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INBK > SEC Filings for INBK > Form 10-Q on 15-May-2013All Recent SEC Filings

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Quarterly Report


Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated and condensed financial statements and related notes appearing elsewhere in this report. This discussion and analysis includes certain forward-looking statements that involve risks, uncertainties and assumptions. You should review the "Risk Factors" section of this report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by such forward-looking statements. See "Cautionary Note Regarding Forward-Looking Statements" at the beginning of this report.


First Internet Bancorp (the "Company") is the bank holding company for First Internet Bank of Indiana (the "Bank"), a nationwide provider of innovative online banking products and services to approximately 40,000 customers. First Internet Bancorp's common stock is listed on the NASDAQ Capital Market.

The Bank is an Indiana chartered bank and was the first state-chartered, FDIC-insured Internet bank. With no branch offices, the Bank has grown retail and commercial customers organically, with lending and deposit products and services that are scalable for our nationwide platform. In recent years, the Bank has been able to capitalize on the significant demand for residential mortgage refinancing, maintaining high credit quality while offering short periods to close. Commercial lending and treasury management services are primarily based in Central Indiana; however, our credit tenant lease financing is nationwide. While maintaining sufficient liquidity, we seek to minimize our cash and cash equivalents by deploying excess cash into diversified, higher yielding assets.

Results of Operations

Comparison of the Three Months Ended March 31, 2013 and March 31, 2012

During the three months ended March 31, 2013, we had net income of $1.49 million compared to net income of $1.15 million for the three months ended March 31, 2012. Net income attributable to common shareholders was $0.77 per diluted share for the three months ended March 31, 2013 compared to $0.60 per diluted share for the 2012 period. On March 18, 2013, the Board of Directors declared a cash dividend of $0.06 per common share.

Other key comparisons between our operating results for the three months ended March 31, 2013 and 2012 are:

Net interest income experienced a $114,000 decrease in the 2013 period despite the 6.4% increase in average earning assets as interest rates continued to decline due the economy and competition. Average loans increased 12.4% at March 31, 2013, offsetting the 29 basis point reduction in rates during the 2013 period. The lower rate environment also drove prepayments in our mortgage-backed securities portfolio resulting in accelerated premium amortization and calls on our agency securities. Management rebalanced the securities portfolio in March 2013 to mitigate this volatility. Total interest expense declined to $1.94 million for the 2013 period compared with $2.16 million for the prior year period as we allowed higher rate deposits to roll off the books.

Non-interest income increased $1.14 million during the three months ended March 31, 2013 as compared to the prior year period. Despite an overall slowdown in the residential refinancing marketplace, the Bank was able to generate a 72% increase in gains on loans sold or $3.01 million compared to $1.75 million for the three months ended March 31, 2013 and 2012, respectively. The 2013 period included a $185,000 loss related to rebalancing the mortgage-backed securities portfolio which is not expected to recur.

Non-interest expense was $4.65 million during the 2013 period as compared to $3.88 million for the prior year period as the Bank hired additional employees to support its growth. The three months ended March 31, 2013 included $193,000 in expenses that are not expected to recur related to listing the Company's stock on NASDAQ Capital Markets.

Net Interest Income

Net interest income for the three months ended March 31, 2013 totaled $3.82 million, a 2.9% decrease from the 2012 period. The decrease was primarily driven by decline in yield on our investment securities. At December 31, 2012, mortgage-backed securities were 50% of the total available for sale portfolio with a significant portion purchased at a premium. Accelerated prepayments attributable to the ongoing low rate environment resulted in premium amortization of $840,000 during the three months ended March 31, 2013 compared to $406,000 for the prior year period. Similarly, agency calls reduced interest and dividend income by $100,000 on a portion of our investment portfolio. Interest income on loans increased 5% during the three months ended March 31, 2013 as average loans outstanding grew 12.4% as compared to the prior year period. The loan growth came from commercial real estate, commercial and industrial and single family mortgage loans held for sale. The increase in interest income from loan growth was somewhat offset by a 29 basis point decline in yield, reflecting the lower rate environment.

