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

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Form 10-Q for FIRST INTERNET BANCORP


15-Aug-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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 our Annual Report on Form 10-K for the year ended December 31, 2012 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.

Overview

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, with lending and deposit products and services that are scalable for our nationwide platform. The Bank has been successful in establishing and growing both its commercial real estate and commercial and industrial loan portfolios. The Bank has also been able to capitalize on the significant demand for residential mortgage refinancing while maintaining high credit quality. This same platform supports our expanding residential purchase mortgage market activity.

Results of Operations

Three Months Ended June 30, 2013 versus Three Months Ended June 30, 2012

Net income increased 33.75%, to $1.71 million, or $0.59 per diluted share for the three months ended June 30, 2013 compared to $1.28 million or $0.45 per diluted share for the same period in 2012.

Net interest margin improved to 2.78% in the three months ended June 30, 2013 from 2.63% in the same period of 2012, driven by increased loan volume and a 14.55% lower cost of deposits.

In the three months ended June 30, 2013, non-interest income increased 70.99% over the same period in 2012 due to the combination of the gain on sale of loans and income from secondary marketing hedge activity as mortgage banking continued to expand. During the three months ended June 30, 2013, 23.54% of the mortgage originations were for residential purchases.

Non-interest expense rose 45.66% in the three months ended June 30, 2013 versus the same period in 2012, as the Company selectively added employees to support asset generation and expanded facilities to accommodate growth.

Return on average assets for the 2013 period was 1.07% compared to 0.83% for the prior year period.

Return on average equity for the 2013 period was 10.86% compared to 8.92% for the prior year period.

Net charge-offs as a percentage of average loans were 0.25% for the three months ended June 30, 2013 compared to 0.67% for the prior year period.

Six Months Ended June 30, 2013 versus Six Months Ended June 30, 2012

Net income increased 31.90%, to $3.20 million, or $1.11 per diluted share for the six months ended June 30, 2013 compared to $2.43 million or $0.85 per diluted share for the 2012 period.

Net interest income after provision for loan losses increased 17.95% in the six months ended June 30, 2013 from the corresponding six months in 2012 reflecting increased commercial loan volumes. Overall, the provision was reduced to $0.16 million due to improvement in credit quality.

Non-interest income for the 2013 period increased 61.86% from the prior year period. The gain on loans sold combined with the income from the secondary marketing hedge activity increased 70.89% from the prior year period.

Non-interest expense for the 2013 period increased 31.44% over the corresponding six months in 2012 as the Company added employees to the operations, human resources, finance, and technology areas in support of continued growth. The balance of the increase in staffing relates to income producing activities of commercial lending and mortgage banking. The Company experienced an increase of consulting and professional fees directly related to the additional costs associated with being a public company. Additionally, to accommodate growth, the Company expanded its facilities which increased occupancy expenses and related equipment costs.

Return on average assets for the first six months ended June 30, 2013 was 1.01% versus 0.81% in the year ago period.

Return on average equity for the first six months ended June 30, 2013 was 10.33% compared to 8.55% for the prior year period.

Net charge-offs as a percentage of average loans were 0.23% for the first six months ended June 30, 2013 versus 0.57% for the prior year period.

Average Balance Sheets, Net Interest Earnings

For the periods presented, the following tables provide the total dollar amount of interest income from average interest-earning assets and the resulting yields. They also highlight the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. The tables do 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 June 30,
                                                         2013                                           2012
                                                     Interest                                       Interest
                                       Average          and                           Average          and
                                       Balance       Dividends       Yield/Cost       Balance       Dividends       Yield/Cost
Assets:
Interest-earning assets:
Loans                                 $ 399,457     $     4,861             4.88 %   $ 376,194     $     4,715             5.04 %
Investment securities - taxable         172,441             902             2.10 %     176,031             916             2.09 %
Investment securities - non-taxable      40,336             396             3.94 %      43,172             424             3.95 %
Total interest-earning assets           612,234           6,159             4.03 %     595,397           6,055             4.09 %

Noninterest-earning assets               30,937                                         20,973
Total assets                          $ 643,171                                      $ 616,370

