Good afternoon, and welcome to the First Internet Bancorp Third Quarter 2018 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Allyson Pooley of Financial Profiles. Please go ahead.

Thank you Kate, and good afternoon everyone. Thank you for joining us to discuss First Internet Bancorp Financial results for the third quarter ended September 30, 2018. Joining us today from the management team are chairman president and CEO David Becker; and Executive Vice President and CFO Kenneth Lovik, David and Ken will discuss the third quarter results and then we'll open the call to your questions. Before we begin I'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of First Internet Bancorp that involve risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings which are available on the company's website. The company disclaims any obligation to update any forward looking statements made during the call. Additionally, management may refer to non-GAAP measures which are intended to supplement but not substitute for 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. Now I could turn the call over to David.

Thank you Allyson. Good afternoon everyone and thank you for joining us today. Since this is our first earnings conference call, I'd like to begin with a brief overview of our company and our strategy and then I will discuss our fourth-quarter performance. Ken will then provide some additional details on our financial results. First Internet Bancorp open for business in 1999 as an industry pioneer in the branchless delivery of banking services. Our mission from the start has been to service customers in the digital economy providing them with customer centric digital banking solutions including real-time capabilities for both payments and lending while maintaining the personal touch of relationship banking. Over nearly 20 years in business we have come to understand our customers' preferences for anywhere, anytime access. Our ability to meet their needs has created a tremendous amount of customer loyalty. Today an increasing number of consumers and businesses prefer digital banking over traditional branch banking. Our national online and mobile deposit gathering and asset generation platforms capitalize on advancing technology and are highly scalable. Our business model uniquely positions us to build relationships with our customers by using technology to modernize delivery channel of an industry deeply rooted in tradition and by offering the combination of products, services, and values that they find compelling. We believe that we are well positioned to flourish within this digital banking ecosystem which is still in the early stages of a powerful secular trend. We have built a $2.4 billion nationwide branchless deposit franchise that provides consumers, small businesses, commercial clients, and municipalities with innovative technology convenient access, high-touch customer service and competitive deposit rates. Our national footprint also enables us to focus our marketing efforts on geographies that are more tech savvy increasing our overall deposit capture. The success of…

Thanks David and thank you everyone for joining us on our first earnings conference call. I'm going to highlight and expand on a few areas and try not to duplicate what is already in the press release. Our total loans were $2.5 billion at September 30, an increase of $120 million from the end of the prior quarter or 20% on an annualized basis. Loan growth this quarter was solid though lower than recent quarters. As David mentioned we are sticking to our focused areas and are very disciplined about deploying capital. Our commercial portfolio grew by $84 million in the quarter on a $138 million of funded originations primarily driven by increased production in public finance, healthcare lending, and single tenant lease financing. Healthcare finance loans grew at the highest rate posting a 36% increase from the second quarter albeit off a lower base. We are still at the early stages of market penetration with this loan product which we launched a little over a year ago via our strategic partnership with Lendeavor, a San Francisco based technology enabled lender focused primarily on dental practices. We also believe that we have a long runway in front of us with our public finance lending as we have the ability to expand geographically and further diversify our network for deal flow and we are putting resources into this growing business line. We particularly like this asset class due to its high credit quality and lower regulatory capital requirements and as discussed in the earnings release these loans are very easy to hedge with interest rate swaps to create LIBOR based floating rate assets. On the consumer side residential mortgages grew by $25 million more than half of the increase was due to funding construction loans that were originated in prior quarters…

[Operator Instructions] The first question comes from Andrew Liesch of Sandler O'Neill. Please go ahead.

Hey everyone.

Good morning Andrew.

Can you just talk a little bit about your loan growth going forward 5% is certainly solid, I'm just kind of curious how are you managing loan growth versus internally generated capital and you certainly had positive comments in the release but just kind of curious for what your thoughts are with this 5% rate or could it be a little bit better?

