8888 Keystone Crossing, Suite 1700
Indianapolis, IN 46240 • (317) 532-7900
www.firstinternetbancorp.com
2 0 1 3 A N N UA L R E P O R T
“Our company holds great promise! With
the right people, products, and processes
in place, we have the building blocks for
sustained organic growth. Should the right
acquisition opportunity present itself, one
that will broaden our asset-generating
capabilities, we have a sufficient capital base
to pursue it. I believe our company is well
positioned to continue its growth trajectory.”
Commercial Real
Estate Lending
We are committed to providing our
clients customized financing solutions
to assist with their commercial
investment property mortgage needs
across a variety of real estate-oriented
products. We hold and service all
originated loans in portfolio and boast
competitive rates while offering an
assortment of loan terms and maturities
to address both long- and short-term
credit needs up to $10 million.
Credit Tenant Leasing
With a nationally focused platform, we
provide acquisition financing to savvy real
estate investors introduced to us through
our committed, growing network of
mortgage bankers and national
correspondents. Properties financed are
generally subject to long-term, net lease
arrangements with well known, financially
strong national and regional tenants that
include drugstores, quick serve
restaurants, convenience stores, office
supply stores, and other retailers.
Business
Capital
Also known as asset based lending.
We offer revolving lines of credit
secured by accounts receivable and
inventory in addition to term loan
components secured by real estate,
machinery and equipment. Credit
lines range from $2 million to $5
million with competitive pricing.
Commercial Banking
We provide local decision making on commercial and
industrial loans for the Indiana and Arizona markets.
We offer competitive rates and customized solutions for
our clients. Our products include commercial lines of
credit, term loans as well as owner occupied real estate
financing. We offer small business administration (SBA)
financing and commercial credit cards. We have a full
array of treasury management services including
business online banking, remote deposit capture
and sweep products.
Consumer
Banking
We offer checking accounts, regular and
money market savings accounts with
industry-leading interest rates, CDs,
IRAs and credit cards – all with great
rates. With customers in all 50 states,
our online and mobile tools are robust
yet easy-to-use.
Residential
Mortgages
We offer an award-winning national
origination platform. We provide
traditional 1-4 family mortgages
with fixed and adjustable rates. We
originate conventional, FHA, VA and
jumbo loans as well as home equity
loans and lines of credit.
Consumer
Lending
Lending directly to consumers as well
as indirectly through an established
dealer network, we focus on high
quality customers with an average
FICO score above 750 at time of
origination. We specialize in niche RV
and horse trailer lending.
First Internet Bank of Indiana is a Member FDIC, Equal Housing Lender.
S H A R E H O L D E R L E T T E R
Dear Fellow Shareholders,
O ur investments in building our business to
become a larger, more diversified banking
entity have generated substantial value
for the company and its shareholders. Strategic
initiatives during the past several years reflect our
confidence in building the First Internet Bank
franchise to be a leader in web-based retail banking
and commercial banking. In 2013, our deposits,
loans and total assets all grew at double-digit levels,
reflecting the success of our business model, the
advancement of our capabilities and the efforts of a
talented management team.
Just a few years ago, we launched
commercial real estate and commercial
and industrial lending channels to
expand the company’s capabilities
and revenue streams. Both have
been extraordinarily successful
in winning new opportunities
for the bank. In 2013,
commercial loans receivable
almost doubled over 2012
levels and represented 40%
of our loans receivable as of
December 31, 2013 — up from
8% four years ago.
“...the popularity of Internet
and mobile banking continues
to accelerate. We launched the
Bank in 1999 with the belief
that electronic channels would
supplant traditional banking offices.
Nationwide, Internet banking has
become consumers’ preferred
banking method — twice as
popular as branch banking.”
prudent credit standards. Credit quality remained
high, with only 37 basis points of nonperforming
loans to total loans at year end. We are adequately
reserved for the potential of loan losses, with an
allowance nearly three times greater than the total
nonperforming loans at year end.
Achieving this mix and quality of loans would
not have been possible without a tremendously
talented team. The leaders of our lending units each
have more than 20 years’ banking experience, with
roots at some of the largest regional and super-
regional institutions in the country. During
the past year, we added seasoned talent
to these teams and strengthened our
compliance resources to ensure
we continue to operate in a
safe and sound manner given
the rapid pace of regulatory
change. We also broadened
our
lending
capabilities in 2013 when an
experienced team specializing
in asset based lending joined
the company. This group will
provide working capital to small
to medium sized companies, enabling
us to continue expanding our commercial
commercial
We are particularly enthusiastic about the
lending platform.
implications of loan production on our net interest
income potential in the coming periods. At $496
million at year end, our loan portfolio has climbed
to new heights. Our expanding loan portfolio
generated 10% more net interest income than in
2012. With nearly half of our portfolio in variable
rate loans at year end, the bank is well positioned in
the event of a rising interest rate environment.
We were able to achieve this growth and win
these new relationships without compromising our
Our nationwide residential mortgage lending
business originated and sold over $700 million
in loans, generating $8.6 million in non-interest
income for us in 2013. The industry-wide slowing
of residential mortgage refinancing activity in the
second half of the year affected our year-over-year
net income. We fully capitalized on the strength of
the mortgage refinancing market in prior years to
support First Internet Bank’s growth and visibility
and to position us for the future. With a web-based
processes in place, we have the building blocks for
sustained organic growth. Should the right acquisition
opportunity present itself, one that will broaden our
asset-generating capabilities, we have a sufficient
capital base to pursue it. I believe our company is well
positioned to continue its growth trajectory.
On behalf of the board of directors and everyone at
First Internet, thank you for your continued support.
Sincerely,
David B. Becker
Chairman, President and Chief Executive Officer
infrastructure and experienced team in place, we
have adapted our processes to compete effectively in
home purchase financing.
We have a positive outlook for our deposit franchise
as the popularity of Internet and mobile banking
continues to accelerate. We launched the Bank in
1999 with the belief that electronic channels would
supplant traditional banking offices. Nationwide,
Internet banking has become consumers’ preferred
banking method — twice as popular as branch
bankingi. More than half of Americans now do their
banking online, and more than one third of cell
phone owners use their mobile devices to conduct
banking transactionsii. We have a loyal base of deposit
customers who find our pricing and robust online
toolset attractive. We are well situated to augment
our deposits and customer base — without the costly
overhead of a branch network.
We focus tightly on enhancing the value of your
investment in First Internet Bancorp. To increase the
company’s profile and improve shareholder liquidity,
we joined NASDAQ during the first quarter of
2013. Within months, our stock was added to the
Russell Microcap Index, MCSI Micro Cap Index
and the ABA NASDAQ Community Bank Index.
The diversity and depth of our shareholder base
have increased as a result of our performance and
investor outreach. We established quarterly cash
dividends for common shareholders, offering our
shareholders an even more attractive and balanced
return on investment. In the fourth quarter of 2013,
we completed our first SEC-registered offering
and raised $29.1 million in new capital in an
oversubscribed offering, creating a solid foundation
for future growth.
Fellow shareholders, our company holds great
promise! With the right people, products, and
i Source: American Bankers Association
ii Source: Pew Research Center
S E L E C T E D F I N A N C I A L I N F O R M A T I O N
802,342
636,367
585,440
503,915
2010
2011
2012
2013
ASSETS IN THOUSANDS
“In 2013, our deposits, loans and total assets
all grew at double-digit levels, reflecting the
success of our business model, the advancement
of our capabilities and the efforts of a talented
management team.”
495,727
Residential Real Estate
Commercial Real Estate
Commercial & Industrial
Consumer
329,570
352,328
299,545
2010
2011
2012
2013
2010
2011
2012
2013
NET LOANS IN THOUSANDS
LOANS COMPOSITION
“Credit quality remained high, with only 37
basis points of nonperforming loans to total
loans at year end. We are adequately reserved
for the potential of loan losses, with an
allowance nearly three times greater than the
total nonperforming loans at year end”
Total nonperforming assets
(as a % of total assets)
Total nonperforming loans
(as a % of total loans)
3.36%
3.17%
2.64%
2.29%
1.62%
1.23%
0.90%
0.37%
2010
2011
2012
2013
NONPERFORMING ASSETS AND LOANS
673,095
Non-Interest Bearing DDA
Interest Bearing DDA
Savings & Money Market
Time Deposits
530,691
486,665
422,703
2010
2011
2012
2013
DEPOSITS IN THOUSANDS
DEPOSITS COMPOSITION
17,448
15,842
11,423
9,517
14,511
14,323
3,437
3,559
2010
2011
2012
2013
2010
2011
2012
2013
NET INTEREST INCOME IN THOUSANDS
NON-INTEREST INCOME IN THOUSANDS
90,908
55,423
48,897
61,350
2010
2011
2012
2013
TOTAL SHAREHOLDERS’ EQUITY
“In the fourth quarter of 2013,
we completed our first SEC-
registered offering and raised
$29.1 million in new capital
in an oversubscribed offering,
creating a solid foundation for
future growth.”
C O R P O R A T E I N F O R M A T I O N
Board of Directors of First Internet Bancorp
David B. Becker
Chairman, President and Chief Executive Officer
David R. Lovejoy
Vice Chairman
Managing Director, Chief Compliance Officer
and Chief Financial Officer
Greycourt & Co.
John K. Keach, Jr.
Private Investor
Former Chairman, President and CEO
Indiana Community Bancorp
Ann D. Murtlow
President and CEO
United Way of Central Indiana
Ralph R. Whitney, Jr.
Principal
Hammond, Kennedy, Whitney & Co., Inc.
Jerry Williams
Of Counsel
Taft Stettinius & Hollister LLP
Jean L. Wojtowicz
President
Cambridge Capital Management Corp.
Senior Management of First Internet Bank
David B. Becker
President and Chief Executive Officer
C. Charles Perfetti
Senior Vice President
Kay E. Whitaker
Senior Vice President
Chief Financial Officer and Secretary
Edward A. Roebuck
Senior Vice President
Chief Credit Officer
Michael E. Lewis
Senior Vice President
Commercial Real Estate Banking
Nicole S. Lorch
Senior Vice President
Retail Banking
Kevin B. Quinn
Senior Vice President
Retail Lending
Connie J. Shepherd
Senior Vice President
Commercial Banking
Shareholder Information
Common Stock
First Internet Bancorp is listed on the NASDAQ
Capital Market under the symbol INBK
Corporate Headquarters
First Internet Bancorp
8888 Keystone Crossing, Suite 1700
Indianapolis, IN 46240
(317) 532-7900
www.firstinternetbancorp.com
Investor Relations Contact
Paula Deemer
(317) 428-4628
investors@firstib.com
Transfer Agent
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
(908) 497-2300
www.rtco.com
Independent Registered Public Accounting Firm
BKD LLP
201 N. Illinois Street, Suite 700
P.O. Box 44998
Indianapolis, IN 46244-0998
(317) 383-4000
Legal Counsel
Faegre Baker Daniels LLP
600 E. 96th Street, Suite 600
Indianapolis, IN 46240-3789
(317) 569-9600
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2013
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Transition Period From ________ to ________.
Commission File Number 001-35750
First Internet Bancorp
(Exact Name of Registrant as Specified in its Charter)
Indiana
(State or other jurisdiction of
incorporation or organization)
8888 Keystone Crossing, Suite 1700
Indianapolis, Indiana
(Address of principal executive offices)
20-348991
(I.R.S. Employer
Identification No.)
46240
(Zip Code)
(317) 532-7900
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: Common Stock, without par value
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of
1933.
Yes
No
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12
months (or such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a
smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
Large Accelerated Filer
Accelerated Filer
Non-accelerated Filer
(Do not check if a smaller reporting company)
Smaller Reporting Company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value of common stock held by non-affiliates of the registrant as of June 28, 2013, the last business day of
the registrant’s most recently completed second fiscal quarter, was approximately $53.39 million, based on the closing sale price
for the registrant’s common stock on that date. For purposes of determining this number, all officers and directors of the registrant
are considered to be affiliates of the registrant. This number is provided only for the purpose of this report and does not represent
an admission by either the registrant or any such person as to the status of such person.
As of March 28, 2014, the registrant had 4,449,619 shares of common stock issued and outstanding.
Documents Incorporated By Reference
Portions of our Proxy Statement for the annual meeting of shareholders to be held on May 19, 2014 are incorporated by
reference in Part III.
Forward-Looking Statements
This annual report on Form 10-K contains "forward-looking statements" within the meaning of the federal securities
laws. These statements are not historical facts, rather statements based on First Internet Bancorp’s (“we,” “our,” “us” or the
“Company”) current expectations regarding its business strategies, intended results and future performance. Forward-looking
statements are generally preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions. Such
statements are subject to certain risks and uncertainties including: failures or interruptions in our information systems; growth in
our commercial lending activities; declines in market values of our investments; technological obsolescence; our possible need
for additional capital resources in the future; competition; loss of key members of management; fluctuations in interest rates;
inadequate allowance for loan losses; risks relating to consumer lending; our dependence on capital distributions from the First
Internet Bank of Indiana (the "Bank"); our ability to maintain growth in our mortgage lending business; a decline in the mortgage
loan markets or real estate markets; risks associated with the regulation of financial institutions; and changes in regulatory capital
requirements. Additional factors that may affect our results include those discussed in this report under the heading “Risk Factors”
and in other reports filed with the Securities and Exchange Commission (the "SEC"). The Company cautions readers not to place
undue reliance on any such forward-looking statements, which speak only as of the date made. The factors listed above could
affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially
from any opinions or statements expressed with respect to future periods in any current statements.
Except as required by law, the Company does not undertake, and specifically disclaims any obligation, to publicly release
the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated events.
(i)
Item 1.
Business
General
PART I
First Internet Bancorp is a bank holding company that conducts its business activities through its wholly-owned subsidiary,
First Internet Bank, an Indiana chartered bank. The Bank was the first state-chartered, FDIC-insured Internet bank. We offer a full
complement of products and services on a nationwide basis. We conduct our deposit operations primarily over the Internet and
have no branch offices.
The Bank commenced banking operations in 1999 and grew organically in the consumer market in its early years by
adding new customers, products and capabilities through its Internet-based platform. The Company was incorporated under the
laws of the State of Indiana on September 15, 2005. On March 21, 2006, we consummated a plan of exchange by which we
acquired all of the outstanding shares of the Bank. In 2007, we acquired Indianapolis-based Landmark Financial Corporation. The
acquisition merged Landmark Savings Bank, FSB, into the Bank. The Landmark acquisition added a turnkey retail mortgage
lending operation that we then expanded on a nationwide basis through our Internet platform. Since then, we have added commercial
real estate (CRE) lending, including a nationwide credit tenant lease financing program, and commercial and industrial (C&I)
lending, including asset based lending and business banking/treasury management services to meet the needs of high-quality,
under-served commercial borrowers and depositors. Our commercial banking activities are highly dependent on establishing and
maintaining strong relationships with our business customers.
As of December 31, 2013, we had total assets of $802.34 million, total liabilities of $711.43 million, and shareholders’
equity of $90.91 million.
Our principal office is located at 8888 Keystone Crossing, Suite 1700, Indianapolis, Indiana 46240. Our website is
www.firstinternetbancorp.com.
Business Strategies
Our business model is significantly different from that of a typical community bank. We do not have a conventional brick
and mortar branch system; rather, we operate through our scalable Internet banking platform. The market area for our residential
real estate lending, consumer lending, and deposit gathering activities is the entire United States. We also offer credit tenant lease
financing on a nationwide basis. Our other commercial lending activities, including CRE loans and C&I loans, corporate credit
cards and corporate treasury management services, are offered by our commercial banking team to businesses primarily within a
one hundred mile radius of our corporate headquarters. The commercial banking market in central Indiana is primarily composed
of larger regional and community banks. We have no significant customer concentrations within our loan portfolio.
Performance
Growth. Total assets have increased 59.00% from $504.62 million at December 31, 2009 to $802.34 million at
December 31, 2013. This increase was driven by strong organic growth. During the same time period, total net loans increased
from $305.44 million to $495.73 million and deposits increased from $411.63 million to $673.10 million, increases of 62.30%
and 63.52%, respectively. Our sustained growth profile is the result of our flexible and highly scalable Internet banking strategy
that allows us to target a broad reach of customers across 50 states. Additionally, key strategic commercial banking hires have
enabled us to further expand our product offerings on both a local and national basis. At December 31, 2013, CRE and C&I loans
comprised 39.82% of the loan portfolio, excluding residential mortgage loans held for sale, compared to 7.73% at December 31,
2009.
Earnings Trend. We have generated positive net income for the last four years. Net income amounted to $4.59 million
for the year ended December 31, 2013.
Asset Quality. At December 31, 2013, our nonperforming assets to total assets was 0.90% and our allowance for loan
losses to total loans receivable was 1.09%. We have maintained a high quality loan portfolio due to our emphasis on a strong credit
culture, conservative underwriting standards, and a diverse national and local customer base.
1
Strategic Focus
We operate on a national basis through our scalable Internet banking platform to gather deposits and offer residential
mortgage and consumer lending products rather than relying on a conventional brick and mortar branch system. We also conduct
commercial banking and related activities, primarily on a local basis. Our overriding strategic focus is enhancing franchise and
shareholder value. We believe the continued creation of franchise and shareholder value will be driven by profitable growth in
consumer and commercial banking, effective underwriting, strong asset quality and efficient
operations.
