Earnings Call Transcript - INBK Q1 2026

Operator, Operator

Thank you for standing by. My name is Rebecca, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Internet Bancorp Earnings Conference Call for the First Quarter 2026. Please note this event is being recorded. It is now my pleasure to turn the call over to Julia Ferrara from ICR. You may begin your conference.

Julia Ferrara, Investor Relations

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

David Becker, Chairman and CEO

Thank you, Julia. Good afternoon, and thank you for joining us on the call today. We delivered strong first quarter results that demonstrated the resilience and strength of our diversified business model. We generated solid revenue growth, expanded our net interest margin and continued making meaningful progress on credit quality, all the while navigating an uncertain macroeconomic environment. Let me start with some of the highlights for the quarter. Total revenue reached $43.1 million in the first quarter, up 21% year-over-year, driven by a 26% increase in net interest income. Our fully taxable equivalent net interest margin expanded to 2.45%, a 54 basis point improvement from a year ago and 15 basis points sequentially. This margin expansion reflects the benefits of our proactive balance sheet management strategy and the power of our deposit franchise, combined with our scalable nationwide lending platforms. Pre-provision net revenue grew 51% year-over-year to $18.1 million, underscoring our ability to generate strong operating leverage while maintaining disciplined expense management. This performance gives us confidence in our ability to drive sustainable profitability as we continue to work through our credit normalization process. On credit, our overall loan book remains solid and continues to perform in line with industry trends. In addition, we're seeing tangible evidence that the decisive actions we've taken over the past several quarters are yielding favorable results on the two problem portfolios, SBA and Franchise. Our provision for credit losses for the quarter came in better than expected, and we're observing improving trends in our portfolio with delinquencies and nonperforming loans headed in the right direction. The credit trends we're seeing, particularly in our SBA portfolio, reflect the impact of enhanced underwriting standards, more vigorous portfolio monitoring and responsive problem loan resolution. On the growth front, our commercial lending pipelines remain robust across multiple verticals. Total loans increased to $3.8 billion with particularly strong production in single tenant, lease financing and construction lending as well as in one of our emerging verticals, wealth advisory lending. While we maintain appropriately conservative underwriting standards, we're seeing great opportunities to deploy capital into high-quality commercial relationships at attractive yields. Turning to the other side of our balance sheet. Total deposits reached $5 billion, up from $4.8 billion in the prior quarter. We continue to benefit from the strength and flexibility of our Banking-as-a-Service initiatives. Importantly, we're seeing continued growth in lower-cost fintech deposits, which has also allowed us to let higher cost CDs and broker deposits mature without replacement. Our fintech deposit platform also provides us with significant balance sheet management flexibility. During the quarter, average fintech deposits totaled $2.4 billion, an increase of over 186% from the first quarter of 2025. At quarter end, we have moved approximately $1.5 billion of these deposits off balance sheet, optimizing our asset size while maintaining these valuable customer relationships and the associated fee income streams. This capability is a unique competitive advantage that enhances both our profitability and our capital efficiency. In our SBA business, while seasonality and tightened underwriting resulted in softer loan production for the quarter, we're pleased with the strong foundation we're building and how the business is positioned for long-term profitable growth. To further align our strategy in SBA, we've strengthened the business by promoting Gary Carter to the position of National Sales Manager. Gary rejoined us a year ago as our Senior SBA Credit Officer, bringing deep industry expertise, including his role at Live Oak Bank that will help us continue building this business on a sound foundation. Our capital and liquidity position remains solid as we were able to closely manage the size of the average balance sheet while continuing to grow revenue. Regulatory capital ratios remain well above minimum requirements with a total capital ratio of 12.5% and a Common Equity Tier 1 ratio of 8.97% as well as substantial liquidity coverage. Moving to our strategic investments in technology and artificial intelligence. We continue to invest thoughtfully in digital capabilities that enhance the customer experience, improve operational efficiency and position us for long-term growth. These technology investments aren't just about maintaining our competitive position, they're also about creating sustainable advantages in how we serve customers, manage risk and drive operational excellence. Looking ahead, we're navigating an uncertain macro environment from a position of increasing strength. Our diversified business model is generating strong revenue growth. Our deposit franchise provides funding advantages and strategic flexibility. We've proven our ability to make difficult decisions and execute effectively. The credit challenges we've experienced are manageable in the context of our overall business. We've taken decisive action, strengthening underwriting standards, enhancing risk management and addressing problem loans proactively. We see the benefits in improving trends and expect continued progress throughout 2026. We are not standing still. We're investing in AI and technology to enhance efficiency and customer experience, strengthening our commercial banking capabilities, expanding fintech partnerships and repositioning our SBA business on a stronger foundation. We're confident in our strategy, our team and our ability to deliver value for shareholders. I'll now turn it over to Nicole for operational highlights, including commercial lending, SBA, Banking-as-a-Service and credit.