I think as we look out to the forecast over the next quarter and beyond. I mean I think we feel good about what public finance has been doing, what single tenant has been doing, as you identified the growth itself is down a bit compared to prior periods as we've talked earlier about there's been some dynamics this year that have impacted the growth rate of the portfolio. Tax reform earlier in the year certainly impacted public financing to a certain extent the single tenant portfolio. Some of that tax reform continues to kind of work its way through the public financing the municipal market, although we may be at with rates rising up here recently we may have gotten to an inflection point on that. I think we feel pretty good about loan growth going forward. I think it's probably in terms of percentage growth I guess we're the law of large numbers is catching up with us a bit but I think we feel $120 million of growth during the quarter, we took what the market gave us that's kind of what we've done in the past. As we've talked about with investors and analysts in the past, we only whether it's single tenant or public finance we're only funding a small portion 10% to 20% of the deals we see, we maintain rate, we maintain structure there has been favorable dynamics in those areas over the past couple of years but it's slowed down a bit. I think we feel good. I think the number I threw out earlier in my prepared comments about 5% to 8% for next quarter is the range itself is going to be dependent on again the timing of funding. There's some seasonal factors that may impact the fourth quarter single tenant sometimes when the live companies have hit their [quarters] for the year, there may be an opportunity to grow balances in that space as competition diminished in the public finance space there's you have municipalities and government entities trying to get financing in place by the end of the year. So there could be some opportunities there to be on the higher end of that range. But I think in terms of like the dollar growth that we've seen over the past year or two it's probably consistent with what we expect. We have strong, we have high hopes for the healthcare finance business as well as Lendeavor gains traction in that space and gets grant gains, brand recognition and their pipelines are looking better every day. So even if single tenant in public finance are maybe not what they were last year, the consumer book is done well and healthcare and Lendeavor are doing well. So I think in terms of dollar amounts we are probably close to where we've been in the past couple years if we were to forecast for next year.

Okay.

Andrew, let me add a quick comment. That's the only area that I would add to in the C&I space, our team is just absolutely knocking it out of the park having some of the best quarters the last couple of quarters they've had since in putting the team together 7-8 years ago, but we're running a little bit in place. We've had some major pay off not by competitive forces or somebody out bidding those or anything of that nature. We've had some very large C&I clients that in the kind of economic situation we had up until yesterday sold their business and left. So C&I has actually hit all the sales targets we had forecasted for them at the beginning of the year but the net effect has been minimal because we've lost some large clients doing to the people selling the business. So that seems to be stabilizing. We don't anticipate any really big ones here into the fourth quarter. So maybe we'll see a little bit of uptake in C&I as well.

Okay. That's really helpful and then just shifting gears to the gain on sale revenue presumably there was just like with less mortgage activity. I'm just curious what your thoughts are on selling portfolio mortgages or single tenant leases advantage growth or concentrations and then also generate some current income?

Well, I mean as we mentioned we do have a sale in single tenant that we're working on that that should get if it comes together it will get done in the fourth quarter and we continue in the single tenant space we continue to talk to the loan sale desks and stay on top of market color as you guys know interest rates have risen over the past year. So it's, I guess the way that we look at it from a balance sheet management perspective new production could be sold fairly easily at a probably a pretty healthy premium but that's also going to be some of the highest coupon loans in the book. This sale that we're looking at here is really a great opportunity for us because it's a chance for us to get some of our lower yielding stuff that was originated 2, 3, 4 years ago in a lower interest rate environment and replaced that with new production in the low to mid five range. On the mortgage side, [resi] mortgage, portfolio mortgage we are always in discussions with certain parties to explore sales. We did a couple of sales last year and we continue to explore that. So we look at that and it's hard, that’s going to be based on market conditions and timing and obviously investor or other buyer appetite out there but we're always looking at just kind of hard to predict the timing of it.

Okay. Guys, thank you so much for taking my questions. I'll step back.

Thanks Andrew.

The next question is from Michael Perito of KBW. Please go ahead.

Good afternoon guys. Thanks for taking my questions.

Hey Mike.

I want to start with Ken maybe on the hedging strategy. I was wondering if you could maybe walk through the mechanics a little bit of what the specific drivers of the 4 to 5 basis point increase in margin in the first and second quarter and then also more broadly where do we kind of go from there, I mean I guess it's the hope of all this hedging activity to kind of remove the margin as a volatile variable and your income model and hold it steady or how do you see yourself positioned after that, initial rebound you expect on the early part of next year?