National Focus on Deposit and Consumer Banking Growth. Our first product offerings were basic deposit accounts,
certificates of deposit, electronic bill pay and credit cards. Within 90 days of opening, we had accounts with consumers in all
50 states. Over the years, we added secured consumer loans, lines of credit, home equity loans and
mortgages. Our
footprint for deposit gathering and these consumer lending activities is the entire nation. With the use of our
technology platform, we do not face geographic boundaries that traditional banks must overcome for customer acquisition. Armed
with smart phones and tablet computers, our customers can access our online banking system, bill pay, and remote deposit capture
24 hours a day, seven days a week, on a real time basis. In addition, we have seven dedicated banking specialists who can service
customer needs via telephone, email or online chat. We intend to continue to expand our deposit base by leveraging technology
and marketing. The average size of our customers' checking account at December 31, 2013 was $13,000, nearly four times the
national average.
Commercial Banking Growth. Over the past three years, we have diversified our operations by adding commercial
banking to complement our consumer platform. We offer CRE loans, credit tenant leases, C&I loans, including asset based lending
and corporate credit cards to commercial businesses. Our commercial lending teams consist of seasoned commercial bankers,
most of whom have had extensive careers with larger money center,
or regional banks. These lenders have developed
core relationships with a consistent base of commercial borrowers. During 2013, we introduced a treasury management
product to capture the deposit side of these commercial relationships. We are continuing to develop new products and services for
this market that will produce additional loan interest income as well as
income. We also intend to grow and expand
our commercial banking platform by hiring additional seasoned loan officers and relationship managers. In October 2013, we
added asset based lending to our commercial offerings and in January 2014, we opened a loan production office in our existing
Tempe, Arizona location.
Experience. Our management team and our Board of Directors are integral to our success. Our management team and
Board of Directors are led by David B. Becker, the founder of First Internet Bank of Indiana. Mr. Becker is a seasoned business
executive and entrepreneur with over three decades of management experience in the financial services and financial technology
space, and has served as our Chief Executive Officer since 2005. Mr. Becker has been the recipient of numerous business awards,
including Ernst & Young Entrepreneur of the Year in 2002, and is an inductee to the Central Indiana Business Hall of Fame. Our
Chief Financial Officer, Kay E. Whitaker, brings over 20 years of experience in the financial services industry, most recently as
the CFO of Central Indiana Community Foundation (“CICF”) from 2007 to 2012. At CICF, Ms. Whitaker provided financial
oversight for 800 philanthropic funds and 165 investment accounts across multiple portfolios, and was named 2012 CFO of the
Year in the not-for-profit sector by the Indianapolis Business Journal. Ms. Whitaker also brings over 15 years of accounting
experience with PriceWaterhouseCoopers focused on financial institutions. The senior management team is complemented by a
dedicated Board of Directors with a wide range of experience from careers in financial services, legal, regulatory, and industrial
services.
The leaders of our lending teams and members of their staff are highly seasoned, career bankers who bring deep banking
knowledge and relationships from regional,
or money center banks. Our management team has a wealth of banking
knowledge from a wide variety of backgrounds which gives us significant market insight and allows us to leverage their
comprehensive,
customer relationships. We organize our lending teams as follows: Commercial and Industrial,
Commercial Real Estate, Consumer, and Mortgage Banking. The C&I team has twelve members and the CRE team has eight
members. The Consumer team has four lenders and the Residential Mortgage Banking team has 26 loan producers and 34 support
staff. We will continue to search for seasoned bankers who can add new lending verticals and sources of noninterest income.
Profitability. We intend to continue to leverage our technology, our long-term commercial relationships and our
noninterest income sources to drive profitability. As we continue to grow, we believe that our model will produce a better efficiency
ratio than more traditional community banks, with a goal of higher returns on assets and equity.
Maintain Asset Quality, Diversified Loan Portfolio and Effective Underwriting. We place an emphasis on our strong
credit culture and strict underwriting standards of diverse loan products to maintain our excellent credit quality. Our loan portfolio
is diversified with a low level of construction loans. At December 31, 2013, the loan portfolio consisted of 28.70% CRE, 11.12%
C&I, 21.68% consumer, and 38.50% residential real estate loans. Our Chief Credit Officer has approximately
years
2
of experience with a major regional bank and joined us in August 2012. Our Compliance Officer has approximately thirty years
of banking and compliance experience.
Efficiency Through Technology. To date, we have pursued growth in a prudent and disciplined fashion. We will continue
to monitor our efficiency ratio and intend to invest in and utilize technology to compete more effectively as we grow in the future.
Through our online account access services, augmented by our team of dedicated banking specialists, we can satisfy all of the
basis,
needs of our retail and commercial customers in an efficient manner. Our data processing systems run on a
unlike many banks that run a “batch system”, so customers benefit from an up-to-the-minute picture of their financial position-
particularly our commercial customers, who complete numerous transactions in a single day.
Scalable Platform. We believe we have built a scalable banking infrastructure based upon technology rather than a
branch network, and that our Internet banking processes are capable of supporting continued growth while improving operational
efficiencies. We believe our support team has the ability to meet our consumer loan and deposit base growth without significant
additional hires.
Expand Market Share Through Disciplined Acquisition Strategy. We may expand on an opportunistic basis, primarily
as a means of securing additional asset generation.
Lending Activities
Residential Mortgage Lending. We offer first-lien residential mortgage loans in 50 states and second-lien (home equity)
loans as well as home equity lines of credit in 47 states. We offer loans for homebuyers (purchase money) as well as existing
homeowners who wish to refinance their current loans. The low interest rate environment in recent years has made refinancing
an attractive opportunity for homeowners. Approximately 70% of the loans we originated in 2013 were refinances. We have
increased the proportion of purchase money loans leveraging our existing technology platform, as this will provide a reliable
stream of business in a rising rate environment.
We attract credit-worthy loan applicants through disciplined online lead generation efforts and through repeat business
from past customers. We track our acquisition costs vigilantly and discontinue any lead sources that are not contributing to a
positive margin. We use customer relationship management tools to track prospects and identify the most likely sales opportunities
on which to focus our efforts. For 2013, the weighted average credit score of our mortgage customer was 772 at the time of
origination.
We currently sell the vast majority of our conforming conventional (fixed rate) loans to the secondary market and thereby
avoid the potential interest rate risk of these loans. We retain variable rate non-conforming (jumbo) loans in our portfolio. As rates
rise, we will have the opportunity to retain conforming conventional loans on an opportunistic basis.
We also actively promote home equity loans and lines of credit through our Internet channel, leveraging our robust yet
easy-to-use customer-facing toolset. We continue to expand our efforts to complement our first-lien product.
Consumer Lending. While we offer consumer loans and credit cards through our website to a nationwide consumer
base, the majority of our consumer loans have been acquired through indirect dealer networks, primarily horse trailers and
recreational vehicles (RVs). In recent years, we expanded our recreational product dealer network and implemented a new loan
origination system to improve the customer experience and document tracking.
Commercial Real Estate (CRE) Lending. We have a team of eight full-time employees in CRE lending, most with large
regional bank experience. We expect that the majority of our CRE loans will be in office, retail, industrial, single family residential
development and construction, and multi-family loans in the Midwest, with credit tenant lease financing on a nationwide basis.
While many banks in Central Indiana must address legacy problem CRE loans in their portfolios, we are in a position to meet
pent-up demand from qualified borrowers. At December 31, 2013, $142.43 million, or 28.70% of our loan portfolio consisted of
CRE loans.
We believe our CRE portfolio will continue its growth in two ways: (1) regionally, in more traditional short and
intermediate-term financing arrangements supporting local developers and conventional property types (office, retail, multi-family,
industrial, residential development & construction) as well as (2) nationally, where we will concentrate on longer term financing
of properties occupied by single tenants committed to long-term leases with borrowers providing significant cash equity in relation
to the debt structured.
3
Commercial and Industrial (C&I) Lending. Historically, we only originated C&I loans occasionally as a result of
referrals we received from customers and third parties. We began focusing on C&I loan originations in the Central Indiana area
in late 2011. In 2013, we expanded our commercial lending capabilities by beginning a new division that offers asset based lending
services. Operating under the name First Internet Bank Business Capital, the new division provides working capital to small-to-
medium sized companies. The asset based lending group provides revolving lines of credit backed by accounts receivable and
inventory as well as term loans backed by real estate and equipment.
We currently have a C&I team of twelve full-time employees, most with large regional bank experience and strong local
relationships. The recent increase in our C&I lending activity is intended to further diversify our lending portfolio and increase
opportunities for new business. In addition to commercial loan originations, C&I lending activity can result in new deposits,
including fee income from treasury management products, and opportunities to cross-sell other products such as residential
mortgage loans and consumer home equity and installment loans. New C&I customers (and their advisors) also serve as referral
sources for additional new business opportunities. In order to attract deposits from C&I borrowers (which diversifies our deposit
mix and reduces our cost of funds) and to enhance our non-interest income, we began offering expanded online account access
and treasury management service capabilities during 2013. In 2013, commercial deposits grew to $16.17 million.
Loan Portfolio Analysis
(dollars in thousands)
Real estate loans:
Residential
Commercial
Total real estate loans
Commercial loans
Consumer loans
Less:
2013
2012
December 31,
2011
2010
2009
$ 191,007
38.50% $ 128,815
36.34% $ 143,452
43.24% $ 106,729
35.30% $ 80,781
26.02%
142,429
333,436
28.70%
84,918
23.95%
43,507
13.11%
19,563
6.47%
20,212
6.51%
67.20% 213,733
60.29% 186,959
56.35% 126,292
41.77% 100,993
32.53%
55,168
11.12%
14,271
4.03%
2,063
0.62%
4,919
1.63%
3,779
1.22%
107,562
21.68% 126,486
35.68% 142,783
43.03% 171,122
56.60% 205,702
66.25%
496,166
100.00% 354,490
100.00% 331,805
100.00% 302,333
100.00% 310,474
100.00%
Net deferred loan fees,
premiums and discounts
Allowance for losses
4,987
(5,426)
3,671
(5,833)
3,421
(5,656)
4,057
(6,845)
Total net loans
$ 495,727
$ 352,328
$ 329,570
$ 299,545
5,062
(10,097)
$ 305,439
Loan Maturities
The following table shows the contractual maturity distribution intervals of the outstanding loans in our portfolio as of
December 31, 2013.
(dollars in thousands)
Amounts due in:
One year or less
More than one to two years
More than two to three years
More than three to five years
More than five to ten years
More than ten to fifteen years
More than fifteen years
Real Estate
Residential
Commercial
Commercial
Consumer
Total
$
8,011
$
12,086
$
8,620
$
7,904
2,158
661
1,088
4,675
166,510
1,576
11,952
37,011
73,686
5,397
721
939
6,163
11,746
27,700
—
—
2,017
1,392
4,659
15,070
69,402
15,022
$
$
$
$
$
$
— $
30,734
11,811
24,932
64,488
171,876
25,094
167,231
496,166
Total
$
191,007
$
142,429
$
55,168
$
107,562
$
4
Fixed vs. Adjustable Rate Loans
The following table shows the distribution of the outstanding loans in our portfolio between those with variable or floating
interest rates and those with fixed or predetermined interest rates as of December 31, 2013.
(dollars in thousands)
Due after December 31, 2013
Fixed
Adjustable
Total
Real estate loans:
Residential
Commercial
Total real estate loans
Commercial loans
Consumer loans
Total loans
$
16,070
$
101,454
117,524
43,499
106,431
174,937
40,975
215,912
11,669
1,131
$
267,454
$
228,712
$
$
$
$
$
$
191,007
142,429
333,436
55,168
107,562
496,166
Loan Activity
The following table shows loan activity for the years ended December 31, 2013 and 2012.
(dollars in thousands)
Year ended December 31,
2013
2012
Total loans at beginning of period: $
354,490
$
331,805
Loans originated:
Real estate loans:
Residential
Commercial
Commercial loans
Consumer loans
Total loans originated
Loans Purchased(1):
Real estate loans:
Residential
Commercial
Commercial loans
Consumer loans
Total loans purchased
Add (Deduct):
Principal repayments
Net other
Net loan activity
22,235
62,242
21,236
16,741
122,454
59,254
—
21,892
—
81,146
(60,149)
(1,775)
141,676
Total loans at end of period
$
496,166
$
__________________________________
(1) Excludes premiums paid or discounts received.
5
4,775
35,861
7,467
24,572
72,675
—
8,877
—
—
8,877
(52,055)
(6,812)
22,685
354,490
Nonperforming Assets
Loans are reviewed at least quarterly and any loan whose collectability is doubtful is placed on nonaccrual status. Loans
are placed on nonaccrual status when either principal or interest is 90 days or more past due, unless, in the judgment of management,
the loan is well collateralized and in the process of collection. Interest accrued and unpaid at the time a loan is placed on nonaccrual
status is charged against interest income. Subsequent payments are either applied to the outstanding principal balance or recorded
as interest income, depending on the assessment of the ultimate collectability of the loan. Restructured loans include troubled debt
restructurings that involved forgiving a portion of interest or principal or making loans at a rate materially less than the market
rate to borrowers whose financial condition had deteriorated. Foreclosed and repossessed assets include assets acquired in the
settlement of loans. The following table sets forth the amounts and categories of nonperforming assets in our portfolio as of the
dates indicated.
(dollars in thousands)
Nonaccrual loans(1):
Real estate loans:
Residential
Commercial
Total real estate loans
Commercial loans
Consumer loans
Total nonaccrual loans
Accruing loans past due 90 days or more:
Real estate loans:
Residential
Commercial
Total real estate loans
Commercial loans
Consumer loans
Total accruing loans past due 90 days
or more
2013
2012
2011
2010
2009
December 31,
$
630
$
1,389
$
876
$
2,841
$
1,054
1,684
—
150
1,834
—
—
—
—
18
18
2,362
3,751
—
155
3,906
450
—
450
—
21
471
7,523
8,399
—
224
8,623
75
—
75
—
56
131
3,593
6,434
1,539
683
8,656
—
900
900
—
30
930
3,388
5,186
8,574
—
1,726
10,300
47
—
47
—
72
119
Total nonperforming loans
1,852
4,377
8,754
9,586
10,419
Real estate owned:
Residential
Commercial
Total real estate owned
368
4,013
4,381
265
3,401
3,666
448
1,064
1,512
591
1,616
2,207
126
—
126
Other nonperforming assets
956
2,253
3,113
5,118
2,164
Total nonperforming assets
Troubled debt restructurings not included
in nonaccruals
Troubled debt restructurings and total
nonperforming assets
7,189
1,243
10,296
13,379
16,911
12,709
1,412
1,086
360
—
$
8,432
$
11,708
$
14,465
$
17,271
$
12,709
__________________________________
(1) Includes nonperforming troubled debt restructurings.
6
(dollars in thousands)
December 31,
2013
2012
2011
2010
2009
Troubled debt restructurings:
Real estate loans:
Residential – Accruing
Residential – Non-accruing
Commercial – Non-accruing
Total real estate loans
Commercial loans
Consumer loans – Accruing
Consumer loans – Non-accruing
$
1,054
$
1,092
$
27
—
1,081
—
189
—
29
510
1,631
—
319
20
817
285
510
1,612
—
269
89
$
360
$
—
—
360
—
—
—
Total troubled debt restructurings
$
1,270
$
1,970
$
1,970
$
360
$
—
—
—
—
—
—
—
—
Total nonperforming loans to total loans
Total nonperforming assets to total assets
Total nonperforming assets and troubled debt
restructurings to total assets
0.37%
0.90%
1.05%
1.23%
1.62%
1.84%
2.64%
2.29%
2.47%
3.17%
3.36%
3.43%
3.36%
2.52%
2.52%
Classified Loans
(dollars in thousands)
Special Mention loans
Substandard loans
Doubtful loans
Total classified loans
Delinquencies
(dollars in thousands)
December 31,
2013
2012
$
$
3,456
$
1,054
—
4,510
$
2,032
2,467
—
4,499
December 31,
2013
2012
30-59 Days
Past Due
60-89 Days
Past Due
90+ Days
Past Due
30-59 Days
Past Due
60-89 Days
Past Due
90+ Days
Past Due
Real estate loans:
Residential
Commercial
Total real estate loans
Commercial loans
Consumer loans
Total
$
$
122
$
— $
—
122
—
484
606
$
—
—
—
45
45
603
955
1,558
—
84
$
130
$
—
130
—
1,025
$
1,642
$
1,155
$
5
—
5
—
148
153
$
1,555
2,362
3,917
—
122
$
4,039
Allocation of Allowance for Loan Losses
The determination of the allowance for loan losses and the related provision is one of our critical accounting policies that
is subject to significant estimates, as previously discussed. The current level of the allowance for loan losses is a result of
management’s assessment of the risks within the portfolio based on the information obtained through the credit evaluation process.
The Company utilizes a risk-rating system on non-homogenous CRE and C&I loans that includes regular credit reviews to identify
and quantify the risk in the commercial portfolio. Management conducts quarterly reviews of the entire loan portfolio and evaluates
the need to establish allowances on the basis of these reviews.
7
Management actively monitors asset quality and, when appropriate, charges off loans against the allowance for loan
losses. Although management believes it uses the best information available to make determinations with respect to the allowance
for loan losses, future adjustments may be necessary if economic conditions differ substantially from the economic conditions in
the assumptions used to determine the size of the allowance for loan losses.
The following tables reflect the allowance for loan losses and its allocations for the periods indicated.
