First Internet Bancorp — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. The company is the holding company for First Internet Bank of Indiana, an online bank serving retail and commercial customers. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
- Q2 earnings: Net income was $1.712 million, or $0.59 per diluted share, compared with $1.280 million, or $0.45, in Q2 2012. Six-month net income was $3.200 million, or $1.11 per diluted share, versus $2.426 million, or $0.85, a year earlier.
- Net interest: Q2 net interest income increased to $4.236 million from $3.890 million; net interest margin rose to 2.78% from 2.63%. For the first half, net interest income was $8.129 million versus $7.892 million, while margin eased to 2.69% from 2.72%.
- Noninterest income and expense: Q2 noninterest income was $3.719 million versus $2.175 million; noninterest expense rose to $5.525 million from $3.793 million. For the first half, those amounts were $6.706 million and $10.088 million, compared with $4.143 million and $7.675 million, respectively.
- Profitability: Q2 return on average assets was 1.07% and return on average equity 10.86%, compared with 0.83% and 8.92% in Q2 2012. First-half figures were 1.01% and 10.33%, versus 0.81% and 8.55%.
- Balance sheet: Total assets were $656.8 million at June 30, up from $636.4 million at year-end 2012. Net loans were $360.8 million, deposits $561.2 million, and shareholders’ equity $61.2 million.
- Cash flow: First-half operating activities provided $26.0 million; investing activities used $59.4 million and financing activities provided $16.4 million. Cash and cash equivalents declined $17.1 million to $15.4 million. Mortgage-loan originations and sales are a significant part of operating cash flows.
- Funding and liquidity: Deposits grew $30.5 million, or 5.7%, from year-end. Cash and available-for-sale securities totaled $209.4 million; loans held for sale were $42.3 million. The company reported $23.7 million of additional FHLB and correspondent borrowing capacity. Loan commitments, including unused lines, were $39.0 million; certificates of deposit due within one year totaled $78.3 million.
- Debt and capital: FHLB advances were $23.7 million, down from $40.7 million at year-end. The company issued a $3.0 million subordinated debenture bearing 8% interest, due in 2021 and callable after June 28, 2016; its balance-sheet carrying amount was $2.745 million after allocation for a warrant. The Bank was reported well-capitalized, with total risk-based capital of 12.96%, Tier 1 risk-based capital of 11.82%, and Tier 1 leverage of 9.00%.
Material changes versus comparable periods
- Q2 net income increased 33.8%; first-half net income increased 31.9%. Management attributed growth to mortgage banking activity, increased commercial loan volumes, improved credit quality, and lower deposit costs.
- Q2 noninterest income increased 71.0%, including $2.249 million of gains on loans sold and $1.208 million of secondary-marketing hedge income. First-half gains on loans sold were $5.260 million, with the same $1.208 million hedge income.
- Operating costs increased as the company added staff, expanded facilities, and incurred higher professional-services costs, including costs associated with being a public company. Q2 noninterest expense rose 45.7% year over year.
- Commercial real estate loans increased 28.0% from year-end, including substantial growth in credit-tenant-lease financing. Total loans grew to $363.0 million from $354.5 million, while residential and consumer loan balances declined.
- Credit indicators improved: nonperforming loans declined to $2.938 million from $4.377 million, and the ratio to total loans fell to 0.81% from 1.23%. The allowance for loan losses was $5.527 million, or 1.52% of loans, compared with $5.833 million, or 1.65%, at year-end. First-half provision expense fell to $0.158 million from $1.134 million.
- Available-for-sale securities had $5.442 million of gross unrealized losses at June 30, versus $2.847 million at year-end; the company attributed most declines to higher market interest rates. First-half other comprehensive loss was $3.404 million, reducing reported equity despite net income.
Outlook, commentary, risks, and unusual items
- The filing gives no specific earnings or financial guidance. Management said it expects to continue quarterly dividends, but future amounts depend on financial condition, earnings, regulatory constraints, and other factors. A $0.06-per-share Q2 dividend was declared.
- Management described continued growth in commercial lending and mortgage banking, including expansion into residential purchase mortgages. It also cautioned that significant continued growth could require additional capital.
- In Q2, the company began using derivatives to manage mortgage-banking interest-rate exposure and elected fair-value accounting for certain mortgage loans held for sale originated on or after April 1. A $1.127 million fair-value loss on these loans was included in gains on loans sold; forward contracts generated $1.208 million of income and interest-rate-lock commitments incurred a $0.078 million loss.
- The company recorded $0.015 million of Q2 and $0.049 million of first-half other-than-temporary impairment loss in earnings on securities. It continued to hold an impaired pooled trust security and reported other securities with Level 3 valuations.
- Risks identified include changes in economic conditions, interest rates and real-estate values; loan demand and credit quality; regulatory changes; competition; and litigation. Management reported no material legal proceedings, no material change in previously disclosed risk factors, and effective disclosure controls as of June 30. It stated ordinary-course claims are not expected to have a material adverse effect.
- The company acquired a Fishers, Indiana office building for $4.083 million and reported additional facility and equipment investment. A three-for-two stock split was completed June 21, 2013. After quarter-end, 46,232 restricted shares were awarded under the 2013 equity plan.
Important facts for investors to verify
- How sustainable mortgage-loan sale and hedge income is, and how fair-value movements affect reported earnings.
- Whether the improvement in delinquencies and nonperforming loans persists, and whether the allowance remains adequate as the commercial real estate portfolio grows.
- The sensitivity of securities values, accumulated other comprehensive income, and capital to further interest-rate changes; review the credit exposure and valuation assumptions for trust preferred and other Level 3 securities.
- Deposit retention and liquidity needs, including near-term certificate maturities, loan commitments, and the company’s reliance on available borrowing capacity.
- The cost and capital implications of the 8% subordinated debt, associated warrant, potential additional debenture, dividend policy, and continued operating expansion.