Nicole Lorch, President and COO

Thank you, David. Starting with commercial real estate, we saw solid first quarter activity with particularly strong production in construction and single-tenant lease financing. These businesses continue to perform well with strong credit quality and attractive risk-adjusted returns on new originations. We were also pleased to see higher balances in a couple of our emerging verticals, wealth advisory lending and equipment finance. The pipeline remains healthy with disciplined underwriting and good yields on new commitments. Turning to SBA. As David mentioned in his comments, the deliberate shift we communicated in our last call that prioritizes credit quality over volume, combined with a seasonally lighter first quarter resulted in lower originations for the quarter. This translated into lower loan sale volume and lower gain on sale revenue compared to the linked quarter. Regarding gain on sale revenue, while premiums have been strong so far this year, we still expect to retain more production on our balance sheet in future periods as the pricing on certain higher-quality deals will not fetch quite the same premiums in the secondary market. We generally look at a 12-month earn-back period when making decisions on whether to sell or hold loans. While this will impact gain on sale revenue for the year, it will be highly additive to net interest income and net interest margin in future periods. Nonetheless, barring any macroeconomic deterioration, we remain optimistic about the previously shared production and gain on sale targets for the full year. Importantly, while we're being selective about growth in this portfolio, we remain committed to small business lending as a core business. This is an attractive lending vertical with good long-term economics, and we have the platform, expertise and relationships to compete effectively once we've fully worked through this current credit cycle. As to credit performance, we've made substantial progress over the past several quarters through proactive and prudent actions. We've significantly enhanced our underwriting standards, added experienced talent to our credit and portfolio management teams and implemented more robust monitoring and early warning systems. We've also been proactive in working with our borrowers to prevent the formation of nonperforming loans, and we're seeing results. As of March 31, delinquencies in the SBA portfolio have improved 118 basis points quarter-over-quarter and 126 basis points year-over-year. As we look ahead, our focus in SBA is on durability and consistency rather than near-term volume. Loans originated under our revised standards are showing more stable early behavior. While these newer vintages are still early in their life cycle, we're encouraged by what we're seeing in terms of borrower performance, responsiveness and overall portfolio dynamics. The operational changes we've made across underwriting, execution and portfolio oversight are now fully embedded in the business. This enables us to remain selective today while preserving the ability to scale responsibly as conditions normalize. Our objective is an SBA portfolio with attractive long-term economics and reduced volatility across cycles, and we are building with that goal in mind. In Franchise Finance, we continue to make progress working through problem loans. Our special assets team was busy during the quarter coming to resolution on several credits. While net charge-off activity remained elevated during the quarter, it more than offset nonperforming loan formation as nonaccrual Franchise Finance loans dropped to their lowest level in four quarters. Looking at our Banking-as-a-Service operations, we continue to see strong momentum with our fintech partners. These relationships provide valuable deposit funding, generate attractive fee income and position us at the forefront of innovation in digital banking. We processed over $82 billion in payments volume during the quarter, an increase of over 260% year-over-year through a carefully curated partner network, a reflection of our efforts to strengthen and deepen existing relationships while cultivating new partnerships. We are constantly evaluating new partnership opportunities while ensuring we maintain the highest standards of compliance and risk management. Across the bank, we continue to invest strategically in AI and automation to drive efficiency and enhance customer service. Our strong data foundation built through previous investments in our data warehouse and integrated data sources now supports our infrastructure upgrades for AI agent processing. While scoping our own proprietary agents, we've already deployed third-party AI capabilities with measurable impact, such as fraud detection agents that screen outbound transfers before processing. Additionally, our virtual customer service agent resolves approximately 45% of inquiries, significantly reducing the burden on human agents and improving response times. The effects of this are validated by the favorable results from the Net Promoter Score framework and customer listening program we implemented in the first quarter with our consumer and small business banking team. Out of the gate, our scores are well above industry average. We have built relationships through transparency and delivering on our promises, and that loyalty delivers strong returns. The diversity of our business model is another key strength. We have multiple engines driving growth and profitability. Our commercial lending is performing well. Our consumer lending remains stable. Our fintech partnerships continue to grow, and we're seeing improving trends in SBA. We're executing on all of this with appropriately conservative underwriting standards that position us for sustainable profitable growth. I will now turn it over to Ken for additional insight into our first quarter performance and update to our 2026 outlook.