(dollars in thousands)
Real estate loans:
Residential
Commercial
Commercial loans
Consumer loans
Amount
$
1,219
2,517
819
871
2013
% of
Total
ALLL
% of
Total
Loans
Amount
December 31,
2012
% of
Total
ALLL
% of
Total
Loans
Amount
2011
% of
Total
ALLL
% of
Total
Loans
22.47%
46.39%
15.09%
16.05%
38.50% $
28.70%
11.12%
21.68%
1,149
3,107
371
1,206
5,833
19.70%
53.27%
6.36%
36.34% $
23.95%
4.03%
20.67%
35.68%
1,099
2,485
333
1,739
19.43%
43.93%
5.89%
43.24%
13.11%
0.62%
30.75%
43.03%
100.00%
100.00% $
5,656
100.00%
100.00%
Total allowance for loan losses
$
5,426
100.00%
100.00% $
(dollars in thousands)
December 31,
2010
% of
Total
ALLL
% of
Total
Loans
Amount
2009
% of
Total
ALLL
% of
Total
Loans
31.19%
18.88%
8.88%
35.30% $
765
7.58%
26.02%
6.47%
1.63%
4,232
79
41.91%
0.78%
6.51%
1.22%
41.05%
56.60%
5,021
49.73%
66.25%
Amount
$
2,135
1,292
608
2,810
Real estate loans:
Residential
Commercial
Commercial loans
Consumer loans
Total allowance for loan losses
$
6,845
100.00%
100.00% $ 10,097
100.00%
100.00%
8
Loan Loss Experience
The following table reflects activity in the allowance for loan losses for the periods indicated and selected related statistics.
(dollars in thousands)
Allowance at beginning of period:
$
5,833
$
2013
Provision for loan losses
Charge offs:
Real estate loans:
Residential
Commercial
Commercial loans
Consumer loans
Total charge-offs
Recoveries:
Real estate loans:
Residential
Commercial
Commercial loans
Consumer loans
Total recoveries
324
(164)
(238)
—
(810)
(1,212)
98
—
70
313
481
Fiscal Year Ended
December 31,
2011
$
6,845
2,440
2012
5,656
2,852
2010
$
10,097
$
927
2009
4,616
11,564
(509)
(1,464)
—
(1,438)
(3,411)
148
—
75
513
736
(811)
(698)
(612)
(2,296)
(4,417)
141
—
19
628
788
(1,158)
(445)
(61)
(3,399)
(5,063)
121
17
—
746
884
(1,402)
(294)
(10)
(5,297)
(7,003)
102
—
—
818
920
Net charge-offs
(731)
(2,675)
(3,629)
(4,179)
(6,083)
Allowance at end of period
$
5,426
$
5,833
$
5,656
$
6,845
$
10,097
Allowance to nonperforming loans
292.98 %
133.26 %
64.61 %
71.41 %
96.91 %
Allowance to total loans outstanding at end
of period
Net charge-offs to average loans outstanding
during period
Underwriting Procedures and Standards
1.09 %
1.65 %
1.70 %
2.26 %
3.25 %
(0.17)%
(0.69)%
(1.05)%
(1.35)%
(1.85)%
Loan Approval Procedures and Authority. Our lending activities follow written, non-discriminatory policies with loan
approval limits approved by the Board of Directors. Loan officers have underwriting and approval authorization of varying amounts
based on their years of experience in the lending field. Additionally, based on the amount of the loan, multiple signatures and or
approvals are required. Our Chief Credit Officer has approval limits on individual loans up to $8 million and pool purchases up
to $40 million. Per the Company’s policy, the maximum the Bank could lend to any one borrower at December 31, 2013 was
$10.0 million.
Our goal is to have a well-diversified and balanced loan portfolio. In order to manage our loan portfolio risk, we establish
concentration limits by borrower, product type, maturity, loan structure, industry and geography. To supplement our internal loan
review resources, we have engaged an independent third-party loan review group, which together represent our internal loan review
function. Responsibility for loan underwriting, compliance and document monitoring reside with the compliance function and
loan operations function.
Residential Real Estate Loans. Residential real estate loans generally include loans for the purchase or refinance of
residential real estate properties consisting of 1-4 units and home equity loans and lines of credit. We currently sell substantially
all of the long-term fixed rate residential real estate loans that we originate to secondary market investors. We also release the
9
servicing of these loans upon sale. Loan servicing includes collecting and remitting loan payments, accounting for principal and
interest, contacting delinquent mortgagors, supervising foreclosures and property dispositions in the event of unremedied defaults,
making certain insurance and tax payments on behalf of the borrowers and generally administering the loans. We typically retain
all adjustable rate residential real estate loans that exceed the government maximum loan amount (which is currently $417,000)
and also loans with balloon payment features in our portfolio. Balloon periods are up to a maximum of 15 years. Qualified
Mortgage Rules went into effect in January 2014 and we discontinued offering balloon loans. Loans secured by first liens on
residential real estate held in the portfolio typically do not exceed 80% of the value of the collateral, are adjustable rate and have
amortization periods of thirty years or less.
Residential real estate loans are typically underwritten to conform to industry standards including criteria for maximum
debt-to-income and loan-to-value ratios as well as minimum credit scores. Our underwriting focuses on appraised value of the
collateral as well as the applicant’s ability to repay the loan from his or her employment and from other sources. We verify an
applicant’s credit information using third-party records and tax returns through the IRS.
Additionally, our residential mortgage underwriters use a third party product to assess the risk of the loan transaction for
both the collateral and applicant. The product helps us identify suspicious mortgage loans and analyzes the property and
neighborhood characteristics for each transaction. From the date of application to the date of closing, all of an applicant’s credit
activity is monitored. All appraisals are reviewed by our collateral underwriter, who is an Indiana state certified appraiser. The
collateral underwriter has several third party products that help assess the quality of the appraisal, the comparables chosen, and
the value determination.
We do not offer, and have never offered, “subprime loans” (loans that generally target borrowers with weakened credit
histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with
questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios).
Consumer Loans. Consumer loans are primarily comprised of loans and credit cards. The majority of our consumer
loans are horse trailer and recreational vehicle loans, underwritten by our staff for buyers whose applications were sent to us
through a dealer network. Minimum underwriting criteria have been established that consider credit score, debt-to-income ratio,
employment history, the advance percentage and collateral coverage. Typically, consumer loans are set up on monthly payments
with amortization periods based on the type and age of the collateral.
Commercial Real Estate Loans. Traditional CRE loans are comprised of loans to small business entities to purchase or
expand structures in which the business operations are housed, loans to owners of real estate who lease space to non-related
commercial entities, loans for construction and land development, and loans to owners of multi-family residential structures, such
as apartment buildings. CRE loans are underwritten primarily based on historical and projected cash flows of the borrower and
secondarily on the appraised value of the underlying real estate pledged as collateral on the debt. Credit tenant lease financing
targets individual and institutional real estate investors purchasing commercial properties subject to long-term leasing arrangements
with national or regional tenants. These transactions are typically longer term in nature given longer contractual lease periods
and reliability of the cash flow from financially strong tenants. For the various types of commercial real estate loans, minimum
criteria have been established within our loan policy regarding debt service coverage while maximum limits on loan-to-value and
amortization periods have been defined. Maximum loan-to-value ratios range from 40% to 85% depending upon the type of real
estate collateral, while the desired minimum debt coverage ratio is 1.20x. CRE loans represented 28.70% of our loan portfolio at
December 31, 2013.
The Bank's CRE loan portfolio is closely monitored on an ongoing basis by the completion of annual reviews requiring
site inspections, periodic financial statement updates from the borrower, property rent rolls, guarantor tax returns and personal
financial statements, payment history reviews, and evidence of ongoing insurance renewals and property tax payments.
Commercial and Industrial Loans. C&I loans focus on the entire business relationship and consist of loans for business
expansion as well as working capital loans used to purchase inventory and fund accounts receivable that are secured by business
assets other than real estate. These loans are generally written for three years or less. Also, new equipment financing is provided
to businesses with these loans generally limited to 90% of the value of the collateral and amortization periods limited to seven
years. C&I loans are often accompanied by a personal guaranty of the principal owners of a business. As with CRE loans, the
underlying cash flow on a historic and projected basis of the business is the primary consideration in the underwriting process,
with a desired minimum debt coverage ratio of 1.20x. We also assess the management’s operational effectiveness, level of equity
invested in the business and customer relationships. We also consider relevant economic and industry factors, as well as competitor
and supplier information relating to the applicant’s business. The financial condition of commercial borrowers is monitored at
least annually with the type of financial information required determined by the size of the relationship. We address the needs of
businesses with higher risk profiles through the use of government-assisted lending programs through the Small Business
10
Administration. We determine the loan structure after evaluating what is appropriate for the specific situation and establish
monitoring mechanisms for going forward.
Deposit Activities and Other Sources of Funds
We obtain deposits through the ACH network (direct deposit as well as customer-directed transfers of funds from outside
financial institutions), remote and mobile deposit capture, mailed checks, wire transfers, and a deposit-taking ATM network. We
do not currently solicit brokered deposits, although we had approximately $17.8 million and $18.3 million in brokered time deposits
at December 31, 2013 and 2012, respectively.
The Bank does not own or operate any ATMs. Through network participation, the Bank’s customers are able to use nearly
any ATM worldwide to withdraw cash. The Bank currently rebates up to $6.00 per customer per month for surcharges our customers
incur when using an ATM owned by another institution. Management believes this program is more cost effective for the Bank,
and more convenient for customers, than it would be to build and maintain a proprietary nationwide ATM network for our customers.
By providing a robust online toolset, quality customer service and a tremendous value for services offered, we have been
able to develop relationships with our retail customers and build brand loyalty. The average retail checking or savings account has
been open with us for more than eight years. As a result, we are not dependent upon costly account acquisition campaigns to attract
new customers on a continual basis.
Deposits
(dollars in thousands)
Fiscal Year ended December 31,
2013
2012
2011
Regular savings accounts
$
Non-interest bearing
Interest-bearing
Money market accounts
Certificates of deposit
Brokered deposits
14,330
19,386
73,748
255,169
292,685
17,890
Premiums on brokered deposits
(113)
2.13 % $
2.88 %
10.96 %
37.91 %
43.48 %
2.66 %
(0.02)%
Total
$
673,095
100.00 % $
11,583
13,187
73,660
202,388
211,542
18,490
(159)
530,691
2.18 % $
2.49 %
13.88 %
38.14 %
39.86 %
3.48 %
(0.03)%
100.00 % $
7,773
15,870
64,006
165,561
209,762
23,898
(205)
486,665
1.60 %
3.26 %
13.15 %
34.02 %
43.10 %
4.91 %
(0.04)%
100.00 %
Time Deposits
(dollars in thousands)
Interest Rate:
<1.00%
1.00% – 1.99%
2.00% – 2.99%
3.00% – 3.99%
4.00% – 4.99%
5.00% – 5.99%
Total
December 31,
2013
$
$
146,532
50,700
75,492
34,577
736
2,538
310,575
11
Time Deposit Maturities at December 31, 2013
(dollars in thousands)
Period to Maturity
Less than 1
year
> 1 year
to 2 years
> 2 years
to 3 years
More than
3 years
Total
$
111,483
$
31,692
$
2,957
$
400
$
146,532
7,258
4,132
18,936
1
—
11,939
26,309
5,296
735
—
10,006
44,962
7,261
—
—
21,497
89
3,084
—
2,538
50,700
75,492
34,577
736
2,538
Percentage
of Total
Certificate
Accounts
47.18%
16.32%
24.31%
11.13%
0.24%
0.82%
$
141,810
$
75,971
$
65,186
$
27,608
$
310,575
100.00%
Interest Rate:
<1.00%
1.00% – 1.99%
2.00% – 2.99%
3.00% – 3.99%
4.00% – 4.99%
5.00% – 5.99%
Total
Time Deposit Maturities of $100,000 or Greater
(dollars in thousands)
Maturity Period:
3 months or less
Over 3 through 6 months
Over 6 through 12 months
Over 12 months
Total
Federal Home Loan Bank Advances
December 31,
2013
$
$
15,374
14,730
79,975
127,194
237,273
Although deposits are the primary source of funds for our lending and investment activities and for general business
purposes, we may obtain advances from the Federal Home Loan Bank of Indianapolis (FHLBI) as an alternative to retail deposit
funds. The following table is a summary of FHLBI borrowings for the periods indicated.
(dollars in thousands)
Balance outstanding at end of period
Average amount outstanding during period
Maximum outstanding at any month end during period
Fiscal Year Ended
December 31,
2012
$
$
40,686
40,625
40,686
$
2013
31,793
30,054
31,793
2011
40,573
38,539
40,573
Weighted average interest rate at end of period
Weighted average interest rate during period
2.63%
3.53%
3.22%
3.35%
3.22%
3.52%
Market Areas
The market area for our retail banking activities, primarily residential mortgage and consumer lending and deposit
gathering, is nationwide. The physical location of our offices is of no consequence to our retail customers.
We also deliver our CRE Credit Tenant Lease financing and asset based lending services nationally. We serve our
traditional CRE borrowers in Indiana and bordering states. Traditional C&I banking focuses on Indiana and Arizona. Our traditional
CRE business and C&I activities are highly dependent on strong lender/borrower relationships.
12
Competition
The markets in which we compete to make loans and attract deposits are highly competitive.
For retail banking activities, we compete with other banks that use the Internet as a primary service channel, including
Ally Bank, EverBank and Bank of Internet. However, we also compete with other banks, savings banks, credit unions, investment
banks, insurance companies, securities brokerages and other financial institutions, as nearly all have some form of Internet delivery
for their services. For residential mortgage lending, competitors that use the Internet as a primary service channel include Quicken
Loans and Discover. However, we also compete with the major banks in residential mortgage lending, including Bank of America,
Chase and Wells Fargo.
For our commercial lending activities, we compete with larger financial institutions operating in the Midwest and Central
Indiana regions, including Key Bank, PNC Bank, Chase, BMO Harris, First Merchants Bank and First Financial Bank. In the
Southwest, we compete with Wells Fargo, Chase, Bank of America, U.S. Bank, Bank of Arizona, and CoBiz Bank. All of these
competitors have significantly greater financial resources and higher lending limits and may also offer specialized products and
services we do not. For our commercial clients, we offer a highly personalized relationship and fast, local decision making.
In the United States, banking has experienced widespread consolidation over the last decade leading to the emergence
of several large nationwide banking institutions. These competitors have significantly greater financial resources and offer many
branch locations as well as a variety of services we do not. We have attempted to offset some of the advantages of the larger
competitors by leveraging technology to deliver product solutions and better compete in targeted segments. We have positioned
ourselves as an alternative to banking conglomerates for consumers who do not wish to subsidize the cost of large branch networks
through high fees and unfavorable rates.
We anticipate that consolidation will continue in the financial services industry and perhaps accelerate as a result of
ongoing financial stress, intensified competition for the same customer segments and significantly increased regulatory burdens
and rules that are expected to increase expenses and put pressure on revenues.
Regulation and Supervision
General
We and the Bank are extensively regulated under federal and state law. We are a registered bank holding company under
the Bank Holding Company Act of 1956 (the “BHCA”) and, as such, are subject to regulation, supervision and examination by
the Board of Governors of the Federal Reserve System (the “Federal Reserve”). We are required to file reports with the Federal
Reserve on a quarterly basis.
The Bank is an Indiana-chartered bank formed pursuant to the Indiana Financial Institutions Act (the “IFIA”). As such,
the Bank is regularly examined by and subject to regulations promulgated by the Indiana Department of Financial Institutions (the
“DFI”) and the Federal Deposit Insurance Corporation (the “FDIC”) as its primary federal bank regulator. The Bank is not a
member of the Federal Reserve System.
The regulatory environment affecting us has been and continues to be altered by the enactment of new statutes and the
adoption of new regulations as well as by revisions to, and evolving interpretations of, existing regulations. State and federal
banking agencies have significant discretion in the conduct of their supervisory and enforcement activities and their examination
policies. Any change in such practices and policies could have a material impact on our operations and shareholders.
The following discussion is intended to be a summary of the material statutes, regulations and regulatory directives that
are currently applicable to us. It does not purport to be comprehensive or complete and it is expressly subject to and modified by
reference to the text of the applicable statutes, regulations and directives.
The Dodd-Frank Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) comprehensively reformed
the regulation of financial institutions, products and services. Certain provisions of the Dodd-Frank Act noted in this section are
also discussed in other sections. Furthermore, many of the provisions of the Dodd-Frank Act require further study or rulemaking
by federal agencies, a process which will take months and years to implement fully.
13
Among other things, the Dodd-Frank Act provides for new capital standards that eliminate the treatment of trust preferred
securities as Tier 1 capital. The Company has never issued any trust preferred securities. The Dodd-Frank Act permanently raised
deposit insurance levels to $250,000, retroactive to January 1, 2008, and provided unlimited deposit insurance coverage for non-
interest bearing transaction accounts through December 31, 2012. Pursuant to modifications under the Dodd-Frank Act, deposit
insurance assessments are now being calculated based on an insured depository institution’s assets rather than its insured deposits
and the minimum reserve ratio of the FDIC’s Deposit Insurance Fund (the “DIF”) has been raised to 1.35%. The payment of
interest on business demand deposit accounts is permitted by the Dodd-Frank Act. The Dodd-Frank Act authorized the Federal
Reserve to regulate interchange fees for debit card transactions and established new minimum mortgage underwriting standards
for residential mortgages. Further, the Dodd-Frank Act barred certain banking organizations from engaging in proprietary trading
and from sponsoring and investing in hedge funds and private equity funds, except as permitted under certain limited circumstances.