Yes, I mean the hedging strategy kind of from a big-picture perspective if you think about our asset classes, single tenant is a longer term fixed-rate product, although we obviously get a lot of equity up front and it's amortizing some of the consumer portfolios are longer-term, obviously mortgages and in the public finance loans by their nature are longer term as well. Really the only real variable rate asset generator we have today that's producing new assets is in C&I. So the ability to take advantage of the changes in hedge accounting and convert some of the public finance production into LIBOR based variable rate assets was an attractive opportunity for us. I think you look at it a couple different ways, one it just it adds asset sensitivity to a balance sheet where as I said earlier a lot of our organic engines we have in-house today are longer-term fixed-rate. It's certainly defensive against rising deposit costs. So it's, and obviously from a long-term interest rate risk management perspective as well it provides protection there. So I don't know if I'd characterize it as a better sale on rising interest rates per se but it's just to add asset sensitivity and make sure that our balance sheet is well positioned in an up rate environment.

Okay helpful. So I guess if I'm to summarize I mean, if short-term rates continue to move you feel at a minimum this will at least help you hold margin steady and then if short-term rates kind of stall out here, is there any negative impact from that or do you think at that point your margin would likely stabilize as well just –

No, I mean I think if short-term rates were to may be continue to climb but stall out a bit we might have some hedges that we put on this year, I mean these are simple three months LIBOR swaps where the receive side is three-month LIBOR and the pay side is what the swap rate is for that particular duration. Short-term rates were to not move here today. We probably have a number of swaps that the LIBOR hasn't reached that fixed rate. The forward curve has LIBOR continuing to move up but even if we got 25-35 basis points or so we'd probably be fairly neutral on the hedging strategy, but I guess the way that I look at it if short-term rates didn't move anymore just went up modestly but we got more slope back to the yield curve. That is beneficial to us and them as rising short rates and having variable rate assets. So there's a few different scenarios there were where NIM can expand in forward periods.

Got it. Helpful and then maybe switching over the comment in the release David about you still focused on opportunities diversify revenues I guess one where you guys kind of add in that regard, I mean, you guys raised the capital curious if there's anything getting closer in the pipeline that maybe you guys can announce per se but guide us towards the opportunities in your pipeline there and then but secondly I mean how broad is this deposit conversation guide, I mean we've seen some of your peers in this branchless bank vertical start to a white label partner with other larger firms and provide their kind of technology and digital platform as a service to those firms clients, I mean is that something you guys are exploring and I'm just curious generally speaking how broad the kind of deposit searches has gone at this point?

Michael, from that standpoint we're in same type of conversations with entities all across the country existing deposit stores using our platform to work on adding more feature functionality to their world just traditional pipelines of deposits that we have an experience in the past and also again from the capital side another the small business gains that we talked about as Ken mentioned in his comments we have already started building out some SBA internal capabilities here that we have not had in the past and anticipation of more SBA opportunity coming our way in a process hopefully at this quarter early first quarter. So, yes we're working both sides of the balance sheet, it's probably putting more effort on the deposit side than we have in the 19 year history of the organization and we're taking a lot of rocks over. We're seeing a lot of opportunities and its constant, we're working both sides of the balance sheet very heavily.

Thanks. Just one last one can you – you talked quite a bit about capital in your prepared remark, I'm sorry if I missed it but I heard you say generally speaking that you view on a relative basis, your capital ratios is able to lever down a bit further than peer given the lower balance sheet but did you actually provide or if not can you provide kind of range as a capital where you feel you're operating in kind of a efficient capital structure maybe not, I understand there's moving targets and it depends what growth looks like but just in an ideal world like where do you kind of see that sweet spot of where you want to operate?

Well, I think if we were, if we can grow and continue to execute on some of the strategic initiatives that we're working on and obviously you can't go into detail on a lot of that stuff and David mentioned some of that and get some things onboard and get that profitability up into the north of 100 basis points and in the 115, 120 ROA and we're self-sustaining with the risk profile we have, I mean I think we'd be comfortable running on a constant basis as TCE in the 7.5 to 7 range on a continual basis getting to the point of being self-sustaining on the capital side.