Liabilities and equity:
Interest-bearing liabilities
Regular savings accounts              $  14,263     $        21             0.60 %   $   9,968     $        14             0.58 %
Interest-bearing demand deposits         71,059              98             0.55 %      64,373              89             0.56 %
Money market accounts                   213,917             398             0.75 %     185,875             354             0.77 %
Certificates and brokered deposits      234,220           1,139             1.95 %     241,383           1,369             2.28 %
Total interest-bearing deposits         533,459           1,656             1.24 %     501,599           1,826             1.46 %

Other interest-bearing liabilities       25,118             267             4.26 %      40,611             339             3.35 %
Total interest-bearing liabilities      558,577           1,923             1.38 %     542,210           2,165             1.61 %

Noninterest-bearing deposits             13,490                                          9,435
Other non-interest bearing
liabilities                               7,858                                          7,038
Total liabilities                       579,925                                        558,623

Shareholders' equity                     63,246                                         57,688
Total liabilities and equity          $ 643,171                                        616,370

Net interest income                                 $     4,236                                    $     3,890

Interest rate spread                                                        2.65 %                                         2.48 %
Net interest margin                                                         2.78 %                                         2.63 %
Average interest-earning assets to
average interest-bearing
liabilities                                                                109.6 %                                        109.8 %

Average Balance Sheets
(dollars in thousands)



                                                                      Six Months ended June 30,
                                                         2013                                           2012
                                                     Interest                                       Interest
                                       Average          and                           Average          and
                                       Balance       Dividends       Yield/Cost       Balance       Dividends       Yield/Cost
Assets:
Interest-earning assets:
Loans                                 $ 411,675     $     9,903             4.85 %   $ 376,803     $     9,513             5.08 %
Investment securities - taxable         157,334           1,386             2.15 %     163,323           1,858             2.73 %
Investment securities - non-taxable      40,800             699             3.45 %      43,183             845             3.94 %
Total interest-earning assets           609,809          11,988             3.96 %     583,309          12,216             4.21 %

Noninterest-earning assets               27,465                                         21,214
Total assets                          $ 637,274                                      $ 604,523

Liabilities and equity:
Interest-bearing liabilities
Regular savings accounts              $  13,820              40             0.59 %   $   9,185              27             0.59 %
Interest-bearing demand deposits         69,806             191             0.55 %      62,510             180             0.58 %
Money market accounts                   209,256             777             0.75 %     178,953             706             0.79 %
Certificates and brokered deposits      232,544           2,276             1.97 %     239,426           2,734             2.30 %
Total interest-bearing deposits         525,426           3,284             1.26 %     490,074           3,647             1.50 %

Other interest-bearing liabilities       28,582             575             4.06 %      40,597             677             3.35 %
Total interest-bearing liabilities      554,008           3,859             1.38 %     530,671           4,324             1.64 %

Noninterest-bearing deposits             12,849                                          9,557
Other non-interest bearing
liabilities                               7,960                                          7,229
Total liabilities                       574,817                                        547,457

Shareholders' equity                     62,457                                         57,066
Total liabilities and equity          $ 637,274                                        604,523

Net interest income                                 $     8,129                                    $     7,892

Interest rate spread                                                        2.56 %                                         2.57 %
Net interest margin                                                         2.69 %                                         2.72 %
Average interest-earning assets to
average interest-bearing
liabilities                                                                110.1 %                                        109.9 %

Rate/Volume Analysis

The following tables set 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 June 30 2013 vs. 2012
            (dollars in thousands)                                Due to Changes in
                                                     Volume              Rate               Net
Interest income
Loans receivable                                  $         894       $      (748 )     $       146
Investment securities - taxable                            (156 )             142               (14 )
Investment securities - non-taxable                         (27 )              (1 )             (28 )
Total                                                       711              (607 )             104

Interest expense
Deposits                                                     81              (251 )            (170 )
Other interest bearing liabilities                         (481 )             409               (72 )
Total                                                      (400 )             158              (242 )

Increase (decrease) in net interest income        $       1,111       $       765       $       346




