First Internet Bancorp Q3 FY2025 Earnings Call

Good day, everyone, and welcome to the First Internet Bancorp Earnings Conference Call for the Third Quarter of 2025. 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 timelines 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.

Thank you, Nicole. Due to the strategic measures implemented during the quarter, we reported a net loss of $41.6 million, or $0.0476 per diluted share. Excluding the pretax loss of $37.8 million from the loan sale, our adjusted net loss for the quarter was $12.5 million, or $1.43 per diluted share. However, our strong revenue growth and corresponding positive operating leverage contributed to an adjusted pretax pre-provision income of $18.1 million, reflecting an increase of over 50% from the second quarter and almost 65% from the third quarter of 2024. Looking into net interest income and expense for the quarter, our net interest income reached $30.4 million, or $31.5 million on a fully taxable equivalent basis, both representing about an 8% increase from the second quarter. Our net interest margin improved to 2.04%, or 2.12% on a fully taxable equivalent basis, an increase of 8 basis points. The yield on average interest-earning assets rose to 5.68% from 5.65%, mainly due to an 11 basis point increase in loan yields, as rates on new originations were 7.5% during the quarter. Looking ahead, despite the Federal Reserve reducing the Fed funds rate in September, we anticipate continued expansion in the portfolio yield, as new origination yields are expected to remain above the current portfolio yield of 6.18%. The sale of lower coupon single-tenant lease financing loans is also expected to positively impact the portfolio yield in the future. In terms of funding costs, the cost of interest-bearing liabilities decreased to 3.90% from 3.96%, mainly due to a 5 basis point reduction in interest-bearing deposit costs and a 7 basis point decrease in the cost of other borrowings, stemming from paying down a significant amount of higher-cost short-term Federal Home Loan Bank advances towards the end of the second quarter. We saw a decline in deposit costs as we benefitted from CD repricing and reduced broker deposit balances, and we also began shifting some of our higher-cost fintech deposits off balance sheet during the quarter, positively impacting deposit costs. This activity increased at the quarter's end following the loan sale. As we noted, we continue to observe 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 reduced with excess liquidity to help shrink the balance sheet further. This price reduction trend, combined with our ability to transition deposits off balance sheet, positions us well to take advantage of further declines in deposit costs in the fourth quarter and through 2026. Coupled with higher loan origination yields, these factors support ongoing growth in both net interest income and net interest margin, even without additional rate cuts from the Federal Reserve. At the end of the quarter, 27% of our deposits, amounting to $1.3 billion, were tied to the Fed funds rate. Therefore, any additional interest rate cuts would further enhance our expansion of both net interest income and net interest margin. Now, I would like to address asset quality, as there were many variables during the quarter, which are summarized in our presentation. As highlighted by David, we recognized a provision for credit losses of $34.8 million in the third quarter, primarily consisting of $21 million in net charge-offs, along with additional specific reserves and a significant increase to the CECL reserve linked to small business lending. To elaborate on the net charge-offs, $15.2 million were tied to the small business lending portfolio, as we took decisive steps to address problem loans that arose throughout the quarter. Following these charge-offs, delinquencies in the small business lending portfolio fell over 50% compared to the previous quarter. Additionally, $5.3 million of net charge-offs were connected to the franchise finance portfolio. These charge-offs accounted for $3.5 million of existing reserves that were released. Nonperforming loans totaled $53.3 million at the end of the third quarter, an increase of $9.7 million from the preceding quarter. This rise in nonperforming loans was primarily due to moving 9 franchise finance loans, with book balances totaling $14.2 million, to nonaccrual status, alongside related specific reserves of $5.8 million. Delinquencies in our franchise finance portfolio dropped almost 80% from the second quarter, and the introduction of new delinquencies has slowed significantly, indicating improved borrower performance. About $1.8 million of the increase in nonperforming loans pertains to small business lending and reflects the remaining balance based on estimated collateral values associated with those loans. At quarter