Got it. Make sense. Thank you guys for taking my questions. I appreciate it.

Thank you.

The next question is from Brad Berning of Craig-Hallum, please go ahead.

Good morning guys, so welcome to your first investor call. I appreciate it very much and so good color. On the deposit franchise building efforts congrats on the big meaty win there. Can you be a little bit more specific about the deposit franchise opportunities that you're seeing in the visibility on those to execute whether it will be in expanding the mini or whether there's other target markets in niches that you're looking at is just wondering if you could help us understand how visible is that effort?

The mini is big. Some of that is restricted here in the state of Indiana, for example municipalities have a requirement for particularly tax dollars to keep those within state based institutions, some other states have similar play, so it's a big opportunity right in our back door and obviously the big one that we have. We think we can leverage that through several municipalities here throughout the state of Indiana. We are looking at other states that don't have similar laws to what Indiana has as a play we continue to work on the HSA programs. We've worked up with a couple CPOs and different organizations to partner with them and getting HSA accounts out to their ultimate customers and employees. We've talked a number of times about trying to crack into the homeowners association market. We're looking at upscale opportunities, I mean we run the gamut we're out as I said earlier kicking up over every stone we can to come up with opportunities from the deposit side.

And then on the follow-up to the SBA comment. So it sounds like you're staffing up from an operational standpoint there. So I take it that you feel pretty good that you're going to be able to put some loans in early ‘19 or sometime during ‘19 to start adding fee income from that business model is that the right way to think about that?

Yes, just internally with what little effort that we put to it without going beyond that we've already turned up a $10 million pipeline within our existing base here today. We hope to add more here as I said earlier later in the quarter early first quarter we're anticipating that could easily bring us a $100 million plus an SBA originations in 2019.

And given the fee income and given the deposit work that you're doing help us understand your thoughts on ROE profile for the institution that you think about it on one 12 months, 24 months, 36 month kind of timeframe? How are you guys thinking about where do you want to get to.

Brad I think a lot of it just has to do with timing. I mean I think in kind of what the normalized capital basis, I mean I think there's no reason why we can't strive to have an ROE in the mid to high-teens. If we have everything on board and made some progress and some deposit initiatives obviously some of that you'd need a full quarter or a full year run rate but if we can get some of the good SBA on board some of the other things we're looking at some traction in the deposit world and had a full year run rate with that I mean you're probably talking in 18 to 24 months timeframe to really ramp it up to get the full benefit of all of that but we'd certainly want to be seeing incremental benefits on our way there.

No, that's very helpful. I appreciate it. Thanks a lot.

Thank you.

The next question is from [indiscernible]. Please go ahead.

Good afternoon guys.

Hey Joe.

Hey Joe.

So my question on the hedging strategy was asked just maybe one more on that maybe Ken if you could explain the genesis of the decision with the change in the accounting standard that made the hedging strategy more feasible and then also maybe walk through the mechanics of sort of the one-year delay and how that works from when you put the swaps on to when the benefits begin to kick in and sort of how that timing works maybe lay out for us when the bulk of these were put on.

Sure. Yes just without kind of going into the details of past guidance, previously hedge account it was very difficult to hedge amortizing or pre-payable assets and achieved the level of hedge effectiveness as measured as the accountants wanted you to measure it to maintain kind of that hedge accounting status. In my opinion the accounting bodies in the past corrected a long-overdue mistake with that in and kind of in the second, third quarter of last year finalized the guidance to make hedging, amortizing and pre-payable assets much easier and quite frankly what they did is they created a couple of new structures to hedge under and they made the hedge effectiveness testing much easier and in particular we've utilized two forms of the hedging in the accounting guidance. The first is called the last of layer approach and the second is called the partial term hedge. So in the public finance portfolio what we do with that is we use partial term hedges basically saying we hedge the asset not for the life of the asset but just for part of its life and then the public finance portfolio, the loans are very easy to hedge because a typical structure may be, it may have an 18 year maturity and a 10 year call meaning that the borrower can't prepay it until the call date. So what we can do from an accounting perspective and from an economic perspective is easily attach a simple three-months LIBOR swap to that loan through the call date. So in this instance if you had an 8 year or excuse me an 18 year loan with a 10 year call, we would put a swap on it to the call and then when the swap matures you're still left with an 8…

Does that does that help Joe?

