First Internet Bancorp (INBK) Q1 2020 Earnings Report, Transcript and Summary

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 many others in the industry. With respect to our customers, we are working with all who are affected by this crisis to provide guidance and help assess their options. We have contacted borrowers across several business lines and provide payment tutorials to many of them. As of last Friday, we have extended payment relief on $361 million loans across our $2.9 billion loan portfolio representing about 13% of our total loans. We have granted the vast majority of these payment deferrals to commercial customers. On the consumer side, we have received payment deferral requests from about 300 borrowers. This represents about $17 million or about 3% of our $540 million consumer loan portfolio, which includes single-family residential mortgages and our consumer specialty line. Additionally, we actively supported the Small Business Administration's Paycheck Protection Program. To-date, we have worked with our clients to get 286 loans approved by the SBA with aggregate balances of $45 million. As of close of business last night, 253 of those loans have been dispersed for a total of $42,237,829 and the SBA fees earned on those were little over $1.5 million. This is easiest fund primarily to cover payroll can qualify to have loans given by the federal government and we are continuing to work with clients in preparation of additional funding being allocated to the PPP program by the federal government. Our expansion into small business banking prior to this crisis, positioned us well to help the industry execute on this program and support business owners across the country. We expect to have, when we emerge from this downturn, we will see an increasing level of active lending and deposit gathering opportunities in the small business arena. This is an important component of our long-term strategy. We have recruited proven professionals and strong leadership over the past year, and we have ambitious plans to build out our SBA and small business presence for years to come. Our full suite of products and consistently high-level of service will be exactly what recovering businesses and emerging entrepreneurs will need when we as a country come out of the Coronavirus imposed downturn. Now I will provide some high-level color on our top three lending lines of business and their exposure to the fallout from this public health crisis. These three lending areas account for more than 68% of our total loans. And, as you know, our largest specialty lending area single-tenant lease financing, where we provide commercial real estate mortgages to investors and single tenant properties. Overall, we feel very good about this business. Our loan portfolio consists of over 680 high quality properties diversified across both geography and industry. We entered this line of business eight years ago, and have funded over $1.4 billion in loans, which currently averaged about $1.4 million per property with only one write-down in that timeframe. We attribute this excellent track record to our high credit underwriting standards which include reviewing the creditworthiness to the borrower, the value of the property, and the financial strength of the tenant. We require a substantial equity cushion for each loan, as evidenced by our average loan to value of 50%. Nearly all of these loans include a level of personal recourse and require ongoing statement reporting to monitor property and financial trends. In addition, many of these properties are located outside of major metropolitan areas, which in these times is likely very positive. That being said, many tenants in this portfolio are experiencing diminished sales and other financial setbacks due to broad scale government restrictions put in place to combat the pandemic, as well as general social distancing and quarantining by much of the population. Tenants are increasingly requesting various forms of rent concessions from the landlords who are our borrowers. As a result, we expect the number of payment deferral programs to increase in this area as well. As of last Friday, we have approved 90-day payment deferral to just over 1% of our single-tenant lease borrowers totaling about $12 million in balances. Given what we believe to be a reasonable case scenario, we expect that about 25% of our single-tenant lease borrowers will need some form of payment deferral. It is important to note that one of the conditions for approval of a deferral program; is where the borrowers have made us April payment. We were pleased to see that all of our single-tenant borrowers made their April payment in a timely manner, the only exception being the one relationship that's been on non-accrual status. Our healthcare finance business is another major area of lending for us. This $372 million portfolio more than 90% of our borrowers are dental practitioners. Most dentists are experiencing short-term cash flow challenges. Following guidance from the American Dental Association to close their offices during the COVID-19 pandemic, the length of time they must remain closed or open only for emergency procedures is uncertain at this point. Many of these borrowers are seeking relief in the form of payment deferrals and participation in the SBA PPP program. This is a very granular portfolio, as the average sized loan is just over $600,000 and all loans are secured by business assets, including real estate in some instances, and each of these loans also have personal guarantees. Due to the impact of the crisis on this particular industry, we have contacted all our healthcare financers, finance borrowers, and have offered 60 or 90-day payment deferral program. To-date, we have received and processed deferrals for approximately 75% of these borrowers. Now turning to our