Total interest expense declined to $1.94 million for the 2013 period compared with $2.16 million for the prior year period as deposits increased but at an overall lower cost. Interest expense on deposits decreased 25 basis points from the prior year period as customers shifted from time deposits to money market accounts. We have demonstrated the ability to retain deposits without paying the highest direct bank rates. In the three months ended March 31, 2013, $15.00 million in FHLB advances matured which reduced costs for the period and will reduce the costs of FHLB advances in the remainder of 2013.

Average Balance Sheets, Net Interest Earnings

For the periods presented, the following table provides the total dollar amount of interest income from average interest-earning assets and the resulting yields. It also highlights the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. The table does not reflect any effect of income taxes. Balances are based on the average of daily balances. Non-accrual loans are included in average loan balances.

Average Balance Sheets

(dollars in thousands)

                                                              Three Months ended March 31,
                                                 2013                                              2012
                              Average       Interest and                        Average       Interest and
                              Balance         Dividends        Yield/Cost       Balance         Dividends        Yield/Cost
Interest-earning assets:
Loans                        $  424,028     $       4,967             4.75 %   $  377,411     $       4,728             5.04 %
Investment securities -
taxable                         139,117               459             1.34 %      147,671               916             2.49 %
Investment securities -
non-taxable                      41,269               303             2.98 %       43,194               421             3.92 %
FHLB stock                        2,943                25             3.45 %        2,943                26             3.55 %
Total interest-earning
assets                          607,535             5,754             3.84 %      571,219             6,091             4.29 %

Noninterest-earning assets       24,182                                            21,454
Total assets                 $  631,539                                        $  592,673

Liabilities and equity:
Regular savings accounts     $   13,372                19             0.58 %   $    8,402                13             0.62 %
Interest-bearing demand
deposits                         68,540                93             0.55 %       60,648                91             0.60 %
Money market accounts           204,543               379             0.75 %      172,032               352             0.82 %
Certificates and brokered
deposits                        230,850             1,137             2.00 %      237,469             1,365             2.31 %
Total interest-bearing
deposits                        517,305             1,628             1.28 %      478,551             1,821             1.53 %

FHLB advances                    32,084               308             3.89 %       40,582               338             3.35 %
Total interest-bearing
liabilities                     549,389             1,936             1.43 %      519,133             2,159             1.67 %

liabilities                      16,466                                            14,518
Other non-interest bearing
liabilities                       3,982                                             2,583
Total liabilities               569,820                                           536,234

Stockholders' equity             61,702                                            56,439
Total liabilities and
equity                       $  631,539                                           592,673

Net interest income                         $       3,818                                     $       3,932

Interest rate spread                                                  2.41 %                                            2.62 %
Net interest margin                                                   2.55 %                                            2.77 %
Average interest-earning
assets to average
liabilities                                                         110.55 %                                          110.03 %

Rate/Volume Analysis

(dollars in thousands)

The following table sets forth certain information regarding changes in our interest income and interest expense for the periods indicated. For each category of earning assets and interest bearing liabilities, information is provided on changes attributable to (i) changes in volume (change in average volume multiplied by old rate); and (ii) changes in rates (change in rate multiplied by old average volume). Changes in rate/volume (change in rate multiplied by the change in volume) have been allocated to the changes due to volume and rate in proportion to the absolute value of the changes due to volume and rate prior to the allocation.

                                                                 Rate/Volume Analysis of
                                                                   Net Interest Income
                                                        Three Months ended March 31 2013 vs. 2012
                                                                    Due to Changes in
                                                     Volume                Rate                 Net
Interest income
Loans receivable                                  $       1,649       $        (1,410 )     $       239
Investment securities - taxable                             (72 )                (385 )            (457 )
Investment securities - non-taxable                         (18 )                (100 )            (118 )
FHLB stock                                                    -                    (1 )              (1 )
Total                                                     1,559                (1,896 )            (337 )