Kenneth Lovik, Executive Vice President and CFO

Thanks, Nicole. We are pleased to report solid first quarter results with net income of $2.5 million or $0.29 per diluted share. Total revenue for the quarter was $43.1 million, a 21% increase over the prior year period and when combined with well-managed expenses, pre-provision net revenue totaled $18.1 million, up 51% year-over-year. These results reflect our diversified business model, strong operational execution and sustained business momentum across our core segments. Net interest income for the first quarter was $31.6 million or $32.8 million on a fully taxable equivalent basis, up about 26% and 25%, respectively, year-over-year. Net interest margin improved to 2.36% or 2.45% on a fully taxable equivalent basis, up 14 and 15 basis points, respectively, from the prior quarter and both up 54 basis points year-over-year. The yield on average interest-earning assets for the quarter rose to 5.67% compared to 5.57% in the prior year period as higher rates on new loan originations more than offset the impact of Federal Reserve rate cuts in late 2025. We also saw a meaningful decline in funding costs during the same period with the cost of interest-bearing deposits falling 56 basis points to 3.45%. The ability to maintain and increase yields on interest-earning assets in conjunction with declining cost of interest-bearing deposits demonstrates delivery on our years-long effort to reposition the balance sheet and optimize our mix of earning assets. Noninterest income for the quarter totaled $11.5 million, up almost 11% year-over-year as fee revenue from our fintech partnerships continued to grow, supplemented by higher net loan servicing revenue following the servicing retained sale of single-tenant lease financing loans in 2025. David and Nicole both touched on our positive momentum in the Banking-as-a-Service space, which is evidenced by the growth in fee revenue with quarterly revenue increasing over 200% compared to the first quarter of 2025 and increasing over 220% on a trailing 12-month basis. Noninterest expense for the quarter totaled $25 million, up only 6% year-over-year despite continued investment in technology and AI to enhance both front and back-office operations and costs related to working out problem loans. Turning to credit. The provision for credit losses was $16.3 million in the first quarter, which was a little better than our initial expectations. The provision for the quarter included net charge-offs of $15.8 million and additional specific reserves in our Franchise Finance portfolio. Relative to our original forecast, the lighter provision was due to a combination of lower loan balances and unfunded commitments as well as updates to the assumptions in the CECL model. Our allowance for credit losses at quarter end was $56.5 million or 1.5% of total loans, up slightly from year-end. Nonperforming loans increased to $61.6 million or 1.63% of total loans. However, a portion of the increase consists of fully guaranteed SBA 7(a) balances where the government guarantee substantially mitigates our loss exposure. Excluding fully guaranteed balances, nonperforming loans to total loans drops to 1.22%. Another component of the increase in nonperforming loans was accruing loans 90 days or more past due. However, the largest portion of this increase, about $6 million, relates to one relationship that we expect to pay off in full in the second quarter. I will also note that our SBA team was successful in bringing some past due borrowers current shortly after quarter end, reducing delinquencies even further. At quarter end, the ratio of the allowance for credit losses to nonperforming loans was 92%. Adjusting nonperforming loans to remove the fully guaranteed SBA balances, the allowance coverage ratio improves to 122%. While we are pleased with the improvement in nonperforming loans and delinquencies, our updated allowance for credit losses model reflects our expectation that the provision for credit losses will remain elevated in the second quarter, but then improve gradually in the second half of the year. Total loans as of March 31, 2026, were $3.8 billion, an increase of $29.1 million or 1% compared to the linked quarter and a decrease of $479 million or 11% compared to March 31, 2025. David and Nicole both covered some of the lending highlights from the quarter where we experienced growth. Overall, origination activity was fairly strong across our commercial and consumer areas. We did, however, experience some early payoff and maturity activity in the Franchise Finance, Public Finance and Recreational Vehicles portfolios and in particular, saw early payoffs of some large balance relationships in the investor commercial real estate portfolio, which impacted total loan growth during the quarter. Total deposits as of March 31, 2026, were $5 billion, representing an increase of $142 million or 3% compared to December 31, 2025, and an increase of $36 million or 1% compared to March 31, 2025. David talked about the continued strong growth in fintech deposits, which has allowed us to further improve the mix of deposits and drive funding costs lower. Average CD and broker deposit balances, our highest cost of deposit funding were down over $180 million from the prior quarter. The weighted average cost of maturing CDs in the first quarter was 4.19%, while the average cost of fintech deposits was 3.19% and the cost of new CDs was 3.62%. As the cost of maturing CDs in the second quarter is 4.11% and in the third quarter is 4.06%, we have the ability to drive funding costs lower throughout the year and hence, drive net interest income and net interest margin higher even in a flat rate environment. Looking at our full year 2026 outlook, we're broadly maintaining the guidance we provided in January. However, we want to acknowledge the heightened macroeconomic uncertainty we're navigating, including volatile energy prices and other potential geopolitical developments. While we're confident in our business momentum and strategic positioning, we're taking a measured approach given the current uncertain environment. With regard to loan growth, while our commercial pipelines remain robust and our consumer business continues to produce solid results, we recognize our full year target could prove ambitious given higher-than-expected loan payoffs and the evolving macro headwinds, which could lead to further tightening of underwriting standards. We're closely monitoring the current environment, and we'll provide updates as the year progresses. In summary, we feel confident in the underlying momentum of our business and our ability to navigate the current macro environment while positioning the business for accelerating profitability in the second half of the year and into 2027. With that, I'll turn it back to the operator for questions.