third area of concentration, our public finance business which consists of over $600 million in total loan. This group provides a range of credit solutions to government and non-profit entities for a variety of their needs, including short-term bridge financing, infrastructure improvement projects, economic development, and equipment financing. This portfolio is primarily concentrated in the Midwest, with Indiana, Michigan, and Ohio representing over 60% of this portfolio. Historically, this has been a very strong portfolio for us. We've never had a delinquency or a loss. However, virtually all local and state municipalities are expected to experience in short-term cash flow challenges due to delayed tax payment dates and a slowdown in the economy due to the pandemic. That being said, regional and local governmental agencies have several options to help navigate today's difficult financial circumstances. Public finance borrowers have both traditional market solutions, as well as programs designed by the U.S. and state governments developed specifically to deal with the economic fallout. For instance, in the State of Indiana, where 55% of our outstanding balances reside, the Indiana Bond Bank has significantly expanded its advanced funding program to assist any Indiana municipalities that have experienced financial difficulties as a result of the pandemic. We're monitoring the states where we have a presence to see if they would have well similar conduit programs. In addition, the Federal Reserve has announced a municipal liquidity facility to provide liquidity to state and local authorities affected by the pandemic. The facility will lend up to $500 billion to eligible municipalities, with each state acting as a conduit to administer the program for municipalities that fall below the population requirement for direct assistance. To-date, we have had no borrowers in this portfolio indicates that they will have a problem making their payments or need any type of payment deferral. June and July are by far our largest payment month, so remains to be seen how well, how many will need assistance from us versus tapping into one of the several federal and state borrowing options that are available. However, we remain very optimistic about our public finance portfolio. In conclusion, we're keenly focused on monitoring and responding to needs in our current portfolios in the near-term. By helping clients bridge the gap to a recovery, we're both helping the country and boosting our reputation in ways that will deepen connections with existing clients to bring new business to the bank over the long-term. And as you have heard me saying many times, our people are our greatest asset and are vital to our long-term success. I want to again acknowledge the entire First Internet Bank team for their devotion to our customers and their hard work as we navigate through the fallout of this pandemic. So dedication and effort are very much appreciated. Our country during challenging times, there is a great deal of work that lies before all of us. But I'm confident that the First Internet Bank team will rise to the occasion. With that, I'd like to turn the call over to Ken to discuss our financial results for the quarter.

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 the end of the first quarter totaled $3.2 billion, an increase of $25 million or almost 1% from the fourth quarter. Money market deposits increased $144 million or 18% to $931 million and now make up 29% of our total deposits, up from 20% one-year ago. This growth was largely offset by declines of $120 million and $10 million in higher cost CDs and broker deposits respectively. During the first quarter, the cost of funds related to interest-bearing deposits decreased by 11 basis points. The cost of money market deposits fell by 18 basis points as we reduced our pricing successively in the fourth quarter and early in the first quarter. In April, we lowered the rate another 10 basis points, which will benefit deposit costs going forward. The cost of CDs and broker deposits decreased by four basis points as new CD production rates remain well below the rates on maturing CDs. Additionally, a shift in the deposit mix from CDs to money market accounts favorably impacted deposit costs. During the first quarter, new CDs came on at a weighted average cost of 1.52% whereas maturing CDs rolled off at 2.57%, a positive spread of over 100 basis points. We expect this trend to continue as the weighted average rate on scheduled CD maturities during the second quarter is 2.59%. Additionally, we have approximately $1.2 billion of CDs in broker deposits maturing at a weighted average cost of 2.45% over the next 12 months versus current production that is in the range of 115 to 120 basis points. Turning to net interest income and net interest margin, net interest income on both a GAAP and fully taxable equivalent basis declined compared to the linked quarter as a decline in earning asset yields driven by lower short-term rates following Federal Reserve rate cuts more than offset funding cost reductions. Net interest margin declined two basis points from the fourth quarter on a fully taxable equivalent basis. The fully taxable equivalent net interest margin of 1.65% came in a bit below our estimate due primarily to the lower than anticipated yields on earning assets. Compared to the linked quarter, lower deposit costs positively impacted the net interest margin by nine basis points and a larger securities balance added three basis points. However, lower loan balances in yields reduced the net interest margin by seven basis points and lower yields on cash balances provided an additional five basis points of pressure. Other factors had a collective negative impact of two basis points on the net interest margin. Given the current interest rate environment, and