The Dodd-Frank Act empowered the newly established Financial Stability Oversight Council to designate certain activities as
posing a risk to the U.S. financial system and to recommend new or heightened standards and safeguards for financial organizations
engaging in such activities.
The Dodd-Frank Act also established the Consumer Financial Protection Bureau (the “CFPB”) as an independent agency
within the Board of Governors of the Federal Reserve System. The CFPB has the exclusive authority to administer, enforce, and
otherwise implement federal consumer financial laws, which includes the power to make rules, issue orders, and issue guidance
governing the provision of consumer financial products and services. The CFPB has exclusive federal consumer law supervisory
authority and primary enforcement authority over insured depository institutions with assets totaling over $10 billion. Authority
for institutions with $10 billion or less rests with the prudential regulator, and in the case of the Bank will be enforced by the FDIC.
The CFPB is also required to establish four offices: 1) Office of Fair Lending and Equal Opportunity, 2) Office of Financial
Education, 3) Office of Service Member Affairs, and 4) Office of Financial Protection for Older Americans. Additionally, the
Bureau is required to establish a Consumer Advisory Board to advise and consult with the Bureau in the exercise of its functions.
Further, the Dodd-Frank Act established the Office of Financial Research, which has the power to require reports from other
financial services companies.
On December 10, 2013, five federal agencies published the final “Volcker Rule” pursuant to the Dodd-Frank Act. Among
other things, the Volcker Rule imposes significant limitations on certain activities by covered banks and bank holding companies,
including restrictions on holding certain types of securities, proprietary trading, and private equity investing. Most of the limitations
imposed by the Volcker Rule are not likely to impact smaller banks which do not engage in proprietary trading or private equity
activities. However, the restrictions on investing in hedge funds and similar entities could impact the ability to invest in collateralized
debt obligations and other investments that many smaller banks hold. On January 14, 2014, through publication of an Interim
Final Rule, the federal banking agencies clarified that investments by banks in certain trust preferred collateralized debt obligations
are not prohibited by the Volcker Rule. However, the ultimate effect of the Volcker Rule on the Bank remains uncertain.
Holding Company Regulation
We are subject to supervision and examination as a bank holding company by the Federal Reserve under the BHCA. In
addition, the Federal Reserve has the authority to issue orders to bank holding companies to cease and desist from unsafe or
unsound banking practices and from violations of conditions imposed by, or violations of agreements with, the Federal Reserve.
The Federal Reserve is also empowered, among other things, to assess civil money penalties against companies or individuals
who violate Federal Reserve orders or regulations, to order termination of nonbanking activities of bank holding companies, and
to order termination of ownership and control of a nonbanking subsidiary by a bank holding company. Federal Reserve approval
is also required in connection with bank holding companies’ acquisitions of more than 5% of the voting shares of any class of a
depository institution or its holding company and, among other things, in connection with the bank holding company’s engaging
in new activities.
Under the BHCA, our activities are limited to businesses so closely related to banking, managing or controlling banks
as to be a proper incident thereto. The BHCA also requires a bank holding company to obtain approval from the Federal Reserve
before (1) acquiring or holding more than a 5% voting interest in any bank or bank holding company, (2) acquiring all or substantially
all of the assets of another bank or bank holding company or (3) merging or consolidating with another bank holding company.
We have not filed an election with the Federal Reserve to be treated as a “financial holding company,” a type of holding
company that can engage in certain insurance and securities-related activities that are not permitted for a bank holding company.
Source of Strength. Under the Dodd-Frank Act, we are required to serve as a source of financial and managerial strength
for the Bank in the event of the financial distress of the Bank. This provision codifies the longstanding policy of the Federal
Reserve. Although the Dodd-Frank Act requires the federal banking agencies to issue regulations to implement the source of
strength provisions, no regulations have been promulgated at this time. In addition, any capital loans by a bank holding company
14
to any of its depository subsidiaries are subordinate to the payment of deposits and to certain other indebtedness. In the event of
a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to
maintain the capital of a depository subsidiary will be assumed by the bankruptcy trustee and entitled to a priority of payment.
Regulation of Banks, Generally
Business Activities. The Bank derives its lending and investment powers from the IFIA, the Federal Deposit Insurance
Act (the “FDIA”) and related regulations.
Loans-to-One Borrower Limitations. Generally, the Bank’s total loans or extensions of credit to a single borrower,
including the borrower's related entities, outstanding at one time, and not fully secured, cannot exceed 15% of the Bank’s unimpaired
capital and surplus. If the loans or extensions of credit are fully secured by readily marketable collateral, the Bank may lend up
to an additional 10% of its unimpaired capital and surplus.
Capital Requirements—Generally. Currently, FDIC regulations require insured non-member banks generally to meet
three minimum capital standards:
•
a ratio of tangible capital to adjusted total assets (tangible capital ratio) of not less than 1.5%;
“Tangible capital” for this purpose is defined to include common stockholders’ equity (including retained earnings),
noncumulative perpetual preferred stock and related earnings and minority interests in consolidated subsidiaries, less
intangibles and investments in certain “non-includable” subsidiaries.
•
a ratio of “core capital” to adjusted total assets (“Tier 1 Capital Ratio” or “leverage ratio”) of not less than 4%; and
“Core capital” (also called “Tier 1 Capital”) is defined similarly to tangible capital, but also includes certain qualifying
supervisory goodwill and certain purchased credit card relationships.
•
a ratio of total capital (core and supplementary) to total risk-weighted assets (“Total Risk-Based Capital Ratio”) of
not less than 8%, provided that the amount of supplementary capital used to satisfy this requirement may not exceed
the amount of core capital.
“Supplementary capital” (also called “Tier 2 Capital”) for this purpose is defined to include cumulative and certain
other preferred stock, mandatory convertible debt securities, subordinated debt and the allowance for loan and lease
losses (up to a maximum of 1.25% of risk-weighted assets). In addition, up to 45% of unrealized gains on available-
for-sale equity securities with a readily determinable fair value may be included in Tier 2 Capital.
In determining the amount of risk-weighted assets for purposes of the risk-based capital requirements, the Bank’s balance
sheet assets and the credit conversion values of certain off-balance sheet items are multiplied by specified risk-weights, generally
ranging from 0% for cash and obligations issued by the U.S. Government or its agencies to 100% for consumer and commercial
loans, as specified by the FDIC regulations based on the degree of risk deemed to be inherent in the particular type of asset.
The FDIC has adopted regulations to implement its capital adequacy requirements through the system of prompt corrective
action established by Section 38 of the FDIA. Under the prompt corrective action regulations, a bank is “well capitalized” if it
has: (1) a Total Risk-Based Capital Ratio of 10.0% or greater; (2) a Tier 1 (Core) risk-based capital ratio of 6.0% or greater; (3) a
leverage ratio of 5.0% or greater; and (4) is not subject to any written agreement, order, capital directive or prompt corrective
action directive to meet and maintain a specific capital level for any capital measure. A bank is “adequately capitalized” if it has:
(1) a Total Risk-Based Capital Ratio of 8.0% or greater; (2) a Tier 1 (Core) risk-based capital ratio of 4.0% or greater; and (3) a
leverage ratio of 4.0% or greater (3.0% under certain circumstances) and does not meet the definition of a “well capitalized”
savings association.
Regulators also must take into consideration: (1) concentrations of credit risk, (2) interest rate risk and (3) risks from
non-traditional activities, as well as an institution’s ability to manage those risks, when determining the adequacy of an institution’s
capital. This evaluation will be made as a part of the institution’s regular safety and soundness examination.
Generally, a bank, upon receiving notice that it is not adequately capitalized (i.e., that it is “undercapitalized”), becomes
subject to the prompt corrective action provisions of Section 38 of the FDIA that, for example, (1) restrict payment of capital
distributions and management fees, (2) require that the FDIC monitor the condition of the bank and its efforts to restore its capital,
(3) require submission of a capital restoration plan, (4) restrict the growth of the bank’s assets and (5) require prior regulatory
15
approval of certain expansion proposals. A bank that is required to submit a capital restoration plan must concurrently submit a
performance guarantee by each company that controls the bank. A bank that is “critically undercapitalized” (i.e., has a ratio of
tangible equity to total assets that is equal to or less than 2.0%) will be subject to further restrictions, and generally will be placed
in conservatorship or receivership within 90 days.
We are also subject to capital adequacy regulations of the Federal Reserve. These capital requirements are substantially
similar to those applicable to the Bank. For bank holding companies, the minimum Tier 1 risk-based capital ratio is 4% and the
minimum Total Risk-Based Capital Ratio is 8%. In addition to the risk-based capital requirements, the Federal Reserve requires
top rated bank holding companies to maintain a minimum leverage capital ratio of Tier 1 capital (defined by reference to the risk-
based capital guidelines) to its average total consolidated assets of at least 3.0%. For most other bank holding companies, the
minimum leverage ratio is 4.0%. Bank holding companies with supervisory, financial, operational or managerial weaknesses, as
well as bank holding companies that are anticipating or experiencing significant growth, are expected to maintain capital ratios
well above the minimum levels. The following summarizes our applicable capital ratios as of December 31, 2013:
(dollars in thousands)
As of December 31, 2013:
Total capital (to risk-weighted assets)
Minimum
Capital
Requirement
Ratio
Amount
Ratio
Actual
Amount
Minimum to be
Well Capitalized
Under Prompt
Corrective Actions
Ratio
Amount
Consolidated
Bank
$
96,981
77,862
17.1% $
13.8%
45,386
45,287
Tier 1 capital (to risk-weighted assets)
Consolidated
Bank
Tier 1 capital (to average assets)
Consolidated
Bank
88,555
72,436
88,555
72,436
15.6%
12.8%
11.7%
9.6%
22,693
22,644
30,385
30,329
8.0%
8.0%
4.0%
4.0%
4.0%
4.0%
N/A
56,609
N/A
33,965
N/A
37,911
N/A
10.0%
N/A
6.0%
N/A
5.0%
In July 2013, the Federal Reserve published final rules (the “Basel III Capital Rules”) establishing a new comprehensive
capital framework for U.S. bank holding companies. The FDIC adopted substantially identical standards for institutions, like the
Bank, subject to its jurisdiction in an interim final rule. The Basel III Capital Rules implement requirements consistent with
agreements reached by the Basel Committee on Banking Supervision as well as certain provisions of the Dodd-Frank Act. These
rules substantially revise the risk-based capital requirements applicable to depository institutions and their holding companies,
including the Company and the Bank. The Basel III Capital Rules are effective for all banks on January 1, 2015 (subject to certain
phase-in periods for some requirements).
Among other things, the Basel III Capital Rules (i) introduce a new capital measure called “Common Equity Tier
1” (“CET1”), (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified
requirements, (iii) apply most deductions/adjustments to regulatory capital measures to CET1 and not to the other components of
capital, thus potentially requiring higher levels of CET1 in order to meet minimum ratios, and (iv) expand the scope of the
deductions/adjustments from capital in comparison to current regulations.
As of January 1, 2015, the minimum capital ratios will be: 4.5% CET1 to risk-weighted assets, 6.0% Tier 1 capital to
risk-weighted assets, 8.0% Total capital (Tier 1 plus Tier 2) to risk-weighted assets and 4.0% leverage ratio.
In addition, a capital conservation buffer of 2.5% above each of these levels will be required for banking institutions like
the Company and the Bank to avoid restrictions on their ability to make capital distributions, including the payment of dividends.
The capital conservation buffer will be phased in over a three year period, beginning at 0.625% in 2016 and increasing by that
amount each subsequent year on January 1.
The Basel III Capital Rules provide for multiple new deductions from and adjustments to CET1. These include, for
example, the requirement that deferred tax assets dependent upon future taxable income and significant investments in non-
consolidated financial entities be deducted from CET1 to the extent that any one category exceeds 10% of total CET1 or all such
16
categories in the aggregate exceed 15% of CET1. Implementation of these adjustments will begin on January 1, 2015, and will
be phased in over the following three years.
The Basel III Capital Rules will also revise the prompt corrective action framework by (i) introducing a CET1 ratio
requirement at each capital level, with a required CET1 ratio to remain well-capitalized at 6.5%, (ii) increasing the minimum Tier
1 capital ratio requirement for each category, with the minimum Tier 1 capital ratio for well-capitalized status being increased to
8% and (iii) transitioning to a leverage ratio of 4% in order to qualify as adequately capitalized and a leverage ratio of 5% to be
well-capitalized.
The Company believes that, as of December 31, 2013, the Company and the Bank would meet all capital adequacy
requirements under the Basel III Capital Rules on a fully phased-in basis if such requirements were currently effective.
Community Reinvestment Act. Under the Community Reinvestment Act (the “CRA”), as implemented by FDIC
regulations, the Bank has a continuing and affirmative obligation, consistent with safe and sound banking practices, to help meet
the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific
lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of
products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the
FDIC, in connection with its examinations of the Bank, to assess the Bank’s record of meeting the credit needs of its entire
community and to take that record into account in evaluating certain applications for regulatory approvals that we may file with
the FDIC.
The CRA regulations establish an assessment system that bases an association’s rating on its actual performance in meeting
community needs. In particular, the assessment system focuses on three tests:
•
•
•
a lending test, to evaluate our record of making loans in our local communities, defined as our CRA assessment
areas;
an investment test, to evaluate our record of investing in community development projects, affordable housing
and programs benefiting low or moderate income individuals and businesses in our CRA assessment areas or a
broader area that includes our assessment areas; and
a service test, to evaluate our delivery of services through our retail banking channels and the extent and innovation
of our community development services.
Due to its Internet focus, the Bank has opted to operate under a CRA Strategic Plan, which was submitted and approved
by the FDIC and sets forth certain guidelines the Bank must meet in order to achieve a “Satisfactory” rating. The current Strategic
Plan expires December 31, 2014 and the Bank will submit a new plan for approval prior to that date. The Bank received a
“Satisfactory” CRA rating in its most recent CRA examination. Failure of an institution to receive at least a “Satisfactory” rating
could inhibit such institution or its holding company from undertaking certain activities, including engaging in certain activities
and acquisitions of other financial institutions.
Transactions with Affiliates. The authority of the Bank, like other FDIC-insured banks, to engage in transactions with its
“affiliates” is limited by Sections 23A and 23B of the Federal Reserve Act and the Federal Reserve’s Regulation W. An “affiliate”
for this purpose is defined generally as any company that owns or controls the Bank or is under common ownership or control
with the Bank, but excludes a company controlled by a bank. In general, transactions between the Bank and its affiliates must be
on terms that are consistent with safe and sound banking practices and at least as favorable to the Bank as comparable transactions
between the Bank and non-affiliates. In addition, covered transactions with affiliates are restricted individually to 10% and in the
aggregate to 20% of the Bank’s capital. Collateral ranging from 100% to 130% of the loan amount depending on the quality of
the collateral must be provided for an affiliate to secure a loan or other extension of credit from the Bank. The Company is an
“affiliate” of the Bank for purposes of Regulation W and Sections 23A and 23B of the Federal Reserve Act. The Bank is in
compliance with these provisions.
Loans to Insiders. The Bank’s authority to extend credit to its directors, executive officers and principal stockholders, as
well as to entities controlled by such persons (“Related Interests”), is governed by Sections 22(g) and 22(h) of the Federal Reserve
Act and Regulation O of the Federal Reserve. Among other things, these provisions require that extensions of credit to insiders:
(1) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than,
those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of
repayment or present other unfavorable features; and (2) not exceed certain limitations on the amount of credit extended to such
persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank’s capital. In addition,
17
extensions of credit in excess of certain limits must be approved in advance by the Bank’s board of directors. Further, provisions
of the Dodd-Frank Act require that after July 21, 2011, any sale or purchase of an asset by the Bank with an insider must be on
market terms and if the transaction represents more than 10% of the Bank’s capital stock and surplus it must be approved in advance
by a majority of the disinterested directors of the Bank. The Bank is in compliance with these provisions.
Enforcement. The DFI and the FDIC share primary regulatory enforcement responsibility over the Bank and its institution-
affiliated parties (“IAPs”), including directors, officers and employees. This enforcement authority includes, among other things,
the ability to appoint a conservator or receiver for the Bank, to assess civil money penalties, to issue cease and desist orders, to
seek judicial enforcement of administrative orders and to remove directors and officers from office and bar them from further
participation in banking. In general, these enforcement actions may be initiated in response to violations of laws, regulations and
administrative orders, as well as in response to unsafe or unsound banking practices or conditions.
Standards for Safety and Soundness. Pursuant to the FDIA, the federal banking agencies have adopted a set of guidelines
prescribing safety and soundness standards. These guidelines establish general standards relating to internal controls and
information systems, internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth,
asset quality, earnings standards, compensation, fees and benefits. In general, the guidelines require appropriate systems and
practices to identify and manage the risks and exposures specified in the guidelines. We believe we are in compliance with the
safety and soundness guidelines.
Dividends. The ability of the Bank to pay dividends is limited by state and federal laws and regulations that require the
Bank to obtain the prior approval of the DFI before paying a dividend that, together with other dividends it has paid during a
calendar year, would exceed the sum of its net income for the year to date combined with its retained net income for the previous
two years. The amount of dividends the Bank may pay may also be limited by the principles of prudent bank management.
Capital Distributions. The FDIC may disapprove of a notice or application to make a capital distribution if:
•
•
•
the Bank would be undercapitalized following the distribution;
the proposed capital distribution raises safety and soundness concerns; or
the capital distribution would violate a prohibition contained in any statute, regulation or agreement applicable to the
Bank.