Interest expense
Deposits                                                    200                  (393 )            (193 )
FHLB advances                                              (265 )                 235               (30 )
Total                                                       (65 )                (158 )            (223 )

Increase (decrease) in net interest income        $       1,624       $        (1,738 )     $      (114 )

Provision for loan losses decreased by $436,000 during the three months ended March 31, 2013, from the three months ended March 31, 2012 as the primary quantitative driver, historical loss experiences, of the estimates we make to determine the provision improved. In determining the provision, management also evaluates qualitative factors such as the improvement to our internal processes for collection and review resulting from the addition of our senior credit officer. The decrease in the provision is supported by the general trends noted in our respective portfolios. Gains on loans sold increased in the 2013 period by $1.26 million, or 72.1%, compared to the prior year period, as we continued to originate a significant volume of single family mortgage loans, meeting consumer refinancing demand due to the low rate environment. Our volumes continued to increase significantly from the prior year and were slightly ahead of the three months ended December 31, 2012. Management has developed a purchase loan origination program to offset the impact of potential declines in consumer refinancing demand in anticipation of an eventual shift in the residential mortgage market when rates eventually rise.

A $185,000 loss on the sale of securities was incurred in the three months ended March 31, 2013 as we sold negative yielding mortgage-backed securities and reinvested the proceeds in a manner management believes will be accretive to future earnings and will stabilize cash flows.

Other noninterest income increased by $105,000 during the three months ended March 31, 2013 compared to the prior year period, primarily due to $99,000 of rental income recognized in the 2013 period on other real estate owned.

Salaries and employee benefits increased $388,000, or 19.5%, during the three months ended March 31, 2013, reflecting the addition of 29 full time employees since March 31, 2012. We have fully staffed our commercial & industrial team, added two officers and filled key operational and marketing positions while also increasing the number of residential mortgage staff to address increased origination volumes.

As a result of the Company's stock being listed on NASDAQ, professional service expenses for the three months ended March 31, 2013 included $117,000 which are not expected to recur in future periods. Our effective income tax rates (income tax provision divided by net income before income tax) for the three months ended March 31, 2013 and 2012 were 31.8% and 24.5% respectively. The increase in tax rates is the result of more taxable investment income from the prior year as well as NASDAQ listing expenses which are not deductible for tax purposes in 2013.

Financial Condition

Investment securities

Investment securities totaled $164.28 million at March 31, 2013 compared to $156.69 million at December 31, 2012. During the three months ended March 31, 2013, we sold $39.01 million in mortgage-backed securities and purchased $52.59 million of U.S. government/agency debt, collateralized mortgage obligations and corporate securities to rebalance the securities portfolio with investments having shorter durations and lower prepayment risk which should improve yields on the portfolio. Amounts for securities purchased in March to be settled in April of $10.0 million are included in accrued expenses and liabilities. All investments are available for sale and recorded at fair value.

The following table summarizes the book value and approximate fair value and distribution of our investment securities as of the dates indicated.

         (dollars in thousands)
                                                     March 31, 2013                       December 31, 2012
                                                                 Approximate                            Approximate
                                            Amortized Cost       Fair Value        Amortized Cost       Fair Value
Securities available for sale:
U.S. government-sponsored enterprises      $         49,495     $      50,385     $         18,666     $      19,618
Municipals                                           37,671            39,856               39,999            42,540
Mortgage- and asset-backed securities -
government-sponsored enterprises                     47,957            49,398               75,782            77,489
Mortgage- and asset-backed securities -
private labeled                                       2,300             2,199                2,696             2,453
Other securities                                     24,226            22,437               16,753            14,593
Total securities available for sale        $        161,649     $     164,275     $        153,896     $     156,693

At March 31, 2013, the portfolio included two trust preferred securities which are Collateralized Debt Obligations ("CDO") backed by pools of debt securities issued by financial institutions: ALESCO IV and I-PreTSL I B-2 notes. During the third quarter of 2009, after analysis of the expected future cash flows and the timing of resumed interest payments, the Company determined that placing the ALESCO CDO on non-accrual status was the most prudent course of action. The Company stopped all accrual of interest and never capitalized any "payment in kind" ("PIK") interest payments to the principal balance of the security. The Company intends to keep this security on non-accrual status until the scheduled interest payments resume on a regular basis and any previously recorded PIK has been paid. The PIK status of this security, among other factors, indicates potential OTTI and accordingly, we utilized an independent third party for the valuation of the CDOs as of March 31, 2013. Based on this valuation and our review of the assumptions and methodologies used, we believe the amortized costs recorded for our CDO investments accurately reflects the position of these securities at March 31, 2013.


