from seasonally lighter SBA origination volumes and our more disciplined underwriting approach. As we think about what to expect in the third and fourth quarters, I would note that secondary market premiums remain strong, production levels picked up in the back half of the quarter, and we expect origination volumes to increase in the second half of the year. The decline in gain on sale revenue was partially offset by sustained growth in fee revenue from our FinTech partners Payments volume and fee revenue continued to build on a trailing 12-month basis, up 256% and 222%, respectively. Net interest income was $32.4 million or $33.6 million on a fully taxable equivalent basis, up 16% and 15% year over year, respectively. interest margin improved to 2.39% or 2.47% on a fully taxable equivalent basis, both up more than 40 basis points from a year ago. Margin expansion was driven primarily by continued improvement on the funding side of the balance sheet as the cost of interest-bearing deposits declined to 3.38% from 3.92% a year ago, benefiting from CD repricing and growth in lower-cost FinTech deposits. On the other hand, earning asset yields were essentially stable. While period end loan balances were up from the prior quarter, average balances were down about 1%.

Growth in construction and investor commercial real estate, single-tenant lease financing, trailers, and emerging verticals, such as wealth advisory lending and embedded finance, was more than offset by early pay and lighter small business lending originations earlier in the quarter. As a result, we carried higher cash balances, which tempered the pace of margin expansion on a sequential basis. Looking forward, pipelines are strong across several commercial lending areas, and small business lending production is expected to increase significantly in the second half of the year. In addition, the increased retention of embedded finance loans is expected to further enhance net interest income and margin. Deposit repricing remains a meaningful tailwind. CD and broker deposit balances declined more than $200 million from the prior quarter as we continued replacing higher-cost funding with lower-cost fintech deposits. The weighted average cost of CDs maturing during the second quarter was approximately 4.11%, while the average cost of on-balance sheet FinTech deposits was 3.19%, and the cost of new and renewing CDs was 3.63%.

The third quarter is a particularly large maturity quarter with more than $445 million of CDs coming due at a weighted average cost of 4.9%. and $700 million in total maturing in the second half of the year at a weighted average cost of 3.94%. With FinTech deposit and CD replacement costs at significantly lower levels, we expect this dynamic to continue supporting net interest income and margin. To summarize our outlook on net interest income and net interest margin, lending pipelines are strong heading into the back end of the year. We continue to optimize the loan portfolio with the composition now about 42% variable rate providing the ability to maintain and increase yields on interest earning assets. When combined with the ongoing ability to drive deposit costs lower, we expect to see sustained expansion of net interest income and margin throughout the remainder of the year. Regarding our outlook for the remainder of 2026, we remain comfortable with our full-year EPS forecast of $2.35 to $2.45. However, with a smaller balance sheet and continued opportunities to grow fee income, the mix between net interest income and non-interest income has shifted somewhat, along with a revised outlook on operating expenses.

We now expect full-year loan growth of approximately 4% to 6%, reflecting elevated early payoffs, lighter first-half small business production, and, as secondary market premiums remain attractive, lower retention of guaranteed SBA balances, with stronger pipelines expected to support growth, in the second half of the year. Our fully taxable equivalent net interest margin outlook remains in the range of 2.75% to 2.80% by the fourth quarter based on the dynamics I mentioned earlier and excludes any interest rate cuts or increases. With a smaller balance sheet, we now expect full year fully taxable equivalent net interest income of $141 million to $142 million. This revision is partially offset by strength in gain on sale premiums and continued FinTech fee income growth, enabling us to raise our non-interest income outlook to $40.5 million to $41 million. Additionally, we are lowering our non-interest expense outlook to $106 million to $107 million, reflecting lower compensation costs, while maintaining investment in technology and AI to support revenue and risk management initiatives. Finally, we expect provision for credit losses of $47 million to $48 million for the full year. Based on the improving trends in non-accrual loans and delinquencies, we expect provision expense to improve sequentially from the second quarter to the third quarter and again from the third quarter to the fourth quarter.

With that, I'll turn it back to the.

operator for questions. Thank you. We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Your first question comes from the line of Brett Rabaton with Stonex.

Brett, your line is open.

Hey, good afternoon, everyone. Thanks for the questions. First, I wanted to talk about the dynamic on the NII guide in the back half of the year, particularly given where you're expecting the margin to be by the end of the year. And if I'm just doing kind of some rough math, right, it basically implies kind of that your funding costs decline about 15 basis points and your earning asset yields are up about 25 to 30 basis points. Is that a fair way to think about it? And then maybe can you talk about how much?.

JARIS and these other things might contribute to higher earning asset yields. Yes, I think you're in the ballpark, Brett. I mean, I think if you think about the deposit repricing opportunity, right, as we mentioned in the prepared comments, we have a lot of CDs that are coming due here in the third quarter. And to be honest with you, right now in the CD market, we are not very competitively priced. What historically was a renewal rate in, call it anywhere from 60 to 70%, is now down in the 40% range. we're just seeing a larger amount of these higher cost CDs rolling off and simply being replaced generally by fintech deposits that are somewhere in, call it the 315 to 320 range. or small business checking, those are much cheaper. But I think we continue to expect continued deposit leverage throughout the rest of the year. I think you're going to see more of it in the third quarter than the fourth quarter, but that's our expectation there.

And quite, to be honest with you, in the second quarter our deposit kind of cost outlook, we were kind of right on top of that, kind of where we got, came up short a little bit in the second quarter was on the lending side. And we talked about average loan balances being down and some of the dynamics that drilled that with lighter SBA originations in the front end of the year. excuse me, in the front end of the quarter, but offset by strong growth, continued growth in construction and investor commercial real estate and single tenant lease financing. as we kind of look forward into the third quarter and the fourth quarter our pipelines in construction and icre are very strong we expect a lot of draw activity in the third and fourth quarters we have a lot of Investor CRE projects that we expect to fund, those are all kind of priced at a SOFR plus three range. single tenant pipeline is very strong. And if you think about where long rates have gone here over the last, you know, call it month, month and a half or so, We're pricing single tenant loans at kind of the highest yields that we have in quite some time. Those are priced at a 225 to 240 spread over the five-year treasury. So those are coming on the books now. Anything that's pricing today is coming on at a 640 to 660 type yield. And then on the Jera side too, we're kind of really excited about that partnership because we, you know, historically we'd retained, call it 10 to 12% of their origination volumes.

And if you think about it in terms of what we retained from say January through May, That was probably four and a half to $5 million. So not very large balances. We were funding their, we were providing senior credit to their fund that was probably a SOFR plus three or four type yield. But going forward, we did, early part of this month, we did acquire some loans from JARIS as they wound down their funds. We kind of got a bulk of, a pool of those, call it about 15 million or so earlier in July. and our expectation is we'll probably with combined with that with retained production will probably have balances will acquire kind of call it in the 45 to 50 million dollar range And those do have very nice, you know, kind of top level. gross yields are they're kind of, you know, they're, you know, usually a seven month type turn on those, um, It's where they pay the higher yield there is, but the gross yield on those is very high. So yes, I mean, I think we expect, and then as we continue to see the lower yielding portfolios, some of the exited portfolios, healthcare, finance, mortgage, that are, you know, 4% or lower continue to roll off. It's just the replacement dynamic combined with, you know, originations in some of our higher yield categories with SBA originations picking up significantly as well. The pathway to a higher yield on the overall loan portfolio is very visible when you put the pieces together.

That's all really helpful color, Ken. Appreciate that. And then just on the credit side, obviously the SBA portfolio is having lower net charge offs, delinquencies are down 20 plus basis points. points, link quarter, dealing with the franchise finance portfolio. I just wanted to hear, you know, do you think you have your hands around all the issues that could be in those portfolios or, you know, have you seen anything new come up here in the future? the past quarter with some things that were originated in the 21 to 23 vintages, or do you feel like you have your hands around all those potential problems?.

As it relates to SBA, Brett, we really do feel like the changes we implemented in underwriting, as well as the changes that we have made to portfolio management, that throughout the end of 2025 and into this year, are really starting to show up the vintages of 21 to 23, we believe we have worked through the worst of that. It's always possible, of course, with a small business for something to pop up. But at this point, we believe problems tend to show up in about the first 18 months, 18 to 24 months with small business, especially when we're looking at business acquisition. What we are seeing, however, is much better performance from the 2025 vintage and, of course, the 2026 year-to-date vintage. So we're feeling very confident that the changes we have made to underwriting guidelines, expectations of borrower strength, and then the changes that we've made as well within portfolio management are going to yield us much better results in the future.

Yes, and I think kind of speaking on the franchise side of things, I think, you know, as we continue to work down, we talked about how we charged off, you know, a fair number of non-performing, non-accrual loans this quarter. We, you know, we referenced that the inflows to the non-accrual. uh, bucket was significantly reduced. So net, net non-accrual franchise finance loans, uh, declined quite a bit. Um, We talked about the declines in SBA delinquencies, but even in early stage franchise delinquencies from the beginning of the year, that number is down over 75%. So similar to SBA, the non-performing loan formation has slowed dramatically. I mean, I think there's probably still some loans that we're keeping our eye on there, but the pool of loans, You know, where maybe a borrower is a habitual, you know, 30-day late payer or something like that. The pool of loans in franchise has certainly declined significantly, you know, certainly from the beginning of the year.

Yes.

In fact, just this afternoon we received a check on a loan that we had marked as doubtful. We had charged it down to, I think, $600,000 was all we had left on the books. Got a check for $600,000. So I think that also speaks well to our ability to measure the recoverability of these loans. So that also gives us a lot of confidence. those confidence going forward. Okay.

Really helpful. Thanks for all the color. Our next question comes from the line of Emily Lee with KBW. Emily, your line is open.

Hi Emily. Hey everyone, this is Emily stepping in for Tim Switzer. Thanks for taking my question. Yes, so, yes, end of period and average loan balances were impacted by early payoffs this quarter. What are your expectations for payoffs going forward? I, you know what, there's, we think,.

Based upon what we've seen this year, we know that there are probably going to continue to have those pop up here and there. What we do like is when a borrower gives us notice. Like for example, we got notice earlier this week that a construction loan or an ICRD loan that's going to mature in, in 27 that they're going to pay it down probably at the end of August. So it's nice when we get advance notice on that, because we can certainly factor that into our models. And quite frankly, it's enough lead time to get out there and replace the balance elsewhere. I think we do expect there's probably going to be some. It's kind of hard to predict.

We have seen elevated payoffs in the franchise finance portfolio on performing loans there. But we've kind of began to model that in because we've seen that for the past couple quarters. But I think it'll continue to happen, but I think we're trying to do our best to capture it in our modeling.

I understand. That's helpful. And then, you know, this quarter, you increased the number of fintech partners I'm just wondering if you could talk about expectations for growth from the BAS platform going forward and how the partner pipeline is looking now. You know, do you still look to kind of continue opportunistically adding more partners as you see fit, or what are your plans there?.

Sure, we have added three partners year to date and I think there are like, so we're now at 15 partners, 21 programs. We have two more programs that we expect to bring online before the end of 2026. And our pipeline of potential programs is healthy behind that. I don't expect us to grow into the triple digits by any means in the next year. We are, we're very careful about how we curate our partnerships and we have some terrific partners in fact four of the 15 have expanded their relationship with us in the last year I think that speaks to the kind of relationships that we're forming and the the capacity that we have to grow right alongside them so we believe that in terms of FinTech partnership revenue we're going to see growth from interest income on the lending program that we're doing. We also then will see a moderate increase from our fees that we collect, whether it's on transactions on oversight fees but you know our our revenue has grown and our transactions have grown I think our revenue is up two hundred and twenty percent year over years so we do see a lot of runway there Great to hear. Thanks for taking my question.

Thanks. Our next question comes from the line of Nathan Race with Piper Sandler. Nathan, your line is open.

Hi everyone, good afternoon. Thanks for taking the questions. Hey, how you doing? I'm wondering if you could just good. Thanks Dave David. Just in terms of thinking about the reserve trajectory going forward, I know it's difficult to predict in terms of what going to be underlying the provisioning assumptions for the back half of this year, but was just curious, you know if some more light on in terms of how specific reserves are trending, particularly against the SBA and franchise finance portfolios and kind of what that suggests in terms of kind of lost content expectations over the next couple of quarters.

Yes, I mean, I think we saw, you know, we a lot of the, you know, as we mentioned in our comments, right, we, you know, we charged off about 11 and a half million of non performing franchise loans. that reduced our specific reserves by 6.7 million that came off. YOU KNOW, WHEN WE THINK ABOUT, LIKE, WHAT THE PROVISION OUTLOOK LOOKS LIKE, YOU KNOW, You know, we do for the provision sometimes it's kind of agnostic whether it's a charge off or a specific reserve. But I think we, again, we kind of continue to feel confident that with the, you know, the enhancements that Nicole mentioned relative to SBA portfolio management, special assets, and where we see the number, potential number of franchise loans, that could be a problem down the road. I think we just see continued decline there. And if you think about it in terms of a net charge off number, I think our expectation is that for net charge offs to come down significantly from what where they were in the first and second quarter. You know, probably be a little bit, you know, could be higher in the third quarter, could be less in the fourth. Like you said in your question, it's hard to predict the timing.

But I think we believe the trajectory is certainly going down in the back half of the year.

And I think, too, to your question, Nate, with our enhanced portfolio management efforts and really being an ally to our borrowers, we're able to provide them more solutions when they get in touch with us earlier. I've just seen over the last 18 months a night and day difference in the way we're better communicating, and that gives us more visibility into what the likelihood of loss would be. So the communication between portfolio management and finance is very, very strong, and that helps to prevent loss.

surprises. The comment that Nicole made earlier about the $600,000 payment we got in today on a loan that we'd reserved against, we also have... a significant franchise that's got three units, a little over $6 million. We've already reserved a 30% reserve against that loan, and we think it's going to pay off in total. So we'll get a recovery of that 30% here this quarter, plus the full $6 million of fallout of the delinquency side and off the balance sheet in total. So that's kind of a wild card there, but we're, The whole thing we've done with the special assets group has enabled us where, as Nicole said, we've reached out and touched literally everybody in the SBA pool, everybody in the franchise pool, checking in with them, how things are going. With all the uncertainty and the economic factors out here right now, we're on a very strong offensive. to try and reach everybody. So if things do start to go south, they'll call us, they won't run from us. And as she just pointed out, there's a lot of things we can do for them when we catch them early.

When they're on their way to the bankruptcy court, it makes it tough for all of us. So we're pretty positive that we've got the right people in the right seats doing the right things right now.

So it's a fun time. Indeed, that's really helpful. Just go back to the margin discussion. And I appreciate all the color around what you have maturing on the CD front in the back half of this year. The expectation that those CDs will largely be replaced by some of the lower cost. deposit gathering programs you have going on with some of your partners? Or I mean, what's kind of the incremental kind of replacement costs on some of those CDs, you know, to the extent it's not backfilled with some of those other relationship deposits?.