end, the ratio of nonperforming loans to total loans was 1.47%, up from 1% in the linked quarter. This increase stemmed not only from higher nonperforming loans but also from the decline in overall loan balances after the loan sale. The allowance for credit losses rose to $59.9 million in the third quarter, marking an increase of $13.4 million, or almost 30%, from the second quarter. This rise was primarily fueled by a considerable increase in the ACL due to recent updates to the CECL model reflecting industry trends in SBA loans, which show that SBA loan default rates in 2025 are approximately 2.3 times greater than in 2022. Consequently, we more than doubled the small business lending ACL, which now represents 1.65% of total loans, compared to 1.07% in the second quarter. Excluding the public finance portfolio, the ACL to total loans ratio rises to 1.89%. To highlight David's earlier point, after the credit measures taken during the quarter, total delinquencies 30 days or more past due, excluding nonperforming loans, decreased to 35 basis points at quarter end—representing the lowest level in a year. Before discussing our fourth quarter outlook, I'll briefly touch on our capital position. As disclosed in our press release and associated 8-K in September, we finalized the sale of $837 million in single-tenant lease financing loans, resulting in a net loss of $37.8 million for the quarter. Although the loss from the loan sale impacted shareholders' equity and regulatory capital, the reduction in risk-weighted assets was even more significant, facilitating an increase in our regulatory capital ratios from the previous quarter. We anticipate that the Tier 1 leverage ratio will significantly improve in the fourth quarter of 2025, as the calculation of average assets will reset lower with a full quarter effect of a smaller balance sheet. Additionally, we succeeded in mitigating the impact of the loan sale on the tangible equity to tangible assets ratio by moving a considerable portion of fintech deposits off balance sheet during the quarter. Now, looking towards the remainder of 2025, I will share some thoughts on our fourth quarter outlook. These estimates assume a stable rate environment, consistent with prior quarters; we are not making predictions on the timing or extent of Federal Reserve rate cuts. We remain optimistic about our strategies aimed at increasing net interest income and net interest margin, as loan yields continue to rise and deposit costs decline. For the fourth quarter, we predict loan balances will rise at an unannualized rate between 4% to 6%. While this may appear to be a steep figure, we expect origination levels to be consistent with previous quarters, though the starting point is lower after the sale of the single-tenant lease financing loans. Alongside the benefits of higher loan yields and reduced funding costs, we also expect to see a boost in the net interest margin as a result of the loan sale, further enhancing the loan portfolio yield. We project that the net interest margin on a fully taxable equivalent basis will rise to between 2.4% and 2.5%. In dollar terms, we expect fully taxable equivalent net interest income to fall within the range of $32.75 million to $33.5 million for the quarter. Regarding noninterest income, we have about $104 million in loans currently held for sale and additional loans that have closed thus far in the quarter. However, we do anticipate a decrease in loan sale volume compared to the third quarter. Consequently, we expect noninterest income to range from $10.5 million to $11.5 million for the quarter. The exception to this estimate is dependent on the duration of the current United States government shutdown. As a government program, sales of SBA loans into the secondary market have been suspended during the shutdown. If the shutdown ends soon, we should be able to proceed with the loan sales in the quarter. However, if it prolongs, our ability to execute these sales would be jeopardized. On the expense side, we are maintaining good cost management practices, projecting expenses to be between $26 million and $27 million for the quarter. Turning to our expectations for 2026, regarding fully taxable equivalent net interest income and the provision for credit losses, we feel confident in current analyst estimates. As for noninterest income, concerning Nicole's comments about increased credit standards in relation to SBA lending, we foresee a decline in origination volumes from 2025, estimating noninterest income to be between $41.5 million and $44.5 million. This anticipated drop in SBA origination volume will impact our forecast for noninterest expense for the year, which we now project to be between $106 million and $109 million. With that, I will hand the call back to the operator to take your questions.

Your first question comes from the line of Tim Switzer from KBW.