                                                               Rate/Volume Analysis of
                                                                  Net Interest Income
                                                        Six Months ended June 30 2013 vs. 2012
            (dollars in thousands)                                 Due to Changes in
                                                     Volume               Rate                Net
Interest income
Loans receivable                                  $      1,412       $       (1,022 )     $       390
Investment securities - taxable                           (116 )               (356 )            (472 )
Investment securities - non-taxable                        (46 )               (100 )            (146 )
Total                                                    1,250               (1,478 )            (228 )

Interest expense
Deposits                                                   142                 (505 )            (363 )
Other interest bearing liabilities                        (396 )                294              (102 )
Total                                                     (254 )               (211 )            (465 )

Increase (decrease) in net interest income        $      1,504       $       (1,267 )     $       237

Financial Condition

Comparison of June 30, 2013 to December 31, 2012

Total assets were $656.77 million compared to $636.37 million at December 31, 2012.

Loan growth occurred with a shift in the mix consistent with the strategy to capitalize on the strengthening commercial markets. Commercial real estate loans, which include owner occupied loans, represented an increase of 27.98% at June 30, 2013 from December 31, 2012. Credit tenant lease financing experienced the largest growth, up 95.72% since December 31, 2012. These loans are originated nationwide via the Bank's established network which provides geographic diversification within specific concentration limits.

Credit quality has improved as total nonperforming loans at June 30, 2013 were 25.04% less than December 31, 2012. The allowance for loan losses was 1.52% of total loans at June 30, 2013 versus 1.65% at December 31, 2012.

Loans held for sale totaled $42,271 at June 30, 2013 compared to $63,234 for December 31, 2012. The decrease is due to the timing of loan sales as closing volumes in the six month period ended June 30, 2013 were 8.07% higher than in the six month period ending December 31, 2012.

Total deposits grew to $561.2 million at June 30, 2013, compared with $530.7 million at December 31, 2012, with a shift to transactional accounts with a lower cost of funds and without the use of brokered deposits. In late 2012, the Bank added online banking and treasury management services to complement its commercial lending services and expand commercial banking relationships.

The Company issued subordinated debt and a related warrant to purchase common stock to a third party for $3.00 million on June 28, 2013. The Company intends to use the proceeds to support the current and future growth of the Company.

The ratio of nonperforming loans to total loans declined to 0.81% at June 30, 2013, compared to 1.23% at December 31, 2012.

Loans



Loan Portfolio Analysis
(dollars in thousands)



                                              June 30, 2013               December 31, 2012
Real estate loans:
Residential                             $  118,770          32.72 %   $  128,815          36.34 %
Commercial - Credit tenant lease            55,319          15.24 %       28,264           7.97 %
Commercial - Other                          53,361          14.70 %       56,654          15.98 %
Total real estate loans                    227,450          62.66 %      213,733          60.29 %

Commercial loans                            19,128           5.27 %       14,271           4.03 %
Consumer loans - Trailers                   74,047          20.40 %       79,625          22.46 %
Consumer loans - Recreational vehicle       38,871          10.71 %       42,087          11.87 %
Consumer loans - Other                       3,487           0.96 %        4,774           1.35 %
Total loans                                362,983         100.00 %      354,490         100.00 %
 Net deferred loan fees, premiums and
discounts                                    3,344                         3,671
Allowance for losses                        (5,527 )                      (5,833 )
Net loans receivable                    $  360,800                    $  352,328

Asset Quality and Allowance for Loan Loss



    (dollars in thousands)                           June 30,        December 31,
                                                       2013              2012
    Non-accrual loans
    Real estate loans:
    Residential                                     $       954     $        1,389
    Commercial                                            1,851              2,362
    Total real estate loans                               2,805              3,751
    Commercial loans                                          -                  -
    Consumer loans                                          123                155
    Total non-accrual loans                               2,928              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                                           10                 21
    Total accruing loans past due 90 days or more            10                471

    Total non-performing loans                            2,938              4,377

    Other real estate owned:
    Residential                                             500                265
    Commercial                                            4,656              3,401
    Other                                                     -                  -
    Total other real estate owned                         5,156              3,666

