First Internet Bancorp — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013, compared primarily with FY2012. This is an annual filing; it does not provide a clear standalone fourth-quarter income statement. First Internet Bancorp is a bank holding company operating First Internet Bank of Indiana, an online-focused bank with no retail branches.
Financial and operating highlights
| Metric | FY2013 / year-end 2013 | FY2012 / year-end 2012 |
|---|---|---|
| Total assets | $802.34 million | $636.37 million |
| Deposits | $673.10 million | $530.69 million |
| Net loans receivable | $495.73 million | $352.33 million |
| Net interest income | $17.45 million | $15.84 million |
| Provision for loan losses | $0.32 million | $2.85 million |
| Noninterest income | $9.52 million | $11.42 million |
| Noninterest expense | $20.48 million | $16.61 million |
| Net income | $4.59 million; diluted EPS $1.51 | $5.61 million; diluted EPS $1.95 |
| Net interest margin | 2.67% | 2.67% |
| Return on average assets / equity | 0.67% / 7.10% | 0.91% / 9.51% |
Cash flow: Operating activities provided $41.54 million, investing activities used $185.42 million, and financing activities provided $165.06 million. Cash and cash equivalents ended the year at $53.69 million, up from $32.51 million.
Debt and capital: Year-end liabilities were $711.43 million and shareholders’ equity was $90.91 million. FHLB advances were $31.79 million, down from $40.69 million. The company also issued $3.0 million of 8% subordinated debt, reported at $2.79 million net on the balance sheet. Bank regulatory capital ratios were 13.8% total risk-based, 12.8% Tier 1 risk-based, and 9.6% Tier 1 leverage; the Bank was classified as well-capitalized.
Liquidity: Management reported $235.10 million of cash and available-for-sale securities, plus $28.61 million of loans held for sale, as generally available for cash needs. It reported capacity for an additional $86.0 million of FHLB advances and correspondent-bank lines. Certificates of deposit totaling $141.81 million were scheduled to mature within one year.
Material changes versus FY2012
- Assets rose about 26% and deposits about 27%; net loans grew 40.7%. Commercial real estate lending increased 67.7%, while commercial and industrial loan balances increased 286.6% from a smaller base.
- Loan growth and portfolio mix shifted toward commercial lending. CRE and C&I together represented 39.82% of loans, excluding mortgage loans held for sale, versus 27.98% in 2012.
- Credit metrics improved: nonperforming loans fell to $1.85 million from $4.38 million, and nonperforming assets to total assets declined to 0.90% from 1.62%. Net charge-offs were 0.17% of average loans versus 0.69%.
- The allowance for loan losses declined to $5.43 million, or 1.09% of loans, from $5.83 million, or 1.65%. The lower provision helped net interest income after provision increase 31.8% to $17.12 million.
- Net income fell 18.2%, reflecting lower mortgage banking income and higher operating expenses. Mortgage banking income declined to $8.68 million from $10.65 million as refinancing activity slowed. Noninterest expenses rose 23.3%, including higher staffing, professional fees, facilities, and public-company costs.
- The company raised $29.10 million net in a public stock offering. Year-end shares outstanding increased to 4.45 million from 2.82 million; tangible book value per share declined to $19.38 from $20.13.
- Unrealized losses on available-for-sale securities contributed to a $4.19 million after-tax other comprehensive loss; year-end accumulated other comprehensive loss was $2.37 million, compared with income of $1.82 million in 2012.
Outlook, risks, contingencies, and unusual items
- Management’s stated strategy is profitable growth in consumer and commercial banking, including expansion of asset-based lending and treasury management, while maintaining underwriting discipline and investing in technology. It introduced asset-based lending in October 2013 and opened a loan production office in Tempe in January 2014.
- The company expects to continue quarterly cash dividends, but future declarations and amounts remain at the Board’s discretion and depend on earnings, capital needs, regulation, and other factors. FY2013 dividends declared were $0.22 per share.
- Risks highlighted include technology outages or cyber incidents; rapid commercial-loan growth and limited seasoning; commercial credit and concentration risk; consumer-loan collateral depreciation; interest-rate changes; mortgage-market contraction; competition; possible future capital needs; and regulatory changes, including Basel III requirements scheduled to begin in 2015.
- The $181.41 million available-for-sale securities portfolio had a reported net unrealized loss of $3.68 million. Two trust-preferred CDO investments had fair values below book values; the ALESCO investment was receiving payment-in-kind rather than cash interest and was on nonaccrual. Management identified possible Volcker Rule treatment of one CDO as a risk, while concluding it expected to hold the security to recovery.
- In January 2014, the company sold its municipal securities portfolio and recorded an approximately $0.36 million pretax gain. Qualified Mortgage rules took effect in January 2014, and the Bank discontinued offering balloon loans.
- Other real estate owned increased to $4.38 million, mainly due to capitalized improvements to two occupied residential buildings on a college campus. Outstanding loan commitments, including unused lines, were $49.10 million. The filing reports no material legal proceedings.
- The filing states disclosure controls were effective at year-end; as a smaller reporting company, the company was not required to include management’s internal-control assessment or an auditor attestation. The auditor gave an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether fast commercial-loan growth remains adequately underwritten as the portfolio seasons, and whether asset-quality improvement persists.
- How lower refinancing volumes affect mortgage banking income, loan-sale margins, and overall profitability.
- The composition, valuation assumptions, cash-flow prospects, and regulatory treatment of the trust-preferred CDOs, particularly ALESCO and I-PreTSL.
- Deposit retention and funding costs as certificates of deposit mature, and the company’s dependence on Bank dividends and available borrowing capacity.
- The effect of securities valuation changes and Basel III implementation on capital, tangible book value, and capacity for dividends or continued growth.
- Whether reported cash-flow movements, loan purchases and originations, and the $29.10 million equity raise reconcile to the audited statements and support planned expansion.