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 1 to raise your hand. To withdraw your question, press star 1 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 Rappitan with Stonex. Brett, your line is open.

Hey, good afternoon, everyone. Thanks for the questions. First, I wanted to talk about, hey guys, first I wanted to talk about the dynamic on the NII guide in the back half of the year, particularly kind of 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 JARUS and these other things might contribute to higher earning asset yields?

Yeah, I think you're in the ballpark, Brett. I mean, I think, you know, 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 percent, is now down in the 40 percent range. So we're just seeing a larger amount of these higher cost CDs rolling off and simply being replaced, you know, generally by fintech deposits that are somewhere in, you know, 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 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 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 drove that with lighter SBA originations in the front end of the year, or 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. So 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. The 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. You know, so those are, you know, those are coming on the books now. You know, 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, you know, four, you know, four and a half to $5 million. So not very large balances. We were, 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, you know, we did, you know, 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, you know, a pool of those, call it about $15 million or so earlier in July. And our expectation is we'll probably, combined with that with retained production, we'll probably have balances we'll acquire, kind of call it in the 45 to $50 million range. And those do have very nice, you know, kind of top level gross yields or they're kind of, you know, they're, you know, usually a seven month type turn on those. It's very structured, very similar to factoring. So the faster they pay, the higher yield there is, but the gross yield on those is very high. So, yeah, 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, You know, obviously, the SBA portfolio is having lower net charge-offs, delinquencies are down, you know, 20-plus basis 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 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.

Yeah. And I think kind of speaking on the franchise side of things, I think as we continue to work down, we talked about how we charged off a fair number of non-performing, non-accrual loans this quarter. We referenced that the inflows to the non-accrual bucket was significantly reduced. So net net non accrual franchise finance loans declined quite a bit. You know, 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, 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.

In fact, just this afternoon, we were receiving a check on a loan that we had marked as doubtful. we had charged it down to, I think, $600,000 with all we had left on the book. 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 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 stepping in for tim switzer uh thanks for taking my question yes so um yeah end of period and average loan balances were impacted by early payoffs this quarter i guess what are your expectations for payoffs going forward um i you know what there's we we think based upon what we've seen this year we 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 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, you know, it's enough lead time to, you know, get out there and replace the balance elsewhere. But 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, you know, I think it'll continue to happen. but I think we're trying to do our best to capture it in our modeling.

Understood. That's helpful. And then, you know, this quarter you increased the number of fintech partners. Just wondering if you could talk about expectations for growth from the BAPS 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 are 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'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 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 or on oversight fees. But, you know, our revenue has grown and our transactions have grown. I think our revenue is up 220 percent year over year. 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 uh taking the question hey nate how you doing i'm wondering if you could just good thanks dave david um just in terms of thinking about the reserve trajectory going forward i know it's difficult to predict in terms of you know what charge-offs are going to be underlying the provisioning assumptions for the back after this year, but was just curious, you know, if you could just shed 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 quarters.

Yeah, I mean, I think we saw, you know, 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, 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, you know, come down significantly from where they were in the first and second quarter, you know, probably a little bit, you know, could be higher in the third quarter, could be less in the fourth. It's 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. So sometimes 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 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 franchisor 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 will fall out of the delinquency side and off the balance sheet in total. So that's kind of a wild card there, but 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. I mean, with all the uncertainty and the economic factors out here right now, we're on a very strong offensive pull 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 uh that's really helpful just going back to the margin discussion can i appreciate all the color around what you have maturing on the cd front in the back half of this year um the expectation that you know those cds will largely be replaced by some of the lower cost uh deposit gathering um programs you have going on with some of your partners Or, I mean, what's kind of the incremental kind of replacement cost on some of those CDs, you know, to the extent it's not backfilled with some of those other relationship deposits?

Yeah, I mean, I guess maybe the easiest way to think about it is just simply replacing, you know, in the third quarter, you know, CDs that are, you know, costing us, you know, $404 on a weighted average basis being replaced with fintech at $320, $315 to $320. That's probably the easiest way to think about it. And as I mentioned, you know, 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, you know, 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 backfilling 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 deposits with two and a half billion dollars 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 we're 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, can you just update us in terms of what that kind of NII or margin sensitivity would be?

Yeah, Ana, and keep in mind that this is a static balance sheet, so it's not really factoring in growth. 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 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.

Okay, great.

And then just lastly, Ken, what's the tax rate assumptions underpinning the EPS guide for this year? yeah i mean it's you know it's a little bit varying i'd say between the 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 eight and a half i mean and this is full year um so you know i think with our expectations of you know stronger you know it's much stronger performance in uh um in the third quarter in 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 uh yeah i think that's something in the 15 range sounds like 15 20 does that sound right probably probably more 12 to 15 ish okay All right. Sounds good. I appreciate all the color. Thanks, everyone.

Great. 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 sort of new focus areas. I wonder if you can give us a little more picture on what the wealth advisory practice is lending to. And on the embedded finance side, I'm 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, you know, for the purpose of, say, you know, 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, you know, 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's 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 . Yeah. 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 Jaris. We had historically been buying about 10 percent of their production and the rest was going to the fund. We 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. At the short-term, as he said, factoring, it can be 35 to 40 percent, depending upon the term and how quick they repay net yield to us at the bottom line, full reserves, processing, servicing, payment of fees, et cetera. It's still yielding in that 12 to 15 percent 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 fast growth um i'm just curious how much of that would be ramp specific versus others uh we're spread out uh probably the biggest impact for ramp is on the deposit side of things on the fee side of it 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 grown significantly. We started it with them 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 their pennies and item is on the deposit side. That's been very, very strong for us. The others, we've adjusted fees almost across the board with all of our clients. Everybody's kind of in a nice growth spurt. As Nicole pointed out, we're not going after every Tom, Dick, 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 viewed as 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. A 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 all going up and to the right pretty quickly.

One quick one for Nicole, if I could, on SBA. um historically you've kind of talked about your market ranking and goals for pretty material growth is that not necessarily the focus now well thanks 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 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. You know, it's painful 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. 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 with 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 is a little bit slower than it had been. We're still in the top 10 originators in the 7A world, and we'll probably stay there through the course of the year. As Nicole said, the pipelines are strong in volume. Second half will be a little better than it was in the first half.

Perfect. Okay, thanks, guys.

Appreciate it.

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 the 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.