Yes, I mean, I guess maybe the easiest way to think about it is to simply replacing in the third quarter CDs that are costing us $404 on a weighted average basis. being replaced with FinTech at 3.20, 3.15 to 3.20. That's probably the easiest way to think about it. And as I mentioned, why I think we'll probably get some more deposit cost savings in the back half of the year, certainly in the third quarter, is just the renewal rate on CDs. I mean, our renewal rate, if we're renewing CDs today, that rate is kind of around a 360. So you're still looking at a 40 basis point pickup, even if we just renewed everything or had new volume, but that renewal rate is going down, which when you're back filling more of it with FinTech deposit growth, you're just going to capture more cost savings. We're not feeling the pressure that a lot of our peers are on them because of the deposit market getting hot again and having to pay up for CDs and or.

with $2.5 billion off balance sheet in cash. As Ken said, if half of those CDs disappear, we'll pull 200 million in at 318 versus the 420. So it's, we're in a, in a pretty enviable position right now with what's going on in the marketplace with the excess cash.

Yep, good stuff. And then you know if we were to get a rate hike later this year,.

in terms of what that kind of NII or margin sensitivity would be? Sure. Yes, Ana, and keep in mind that this is a static balance sheet, so it's not really factoring in growth. You know, obviously everything we've done over the last few years, we've moved ourselves much closer to a neutral position, but we still are a little bit liability sensitive. So if we had a rate hike, again, static balance sheet, it's probably about on an annual basis about $2.4 million reduction to $2.4 million. NII. If it went the other way, if we had a rate cut, a 25 basis point rate reduction, we would probably pick up about $2.2 million in additional NII.

OK, great. And then just lastly, Ken, what's the tax rate assumptions underpinning the.

EPS guide for this year? Yes, I mean, it's, you know, it's a little bit varying, I'd say, between the range. I mean, it's not a huge range, but I'd say it's probably, you know, on the low end of the range, call it a six to six and a quarter. On the higher end of the range, call it eight to eight and a half. I mean, and this is full year. So, you know, I think with our expectations of, you know, stronger, you know, much stronger performance in the third quarter and the fourth quarter, you could probably kind of math into, you know, if I'm giving you the tax rate for the year, you can probably back into what it could be for the quarters.

Yes, I think that's something that 15% range. Sounds like 15, 20%. Does that sound right? Probably more 12 to 15 ish. OK, alright, sounds good. I appreciate all the color. Thanks.

thanks Nate our next question comes from the line of George Sutton with Craig Hallam George your line is open.

Thank you. You mentioned wealth advisory and embedded finances are new focus areas. I wonder if you could give us a little more picture on what the wealth advisory practice is lending to. And on the embedded finance side, I'm sorry. I'm curious, is that broader than just JARIS or are you specifically focused on JARIS there?.

I'll handle the wealth advisory piece. The wealth advisory lending is to RIAs, Generally, for the purpose of say, ownership transition, succession issues, you may have, You know, what you see in the RIA, the Registered Investment Advisor world today, is you see a lot of, A lot of advisors are getting near retirement and there's a lot of ownership transition, a senior partner selling to a junior partner, So that's really what that is. It's financing acquisition or succession transition, ownership transition in the advisor space.

The average owner of an RIA today, George, is 66 years old. And so there's a lot of folks kind of saying enough is enough and a little bit of volatility might be creating some of the issues, but we've been doing it for probably 18 to 24 months now, but the volume has really seemed to pick up over the last four to five months. I'll take on the embedded finance. Yes, JARIS is by far the biggest opportunity for us in the short term. We have two others in the queue. One is wrapping up on their due diligence and final testing and should be going live, one of the ones that Nicole was talking about coming on between now and year end. But the big change for us in the second half of this year before the new guys come on board is Jera's.

We had historically been buying about 10 percent of their production and the rest was going to the fund. We had actually bought out that fund and it's going to jump. We did about five million with them in the first half of the year, and we're probably going to do 10 to 15 million in the second half of the year. As Ken said, that tremendously helps them at the top end on the Yield on it, short-term, as I said, factoring, it can be 35% to 40%, depending upon the term and how quick they repay. Net yield to us at the bottom line, full reserves, processing, servicing, payment. the fees, et cetera, it's still yielding in that 12 to 15% range for us. So that's double down anything else we have on the books today. So it's a great asset for us and the other folks.

The pricing will be similar for those that we're turning on here in the second half of the year.

You had historic bass growth. I'm just curious how much of that would be ramp specific versus others?.

We're spread out. Probably the biggest impact for RAMP is on the deposit side of things, on the fee side We're there with them, but we actually have some others that the pure processing earnings are stronger. Ramp, we do their bill pay product, which has has grown significantly. We started it with M Square Zero a little over two years ago. On June 30th and July 1, we literally cleared $1 billion plus per day in bill payments. but they're pennies of transactions. So the real growth that we've gotten out of ramp in the last few months, obviously the numbers are going up, but they're pennies an item is on the deposit side. That's been very, very strong for us. others we've adjusted fees almost across the board with all of our clients everybody's kind of been a nice growth spurt as Nicole pointed out we're not going after after every Tom d*** and Harry that's out there we're pretty judicious on who we work with and who we talk to we've got a pretty good reputation in the business of being ahead of the regulators and not having compliance issues. And we're, is a little bit painful to deal with, but at the end of the day that's a win for us and the fintechs.

So we've got good volume across the line few years back. We went from a million in revenue to two to four. We had forecasted eight. I think it's going to not pass 10 this year pretty easily, so it's it's all going up into right pretty quickly. David Morgan, One quick one for Nicole, if I could on SBA. Historically, you've kind of talked about your market ranking and goals for pretty material growth. Is that not necessarily the focus now? No.

Well, thanks for the question, George. Obviously, I mean, we want to put people in small business and help them achieve their dreams when we can and when it makes sense. We needed to retool our credit underwriting guidelines. We needed to build better portfolio management processes, so we didn't continue to add to the portfolio. and then not have a way to keep up with our borrowers. So with those two things addressed, I think that we do have a good opportunity to ramp volume back up, but we're going to do that judiciously, not focus on quantity, but really focus on quality. We... to us when a business has to close its doors. And so we want to make sure that we're putting the right borrowers in the right business so that we can be a good partner to them.

So I do think we have a good opportunity now that we have our processes in place and we have credit underwriting guidelines that we know work. we're feeling much better about our ability to scale volume again. I think we'll see some improvement in volume in the second half of this year. Our lending teams are growing slightly, and we have some good people with new contacts that they've made. Our referral sources, we're growing more loans that have some real estate behind them, so those command a better premium. So I think we did a lot of retooling that is going to help us in future periods.

The SBA industry as a whole, George, is down about 18% year to date on growth year over year. compared to last year. So the industry as a whole was a little bit slower than it had been. We're still in the top 10 originators in the 7A world and will probably stay there through the course of the year. As Nicole said, the pipelines are strong and volume second half will be a little better than it was in the first half.

Perfect. Okay. Thanks, guys. Appreciate it. Thank you.

There are no further questions at this time. I will now turn the call back to David Becker for closing remarks.

Thanks, Trevor, and thanks everybody for joining us today and for your interest in First Internet Bancorp. This was a quarter we've been working towards for some time and we're proud of the progress our teams have made on credit as well as increasingly capital efficient fee generating direction of our business. We remain mindful of all the macroeconomic uncertainty in the world and things going on around us, but we are executing from a position of genuine momentum, and we believe the hardest part of our credit cycle is truly behind us. We appreciate your support. Feel free to reach out to any of us if you have further questions. Thank you, and have a good evening.

This concludes today's call. Thank you for attending. You may now disconnect.

This live transcript is auto-generated without human intervention or review.

[Call has ended.]

Thank you for standing by. My name is Rebecca, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Internet Bancorp Earnings Conference Call for the First Quarter 2026. [Operator Instructions] Please note this event is being recorded.

It is now my pleasure to turn the call over to Julia Ferrara from ICR. You may begin your conference.

Thank you, operator. Hello, everyone, and thank you for joining us to discuss First Internet Bancorp's first quarter 2026 financial results. The company issued its earnings press release earlier this afternoon, and it is available on the company's website at www.firstinternetbancorp.com. In addition, the company has included a slide presentation that you can refer to during the call. You can also access these slides on the website.

Joining us from the management team today are Chairman and CEO, David Becker; President and COO, Nicole Lorch; and Executive Vice President and CFO, Ken Lovik. David and Nicole will provide an overview, and Ken will discuss the financial results, and then we'll open up the call for your questions.

Before we begin, I'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial conditions of First Internet Bancorp that involves risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. The company disclaims any obligation to update any forward-looking statements made during the call.

Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures.

At this time, I'd like to turn the call over to David.

Thank you, Julia. Good afternoon, and thank you for joining us on the call today. We delivered strong first quarter results that demonstrated the resilience and strength of our diversified business model. We generated solid revenue growth, expanded our net interest margin and continued making meaningful progress on credit quality, all the while navigating an uncertain macroeconomic environment. Let me start with some of the highlights for the quarter.

Total revenue reached $43.1 million in the first quarter, up 21% year-over-year, driven by a 26% increase in net interest income. Our fully taxable equivalent net interest margin expanded to 2.45%, a 54 basis point improvement from a year ago and 15 basis points sequentially. This margin expansion reflects the benefits of our proactive balance sheet management strategy and the power of our deposit franchise, combined with our scalable nationwide lending platforms.

Pre-provision net revenue grew 51% year-over-year to $18.1 million, underscoring our ability to generate strong operating leverage while maintaining disciplined expense management. This performance gives us confidence in our ability to drive sustainable profitability as we continue to work through our credit normalization process. On credit, our overall loan book remains solid and continues to perform in line with industry trends. In addition, we're seeing tangible evidence that the decisive actions we've taken over the past several quarters are yielding favorable results on the 2 problem portfolios, SBA and Franchise.

Our provision for credit losses for the quarter came in better than expected, and we're observing improving trends in our portfolio with delinquencies and nonperforming loans headed in the right direction. The credit trends we're seeing, particularly in our SBA portfolio reflect the impact of enhanced underwriting standards, more vigorous portfolio monitoring and responsive problem loan resolution.

On the growth front, our commercial lending pipelines remain robust across multiple verticals. Total loans increased to $3.8 billion with particularly strong production in single tenant, lease financing and construction lending as well as in one of our emerging verticals, wealth advisory lending. While we maintain appropriately conservative underwriting standards, we're seeing great opportunities to deploy capital into high-quality commercial relationships at attractive yields.

Turning to the other side of our balance sheet. Total deposits reached $5 billion, up from $4.8 billion in the prior quarter. We continue to benefit from the strength and flexibility of our Banking-as-a-Service initiatives. Importantly, we're seeing continued growth in lower-cost fintech deposits, which has also allowed us to let higher cost CDs and broker deposits mature without replacement. Our fintech deposit platform also provides us with significant balance sheet management flexibility.

During the quarter, average fintech deposits totaled $2.4 billion, an increase of over 186% from the first quarter of 2025. At quarter end, we have moved approximately $1.5 billion of these deposits off balance sheet, optimizing our asset size while maintaining these valuable customer relationships and the associated fee income streams. This capability is a unique competitive advantage that enhances both our profitability and our capital efficiency.

In our SBA business, while seasonality and tightened underwriting resulted in softer loan production for the quarter, we're pleased with the strong foundation we're building and how the business is positioned for long-term profitable growth. To further align our strategy in SBA, we've strengthened the business by promoting Gary Carter to the position of National Sales Manager. Gary rejoined us a year ago as our Senior SBA Credit Officer, bringing deep industry expertise, including his role at Live Oak Bank that will help us continue building this business on a sound foundation.

Our capital and liquidity position remains solid as we were able to closely manage the size of the average balance sheet while continuing to grow revenue. Regulatory capital ratios remain well above minimum requirements with a total capital ratio of 12.5% and a Common Equity Tier 1 ratio of 8.97% as well as substantial liquidity coverage.

Moving to our strategic investments in technology and artificial intelligence. We continue to invest thoughtfully in digital capabilities that enhance the customer experience, improve operational efficiency and position us for long-term growth. These technology investments aren't just about maintaining our competitive position, they're also about creating sustainable advantages in how we serve customers, manage risk and drive operational excellence.

Looking ahead, we're navigating an uncertain macro environment from a position of increasing strength. Our diversified business model is generating strong revenue growth. Our deposit franchise provides funding advantages and strategic flexibility. We've proven our ability to make difficult decisions and execute effectively. The credit challenges we've experienced are manageable in the context of our overall business. We've taken decisive action, strengthening underwriting standards, enhancing risk management and addressing problem loans proactively. We see the benefits in improving trends and expect continued progress throughout 2026.

We are not standing still. We're investing in AI and technology to enhance efficiency and customer experience, strengthening our commercial banking capabilities, expanding fintech partnerships and repositioning our SBA business on a stronger foundation. We're confident in our strategy, our team and our ability to deliver value for shareholders.

I'll now turn it over to Nicole for operational highlights, including commercial lending, SBA, Banking-as-a-Service and credit.

Thank you, David. Starting with commercial real estate, we saw solid first quarter activity with particularly strong production in construction and single-tenant lease financing. These businesses continue to perform well with strong credit quality and attractive risk-adjusted returns on new originations. We were also pleased to see higher balances in a couple of our emerging verticals, wealth advisory lending and equipment finance. The pipeline remains healthy with disciplined underwriting and good yields on new commitments.

Turning to SBA. As David mentioned in his comments, the deliberate shift we communicated in our last call that prioritizes credit quality over volume, combined with a seasonally lighter first quarter resulted in lower originations for the quarter. This translated into lower loan sale volume and lower gain on sale revenue compared to the linked quarter. Regarding gain on sale revenue, while premiums have been strong so far this year, we still expect to retain more production on our balance sheet in future periods as the pricing on certain higher-quality deals will not fetch quite the same premiums in the secondary market.

We generally look at a 12-month earn-back period when making decisions on whether to sell or hold loans. While this will impact gain on sale revenue for the year, it will be highly additive to net interest income and net interest margin in future periods. Nonetheless, barring any macroeconomic deterioration, we remain optimistic about the previously shared production and gain on sale targets for the full year. Importantly, while we're being selective about growth in this portfolio, we remain committed to small business lending as a core business. This is an attractive lending vertical with good long-term economics, and we have the platform, expertise and relationships to compete effectively once we've fully worked through this current credit cycle.

As to credit performance, we've made substantial progress over the past several quarters through proactive and prudent actions. We've significantly enhanced our underwriting standards, added experienced talent to our credit and portfolio management teams and implemented more robust monitoring and early warning systems. We've also been proactive in working with our borrowers to prevent the formation of nonperforming loans, and we're seeing results.

As of March 31, delinquencies in the SBA portfolio have improved 118 basis points quarter-over-quarter and 126 basis points year-over-year. As we look ahead, our focus in SBA is on durability and consistency rather than near-term volume. Loans originated under our revised standards are showing more stable early behavior. While these newer vintages are still early in their life cycle, we're encouraged by what we're seeing in terms of borrower performance, responsiveness and overall portfolio dynamics.