Yes, so that's really helpful color and I guess so the thought if you started this roughly a year ago I mean the bulk of these benefits should really start kicking in for you here in the fourth quarter first quarter second quarter in next year?

A year ago with we did one your deferred storage on the stuff we were doing a year ago Joe because the marketplaces talked about for two or three years since the [indiscernible] was going to do two, three, four, rate increases a year they wind up doing one or two. So we took the gambit that if they followed suit and one to two year one to two bumps this year we'd be in good position when you're out obviously the none three still talking about a fourth. So as the market if the Fed has stepped up the rate increases over the course of 2018 we shortened down the start term as Ken said a lot of the activity that we've had particularly in municipal markets we're taking it the swap will kick in at the first reset or first payment date and stuff. So some of those have been shortened from a one-year start date down to six nine months, so yes some of it will start to kick in here fourth-quarter first quarter next year and then six, twelve months out here we'll have 55% of the municipal portfolio is hedged and swap will all be in place at that point. So that's what we're talking about earlier that the pickup that we should have to 2019.

That's really helpful guys and other details on this stuff can be a little mind-- so appreciate the explanation. David on M&A, assuming that you wouldn't want to use your stock at these levels to do with you and also that you wouldn't want to issue capital to do a deal to stock price. So assuming I'm right on that do you still see opportunities out there if the stock price doesn't rebound here in the near term.

We do part of the activity that we're doing is lifting teams so and there'll be some assets that will come with it but it's not really acquisition of the company itself. So premiums are minimal, yes we think we've got a couple of opportunities that we have sufficient capital base today and sufficient cash that we could do a couple smaller opportunities have big potential upside in our world.

Okay and I know on the same token, I know you want to preserve a capital for growth potentially M&A down the line but in extreme circumstances like this if it's not closed at ‘18 on a book last night which would be opportunistic in terms of share repurchase for circumstances like this or is that not on your radar at this point?

We look at obviously all opportunities in front of us. I wouldn't put that one that's necessarily at the top of the list but if it stays down there and it's nothing else that has a better financial impact and return to shareholders comes about and it would be a consideration we're definitely looking at everything.

Okay, fair enough and then David you've had great success with the timing of the entries into the new business lines most recently with the municipal business. Any other areas that look particularly attractive, well actually you talked about that earlier but what sort of drive the decision-making process for you is that geography, is it a person or the team you're getting or is it the business line itself and then you go out and find the team to help you do that you're a sort of agnostics geography.

It's really a combination of all three of those Joe. So obviously the right people as we mentioned in my comments, I think the statement that our success over the last 20 years is finding the right people that can work in our kind of entrepreneurial space and opportunity. Something that we can do in a national footprint we obviously get economy scale gives us a much wider approach as we've done in the municipal markets and then the STL is in the consumer we bid on only 20% of the activity we see so we get a local institution that is going nuts on covenants or pricing we can walk away from it. So it really is a combination of all three the healthcare, it was built around the team the technology there time-to-market able to execute deals effectively efficiently we brought the national footprint to them, we started out kind of West Coast based, I think we're now in nine states across the U.S. they're about to sign a couple large national partnerships that could really kick start that one. The SBA program obviously is a national footprint unlike traditional C&I lending it's not as big in scope and scale there's ways you can do that on national a lot easier than you can do traditional C&I lending. So national footprint great team, great people and obviously bottom line opportunity SBA has not only good adjustable-rate assets they also have the income from sales and secondary market which would take some of the edge off the mortgage. So it's really all three points.

Okay great and last one for me Ken with the growth of some of these other areas and maybe the potential sale was $20 million or so single tenant like you talked about where would CRE concentration approximately a quarter end and you're targeting a certain level there?

I don't have the number in front of me right now I'm guessing it's probably going to be in the high 3s.

