Good day, everyone. Welcome to the First Internet Bancorp Earnings Conference Call for the First Quarter of 2020. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. And please note that today's event is being recorded. I would now like to turn the conference over to Larry Clark from Financial Profiles Incorporated. Please go ahead, Mr. Clark.

Thank you, Operator. Good day, everybody and thank you for joining us to discuss First Internet Bancorp's financial results for the first quarter of 2020. The company issued its earnings press release yesterday afternoon and it's 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 today from the management team are Chairman, President, and CEO, David Becker; and Executive Vice President and CFO, Ken Lovik. David will provide a company update and Ken will discuss the financial results. Then we will open the call up to your questions. Before we begin, I would 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 the most directly comparable GAAP measures. The press release, which is available on the website, contains the financial and other quantitative information to be discussed today, as well as a reconciliation of the GAAP to non-GAAP measures. This time, I'd like to turn the call over to David.

Thank you, Larry. Good afternoon, everyone and thank you for joining us today. As we speak with you today, the public health crisis confronting our country is of course at the forefront of our thoughts. Our top priority in this unprecedented environment is the health of our team, customers, and all of our stakeholders. Our sincerest best wishes go out to the patients and families fighting the direct threat of COVID-19, as well as the healthcare professionals and other first responders who are leading the charge to combat this pandemic. The hallmark of First Internet Bancorp has always been our team's tireless, collective effort to achieve strong results for our shareholders, customers, and the communities in which we operate. Now more than ever, that commitment will guide us as we work to ensure our clients continue to receive exceptional service. We have an opportunity to help our economy by helping the people who drag us weather the storm. First, we have fully implemented our companywide business continuity plan, so that we may continue to conduct our business while keeping our employees and clients safe and healthy. We're offering alternative work practices, including work-from-home options, and approximately 60% of our workforce is currently working remotely. For those of you who are continuing to come into the office, we have certain teams working in shifts and are placing greater distance between employees. We're also conducting most of our meetings through telephone or online channels. As a relationship banking company founded to serve customers with digital solutions, we have adjusted well to this new reality. In fact, while we have had to make some adjustments to how we operate, as a fully digital institution without branches, the channels through which we service our customers do not have to change on the fly, like…

Thanks, David. We're pleased with our first quarter performance as we delivered net income of $6 million and diluted earnings per share of $0.62, despite a higher provision for loan losses due primarily to building the allowance for loan losses, our earnings increased year-over-year. As David mentioned, our focus is on supporting our clients, colleagues, and communities to allow us to emerge from this crisis even stronger. The balance sheet was relatively flat and average earning assets declined slightly in the quarter due mainly to lower loan and average cash balances. As such a result was in line with our expectations for only modest balance sheet growth over the course of the year. Loans outstanding at the end of the first quarter totaled $2.9 billion, a decrease of $71 million or 2.4% from the fourth quarter. Commercial loans were stable as declines in public finance and single-tenant lease financing balances offset strong growth in healthcare finance loans, as well as the modest growth in small business lending and construction balances. Consumer loans fell by $94 million or 15% compared to the fourth quarter due primarily to our previously announced sale of a pool of consumer mortgages. We sold a total of $191 million of loans during the quarter, which included the $91 million pool of residential mortgages that included seasoned lower yielding loans. The market remained strong so the high quality loans we originate as we sold $94 million of public financing and single-tenant loans at solid premiums. Additionally, we sold $5.6 million of SBA 7(a) guaranteed loans before the market closed in late March. In total, we recognized the gain of $1.8 million from our loan sale activity in the first quarter, a slight increase from $1.7 million in the fourth quarter. Moving on to deposits, total deposits at…

We will now begin the question-and-answer session. [Operator Instructions]. Our first question is from Nathan Race from Piper Jaffray. Go ahead.

Question, Ken or David, just going back to some comments around stress testing, the portfolio under severe adverse scenario. I'm just curious if you guys could share maybe kind of what's your kind of internal analysis suggest from maybe a loss content or charge-off perspective in the type of scenario just given what you guys see today across the portfolio?

Yes, we have third-party stress testing performed on several of our loan portfolios are larger portfolios. And I would say when we look at kind of moderate stress and severe stress. The loss content is fairly much in line with what the reserve levels we have, individually at those loan portfolio as individually at that single-tenant portfolio level which is probably -- which is in the neighborhood of 100 basis points or so.

Okay. Understood. So I guess within that context, any thoughts on kind of just how you guys see your reserve tracking over the next couple of quarters maybe as a percentage of loans, or just any way to kind of frame-up what you guys are seeing as you sit here today in terms of where you've seen sufficient reserve levels, obviously it's a very fluid environment. So it's obviously difficult to ascertain but just any thoughts on maybe how you guys see the reserve trending over the next quarter or two?