    Other non-performing assets                           1,013              2,253

    Total non-performing assets                     $     9,107     $       10,296

    Total non-performing loans to total loans              0.81 %             1.23 %
    Total non-performing assets to total assets            1.39 %             1.62 %

Troubled Debt Restructurings





     (dollars in thousands)                        June 30,       December 31,
                                                     2013             2012
     Troubled debt restructurings - non-accrual   $       28     $           558
     Troubled debt restructurings - performing         1,354               1,412
     Total troubled debt restructurings           $    1,382     $         1,970

Total non-performing assets decreased $1.19 million, or 11.55% at June 30, 2013, from $10.30 million at December 31, 2012. Total non-performing loans decreased by $1.44 million, or 32.88%, from December 31, 2012 to June 30, 2013 reflecting a significant decline in delinquencies. We have three properties in commercial other real estate owned at June 30, 2013. One property carried at $3.58 million consists of two buildings which are residential units on a college campus. Improvements have been made in collaboration with the university so that the property can be occupied for the fall semester.

Non-performing loans are comprised of loans past due 90 days or more and other nonaccrual loans. Non-performing assets include non-performing loans, impaired investment securities, other real estate owned, and other assets which are primarily repossessed vehicles.

Deposits



(dollars in thousands)



                                          June 30, 2013            December 31, 2012
      Regular savings accounts        $  13,115         2.34 %   $  11,583         2.18 %
      Non-interest bearing               16,915         3.01 %      13,187         2.49 %
      Interest-bearing                   73,321        13.07 %      73,660        13.88 %
      Money market accounts             217,861        38.82 %     202,388        38.14 %
      Certificates of deposit           221,596        39.49 %     211,542        39.86 %
      Brokered deposits                  18,490         3.29 %      18,490         3.48 %
      Premiums on brokered deposits        (136 )      -0.02 %        (159 )      -0.03 %
      Total                           $ 561,162       100.00 %   $ 530,691       100.00 %

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. As noted in the table above, total deposits increased $30.47 million, or 5.74%, to $561.16 million at June 30, 2013 from $530.69 million at December 31, 2012.

Investment Securities



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



                                                June 30, 2013                   December 31, 2012
                                         Amortized       Approximate       Amortized       Approximate
                                           Cost          Fair Value          Cost          Fair Value
Securities available for sale:
U.S. government-sponsored enterprises   $    58,836     $      58,338     $    18,666     $      19,618
Municipals                                   45,926            46,463          39,999            42,540
Mortgage- and asset-backed securities
- government-sponsored enterprises           55,433            55,060          75,782            77,489
Mortgage- and asset-backed securities
- private labeled                             1,595             1,522           2,696             2,453
Other securities                             34,585            32,551          16,753            14,593
Total securities available for sale     $   196,375     $     193,934     $   153,896     $     156,693

At June 30, 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 June 30, 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 June 30, 2013.

Premises and Equipment

The Bank does not have branches and primarily leases its office space. In the past six months, the Company relocated its offices in Indianapolis, Indiana, opened an administrative office in Tempe, Arizona and acquired an office building with approximately 52,000 square feet of office space and related real estate in Fishers, Indiana from an unaffiliated third party for $4.08 million. The acquired property is for the current and future operations of the Bank. The Bank intends to use the Fishers property for some of its administrative operations and not as a branch. The remaining $1.87 million increase in premises and equipment for the period was for furniture, fixtures and equipment at the three new locations.

Shareholders' Equity

Shareholders' equity decreased to $61.18 million at June 30, 2013 compared to $61.35 million at December 31, 2012. This was the result of net income for the six months ended June 30, 2013 of $3.20 million, the issuance of common stock warrants valued at $0.26 million, the issuance of $0.06 million of deferred stock rights under the Directors Deferred Stock Plan, offset by an unrealized loss in other comprehensive loss of $3.40 million, and $0.29 million dividends declared on common stock.

At June 30, 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 June 30, 2013:
Total capital (to
. . .
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