The operational changes we've made across underwriting, execution and portfolio oversight are now fully embedded in the business. This enables us to remain selective today while preserving the ability to scale responsibly as conditions normalize. Our objective is an SBA portfolio with attractive long-term economics and reduced volatility across cycles, and we are building with that goal in mind.

In Franchise Finance, we continue to make progress working through problem loans. Our special assets team was busy during the quarter coming to resolution on several credits. While net charge-off activity remained elevated during the quarter, it more than offset nonperforming loan formation as nonaccrual Franchise Finance loans dropped to their lowest level in 4 quarters.

Looking at our Banking-as-a-Service operations, we continue to see strong momentum with our fintech partners. These relationships provide valuable deposit funding, generate attractive fee income and position us at the forefront of innovation in digital banking. We processed over $82 billion in payments volume during the quarter, an increase of over 260% year-over-year through a carefully curated partner network, a reflection of our efforts to strengthen and deepen existing relationships while cultivating new partnerships. We are constantly evaluating new partnership opportunities while ensuring we maintain the highest standards of compliance and risk management.

Across the bank, we continue to invest strategically in AI and automation to drive efficiency and enhance customer service. Our strong data foundation built through previous investments in our data warehouse and integrated data sources now supports our infrastructure upgrades for AI agent processing. While scoping our own proprietary agents, we've already deployed third-party AI capabilities with measurable impact, such as fraud detection agents that screen outbound transfers before processing. Additionally, our virtual customer service agent resolves approximately 45% of inquiries, significantly reducing the burden on human agents and improving response times.

The effects of this are validated by the favorable results from the Net Promoter Score framework and customer listening program we implemented in the first quarter with our consumer and small business banking team. Out of the gate, our scores are well above industry average. We have built relationships through transparency and delivering on our promises, and that loyalty delivers strong returns.

The diversity of our business model is another key strength. We have multiple engines driving growth and profitability. Our commercial lending is performing well. Our consumer lending remains stable. Our fintech partnerships continue to grow, and we're seeing improving trends in SBA. We're executing on all of this with appropriately conservative underwriting standards that position us for sustainable profitable growth.

I will now turn it over to Ken for additional insight into our first quarter performance and update to our 2026 outlook.

Thanks, Nicole. We are pleased to report solid first quarter results with net income of $2.5 million or $0.29 per diluted share. Total revenue for the quarter was $43.1 million, a 21% increase over the prior year period and when combined with well-managed expenses, pre-provision net revenue totaled $18.1 million, up 51% year-over-year. These results reflect our diversified business model, strong operational execution and sustained business momentum across our core segments.

Net interest income for the first quarter was $31.6 million or $32.8 million on a fully taxable equivalent basis, up about 26% and 25%, respectively, year-over-year. Net interest margin improved to 2.36% or 2.45% on a fully taxable equivalent basis, up 14 and 15 basis points, respectively, from the prior quarter and both up 54 basis points year-over-year. The yield on average interest-earning assets for the quarter rose to 5.67% compared to 5.57% in the prior year period as higher rates on new loan originations more than offset the impact of Federal Reserve rate cuts in late 2025.

We also saw a meaningful decline in funding costs during the same period with the cost of interest-bearing deposits falling 56 basis points to 3.45%. The ability to maintain and increase yields on interest-earning assets in conjunction with declining cost of interest-bearing deposits demonstrates delivery on our years-long effort to reposition the balance sheet and optimize our mix of earning assets.

Noninterest income for the quarter totaled $11.5 million, up almost 11% year-over-year as fee revenue from our fintech partnerships continued to grow, supplemented by higher net loan servicing revenue following the servicing retained sale of single-tenant lease financing loans in 2025. David and Nicole both touched on our positive momentum in the Banking-as-a-Service space, which is evidenced by the growth in fee revenue with quarterly revenue increasing over 200% compared to the first quarter of 2025 and increasing over 220% on a trailing 12-month basis. Noninterest expense for the quarter totaled $25 million, up only 6% year-over-year despite continued investment in technology and AI to enhance both front and back-office operations and costs related to working out problem loans.

Turning to credit. The provision for credit losses was $16.3 million in the first quarter, which was a little better than our initial expectations. The provision for the quarter included net charge-offs of $15.8 million and additional specific reserves in our Franchise Finance portfolio. Relative to our original forecast, the lighter provision was due to a combination of lower loan balances and unfunded commitments as well as updates to the assumptions in the CECL model. Our allowance for credit losses at quarter end was $56.5 million or 1.5% of total loans, up slightly from year-end.

Nonperforming loans increased to $61.6 million or 1.63% of total loans. However, a portion of the increase consists of fully guaranteed SBA 7(a) balances where the government guarantee substantially mitigates our loss exposure. Excluding fully guaranteed balances, nonperforming loans to total loans drops to 1.22%. Another component of the increase in nonperforming loans was accruing loans 90 days or more past due. However, the largest portion of this increase, about $6 million, relates to one relationship that we expect to pay off in full in the second quarter. I will also note that our SBA team was successful in bringing some past due borrowers current shortly after quarter end, reducing delinquencies even further.

At quarter end, the ratio of the allowance for credit losses to nonperforming loans was 92%. Adjusting nonperforming loans to remove the fully guaranteed SBA balances, the allowance coverage ratio improves to 122%. While we are pleased with the improvement in nonperforming loans and delinquencies, our updated allowance for credit losses model reflects our expectation that the provision for credit losses will remain elevated in the second quarter, but then improve gradually in the second half of the year.

Total loans as of March 31, 2026, were $3.8 billion, an increase of $29.1 million or 1% compared to the linked quarter and a decrease of $479 million or 11% compared to March 31, 2025. David and Nicole both covered some of the lending highlights from the quarter where we experienced growth. Overall, origination activity was fairly strong across our commercial and consumer areas. We did, however, experience some early payoff and maturity activity in the Franchise Finance, Public Finance and Recreational Vehicles portfolios and in particular, saw early payoffs of some large balance relationships in the investor commercial real estate portfolio, which impacted total loan growth during the quarter.

Total deposits as of March 31, 2026, were $5 billion, representing an increase of $142 million or 3% compared to December 31, 2025, and an increase of $36 million or 1% compared to March 31, 2025. David talked about the continued strong growth in fintech deposits, which has allowed us to further improve the mix of deposits and drive funding costs lower.

Average CD and broker deposit balances, our highest cost of deposit funding were down over $180 million from the prior quarter. The weighted average cost of maturing CDs in the first quarter was 4.19%, while the average cost of fintech deposits was 3.19% and the cost of new CDs was 3.62%. As the cost of maturing CDs in the second quarter is 4.11% and in the third quarter is 4.06%, we have the ability to drive funding costs lower throughout the year and hence, drive net interest income and net interest margin higher even in a flat rate environment.

Looking at our full year 2026 outlook, we're broadly maintaining the guidance we provided in January. However, we want to acknowledge the heightened macroeconomic uncertainty we're navigating, including volatile energy prices and other potential geopolitical developments. While we're confident in our business momentum and strategic positioning, we're taking a measured approach given the current uncertain environment.

With regard to loan growth, while our commercial pipelines remain robust and our consumer business continues to produce solid results, we recognize our full year target could prove ambitious given higher-than-expected loan payoffs and the evolving macro headwinds, which could lead to further tightening of underwriting standards. We're closely monitoring the current environment, and we'll provide updates as the year progresses.

In summary, we feel confident in the underlying momentum of our business and our ability to navigate the current macro environment while positioning the business for accelerating profitability in the second half of the year and into 2027.

With that, I'll turn it back to the operator for questions.

We will now begin the question-and-answer session. [Operator Instructions] And your first question comes from the line of Nathan Race with Piper Sandler.

I was wondering if you could just help us kind of unpack the charge-offs a bit more for this quarter. And just generally, what kind of visibility you have into charge-offs over the balance of this year? I know you guys have spent a lot of time scrubbing the SBA portfolio. But just curious within that context, how we should think about the $50 million to $53 million provisioning forecast that was laid out last quarter for this year.

Yes. I think as we think about it, it's -- I think it's still very similar to what we had talked about last quarter where we expect the bulk of it in the second half of the year. In terms of charge-offs for this quarter, we had $15 million to $16 million of charge-offs. I think where SBA -- I think our SBA came in line with what we were forecasting. Our Franchise number was a little bit higher because we took action on some other credits probably sooner rather than later. But I think we still continue to feel like first quarter is probably going to be the worst of the quarters in the second quarter. You can look at -- even though we made progress on reducing nonaccrual unguaranteed SBA balances and Franchise balances, we still have elevated nonperforming loans that we need to work through. But our special assets team is working through those.

And I think we'll probably see some resolution on many of those here in the second quarter. And I think by the time we get to the third and fourth quarters, I think our feeling is that we'll be through a lot of the kind of some of the older vintages where there's probably still some potential problems. And by the time we get to the end of the year, the credit costs are going to be at a far more moderate level.

Okay. Got it. That's really helpful. Maybe changing gears to the margin. With the Fed on hold, I think that's a bit of a headwind in terms of deposit repricing. But David, you mentioned a lot of the success you're having bringing on some lower-cost deposits from some fintech relationships. So just curious how you're kind of thinking about the margin trajectory over the next few quarters, assuming the Fed remains on pause and just trying to drive that with the NII growth expectations for this year that were laid out last quarter of, I believe, $155 million to $160 million.

We're sitting here, Nate, Ken and I are pointing fingers back and forth on it. Yes, the net interest margin, the biggest issue that we have out here even without -- and we did not put in our forecast at the beginning of the year, any rate decreases. We have not come back and modified it with any rate increases yet. But we -- from the get-go, we weren't anticipating any rate fall off this year.

But because of the CDs that are maturing and running off, as Ken said earlier, they're north of 4%. New CDs that we're adding and rolling are in the 3.6% range. So there's a gap there, but even better yet on the fintech deposits are coming in at about 3.19%, almost 100 basis points improvement. So that will continue throughout the course of the year. We have another $800 million rolling between now and year-end. So we could be up in that $290 million range by the end of the year.

Yes. I think, Nate, in terms of what we -- I mean, kind of similar to what we talked about last quarter, I think our forecasting still holds that we'll probably -- I mean, feel like a 10 to 15 basis point improvement through the -- 10 to 15 basis point improvement per quarter through the end of the year is a very, very achievable target on our end.

Okay. And then David, I believe you said to get you to the $290 million by the fourth quarter, if I heard you correctly?

Yes.

Your next question comes from the line of Brett Rabatin with StoneX Group.

I wanted to just continue to talk about guidance, and you just mentioned the $290 million guidance. I think for the outlook in January, you mentioned $275 million to $280 million by the fourth quarter. It sounds like the only tweak that you've made, if I'm hearing this right, really is you're a bit more conservative on that 15% to 17% loan growth target, just given some uncertainties. But I was a little surprised you didn't tweak down maybe the expense guide a little bit from the $111 million to $112 million and then also, it seemed like the fee income guide could have increased. Any thoughts on fee income and expense guidance and just the variables that might impact that?

Yes. I think on the expense side, Brett, I think we're -- the guidance we had out there before, I think we're good keeping it there just for conservatism. I do think if, for example, in the macro headwinds, if you will, impact originations or maybe the SBA originations are lighter in the first half of the year or whatever, we have some offsets on the expense side, certainly in incentive compensation tied to loan origination. So there are definitely some offsets there on the expense side that would take that number lower.

And then on the fee side, too, there's levers there, too. I mean, as we -- Nicole said in her comments that we expect to retain more balances going forward in SBA, given some of the higher quality deals we're doing. But as we put in our deck, look, premiums are holding in there on gain on sale. So there could be -- if the premium levels hold up near the high end of the range, I mean, there's the opportunity to sell more into the secondary market and drive higher fee income. So there's a number of different levers there that could offset perhaps any shortfall in the loan growth.

Okay. So there's leverage to both those line segments.

Yes. Absolutely.

And then I know you guys have been working really hard on the Franchise and SBA. When I think about the macro of higher oil prices, I guess the only piece of your portfolio that I start to think about would be the RV portfolio. And I know quite a few of that or a lot of that is not RVs per se. It's horse trailers and things that people use for work. But have you guys seen any migration in the RV book as you've been looking at that portfolio just to watch it as oil prices/gas has been higher?

A great question, Brett. I'll take that one. We actually just had a credit committee meeting this morning, and we're talking around the table with all of our lending lines about the impact of fuel prices. I think diesel fuel is up over $1 per gallon and certainly regular gasoline is as well. Our consumers have not been affected. We are not seeing any increase in delinquencies or any problem loans in the consumer book as a result of fuel prices. The horse trailers in particular, have always performed well even with headwinds.

Other lines of business that could be -- and in fact, originations are very solid. So even in this first quarter and the conflict has been going on for a little over a month now. So we're not seeing any depreciable decline in new originations with people spooked by the prices. So that's a positive sign. In other lines of business, equipment finance, we do some lending for fleet vehicles. We're not seeing any issues there that are related to fuel prices. We've also done some outbound contacting of our top SBA customers who are most likely based on their industry to be affected by fuel pricing. So that's not just transportation, but it's anything that would have a fuel component to it. And there -- we're hearing no issues related to fuel pricing at this point. Some have had to pass along price increases to their customers. But overall, we're not seeing any weakness in the portfolio as a result. Certainly, we all hope that the conflict gets resolved sooner than later.

Yes. That's -- I think everyone knows that. And then if I could just ask one last one just around -- you guys highlighted the $82 billion of payments processed. When I think about some of the stuff that you've been doing in fintech, I guess I look at the fee income and just think that there should be some momentum in fees aside from whatever happens to the SBA bucket. Do we start to see bigger fees related to all these things you're doing in fintech? Or is that just going to be a process over time? It just seems like you're gaining some momentum on the fintech side, but it hasn't yet showed up really in a meaningful way on the fee side.

Well, we are seeing some momentum there. And I think what's important is that we have negative net revenue churn, which means we are seeing really good retention from our existing programs, and we have been able to increase our fee structure in a way that helps us to support them and support the growth of the program. We're not bringing on new programs at a rate that we cannot sustain. So we always have a backlog of customers that we've been talking to. We're in due diligence with half a dozen programs, but we're trying to make sure that we're bringing them on in a really responsible way. And we have some solid partners that are meaningful.

So I think on a year-over-year basis, we've doubled the fees that we're seeing in our fintech partnership line of business. But it does show up in different ways across our income statement. For instance, the balances that we've been able to push off balance sheet, those are not showing up in the interest income or interest expense, but those are showing up in noninterest income. You're also seeing the fees in the noninterest income. And then we do have a couple of lending programs and those are going to show up then in interest income. Does that help?

That is helpful. Do those things show up in the other line? Or what line items did those show up in?

Yes. Brett, they really -- they show up in the other line item. Well, they show up in the other line item. They also show up in the services and fees, service charges and fees line item. But just to put some numbers around that. I mean, in the fourth quarter, we had about just, call it, a little bit over $1 million for the quarter in fee income. This -- in the first quarter of '26, we had a little over $1.5 million of fee income.