Insurance of Deposit Accounts. The Bank is a member of the DIF, which is administered by the FDIC. All deposit accounts
at the Bank are insured by the FDIC up to a maximum of $250,000 per depositor.
The FDIA, as amended by the Federal Deposit Insurance Reform Act and the Dodd-Frank Act, requires the FDIC to set
a ratio of deposit insurance reserves to estimated insured deposits—the designated reserve ratio (the “DRR”)—of at least 1.35%.
The FDIC utilizes a risk-based assessment system that imposes insurance premiums based upon a risk matrix that takes into account
a bank’s capital level and supervisory rating. On February 27, 2009, the FDIC introduced three possible adjustments to an
institution’s initial base assessment rate: (1) a decrease of up to five basis points for long-term unsecured debt, including senior
unsecured debt (other than debt guaranteed under the Temporary Liquidity Guarantee Program) and subordinated debt and, for
small institutions, a portion of Tier 1 capital; (2) an increase not to exceed 50 percent of an institution’s assessment rate before
the increase for secured liabilities in excess of 25 percent of domestic deposits; and (3) for non-Risk Category I institutions, an
increase not to exceed 10 basis points for brokered deposits in excess of 10 percent of domestic deposits.
On November 9, 2010, the FDIC proposed to change its assessment base from total domestic deposits to average total
assets minus average tangible equity, which is defined as Tier 1 capital, as required in the Dodd-Frank Act. The new assessment
formula became effective on April 1, 2011, and was used to calculate the June 30, 2011 assessment. The FDIC plans to raise the
same expected revenue under the new base as under the current assessment base. Since the new base is larger than the current
base, the proposal would lower the assessment rate schedule to maintain revenue neutrality. Assessment rates would be reduced
to a range of 2.5 to 9 basis points on the broader assessment base for banks in the lowest risk category (well capitalized and
CAMELS I or II) and up to 30 to 45 basis points for banks in the highest risk category.
FDIC insurance expense, including assessments relating to Financing Corporation (FICO) bonds, totaled $451,000,
$455,000 and $727,000 for 2013, 2012 and 2011, respectively.
18
Under the FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and
unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule,
order or condition imposed by the FDIC.
Liquidity. The Bank is required to maintain a sufficient amount of liquid assets to ensure its safe and sound operation.
To fund its operations, the Bank historically has relied upon core deposits, fed funds lines with correspondent banks, Federal Home
Loan Bank of Indianapolis (“FHLBI”) borrowings and brokered deposits. The Bank does not currently solicit brokered deposits.
The Bank believes it has sufficient liquidity to meet its funding obligations.
Federal Home Loan Bank System. The Bank is a member of the FHLBI, which is one of the regional Federal Home Loan
Banks comprising the Federal Home Loan Bank System. Each Federal Home Loan Bank serves as a central credit facility primarily
for its member institutions. The Bank, as a member of the FHLBI, is required to acquire and hold shares of FHLBI capital stock.
While the required percentage of stock ownership is subject to change by the FHLBI, the Bank is in compliance with this requirement
with an investment in FHLBI stock at December 31, 2013 of $2.9 million. Any advances from the FHLBI must be secured by
specified types of collateral, and long-term advances may be used for the purpose of providing funds to make residential mortgage
or commercial loans and to purchase investments. Long term advances may also be used to help alleviate interest rate risk for
asset and liability management purposes. The Bank receives dividends on its FHLBI stock.
Federal Reserve System. Although the Bank is not a member of the Federal Reserve System, it is subject to provisions
of the Federal Reserve Act and the Federal Reserve’s regulations under which depository institutions may be required to maintain
reserves against their deposit accounts and certain other liabilities. In 2008, the Federal Reserve Banks began paying interest on
reserve balances. Currently, reserves must be maintained against transaction accounts (primarily NOW and regular checking
accounts). As of December 31, 2013, the Federal Reserve’s regulations required reserves equal to 3% on transaction account
balances over $12.4 million and up to $79.5 million, plus 10% on the excess over $79.5 million. These requirements are subject
to adjustment annually by the Federal Reserve. The Bank is in compliance with the foregoing reserve requirements. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve may be used to satisfy liquidity requirements imposed
by the FDIC.
Anti-Money Laundering and the Bank Secrecy Act. Under the Bank Secrecy Act (the “BSA”), a financial institution is
required to have systems in place to detect and report transactions of a certain size and nature. Financial institutions are generally
required to report to the U.S. Treasury any cash transactions involving more than $10,000. In addition, financial institutions are
required to file suspicious activity reports for transactions that involve more than $5,000 and which the financial institution knows,
suspects or has reason to suspect involves illegal funds, is designed to evade the requirements of the BSA or has no lawful purpose.
The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001
(the “USA PATRIOT Act”), which amended the BSA, is designed to deny terrorists and others the ability to obtain anonymous
access to the U.S. financial system. The USA PATRIOT Act has significant implications for financial institutions and businesses
of other types involved in the transfer of money. The USA PATRIOT Act, together with the implementing regulations of various
federal regulatory agencies, has caused financial institutions, such as the Bank, to adopt and implement additional policies or
amend existing policies and procedures with respect to, among other things, anti-money laundering compliance, suspicious activity,
currency transaction reporting, customer identity verification and customer risk analysis.
The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals
and others. These sanctions, which are administered by the Treasury Office of Foreign Assets Control (“OFAC”), take many
different forms. Generally, however, they contain one or more of the following elements: (1) restrictions on trade with or investment
in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and
prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-
related advice or assistance to, a sanctioned country; and (2) blocking of assets in which the government or specially designated
nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including
property in the possession or control of U.S. persons). Blocked assets (for example, property and bank deposits) cannot be paid
out, withdrawn, set off or transferred in any manner without a license from OFAC.
Consumer Protection Laws. The Bank is subject to a number of federal and state laws designed to protect consumers and
prohibit unfair or deceptive business practices. These laws include the Equal Credit Opportunity Act, Fair Housing Act, Home
Ownership Protection Act, Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act of 2003 (the
“FACT Act”), the Gramm-Leach-Bliley Act (the “GLBA”), the Truth in Lending Act, the CRA, the Home Mortgage Disclosure
Act, the Real Estate Settlement Procedures Act, the National Flood Insurance Act and various state law counterparts. These laws
and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must interact with
customers when taking deposits, making loans, collecting loans and providing other services. Further, the Dodd-Frank Act
established the CFPB, which has the responsibility for making and amending rules and regulations under the federal consumer
19
protection laws relating to financial products and services. The CFPB also has a broad mandate to prohibit unfair or deceptive
acts and practices and is specifically empowered to require certain disclosures to consumers and draft model disclosure forms.
Failure to comply with consumer protection laws and regulations can subject financial institutions to enforcement actions, fines
and other penalties. The FDIC will enforce CFPB rules with respect to the Bank.
Mortgage Reform. The Dodd-Frank Act prescribes certain standards that mortgage lenders must consider before making
a residential mortgage loan, including verifying a borrower’s ability to repay such mortgage loan. The Dodd-Frank Act also allows
borrowers to assert violations of certain provisions of the Truth-in-Lending Act as a defense to foreclosure proceedings. Under
the Dodd-Frank Act, prepayment penalties are prohibited for certain mortgage transactions and creditors are prohibited from
financing insurance policies in connection with a residential mortgage loan or home equity line of credit. The Dodd-Frank Act
requires mortgage lenders to make additional disclosures prior to the extension of credit, in each billing statement and for negative
amortization loans and hybrid adjustable rate mortgages. Additionally, the Dodd-Frank Act prohibits mortgage originators from
receiving compensation based on the terms of residential mortgage loans and generally limits the ability of a mortgage originator
to be compensated by others if compensation is received from a consumer.
Customer Information Security. The federal banking agencies have adopted final guidelines for establishing standards
for safeguarding nonpublic personal information about customers. These guidelines implement provisions of the GLBA.
Specifically, the Information Security Guidelines established by the GLBA require each financial institution, under the supervision
and ongoing oversight of its board of directors or an appropriate committee thereof, to develop, implement and maintain a
comprehensive written information security program designed to ensure the security and confidentiality of customer information
(as defined under the GLBA), to protect against anticipated threats or hazards to the security or integrity of such information and
to protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any
customer. The federal banking regulators have issued guidance for banks on response programs for unauthorized access to customer
information. This guidance, among other things, requires notice to be sent to customers whose “sensitive information” has been
compromised if unauthorized use of this information is “reasonably possible.”
Identity Theft Red Flags. The federal banking agencies jointly issued final rules and guidelines in 2007 implementing
Section 114 of the FACT Act and final rules implementing Section 315 of the FACT Act. The rules implementing Section 114
require each financial institution or creditor to develop and implement a written Identity Theft Prevention Program to detect,
prevent and mitigate identity theft in connection with the opening of certain accounts or certain existing accounts. In addition, the
federal banking agencies issued guidelines to assist financial institutions and creditors in the formulation and maintenance of an
Identity Theft Prevention Program that satisfies the requirements of the rules. The rules implementing Section 114 also require
credit and debit card issuers to assess the validity of notifications of changes of address under certain circumstances. Additionally,
the federal banking agencies issued joint rules, that became effective in 2008, under Section 315 that provide guidance regarding
reasonable policies and procedures that a user of consumer reports must employ when a consumer reporting agency sends the user
a notice of address discrepancy.
Privacy. The GLBA requires financial institutions to implement policies and procedures regarding the disclosure of
nonpublic personal information about consumers to nonaffiliated third parties. In general, the statute requires financial institutions
to explain to consumers their policies and procedures regarding the disclosure of such nonpublic personal information and, except
as otherwise required or permitted by law, financial institutions are prohibited from disclosing such information except as provided
in their policies and procedures. The Bank is required to provide notice to its customers on an annual basis disclosing their policies
and procedures on the sharing of nonpublic personal information. In December 2009, the federal banking agencies promulgated
regulations that incorporate a two-page model form that financial institutions may use to satisfy their privacy disclosure obligations
under the GLBA. These regulations became effective in January 2011.
Employees
At December 31, 2013, we had 130 full-time equivalent employees. None of our employees are currently represented
by a union or covered by a collective bargaining agreement. Management believes that its employee relations are satisfactory.
Corporate Information
We were incorporated under the laws of the State of Indiana on September 15, 2005. On March 21, 2006, we consummated
a plan of exchange by which we acquired all of the outstanding shares of the Bank. Our principal executive offices are located at
8888 Keystone Crossing, Suite 1700, Indianapolis, Indiana 46240, and our telephone number is (317) 532-7900.
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Available Information
Our Internet address is www.firstinternetbancorp.com. We post important information for investors on our website in the
“Investor Relations” section and use this website as a means of disclosing material, nonpublic information and for complying with
our disclosure obligations under Regulation FD. Accordingly, investors should monitor the Investor Relations section of our
website, in addition to following our press releases, SEC filings, public conference calls, presentations and webcasts. Investors
can easily find or navigate to pertinent information about us, free of charge, on our website, including:
•
•
•
•
•
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our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), as soon as reasonably practicable after we electronically file such material with or furnish it to the
SEC;
announcements of investor conferences and events at which our executives talk about our products and competitive
strategies. Archives of some of these events are also available;
press releases on quarterly earnings, product announcements, legal developments and other material news that we may
post from time to time;
corporate governance information, including our Corporate Governance Principles, Code of Business Conduct and Ethics,
information concerning our Board of Directors and its committees, including the charters of the Audit Committee,
Compensation Committee, and Nominating and Corporate Governance Committee, and other governance-related policies;
shareholder services information, including ways to contact our transfer agent; and
opportunities to sign up for email alerts and RSS feeds to have information provided in real time.
The information available on our website is not incorporated by reference in, or a part of, this or any other report we file
with or furnish to the SEC.
Executive Officers of the Registrant
Our executive officers are as follows:
Name
David B. Becker
Nicole S. Lorch
C. Charles Perfetti
Edward A. Roebuck
Kay E. Whitaker
Age
60
39
69
49
54
Position
Chairman, President, Chief Executive Officer and Director
Senior Vice President, Retail Banking
Senior Vice President
Senior Vice President and Chief Credit Officer
Senior Vice President Finance, Chief Financial Officer and Secretary
David B. Becker has served as our Chairman of the Board since 2006 and as our President since 2007. Mr. Becker is the
founder of the Bank, and has served as an officer and director of the Bank since 1998.
Nicole S. Lorch has served as Senior Vice President, Retail Banking since May 2011. Ms. Lorch joined the Company as
Director of Marketing in 1999 and served as Vice President, Marketing & Technology from May 2003 to May 2011. She previously
served as Director of Marketing at Virtual Financial Services, an online banking services provider, from 1996 to 1999.
C. Charles Perfetti was appointed Senior Vice President in January 2012. Mr. Perfetti joined First Internet Bancorp in
2007 upon our acquisition of Landmark Financial Corporation, where he had served as President from 1989 to 2007. He previously
conducted independent real estate and government consulting and served as the Chief Investment Manager of the State of Indiana
from 1979 to 1986.
Edward A. Roebuck has served as Senior Vice President and Chief Credit Officer since August 2012. Mr. Roebuck
previously served as Senior Asset Manager at PNC Bank from January 2009 to June 2012 and as Chief Credit Officer and Senior
Underwriter at National City Bank from 1986 to December 2008.
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Kay E. Whitaker was appointed to serve as Senior Vice President-Finance, Chief Financial Officer and Secretary in
January 2013. Ms. Whitaker previously served as Chief Financial Officer at the Central Indiana Community Foundation from July
2007 to December 2012, where she managed all accounting, finance, human resources, facilities, technology and data functions.
She also served as an independent consultant for PricewaterhouseCoopers from 2005 to 2007, as Chief Operating Officer of Energy
Ventures, an energy services and utility corporation, from 1997 to 2004, as Chief Financial Officer of Golden Care, Inc., a respiratory
therapy and supply company, from 1995 to 1997 and as a Senior Manager in the financial services: mortgage and commercial
banking division of PricewaterhouseCoopers from 1982 to 1995.
Executive officers are elected annually by our board of directors and serve a one-year period or until their successors are
elected. None of the above-identified executive officers are related to each other or to any of our directors.
Item 1A.
Risk Factors
Risk factors which could cause actual results to differ from our expectations and which could negatively impact our
financial condition and results of operations are discussed below and elsewhere in this report. Additional risks and uncertainties
not presently known to us or that are currently not believed to be significant to our business may also affect our actual results and
could harm our business, financial condition and results of operations. If any of the risks or uncertainties described below or any
additional risks and uncertainties actually occur, our business, results of operations and financial condition could be materially
and adversely affected.
RISKS RELATED TO OUR BUSINESS
A failure of, or interruption in, the communications and information systems on which we rely to conduct our business
could adversely affect our revenues and profitability.
We rely heavily upon communications and information systems to conduct our business. Although we have built a level
of redundancy into our information technology infrastructure and update our business continuity plan annually, any failure or
interruption of our information systems or the third-party information systems on which we rely as a result of inadequate or failed
processes or systems, human errors or external events, could adversely affect our Internet-based operations and slow the processing
of applications, loan servicing, and deposit-related transactions. In addition, our communication and information systems may
present security risks and could be susceptible to hacking or other unauthorized access. The occurrence of any of these events
could have a material adverse effect on our business, financial condition and results of operations.
Our commercial loan portfolio exposes us to higher credit risks than residential real estate and consumer loans, including
risks relating to success of the underlying business and conditions in the market or the economy and concentration in our
commercial loan portfolio.
We are growing our CRE and C&I loan portfolios. These loans generally involve higher credit risks than residential real
estate and consumer loans and are dependent upon our lenders maintaining close relationships with the borrowers. Payments on
these loans are often dependent upon the successful operation and management of the underlying business or assets and repayment
of such loans may be influenced to a great extent by conditions in the market or the economy. Commercial loans are generally
larger than residential real estate or consumer loans and could lead to concentration risks within our commercial loan portfolio.
Our failure to manage this growth could have a material adverse effect on our business, financial condition and results of operations.
The market value of some of our investments could decline and adversely affect our financial position.
As of December 31, 2013, we had a net unrealized loss of $3.68 million on the available-for-sale portion of our $181.41
million investment securities portfolio. In assessing the impairment of investment securities, we consider the length of time and
prospects of the issuers, whether the
extent to which the fair value has been less than cost, the financial condition and
market decline was affected by macroeconomic conditions and whether we have the intent to sell the security or will be required
to sell the security before its anticipated recovery. We also use economic models to assist in the valuation of some of our investment
securities. If our investment securities experience a decline in value, we would need to determine whether the decline represented
an other-than-temporary impairment (OTTI), in which case we would be required to record a write-down or loss and a charge to
our earnings.
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Because our business is highly dependent on technology that is subject to rapid change and transformation, we are subject
to risks of obsolescence.
The Bank conducts its consumer lending and deposit-gathering activities through the Internet. The financial services
industry is undergoing rapid technological change, and we face constant evolution of customer demand for technology-driven
financial and banking products and services. Many of our competitors have substantially greater resources to invest in technological
improvement and product development, marketing and implementation. Any failure to successfully keep pace with and fund
technological innovation in the markets in which we compete could have a material adverse effect on our business, financial
condition and results of operations.
We may need additional capital resources in the future and these capital resources may not be available when needed or at
all, without which our financial condition, results of operations and prospects could be materially impaired.
If we continue to experience significant growth, we may need to raise additional capital. Our ability to raise capital, if
needed, will depend upon our financial performance and condition and on conditions in the capital markets, as well as economic
conditions generally. Accordingly, such financing may not be available to us on acceptable terms or at all. If we cannot raise
additional capital when needed, it would have a material adverse effect on our business, financial condition and results of operations.