Just back then went up [indiscernible] Joe we just completed safety soundness again and I think we told you guys in the past we have regulatory blessing potentially carry that again based on the product that we're offering in the quality of the product we could go up to six times capital if we wanted to so, there's no concern about asset quality or concentration internally or externally from the regulatory focus on our CRE products.

Yes, I think I mean we include in our internal concentration, we include the owner-occupied in that regulator's exclude that when we include that we were 390 some odd percent at the end of the quarter, into the second quarter and I don't think that number would change materially and then you back out owner-occupied in your [indiscernible] in a half times, three six something like that.

But safe to say you guys operate with much higher levels in the past that you don't feel any need. This level or you're at now is fine. There is no sort of internal or external pressure into this to get that concentration levels lower.

No. None whatsoever.

Okay. Great. Thank you.

Thanks.

The next question is from John [indiscernible] Partners please go ahead.

Good afternoon guys.

Hey John.

Hey Ken, maybe just a couple quick ones the tax rate what would 10% -11% going forward or?

I think for the foreseeable future in the quarters that's probably good. For the benefit of everybody on the call I mean the effective tax rate is for us obviously it's driven and it's heavily impacted by the tax exempt income from the municipal lending business and the proportion of tax exempt revenue to taxable income. One thing with mortgage underperforming and producing lower revenue there that's I believe had an impact on that tax rate, but yes I think we're modeling internally for the foreseeable future in that 10% to 11% range.

Okay and then Ken on the only expense side you talked about some savings at a mortgage and then offset that with new hires, do you think sort of looking at 2019 you can keep total operating expense growth sort of low double digits 10% to 12%?

Yes, that's probably a good range. That's where we're looking at right now. Low double digits is where we're looking at right now.

Okay. Super. Thanks guys. Thanks for doing the call.

Yes, appreciate it.

Thanks John.

The next question is from Matt [indiscernible] Capital Management. Please go ahead.

Thank you, I was curious, want to delve a little deeper into the healthcare loans. First of can you remind me are those floating rate loans and then secondarily my other question is around the current growth that you're seeing with the, you talked about a really robust pipeline can we expect it to even accelerate from these types of quarterly levels that you are seeing here?

It will go – it will increase over what it's been through the course of this year. They're getting up to speed, we're anticipating next year that we're going to do somewhere in the range of probably $35 million to $50 million quarter, an opportunity it is mostly fixed-rate product what is coming to their market based on the 10-year term some of the newer deals we're starting to see a five-year reset on it. We also have an opportunity to do some build-out loans that have a much higher short-term yield term where that is adding new chair or new dentists to the practice and they need to do a build out for them some equipment leasing opportunity. So the bulk of the business is business acquisition or commercial real estate buying a practice in a building and that's on a 10-year term in 10 year amortization but we do see some opportunities over the next six to nine months to get into a little bit of equipment leasing with them and/or build out play that we will have a higher yield shorter return.

All right. Thank you.

The next question comes from Bill [indiscernible] Capital Management please go ahead.

Thank you. I'd like to circle back to your asset growth and how you reference the rate of growth will likely slow to simply due to the law of large numbers as a result of that are you anticipating in less capital raising activities, equity capital raising activities will take place or talk to that issue if you would please.

Hey Bill, well I think maybe just go back to my original comment in the script about capital and how we feel about our current position today. I mean I think with the current year-over-year growth and the dollar amounts probably being it's good a run rate as many to look at, I think that gives us a fair amount of time to before we'd be in a position to have to raise capital. So I don't – we don't have any capital raising plans imminent on the horizon. I think we feel like we have a lot of runway with the capital we have and obviously we have a number of things going on and number of strategic initiatives and well we don't think any of those may require capital today. It might accelerate growth in some area but everything that we're looking at are ways not only in terms of asset or deposit generation also additive to profitability and again moving that ROA, ROE far north of where they are today and again maybe hopefully getting to the position of being self-sustaining on capital.

Great. Thank you.

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

We'd just like to thank everybody for joining us for our first official earnings call. We look forward to speaking to all of you very soon. We appreciate your time today. Thank you very much.

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