So to Nicole's point, with some of the momentum that we're getting with some of our existing partners, higher volumes, higher payments volumes, higher deposits, more deposits pushed off balance sheet. I mean if you run rate that, you're talking about a 50% growth year-over-year and you're starting to talk about real dollars.

Okay. And Ken, just to be clear, that $1.5 million, that encompasses all of your fintech operations?

Yes. That's just fees, right? That doesn't include any interest income from any of our lending partners. That's just pure fee income. Yes.

Your next question comes from the line of Emily Lee with KBW.

This is Emily stepping in for Tim Switzer. Yes. So you mentioned you're in due diligence with about half a dozen programs right now on the fintech side. Can you speak more on just those partners in the pipeline and maybe the projected timing of those launches or an idea of kind of potential earnings impact surrounding those?

Well, we are not known for being easy in the fintech space. In fact, I think we've gotten a reputation for being one of the tougher due diligence programs out there. So we certainly kick the tires and give them a good opportunity to understand what our expectations are because, in fact, we are the regulators of these programs because they are, in fact, our customers in many cases. So right now, I know we have a couple of lending programs that we are taking a look at. We also have a couple of deposit programs that are out there. We have one that is moving much closer to approval. And so I think that would be a second quarter onboarding event.

But some of them will go more slowly, especially when there is a consumer lending program involved, for instance, that's going to be probably the longest due diligence process. Something that might be a business payments program can be a bit faster. It just depends on the nature of the program and when that starts to show up. Also depends on whether or not the program is existing with another financial institution as a sponsor bank. A conversion is a different beast and usually can be quicker to have an impact on the financial statements as opposed to a brand new program that needs to ramp up itself. So it all depends is the very official answer to that, but we have some that we do expect to be bringing on in the next quarter and then the third quarter as well.

Understood. And then also just on the NIM. You mentioned 10 to 15 basis points of improvement per quarter through the end of the year as a very achievable target. That's if the Fed doesn't cut, but what would be the impact of 125 bps cut?

If they cut -- and this is -- keep in mind, we run this on a static balance sheet. So this doesn't impact -- this doesn't take into account growth. But on a static balance sheet, you're talking about probably $2.2 million to $2.3 million annually of net interest income.

Your next question comes from the line of George Sutton with Craig-Hallum.

This is Logan on for George. First one for you, Ken. I was wondering if you could just kind of talk about the loan-to-deposit ratio. I've got it kind of stepping down again this quarter, and you've talked about how it's kind of a historically low point for you guys. I wonder if you could just sort of address sort of the path for that from here, especially as we think about potentially lower loan growth this year and just sort of how you plan to manage that?

Well, I think over the course of the year, we expect the loan-to-deposit ratio to increase. We ended the year with pretty healthy cash balances. And it's kind of hard to look at any particular quarter end cash balances because sometimes they're inflated due to payments activity at the end of the month. But we do have, in our minds, excess cash that we can just take out of the cash and deploy.

So we probably see that ratio if we're at 75%, 76% this quarter, probably gradually stepping up and probably being somewhere closer to 85% to 90% in the fourth quarter. And I think that's -- we like that because you're obviously -- you're deploying cash into higher interest-earning assets, loans, but on keeping the balance sheet relatively -- keeping balance sheet growth to a minimum.

We had a couple of very large commercial loans, literally one paid at the last day of the quarter that was over $50 million and knocked it down. So that kind of messed up the ratios pretty quickly. But as we are in that commercial market now, we can have some pretty big swings. And as Ken said, we have swings on the deposit side at quarter end because of bill payment services and we also have people trying to close deals or clear them up by quarter end. So that number didn't intentionally go down. It was just a matter of math and the way things happen in that last week of the quarter.

Okay. Got it. And then maybe just a high-level one for you, David. I mean the last few quarters, you kind of mentioned that returning to that 1% return on asset level. And obviously, there's a lot of moving dynamics this year. But maybe just talk about sort of the steps that you need to take to sort of get back there and call it, the medium term?

Yes. We get back to our -- what we think our numbers are for the fourth quarter, that will set us up to be back into the 1% return for 2027. And we just continue the improvements. We've got a great base taking that number forward through our calculations, we'll be right back at 1% by the end of 2027.

Your next question comes from the line of John Rodis with Brean Capital.

Ken, the -- what drove the tax benefit this quarter? And how should we think about the tax rate going forward?

The -- again, it's -- when net income is low like it has been, we do get a significant benefit from our tax-exempt businesses, particularly our Public Finance portfolio. So we have to get to a certain level of pretax income before you start applying rates to it. I mean I think if we're in the range of I don't know, call it, maybe $3 million of pretax or less, probably that tax rate is going to be nonexistent to a credit. And then kind of once you get into maybe north of $5 million to $8 million or so, you're probably a low mid-single-digit tax rate. And then if we get into, say, a $10 million to $12 million of pretax income, you're probably looking closer to a 7% to 9% tax rate, effective tax rate that is.

It's just when income -- when pretax income is low, we just -- we get such a benefit from the not only the tax-exempt business in public finance, but we also get benefits from some LIHTC investments. And obviously, from last year, we have an NOL that we can carry forward when we make money. So as long as when pretax income is low, we're going to have a pretty -- we're going to have a decent tax credit.

Okay. It's a moving target then.

It is.

Your final question comes from the line of Nathan Race with Piper Sandler.

Just on the SBA revenue going forward, I appreciate Nicole's comments earlier around holding some production for a longer seasoning period, I think, was what she was alluding to. So I'm just trying to think about kind of the cadence of SBA revenue. I think in the past, it's been more back half loaded. But I know you guys have made a number of changes to your platform and credit infrastructure over the last handful of quarters. So I was just hoping you could kind of speak to the cadence of kind of SBA revenue within that context.

Yes. I think historically, if we go back in time a couple of years, it's probably like first quarter, you had -- it was seasonally light, although oftentimes, you may reap the benefit of a strong fourth quarter in terms of loan sales. But in terms of originations, first quarter historically has been light and it ramps up in the second, ramps in the third and then usually maybe comes back a little bit in the fourth quarter.

I think the way that we're looking at it this year and the experience we saw in the first -- certainly in the first quarter with, again, kind of changing our approach on underwriting and having our team get around that, combined with just the typical seasonality is that probably the way that we're looking at originations this year is that there's just -- there's going to be a ramp-up throughout the year. And second quarter will be a little bit higher than first and third quarter and fourth quarter will be -- I don't want to use the word significantly higher, but we do have those third and fourth quarters ramping up in terms of origination volume, much higher than we have second and first quarter.

And our pipeline is building. It's up about 1/3 from where it was at year-end. So that would suggest that we're going to be in a good position to hit that.

Okay. So it sounds like the base case is SBA revenue grows from here and the guidance from last quarter on total fee income, which I believe was $33 million to $35 million, it's going to be higher than that, correct?

Well, I think right now, we think -- keep in mind, that's total fee income. I think last quarter, we said in terms of just pure gain on sale somewhere in the $19 million to $20 million range, just that line item within the fee income. I think as we talked about, I think we still feel good about that total amount. Maybe it just shifts a little bit more towards third and fourth quarter than say, I mean, we had a pretty good first quarter without a doubt. The second -- the third and the fourth quarters are definitely stronger than the second quarter.

I will now turn the call back over to David Becker for closing remarks.

We thank you for joining us today and for all the thoughtful questions we had. We're pleased with the strong momentum that we built during the first quarter. We remain confident in our ability to execute on the priorities we've outlined for the year. We are very mindful as we have said many times about the macroeconomic uncertainty, but we think we're executing from a position of strength and we're well positioned for improving profitability throughout this year and beyond. So we appreciate your continued support. Look forward to keeping you updated on our progress next quarter.

Thank you very much.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Thank you for standing by. My name is Sylvia, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Internet Bancorp Earnings Conference Call for the Fourth Quarter and Full Year 2025. [Operator Instructions] Please note that this event is being recorded.

It is now my pleasure to turn the call over to Julia Ferrara from ICR. You may begin your conference.

Thank you, operator. Hello, everyone, and thank you for joining us to discuss First Internet Bancorp's Fourth Quarter and Full Year 2025 Financial results. The company issued its earnings press release earlier this afternoon, and it is available on the company's website at www.firstinternetbancorp.com. In addition, the company has included a slide presentation that you can refer to during the call. You can also access these slides on the website.

Joining us from the management team today are Chairman and CEO, David Becker; President and COO, Nicole Lorch; and Executive Vice President and CFO, Ken Lovik. David and Nicole will provide an overview, and Ken will discuss the financial results, and then we'll open up the call for your questions.

Before we begin, I'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of First Internet Bancorp that involves risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. The company disclaims any obligation to update any forward-looking statements made during the call.

Additionally, management may refer to non-GAAP measures, which are intended to supplement and not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures.

At this time, I'd like to turn the call over to David.

Thank you, Julia. Good afternoon, and thank you for joining us on the call today. We are pleased to close 2025 with strong fourth quarter results that demonstrate the power of our differentiated digital banking model. Our core business fundamentals remain robust with quarterly revenue up 21% over the prior year period. Our digital-first approach and disciplined expense management enabled us to navigate challenging credit issues related to 2 of our loan portfolios while capitalizing on opportunities across our diverse business lines.

Before I provide an update on credit, which I know is top of mind for the investment community, I would like to briefly touch on our 2025 key accomplishments. We delivered strong results for the year, including 30% net interest income growth year-over-year, consistent expansion of net interest margin throughout 2025 and actively managed expenses to drive improved operational efficiency.

We successfully completed the strategic sale of approximately $850 million in single-tenant lease financing loans to Blackstone, which strengthened our capital position, enhanced our rate risk profile and accelerated our progress towards achieving a 1% return on average assets. This transaction reduced our exposure to lower-yielding fixed rate assets and provided significant balance sheet flexibility.

Our Banking-as-a-Service initiatives achieved remarkable growth, generating over $1.3 billion in new deposits for 2025, more than tripling the amount from the prior year. We also processed over $165 billion in payments volume, an increase of over 225% from 2024 and maintained strong deposit relationships that enhanced our funding flexibility. These partnerships have evolved to become true strategic revenue drivers through reoccurring transaction fees, program management fees and interest income.

In our SBA business, despite industry challenges, including a government shutdown, we maintained our position as a top 10 SBA 7(a) lender with nearly $580 million in funded originations during 2025. Our enhanced underwriting standards and improved servicing capabilities strengthened our competitive position while we navigated temporary process improvements required by evolving SBA guidelines.

Additionally, we expanded and strengthened our SBA leadership team to drive long-term business growth. We promoted David Bybee to Senior Vice President, Government Guaranteed Lending to oversee all aspects of our SBA operations. We also added talent and depth to our credit underwriting and portfolio management teams.

We maintained solid capital discipline while returning $2.7 million to shareholders through dividends and share repurchases, demonstrating our commitment to balanced capital allocation. During the quarter, we executed our share buyback program by purchasing 27,998 shares at an average price of $18.64 per share, capitalizing on temporary market dislocation.

Turning to credit. I want to address the credit challenges and the proactive measures we have taken to remedy the 2 problem loan areas, primarily our small business lending and franchise finance portfolio. As such, I want to emphasize several critical points.

First, I want to reiterate our credit issues are isolated to 2 specific portfolios, SBA and franchise finance. The remainder of our lending verticals maintained solid credit quality with our overall level of nonperforming loans in line with peer institutions.

Second, our enhanced risk management processes and prudent underwriting standards are yielding positive results. In addition, we've implemented advanced analytics that provide deep portfolio intelligence and enable proactive borrower engagement.

Third, after further evaluation of the problem loans, we are guiding to a higher provision for 2026 than we initially estimated. This is designed to clean up our remaining problem portfolios and position us for improved performance going forward. We expect credit to improve gradually in the second half of the year as the problem loans come to resolution and are replaced with higher quality loans.

Fourth, we have solid capital and liquidity positions to weather any credit-related challenges. Our regulatory capital ratios remain well above minimum requirements with a total capital ratio of 12.44% and a common equity Tier 1 ratio of 8.93% as well as substantial liquidity coverage. Most importantly, we believe credit will stabilize as we progress through 2026 as problem loans are resolved and enhanced underwriting standards take effect with new loans.

Despite the isolated credit issues related to 2 portfolios, our core revenue engine remains robust with multiple growth drivers. We have strong loan and deposit pipelines across our commercial lending verticals and vast partnerships. Net interest margin continues as we benefit from higher loan yields and declining deposit costs. Our technology investments, including AI-powered origination, underwriting support and customer-facing support, driving greater efficiency while maintaining conservative credit management practices.

Looking ahead, our digital-first model positions us advantageously for continued growth. Our interest rate-neutral balance sheet structure, disciplined loan pricing and diversified revenue streams provide multiple growth vectors over the long term. We expect continued net interest margin expansion, robust fintech partnership growth, credit stabilization and the benefits of our strategic balance sheet optimization to drive improved profitability. We remain confident in our ability to deliver strong financial performance while building long-term shareholder value through disciplined execution of our strategic priorities.

I'll now turn it over to Nicole for operational highlights, including SBA, BaaS and credit.

Thank you, David. Despite the longest federal government shutdown in history, we successfully netted $8.6 million in secondary market sales for SBA loans through November and December, demonstrating the resilience of our operations and market position.

Looking ahead to 2026, we are strategically realigning our SBA production with our enhanced and more stringent underwriting guidelines. This deliberate shift prioritizes credit quality over volume, positioning us for sustainable long-term performance. As a result, we anticipate production of approximately $500 million for the year, a more measured approach that reflects our commitment to prudent risk management.

Given our focus on attracting higher credit quality borrowers, we expect to offer more competitive rates, which will naturally lead us to retain a larger portion of our production on balance sheet in 2026. As a result, we estimate gain on sale revenue in the range of $19 million to $20 million compared to $29.4 million in 2025. While this represents a decrease in fee income, it will generate a positive impact on net interest income and prove accretive to our net interest margin.

Our BaaS platform continues to demonstrate exceptional growth and diversification. As a sponsor bank, we support deposit programs, payment processing, including card, ACH and real-time payments and lending programs across our fintech partner network. Importantly, none of our partners depend on card interchange as their sole or primary revenue source, which provides stability and allows us to scale our partnership model as our balance sheet grows.

Demand for our sponsorship and program oversight capabilities remains robust. We are fielding interest from potential partners with use cases for real-time payments, which we support through both the RTP network and FedNow, where we served as a pilot institution. First Internet Bank is committed to standing at the forefront of payment innovation, but we also excel at good old ACH.

I'm pleased to note that First Internet Bank was a co-winner of the award for Payments Innovation of the Year from American Banker for our work with increase to deliver high fidelity ACH, a tech solution that brings greater reliability to ACH transactions.

Our payment processing volumes continue to reach impressive scale. We facilitated $65 billion in payments for our fintech partners in the fourth quarter, which was up over 40% from volumes processed in the third quarter. As of December 31, 2025, we maintained almost $2 billion in deposits with a significant portion strategically positioned off balance sheet, where we earn attractive spreads reported as noninterest income.