The competitive nature of the banking and financial services industry could negatively affect our ability to increase our
market share and retain
profitability.
Competition in the banking and financial services industry is strong. We compete with commercial banks, savings
institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies and brokerage and
investment banking firms operating locally and elsewhere. Some of our competitors have greater name recognition and market
presence than we do and offer certain services that we do not or cannot provide. In addition, larger competitors may be able to
price loans and deposits more aggressively than we do, which could affect our ability to increase our market share and remain
profitable on a
basis
within the financial services industry.
basis. Our success will depend on the ability of the Bank to compete successfully on a
We rely on our management team and could be adversely affected by the unexpected loss of key officers.
Our future success and profitability is substantially dependent upon our management and the abilities of our senior
executives. We believe that our future results will also depend in part upon our ability to attract and retain highly skilled and
qualified management. Competition for senior personnel is intense, and we may not be successful in attracting and retaining such
personnel. Changes in key personnel and their responsibilities may be disruptive to our businesses and could have a material
adverse effect on our businesses, financial condition and results of operations. In particular, the loss of our chief executive officer
could have a material adverse effect on our business, financial condition and results of operations.
Fluctuations in interest rates could reduce our profitability and affect the value of our assets.
Like other financial institutions, we are subject to interest rate risk. Our primary source of income is net interest income,
which is the difference between interest earned on loans and investments and interest paid on deposits and borrowings. We expect
that we will periodically experience imbalances in the interest rate sensitivities of our assets and liabilities and the relationships
of various interest rates to each other. Over any defined period of time, our interest-earning assets may be more sensitive to changes
in market interest rates than our interest-bearing liabilities, or vice-versa. In addition, the individual market interest rates underlying
our loan and lease and deposit products may not change to the same degree over a given time period. In any event, if market
interest rates should move contrary to our position, earnings may be negatively affected. In addition, loan and lease volume and
quality and deposit volume and mix can be affected by market interest rates as can the businesses of our clients. Changes in levels
of market interest rates could have a material adverse effect on our net interest spread, asset quality, origination volume and overall
profitability.
Market interest rates are beyond our control, and they fluctuate in response to economic conditions and the policies of
various governmental and regulatory agencies, in particular, the Board of Governors of the Federal Reserve (the “Federal Reserve”).
Changes in monetary policy, including changes in interest rates, may negatively affect our ability to originate loans and leases,
the value of assets and our ability to realize gains from the sale of our assets, all of which ultimately could affect our earnings.
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An inadequate allowance for loan losses would reduce our earnings and adversely affect our financial condition and results
of operations.
Our success depends to a significant extent upon the quality of our assets, particularly loans. In originating loans, there
is a substantial likelihood that credit losses will be experienced. The risk of loss will vary with, among other things, general
economic conditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case
of a collateralized loan, the quality of the collateral. Although we and our regulators regularly review our loan portfolio and evaluate
the adequacy of our allowance and believe that the allowance is adequate to absorb any inherent losses in our portfolio, there can
be no assurance that we will not experience losses in excess of the allowance and be required to increase our provision.
Consumer loans in our portfolio generally have greater risk of loss or default than residential real estate loans and may
make it necessary to increase our provision for loan losses.
At December 31, 2013, our consumer loans totaled $107.56 million, representing approximately 21.68% of our total loan
portfolio at such date. The overwhelming majority of our consumer loans are horse trailer and recreational vehicle loans acquired
through indirect dealer networks. Consumer loans generally have a greater risk of loss or default than do residential mortgage
loans, particularly in the case of loans that are secured by rapidly depreciating assets such as horse trailer and recreational vehicles.
In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the
outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections
are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce,
illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy
and insolvency laws, may limit the amount which can be recovered on such loans. It may become necessary to increase our
provision for loan losses in the event that our losses on these loans increase, which would reduce our earnings and have a material
adverse effect on our business, financial condition and results of operations.
Because of our holding company structure, we depend on capital distributions from the Bank to fund our operations.
We are a separate and distinct legal entity from the Bank and have no business activities other than our ownership of the
Bank. As a result, we primarily depend on dividends, distributions and other payments from the Bank to fund our obligations. The
ability of the Bank to pay dividends to us is limited by state and federal law and depends generally on the Bank’s ability to generate
net income. If we are unable to comply with applicable provisions of these statutes and regulations, the Bank may not be able to
pay dividends to us, and we would not be able to pay dividends on our outstanding common stock.
Lack of seasoning of our commercial loan portfolios may increase the risk of credit defaults in the future.
Due to our increasing emphasis on CRE and C&I lending, a substantial amount of the loans in our commercial loan
portfolios and our lending relationships are of relatively recent origin. In general, loans do not begin to show signs of credit
deterioration or default until they have been outstanding for some period of time, a process referred to as “seasoning.” A portfolio
of older loans will usually behave more predictably than a newer portfolio. As a result, because a large portion of our commercial
loan portfolio is relatively new, the current level of delinquencies and defaults may not be representative of the level that will
prevail when the portfolio becomes more seasoned, which may be higher than current levels. If delinquencies and defaults increase,
we may be required to increase our provision for loan losses, which would have a material adverse effect on our business, financial
condition and results of operations.
If our mortgage lending business does not grow, we will not be as profitable as we have been in recent years.
The residential mortgage business is highly competitive, and highly susceptible to changes in market interest rates,
consumer confidence levels, employment statistics, the capacity and willingness of secondary market purchasers to acquire and
hold or securitize loans, and other factors beyond our control. Additionally, in many respects, the mortgage origination business
is relationship based and dependent on the services of individual mortgage loan officers. The loss of services of one or more loan
officers could have the effect of reducing the level of our mortgage production. As a result of these factors, we cannot be certain
that we will be able to maintain or grow the volume or percentage of revenue or net income produced by our residential mortgage
loan business. A decline in our residential mortgage business may have an adverse effect on our financial condition and results of
operations.
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A sustained decline in the mortgage loan markets or the related real estate markets could reduce loan origination activity or
increase delinquencies, defaults and foreclosures, which could adversely affect our financial results.
Historically, our mortgage loan business has provided a significant portion of our revenue and our ability to maintain or
grow that revenue is dependent upon our ability to originate loans and sell them on the secondary market. During the year ended
December 31, 2012, income from mortgage banking activities was $10.65 million and for the year ended December 31, 2013,
$8.68 million. Mortgage loan origination is sensitive to changes in economic conditions, including decreased economic activity,
a slowdown in the housing market, or higher market interest rates, and has historically been cyclical, enjoying periods of strong
growth and profitability followed by periods of lower volumes and market-wide losses. During periods of rising interest rates,
refinancing originations for many mortgage products tend to decrease as the economic incentives for borrowers to refinance their
existing mortgage loans are reduced. In addition, the mortgage loan origination business is affected by changes in real property
values. A reduction in real property values could also negatively affect our ability to originate mortgage loans because the value
of the real properties underlying the loans is a primary source of repayment in the event of foreclosure. The national market for
residential mortgage loan refinancing has recently experienced a decline, and a continuation of that trend may adversely impact
our business. Any sustained period of increased delinquencies, foreclosures or losses could harm our ability to originate and sell
mortgage loans, and the price received on the sale of such loans, which could have a material adverse effect on our business,
financial condition and results of operations.
Reputational risk and social factors may negatively affect us.
Our ability to attract and retain depositors and customers is highly dependent upon consumer and other external perceptions
of our business practices and financial condition. Adverse perceptions could damage our reputation to a level that could lead to
difficulties in generating and maintaining deposit accounts, accessing credit markets and increased regulatory scrutiny of our
business. Borrower payment behaviors also affect us. To the extent that borrowers determine to stop paying their loans where the
financed properties’ market values are less than the amount of their loans, or for other reasons, our costs and losses may increase.
Adverse developments or perceptions regarding the business practices or financial condition of our competitors, or our industry
as a whole, may also indirectly adversely affect our reputation.
In addition, adverse reputational developments with respect to third parties with whom we have important relationships
may adversely affect our reputation. All of the above factors may result in greater regulatory and/or legislative scrutiny, which
may lead to laws or regulations that may change or constrain the manner in which we engage with our customers and the products
we offer and may also increase our litigation risk. If these risks were to materialize they could negatively affect our business,
financial condition and results of operations.
RISKS RELATING TO THE REGULATION OF OUR INDUSTRY
We operate in a highly regulated environment, which could restrain our growth and profitability.
We are subject to extensive laws and regulations that govern almost all aspects of our operations. These laws and
regulations, and the supervisory framework that oversees the administration of these laws and regulations, are primarily intended
to protect depositors, the Deposit Insurance Fund and the banking system as a whole, and not shareholders and consumers. These
laws and regulations, among other matters, affect our lending practices, capital structure, investment practices, dividend policy,
operations and growth. Compliance with the myriad laws and regulations applicable to our organization can be difficult and costly.
In addition, these laws, regulations and policies are subject to continual review by governmental authorities, and changes to these
laws, regulations and policies, including changes in interpretation or implementation of these laws, regulations and policies, could
affect us in substantial and unpredictable ways and often impose additional compliance costs. Further, any new laws, rules and
Wall Street Reform and Consumer Protection Act and regulatory capital rules, could make
regulations, such as the
compliance more difficult or expensive. All of these laws and regulations, and the supervisory framework applicable to our industry,
could have a material adverse effect on our business, financial condition and results of operations.
Federal and state regulators periodically examine our business, and we may be required to remediate adverse examination
findings.
The Federal Reserve, the Federal Deposit Insurance Corporation (the “FDIC”) and the Indiana Department of Financial
Institutions (the “DFI”) periodically examine our business, including our compliance with laws and regulations. If, as a result of
an examination, a federal banking agency were to determine that our financial condition, capital resource, asset quality, earnings
prospects, management, liquidity or other aspects of any of our operations had become unsatisfactory, or that we were in violation
of any law or regulation, it may take a number of different remedial actions as it deems appropriate. These actions include the
power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation
25
or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our
growth, to assess civil monetary penalties against our officers or directors, to remove officers and directors and, if it is concluded
that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance and
place us into receivership or conservatorship. Any regulatory action against us could have a material adverse effect on our business,
financial condition and results of operations.
Our FDIC deposit insurance premiums and assessments may increase which would reduce our profitability.
The deposits of the Bank are insured by the FDIC up to legal limits and, accordingly, subject to the payment of FDIC
deposit insurance assessments. The Bank’s regular assessments are determined by its risk classification, which is based on its
regulatory capital levels and the level of supervisory concern that it poses. High levels of bank failures since the beginning of the
financial crisis and increases in the statutory deposit insurance limits have increased resolution costs to the FDIC and put significant
pressure on the Deposit Insurance Fund. In order to maintain a strong funding position and restore the reserve ratios of the Deposit
Insurance Fund, the FDIC increased deposit insurance assessment rates and charged a special assessment to all
financial institutions. Further increases in assessment rates or special assessments may occur in the future, especially if there are
significant additional financial institution failures. Any future special assessments, increases in assessment rates or required
prepayments in FDIC insurance premiums could reduce our profitability or limit our ability to pursue certain business opportunities,
which could have a material adverse effect on our business, financial condition and results of operations.
The short-term and long-term impact of recently adopted regulatory capital rules is uncertain and a significant increase in
our capital requirements could have an adverse effect on our business.
In July 2013, the federal banking agencies approved rules that will significantly change the regulatory capital requirements
of all banking institutions in the United States. The new rules are designed to implement the recommendations with respect to
regulatory capital standards, commonly known as Basel III, approved by the International Basel Committee on Bank Supervision.
We will become subject to the new rules over a multi-year transition period commencing January 1, 2015. The new rules establish
a new regulatory capital standard based on tier 1 common equity and increase the minimum leverage and
capital ratios.
The rules also change how a number of the regulatory capital components are calculated. The new rules will generally require us
and the Bank to maintain greater amounts of regulatory capital. A significant increase in our capital requirements could have a
material adverse effect on our business, financial condition and results of operations.
On December 10, 2013 five federal agencies (the Federal Reserve, Federal Deposit Insurance Corporation, Office of the
Comptroller of the Currency, Commodity Futures Trading Commission, and the Securities and Exchange Commission) published
the final Volcker Rule pursuant to the Dodd-FrankAct which was subsequently revised on January 14, 2014. The Company holds
a trust preferred collateralized debt obligation (CDO) which was not included on the non-exclusive issuer list. The agencies may
conclude the security may not be retained by the Company, which could result in an adverse charge to earnings.
We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair
lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.
The Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws
and regulations impose nondiscriminatory lending requirements on financial institutions. The Department of Justice and other
federal agencies are responsible for enforcing these laws and regulations. A successful regulatory challenge to an institution’s
performance under the Community Reinvestment Act or fair lending laws and regulations could result in a wide variety of sanctions,
including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on
expansion and restrictions on entering new business lines. Private parties may also have the ability to challenge an institution’s
performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our
business, financial condition and results of operations.
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other
statutes and regulations.
laundering
The Bank Secrecy Act, the USA PATRIOT Act of 2001 and other laws and regulations require financial institutions,
among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency
transaction reports as appropriate. The federal Financial Crimes Enforcement Network is authorized to impose significant civil
money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual
federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue
Service. We are also subject to increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control.
If our policies, procedures and systems are deemed deficient, we would be subject to liability, including fines and regulatory
26
actions, which may include restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed
with certain aspects of our business plan, including our acquisition plans. Failure to maintain and implement adequate programs
to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results
could have a material adverse effect on our business, financial condition and results of operations.
RISKS RELATED TO OUR COMMON STOCK
There is a limited trading market for our common stock and you may not be able to resell your shares.
Our common stock began trading on the NASDAQ Capital Market on February 22, 2013 and we issued common stock
through a follow-on public offering in late 2013; however, trading remains relatively limited. Although we expect that a more
liquid market for our common stock will develop, we cannot guarantee that you would be able to resell shares of common stock
at an attractive price or at all.
Federal banking laws limit the acquisition and ownership of our common stock.
Because we are a bank holding company, any purchaser of 5% or more of our common stock may be required to file a
notice with or obtain the approval of the Federal Reserve under the Change in Bank Control Act of 1978, as amended, or the
BHCA. Specifically, under regulations adopted by the Federal Reserve, (1) any other bank holding company may be required to
obtain the approval of the Federal Reserve before acquiring 5% or more of our common stock and (2) any person other than a
bank holding company may be required to file a notice with and not be disapproved by the Federal Reserve to acquire 10% or
more of our common stock.
Anti-takeover provisions could negatively impact our shareholders.
Provisions of Indiana law and provisions of our Articles of Incorporation could make it more difficult for a third party
to acquire control of us or have the effect of discouraging a third party from attempting to acquire control of us. We are subject
to certain anti-takeover provisions under the Indiana Business Corporation Law. Additionally, our Articles of Incorporation
authorize our Board of Directors to issue one or more classes or series of preferred stock without shareholder approval and such
preferred stock could be issued as a defensive measure in response to a takeover proposal. These provisions could make it more
difficult for a third party to acquire us even if an acquisition might be in the best interest of our shareholders.
Our shares of common stock are not an insured deposit and as such are subject to loss of entire investment.
The shares of our common stock are not a bank deposit and are not insured or guaranteed by the FDIC or any other
government agency. Your investment is subject to investment risk and you must be capable of affording the loss of your entire
investment.
If we were to issue preferred stock, the rights of holders of our common stock and the value of such common stock could be
adversely affected.
Our Board of Directors is authorized to issue classes or series of preferred stock, without any action on the part of the
stockholders. The Board of Directors also has the power, without stockholder approval, to set the terms of any such classes or
series of preferred stock, including voting rights, dividend rights and preferences over the common stock with respect to dividends
or upon the liquidation, dissolution or winding-up of our business and other terms. If we issue preferred stock in the future that
has a preference over the common stock with respect to the payment of dividends or upon liquidation, dissolution or winding-up,
or if we issue preferred stock with voting rights that dilute the voting power of the common stock, the rights of holders of the
common stock or the value of the common stock would be adversely affected.
If we default on our subordinated debt, we will be prohibited from paying dividends or distributions on our common stock.
During 2013, we issued a $3.0 million subordinated debenture to a third party. The purchase agreement under which the
subordinated debenture was issued prohibits us from paying any dividends on our common stock or making any other distributions
to our shareholders at any time when there shall have occurred and be continuing an event of default under the agreement.
Events of default generally consist of, among other things, our failure to pay any principal or interest on the subordinated
debenture when due, our failure to comply with certain agreements, terms and covenants under the agreement (without curing
such default following notice), and certain events of bankruptcy, insolvency or liquidation relating to us.
27
If an event of default were to occur and we did not cure it, we would be prohibited from paying any dividends or making
any other distributions to our shareholders or from redeeming or repurchasing any of our common stock, which would likely have
a material adverse effect on the market value of our common stock. Moreover, without notice to or consent from the holders of
our common stock, we may enter into additional financing arrangements that may limit our ability to purchase or to pay dividends
or distributions on our capital stock, including our common stock.
We are subject to evolving and expensive corporate governance regulations and requirements. Our failure to adhere to these
requirements or the failure or circumvention of our controls and procedures could seriously harm our business.
Although we are subject to extensive regulation as a financial institution, until recently we have historically not been
required to follow the corporate governance and financial reporting practices and policies required of a company whose stock is
registered under the Exchange Act and traded on a national securities exchange. With the listing of our common stock on the
NASDAQ Capital Market we are subject to these requirements. Compliance with these requirements means we incur significant
legal, accounting and other expenses that we did not incur in the past and are not reflected in our historical financial statements.
