First Internet Bancorp — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. The company operates First Internet Bank of Indiana, a nationwide internet-based bank with commercial lending concentrated in Central Indiana, Phoenix, and nearby markets.
Financial performance and position
| Metric | Q2 2015 / June 30, 2015 | Comparable period / prior date |
|---|---|---|
| Net income | $2.265 million; diluted EPS $0.50 | Q2 2014: $0.977 million; diluted EPS $0.22 |
| Six-month net income | $4.328 million; diluted EPS $0.95 | First half 2014: $1.577 million; diluted EPS $0.35 |
| Net interest income | $7.572 million; six-month total $14.346 million | Q2 2014: $5.373 million; first half 2014: $10.239 million |
| Net interest margin | 2.87% for Q2; 2.86% for first half | Q2 2014: 2.61%; first half 2014: 2.56% |
| Noninterest income / expense | Q2: $2.476 million / $6.327 million | Q2 2014: $1.622 million / $5.560 million |
| Total assets | $1,104.6 million | $970.5 million at December 31, 2014 |
| Loans / deposits | $814.2 million / $856.5 million | $732.4 million / $758.6 million at December 31, 2014 |
| Cash and cash equivalents | $30.6 million | $28.3 million at December 31, 2014 |
| Capital, consolidated | CET1 11.12%; Tier 1 11.12%; total risk-based 12.28%; leverage 8.93% | At December 31, 2014: Tier 1 12.55%; total risk-based 13.75%; leverage 9.87% under then-applicable rules |
- Q2 pretax income was $3.417 million and income tax provision was $1.152 million. The filing reports return on average assets of 0.84% and return on average shareholders’ equity of 9.15% for Q2.
- Mortgage banking income was $2.214 million in Q2 and $5.100 million for the first half. The filing attributes the increase year over year to improved gain-on-sale margins and higher origination volumes.
- Allowance for loan losses was $7.073 million, up from $5.800 million at year-end; allowance was 0.87% of loans. First-half provision was $0.746 million, while net recoveries were $0.527 million.
- FHLB advances were $140.935 million, compared with $106.897 million at year-end. Subordinated debt was $2.915 million; its $3.0 million principal debenture carries an 8% fixed rate and matures in 2021, with repayment permitted after June 28, 2016.
- First-half cash flows: operating activities provided $9.994 million, investing activities used $139.028 million, and financing activities provided $131.347 million. Cash and cash equivalents increased $2.313 million.
Material changes versus prior periods
- Q2 net income increased 131.8% year over year; first-half net income increased 174.4%. Management cited higher net interest and noninterest income, partly offset by higher loan-loss provision and operating expense.
- Q2 net interest income rose 40.9% year over year. Management attributed the growth primarily to a larger average interest-earning asset base, particularly loans, along with improved asset yields and lower funding costs.
- Assets grew 13.8% from year-end, driven mainly by loan growth of $81.8 million and an increase in available-for-sale securities of $53.2 million. Commercial loans grew 27.9%; single-tenant lease financing rose $87.3 million and represented 34.4% of loans at quarter-end. Consumer loans declined 4.2%.
- Deposits rose 12.9% from year-end. Certificates of deposit increased $79.7 million and made up 51.5% of deposits at June 30.
- Credit indicators remained low: nonperforming loans were $0.188 million, or 0.02% of loans, versus $0.296 million, or 0.04%, at year-end. Nonperforming assets were $4.765 million, including $4.488 million of other real estate owned.
- Accumulated other comprehensive loss widened to $1.238 million from $0.135 million at year-end; Q2 other comprehensive loss was $1.630 million, largely reflecting unrealized securities valuation changes.
Outlook, risks, and contingencies
- No specific earnings or revenue guidance is provided. Management said it expects to continue quarterly dividends; the board declared a third-quarter dividend of $0.06 per share, while future declarations remain subject to financial condition, earnings, regulatory constraints, and other factors.
- Management said capital resources are sufficient for current and expected needs, including dividends, but additional capital may be needed to support continued growth. The bank had $124.5 million of additional FHLB and correspondent-bank borrowing capacity.
- Liquidity included $222.6 million of cash, time deposits, and available-for-sale securities, plus $29.9 million of loans held for sale. Outstanding loan commitments, including unused lines, were $130.4 million; certificates of deposit maturing within one year totaled $262.3 million.
- Interest-rate exposure is a key risk. Model estimates for a parallel rate change showed next-12-month net interest income increasing 2.26% under a +100-basis-point shock and 1.63% under +200 basis points, but declining 6.57% under the modeled -100-basis-point case. Estimated economic value of equity declined 2.18% under +100 basis points and 4.86% under +200 basis points.
- Other disclosed risks include dependence on communications and information systems, competition, interest-rate and economic conditions, regulatory risks, and execution of commercial real estate and commercial and industrial loan growth. Commercial loan growth and the increasing single-tenant lease-financing concentration warrant monitoring.
- The company reported no material legal proceedings, no material changes to previously disclosed risk factors, and no material changes in internal control over financial reporting. Management stated ordinary-course claims and lawsuits are not expected to have a material adverse effect.
- Management considered unrealized losses on securities temporary, primarily due to interest-rate movements, and reported no securities with other-than-temporary impairment in the first half of 2015. Changes in market value remain a potential source of earnings or equity volatility.
Important facts for investors to verify
- Whether growth in commercial and especially single-tenant lease-financing loans maintains underwriting quality as portfolio mix shifts.
- Whether deposit growth and funding costs remain sustainable, given the large certificate-of-deposit share and $262.3 million due within one year.
- Future credit performance, allowance adequacy, and the sustainability of first-half net recoveries, including the disclosed recoveries of previously charged-off loans.
- Mortgage origination volumes and gain-on-sale margins, which contributed materially to noninterest income growth.
- Actual interest-rate sensitivity versus model estimates, and the effects of securities fair-value changes on accumulated other comprehensive income and capital.
- Capital and liquidity headroom as assets grow, dividends continue, and Basel III capital conservation buffer requirements phase in.