Turning to credit performance. As David mentioned, our overall loan book remains strong and continues to perform in line with industry trends. Regarding our franchise and SBA portfolios, we took decisive action throughout 2025 to address credit issues, including tightening and refining underwriting standards, implementing streamlined processes for earlier problem loan detection and improving collection processes.

Our franchise finance portfolio continues to show noticeable progress due to several strategic factors. We ceased purchasing loans in this space, allowing the portfolio to naturally decrease in size and the remaining borrowers tend to be stronger multiunit operators with greater operational experience and financial resources.

Our collection efforts are further supported by ApplePie Capital serving as an intermediary and providing valuable brand support. For our SBA loans, credit remains challenging, but with an encouraging outlook in the second half of 2026. Our SBA lending has been primarily in the area of business acquisition, which has elevated levels of transition risk as new owners take over.

Our internal analysis, which is supported by external data and analytics as well, suggests there may be more pain to come as we work through loans originated in late 2024 and early 2025 under previous guidelines.

I would like to give a special mention to our special assets team that worked diligently on the franchise finance and SBA portfolios throughout 2025. They have done an outstanding job staying on top of our workouts, offering alternatives when possible, and they have had some pleasant surprises for us on a handful of loans where recoveries in the fourth quarter and into January came in higher than expected.

We have significantly strengthened our organizational capabilities throughout 2025 to enhance our operational depth and customer reach. Beyond personnel, we have refined our credit guidelines to better identify transaction risk, and we have strengthened our processes to improve both credit quality and the borrower experience.

Most notably, we are implementing an AI-driven solution to standardize our document collection process, reduce origination times and create a more seamless experience for our clients. Our investments in portfolio predictive analytics represents a transformational advancement in our risk management capabilities. This technology enables us to identify potential issues earlier in the credit life cycle and take proactive measures to protect our portfolio quality. This comprehensive approach to credit management, operational excellence and strategic partnership development positions us exceptionally well for continued success and sustainable long-term growth.

I will now turn it over to Ken for additional insight into our fourth quarter performance and 2026 outlook.

Thanks, Nicole. We delivered solid fourth quarter results with net income of $5.3 million or $0.60 per diluted share. Our results for the quarter included a pretax loss of $400,000 on the sale of an additional $14.3 million of single-tenant lease financing loans to fulfill our commitment related to the large sale in the third quarter. Excluding the impact of the loan sale, adjusted net income was $5.6 million and adjusted earnings per share was $0.64.

Adjusted total revenue for the quarter was $42.1 million, a 21% increase over the fourth quarter of 2024. And when combined with well-managed expenses, adjusted pre-provision net revenue totaled $17.9 million, up 66% year-over-year. These results reflect strong operational execution and sustained business momentum across our core segments.

Net interest income for the fourth quarter was $30.3 million or $31.5 million on a fully taxable equivalent basis, up about 29% and 27% year-over-year, respectively. Net interest margin improved to 2.22% or 2.30% on a fully taxable equivalent basis, both up 18 basis points from the prior quarter and 55 basis points year-over-year.

The yield on average interest-earning assets for the quarter rose to 5.71% from 5.52% in the prior year period, driven primarily by a 46 basis point increase in loan yields as higher rates on new originations more than offset the impact of 3 Federal Reserve rate cuts during 2025.

We also saw a meaningful decline in funding costs during the same period with the cost of interest-bearing deposits falling to 3.68% from 4.30% in the prior year period. The rising yields on interest-earning assets in conjunction with declining cost of interest-bearing deposits demonstrate delivery on our years-long effort to reposition the balance sheet and optimize our mix of earning assets.

Adjusted noninterest income for the quarter totaled $11.8 million, down from the prior quarter due to the large volume of SBA loan sales in the third quarter and up from $11.2 million in the prior year period. As Nicole mentioned in her comments, gain on sale revenue from SBA loan sales remained solid during the quarter and was supplemented by higher net loan servicing revenue as we began servicing the portfolio we sold to Blackstone. Additionally, fee revenue from our fintech partnerships increased during the quarter, continuing a trend of quarterly growth throughout the year.

Noninterest expense for the quarter totaled $24.2 million compared to $24 million in the prior year period. The slight increase over the prior year period was due primarily to continued investment in tech and AI to enhance both front and back-office operations and costs related to working out problem loans, offset by lower incentive compensation.

Turning to credit. In the fourth quarter, we recognized a provision for credit losses of $12 million, which consisted primarily of $16 million of net charge-offs, partially offset by a net decrease in specific reserves as $3.5 million of loans charged off during the quarter had existing reserves.

Nonperforming loans increased to $58.5 million in the fourth quarter, and the ratio of nonperforming loans to total loans was 1.56% compared to 1.48% in the linked quarter. However, the increase in nonperformers consisted almost entirely of SBA guaranteed balances and fully collateralized SBA unguaranteed balances. Excluding guaranteed balances, the ratio of nonperforming loans to total loans was 1.20%.

At quarter end, the allowance for credit losses represents 1.49% of total loans. Excluding the public finance portfolio, the ACL to total loans increased to 1.67%. Additionally, the small business lending ACL to unguaranteed balances was 7.34%.

Total loans as of December 31, 2025, were $3.7 billion, an increase of $143 million or 4% compared to the linked quarter and a decrease of $424 million or 10% compared to December 31, 2024. The increase over the linked quarter reflects strong origination and funding activity in single-tenant lease financing, construction and small business, partially offset by lower public finance and franchise finance balances. The decline from the prior year period was driven by the large single-tenant lease financing loan sale, offset by strong growth in construction, commercial and industrial and small business lending.

Total deposits as of December 31, 2025, were $4.8 billion, representing decreases of $76 million or 2% and $93 million or 2% compared to September 30, 2025, and December 31, 2024, respectively. As David mentioned earlier, we experienced tremendous growth in fintech deposits throughout 2025, allowing higher cost CDs and broker deposits to mature. Furthermore, the ability to move fintech deposits off balance sheet enhanced our ability to manage the size of the balance sheet following the large loan sale in the third quarter of 2025.

Now turning to our full year 2026 outlook. We expect continued loan growth in the range of 15% to 17%, driven by strong pipelines across our commercial lending verticals as well as a lower base coming off the balance sheet repositioning trade in the third quarter.

Net interest margin expansion should continue, reaching 2.75% to 2.80% by the fourth quarter of 2026 as we benefit from ongoing deposit repricing and optimized asset mix.

We anticipate fully taxable equivalent net interest income of $155 million to $160 million for the full year. Noninterest income is projected at $33 million to $35 million, reflecting lower SBA originations as well as lower gain on sale revenue as we retain a greater amount of guaranteed balances but partially offset by continued BaaS growth and increased loan servicing revenue.

Operating expenses are projected at $111 million to $112 million, representing controlled growth that includes continued investment in tech and AI to support our revenue and risk management initiatives while maintaining operational efficiency.

With regard to the provision for credit losses, as David mentioned earlier, we are guiding to a higher provision to capture net charge-offs and additional reserves related to problem loans and estimate $50 million to $53 million for the full year, which should moderate as we progress through 2026 and problem loans are resolved.

We expect provision for the first half of the year to remain elevated with first quarter provision expected in the range of $17 million to $19 million and second quarter provision in the range of $14 million to $16 million. We expect the provision to improve in the second half of the year. This guidance translates to earnings per share of $2.35 to $2.45 with a midpoint of approximately $2.40 per share.

2025 was a year of disciplined execution and strategic investments in people, process and technology, setting us up for much stronger financial performance in 2026, particularly in the second half of the year. As shareholders ourselves, we remain laser-focused on building long-term shareholder value.

With that, I'll turn it back to the operator for questions.

[Operator Instructions] Your first question comes from Brett Rabatin from Hovde Group.

I might need a little bit of help walking through some of the variables. The two key ones might be just on SBA, how much of that will you have on the balance sheet, do you think maybe an average or how you see that progressing throughout the year? And at what yield that would positively impact that 6.39% loan yield in the fourth quarter?

And then secondly, on the funding side, I know you've got about $2.4 billion of CDs that cost 4.19% in the fourth quarter. I know we've talked in the past about what's repricing. I might need an update on the repricing opportunities on the first half of the year, particularly on the CD side.

Sorry, Brett, we didn't catch the very first part of your comments. It sounds like you're about NII and net interest margin.

Yes, correct. Sorry, it's -- might have a bad connection here. But yes, I'm just trying to, Ken, trying to get a better understanding of the NII guidance. And just wanted to understand on the SBA side, how much of that goes on the balance sheet and at what yield throughout the year? And then just trying to make sure I understand the repricing opportunities on the funding side of the equation.

Yes. I'll start with the funding side of the equation first because a lot of that is, to be honest with you, somewhat mechanical. We do expect to see continued decrease in deposit costs throughout the year. Now we'll probably see a larger -- on a quarterly basis, a larger impact in the first quarter because we will reap the benefits of 2 rate cuts in the fourth quarter that will kind of play their way through and we'll have a full run rate on Fed funds types -- Fed funds index deposits, other money markets that go down with a decent beta on rates. And obviously, we bring down our CD rates as well.

And just as a reminder, we're not forecasting any rate cuts in our forecast for next year. But we do expect to see deposit costs go down, again, like I said, more in -- the biggest quarterly basis will be in the first quarter. Just kind of as an indication of that, and I'll give you some ideas on some CD repricing, but our fintech deposits as far as like repricing. So for example, on December 31, the spot rate on our on-balance sheet fintech deposits was 3.52%. Today, the spot rate is 3.35%. So there's a nice drop there.

In terms of just looking at CD maturities, we got about $850 million of CDs maturing over the next 6 months with a weighted average cost of 4.15%. The current weighted average cost of CDs coming in the door today is 3.65%. So that's a pickup of 50 basis points there. And even if we push that out to deposit CDs that mature over the next 12 months, that's almost $1.4 billion and the weighted average cost on that is 4.11%. So again, almost a 50 basis point pickup on those. So just by virtue of CDs rolling off the balance sheet and either being replaced by fintech or being renewed or new CD production, there's a nice pickup there on the CD cost.

On the lending side, it's kind of continuing to do what we have been doing here for the past year. I mean, new loan production, new loan rates, the new origination rates in the fourth quarter were about 6.85%, getting close to 7%. We're just -- which is above the portfolio yield as a whole. So when we think about what we -- where we expect to see growth over the coming year, we do expect to see our kind of our combination of construction and investor commercial real estate continue to grow. We expect growth in C&I lending as well.

We've had success in some of these kind of, we'll call them, emerging verticals that we've started to get into with wealth advisory lending. Equipment finance is doing well. And these are all yields kind of in the high 6s to low 7s on that. And then again, with SBA, with our intention to retain a greater percentage of our guaranteed originations, we expect that we'll be holding an additional almost $94 million of those on the balance sheet kind of priced at, call it, prime plus 1.5%.

So yes, all of the lending verticals that were -- all the new yields coming on the balance sheet are just obviously higher than what the current yield is in the portfolio today. So it's really just kind of a continuation of what we've been doing over the last 12 to 18 months.

Okay. And I wanted to -- there's a lot of questions embedded in the credit stuff. But wanted to see if you had an updated number for criticized loans. I think I believe they were $139 million last quarter. Just wanted to see what those did, particularly in the SBA bucket and the franchise finance bucket. And then it sounds like the issue is you're kind of expecting some more business acquisition-oriented SBA credits to maybe migrate and just wanted to see if there was any commonality, timing business or anything else that you seem to be hitting on that is impacting that piece of the portfolio.

Yes. The total criticized loans probably increased about, call it, $16 million or so. So that was up, call it, 10%, 11%. Yes, I would say it's probably a mix predominantly SBA in there. There's probably some in franchise. And obviously, keep in mind that these are loans that -- these aren't necessarily substandard loans. These are loans that just may have been downgraded from a 6 to a 7 that are still performing. We continue -- we're actively monitoring loans in that bucket and working with borrowers on that. Kind of on -- we did see some in the franchise -- excuse me, well in both in franchise and in SBA roll off as we charged off some loans as well. But yes, we saw a little bit of an uptick. Most of it, though, is in the special mention category, not substandard.

You asked a question if we are seeing some commonality into issues about the only thing we've got, Brett, is on the SBA portfolio in that 12- to 18-month window is kind of where if they're going to run into a problem, they run into it. It's kind of getting through that first year of business, year-end closeout and stuff that. So we got very aggressive during the fourth quarter, calling people. I think we reached out Nicole.

400 borrowers.

We talked to over 400 borrowers that are currently okay and just did a touch base to see, hey, how is the year-end shaping up for you, anything we can do, trying to get a little bit ahead of the game. But as we've said time and time again, there is no given vertical, no given business type that's getting into trouble. But if there's any commonality to them, they seem to hit in that 12- to 18-month window is when they kind of hit the wall or start to go south.

So we're trying to get ahead of that and stay on a proactive basis with them before they get to that window. So in some cases, it's just a matter of a shortfall of some cash, but they get pretty frustrated and they want to get out. So if we can help them make a payroll or something to keep things afloat, we're very much on a positive play with them at the current time.

Your second question comes from Nathan Race from Piper Sandler.

I was curious if there are any interest reversals that impacted the margin in the fourth quarter. And just given the credit cost outlook for this year, which is really helpful. Just curious if that contemplates any additional interest reversals just as you continue to work through the SBA credit quality factors.

Yes. We do model in interest reversals into our assumptions on net interest income as part of our forecast. With some of the migrate -- some of the net charge-offs, we probably had, I don't know, maybe $300,000 to $400,000 of probably interest reversals there, which is, I don't call that 3 to 5 basis points or so, probably consistent with what we've seen in prior quarters.

Okay. So that kind of explains the NII margin shortfall relative to the guidance from last quarter.

Yes, that's a little bit of it. And some of it, too, if we probably -- following the large single-tenant transaction, we're able to move deposits off the balance sheet. But sometimes the fintech deposits can be a little bit volatile. So we probably carried higher cash balances -- average cash balances throughout the quarter that certainly probably impacted the margin a few basis points as well.

Understood. That's helpful. And then, Ken or Nicole or David, I'm trying to understand kind of what's the embedded net charge-off expectations relative to the provision guide for this year of 3 -- I'm sorry, $50 million to $53 million. I mean, I understand the provision guidance and -- but I'm also trying to understand how much more you need to provide relative to charge-offs, just given that you're expecting to grow loans 15% to 17% this year.

Yes. No, there's -- yes, there's -- I would say, of that, probably half or so are going to be assumptions on charge-offs and specific reserves, probably half charge-offs -- half charge-offs and some additional specific reserves above that. I mean we kind of do -- as we -- Nicole talked about in her comments, right, and David, we have a number of different methodologies we use to kind of try to target what we think potential losses may be from a forecasting perspective. And I think we -- our bias on this quarter and looking forward into '26 was to -- let's go with the highest -- the higher estimate of the different methodologies we look at.

