First Internet Bancorp — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Amounts are in thousands of dollars unless stated otherwise. First Internet Bank operates nationally through an internet-based platform, serving consumer and commercial customers.
Financial performance and condition
| Metric | Q3 2014 / Sep. 30, 2014 | Comparable period / Dec. 31, 2013 |
|---|---|---|
| Total interest and noninterest income | $9,890 for Q3; $27,668 for nine months | $8,083 for Q3 2013; $26,777 for nine months 2013 |
| Net interest income | $5,673 for Q3; $15,912 for nine months | $4,355 for Q3 2013; $12,484 for nine months 2013 |
| Net income | $1,282 for Q3; $2,859 for nine months | $727 for Q3 2013; $3,927 for nine months 2013 |
| Diluted EPS | $0.28 for Q3; $0.63 for nine months | $0.25 for Q3 2013; $1.36 for nine months 2013 |
| Net interest margin | 2.68% for Q3; 2.60% for nine months | 2.59% for Q3 2013; 2.65% for nine months 2013 |
| Total assets | $926,883 | $802,342 |
| Loans receivable, gross | $695,929 | $501,153 |
| Total deposits | $737,970 | $673,095 |
| FHLB advances / subordinated debt | $86,871 / $2,852 | $31,793 / $2,789 |
| Shareholders’ equity | $94,774 | $90,908 |
- Profitability: Q3 net income rose 76% year over year, supported by 30% growth in net interest income and 18% growth in noninterest income. Nine-month net income fell 27%, as noninterest income declined 39% and noninterest expense rose 10%.
- Drivers and expenses: Average loan balances increased 56% year over year in Q3, while loan yields fell 50 basis points. Q3 noninterest expense increased 13%, mainly from higher salaries and benefits. Nine-month mortgage banking income declined 51%, reflecting slower residential refinancing.
- Cash flow: For the first nine months, operating cash flow was $6,137, investing cash flow was negative $139,169, and financing cash flow was $118,949. Cash and cash equivalents decreased $14,083 to $39,607.
- Liquidity and funding: Management reported $169,810 of cash, time deposits, and available-for-sale securities, plus $27,547 of loans held for sale. Additional FHLB and correspondent-bank borrowing capacity was $231,000. Deposits increased 10%; FHLB advances increased substantially.
- Margins and capital: Nine-month net interest margin edged down 5 basis points year over year. Tangible common equity to tangible assets was 9.77%, down from 10.81% at year-end 2013 amid asset growth. The Bank exceeded regulatory minimums and was classified as well-capitalized; its total risk-based capital ratio was 11.94%.
Material changes and credit quality
- Assets grew 16% from year-end, primarily as loans increased 39%; available-for-sale securities fell 29%. Commercial real estate loans grew 66%, including 97% growth in credit tenant lease financing, and commercial loans grew 31%.
- Management repositioned the securities portfolio to increase liquidity and reduce interest-rate risk and duration, selling municipal securities and certain other securities. The portfolio’s fair value was $128,203, down from $181,409 at year-end 2013.
- Credit measures improved: nonperforming loans were $400, or 0.06% of loans, versus $1,852, or 0.37%, at year-end. Nonperforming assets were $5,067, or 0.55% of assets, versus $7,189, or 0.90%.
- The allowance for loan losses was $5,464, or 0.79% of loans, compared with $5,426, or 1.09%, at year-end. A $459 recovery on a resolved nonaccrual commercial real estate credit drove a loan-loss provision credit in both the quarter and nine-month period.
Outlook, risks, contingencies, and unusual items
- The filing provides no quantified earnings or financial guidance. Management said it expects to continue quarterly dividends, subject to board decisions, financial condition, earnings, and regulatory constraints. A fourth-quarter dividend of $0.06 per share was declared after quarter-end.
- Management stated that capital resources were sufficient for current and expected needs, but additional capital could be needed to support continued growth. Unfunded loan commitments were $83,492, up from $49,100 at year-end; certificates of deposit of $199,600 mature within one year.
- Forward-looking risks include reliance on communications and information systems, planned commercial real estate and commercial/industrial loan growth, competition, interest-rate fluctuations, economic conditions, and financial-institution regulation. The company also identifies credit estimates, securities valuation, and taxes as judgment-sensitive areas.
- The nine-month effective tax rate increased to 33% from 29%, largely because the 2014 securities repositioning eliminated municipal securities that had generated tax-exempt interest. Securities sales produced a $538 gain for the nine-month period. No material legal proceedings or material changes to previously disclosed risk factors were reported.
- The 2013 public offering increased weighted-average shares by approximately 1.61 million year over year, affecting per-share comparisons. Management reported effective disclosure controls as of September 30, 2014.
Important facts for investors to verify
- Whether rapid commercial real estate and credit tenant lease growth preserves underwriting quality and portfolio diversification.
- Whether the lower loan-loss allowance ratio remains appropriate as the loan portfolio expands; review delinquency, nonaccrual, and collateral trends.
- Whether deposit growth and pricing can fund loan growth without materially pressuring funding costs, margins, or liquidity.
- How slower mortgage refinancing, securities portfolio changes, and interest-rate movements affect future earnings and accumulated other comprehensive income.
- How the $199.6 million of certificates maturing within one year and the increased FHLB borrowing are managed.