I have a question regarding the credit outlook. I know it's challenging to provide specific numbers or timelines, but can you give us an idea of when we might reach peak delinquencies and peak nonperformers? When can we be confident that these figures will begin to decrease? Also, what does the reserve indicate about the credit losses and the credit content of the portfolio as you view it currently?

I will take care of the delinquency aspect. As we mentioned, those figures continue to decrease. Currently, in franchise lending, we have only four delinquent accounts, which is at 35 basis points, compared to 77 basis points two quarters ago. We believe the leading indicators are moving in the right direction and becoming more stable. Of course, there's considerable economic activity happening in Washington, D.C., and globally that could affect companies. Today’s situation is challenging, but as we assess it, only two of our portfolios, SBA and franchise, are currently impacted, and everything is trending positively from where we are right now. I’ll let Ken explain how we’ve categorized this, including specific reserves and reserve reserves. There are also some items classified as nonperforming, pending the resolution of asset sales, which could bring some recovery. He can provide more details on that.

Yes. Let’s start with nonperforming assets. The increase in nonperforming loans this quarter was mainly due to certain franchise finance loans that we addressed during the quarter. These were either delinquent loans or loans with identified issues that we classified as nonaccrual and set specific reserves for. Regarding delinquencies in the franchise finance sector, the number has decreased significantly; we had four delinquent loans at the end of the quarter. As a leading indicator, we believe that in terms of the franchise portfolio, we have likely seen the worst of the situation. There are still existing nonperforming loans where we may need to adjust specific reserves or there could be new loans that become problematic, but we feel we have mostly dealt with what I would call the last major group of issue loans. The credit outlook appears positive moving forward, and the franchise loans comprise the largest portion of our nonperforming loan category. In terms of future increases in nonperforming assets, there may be some additions related to SBA and residual balances that we have not charged off yet. However, we believe that significant increases will be limited moving forward. We are optimistic that we are nearing the peak of nonperforming asset levels. Concerning reserves, we made substantial adjustments to the Allowance for Credit Losses related to SBA, essentially doubling it to approximately $27.5 million. We adjusted our assumptions in the CECL model to the high end. This model reflects a life of loan loss expectation, which is what our forecasting is based on. We are comfortable with this figure as we assess the situation 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. The CECL model accounts for delinquencies that affect the reserve calculation. Most of our delinquencies are 60 days or less, and we do get penalized when they go beyond that. However, the CECL model includes the effect of delinquencies in its calculations. Nonperforming loans, on the other hand, are excluded from this and have specific reserves associated with them, referred to as individually evaluated loans. When a loan transitions to nonperformer status, we conduct an individual analysis and assign a specific reserve accordingly. The primary component of the reserve in the ACL is the CECL reserve, with the secondary component being these specific reserves evaluated at the loan level. The bottom line for both SBA and the franchise loans is that we have a handle on the situation. We have moved a significant amount of loans forward where justifiable. In the SBA sector, there are specific guidelines regarding when loans can be classified as nonperforming, and we must repurchase them from the secondary market, which involves some procedures. But we currently consider our position to be quite solid. Moving forward, as previously discussed, we have been tightening our credit standards over time. According to data from a group called Lumos, the statistical trends in the SBA sector show that the vintages for 2021 and 2022 seem to have peaked, representing most of our problematic credits. We have significantly tightened credit over the past two years and have implemented another round of tightening within the last 60 days. I believe we have optimized our processes as much as possible right now. While there are external factors that could potentially impact us, we feel that if the situation regarding tariffs and similar issues remains stable, we believe the most challenging times may be behind us on both fronts.

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 timeline 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 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 timelines for several weeks if the government shutdown were to persist.