Yes, I would say, Ken could probably add a little more granular detail on that. But we obviously shrunk the portfolio a little bit here in the first quarter, we will stay somewhere in the same balance it is today or not or potentially continue to shrink it over the course of the year. So we adjusted our factors and put back a $1.5 million in the first quarter, which was more than we needed to. But we -- there were some COVID-19 factors to reserve for has bumped us almost five points I think in the total balance of the ALLL account. We anticipate at least doing that amount, if not more, over the course of the next couple of quarters kind of depends on how the loans shake out. For example, the dental portfolio did have a lot of very high percentage that asked for the department, but as soon as their doors open, I myself personally have missed my checkup, I am waiting to get a new appointment and get back in those guys, that'll be a short-term crunch and we think they'll be back to business and running great as soon as the state starts open up again. So too early to tell at the current time. We love the fact that the SBA portfolio everybody in the portfolio made their April month payments, where in a week, spend a lot of times, Steve Farrell, Chief Credit Officer, all the division leaders have reviewed the portfolios top to bottom individually by loan. And we really think we're in as good a shape as we could be for kind of the unknown consequences of what this quarantine and restriction is going to be.

Got it, that's great color. Appreciate that. And if I could just ask, I appreciate all this commentary and detail in the slide deck, as it relates to those industry exposures that are maybe more impacted by COVID-19. And I guess I'm just curious, based on the balances that you guys have outlined on Page 13 of this slide deck, do you guys have a sense for what amount of PPP loans if you're putting here that have in the pipeline will feed directly towards these borrowers that you guys outlined on that slide?

We probably have that data, it's probably not handy. I mean, I think in back -- further back in the deck on the SBA side, we kind of break out the PPP recipients that there is a full suite of PPP loans for five borrower type. I would say probably that within that C&I number probably a fair amount of those impacted by the -- those directly impacted by the pandemic were a fair portion of those that are in that C&I bucket of PPP loans. Just a little bit of color to this because after the chart that's on Page 13. If you take a look at the small business lending side and I'm going to screw up the acronym, I think it's NAA, NACIS code or NAICS code whatever it is, the full service restaurants, hotels, and the small business lending side of the SBA. The federal government came out with a 90-day deferral on those loans in the very beginning of the crisis, because obviously they were the first to close and that's heavily impacted. And they have now come back on all of our 7(a) loans. So, literally all $30 million here for the next six months, the federal government is going to make full payment of principal and interest on those loans. So these stuff should be in great shape to come out the backside of this. As Ken said, this slide towards the end of the deck that shows the break out all of those, all those loans we did although some banks are getting in trouble for it, we followed the rule of servicing our customers. So literally all of those loans in the one area in that category and kind of the C&I that doesn't appear on this sheet because construction workers are still going. We had some construction companies that are clients of ours that jump in on the PPP program. But I would say this is an off the cuff number we will validate and get it back to your [ph] questions what I would say 70% -- 60% to 70% probably ended up with folks that are on the sheet. So it was a great program for us and it was 100% current customer focus so.

Okay, understood. And if I could just ask one more. Again, appreciate all the details in the slide deck. On the healthcare books, specifically dental are those recourse loans generally?

Recourse, we have personal guarantees on all those loans. Most of them are either practice acquisition or the real estate of the dental community. We've been in it over three years-to-date, we've never had a delinquent account and have not had any losses whatsoever in the portfolio. Actually, before we got into our current client base, we had purchased a portfolio from a New England Bank. I think it was about $35 million in loans five, six years ago. And that portfolio is down to just a few million today. And I think we've had a total of $15,000 in losses out of it. So these are extremely strong credit, great credit profiles, great debt service coverage, great equity in the businesses, strong operators, outside of the fact that the doors are locked now except for emergency procedures. We have total faith that as soon as their doors opens up -- opens up, they will be back in business and running strong again. So we're real confident that portfolio is pretty rock solid.

Our next question is from Michael Perito from KBW. Go ahead.

Doing all right, hanging in. It sounds like you guys are doing the same.

Yes.

Yes. I appreciate the time with everything going on all the edit disclosures. It's all very helpful. So thank you. I wanted to spend a few more minutes on credit, I guess first as we think about this single-tenant leasing portfolio, is there any historical context whether your own or peer analysis that you guys have done on kind of how this or similar type of portfolio performed maybe like during 2008, 2009 during the period of greater stress? I mean, obviously, the loss rates for the last 10 years or so have been low, but there hasn't really been a lot of credit events going on the last decade or so since that. I was just curious if you guys have any kind of context that would be helpful there?