Compliance will also require a significant diversion of management time and attention, particularly with regard to disclosure
controls and procedures and internal control over financial reporting, and will require changes in corporate governance practices.
Although we have reviewed, and will continue to review, our disclosure controls and procedures in order to determine whether
they are effective, our controls and procedures may not be able to prevent errors or frauds in the future. Faulty judgments, simple
errors or mistakes, or the failure of our personnel to adhere to established controls and procedures, may make it difficult for us to
ensure that the objectives of the control system will be met. A failure of our controls and procedures to detect other than
inconsequential errors or fraud could seriously harm our business and results of operations.
Item 1B.
Unresolved Staff Comments
Not applicable.
Item 2.
Properties
Our principal office is located at 8888 Keystone Crossing, Suite 1700, Indianapolis, Indiana 46240.
The Company owns an office building with approximately 52,000 square feet of office space and related real estate
located in Fishers, Indiana. The Company intends to use the property for the current and future operations of the Bank.
The Bank is currently leasing approximately 15,250 square feet of office space at the Fishers property. The lease has an
initial term of five years and provides for monthly rent in the amount of $18.50 per square foot. The Company expects that the
Bank will increase its use of the property over time. The Company believes that the leased principal office space and the Fishers
property will be adequate to meet the Bank’s current and near-term needs.
The Company borrowed $4.0 million from the Bank for the purchase of the Fishers property. The scheduled maturity
date of the loan is March 6, 2014. Effective March 6, 2014, we entered into an Acknowledgment, Confirmation and Amendment
that, among other things, extended the maturity until March 6, 2015. The loan bears interest during the term at a variable rate
equal to the then applicable prime rate (as determined by the Bank with reference to the "Prime Rate" published in The Wall Street
Journal) plus 1.00% per annum. The loan agreement contains customary affirmative covenants and events of default. The loan
agreement provides that the loan is to be secured by a first priority mortgage and lien on the acquired property and requires that
the Company maintain collateral securing the loan that has a value of not less than $5.2 million during the term of the loan.
On March 5, 2013 the Bank entered into a sublease for 5,670 square feet of furnished office space in Tempe, Arizona
and intends to use the space primarily to house administrative operations. The term of the lease is 37 months.
Item 3.
Legal Proceedings
We are not party to any material legal proceedings. From time to time, the Bank is a party to legal actions arising from
its normal business activities.
Item 4.
Mine Safety Disclosures
None.
28
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market Information
Our common stock began trading on the NASDAQ Capital Market under the symbol “INBK” effective February 22,
2013. Previously, our common stock (and prior to the formation of the Company, shares of the common stock of the Bank) were
quoted on the over-the-counter market under the symbol “FIBP.” These quotations as reported on the over-the-counter market
reflect inter-dealer prices without retail mark-up, mark-down, or commissions and may not necessarily represent actual transactions.
The following table sets forth the range of high and low bid quotations for each quarter within the two most recent fiscal
years.
Period
Year Ended December 31, 2012:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended December 31, 2013:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
(US$)
Low
(US$)
Declared
Dividends
$
10.60
$
10.67
11.37
15.32
19.77
21.88
36.00
31.82
$
6.83
8.87
9.37
10.67
13.67
14.43
20.99
20.12
—
—
—
0.1667
0.0400
0.0600
0.0600
0.0600
As of March 28, 2014, we had 4,449,619 shares of common stock issued and outstanding, and there were 189 holders of
record of our common stock.
Dividends
We paid a special cash dividend of $0.1667 per share of common stock on December 28, 2012. We had never previously
paid any dividends. Beginning in the first quarter of 2013, the Company began to pay regular quarterly dividends. Total dividends
declared in 2013 were $0.2200 per share. The Company expects to continue to pay cash dividends on a quarterly basis; however,
the declaration and amount of any future cash dividends will be subject to the sole discretion of our Board of Directors and will
depend upon many factors, including our financial condition, earnings, capital requirements of our operating subsidiaries, legal
requirements, regulatory constraints and other factors deemed relevant by our Board of Directors.
On June 21, 2013 we effected a three-for-two (3:2) stock split of our outstanding common stock through the payment of
a stock dividend of one-half of one share for each then-outstanding share of common stock.
Recent Sales of Unregistered Securities
None.
29
Item 6.
Selected Financial Data
Five Year Selected Financial and Other Data
(dollars in thousands)
Balance Sheet Data:
Total assets
Cash and cash equivalents
Loans receivable, net
Loans held for sale
Investment securities available for sale
Deposits
Tangible common equity (1)
Total shareholders’ equity
Income Statement Data:
Interest and dividends
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision
Non-interest income
Non-interest expenses
Income (loss) before income taxes
Income taxes
Net income (loss)
Net income (loss) available to common
shareholders
Per Share Data:
Net income
Basic
Diluted
Tangible book value per common share at
period end (1)
Average common shares outstanding
Basic
Diluted
Common shares outstanding at end of period
Dividends – common stock
Dividend payout ratio (2)
2013
2012
Fiscal Year ended
December 31,
2011
2010
2009
$
$
$
$
$
$
$
$
802,342
53,690
495,727
28,610
181,409
673,095
86,221
90,908
25,536
8,088
17,448
324
17,124
9,517
20,482
6,159
1,566
4,593
4,593
1.51
1.51
19.38
3,041,666
3,050,001
4,448,326
0.2200
14.57%
$
$
$
$
$
$
$
$
636,367
32,513
352,328
63,234
156,693
530,691
56,663
61,350
24,374
8,532
15,842
2,852
12,990
11,423
16,613
7,800
2,194
5,606
5,606
1.95
1.95
20.13
2,869,365
2,869,365
2,815,094
0.1667
8.53%
$
$
$
$
$
$
$
$
585,440
34,778
329,570
45,091
149,270
486,665
50,736
55,423
23,944
9,621
14,323
2,440
11,883
3,559
11,483
3,959
773
3,186
3,186
1.11
1.11
18.07
$
$
$
$
$
$
$
503,915
32,417
299,545
5,008
136,936
422,703
44,210
48,897
25,296
10,785
14,511
927
13,584
3,437
10,370
6,651
1,696
4,955
4,955
1.74
1.74
15.75
$
$
$
$
$
$
$
504,615
30,016
305,439
7,169
133,584
411,627
40,077
44,764
28,607
14,859
13,748
11,564
2,184
2,903
9,341
(4,254)
(2,136)
(2,118)
(2,118)
(0.75)
(0.75)
14.28
2,859,434
2,859,434
2,807,385
2,848,379
2,848,379
2,807,385
— $
—%
— $
—%
2,838,123
2,838,123
2,807,385
—
—%
30
Performance Ratios:
Return on average assets
Return on average equity
Net interest margin (3)
Income as a percentage of average assets (4)
Noninterest income as a percentage of
average assets
Noninterest expense to average assets
Efficiency ratio (5)
Asset Quality Ratios:
Nonperforming loans as a percentage of total
loans
Nonperforming assets to total assets
Nonperforming assets (including troubled
debt restructurings) to total assets
Allowance for loan losses as a percentage of
total loans receivable
Net (charge-offs) recoveries to average
outstanding loans during the period
Allowance for loan losses as a percentage of
nonperforming loans
Capital Ratios:
Tangible common equity to tangible assets
(1)
Total capital to risk weighted assets (6)(7)
Tier 1 capital to risk weighted assets (6)(7)
Tier 1 capital to average assets (6)
Other Data:
Full-time equivalent employees
Number of offices
2013
2012
Fiscal Year ended
December 31,
2011
2010
2009
0.67 %
7.10 %
2.67 %
5.12 %
1.39 %
2.99 %
75.96 %
0.91 %
9.51 %
2.67 %
5.83 %
1.86 %
2.70 %
60.93 %
0.59 %
6.09 %
2.75 %
5.09 %
0.66 %
2.12 %
64.22 %
1.01 %
10.10 %
3.06 %
5.96 %
0.70 %
2.11 %
57.78 %
(0.40)%
(4.56)%
2.67 %
5.93 %
0.55 %
1.76 %
56.10 %
0.37 %
0.90 %
1.23 %
1.62 %
2.64 %
2.29 %
3.17 %
3.36 %
3.36 %
2.52 %
1.05 %
1.84 %
2.47 %
3.43 %
2.52 %
1.09 %
1.65 %
1.70 %
2.26 %
3.25 %
(0.17)%
(0.69)%
(1.05)%
(1.35)%
(1.85)%
292.98 %
133.26 %
64.61 %
71.41 %
96.91 %
10.81 %
17.10 %
15.60 %
11.70 %
8.97 %
13.46 %
12.20 %
8.89 %
8.74 %
12.40 %
11.15 %
8.74 %
8.86 %
12.16 %
10.91 %
9.41 %
8.02 %
11.04 %
9.77 %
7.72 %
130
4
97
1
74
1
52
1
50
2
___________________________________
Refer to Note 1 to the Company's consolidated financial statements regarding reclassifications of prior period financial information.
(1) Tangible common equity, tangible assets and tangible book value per common share performance financial measures not
recognized in generally accepted accounting principles ("GAAP"). Our management, banking regulators, many financial
analysts and other investors use these non-GAAP financial measures to compare the capital adequacy of banking organizations
with significant amounts of preferred equity and/or goodwill or other intangible assets, which typically stem from the use of
the purchase accounting method of accounting for mergers and acquisitions. Tangible common equity, tangible assets, tangible
book value per share or related measures should not be considered as a substitute for total shareholders' equity, total assets,
book value per share or any other measure calculated in accordance with GAAP. Moreover, the manner in which we calculate
these measures may differ from those of other companies reporting measures with similar names. The following table reconciles
these non-GAAP performance measures and a capital ratio using such measures to the most directly comparable GAAP
measure or ratio.
31
(dollars in thousands, except share data)
Total equity - GAAP
Adjustments
Goodwill
Tangible common equity
Total assets - GAAP
Adjustments
Goodwill
Tangible assets
2013
2012
Fiscal Year ended
December 31,
2011
2010
2009
$
90,908
$
61,350
$
55,423
$
48,897
$
44,764
(4,687)
86,221
(4,687)
56,663
(4,687)
50,736
(4,687)
44,210
(4,687)
40,077
802,342
636,367
585,440
503,915
504,615
(4,687)
797,655
(4,687)
631,680
(4,687)
580,753
(4,687)
499,228
(4,687)
499,928
Total common shares
4,448,326
2,815,094
2,807,385
2,807,385
2,807,385
Book value per common share
Effect of adjustment
Tangible book value per common share
$
$
$
20.44
(1.06)
19.38
$
$
$
21.79
(1.66)
20.13
$
$
$
19.74
(1.67)
18.07
$
$
$
17.42
(1.67)
15.75
$
$
$
15.95
(1.67)
14.28
Total shareholders’ equity to assets ratio
Effect of adjustment
Tangible common equity to tangible assets
ratio
11.33 %
(0.52)%
9.64 %
(0.67)%
9.47 %
(0.73)%
9.70 %
(0.84)%
8.87 %
(0.85)%
10.81 %
8.97 %
8.74 %
8.86 %
8.02 %
(2) Dividends per share divided by diluted earnings per share.
(3) Net interest margin is net interest income divided by average earning assets.
(4) Income consists of interest income and noninterest income.
(5) Efficiency ratio is noninterest expense divided by the sum of net interest income and noninterest income.
(6) Capital ratios are calculated in accordance with regulatory accounting principles specified by our primary federal banking
regulatory authority.
(7) During 2013, we changed the methodology we use to determine a component of our risk-weighted assets for regulatory capital
purposes. The old methodology overstated the risk to which we were exposed on these assets, as we reported as assets sold
with recourse loans we had sold to investors who had no right to return them. We discussed our intention to make this change
with our regulators and began using the new methodology in the Company’s June 30, 2013 regulatory filings. We subsequently
amended the Company’s December 31, 2012 and March 31, 2013 regulatory filings to conform the computation of these
regulatory capital ratios to the new methodology. The change in methodology had no impact on our financial statements
prepared in accordance with GAAP because the transfers of the assets to the investors were considered true sales under relevant
accounting guidance.
Item 7.
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.
Overview
First Internet Bancorp is a bank holding company that conducts its business activities through its wholly-owned subsidiary,
First Internet Bank, an Indiana chartered bank. The Bank was the first state-chartered, FDIC-insured Internet bank. We offer a full
complement of consumer (retail) products and services on a nationwide basis. We conduct our retail operations primarily online
and by phone; we have no branches.
32
To meet the needs of high-quality, underserved commercial borrowers and depositors, we offer commercial real estate
(CRE) lending, including a nationwide credit tenant lease financing program, commercial and industrial (C&I) lending, including
asset based lending, and business banking/treasury management services. Our commercial banking activities are highly dependent
on establishing and maintaining strong relationships with our business customers.
To support our positive momentum and enable continued growth, the Company completed a public offering of common
stock during the 2013 fourth quarter, which provided $29.1 million of new capital.
Financial Condition
Comparison of December 31, 2013 to December 31, 2012
• Total assets were $802.34 million at December 31, 2013 compared to $636.37 million at December 31, 2012.
• Net loans receivable grew 40.70% in 2013 following efforts to expand the Company's loan origination capabilities
and diversify revenue streams. Total C&I loan balances increased 286.57% at December 31, 2013 versus
December 31, 2012. CRE loans, which include owner occupied loans, represented an increase of 67.73% at
December 31, 2013 from December 31, 2012. Credit tenant lease financing experienced the largest growth
within the commercial real estate portfolio, up 197.81% since December 31, 2012. Credit tenant lease loans
are originated nationwide via the Bank’s established network which provides geographic diversification within
specific concentration limits.
• Reflecting continued credit quality, total nonperforming loans at December 31, 2013 were 57.69% less than
December 31, 2012. The allowance for loan losses was 1.09% of total loans at December 31, 2013 versus 1.65%
at December 31, 2012. The ratio of nonperforming loans to total loans declined to 0.37% at December 31, 2013,
compared to 1.23% at December 31, 2012.
• Loans held for sale totaled $28.61 million at December 31, 2013 compared to $63.23 million for December 31,
2012. The decrease is due to a 32.18% lower volume of closed loans in the three month period ended December 31,
2013 than in the three month period ending December 31, 2012.
• Total deposits grew to $673.10 million at December 31, 2013, compared with $530.69 million at December 31,
2012, with lower cost of funds and without the use of brokered deposits.
• Tangible common equity increased $29.56 million from $56.66 million at December 31, 2012 to $86.22 million
at December 31, 2013. The increase is attributable to the Company completing a public offering of 1.587 million
shares of its common stock in 2013, resulting in net proceeds to the Company of $29.10 million. Tangible book
value per common share decreased 3.73% from $20.13 at December 31, 2012 to $19.38 at December 31, 2013.
• 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.
Results of Operations
Fiscal Year Ended December 31, 2013 vs. Fiscal Year Ended December 31, 2012
• Net income decreased 18.18%, to $4.59 million, or $1.51 per diluted share for the year ended December 31,
2013 compared to $5.61 million or $1.95 per diluted share for the 2012 period. The 58.02% year-over-year
increase in common shares outstanding contributed to the impact on our earnings per share ratio.
•
Income as a percentage of average assets decreased from 5.83% for the year ended December 31, 2012 to 5.12%
for the 2013 period, reflecting decreased net income and increased average assets.
• Net interest income after provision for loan losses increased $4.13 million or 31.82% in the year ended
December 31, 2013 from the corresponding 2012 period. The increase is attributable to a $1.60 million increase
in net interest income and a $2.53 million decrease in the provision for credit losses due to improvement in
credit quality. Net charge-offs as a percentage of average loans were 0.17% for the year ended December 31,
2013 versus 0.69% for the prior year.
33
• Net interest margin remained constant at 2.67% in the year ended December 31, 2013 compared to 2.67% in
the prior year period. Although our cost of funds decreased 15.16% in the year ended December 31, 2013 from
the year ago period, this benefit was offset by a lower yield on earning assets.
• Noninterest income as a percentage of average assets decreased from 1.86% for the year ended December 31,
2012 to 1.39% for the 2013 period. This decrease was primarily caused by a nationwide slowing in mortgage
refinancing activity which negatively impacted our 2013 results.
• Noninterest expense for the year ended December 31, 2013 increased 23.29% over the prior year as the Company
added employees to produce and in support of continued growth. The Company experienced an increase in
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.
• Noninterest expense to average assets increased from 2.70% for the year ended December 31, 2012 to 2.99%
for the 2013 period reflecting the continuing investment in our revenue channels. The Company also incurred
expenses related to the NASDAQ listing and becoming an SEC-reporting company.
• Return on average assets for the year ended December 31, 2013 was 0.67% versus 0.91% in the prior year, which
reflects the decrease in net income and the increase in assets.
• Return on average equity for the year ended December 31, 2013 was 7.10% compared to 9.51% for the prior
year, which reflects the decrease in net income and the additional $29.10 million of new capital.
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, and 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. Nonaccrual loans are included in average loan balances.
