First Internet Bancorp (INBK) Earnings Call Transcript & Summary

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.