Business Context and Reporting Period
Company: First Internet Bancorp (First Internet Bank of Indiana)
Reporting Period: Fiscal Year Ended December 31, 2012
Business Model: A bank holding company operating as the first state-chartered, FDIC-insured Internet bank. The company conducts business nationwide via the Internet with no physical branch offices. Key strategies include growing nationwide retail activities, increasing non-interest income through mortgage sales, and expanding commercial real estate (CRE) and commercial and industrial (C&I) lending portfolios.
Key Financial Metrics
| Metric | 2012 | 2011 |
|---|---|---|
| Total Assets | $636.4 million | $585.4 million |
| Total Deposits | $530.7 million | $486.7 million |
| Total Loans (Net) | $352.3 million | $329.6 million |
| Net Interest Income | $15.6 million | $14.3 million |
| Non-Interest Income | $11.7 million | $3.6 million |
| Net Income | $5.6 million | $3.2 million |
| Earnings Per Share (Diluted) | $2.93 | $1.67 |
| Return on Average Assets | 0.91% | 0.59% |
| Return on Average Equity | 9.51% | 6.13% |
| Net Interest Margin | 2.63% | 2.75% |
| Efficiency Ratio | 61.02% | 64.22% |
| Allowance for Loan Losses | $5.8 million (1.65% of loans) | $5.7 million (1.70% of loans) |
| Non-Performing Assets | $10.3 million (1.62% of assets) | $13.4 million (2.29% of assets) |
| Shareholders' Equity | $61.4 million | $55.4 million |
Material Changes vs. Prior Period
- Profitability Surge: Net income increased 75.9% to $5.6 million, driven primarily by a 188.5% increase in gains on loans sold ($10.6 million vs. $3.7 million) due to high refinancing volumes.
- Asset Growth: Total assets grew 8.7% and total deposits grew 9.0%. The loan portfolio expanded by 6.9%, with significant growth in CRE and C&I loans (up 117.5% combined).
- Expense Increase: Non-interest expenses rose 45.2% to $16.7 million. This was largely due to a 60.6% increase in salaries and benefits (adding 23 employees) and higher marketing and professional fees.
- Asset Quality Improvement: Non-performing loans as a percentage of total loans declined significantly from 2.64% in 2011 to 1.23% in 2012. Net charge-offs decreased to $2.7 million (0.69% of average loans) from $3.6 million (1.05%) in 2011.
- Dividend Activity: The company declared a special cash dividend of $0.25 per share in Q4 2012, totaling approximately $479,000.
Guidance, Outlook, and Risks
- Outlook: Management expects to continue organic growth in consumer activities and regional growth in commercial lending. The company plans to maintain strict underwriting guidelines to preserve asset quality.
- Regulatory Capital: The company is "well-capitalized" under prompt corrective action regulations, with a Total Risk-Based Capital Ratio of 11.0% and Tier 1 Capital Ratio of 9.9%.
- Key Risks:
- Technology Dependence: Reliance on internet infrastructure creates risks regarding system failures, interruptions, or security breaches.
- Commercial Lending Expansion: Growth in CRE and C&I portfolios introduces higher credit risks compared to traditional consumer loans.
- Interest Rate Risk: Fluctuations in market rates could negatively impact net interest spread and asset values.
- Investment Portfolio: The company holds $3.3 million in private label mortgage-backed securities with an unrealized loss of $2.4 million. Management monitors these for other-than-temporary impairment (OTTI).
- Unusual Items: In 2011, the company recorded a $368,000 loss on an investment in an Indiana financial institution and a $288,000 write-down on OREO. In 2012, loss on asset disposals decreased significantly.
Investor Verification Checklist
- Mortgage Origination Volume: Verify the sustainability of the 109% increase in residential mortgage loan closings (2,623 loans) and the ability to maintain high gains on sales in a changing rate environment.
- Commercial Loan Quality: Monitor the performance of the rapidly expanding CRE and C&I portfolios (now 28% of total loans) for early signs of delinquency.
- Investment Valuation: Review the valuation assumptions for the $2.4 million unrealized loss in private label mortgage-backed securities and the ALESCO IV trust preferred security.
- Expense Management: Assess whether the 45% increase in operating expenses is a one-time step-up due to staffing or a permanent increase in the cost structure.
- Liquidity Position: Confirm the stability of the deposit base, noting that brokered deposits decreased to $18.5 million from $23.9 million.