Operator, Operator

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

Nathan Race, Analyst - Piper Sandler

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

Kenneth Lovik, Executive Vice President and CFO

Yes. As we think about it, it's still very similar to what we had talked about last quarter where we expect the bulk of it in the second half of the year. In terms of charge-offs for this quarter, we had $15 million to $16 million of charge-offs. Our SBA charge-offs came in line with what we were forecasting. Our Franchise number was a little bit higher because we took action on some other credits sooner rather than later. We continue to feel like first quarter is probably going to be the worst of the quarters into the second quarter. Even though we made progress on reducing nonaccrual unguaranteed SBA balances and Franchise balances, we still have elevated nonperforming loans that we need to work through. Our special assets team is working through those, and we expect to see resolution on many of those in the second quarter. By the time we get to the third and fourth quarters, our view is that we'll be through many of the older vintages where there's still some potential problems. By the end of the year, we expect credit costs to be at a far more moderate level.

Nathan Race, Analyst - Piper Sandler

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

David Becker, Chairman and CEO

We're sitting here, Nate, Ken and I are pointing fingers back and forth on it. The net interest margin, the biggest issue that we have out here even without... we did not put in our forecast at the beginning of the year any rate decreases. We have not come back and modified it with any rate increases yet. From the get-go, we weren't anticipating any rate falloff this year. Because of the CDs that are maturing and running off, as Ken said earlier, they're north of 4%. New CDs that we're adding and rolling are in the 3.6% range. So there's a gap there, but even better yet, fintech deposits are coming in at about 3.19%, almost a 100 basis point improvement. So that will continue throughout the course of the year. We have another $800 million rolling between now and year-end. So we could be up in that $290 million range by the end of the year.

Kenneth Lovik, Executive Vice President and CFO

Yes. Nate, similar to what we talked about last quarter, our forecasting still holds that we feel a 10 to 15 basis point improvement per quarter through the end of the year is a very achievable target on our end.