One of the big questions regarding their throughput is that there is a lot of personnel changes happening in D.C. right now due to the closure. The SBA is already short-staffed. We hope that the staff hasn’t been let go or that they return once it reopens. How this unfolds will depend on the staffing situation when the SBA reopens. However, as Nicole mentioned, we have everything set up and are prepared to proceed, aiming to catch up before the end of the quarter. We have adjusted our expectations; previously, we projected just over $10 million last quarter for the fourth quarter, which Ken shared with you. We have lowered that estimate from just over $10 million to $8 million, anticipating that we might not be able to get everything processed. Nonetheless, as Nicole said, we are ready to act as soon as they reopen, hoping they will have the staff to manage the processing.

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 doing an audit of that portfolio currently. And as of 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. Back probably almost 6 months ago now, 5 or 6 months ago, we jumped in and took control with the assistance of the folks at ApplePie to do the collection efforts. We now the minute somebody goes past due or has an issue, or if they have 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 our confidence level is high on franchise.

I don't know if you have it available, but criticized increased from 108 to 128 last quarter. 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. I just wanted to know how you would describe the issues you've been experiencing. Would you consider them all unique, or do you think some of what you've dealt with is related to a weakening consumer or something specific?

We have referred to our small business loans as snowflakes in the past because each one is unique and has its own story. However, if you take a broader look at franchise finance and small business loans, there are likely some underlying commonalities. The Lumos portfolio analysis has helped us identify trends that we might not have noticed, such as specific geographies, even down to ZIP codes, and we know that certain industries have faced challenges. We have been relatively insulated from consumer stress because our consumer loan portfolio consists of high credit quality borrowers. If economic stress persists, we might see a slowdown in the acquisition of new recreational vehicles or horse trailers, as these items can be seen as nice-to-haves rather than essentials. This could result in a decline in the origination of new loans. Nevertheless, our consumer borrowers have remained strong for us and our portfolio. For small businesses, we are working to identify commonalities and address them to improve our future credit standards.

I agree with Nicole that consumers are handling the current challenges reasonably well for now, but the small business sector is starting to experience some effects. Economists in Indiana are indicating that conditions may worsen before they improve. We are beginning to feel the impact of tariffs on raw goods, which is particularly affecting small manufacturers in the state who struggle to absorb these costs. For instance, my son operates a bicycle shop in Bloomington, Indiana, and if the proposed tariffs on China pass, a bicycle chain that cost $25 six months ago could rise to $100. It’s uncertain how significant this situation will become, but small independent retailers and businesses are likely to experience effects in the next two to three months if trends continue. Nonetheless, I agree with Jamie regarding the challenges we face. We're actively monitoring the situation, and as Nicole mentioned, our Lumos technology and AI product provide alerts on potential trouble areas. This allows us to proactively engage with quick-service restaurant owners in Southern Florida, for example, before they encounter major issues. The AI technology we’ve implemented recently has provided us valuable insights into both franchise and small business portfolios.

And if I could just sneak in one last one. David, you said you'd buy back stock when you got down to these kinds 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.

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?

These loans were either under our observation because we knew the borrowers were having difficulties or they had become delinquent. Last quarter, delinquencies decreased by $11 million. If you consider the numbers, most of the $14 million we charged off or classified as nonperforming this quarter were already delinquent last quarter. They may have been delinquent for 30 to 40 days. When loans are delinquent, as David mentioned, we maintain a level of communication with the borrowers, working to resolve their situations. It was prudent to categorize these delinquent loans as nonperforming and set aside specific reserves for them. However, we are seeing some success with our resolution strategies. For instance, we had about $1 million from two nonperforming loans last quarter that were moved to nonaccrual and had reserves against them. Our credit administration team managed to reach a resolution where we recovered $0.90 on the dollar on those loans, which was better than the amount we initially reserved. There are many factors at play, but essentially, these were delinquent loans that were reclassified as nonperforming, and we put reserves against them.

