First Internet Bancorp Q2 FY2026 earnings call

Credit Quality Improvements

• Management marked a clear inflection point in the firm's credit trajectory, after 18 months of process overhaul following elevated credit issues in prior quarters.
• Significant operational changes were implemented: strengthened underwriting standards, enhanced portfolio monitoring, expanded special assets resolution capabilities, and added predictive analytics/early warning tools to identify borrower stress earlier.
• Separation and specialization was created between portfolio management and problem loan resolution, improving efficiency of both teams. Disciplined actions have driven measurable, sustained credit improvement across key portfolios.

Strategic Capital Deployment

• The firm is optimizing its loan portfolio by allowing lower-yielding legacy portfolios (healthcare finance, residential mortgage) to run off, and redeploying capital into higher risk-adjusted return verticals, including construction, investor commercial real estate, single tenant lease financing, small business lending, and emerging areas: wealth advisory lending and embedded finance.
• A key strategic move was expanding the partnership with embedded finance technology partner JARIS: the firm now retains all JARIS platform originations (previously only retaining ~10-12% and selling the majority to a JARIS-managed fund). These short-duration, high-yielding assets are expected to be accretive to net interest income.
• The firm curates FinTech/banking as a service (BaaS) partnerships selectively rather than pursuing rapid volume growth; 3 new partners have been added year-to-date, reaching 15 total partners and 21 programs, with 2 more programs expected to launch by end-2026, and multiple existing partners have expanded their relationships with the firm.

Technology and Operational Investment

• As a branchless digital bank, technology investment is focused on business outcomes rather than novelty: all investments are evaluated for their ability to improve customer experience, strengthen risk management, boost efficiency, and generate appropriate return on invested capital.
• Cost discipline has been maintained while continuing to invest in technology, AI, and talent to support growth and risk management initiatives, leading to lower full-year operating expense guidance.

First Internet Bancorp reported Q2 2026 total revenue of $41.1 million, a 23% year-over-year increase. Net income totaled $2.4 million, or 27 cents per diluted share, up significantly from the prior year period. Pre-provision net revenue was $15 million, up 28% year-over-year. Net interest income was $32.4 million ($33.6 million fully taxable equivalent), up 16% and 15% year-over-year respectively, with a net interest margin of 2.39% (2.47% fully taxable equivalent), up more than 40 basis points year-over-year. Non-interest income growth was led by FinTech partnership fee revenue, which grew 222% on a trailing 12-month basis, alongside payments volume growth of 256%. Provision for credit losses was $13.4 million, down from $16.3 million in Q1 2026. Net charge-offs totaled $16.9 million: SBA/small business lending net charge-offs were $4.8 million, down 47% from Q1 2026; franchise finance net charge-offs were $11.6 million, of which $6.7 million was covered by pre-existing specific reserves. Non-performing loans totaled $60.1 million, or 1.58% of total loans, down from $61.6 million (1.63%) in Q1 2026, marking the first sequential decline in several quarters. Non-accrual loans declined for the second consecutive quarter, down 19% from year-end 2025. Total delinquencies declined 26% quarter-over-quarter to $29.1 million, or 78 basis points of total performing loans.

• Full-year 2026 EPS guidance is maintained at $2.35 to $2.45.
• Full-year loan growth guidance is revised to 4% to 6%, down from prior expectations, due to elevated early payoffs, lighter small business originations in the first half, and lower retention of guaranteed SBA balances amid strong secondary market premiums; strong pipelines are expected to drive growth in the second half.
• Fully taxable equivalent net interest margin guidance for Q4 2026 is maintained at 2.75% to 2.80%, excluding any future interest rate changes.
• Full-year fully taxable equivalent net interest income guidance is revised to $141 million to $142 million, due to the smaller expected balance sheet.
• Full-year non-interest income guidance is raised to $40.5 million to $41 million, driven by stronger-than-expected SBA gain-on-sale premiums and continued FinTech fee revenue growth.
• Full-year non-interest expense guidance is lowered to $106 million to $107 million, driven by lower compensation costs, while maintaining planned technology and AI investments.
• Full-year 2026 provision for credit losses guidance is set at $47 million to $48 million, reflecting improving credit trends.
• Management expects sustained net interest income and margin expansion through the second half of 2026, driven by ongoing deposit cost reduction from maturing high-cost CDs, higher yields on new originations in high-return verticals, and increased retention of high-yield embedded finance loans. Net charge-offs are expected to decline significantly in the back half of 2026.

