First Internet Bancorp — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014; balance-sheet comparisons are to December 31, 2013. First Internet Bancorp is a bank holding company operating First Internet Bank of Indiana, a branchless, internet-based bank offering consumer and commercial banking, lending, and mortgage services. Unless stated otherwise, dollar amounts below are in millions.
Financial results and condition
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net interest income | $5.37 | $4.24 | $10.24 | $8.13 |
| Net income | $0.98 | $1.71 | $1.58 | $3.20 |
| Diluted EPS | $0.22 | $0.59 | $0.35 | $1.11 |
| Net interest margin | 2.61% | 2.78% | 2.56% | 2.69% |
| Mortgage banking income | $1.23 | $3.46 | $2.13 | $6.47 |
| Noninterest expense | $5.56 | $5.53 | $11.00 | $10.09 |
- Balance sheet: Total assets were $868.1 at June 30, up 8% from year-end. Net loans were $626.5, up 26%; deposits were $744.2, up 11%. Shareholders’ equity was $94.5.
- Cash flow: For the first half, operating activities provided $11.7; investing activities used $105.1; financing activities provided $60.4. Cash and cash equivalents declined $33.0 to $20.6.
- Debt and liquidity: FHLB advances were $21.8 and subordinated debt was $2.8. Management reported $182.2 in cash, time deposits, and available-for-sale securities, plus $21.5 in loans held for sale, generally available for cash needs. Additional FHLB and correspondent-bank borrowing capacity was $96.0.
- Capital: The Bank was reported as well-capitalized. Its total risk-based capital ratio was 12.53%, Tier 1 risk-based ratio 11.72%, and Tier 1 leverage ratio 8.72%. Tangible common equity to tangible assets was 10.41%, versus 10.81% at year-end.
- Credit quality: Nonperforming loans were $1.18, or 0.19% of loans, compared with $1.85, or 0.37%, at year-end. Nonperforming assets were $5.96, or 0.69% of assets. The allowance for loan losses was $5.14, or 0.82% of loans; first-half net charge-offs as a percentage of average loans were 0.13%.
Material changes and management commentary
- Net income fell 43% in Q2 and 51% in the first half year over year. Management attributed the decline primarily to weaker residential mortgage refinancing activity, which reduced mortgage banking income by 64% in Q2 and 67% in the first half.
- Net interest income increased 27% in Q2 and 26% in the first half, reflecting loan growth. However, net interest margin narrowed as yields on new loans declined and cash balances were elevated during securities portfolio repositioning. Average cost of funds declined to 1.18% in Q2 and 1.20% for the half.
- Commercial lending expanded: commercial real estate loans rose 42% from year-end, with credit tenant lease balances up 71%; commercial and industrial balances increased 31%. Residential and consumer lending also contributed to the larger loan portfolio.
- The Company sold municipal securities in Q1 and continued portfolio sales in Q2, including ALESCO IV and I-PreTSL I collateralized debt obligations. Management said the repositioning was intended to reduce interest-rate and credit risk and shrink the portfolio. First-half securities sales generated a net gain of $0.48.
- Per-share comparisons were also affected by the approximately 1.62 million additional shares issued in the 2013 public offering.
Outlook, risks, and contingencies
- The filing gives no quantitative earnings or revenue guidance. Management said capital resources were sufficient for current and expected needs, while noting that additional capital might be needed to support continued growth.
- The Board declared a $0.06-per-share Q2 dividend payable July 15 and a $0.06-per-share Q3 dividend payable October 15. The Company expected quarterly dividends to continue, subject to Board decisions, financial results, and regulatory constraints. The Bank had not declared a dividend to the holding company since June 2013; the holding company depends primarily on Bank dividends for funds.
- Approved loan commitments, including unused lines, were $70.0, up $20.9 from year-end. Certificates of deposit maturing within one year totaled $193.9. Management expected most maturing deposits to remain, citing competitive rates.
- Key disclosed risks include mortgage and real-estate market weakness, interest-rate changes, credit losses and adequacy of the loan-loss allowance, commercial lending growth, competition, regulatory capital requirements, reliance on Bank distributions, and information-system interruptions. The Company reported no material changes to previously disclosed risk factors.
- Available-for-sale securities had $1.31 of gross unrealized losses at June 30; management attributed most declines to interest-rate movements and stated it did not consider them other-than-temporary, subject to its impairment assessments. The filing also notes estimates and judgments in loan-loss reserves, securities valuations, and income taxes.
- Off-balance-sheet credit commitments were in the ordinary course of business. Mortgage loan commitments to sell were $45.8 and matured in less than one year; management did not expect off-balance-sheet arrangements to materially affect liquidity or capital. The Company reported no material legal proceedings and considered ordinary-course claims unlikely to have a material adverse effect.
Important facts for investors to verify
- Whether commercial loan growth can be sustained with underwriting standards and credit quality intact.
- Whether mortgage banking income stabilizes after the refinancing slowdown, and how its recovery or further decline affects earnings.
- Whether net interest margin can improve as loan yields, funding costs, cash balances, and securities repositioning evolve.
- The composition, pricing, and retention of deposits, including the $193.9 of certificates of deposit maturing within one year and the $17.9 of brokered deposits reported at quarter-end.
- Future credit performance and reserve adequacy, particularly given loan growth and the allowance decline to 0.82% of loans.
- Capital and liquidity needs if growth continues, and the holding company’s ability to fund dividends given its reliance on Bank distributions and regulatory limits.