Net loans at March 31, 2013 maintained December 31, 2012 levels. Commercial lending grew consistent with our diversification strategy. Most notably, commercial & industrial loans increased 38% from December 31, 2012 as our experienced team completed its first full year of operations. Credit tenant leasing grew 14.7% during the quarter ended March 31, 2013. The growth was offset by slight reduction in consumer loans.

Loan Portfolio Analysis

(dollars in thousands)

                                             March 31, 2013               December 31, 2012
Real estate loans:
Residential                             $  124,290          35.02 %   $  128,815          36.34 %
Commercial - Credit tenant lease            32,438           9.14 %       28,264           7.97 %
Commercial - Other                          56,909          16.04 %       56,654          15.98 %
Total real estate loans                    213,637          60.20 %      213,733          60.29 %
Commercial loans                            19,744           5.57 %       14,271           4.03 %
Consumer loans - Trailers                   76,875          21.66 %       79,625          22.46 %
Consumer loans - Recreational vehicle       40,149          11.31 %       42,087          11.87 %
Consumer loans - Other                       4,476           1.26 %        4,774           1.35 %
                                           354,881         100.00 %      354,490         100.00 %
Net deferred loan fees, premiums and
discounts                                    3,483                         3,671
Allowance for losses                        (5,748 )                      (5,833 )
Total loans                             $  352,616                    $  352,328

Asset Quality and Allowance for Loan Loss

Non-performing loans are comprised of loans past due 90 days or more on nonaccrual status and other nonaccrual loans. Non-performing assets include non-performing loans plus other real estate owned and other assets which are primarily repossessed vehicles. At March 31, 2013, our non-performing loans totaled $3.77 million, or 1.06%, of total loans compared to 2.28% at March 31, 2012. At March 31, 2013, our total non-performing assets totaled $10.21 million, or 1.57%, of total assets compared to 2.28% at March 31, 2012.

    (dollars in thousands)                           March 31,       December 31,
                                                       2013              2012
    Non-accrual loans
    Real estate loans:
    Residential                                     $     1,189     $        1,389
    Commercial                                            2,362              2,362
    Total real estate loans                               3,551              3,751
    Commercial loans                                          -                  -
    Consumer loans                                          177                155
    Total non-accrual loans                               3,728              3,906

    Accruing loans past due 90 days or more:
    Real estate loans:
    Residential                                               -                450
    Commercial                                                -                  -
    Total real estate loans                                   -                450
    Commercial loans                                          -                  -
    Consumer loans                                           44                 21
    Total accruing loans past due 90 days or more            44                471

    Total non-performing loans                            3,772              4,377

    Other real estate owned:
    Residential                                             265                265
    Commercial                                            3,943              3,401
    Other                                                     -                  -
    Total other real estate owned                         4,208              3,666

    Other non-performing assets                           2,227              2,253

    Total non-performing assets                     $    10,207     $       10,296

    Total non-performing loans to total loans              1.06 %             1.23 %
    Total non-performing assets to total assets            1.57 %             1.62 %

Troubled Debt Restructurings

      (dollars in thousands)                        March 31,      December 31,
                                                      2013             2012
      Troubled debt restructurings - non-accrual   $     1,037     $       1,065
      Troubled debt restructurings - performing            882               905
      Total troubled debt restructurings           $     1,919     $       1,970

Total non-performing assets decreased from $10.3 million at December 31, 2012 to $10.2 million at March 31, 2013. Total non-performing loans decreased by $615,000, or 13.8%, from December 31, 2012 to March 31, 2013 reflecting a significant decline in delinquencies. We have six properties in other real estate owned at March 31, 2013. One property consists of two buildings which are residential units on a college campus. We have invested $541,000 in improvements in collaboration with the university during the period so that the properties can be occupied in the fall semester.

