First Internet Bancorp — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; this is an annual filing, not a standalone fourth-quarter report. First Internet Bancorp operates First Internet Bank of Indiana, a nationwide online bank without traditional branches, alongside commercial banking and mortgage activities. Amounts below are in U.S. dollars; “million” is abbreviated as “m.”
Financial performance and position
| Metric | FY 2014 / Dec. 31, 2014 | Prior comparable period |
|---|---|---|
| Total assets | $970.5m | $802.3m at Dec. 31, 2013; up 21.0% |
| Total loans receivable | $732.4m | $501.2m; up 46.1% |
| Total deposits | $758.6m | $673.1m; up 12.7% |
| Net interest income | $22.3m | $17.4m; up 27.7% |
| Net interest margin | 2.65% | 2.67% |
| Noninterest income | $7.2m | $9.5m; down 24.6% |
| Noninterest expense | $22.7m | $20.5m; up 10.6% |
| Net income | $4.3m | $4.6m; down 5.9% |
| Diluted EPS | $0.96 | $1.51 |
| Return on average assets / equity | 0.50% / 4.61% | 0.67% / 7.10% |
| Cash and cash equivalents | $28.3m | $53.7m at Dec. 31, 2013 |
| Shareholders’ equity | $96.8m | $90.9m at Dec. 31, 2013 |
Net interest income after loan-loss provision was $21.9m. The provision was $0.35m, versus $0.32m in 2013. The efficiency ratio was 76.92%, compared with 75.96%. Mortgage banking income fell to $5.6m from $8.7m as loans sold declined 47.8%, partly offset by a higher gain-on-sale margin. Diluted weighted-average shares increased 47.8%, contributing to the larger decline in EPS than in net income.
Operating cash flow was $2.0m, compared with $41.5m in 2013; investing cash outflow was $186.7m and financing cash inflow was $159.3m. Cash and cash equivalents decreased $25.4m during the year. These cash-flow figures reflect substantial mortgage-loan origination and sale activity.
Material changes and balance-sheet details
- Commercial real estate (CRE) loans grew 92.3% to $273.9m; commercial and industrial loans rose 40.0% to $77.2m. Residential real estate loans increased 46.1% to $279.0m, including $104.9m of purchased adjustable-rate mortgages. Consumer loans declined to $97.1m.
- CRE and C&I together represented 48.3% of the loan portfolio, versus 39.8% in 2013. Management notes that a substantial part of the commercial portfolio is relatively new and has limited seasoning.
- Certificates of deposit increased 23.4% to $361.2m. Certificates and brokered deposits totaling $223.1m were scheduled to mature within one year. Brokered deposits were $13.5m, and the company said it did not currently solicit them.
- FHLB advances rose to $106.9m from $31.8m, with a year-end weighted-average rate of 1.58%; $101.0m was scheduled to mature in 2015. Subordinated debt was $2.9m, carrying an 8% fixed rate and maturing in 2021, subject to stated repayment terms.
- Available-for-sale securities declined to $137.5m from $181.4m, principally following portfolio restructuring and the sale of municipal securities and trust-preferred CDOs. The portfolio had a net unrealized loss of approximately $0.2m at year-end; management attributed unrealized losses primarily to interest-rate changes.
- Asset quality improved: nonperforming loans were $0.30m, or 0.04% of loans, versus $1.85m and 0.37%; nonperforming assets were 0.50% of total assets versus 0.90%. The allowance was $5.8m, or 0.79% of loans, down from 1.09%. Other real estate owned was $4.5m.
Liquidity, capital, outlook and risks
At year-end, management reported $165.8m in cash and available-for-sale securities, $34.7m in loans held for sale, and capacity for an additional $160.1m of FHLB advances and correspondent-bank lines, subject to collateral. Outstanding loan commitments, including unused lines, were $110.4m. Management said liquidity and capital resources were sufficient for current and expected needs, while noting that continued significant growth could require additional capital.
The Bank was well capitalized under applicable 2014 standards: total risk-based capital was 12.17%, Tier 1 risk-based capital 11.38%, and Tier 1 leverage 8.94%. The company said it believed it would meet Basel III requirements on a fully phased-in basis; new rules began taking effect January 1, 2015. No quantified earnings or growth guidance was provided. Management’s stated priorities were profitable consumer and commercial growth, disciplined underwriting, asset quality, and technology-supported efficiency. The company expected to continue quarterly cash dividends, subject to Board discretion and regulatory and capital constraints; 2014 declared dividends were $0.24 per share.
Key risks include commercial-credit concentration and limited seasoning, potential losses exceeding the allowance, interest-rate changes, mortgage-market weakness, reliance on certificates of deposit and other funding, and dependence on Bank distributions to fund the holding company. The Internet-based operating model also exposes the company to systems outages, cyberattacks, and third-party service-provider failures. Regulatory changes, including Basel III and consumer-protection rules, may increase costs or constrain operations. Management reported effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions on the financial statements and internal controls.
An unusual earnings and tax item was the 2014 securities restructuring: the company sold its odd-lot and long-duration municipal securities and recognized $0.54m of securities-sale gains. The restructuring contributed to the effective tax rate rising to 33.0% from 25.4%, in part because it reduced tax-exempt investment income. The filing also describes an intercompany $4.0m property loan whose maturity was extended in March 2015 to March 2016.
Important facts for investors to verify
- Whether rapid CRE and C&I growth remains well underwritten as the commercial loan book seasons, and whether credit costs or criticized loans rise.
- Whether the $5.8m allowance remains adequate given loan growth, consumer-loan collateral risks, and the lower allowance-to-loans ratio.
- How the $223.1m of certificates scheduled to mature within one year renews, and the impact of funding costs and FHLB maturities on net interest margin and liquidity.
- Whether mortgage originations, loan-sale volumes, and mortgage banking income stabilize after the substantial 2014 decline.
- How Basel III implementation, regulatory constraints, and future capital needs affect growth and dividend capacity.
- Whether the company’s online systems and third-party safeguards can manage cybersecurity and operational-continuity risks.