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 conduct vintage analysis, which helps us model future credit outlook based on those vintages. As David mentioned, we've identified certain hotspots within our portfolio. I would say that more than an increase in rates, the borrowers are feeling the impact of their loan rate on their monthly payments. For example, we've calculated that a 25 basis point reduction on a $1 million loan results in a decrease of about $300 in their monthly payment. So, it's not just the changes in interest rates affecting borrowers; inflation broadly is also a significant factor. It's driving up the costs of raw materials and inventory they need to purchase, and labor costs have risen as well. Additionally, in certain regions, consumers are beginning to cut back on spending. Therefore, we see inflation influencing borrowers more than direct changes in interest rates. Our predictive analytics engine provides us with valuable data to identify industries that might be more sensitive to inflation, allowing us to better refine our credit standards.

Well, as I mentioned, we typically model a flat rate scenario and prefer not to speculate on where rates might be. If we consider the full year net interest margin for next year, we're likely looking at a range of 2.70% to 2.80%. This will increase gradually throughout the year, though not as sharply as in the past, but we do expect a quarterly rise over the course of the year. With a static balance sheet, the sale of single-tenant lease financing loans has brought us closer to a neutral position, yet we remain slightly liability sensitive. Therefore, for every 25 basis point rate cut, we anticipate an annualized increase of approximately $1.4 million in 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 process of transferring deposits through the IntraFi network is relatively straightforward. When we establish our partnerships with various fintech companies, the depositor agreements allow us to move deposits into the IntraFi network for purposes such as reciprocal deposits, deposit insurance, or offloading from the balance sheet. We do earn fee income from this arrangement, as we receive a spread based on the difference between the rate we pay on the deposits and what we earn through the deposit network. This strategy has been advantageous, particularly for our higher-cost fintech deposits, which are often already designated for the IntraFi network. This approach enables us to offload higher-cost deposits and effectively manage balance sheet volatility and volume. For instance, if our deposits increase by $200 million in a quarter and we do not require that additional amount, we can transfer it off the balance sheet. Furthermore, we can easily reintegrate those deposits when necessary, particularly if we experience declines in CD volumes or other deposit sources. This flexibility greatly enhances our ability to manage the balance sheet moving forward.

The other side of that equation, George, as you pointed out, we have plenty of excess cash at the moment. We're still growing and expect to grow the loan portfolio by 10% next year. We sold STL, but Maris is back in the marketplace, nearing $100 million in originations this quarter. This gives us better pricing and enables us to potentially drop rates across the board if the Fed makes another move at the end. Historically, when we dropped by 25%, we would reduce rates by 10 to 15 points. With the excess cash, we have significantly better flexibility. Currently, we're also performing well in CDs, especially in the commercial markets, where our long-term CDs in the 4 to 5-year category rank among the top 25 in the country. While no one is buying those right now, it doesn't impact us, and we haven't been on the charts in the CD market for the past two months. We have over $400 million rolling in CDs this quarter at a cost in the 434 to 435 range. If they were to renew, it would likely be in the 370 range, but if they don't due to our lower rates compared to elsewhere, we're fine with that. This situation gives us a level of flexibility we haven't seen in years. So you're right, having that excess cash is advantageous, and it's not costing us anything. As Ken mentioned, we can offload it from our balance sheet, gain a few points without affecting our net interest margin or our ratios. This places us in a strong position compared to where we were following 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 are exploring several fintech opportunities that have the potential for significant growth in lending. Currently, our leasing opportunities are yielding 7.5% to 8%, compared to 5% from our single-tenant investments. The new single tenant that Maris is bringing on board will be on a 5-year term instead of the usual 10-year term, which offered rates of over 6% to 6.5%. Additionally, there is a forward flow opportunity with Blackstone, providing us greater flexibility. We had previously avoided larger lending opportunities in the fintech space due to cash constraints, but we are now re-entering that market and engaging in discussions. I believe you're spot on; we will likely see a different portfolio mix in 18 months compared to today, and we have several promising opportunities that could be highly advantageous for us.

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

Ken, I have a follow-up question regarding the NII guidance for 2026, which is between $149 million and $150 million. Is this 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. The 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.