• Macroeconomic and geopolitical uncertainty remain, which could impact borrower performance and lead to unexpected credit losses not captured in current forecasts.
• Elevated early loan payoffs, which are difficult to predict accurately, can impact average loan balances and net interest income growth relative to projections.
• Renewal rates on maturing CDs have declined, creating uncertainty around deposit replacement, though management notes excess cash on hand to absorb runoff and lower cost FinTech deposits are available to replace maturing high-cost CDs.
• The firm remains modestly liability sensitive: a 25 basis point interest rate hike would reduce annual net interest income by approximately $2.4 million on a static balance sheet.
• While the worst of credit issues from 2021-2023 vintages is believed to be past, unexpected stress could still emerge in the SBA and franchise finance portfolios, though management has proactively engaged with nearly all borrowers in these segments to identify issues early.

Q: The NII guidance implies ~15bps of funding cost decline and ~25-30bps of earning asset yield increase in the back half. Is this accurate, and how much will the expanded JARIS partnership contribute to higher yields? / A: This rough math is in line with management expectations. Large volumes of high-cost CDs maturing in Q3 will be replaced primarily by lower-cost FinTech deposits, delivering significant deposit cost savings, concentrated in Q3. Strong pipelines for construction, investor commercial real estate, and single tenant lease financing are bringing new higher-yield loans onto the balance sheet: commercial loans are priced at SOFR + 3, and single tenant loans currently carry a 6.4-6.6% yield. The expanded JARIS partnership adds high-yield short-duration assets, with expected total balances of $45-50 million in the near term, and gross yields well above existing legacy portfolio assets. As lower-yielding legacy portfolios continue to run off, the path to higher overall portfolio yields is very clear. (527 chars)

Q: Do management believe they have fully identified all potential credit issues in 2021-2023 SBA and franchise finance vintages? / A: For the SBA portfolio, underwriting and portfolio management changes implemented in late 2025 have already shown clear improvements, and management believes the worst of stress from 2021-2023 vintages is behind them. New 2025 and 2026 vintages are performing far better than older cohorts. For franchise finance, non-accrual inflows have slowed dramatically, and early-stage delinquencies are down more than 75% from the start of the year. While isolated issues can still emerge, the pool of at-risk loans has declined significantly, and proactive early outreach to borrowers has improved visibility and loss recovery. (519 chars)

Q: Can management update the outlook for BaaS/FinTech partner growth? / A: The firm has added 3 new partners year-to-date to reach 15 total partners, with 2 more programs launching by end-2026, and a healthy pipeline behind that. Growth is deliberate and curated, not focused on volume for volume's sake, and 4 existing partners have already expanded their relationships with First Internet this year. FinTech revenue is already up 222% year-over-year, with clear long-term runway for continued growth from both interest income on new lending programs and moderate fee growth from transactions and oversight. (411 chars)

Q: Can you share details on the new emerging verticals of wealth advisory lending and embedded finance? / A: Wealth advisory lending focuses on financing ownership and succession transitions for Registered Investment Advisors (RIAs), a market with significant structural demand as the average RIA owner is 61 years old, and volumes have picked up sharply in recent months. Embedded finance has more than just the JARIS partnership: JARIS is the largest current opportunity, with two additional partners expected to go live by end-2026. The expanded JARIS relationship delivers net yields of 12-15% after all costs and reserves, far higher than any other assets on the balance sheet, with new originations expected to double in the second half of 2026. (478 chars)