The only context that I have for you, Michael, is kind of second hand, obviously some of our investors are large insurance companies and STL product is a mainstay in their investment portfolio. Generally, they're in larger dollars than we are. But again, if you think about the focus, the restaurants, the quick service is a big chunk of ours, obviously we have Bob Evans and rental officers they are only like two really full service team that we have out here. But it's been a tremendous portfolio. And as we have talked to those investors over the years about the bank, they're all excited that we're in the portfolio. They love the quality of it. And I will tell you, we closed on the sale of close to $40 million of that portfolio on like the last day of the quarter. So I think that goes back to the strength and quality of our assets. We sold $100 million on the consumer mortgage side of things. We sold about $45 million in the municipal lending side during the first quarter, and then we closed to actually a second time purchaser STL portfolio right at the very end of the quarter. So, we're pretty comfortable that this is a great quality product. We have seasoned investors; most of our investors have real estate background. It's not like they're just coming up and buying a Dollar General Store for the hell of it. They've got good understanding of the industry to play and we stated, we underwrite them first and we have a lot of folks that have a carrying capacity and we've had individual units go dark over the years, and we've never had a collection issue or problem the individual investor was able to carry the property until they got it released to somebody else. So states are starting to open up, obviously, the faster that some of these can get back into business, the better. But I think we're pretty confident that we're in solid shape on the STL portfolio top to bottom.

Helpful, Dave. Thanks and then as I look at the Slide 14 the present imbalances with deferrals when I -- and I think about the additional reserves you guys put up in the quarter. I mean, is any of that kind of specific allowance against the credits that are deferring payments? Or is it really just general at this point? And there's nothing being specifically held against your clients that are in a position of deferral?

Yes, it's 100% general at this point, and if you take a look at this sheet on 14, you go up to healthcare, that's $290 million out of $360 million. So the reality of it, if we take them out, we've only deferred $70 million on a $3 billion portfolio. The consumer has been phenomenally strong in the mortgage area and on the consumer lending side of things and it really is that healthcare one that's a little out of center now, but they were one of the very first hit and we actually went to them with a deferral program upfront. And we had about 80% of our accounts take advantage of it.

Has deferrals picked up since the end of the quarter relative to these numbers that have been disclosed?

All the numbers disclosed here are as of last Friday.

Oh, I see, I haven't gone here. I apologize as of April 17. Okay. Great. So I wanted to transition a couple more. So it sounds like if I'm hearing you guys correctly, I just want to confirm that I am, the balance sheet strategy from here is that the balance sheet might actually shrink a little bit in the hope of building, aiding the build capital, while also making sure deposit growth is steady to that way, there's plenty of liquidity, even if it's at the expense of the margin a little bit; is that kind of a fair summarization?

That's spot on.

Okay. And then just as we think about the PPP program. I am sorry if I missed it. But did you guys mention what type of fees you expect from that $45 million? I think it was and also, I mean do you have any idea of what the pipe -- what those numbers would look like roughly, if this second wave of funding comes through? I'm sure you have a backlog of applications. It seems like most do any idea on what that figure would look like?

Yes, I will tell you Michael, the actual figure I have right here in front of me, what we have close to-date and actually funded out of our 268 loans, we funded 253 of them for $42.2 million and the fees earned on the dispersed loans to-date are $1,525,887.48. So just a little over a $1.5 million. We have in pipeline today that either because of lack of documentation or play that folks did not get through, we've got just shy of 100 applications in process, just a little bit under $10 million about another 25%. We reopened when it became fairly clear we did a soft opening of our application portal about 48 hours ago and we've got another 30 new inquiries to go along with it. So we hope to have all of our clients all 96 that were in process, locked and loaded. I think this round of funding and when it comes out, it's going to go very, very quickly. They opened up at the very tail-end literally within the last few hours for the first PPP program to into -- two square PayPal, some of the fintech companies to go after some of the micro businesses that they deal with. And I can tell you they have thousands of applications pending and ready to go when this portal opens, so we literally are at stage with the 90 applications that we have ready to go. All we have to do is apply for an E-Tran number. So we've got them lock loaded, and we should probably come away with another $10 million or so. One of the questions and concerns, I don’t know whether you caught in Ken's commentary, but they have tied all of the funding for the SBA program into this second wave of PPP loans. So if they do advance 100% of this PPP money as everybody anticipates they will. There's nothing left for funding traditional 7(a) loans between now and the end of the period. So over the last 72 hours when we caught that kind of structure issue in the PPP portfolio, we've taken all of our 7(a) loans that we have in the pipeline that we anticipate could possibly close between now and July 1. And we've applied for an E-Tran number and locked funds for those loans. So we don't wind up here in 72 hours with no SBA opportunity for the balance of the year. So we've been monitoring this thing with a magnifying glass from the minute it started. And in the last 72 hours, we've really prepped ourselves to one take care of our 7(a) business and two, be prepared for some additional loans under the PPP program.