But yes, I think that's to the point that we talk about in terms of the provision, like we expect to hit the bulk of that will be reflected in the first and the second quarter. And our expectations are as we sit here today is that as we get into the third and the fourth quarter, the provisions will move more in line kind of with what the -- perhaps even a little bit lower near the end of the year, but in line with kind of like where the estimates are today.

To add a little color to what Ken was talking about with that Nate, the different models that we've run, I mean we have data from Lumos on our SBA portfolio as well as Redwood data that gives us some predictive analytics around what our portfolio might do.

We've also done a lot of vintage analysis internally because we continue to refine our credit guidelines as we have been growing our portfolios, we made significant changes to our guidelines in the second half of this year. So I would imagine that we're through the 2021, 2022 and even the 2023 vintages, I think, in terms of feeling the most pain, we are currently working through 2024 loans and likely we will even have elevated levels of charge-offs compared to what we might like to see on the 2025 vintage that were underwritten under the previous guidelines. But then going forward, and that's the 12 to 18 months that David referenced, we think we're going to be in a much better place once we get through the earlier vintages and we're able to work with credits that are underwritten to current guidelines.

Okay. Understood. That's really helpful. And I apologize for trying to oversimplify it, but just in terms of net charge-off expectations for this year and where you see the reserve ending up relative to the loan growth target, just any thoughts in terms of a range there?

Well, in terms of like -- I mean, we expect, obviously, in the -- we expect the allowance to continue to grow throughout the year. Again, some of it is going to be driven by specific reserves. Some of it's going to be driven by loan growth. But we got -- right now, we could -- the provision -- or excuse me, the ACL could be up by the fourth quarter, be up anywhere from, say, I don't know, call it, somewhere between $20 million and $30 million. And I know that's a wide range, but sometimes it's -- you don't know exactly whether something is going to be a charge-off or you're going to take a specific reserve on a credit. But that would be kind of the range of growth I'd forecast us to experience in -- by year-end in the ACL balance.

Okay. Understood. Apologies for the endless question there. I appreciate that. And then maybe just lastly on the tax rate within your expectations for $2.35 to $2.45 in EPS this year.

Yes. I think because of the way that we've talked about the provision and if you work through it and probably one thing that we didn't talk about in the second quarter as we kind of shift to holding more SBA loans in the second quarter, that really will kind of go into effect in earnest in the second quarter where we'll probably see a decline in gain on sale revenue there.

I mean the first 2 quarters of the year is where earnings are really depressed. So if you think about those 2 quarters, we have into our models now a tax rate of somewhere, call it, 7% to 8.5% in the first and second quarter. And then as earnings improve throughout the year, we have that kind of ramping up to like kind of a 10% to 12% in the third and fourth quarter.

Your next question comes from George Sutton from Craig-Hallum.

Just want to walk back to last quarter, and we had talked about really pulling some of the challenges forward in terms of loan issues. You did the pro audit. You had implemented the Lumos technology. And I'm not really clear what -- so I would have anticipated a much cleaner look coming out of this quarter. What changed in this quarter? What were the dynamics that you saw that might have been different than you expected?

Well, I can take a quantitative look at or a qualitative look at that for you, George. In terms of SBA, I think we have been looking at kind of what was right in front of us and the problems that we knew of at the time. And as we have been spending more time with the Lumos data and spending more time with our vintage analysis, we've gotten a clearer picture, not just of what's right in front of us, but also what's out on the horizon.

I kind of think of it like a bathtub, and we knew how much water was in the tub and there's a drain, but we also have water flowing in because we continue to originate loans. And so we've had a better capability to measure both the drain as well as the inflows. So that gives us a better picture of what we're dealing with. And I think we want to create a really realistic view of things for you. So I think we're doing a better job of looking at what is to come rather than just what's right in front of us.

Understand. On the BaaS side, so you saw a pretty material increase in payments quarter-over-quarter. Where are we seeing that in the income statement dynamics?

That's going to be in other noninterest income.

Okay. And other noninterest income fell quarter-over-quarter. So I just wasn't clear.

Well, that's what -- that's -- if you have our new slide deck, revised.

It did not. It grew 30%, sorry, quarter-over-quarter. So that's where we're seeing that impact. And then the fintech other income is the dollars bringing in for deposits that you've pushed off to third parties. Is that correct?

Yes. Some of that's in there. I think if you -- in our revised slide deck, we tried to kind of break out the fintech a little bit more clearly because fintech hits a couple of different line items, right? There's program, there's transaction fees. Those are going to be in other noninterest in the other line item on the GAAP income statement. There is the gain on sale we have on the embedded finance loans we originate for Jarris. So that's in the gain on sale line item. And then there is kind of a little bump, but it's growing the fee income we make on the deposits we push off the balance sheet.

So if you look at Page 16 of our new slide deck, which has kind of -- we've kind of simplified or kind of slice the noninterest income a different way, you'll see a bar in there for fintech. So you'll see almost $900,000. Okay. You got that. So we're going to provide this to give the analysts more color on where the fee income -- what the fee income is coming from our fintech efforts.

Great. Last question for David on just M&A in general as we're starting to see more bank M&A. You're an interesting duck out there in that you're an online platform trading at a pretty significant discount to tangible book. What is your thought process if approached?

Well, being honest, I can say we have been approached 3 or 4 times here over the last half of last year. We entertain all inquiries. We speak and talk. We've had a couple of international organizations that are winning a foothold here in the United States that are interested in us. We found some folks that have some fintech issues in their world in BSA, AML that need to get cleaned up and operational, and they love what we're doing.

So we're chatting with a lot of people, George. It's probably the most activity. We've seen more activity in the last 6 months than we have in the last 5 years put together. So we'll entertain and talk to anybody. We've not got anything remotely close at this point, but we're talking on both sides, looking at opportunities from our side and some specialty lending programs and services as well as institutions looking at us.

Your next question comes from Emily Lee from KBW.

This is Emily stepping in for Tim Switzer. So going back to just the fintech and BaaS pipeline, I was wondering what the impact to earnings has been so far? And how much of deposit growth is driven by the current customers versus new onboarding on the fintech platform?

On the deposit side, the vast majority is driven by fintechs that we've been working with now for a few years, right, ramp, that's the biggest piece. That's the biggest source of deposits for us. We have 2 programs for them, a business savings and a bill pay product, which is really more of a payments engine. And then we have deposits with our platform partner, increase with their program. And we've been doing these deposits, providing deposit services for both of these for a couple of years now, right?

But we have seen during 2025, we did see what I would call explosive growth in them, right? When they rolled out, they rolled out as pilots and there was some modest growth there, but we've seen quite a bit of growth over the past 12 months. predominantly in the Ramp program and to a lesser extent, in increase. And then really with all of our fintech partners, we do have varying amounts of deposits, some ranging from $80 million, $90 million down to $2 million or $3 million. But the bulk of it are the -- from Ramp and from increase.

We have been -- Emily, we've been deliberately selective in bringing aboard new programs over the last couple of years, and we've had terrific growth from our existing programs. So we've been able to grow the program and even add new programs with existing partners which has been a great way to extend existing relationships. So it hasn't necessarily been necessary for us to go out and attract new relationships. That said, we're getting calls all the time, and we have a great pipeline of new opportunities. But we are looking for programs that we think offer something special.

We're really excited to bring Pool Money live in the next couple of days. They've been growing their wait list. It offers a chance to offer a group deposit account. And so we're excited to work with Pool. We think that they will be a good program for us to work alongside. So we will continue to add new opportunities, but it hasn't been something that we've necessarily had to be adding dozens of new programs because our existing partners have been so successful.

Yes. And to come back to I'm sorry, I was going to just answer your revenue question. So we have -- if you look at the chart on the -- that we have in the deck on the fintech revenue, you'll see that on a quarterly basis throughout the year, it's gone up quite a bit. But when you add in interest income that we make from lending efforts with our partnership with Jarris, we had about $6.7 million of gross revenue from that, that was up more than double over last year. So the fintech effort is producing results in terms of increased revenue year-over-year, both between noninterest income and the interest income line items.

We have a follow-up question from Nathan Race from Piper Sandler.

Just going back to the balance sheet growth expectations, particularly I appreciate the 5% to 17% loan growth guidance. Is the expectation that deposit growth is largely going to follow and fund that? Or I'm just trying to think about some of the dynamics to fund that pretty strong loan growth outlook.

Yes. Well, some -- a combination, right? So we're modeling right now, we'll call it somewhere between 8% and 10% loan -- excuse me, deposit growth there. Obviously, we're -- I wouldn't say we ended the year with a huge amount of excess cash, but there were cash balances that we were higher than we'd like to be carrying. So some of it is just deploying cash on the balance sheet. And then some of it is just, I'll call it, like securities cash flows funding that as well. So between the 3 of those, it's just kind of going from different parts of the asset side into the loan side.

Part of the play, Nate, our loan-to-deposit ratio is probably at an all-time low for us in our history. So as Ken said, we've got a lot of flexibility to move some stuff around there. And what's off balance sheet is primarily the BaaS fintech deposits at a cost to us of about 350 basis points, and we're putting it back out the door, particularly we pick up some of the SBA loans, about 20% of our new originations that are prime plus 1.5, we're going to fund that at max with those b deposits if we run out of cash on the balance sheet. We just pull that back in. So we've got a great spread in there, probably one of the best we've had in the history of the bank.

So from a deposit cost as well as loan origination opportunities, we're kind of all-time low on the deposits and all-time high on loan origination. So we got an awful, awful lot of flexibility built in over the next 12 months.

And I would be remiss if I didn't remind everyone that we have an award-winning small business checking account. We won the Best in Biz award this last quarter. And we're improving our win rate as we're going out and talking to SBA borrowers about the opportunity to grow the full relationship with First Internet Bank. So I want to thank our teams for the efforts that they've put in there to work collaboratively, and we continue to add features to that product, including Zelle for Business so they can make business payment kind of business-to-business or even business-to-consumer payments. So it's been exciting to watch that program grow.

Yes. I noticed that. Congratulations on that well deserved. And then, Ken, just any thoughts on the starting point for the margin in the first quarter? I appreciate the guide getting up to 2.75% to 2.80% by the end of this year, but just any thoughts on the first quarter?

Yes. The way that I think about the margin throughout the year is it's probably call it, 10 to 15 basis points of expansion per quarter with probably a little bit more in the first quarter pursuant to my comments about the kind of getting a full quarter's run rate of 2 Fed rate cuts in there.

Okay. Got you. And just as I'm going through that, it appears that you guys would be unprofitable based on the guidance in the first quarter. Is that accurate?

No. No.

Okay. I'll have to follow up offline with you, Ken, if that's all right.

No. I mean, in the first quarter, we still expect to have a fair -- a decent level of noninterest income because we do have -- we still have a pretty healthy balance of loans held for sale on the balance sheet. So we still have a lot of SBA loans to sell before we kind of start retaining more balances. That's probably going to be more -- I think I said earlier, more of a second quarter impact. So I think the noninterest income line item for the first quarter should be kind of in line where we've kind of been historically in the first quarter in the past.

Or a government shutdown.

I was just going to bring up right. I forgot about that.

There are no further questions at this time. I will now turn the call over to David Becker for closing remarks.

Thank you much, guys. We appreciate all your time this evening and the great questions. I hope you -- if you have any feedback, we obviously changed up the deck quite significantly, kind of did a refresh on that and trying to give you a little more detail and insight as to where we're going and what we're doing please reach out to Ken, Nicole or myself or all of us, and we're happy to go through that with you. And we do appreciate the adjustment on the time frame that made it a much easier pulled together for us with all the year-end issues coming around, and we'll continue this going forward.

Hopefully, we will see some of you next week at either Bank Directors Conference and some of our investors at the Janney conference, which follows on. So thank you very much for your time, and we're kicking off, I think, a great 2026. We appreciate it. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

Good day, everyone, and welcome to the First Internet Bancorp Earnings Conference Call for the Third Quarter of 2025. [Operator Instructions] And please note that today's event is being recorded.

I would now like to turn the conference over to Ben Brodkowitz from Financial Profiles, Inc. Ben, please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining us to discuss First Internet Bancorp's Third Quarter 2025 Financial Results. The company issued its earnings press release yesterday afternoon, and it is available on the company's website at www.firstinternetbancorp.com. In addition, the company has included a slide presentation that you can refer to during the call. You can also access these slides on the website.

Joining us from the management team today are Chairman and CEO, David Becker; President and COO, Nicole Lorch; and Executive Vice President and CFO, Ken Lovik. David and Nicole will provide an overview, and Ken will discuss the financial results. Then we'll open up the call for your questions.

Before we begin, I'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of First Internet Bancorp that involve risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. The company disclaims any obligation to update any forward-looking statements made during the call.

Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures.

At this time, I'd like to turn the call over to David.

Thank you, Ben. Good afternoon, and thank you for joining us on the call today. I want to start by highlighting the continued strength of our core business fundamentals and the key strategic execution. Our revenue engine remains robust. We delivered our eighth consecutive quarter of net interest income growth with net interest margin expansion continuing as planned. Additionally, our SBA and BaaS businesses contributed meaningful growth to noninterest income.

In the third quarter, we maintained our top line growth momentum as adjusted total revenues reached $43.5 million, an increase of 30% over the second quarter. Revenue growth was driven by a significant increase in the gain on sale of SBA guaranteed loan balances.

Net interest income was also up, marking the eighth consecutive quarter of growth. Net interest income increased over 8% compared to the linked quarter and was up 40% compared to the third quarter of 2024, driven by higher earning asset yields and lower deposit costs.

Accordingly, net interest margin on a fully tax equivalent basis increased 8 basis points from the second quarter to 2.12%. Further, our prudent operating expense management and strong top line growth drove significant operating leverage for the quarter.

During the quarter, we executed certain strategic actions that had a near-term negative impact on earnings but strengthened our financial position and set the stage for our future growth.

First, we successfully completed the sale of $837 million of STL loans. This had several key benefits that advance our strategic priorities. The transaction enhances our interest rate risk profile, strengthens our capital ratios and expedites the optimization of our interest-earning asset base. These improvements will significantly enhance net interest margin and accelerate our progress towards achieving our near-term goal of a 1% return on average assets.

During the quarter, we also took decisive and aggressive action to address credit issues in the small business lending and franchise finance portfolios. We recognized a $34.8 million provision for credit losses, which included $21 million of net charge-offs, additional specific reserves and a significant increase to the allowance for credit losses related to the small business lending. These actions reflect our intention to expedite the improvement of our portfolio's credit quality.

As a result of these actions, total delinquencies were 35 basis points, as of September 30th, down from 62 basis points in the second quarter and 77 basis points in the first quarter. From the standpoint that delinquencies are the best indicator of potential future credit losses, this puts the health of our portfolio right in line with our peers.

Importantly, our credit issues are isolated to small business lending and franchise finance portfolios. Credit quality across the remainder of our lending vertical is sterling, reflecting the strength and stability of our broader portfolio.

Turning to lending activity for a minute. Our commercial lending teams continued to deliver a strong level of originations throughout the quarter. Excluding the impact of the loan sale, commercial loan balances were up $115 million or 3.2% and total loan balances were up $105 million or 2.4%.

