First Internet Bancorp — Q1 2013 Form 10-Q
Business context and reporting period
First Internet Bancorp is the holding company for First Internet Bank of Indiana, an online bank serving retail and commercial customers nationwide. The unaudited quarter ended March 31, 2013; year-over-year comparisons are to the three months ended March 31, 2012. Dollar figures below are in millions unless stated otherwise.
Financial performance and position
- Profit: Net income was $1.49 million versus $1.15 million; diluted EPS was $0.77 versus $0.60. The board declared a $0.06-per-share dividend.
- Interest income and margins: Net interest income declined 2.9% to $3.82 million. Net interest margin fell to 2.55% from 2.77%; net interest spread was 2.41% versus 2.62%. Average earning assets increased 6.4%, but lower asset yields and accelerated securities premium amortization weighed on results.
- Other income and expenses: Noninterest income rose to $3.15 million from $2.04 million, principally on loan-sale gains of $3.01 million versus $1.75 million. Noninterest expense increased to $4.65 million from $3.88 million, including higher staffing and stock-listing costs.
- Credit costs and asset quality: Loan-loss provision was $0.13 million, down from $0.57 million. Nonperforming loans were $3.77 million, or 1.06% of loans, versus $4.38 million and 1.23% at year-end 2012. Nonperforming assets were $10.21 million, or 1.57% of assets. The allowance for loan losses was $5.75 million.
- Balance sheet: Total assets were $650.84 million versus $636.37 million at December 31, 2012. Net loans were $352.62 million; loans held for sale were $61.60 million. Deposits rose to $546.67 million from $530.69 million, while FHLB advances declined to $25.71 million from $40.69 million. Shareholders’ equity was $62.64 million.
- Cash flow and liquidity: Cash and cash equivalents ended at $34.41 million, up $1.89 million during the quarter. The cash-flow statement reports $16.39 million of net cash used in operating activities, $15.48 million used in investing, and $0.98 million provided by financing. Management reported $198.68 million of cash and available-for-sale securities, $61.60 million of loans held for sale, and $28.46 million of additional borrowing capacity generally available for liquidity needs.
- Capital: The Bank was well-capitalized under applicable regulations. Its total risk-based capital ratio was 10.0%, meeting the 10.0% well-capitalized threshold; its Tier 1 risk-based and leverage ratios were 9.1% and 8.9%, respectively.
Material changes versus comparable periods
- Net income and diluted EPS increased year over year despite lower net interest income and margin. Higher loan-sale gains and a smaller loan-loss provision more than offset increased operating expenses.
- Average loans grew 12.4% year over year, but loan yields declined 29 basis points. Lower rates also accelerated mortgage-backed securities prepayments and premium amortization; amortization was $0.84 million versus $0.41 million.
- Commercial and industrial loans grew 38% from year-end 2012, and credit-tenant-lease loans grew 14.7% during the quarter. Total net loans were nearly unchanged from year-end.
- The securities portfolio increased to $164.28 million from $156.69 million. The Bank sold mortgage-backed securities and bought shorter-duration investments to reduce prepayment risk and manage cash-flow volatility.
Outlook, commentary, risks and unusual items
- Management said it developed a purchase-loan origination program to help offset potential declines in refinancing activity if mortgage rates rise. The filing provides no formal earnings or numerical guidance.
- Management expects to continue quarterly dividends, subject to board decisions, financial condition, earnings and regulatory constraints. It believes most certificates of deposit maturing within one year will remain at the Bank.
- Q1 included a $0.185 million loss on securities sold during portfolio rebalancing and $0.193 million of NASDAQ-listing-related expenses; management said these items were not expected to recur. The filing also identifies $0.117 million of listing-related professional-service costs.
- A $2.0 million par ALESCO IV pooled trust security had an other-than-temporary impairment assessment; the company recognized a $0.034 million credit loss in Q1 on private-label securities. Management identified substantial unrealized losses in certain securities and described valuation estimates as dependent on credit and cash-flow assumptions.
- Key risks cited include interest-rate and real-estate-value changes, loan and deposit demand, loan-portfolio quality, regulation, competition, and litigation. Management said ordinary-course claims were not expected to have a material adverse effect; no material legal proceedings or off-balance-sheet arrangements were reported.
- The Bank acquired an Indiana office property for approximately $4.0 million for administrative operations, not as a branch. Management said significant future growth could require additional capital. Disclosure controls were assessed as effective at March 31, 2013.
Important facts for investors to verify
- Whether loan-sale gains and refinancing volumes remain strong, and how the purchase-loan program performs as mortgage-market conditions change.
- Whether net interest margin stabilizes amid rate movements, securities prepayments and the changed investment mix.
- The performance, impairment assumptions and valuation of the trust-preferred and other securities portfolio.
- Trends in nonperforming loans, other real estate owned, delinquencies and the adequacy of the loan-loss allowance.
- Deposit retention and funding costs, available borrowing capacity, and the effect of outstanding loan commitments on liquidity.
- The sustainability of earnings after the stated nonrecurring listing and securities-sale costs, and capital needs if growth continues.