Got it. And just lastly, do you expect expenses to kind of remain elevated, Ken, in this next quarter here? I mean, I'm sure there's a lot going on behind the scenes and there's it's the right thing to do, but I'm sure there's a cost to it. I mean, is that a fair assumption or do you think there's some relief that can come through in the next quarter?

I don't. I mean there might be a little bit of relief, but I wouldn't say a ton. I mean, we have the headcount increase because we did again, we absorbed the full-quarters impact of the First Colorado SBA team we brought on board last quarter plus we continue to build out new LOs in that space, BDOs. So there is probably not a lot of relief in that headcount number. Some other things I would expect to be stable. I think the, like for example, loan expenses were up this quarter. That was more due to dealing with the -- some administrative costs related to the one single-tenant property we have on non-accrual. So that number probably come down. But I think it's probably more of a stable number. Maybe a little bit of leverage to go down but I wouldn't say a whole lot.

Like the obviously first quarter, we have a bunch of [indiscernible] tax, stuff that pops up and kind of blow up this area a little bit too. One of the other things that we're doing in the course of COVID-19 is to say we got 60% of our people working from home, that's increased our costs, a lot of our employees did not have sufficient bandwidth at home. So we've got the hotspot for picking up some communication charges. We bought close to an additional 50 laptops so people can work-from-home. So we had some kind of one-off incidental costs during the first quarter and just the play of the split operations obviously add some concerns and play. We paid a fair amount of overtime for people to get what -- some of our staff to get through the SBA crunch that we had in the 10 days of the PPP program. So there's some one-off and we're doing some things to kind of support the community and folks here in town, we bring in lunch, breakfast one, two, three times a week to the staff that's coming into the office to help the local merchants out the program. We've made a gift that I think we kicked out a press release a week or so ago. Here in Central Indiana and Hamilton and Marion County it's kind of our backdoor. We gave a grant of $250,000 to the impact fund, which is working with the Indianapolis chamber to help basically do micro loans to minority businesses in the two County area here that are in really, really Dire Straits with the anticipation that they're going out as loans with really their grants and gifts to try and help these folks stay alive. So we've got some extraordinary expenses in here on the COVID side. I can tell you, it's not going to go up significantly. But as Ken has pointed out, I don't know that it's going to drop significantly, particularly in the next 60 to 90 days.

[Operator Instructions]. Our next question is from George Sutton from Craig-Hallum. Go ahead.

Thank you. Hi, guys. I would like to add my appreciation on the slide deck; I think it's really well put together. So really, I want to ask a fairly simplistic question, but relative to the deferral programs, if you assume, I had a $1 million loan and a 3% interest rate, and I got a 90-day deferral, what -- I just want to be clear, what are the economics to you in that program? What is the resultant loan balance and what kind of interest costs would I have from there?

Well, on our side, with the deferral programs, we still earn interest on that, even though you're not paying the loan, because we're not again -- we're not forgiving it. We're just deferring the payment. So we as the financial institution, we continue to earn the interest on it. The way that those payments are treated kind of vary by loan type based upon the structure of our loans, like for example, if a single-tenant what we've been doing with those is that we take the unpaid principal and interest then we add that to the balloon payment. That's due on maturity. In the healthcare finance business, what we do is we take those payments and we add them to the back end of the loan. So there's kind of some different nuances in how the cash payments are handled. But we certainly earn interest throughout the deferral period.

So it's in effect, like a picking treatment of the payments, payment income?

I see what you're saying. Yes, I guess you could think about it like that. That’s an interesting way to think about it. But yes, yes, I mean, we're obviously not receiving cash, but we are earning interest on it. And we ultimately will receive the cash. It's just really a timing difference.