the uncertainty of the COVID-19 crisis, it is hard to forecast what net interest margin will look like over the remainder of the year. Lower deposit costs will certainly provide a benefit and our long-term fixed rate loan portfolio should provide some stability, but the sharp decline in short-term rates and historically low long-term rates will have an impact on asset yields. Additionally, while we have discussed in the past, our goal to run-off excess liquidity, the uncertainty of the pandemic crisis probably warrants maintaining higher levels of cash in the balance sheet, which we now expect to do until we are past the crisis. Turning to non-interest income. Our direct-to-consumer mortgage business is experiencing strong demand helped by the declining interest rates during the quarter. The low rate environment and the technology enhancements we have made to the platform provide our mortgage business with the potential to remain a solid performer going forward. However, the ultimate impact of the pandemic on the economy in general and aspects of the mortgage process specifically could provide some volatility if it lingers for an extended period of time. Related to gain on sale revenue, over the long-term, we anticipate higher SBA-related fees based on our plans to continue building out this business line as both production levels and servicing portfolio grow. It is a little difficult to forecast 2020 performance as the secondary market has slowed down and some near term regulatory uncertainty exists with the 7(a) program in the wake of the Paycheck Protection Program. However, our expanding team will continue to increase its origination volumes and if necessary, we will free up capacity on the balance sheet to portfolio of the loans. With respect to non-interest expenses, the increase of $900,000 from the fourth quarter was due primarily to $600,000 increase in salaries and employee benefits and a $300,000 increase in loan expenses. The increase in salaries and employee benefits expense was due primarily to seasonality, a full quarter of SBA personnel additions, and mortgage incentive compensation. And the increase in loan expenses was due mainly to administrative costs related to non-performing loans. Turning to asset quality. The provision for loan losses in the first quarter was $1.5 million compared to $500,000 for the fourth quarter. The linked quarter increase was due primarily to the increase in the allowance for loan losses as we adjusted qualitative factors to reflect the uncertainty in the economic environment. As a reminder, we are exempt from implementing CECL until 2023. Net charge-offs of $400,000 were recognized during the first quarter of 2020, resulting in net charge-offs to average loans of six basis points compared to four basis points in the fourth quarter. The charge-offs were primarily in the consumer portfolios and also included one small balance C&I credit. Non-performing loans increased by $700,000 in the first quarter to $7.4 million. However, the ratio of non-performing loans to total loans remains relatively low at 26 basis points, which was up three basis points from the fourth quarter. Projecting future credit losses is challenging as they will be significantly influenced by the severity and duration of the COVID-19 induced economic downturn. We want to work with clients impacted by the crisis and to be part of the solution rather than the problem. With this in mind, and as David noted earlier, we introduced a voluntary payment deferral program. We also actively supported our small business customers with their applications for loans through the SBA's Paycheck Protection Program. David reviewed our larger loan portfolios earlier highlighting the strengths and resiliency of those asset classes. But I also wanted to touch on our exposure to highly impacted industries within our commercial loan book. As noted in the presentation, we have exposure to restaurants through our single-tenant portfolio. While the nature of this crisis is unlike any other, this portfolio has held up well under the annual stress testing we perform, which includes a severe stress scenario. Excluding the single-tenant and healthcare finance portfolios, our exposure to impacted industries is fairly minimal at about 2.8% of the entire loan book. And it's important to note that we have no exposure to airlines, cruise ships, oil and gas, multifamily, and other high impact industries. With respect to capital, our overall capital levels remain healthy due to balance sheet actions we have taken to manage and preserve capital. Our tangible common equity to tangible assets ratio decreased to 7.22% in the first quarter from 7.33% in the fourth quarter, primarily due to the increase in the unrealized loss on cash flow hedges that flow through accumulated other comprehensive income. These hedges are interest rate swaps we use to create long-term fixed rate funding. As rates declined sharply this quarter, the mark-to-market valuation of these hedges continued to decline as well. Tangible book value per share was down slightly this quarter as well again driven largely by the valuation of the cash flow hedges. However on a year-over-year basis, tangible book value per share is up over $2 per share, or over 7%. Overall, regulatory capital ratios at the holding company and the bank remain strong. And we have more than sufficient on balance sheet liquidity supplemented by access to multiple funding sources to manage the potential economic impact of the COVID-19 crisis. As David said, these are challenging times. And there's a lot of work that lies before us. However, we are confident that when this crisis passes, we will emerge from it a stronger company. With that, I will turn it back to the operator, so we can take your questions.

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.