Nathan Race, Analyst - Piper Sandler

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

David Becker, Chairman and CEO

Yes.

Operator, Operator

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

Brett Rabatin, Analyst - StoneX Group

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

Kenneth Lovik, Executive Vice President and CFO

Yes. On the expense side, Brett, I think the guidance we had out there before, we are comfortable keeping it there for conservatism. If the macro headwinds impact originations or SBA originations are lighter in the first half of the year, we have some offsets on the expense side, certainly in incentive compensation tied to loan origination. So there are offsets that could take that number lower. On the fee side, there are levers there too. As Nicole said, we expect to retain more balances going forward in SBA, given some of the higher-quality deals we're doing. But premiums are holding in there on gain on sale. If premium levels hold up near the high end of the range, there's the opportunity to sell more into the secondary market and drive higher fee income. So there are a number of different levers that could offset perhaps any shortfall in loan growth.

Brett Rabatin, Analyst - StoneX Group

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

Nicole Lorch, President and COO

A great question, Brett. I'll take that one. We actually just had a credit committee meeting this morning, and we're talking around the table with all of our lending lines about the impact of fuel prices. Diesel fuel is up over $1 per gallon and regular gasoline is up as well. Our consumer borrowers have not been affected. We are not seeing any increase in delinquencies or any problem loans in the consumer book as a result of fuel prices. The horse trailers in particular have always performed well even with headwinds. Originations are very solid in this first quarter despite the conflict. So we're not seeing any decline in new originations with people spooked by the prices. In other lines of business, equipment finance, we do some lending for fleet vehicles and we're not seeing any issues there related to fuel prices. We've also done some outbound contacting of our top SBA customers who are most likely to be affected by fuel pricing. That's not just transportation, but anything that would have a fuel component. We're hearing no issues related to fuel pricing at this point. Some have had to pass along price increases to their customers. Overall, we're not seeing weakness in the portfolio as a result.

Brett Rabatin, Analyst - StoneX Group

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

Nicole Lorch, President and COO

We are seeing momentum there. Importantly, we have negative net revenue churn, which means we are seeing strong retention from our existing programs, and we have been able to increase our fee structure in a way that supports growth of the program. We're not bringing on new programs at a rate that we cannot sustain. We always have a backlog of customers that we're evaluating. We're in due diligence with about half a dozen programs, and we are making sure we're bringing them on in a responsible way. We have some solid partners that are meaningful. On a year-over-year basis, we've doubled the fees that we're seeing in our fintech partnership line of business. It does show up in different ways across our income statement. For instance, balances we've been able to push off balance sheet are not showing up in interest income or interest expense, but they do show up in noninterest income. You're also seeing fees in noninterest income. And then we have a couple of lending programs that will show up in interest income.

Brett Rabatin, Analyst - StoneX Group

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

Kenneth Lovik, Executive Vice President and CFO

Brett, they show up in the other line item and in services and fees, service charges and fees. To put some numbers around that: in the fourth quarter, we had a little over $1 million for the quarter in fee income from fintech partnerships. In the first quarter of 2026, we had a little over $1.5 million of fee income. With the momentum from existing partners, higher volumes, higher payments volumes, higher deposits, and more deposits pushed off balance sheet, if you run that rate, you're talking about roughly 50% growth year-over-year and more meaningful dollars going forward.

Brett Rabatin, Analyst - StoneX Group

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

Kenneth Lovik, Executive Vice President and CFO

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

Operator, Operator

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

Emily Noelle Lee, Analyst - KBW

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

Nicole Lorch, President and COO

We are not known for being easy in the fintech space. We've gotten a reputation for being one of the tougher due diligence programs out there. We kick the tires and make sure partners understand our expectations because we effectively regulate these programs as they are our customers in many cases. Right now, we have a couple of lending programs and a couple of deposit programs in review. We have one that is moving much closer to approval and we expect a second quarter onboarding event for that program. Some will go more slowly, especially consumer lending programs, which have a longer due diligence process. A business payments program can be faster. The timing depends on the nature of the program and whether the program is existing with another financial institution as a sponsor bank. A conversion can be quicker and have a faster impact on the financial statements than a brand new program that needs to ramp. So it depends. We have some that we expect to bring on in the next quarter and then additional ones in the third quarter.