Heading into the fourth quarter, our loan pipelines remain strong, as our teams continue to see excellent opportunities, especially in our commercial real estate, single-tenant lease financing and commercial and industrial lines of business.

Looking ahead, the fundamentals that drive our business, a differentiated model, experienced and dedicated teams, diversified revenue streams, solid capital position and disciplined risk management position us well to continue delivering sustainable growth and enhanced long-term shareholder value.

Now I'll turn it over to Nicole to talk about small business lending and BaaS.

Thank you, David. Gain on sale of SBA loans rebounded strongly in the third quarter following our process improvements, generating $10.6 million in gain on sale revenue. We delivered another solid quarter for new loan originations and ended the quarter with $104 million in held-for-sale loans that we look to sell into the secondary market when the federal government reopens and loan sales resume.

Anticipating the government shutdown, we proactively secured SBA authorizations for loans in our pipeline prior to September 30th, enabling us to continue to meet our borrowers' desired transaction time lines without disruption. Our pipeline remains robust at $260 million, positioning us well for gain on sale in future periods and for interest income on retained balances.

We continue our drive for process improvement throughout the SBA initiative. This quarter, we made strategic investments in technology platforms, including AI technology to our document collection and verification steps to create a streamlined experience for our borrowers, eliminate manual tasks for our employees and to provide our credit teams better insights into new loan opportunities.

We also introduced loan level predictive analytics to bolster our portfolio management processes and problem loan identification practices. Additionally, the learnings from our analytics engine enabled us to further refine our credit standards for better credit outcomes in future periods.

Our commitment to innovation and excellence extends to the continued success of our fintech partnerships, which is commonly referred to as Banking as a Service or Simply BaaS. Through strong relationships forged with quality programs, sustained growth in deposit balances has provided us robust balance sheet liquidity as well as tremendous balance sheet flexibility.

In the third quarter, we strategically moved over $700 million of fintech deposits off balance sheet to optimize our balance sheet size following the loan sale. We have continued to move additional deposits off the balance sheet here in the fourth quarter, but retain the flexibility to bring them back to fund growth opportunities or to meet liquidity needs as market conditions warrant.

Total revenue from our fintech initiatives, consisting primarily of interest income and program and transaction fees was up 14% compared to the second quarter and up 130% from the third quarter of 2024. These results highlight the strong performance across our diverse business lines.

I will now turn it over to Ken for additional insight into our third quarter performance and our fourth quarter outlook.

Great. Thank you, Nicole. As a result of the strategic actions taken during the quarter, we reported a net loss of $41.6 million or $0.0476 per diluted share. Excluding the pretax loss on the loan sale of $37.8 million, adjusted net loss for the quarter was $12.5 million or $1.43 per diluted share. However, with the strong revenue growth and corresponding positive operating leverage mentioned earlier, adjusted pretax pre-provision income totaled $18.1 million, an increase of over 50% from the second quarter and almost 65% from the third quarter of 2024.

Now turning to the primary drivers of net interest income and net interest expense during the quarter. Net interest income for the quarter -- for the third quarter was $30.4 million or $31.5 million on a fully taxable equivalent basis, both up about 8% from the second quarter.

Net interest margin improved to 2.04% or 2.12% on a fully taxable equivalent basis, both up 8 basis points. The yield on average interest-earning assets rose to 5.68% from 5.65%, driven primarily by an 11 basis point increase in loan yields, as rates on new originations were 7.5% during the quarter.

Looking forward, while the Federal Reserve lowered the Fed funds rate in September, we expect to see continued expansion in the portfolio yield, as new origination yields should remain above the current portfolio yield of 6.18%. Additionally, the sale of lower coupon single-tenant lease financing loans is expected to have a meaningful impact on the portfolio yield in future periods.

Turning to our funding costs. The cost of interest-bearing liabilities declined to 3.90% from 3.96%, driven mainly by a 5 basis point decrease in interest-bearing deposit costs and a 7 basis point decrease in the cost of other borrowings, as we saw the benefit of paying down a significant amount of higher cost short-term Federal Home Loan Bank advances near the end of the second quarter.

Deposit costs -- deposit costs declined as we continue to benefit from CD repricing and reduced broker deposit balances. Furthermore, we began moving some of our higher-cost fintech deposits off balance sheet in the quarter, which had a positive impact on deposit costs and this activity ramped up near quarter end following the loan sale.

As noted on Slide 10 of the presentation, we continue to see favorable trends in CD pricing across the curve. As higher cost CDs mature, we expect them to be replaced by lower-cost fintech deposits or new CDs at more attractive rates or simply paid down with excess liquidity to assist in shrinking the balance sheet further.

This shift in downward pricing, complemented by our ability to move deposits off balance sheet positions us extremely well to capitalize on further declines in deposit costs in the fourth quarter and into 2026.

And when combined with higher loan origination yields, these dynamics support sustained growth in both net interest income and net interest margin even in the absence of further rate cuts from the Federal Reserve.

At quarter end, $1.3 billion or 27% of our deposits were indexed to the Fed funds rate. So should we see additional interest rate cuts, expansion of both net interest income and net interest margin would be further enhanced.

Now I'm going to take a few minutes to speak to asset quality, as there were a number of moving parts during the quarter, some of which are summarized on Slide 13 in the presentation.

As David mentioned in his comments, we recognized a provision for credit losses of $34.8 million in the third quarter, which consisted primarily of $21 million of net charge-offs as well as additional specific reserves and a significant increase to the CECL reserve related to small business lending.

To provide a little bit more detail on the net interest charge-offs in the quarter, $15.2 million were related to the small business lending portfolio as we took an aggressive approach to cleaning up problem loans that evolved over the quarter.

Following these charge-offs, delinquencies in the small business lending portfolio declined over 50% compared to the prior quarter. Additionally, $5.3 million of net charge-offs were related to the franchise finance portfolio. These charge-offs had $3.5 million of existing reserves in place that were removed.

Nonperforming loans totaled $53.3 million at the end of the third quarter, up $9.7 million from the linked quarter. The increase in nonperforming loans was primarily driven by moving 9 franchise finance loans with book balances of $14.2 million to nonaccrual with related specific reserves of $5.8 million.

Delinquencies in our franchise finance portfolio decreased almost 80% from the second quarter and the pace of new delinquencies has slowed meaningfully, signaling improved borrower performance.

A portion of the increase in nonperforming loans, about $1.8 million related to small business lending and represented the remaining balance based on estimated collateral values associated with the loans.

At quarter end, the ratio of nonperforming loans to total loans was 1.47%, up from 1% in the linked quarter. The increase was driven not only by the increase in nonperforming loans, but also the decline in loan balances following the loan sale.

The allowance for credit losses increased to $59.9 million in the third quarter, up $13.4 million or almost 30% from the second quarter. The increase was primarily driven by a significant increase in the ACL, as a result of updated inputs to the CECL model given recent industry trends in SBA loans, which show SBA loan default rates across the industry are approximately 2.3x higher in 2025 than in 2022. As a result, we more than doubled the small business lending ACL.

Following this activity, the ACL now represents 1.65% of total loans, up from 1.07% in the second quarter. If you exclude the public finance portfolio, the ACL to total loans increases to 1.89%.

As shown in one of the slides -- in one of the graphs on Slide 13, to emphasize the point David made in his comments, following the credit actions taken during the quarter, total delinquencies 30 days or more past due, excluding nonperforming loans, declined to 35 basis points at quarter end and are at their lowest point in a year.

I will briefly touch on our capital position prior to moving on to our outlook for the fourth quarter. As announced in our press release and associated 8-K in September, we closed on the sale of $837 million of single-tenant lease financing loans with a net loss of $37.8 million at the end of the quarter.

While the loss from the loan sale reduced shareholders' equity and regulatory capital, the reduction in risk-weighted assets was even more pronounced, leading to growth in regulatory capital ratios from the linked quarter.

Related to the Tier 1 leverage ratio, we expect this ratio to increase significantly in the fourth quarter of 2025 as the average assets calculation resets lower with a full quarter effect of a smaller balance sheet. Furthermore, we were able to mitigate the impact of the loan sale on the tangible equity to tangible assets ratio by moving a significant portion of fintech deposits off balance sheet during the quarter.

Now turning to the remainder of 2025, I would like to provide some commentary on our outlook for the fourth quarter of 2025. Note that these estimates assume a flat rate environment, consistent with prior quarters, we are not going to attempt to predict the timing and magnitude of Fed rate cuts. We remain excited about our strategies to drive net interest income and net interest margin growth, as loan yields continue to increase and deposit costs decline.

During the fourth quarter, we expect loan balances to increase at an unannualized rate in the range of 4% to 6%. While this may seem like a high number, we expect origination levels to remain consistent with prior quarters, while the starting point is lower following the sale of the single-tenant lease financing loans.

In addition to the continued benefit of higher loan yields and lower funding costs, we also expect a lift in the net interest margin resulting from the loan sale as the loan portfolio yield is further enhanced.

For the fourth quarter, we expect the net interest margin on a fully taxable equivalent basis to increase to the range of 2.4% to 2.5%. In dollar terms, we expect fully taxable equivalent net interest income to come in the range of $32.75 million to $33.5 million for the quarter.

With respect to noninterest income, we have about $104 million in loans currently held for sale plus additional loans that have closed thus far in the quarter. However, we do expect loan sale volume to be down from the third quarter. As a result, we expect noninterest income to come in the range of $10.5 million to $11.5 million for the quarter.

The one caveat to this assumption is how long the United States government shutdown lasts. As a government program, sales of SBA loans into the secondary market have been halted during the shutdown. Assuming the shutdown ends sometime soon, we should be able to complete the loan sales during the quarter. However, if the shutdown continues for an extended amount of time, then the ability to execute the sale of all of these loans would be at risk.

On the expense side, we continue to manage costs well and expect them to come in the range of $26 million to $27 million for the quarter.

Moving to an update for our expectations for 2026. With regard to fully taxable equivalent net interest income and the provision for credit losses, we feel comfortable with where the analyst estimates currently are at.

Moving to our outlook for noninterest income to Nicole's comments regarding heightened credit standards related to SBA lending, we expect origination volumes to decline from 2025 and have modeled noninterest income to be in the range of $41.5 million to $44.5 million. The lower SBA origination volume will have a corresponding impact on our forecast of noninterest expense for the year, which we now estimate to be in the range of $106 million to $109 million.

With that, I will turn the call back to the operator so we can answer your questions.

[Operator Instructions] Your first question comes from the line of Tim Switzer from KBW.

So I guess, the first one I had is on the credit outlook. And I understand it's tough to maybe put some numbers behind it or like a time line. But is there any way for us to get a sense of -- I'm sure this is probably peak charge-offs, but when do we see peak delinquencies, peak nonperformers and have confidence that those start to move down? And what is like embedded within the reserve in terms of credit losses? Like what's the credit content of the portfolio as you guys see it today?

I'll handle the delinquency side. As we discussed, those numbers keep coming down. Like at the current time on the franchise lending, we only have 4 delinquent accounts. It's at 35 basis points compared to 2 quarters ago when it was 77 basis points. So the leading indicators in our mind, are going all in the right direction and getting more and more stable.

Obviously, there's a lot of economic activity going on in D.C. and around the world that can have impact on companies. So as you see today, it's a tough one. But as we're looking at it and working -- and it's right now impacting just 2 of the portfolios that we have, SBA and franchise, but it's all headed in the right direction currently from where we're at.

I'll let Ken speak to how we've broken out. There's specific reserves, there's reserve reserves. There's some stuff that's in nonperforming that we're waiting on resolution of sale of assets, et cetera, could get some recovery back out of it. But he can give you a little more detail on how that lays out.

Yes. Maybe we'll talk about nonperforming assets first, right? So the biggest -- the increase in nonperforming loans this quarter was primarily driven by certain franchise finance loans that we took action on during the quarter. These were either delinquent loans or loans with identified issues that we moved to nonaccrual and we put specific reserves on.

I'll go to David's comment about delinquencies here and with regard to franchise finance, the delinquency number is now down significantly, right? I think I believe we had 4 loans that were delinquent at quarter end. And I guess, as a leading indicator there, I think we feel like in terms of the franchise portfolio, we've kind of seen the worst of the worst. Yes, there -- we do have existing nonperforming loans in there where we might have to adjust an existing specific reserve or there may be a loan that pops up.

But I think we feel like we've kind of been through what I'd call maybe the last big bucket of problem loans there. And the credit outlook there should be -- should look good going forward. And quite frankly, those are -- if you break down our nonperforming loan bucket, the franchise loans are by far the biggest -- the largest single amount in there.

So I think in terms of NPAs and NPA increases going forward, there might be some more additions with regards to SBA and the residual balances of what we don't charge off. But I think the large increases going -- I think we've kind of minimized the significant increases going forward. And I think we remain optimistic that we're getting close to being peak NPA level.

And then to kind of address your question on the reserves and stuff. As we mentioned in the commentary, we made some significant adjustments to the ACL related to SBA. We essentially doubled it. We increased that number to about $27.5 million. And I think we kind of went to the high end on some of the assumptions in our CECL model there.

And I think, obviously, a CECL model is a life of loan loss expectation, which is what our model is forecasting. So I think that's kind of a number that we feel comfortable with as we sit here today.

So does your reserve kind of embed the outlook you just talked about in terms of delinquencies remaining low, not too many new ones and NPAs moving down from here?

Well, it does to a certain extent. I mean the CECL model is -- there are delinquencies do impact the calculation of the reserve. Most of our delinquencies are 60 days or less. You certainly get penalized when delinquencies are higher than that. But yes, the CECL model does take into account the impact of delinquencies within the math of the CECL model.

Now nonperformers, those are not in the -- I mean, those are kind of taken out of the release -- those are taken out of the model and those have specific reserves. Those are called individually evaluated loans.

So when something does move to nonperformer, we will do an individual analysis and put a specific reserve on that. So that's kind of the -- obviously, the biggest piece of the reserve of the ACL is the CECL reserve and then a secondary piece are the specific reserves, which are individually evaluated at the loan level.

I say clear is mud, right? The bottom line play for both, I think SBA, and we're really, really comfortable on the franchise loans is that we got our arms around the problem. We moved an awful lot of stuff pulled things forward that we could justify pulling forward.

Within the SBA world, there's a lot of guidelines, as to when we can put loans to nonperforming. We have to buy them back out of the secondary market. We have to jump through some hoops to get it. But we're as clean as clean can be today.

And I think going forward, as we've spoken to in the past, we have been tightening down credit standards over time. We've got data through a group called [ Lumos ] of all the statistical stuff going on in the SBA world and vintages for '21, '22 seem to have peaked, which is also the vintages of loan originations, where most of our problem credits reside.

We've tightened up credit significantly over the last 2 years and did another tightening up here within the last 60 days. So I think it's as good as we can get it right now. As I say, there are things happening around the world that could severely impact us. But if we see kind of consistent and status quo on tariffs, et cetera, we think that we're kind of the worst is behind us on both sides.