Premises and Equipment

We do not have branches and primarily lease all office space and equipment. In the three months ended March 31, 2013, we acquired an office building with approximately 52,000 square feet of office space and related real estate located at 11201 USA Parkway, Fishers, Indiana (the "Property") from an unaffiliated third party for an aggregate consideration of approximately $4.00 million. The Company acquired the Property for the current and future operations of the Bank. The Bank intends to use the Property for some of its administrative operations and not as a branch or loan or deposit production office. The $4.06 million increase in premises and equipment, net as of March 31, 2013, reflects this acquisition.


(dollars in thousands)

                                          March 31, 2013           December 31, 2012
      Regular savings accounts        $  14,911         2.73 %   $  11,583         2.18 %
      Non-interest bearing               16,046         2.94 %      13,187         2.49 %
      Interest-bearing                   75,217        13.76 %      73,660        13.88 %
      Money market accounts             208,833        38.20 %     202,388        38.14 %
      Certificates of deposit           213,317        39.02 %     211,542        39.86 %
      Brokered deposits                  18,490         3.38 %      18,490         3.48 %
      Premiums on brokered deposits        (147 )      -0.03 %        (159 )      -0.03 %
      Total                           $ 546,667       100.00 %   $ 530,691       100.00 %

Total deposits grew to $546.7 million at the end of the first quarter, compared with $530.7 million at December 31, 2012. Non-interest bearing demand deposit accounts grew to $16.1 million compared with $13.2 million at the end of 2012, reflecting more relationship banking business with commercial customers. In the last year, First Internet Bank added online banking and treasury management services to complement its commercial lending services in order to attract not only loans, but expanded commercial banking relationships. As we grow this part of our business, we expect the fee-based services will contribute to non-interest income and help to reduce our cost of funds.

While we are focused on building non-interest bearing deposits, our independence from a traditional bricks and mortar branch structure permits us to offer competitive rates for interest-bearing accounts, as needed, in order to fund loan growth. Deposit interest expense in first quarter 2013 declined to $1.63 million compared with $1.82 million in the last quarter of 2012, reflecting ongoing efforts to re-price interest-bearing accounts as appropriate in the continued low-interest rate environment, and reduced use of higher-cost wholesale funding sources. The ability to grow core deposits to fund lending activity continues to drive a declining use of Federal Home Loan Bank borrowings.

Shareholders' Equity

Shareholders' equity increased $1.29 million to $62.64 million at March 31, 2013 compared to $61.35 million at December 31, 2012. This was the result of net income for the three months ended March 31, 2013 of $1.49 million offset by an unrealized loss in other comprehensive loss before tax of $171,000 and $113,000 in dividends declared on common stock.

At March 31, 2013, the Company and the Bank exceeded all applicable regulatory capital minimum requirements, and the Bank was considered "well-capitalized" under applicable regulations. We believe our capital resources are sufficient to meet our current and expected needs, including any cash dividends we may pay. However, if we continue to experience significant growth, we may require additional capital resources.

(dollars in thousands)

                                                                                       Minimum to be
                                                            Minimum                   Well Capitalized
                                                            Capital                     Under Prompt
                         Actual                           Requirement                Corrective Actions
                         Amount         Ratio        Amount         Ratio          Amount           Ratio
As of March 31, 2013:
Total capital (to
risk-weighted assets)
Consolidated            $  62,016          10.1 %   $  49,197            8.0 %           N/A            N/A
Bank                       61,424          10.0 %      49,135            8.0 %        61,419           10.0 %
Tier 1 capital (to
risk-weighted assets)
Consolidated               56,249           9.2 %      24,598            4.0 %           N/A            N/A
. . .
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