First Internet Bancorp — Q1 2014 Form 10-Q
Business context and reporting period. First Internet Bancorp is a bank holding company operating First Internet Bank of Indiana, a nationwide, branchless internet bank. This unaudited filing covers the three months ended March 31, 2014; balance-sheet comparisons are to December 31, 2013, and operating results are compared with Q1 2013.
Financial performance and condition
| Metric | Q1 2014 / March 31, 2014 | Comparable period / December 31, 2013 |
|---|---|---|
| Net interest income | $4.866 million | $3.893 million in Q1 2013; up 25% |
| Net interest margin | 2.51% | 2.60% in Q1 2013 |
| Net income; diluted EPS | $600,000; $0.13 | $1.488 million; $0.52 in Q1 2013 |
| Noninterest income | $1.511 million | $2.971 million in Q1 2013; down 49% |
| Noninterest expense | $5.438 million | $4.547 million in Q1 2013; up 20% |
| Total assets | $848.119 million | $802.342 million |
| Net loans | $526.861 million | $495.727 million |
| Total deposits | $727.652 million | $673.095 million |
| FHLB advances; subordinated debt | $21.819 million; $2.809 million | $31.793 million; $2.789 million |
| Cash and cash equivalents | $57.460 million | $53.690 million |
| Operating, investing, financing cash flows | $13.574 million; $(53.967) million; $44.163 million | Net increase in cash: $3.770 million |
Interest income was $7.033 million and interest expense was $2.167 million. The provision for loan losses was $147,000. The filing reports return on average assets of 0.30% and return on average equity of 2.64%, versus 0.94% and 9.64%, respectively, in Q1 2013.
At quarter-end, the allowance for loan losses was $5.388 million, or 1.02% of loans. Nonperforming loans were $1.352 million (0.26% of loans), and nonperforming assets were $6.912 million (0.81% of assets). The Bank was considered well-capitalized: total risk-based capital was 13.45%, Tier 1 risk-based capital 12.53%, and Tier 1 leverage capital 9.00%.
Material changes versus prior periods
- Net income fell about 60% year over year. Management attributed the decline chiefly to a 70% decrease in mortgage banking income, reflecting the nationwide slowdown in residential mortgage refinancing; mortgage banking income was $900,000 versus $3.011 million.
- Net interest income increased as the loan portfolio grew, while reported cost of funds declined to 1.22% from 1.39%. Net interest margin nevertheless narrowed to 2.51% from 2.60%; management cited temporarily elevated cash balances from loan-funding timing and securities-portfolio repositioning.
- Noninterest expense rose as the company added commercial lending teams and loan production capacity. Diluted EPS was also affected by the increase in diluted weighted-average shares to 4.502 million from 2.886 million, largely following the 2013 public offering.
- Quarter-end net loans rose 6% from year-end, with growth in commercial real estate and commercial lending. Deposits increased 8%; management said deposit growth was achieved without using brokered deposits during the quarter, although $17.890 million of brokered deposits remained outstanding.
- Credit indicators improved from year-end: nonperforming loans declined from $1.852 million to $1.352 million, and nonperforming assets from $7.189 million to $6.912 million. The allowance-to-loans ratio decreased from 1.09% to 1.02%.
Outlook, risks, contingencies, and unusual items
- The filing provides no numerical earnings or revenue guidance. Management said capital resources were sufficient for current and expected needs, but additional capital might be required to support continued growth. The company expected to continue quarterly dividends, subject to board decisions, financial condition, earnings, and regulatory constraints.
- Liquidity included $264.829 million in cash, interest-bearing time deposits, and available-for-sale securities, plus $17.273 million in loans held for sale. The company reported capacity for an additional $96 million in FHLB advances and correspondent-bank fed funds lines. Certificates of deposit totaling $171.746 million were due within one year; management expected most maturing deposits to remain.
- Approved outstanding loan commitments, including unused lines, were $57.460 million, up from $49.100 million at year-end. The filing identifies risks including information-system interruptions, commercial and consumer credit growth, loan-loss allowance adequacy, interest-rate and investment-value changes, mortgage and real-estate market conditions, competition, regulatory requirements, and reliance on bank distributions.
- The available-for-sale securities portfolio was $204.869 million at fair value, with $4.463 million of gross unrealized losses. Management attributed most declines to interest rates and did not consider the affected securities other-than-temporarily impaired. The company recorded no OTTI credit loss in Q1 2014; it had recognized a credit loss on an ALESCO IV trust-preferred security previously and continued to identify its credit performance as a matter for valuation and monitoring.
- The company sold its municipal securities portfolio during the quarter and recorded a $359,000 pretax gain on securities sales. A $359,000 gain partially offset the mortgage-income decline. Mortgage derivatives generated a $91,000 gain on interest-rate lock commitments and a $195,000 loss on forward contracts.
- The company declared a $0.06-per-share dividend, totaling $269,000, payable April 15, 2014. It had a fixed-rate subordinated debenture with $3 million principal, an 8% coupon, and a 2021 maturity; it may be repaid without penalty after June 28, 2016.
- Management said ordinary-course claims and lawsuits were not expected to have a material adverse effect; the company reported no material legal proceedings, no material change in disclosed risk factors, and effective disclosure controls as of March 31, 2014.
Important facts for investors to verify
- Whether mortgage banking volumes and income stabilize after the refinancing slowdown, and whether commercial loan growth can offset that weakness without materially higher costs or credit losses.
- Whether the narrowing net interest margin reverses as excess cash is deployed and funding costs evolve.
- Loan concentrations and underwriting performance, particularly in commercial real estate and credit-tenant-lease financing; monitor delinquencies, nonperforming assets, charge-offs, and allowance adequacy.
- Deposit retention and funding costs, near-term certificate maturities, and the availability and terms of stated borrowing capacity.
- Valuation and recovery assumptions for securities with unrealized losses and trust-preferred exposures, including the ALESCO IV and I-PreTSL I positions.
- The sustainability of dividends and capital ratios as the company pursues growth and manages its subordinated debt and other funding obligations.