That's very helpful. I appreciate all the color there. And if I could get one more on the government shutdown. There's kind of 2 impacts here, right? If the government shutdown, you can't sell your loans, but also at some point, I mean, the SBA isn't approving new SBA numbers either. So is there a time line or like a deadline in terms of when this kind of slows down your ability to originate new loans? And let's just say we're shut down for another week or 2, how quickly historically is the SBA able to kind of catch up on that backlog of new applications for approval?

That's an astute question, Tim. We are -- we anticipated the shutdown. So on the loans that were through credit approval in our pipeline, we went ahead and got authorization prior to September 30th. So we went into the shutdown with about $94 million in pipeline loans that we have authorization on. So month-to-date, we have funded $18 million of new originations.

We can continue to close and fund loans, where we have that authorization. So we have another $73 million, $75 million in loan closing right now. And as they work through that pipeline, we will be able to close them. So foreseeably, we can meet our borrowers' desired time lines for several weeks if the government shutdown were to persist.

One of the big questions on their throughput, Tim, is going to be -- there's a lot of firing and shuffling of the decks going on with personnel in D.C. right now because of the closure. SBA is kind of short staff to begin with. We're praying to god that the people didn't get cut loose or the people come back after it reopens. But part of that will be dependent upon how -- what the staffing situation is when the SBA reopens.

So -- but we -- as Nicole said, we've got a prime stood up, ready to go, and we hopefully will catch up before the end of the quarter. We did reduce. We were thinking we did a little over $10 million last quarter in our projection here for the fourth quarter that Ken has given you numbers on.

We backed that down from a little over $10 million to $8 million in anticipation that we might not be able to get everything through. But the rest of it, as Nicole said, we're primed ready to go as soon as they reopen and hopefully have the staff to process.

Yes. It's definitely a fluid situation, but it sounds like you guys were well prepared ahead of time.

Your next question comes from the line of Brett Rabatin from Hovde Group.

Wanted just to go back to the franchise finance portfolio for a second. And obviously, that portfolio was originated by a third-party ApplePie. And so as we look at that portfolio, you're saying that delinquencies are down. But can you help us maybe get some confidence on just the remaining balances of $450 million of that portfolio?

The ultimate on that one is Crowe is in doing an audit of that portfolio currently. And as yesterday afternoon at 5:00, they've gone through over 90% of those loans as an external audit. They had no downgrades on the loans and had 2 upgrades. So we not only internally feel better about it.

And you hit the nail on the head, Brett. The issue wasn't the remote origination, but it was the remote collection effort. And back probably almost 6 months ago now, 5, 6 months ago, we jumped in and took control with the assistance of the folks at ApplePie to do the collection efforts. And we now the minute somebody goes past due or has an issue or if they got a problem or a question or concern, we talk to them. We're not relying on the third-party servicer.

So we have been through literally every loan file. Crowe has now been through 90%. We'll finish it up this week, hopefully, early next week. But we're very proud of the fact that right now, they've had 0 downgrades and 2 upgrades on what they've looked at. So we're -- our confidence level is high on franchise.

And then I don't know if you guys have it available, but criticized went from [ 108 to 128 ] last quarter. I don't know if you have that balance or you have to wait for the filings, but I was hoping you might have that figure.

Well, you'll have to wait till the filings because we don't have the formal number calculated.

Okay. And then just wanted to -- we started earnings season with Jamie talking about cockroaches, and we've seen a few what you would probably call idiosyncratic issues. How would you describe what you guys have experienced? Would you say it's all idiosyncratic? Would you say some of the stuff that you've had to deal with has been somewhat related to either a weakening consumer or anything in particular?

We have referred to our small business loans, Brett, in the past as snowflakes because they are all individual unique and each one has a story behind it. But I do think if you step back and you look at franchise finance as well as small business, there are probably some underlying commonalities to the loan.

And so where the Lumos portfolio analysis has been really helpful to us is in identifying any trends that we might not have such as specific geographies, and I don't mean states, but I mean down to ZIP codes as well as we know that there are some industries certainly that have been tougher.

We have been fairly insulated from any consumer stress that is out there because the portfolio that we have of consumer loans is to a very high credit quality borrower. What we might see in the future, if there were continued stress in the economy, for instance, is there might just be a slowdown in the acquisition of new recreational vehicles or horse trailers if those are not must-have items, but nice-to-have items and people make a decision not to acquire a new one.

So what we might see would be a slowdown in the origination of new loans. But we're seeing that the borrower -- the consumer borrower has stayed very strong for us and for our portfolio. With the small business, we are identifying, where we can any commonalities and remediating those for future credit standards.

I think the issue -- I agree with Nicole 100% the consumer, I think, is weathering the storm fairly well currently until unemployment starts to rear its ugly head. But I think the small business side is starting to feel some of the effects. We've got a lot of economists around the state of Indiana, all the major universities, et cetera, that are starting to say, hey, it's going to get tougher before it gets better. We're just now starting to feel the impacts of tariffs on raw good and stuff.

We're still a manufacturing state here in Indiana, and it's really starting to ripple through small manufacturers, independent players here in the state of Indiana that aren't able to absorb the cost. I have a son that's running a bicycle shop in Bloomington, Indiana, they proposed new tariffs on China go through a bicycle chain that 6 months ago cost $25 will now cost $100. And that's the thing. We don't know how much of this is going to be for real or not.

But small independent retailers, small businesses are going to see some impact here over the next 2 to 3 months if things continue on the same path. So yet to be determined. And -- but I do agree with Jamie, if there's one cockroaches more as we well know in the SBA world. So we're on it as best we can be.

And one of the things that Nicole pointed out that this Lumos technology and the AI product gets is it warns us of hotspots. So we can take a proactive position. And if we have a quick service restaurant in Southern Florida in certain ZIP codes in areas, they're saying this is a hotspot, take a look. We can talk to those owners before they hit a wall and run into problems. So the AI tech that we've implemented over the last 3 to 4 months has really given us huge insight to both the franchise portfolios as well as the SBA portfolio.

And if I could just sneak in one last one. David, you said you'd buy back stock when you got down to these kind of levels and we're down here again. Are you guys going to buy back stock at these levels? And how do you think about that versus maybe growing the capital further?

It's a mixed bag. It's a tough decision to make. But if we stay in the teens for any period of time here, we do have authorization ability over the next 2 years to buy back $25 million. Obviously, where our capital is today, we can't go spend $25 million tomorrow.

But if it stays down here in the teens, we come out of blackout and all that good stuff for part of next week, we will definitely get into the market and buy some shares if it stays in the teens. And I think we have some directors, myself, in particular, that will also get into the market next week. So...

Your next question comes from the line of Nathan Race from Piper Sandler.

I'm a little confused. I was going back to my notes from last quarter and I wrote down that you guys ceased originating franchise finance loans back in January, and you didn't have any deferments within franchise finance coming out of last quarter. So I guess, I'm just trying to understand what transpired with these handful of loans that moved to nonperforming and that you also charged off in the quarter. Was it just the collection efforts that you undertook that you just described earlier, David? Or would just appreciate any other color in terms of what transpired within the franchise portfolio over the last 90 days?

Well, these would be loans that we were either monitoring, where we were aware that the borrower was struggling or perhaps the borrower went delinquent. And maybe last quarter -- because keep in mind, delinquencies came down $11 million.

So if you just think about the math, most of that $14 million that we charged off or excuse me, moved to nonperforming this quarter were delinquent last quarter, right? They maybe were 30 days or 40 days or something like that.

And obviously, when they're in delinquencies, as David talked about, the level of communication we have and speaking to the borrowers, trying to work through a situation or work through resolution. And those were the loans, the delinquencies, where it was most prudent to move them to nonperforming and put a specific reserve on them.

And -- but to kind of go back the other way on it, we are seeing some success in some of our resolution strategies with that. So for example, there was about $1 million of 2 loans totaling about $1 million that were nonperforming last quarter that so obviously have been moved to nonaccrual, had a reserve against them.

But our commercial -- or our credit administration team worked out a resolution, where we were made whole $0.90 on the dollar on those deals, which were -- which was obviously much better than what we had reserved. So there are a lot of moving parts, but I guess the simplest piece is that these were just delinquencies that we moved to nonperforming and put reserves on.

And Nicole, I know you mentioned that on the SBA side, these are snowflake situations in terms of where you're seeing charge-offs. But also just curious, are there any commonalities in terms of vintage or when these loans are originated, perhaps when rates were lower and now a lot of these small business borrowers are being rate shocked. Is there any line of thought into that scenario?

Yes, that's a great question. Thanks for asking, Nate. We do vintage analysis, and so we are modeling future credit outlook based on the vintages. And I think David talked about some hotspots in the portfolio that we have identified. I would say, more than an increase in rates that the borrowers -- it's yes, an increase in their loan rate has impacted their monthly payment amount.

But I think we've modeled on a $1 million loan, a 25 basis point reduction is about $300 a month to them. So it's not just solely the movement of interest rates and the impact on the borrower, but inflation more generally and it driving up the price of their raw materials or inventory that they need to buy, the cost of labor has gone up for them. And in some pockets of the country, consumers are starting to slow down on buying.

So what we do see is an impact of inflation more so than impact of interest rate directly. And again, that's data that we're getting from our predictive analytics engine. So it's been really helpful to us in identifying what those industries are that might be more inflation sensitive, and it allows us to better refine our credit standards.

And then, Ken, I think you mentioned you're comfortable with where kind of the projections are for NII for next year. I think it's around $150 million or so. Just curious, if we do get 4 or 5 rate cuts as reflecting the forward curve over the next 12 to 18 months, where do you see kind of the margin trending by the end of next year?

Well, in -- okay. So as I said, we kind of model a flat rate scenario, not to try not to be in the business of guessing, where rates are. So if we think about a full rate NIM for next year, we're probably talking somewhere kind of in the range of 2.70% to 2.80%.

That's a full year, and that kind of ramps up over the course of the year. So it's not maybe quite as pronounced a stair step up as we would have had previously but it does increase quarterly over the course of the year.

Now on a static balance sheet given -- with the sale of single-tenant lease financing loans, that moved us a lot closer to being neutral, but we are still slightly liability sensitive. So for every 25 basis point rate cut, we see an annualized increase of, call it, $1.4 million of net interest income.

Your next question comes from the line of George Sutton from Craig-Hallum.

Can you just walk us through the moving off of the excess deposits, the mechanics of that? I believe you have a relationship with IntraFi and you get a fee on actually moving those deposits? And then structurally, how do you think about future deposits coming in when you have the ability to pull some of these deposits back in a scenario, where loan growth is good?

Yes. The mechanics for pushing them off through the IntraFi network are pretty easy. When we set up several of our fintech relationships the depositor forms allow the deposits to be pushed into the IntraFi network either for reciprocal deposits or deposit insurance or to move off the balance sheet.

And yes, we do make fee income, which is -- they pay us kind of a spread, call it, Fed funds minus. And we collect the difference between what the rate we're paying on the deposit and what we're getting paid through pushing it into the deposit network. So it kind of depends.

I think where it's really been beneficial for us is the -- a lot of our, what I'll call, higher cost fintech deposits are kind of already approved to be into the IntraFi network. So it does a couple of things, right? It allows us to move kind of the higher cost, call it, Fed funds minus 20 basis points deposits off balance sheet. But we also see a lot of volatility and increasing volume in those. So it helps us to manage the size of the balance sheet.

So if those deposits go up $200 million in a quarter and we don't need the $200 million, we can push that off the balance sheet. And then to your point earlier, we can bring those back onto the balance sheet very easily to help in the event that perhaps CD volumes are down or other deposit areas are down, we can bring those back onto the balance sheet very easily to fund loan growth or fund CD outflows. It just gives us a lot more flexibility to manage the balance sheet going forward.

The other side of that equation, George, as you pointed out, we have plenty of excess cash at the current time. We're still growing and anticipate growing the loan portfolio by 10% next year. We sold STL, but Maris is back in the marketplace, pushing close to $100 million in originations in just this quarter. It gives us a little better pricing there.

It also enables us -- if the Fed does do another pop here at the end, we'll probably do a 100% drop on rates kind of across the board on our side to match it. Historically, if we dropped 25%, we would drop rates 10 to 15 points. Because of the excess cash, we have a lot better flexibility.

We're also in a position now, I think, on CDs, particularly in the commercial markets, only our long-term CDs in the 4, 5-year category, we appear in the top 25 in the country. Nobody is buying those right now. So it's not impacting us, but we haven't been on the charts in the CD realm for the last 2 months.

Renewal on CDs, we have over [ $400 million ] rolling this quarter at a [ 434, 435 ] cost. If they were to renew, it's going to be in a [ 370 ] range or if they go away because we're down lower than they can get elsewhere, we're okay with that. It buys us a lot of flexibility we've not had in years. So you're right, having that excess cash is a nice play. Plus it's not costing us anything,

As Ken said, we can get it off balance sheet. pick up a few points. It doesn't mess up our NIMs, doesn't mess up our ratio. So it's a nice position right now compared to where the world was post Silicon Valley 2.5 years ago.

So further on the flexibility perspective, that was a pretty meaningful strategic move to sell the single-tenant loans. And I'm just curious, if we think forward, say, 18 months from now, how different do you see the business being? Are there contemplations of moving in different directions? Or it obviously gives you flexibility. I'm curious what you're going to do with that flexibility.

We have a couple of fintech opportunities we're looking at that could grow significantly on the lending side. We have some leasing opportunities that are yielding us 7.5%, 8% versus the 5% we had on the single tenant.

And the new single tenant that Maris is bringing back on board, we're on a 5-year term versus what was traditionally a 10-year term at north of 6%, 6.5%. So -- and there's also forward flow opportunity there with Blackstone. So it gives us a lot of flexibility.

We, on the fintech side, kind of shied away from some of the bigger lending opportunities because of lack of cash. We're now back in that market and talking to some folks. So I think you hit the nail head on.

We're going to probably have a little different portfolio mix 18 months from now than we have today. But we got a couple of opportunities we're looking at that could be very beneficial to us.

Your next question comes from the line of John Rodis from Janney.

Ken, just a follow-up question on -- for 2026, the NII guidance, the [ $149 million to $150 million ], is that on an FTE basis?

No. well, that's GAAP. So add about $4.4 million to get to FTE.

There are no further questions at this time. I will now turn the call over to Mr. David Becker. Please continue.

Thanks, John. Thanks, everybody, for joining us today. We obviously covered a lot of ground here. We have really, as we've discussed many times already, consistently delivered strong net interest income improvements over the last 12 to 18 months.

Macro environment remains uncertain out here as to what's going on in the world, but our customer activity is stabilizing. Lending teams continue to do very well. Pipelines are solid. We are also excited about growth potential from the fintech partnerships, as I just discussed a minute ago, which will further diversify and strengthen our revenue base.

So with improvements in the loan mix, anticipated reduction in deposit costs, if the Fed is to do something else, we're confident in our ability to deliver stronger earnings in the coming quarters.

As fellow shareholders, we remain committed to enhancing the profitability and long-term value, and we thank you for your continued support, and have a great afternoon.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.