Emily Noelle Lee, Analyst - KBW

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

Kenneth Lovik, Executive Vice President and CFO

If they cut 125 basis points, and this is on a static balance sheet that doesn't include growth, you're talking about roughly $2.2 million to $2.3 million annually of net interest income impact.

Operator, Operator

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

Logan W Lillehaug, Analyst - Craig-Hallum (on behalf of George Sutton)

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

Kenneth Lovik, Executive Vice President and CFO

Over the course of the year, we expect the loan-to-deposit ratio to increase. We ended the year with healthy cash balances. Quarter-end cash balances can be inflated due to payments activity at the end of the month, but we do have excess cash that we can deploy. If we're at roughly 75% to 76% this quarter, we probably see that ratio gradually stepping up and being closer to 85% to 90% in the fourth quarter. That is attractive because you're deploying cash into higher interest-earning assets while keeping balance sheet growth to a minimum.

David Becker, Chairman and CEO

We had a couple of very large commercial loans, including one paid on the last day of the quarter that was over $50 million, which lowered the ratio. That created a quick swing in the ratios. We also see swings on the deposit side at quarter end because of bill payment services and customers trying to close deals by quarter end. That number didn't intentionally go down; it was a timing math effect in that last week of the quarter.

Logan W Lillehaug, Analyst - Craig-Hallum (on behalf of George Sutton)

Okay. Got it. And then maybe just a high-level one for you, David. The last few quarters, you mentioned returning to that 1% return on assets level. Obviously, there are a lot of moving dynamics this year. But maybe just talk about the steps that you need to take to get back there in the medium term?

David Becker, Chairman and CEO

If we hit the numbers we expect for the fourth quarter, that will set us up to be back into the 1% return on assets range for 2027. We will continue the improvements we've been making. Based on our current calculations and trajectory, we expect to be back at roughly 1% by the end of 2027.

Operator, Operator

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

John Rodis, Analyst - Brean Capital

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

Kenneth Lovik, Executive Vice President and CFO

When net income is low as it has been, we get a significant benefit from our tax-exempt businesses, particularly our Public Finance portfolio. We have to get to a certain level of pretax income before applying a standard tax rate. If pretax income is low, we may show a nonexistent or even credit effective tax rate. Once pretax income moves into a mid-range, you may see a low single-digit effective tax rate. If we get to higher pretax income levels, say $10 million to $12 million, the effective tax rate could trend closer to 7% to 9%. In addition to the tax-exempt public finance income, we also benefit from LIHTC investments and have an NOL carryforward from last year that will benefit us when we generate higher pretax income. So when pretax income is low, we expect a substantial tax benefit; as pretax income rises, the effective rate will increase.

Operator, Operator

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

Nathan Race, Analyst - Piper Sandler

Just on the SBA revenue going forward, I appreciate Nicole's comments earlier around holding some production for a longer seasoning period. I'm trying to think about the cadence of SBA revenue. In the past, it's been more back half loaded, but you've made a number of changes to your platform and credit infrastructure. Can you speak to the cadence of SBA revenue within that context?

Kenneth Lovik, Executive Vice President and CFO

Historically, first quarter has been seasonally light for originations, with originations ramping in the second and third quarters and usually easing a bit in the fourth. Given our revised underwriting approach and the seasonality we saw in the first quarter, we're expecting a ramp-up throughout the year. Second quarter should be higher than first quarter, and third and fourth quarters should be materially higher than the first and second quarters in terms of origination volume.

Nicole Lorch, President and COO

Our pipeline is building. It's up about one third from where it was at year-end, which suggests we'll be in a good position to hit the targets we expect.

Nathan Race, Analyst - Piper Sandler

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

Kenneth Lovik, Executive Vice President and CFO

Keep in mind that $33 million to $35 million is total fee income. Last quarter, our expectation for pure gain on sale was in the $19 million to $20 million range. We still feel good about that total amount, but the timing may shift more toward the third and fourth quarters. The first quarter was solid, and historically the third and fourth quarters are stronger than the second quarter for origination and gain-on-sale activity.

Operator, Operator

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

David Becker, Chairman and CEO

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

Operator, Operator

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