First Internet Bancorp — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; balance-sheet comparisons are to December 31, 2012. First Internet Bancorp is a bank holding company operating First Internet Bank of Indiana, a nationwide, branchless internet bank.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income | $4.36 million | $3.86 million | $12.48 million | $11.75 million |
| Net interest margin | 2.59% | 2.54% | 2.65% | 2.66% |
| Provision (credit) for loan losses | $(0.06) million | $0.97 million | $0.10 million | $2.11 million |
| Noninterest income | $1.64 million | $3.47 million | $8.35 million | $7.61 million |
| Noninterest expense | $5.14 million | $4.11 million | $15.23 million | $11.78 million |
| Net income | $0.73 million | $1.63 million | $3.93 million | $4.05 million |
| Diluted EPS | $0.25 | $0.57 | $1.36 | $1.41 |
Q3 net income fell 55%; nine-month net income declined 3%. Q3 mortgage banking income fell to $1.30 million from $3.21 million, while salaries, marketing, professional services and occupancy contributed to higher expenses. Nine-month mortgage banking income increased 11% year over year to $7.77 million. Q3 return on average assets was 0.41% (1.04% prior year); nine-month return was 0.80% (0.89% prior year).
- Balance sheet at September 30: Assets were $738.52 million, up from $636.37 million; net loans were $434.17 million, up from $352.33 million; deposits were $636.65 million, up from $530.69 million.
- Funding and debt: FHLB advances were $31.77 million, down from $40.69 million. The company issued $3.0 million of subordinated debt at a fixed 8% rate, with a June 2021 maturity and a June 2016 early repayment option. The balance sheet reports $2.77 million carrying value.
- Liquidity and cash flow: Cash and cash equivalents totaled $26.33 million. Management reported $245.49 million in cash, time deposits and available-for-sale securities, plus $18.31 million in loans held for sale, generally available for cash needs, and $86 million of additional FHLB/correspondent borrowing capacity. Nine-month operating cash flow was $52.27 million, investing cash flow $(158.14) million and financing cash flow $99.68 million; cash declined $6.18 million.
- Capital: Shareholders’ equity was $61.87 million. The Bank’s total risk-based capital ratio was 11.70%, Tier 1 risk-based ratio 10.70%, and Tier 1 leverage ratio 8.36%; the filing says the Bank was well capitalized. Tangible common equity to tangible assets was 7.79%, down from 8.97% at year-end.
- Credit quality: Nonperforming loans were $2.66 million, or 0.61% of loans, versus $4.38 million and 1.23% at year-end. The allowance was $5.46 million, 1.26% of loans versus 1.65%. Other real estate owned rose to $5.38 million from $3.67 million; total nonperforming assets were $9.06 million.
Material changes and management commentary
- Loan growth reflected an expanding commercial strategy: commercial loans increased to $47.37 million from $14.27 million, and commercial real estate loans to $121.03 million from $84.92 million. Credit tenant lease loans grew 135% from year-end. Management noted these loans are originated nationwide within concentration limits.
- Management attributed improved nine-month credit costs to better credit quality. Net charge-offs as a percentage of average loans were 0.15%, compared with 0.48% in the prior-year period.
- Deposits grew 19.97% from year-end. Management cited growth with lower cost of funds; the deposit table nevertheless reports $18.49 million of brokered deposits at both dates.
- Available-for-sale securities had a $2.56 million net unrealized loss at quarter-end, mainly attributed to interest-rate increases. The company recognized $49,000 of OTTI losses in the first nine months; management said most unrealized declines were temporary, but identified credit impairment in an ALESCO pooled trust security.
- The company acquired a Fishers, Indiana office building for $4.08 million and expanded facilities. It also relocated its Indianapolis office and opened an administrative office in Tempe, Arizona.
- Management said capital resources were sufficient for current and expected needs, while noting that continued significant growth could require additional capital. A proposed $25 million common-stock offering was registered, with an underwriters’ over-allotment option for up to $3.75 million. Intended uses include organic growth, strategic acquisitions and general corporate purposes; completion is not stated in this filing.
- The Board declared a $0.06-per-share Q3 cash dividend, payable October 15, 2013. Management expected quarterly dividends to continue, subject to Board decisions, earnings, regulatory constraints and other factors.
Outlook, risks and contingencies
The filing provides no quantified earnings or operating guidance. Management cautioned that interim results are not necessarily indicative of full-year results. Principal risks include technology or information-system failures, interest-rate and securities-value changes, credit losses and the seasoning of newer commercial portfolios, consumer-loan collateral and repayment risk, mortgage-market weakness, competition, regulatory and capital requirements, and dependence of the holding company on distributions from the Bank. The company also noted that the offering could dilute existing shareholders and that the subordinated-debt agreement restricts dividends during an uncured event of default.
Management said ordinary-course claims and lawsuits were not expected to have a material adverse effect; the company reported no material legal proceedings and no off-balance-sheet arrangements. Disclosure controls were concluded effective as of September 30, 2013.
Investor verification priorities
- Confirm whether the proposed public offering closed, its proceeds and share dilution, and how the capital was deployed.
- Track commercial-loan growth, concentrations, seasoning, delinquency trends and allowance adequacy.
- Assess mortgage originations and sale margins, including the effect of purchase/refinance mix and fair-value accounting for loans and derivatives.
- Review securities valuation and credit exposure, particularly the pooled trust securities, and sensitivity to further rate changes.
- Monitor deposit retention and maturities, borrowing capacity, capital ratios and the Bank’s ability to fund holding-company dividends.
- Follow resolution or valuation of the $5.38 million OREO portfolio, including the college-campus residential property described in the filing.