George, I would point that the things that we did, Nathan asked in the beginning about some of the stress testing and stuff we did, we went through our full portfolio, it's absolutely every one of our loans in our portfolio did not make a payment for 90 days, the cost to us is $257 million. So one of the reasons for keeping the elevated cash flows as Ken said, our earnings are still there. We're just not getting the cash. So if the same things the lectern, it gets really crazy over the next 45 days, it goes up and we have to bump up, talk to all the other bankers on twice a week phone calls with the CEOs of all the banks here in the State of Indiana. And as a general rule, I think most of the banks are deferring somewhere in the range of low-end is probably 5%, high-end I’ve heard is about 17% of their loans. So, if we had to defer a 100% of the loan, and it went absolutely nuts that's $257 million in cash, it would cost us over 90-day period. So we're well -- we're going to get nowhere near that number. But that was one of the factors we used in deciding to hang on a little extra cash at the current time.

All right. I just knocked on wood for you just to be clear.

I can hear [indiscernible] knocking on wood.

So relative to your 7(a) loan discussion, you mentioned $100 million in apps that were in process. Are you conflating those, or those separate? I just want to be clear, what you've brought from that pipeline into the mix?

The 7(a) loans that we've pushed through is what I'm sorry, that was not $100 million of them. I don't think I said that. But if I did that --

No, no you mentioned there's $100 million in apps in process for this second PPP.

Yes, 100 applications for $10 million, yes.

Sorry, that's what I meant. Okay, but are we --

That's good -- 100 applications.

But that is not inclusive of the 7(a) loans that are in process. That's what I'm trying to say.

That’s correct. That's absolutely correct. The 7(a) loans that we went and got E-Tran numbers on, I'm going to guess that to be close to $10 million portfolio or $10 million in loans that we think might close between now and June 30 that we've kind of stepped up the process to make sure we have funds allocated for them. So together -- go ahead.

I apologize. Last question relative to the PPP economics I'm being told there's a fair amount of monitoring of these and it's going to be required the SBAs really going to be able to monitor very effectively. Are there economic benefits for you in doing that?

Yes and no. Hopefully the gist of the program and this truly and you probably heard it 100 times from everybody you've talked to, this is a plane being built. Well, it is flying without question and nobody has any idea how to help us. They're going to land this plane yet. We have -- we were, as of last Saturday, it was before we finally got support in SBAs what the loan documents should look like. And they had sent from a date of approval to actually dispersing the funds. It was originally a seven-day window that came out last Thursday that changed on Friday to 10 days. So we will meet that window time for all the loans that we get approved, we will get them dispersed within the 10-day window, or the customer won't get the loan. There has been absolutely no play other than the fact that the eight-week window of time to determine your forgiveness amount starts the day you receive the funds. And that's absolutely the only thing we've got today, George, about how to run this program forward, how to apply. We don't even know directly how to build SBA at the current time for the upfront fee. Suggest if the bank call us on the other day is just put together a spreadsheet, send them a bill and see what happens. So they really -- this program is being defined. If you take a look at it, the SBA in the last 10 days has done more business than they've done in the last 14 years put together. So it is just a total cluster. And you have to be determined how much monitoring and activity is going to take out the other side. But if all things work as everybody hopes, people go back to work, 60, 90 days from now they go back in and get a fair amount of the loans are covered and reimbursed given forgiveness is given on the loan balances, then we'll do okay in the program. If this stretches on into a six month cluster, we'll probably break-even but it's one of those things we felt if it was the right thing for us to do, whether we make money on it or not, we had to try and help the business community.

Got it. I've heard it a little differently. It's like a rocket. It's like building a rocket ship after it was launched. But same type --

I would -- I would -- having lived it for the last 14 days, I'd agree with that analogy. That's, that's better than an airplane.

Our next question is from Nathan Race from Piper Jaffray. Go ahead.

Yes, thanks. Just a follow-up, Ken, any thoughts on just the tax rate going forward?

Apart from the tax rate going forward, I would say some of it is going to depend on the level of mortgage revenue that comes in; it's all highly dependent on the proportion of tax exempt revenue to total revenue. I mean this quarter we had -- we picked up the benefit of a change in tax laws as a result of the CARES Act that was offset by a little bit by expense associated with equity compensation vesting events. I'd probably say it's probably closer to the rate in the fourth quarter than it is in the rate that we had currently here, so probably, 7% to 9% effective rate.

This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. David Becker for closing remarks.

Guys, I know this is some crazy, crazy times that we're living through today nothing in history to tell us or at least for the folks that are on the call today, I guess we could go back to the Spanish Flu in 1918 and maybe draw some analogies to what's going on in the world today. But it has been tremendously crazy time. So I want to thank all of you. We've had a chance to talk to several of you directly over the last few weeks. And you have questions; feel free to reach out to us. Thank you for joining the call today. We hope everyone remains healthy and safe during these challenging times. And we hope to talk to you again soon. Thank you very much for your participation today.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.