34
Average Balance Sheets
(dollars in thousands)
Assets:
Interest-earning assets:
Year Ended December 31,
2013
Average
Balance
Interest
and
Dividends
Yield/
Cost
Average
Balance
2012
Interest
and
Dividends
2011
Yield/
Cost
Average
Balance
Interest
and
Dividends
Yield/
Cost
Loans
$ 435,799
$ 20,843
4.78% $ 390,058
$
19,560
5.01% $ 346,589
$
18,752
Investment securities
180,850
4,502
2,943
34,842
103
88
2.49%
3.50%
0.25%
172,887
2,943
27,363
4,645
100
69
2.69%
3.40%
0.25%
145,823
3,080
25,383
5,045
83
64
5.41%
3.46%
2.69%
0.25%
FHLB stock
Other interest-earning assets
Total interest-earning
assets
654,434
25,536
593,251
24,374
520,875
23,944
Noninterest-earning assets
Total assets
30,146
$ 684,580
21,289
$ 614,540
19,938
$ 540,813
Liabilities and equity:
Interest-bearing liabilities
Regular savings accounts
$ 13,806
$
81
0.59% $
9,999
$
58
0.58% $
7,417
$
48
0.65%
Interest-bearing demand
deposits
Money market accounts
Certificates and brokered
deposits
Total interest-bearing
deposits
68,366
224,383
376
1,666
0.55%
0.74%
62,154
187,029
351
1,448
0.56%
0.77%
55,708
151,134
386
1,444
0.69%
0.96%
260,549
4,738
1.82%
238,575
5,315
2.23%
220,601
6,388
2.90%
567,104
6,861
497,757
7,172
434,860
8,266
Other borrowings
Total interest-bearing liabilities
31,471
598,575
1,227
8,088
Noninterest-bearing liabilities
13,605
Other non-interest bearing
liabilities
Total liabilities
Stockholders’ equity
7,696
619,876
64,704
Total liabilities and equity
$ 684,580
3.90%
40,625
538,382
13,939
3,285
555,606
58,934
$ 614,540
1,360
8,532
3.35%
38,559
473,419
8,218
6,863
488,500
52,313
$ 540,813
1,355
9,621
3.51%
Net interest income
$ 17,448
$
15,842
$
14,323
Interest rate spread
Net interest margin
Average interest-earning assets to
average interest-bearing
liabilities
2.55%
2.67%
109.33%
2.52%
2.67%
110.19%
2.57%
2.75%
110.02%
35
Rate/Volume Analysis
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
Fiscal Years Ended December 31,
2013 vs. 2012
Due to Changes in
2012 vs. 2011
Due to Changes in
2011 vs. 2010
Due to Changes in
Volume
Rate
Net
Volume
Rate
Net
Volume
Rate
Net
(dollars in thousands)
Interest income
Loans receivable
$
2,212
$
(929) $
1,283
$
2,233
$
(1,425) $
808
$
2,209
$
(3,325) $
(1,116)
Investment securities
FHLB stock
Other interest-earning assets
210
—
19
(353)
(143)
776
(1,177)
(401)
3
—
3
19
(4)
5
22
—
Total
2,441
(1,279)
1,162
3,010
(2,580)
416
(11)
(5)
(665)
(249)
26
3
15
(2)
2,609
(3,961)
(1,352)
18
5
430
Interest expense
Deposits
Other borrowings
Total
790
(335)
455
(1,101)
202
(899)
(311)
(133)
(444)
852
71
923
(1,946)
(1,094)
(66)
5
(2,012)
(1,089)
578
85
663
(1,566)
(261)
(988)
(176)
(1,827)
(1,164)
Increase (decrease) in net interest
income
$
1,986
$
(380) $
1,606
$
2,087
$
(568) $
1,519
$
1,946
$
(2,134) $
(188)
Liquidity and Capital Resources
Total shareholders’ equity increased $29.56 million during 2013. The increase is attributable to the Company completing
a public offering of 1.587 million shares of its common stock in 2013, resulting in net proceeds to the Company of $29.10 million.
The Company’s primary source of funds is dividends from the Bank, the declaration of which is subject to regulatory
limits. The Company’s primary use of cash is to pay regular quarterly dividends. Total dividends declared in 2013, adjusting for
the 3-for-2 stock split, were $0.22 per share.
The Company expects to continue to pay cash dividends on a quarterly basis; however, the declaration and amount of
any future cash dividends will be subject to the sole discretion of our Board of Directors and will depend upon many factors,
including our financial condition, earnings, capital requirements of our operating subsidiaries, legal requirements, regulatory
constraints and other factors deemed relevant by our Board of Directors. At December 31, 2013, the Company, on an unconsolidated
basis, had $17.98 million in cash generally available for its cash needs.
At December 31, 2013, we had $235.10 million in cash and investment securities available for sale and $28.61 million
in loans held for sale that were generally available for our cash needs. At December 31, 2013, we had the ability to borrow an
additional $86.00 million in FHLB advances and correspondent bank fed funds line of credit draws.
At December 31, 2013, approved outstanding loan commitments, including unused lines of credit, amounted to $49.10
million. Certificates of deposit scheduled to mature in one year or less at December 31, 2013, totaled $141.81 million; however,
due to our competitive rates, we believe that a majority of maturing deposits will remain with the Bank.
OREO increased by 19.50% during 2013 to $4.38 million. The increase is attributable to capitalized improvements made
on two buildings that are residential units on a college campus. These improvements have been made in collaboration with the
university and the property continues to be occupied.
Total deposits increased 26.83% from the end of 2012, most notably in money market accounts and certificates of deposit,
which increased 26.08% and 38.36%, respectively.
36
At December 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. We demonstrated our access to public equity and private debt markets during
2013.
Investing Activities
Investment Securities Portfolio
In managing our investment securities portfolio we focus on providing an adequate level of liquidity and establishing an
interest rate-sensitive position, while earning an adequate level of investment income without taking undue risk. Investment
securities that are acquired and held principally for the purpose of selling them in the near term with the objective of generating
economic profits on short-term differences in market characteristics are classified as securities held for trading. Securities that
we intend to hold until maturity are classified as held-to-maturity securities, and all other investment securities are classified as
available-for-sale. Currently, all of our investment securities are classified as available-for-sale. The carrying values of available-
for-sale investment securities are adjusted for unrealized gains or losses as a valuation allowance and any gain or loss is reported
on an after-tax basis as a component of other comprehensive income (loss).
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)
Securities available for sale:
2013
December 31,
2012
2011
Amortized
Cost
Approximate
Fair Value
Amortized
Cost
Approximate
Fair Value
Amortized
Cost
Approximate
Fair Value
U.S. Government-sponsored enterprises
$
57,569
$
56,277
$
18,666
$
19,618
$
24,685
$
Municipals
Mortgage- and asset-backed securities –
government-sponsored enterprises
Mortgage- and asset-backed securities – private
labeled
Other securities
46,126
75,058
1,313
5,025
46,323
73,941
1,232
3,636
39,999
75,782
2,696
16,753
42,540
77,489
2,453
14,593
40,849
67,354
5,850
8,648
25,502
42,761
69,790
5,445
5,772
Total securities available for sale
$
185,091
$
181,409
$
153,896
$
156,693
$
147,386
$
149,270
On December 10, 2013, five federal agencies (the Federal Reserve, Federal Deposit Insurance Corporation, Office of the
Comptroller of the Currency, Commodity Futures Trading Commission, and the Securities and Exchange Commission) published
the final Volcker Rule pursuant to the Dodd-Frank Act. The Volcker Rule restricts certain activities by covered bank holding
companies, including private equity investing, proprietary trading, and restrictions on certain types of investments.
On January 14, 2014, the same five federal agencies revised the Volcker Rule’s application to permit banking entities to
retain interests in certain CDOs backed primarily by trust preferred securities from the investment prohibitions of section 619 of
the Volcker Rule. Under the interim final rule, the agencies permit the retention of an interest in or sponsorship of covered funds
by banking entities if certain criteria are met. In addition, the agencies released a non-exclusive list of issuers that meet the criteria
of the interim final rule.
At December 31, 2013, the Company had investments in two different trust preferred CDOs. One of the Company’s
CDOs is included in the list of non-exclusive issuers that are not subject to the Volcker Rule. Management has analyzed the terms
of I-PreTSL I, the other CDO that was not included on the non-exclusive issuer list and the criteria under the interim final rule
and have concluded that it is more likely than not that we will be able to hold this security to recovery under the final Volcker
Rule regulations.
37
Our trust preferred CDOs consist of the two securities identified in the following table, which contains information
regarding these securities as of December 31, 2013 (amounts in thousands):
Deal name
Class
Book value
Fair value
Unrealized loss
Other-than-temporary impairment recorded in earnings
Lowest credit rating assigned
Number of performing institutions
Number of issuers in default
Number of issuers in deferral
Original collateral
Actual defaults & deferrals as a % of original collateral
Remaining collateral
Actual defaults & deferrals as a % of remaining collateral
Expected defaults & deferrals as a % of remaining collateral
Performing collateral
Current balance of class
Subordination
Excess subordination
Excess subordination as a % of performing collateral
Cash Flow Analysis Assumptions:
Discount margin (1)
Cumulative Default % Range
(Weighted Average)
Loss Given Default % Range
(Weighted Average)
Cumulative Prepayment % Range
(Weighted Average)
$
$
$
$
$
$
$
$
$
$
I-PreTSL I
B-2 Notes
2,000
1,371
(629)
$
$
$
— $
ALESCO IV
B-2 Notes
1,025
302
(723)
964
CCC-
14
—
2
351,000
9.26 %
188,500
17.24 %
26.94 %
156,000
33,200
16,000
12,328
$
$
$
$
$
$
C
34
1
2
400,000
3.88 %
256,595
6.04 %
10.35 %
241,095
56,374
—
(72,874)
7.9 %
(30.2)%
6.00 %
3.8% - 100%
(26.9)%
85% - 85%
(85)%
29.0% - 37.6%
(32.1)%
12.50 %
2.1% - 54.4%
(9.5)%
90% - 100%
(89.1)%
0% - 100%
(12.8)%
_________________________________
(1) The discount rate for floating rate bonds is a compound interest formula based on the London Interbank Offered Rate
(LIBOR) forward curve for each payment date
These two CDOs are backed by pools of debt securities issued by financial institutions. The collateral of the ALESCO
CDO consists of trust-preferred securities (“TruPS”) and subordinated debt securities issued by banks and bank holding companies.
The collateral of the I-PreTSL CDO consists of TruPS and subordinated debt securities of insurance companies. Performing
collateral is the amount of remaining collateral less the balances of collateral in deferral or default. Subordination is the amount
of performing collateral in excess of the current balance of a specified class of notes and all classes senior to the specified
class. Excess subordination is the amount that the performing collateral balance exceeds the outstanding bonds in the current
class, plus all senior classes. It is a static measure of credit enhancement, but does not incorporate all of the structural elements
of the security deal. This amount can also be impacted by future defaults and deferrals, deferring balances that cure or redemptions
of securities by issuers. A negative excess subordination indicates that the current performing collateral of the security would be
insufficient to pay the current principal balance of the class notes after all of the senior classes notes were paid.
However, the performing collateral balance excludes the collateral of issuers currently deferring their interest payments.
Because these issuers are expected to resume payment in the future (within five years of the first deferred interest period), a
38
negative excess subordination does not necessarily mean a class note holder in the CDO will not receive a greater than projected
or even full payment of cash flow at maturity.
At December 31, 2013 and 2012 the Company was receiving “payment in kind” (“PIK”), in lieu of cash interest on the
ALESCO trust preferred securities investment. The Company’s use of “PIK” does not indicate that additional securities have been
issued in satisfaction of any outstanding obligation; rather, it indicates that a coverage test of a class or tranche directly senior to
the class in question has failed and interest received on the PIK note is being capitalized, which means the principal balance is
being increased. Once the coverage test is met, the capitalized interest will be paid in cash and current cash interest payments will
resume.
The Company’s CDOs both allow, under the terms of the issue, for issuers to defer interest for up to five consecutive
years. After five years, if not cured, the securities are considered to be in default and the trustee may demand payment in full of
principal and accrued interest. Issuers of the securities in the collateral pool are also considered to be in default in the event of the
failure of the issuer or a subsidiary. The structuring of these CDOs provides for a waterfall approach to absorbing losses whereby
lower classes or tranches are initially impacted and more senior tranches are only impacted after lower tranches can no longer
absorb losses. Likewise, the waterfall approach also applies to principal and interest payments received, as senior tranches have
priority over lower tranches in the receipt of payments. Both deferred and defaulted issuers are considered nonperforming, and
the trustee calculates, on a quarterly or semi-annual basis, certain coverage tests prior to the payment of cash interest to owners
of the various tranches of the securities. The coverage tests are compared to an over-collateralization target that states the balance
of performing collateral as a percentage of the tranche balance plus the balance of all senior tranches. The tests must show that
performing collateral is sufficient to meet requirements for the senior tranches, both in terms of cash flow and collateral value,
before cash interest can be paid to subordinate tranches. As a result of the cash flow waterfall provisions within the structure of
these securities, when a senior tranche fails its coverage test, all of the cash flows that would have been paid to lower tranches are
paid to the senior tranche and recorded as a reduction of the senior tranches’ principal. This principal reduction in the senior tranche
continues until the coverage test of the senior tranche is passed or the principal of the tranche is paid in full. For so long as the
cash flows are being diverted to the senior tranches, the amount of interest due and payable to the subordinate tranches is capitalized
and recorded as an increase in the principal value of the tranche. The Company’s CDO investments are in the mezzanine tranches
or classes which are subordinate to one of more senior tranches of their respective issues. The Company is receiving PIK for the
ALESCO CDO due to failure of the required senior tranche coverage tests described. This security is currently projected to remain
in full or partial PIK status for a period of three years.
The impact of payment of PIK to subordinate tranches is to strengthen the position of the senior tranches by reducing
the senior tranches’ principal balances relative to available collateral and cash flow. The impact to the subordinate tranches is to
increase principal balances, decrease cash flow, and increase credit risk to the tranches receiving the PIK. The risk to holders of
a security of a tranche in PIK status is that the total cash flow will not be sufficient to repay all principal and capitalized interest
related to the investment.
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 nonaccrual status was the most prudent course of action.
The Company stopped all accrual of interest and never capitalized any PIK interest payments to the principal balance of the
security. The Company intends to keep this security on nonaccrual 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, the Company utilized an independent third party for the valuation of the CDOs as of December 31, 2013.
Based on this valuation and the Company’s review of the assumptions and methodologies used, the Company believes the amortized
costs recorded for its CDO investments accurately reflects the position of these securities at December 31, 2013.
Within the valuation performed, the default and recovery probabilities for each piece of collateral were formed based on
the evaluation of the collateral credit and a review of historical industry default data and current/near-term operating conditions.
For collateral that has already defaulted, the Company assumed no recovery. For collateral that was in deferral, the Company
assumed a recovery of 10% of par for banks, thrifts or other depository institutions, and 15% of par for insurance companies.
Although the Company conservatively assumed that the majority of the deferring collateral continues to defer and eventually
defaults, also recognizes there is a possibility that some deferring collateral may become current at some point in the future.
TruPS CDOs are typically subject to five-year no call provisions. At the expiration of these lockout periods, they are
typically freely callable at par. As most of TruPS within CDOs were issued before 2008, most securities are now freely callable
at par. Although less common, some issuances are callable before the end of a lock out period at a premium (levels varying from
issuer to issuer and typically depending on how close to the end of the no call period). Additionally, there exists a provision in
most trust preferred indentures that allow for the securities to become callable at par (even during the lockout period) if there is
an adverse capital treatment event.
39
Prepayment assumptions are predicated on the terms and pricing of CDOs relative to prevailing current market conditions,
as well as regulatory and legislative developments that may affect issuers’ decision to prepay. There were no significant changes
made within the prepayment assumptions during 2013. Our CDOs have a five-year call option – meaning that, on the fifth
anniversary of issuance, the issuer has the right to redeem the security at par. Additionally, most trust preferred security indentures
include language that permits an issuer to call the security if an adverse capital treatment event occurs. These provisions allow
issuers to redeem at virtually any time if a legislative or regulatory development changes the TruPS’ status as a component of Tier
1 capital. The passage of the Dodd-Frank Act in July 2010, constituted such an event for certain bank holding companies.
Specifically, bank holding companies with consolidated assets of $15 billion or more can no longer treat as Tier 1 Capital any
hybrid capital instruments (such as TruPS) issued on or after May 19, 2010. Furthermore, the ability of these institutions to continue
to treat as Tier 1 Capital any hybrid capital instruments, including TruPS, issued before May 19, 2010, will be phased out
incrementally over a period of three years, beginning January 1, 2013. Notwithstanding the foregoing, we believe that the terms
and pricing of TruPS issued by banks and insurance companies were so aggressive that it is unlikely that financing on such attractive
terms will become available in the foreseeable future. Additionally, the favorable capital treatment of these securities (i.e. status
as Tier 1 capital) makes them a particularly attractive debt instrument. Therefore, we assume that the bulk of the TruPS collateral
does not prepay over the life of the CDO. However, in light of legislative developments, we have instituted a 40% prepayment
assumption rate for those banks with assets greater than $15 billion for two years corresponding to the start of the phase-out period
for Tier 1 capital treatment – and, subsequently, an annual prepayment rate assumption of 2%. The 40% prepayment rate was the
result of a detailed analysis of the terms of those TruPS issued by banks with assets in excess of $15 billion. Specifically, we
looked to the contractual interest rate of these instruments (i.e. fixed rate or spread over LIBOR) and compared them to current
debt market rates of the issuing institutions. The bulk of the TruPS within the CDOs were issued at rates inside of current market
debt yield (thus making refinancing prohibitively expensive). For issuers that have made a public announcement of intent to redeem
their outstanding TruPS, we assume an immediate prepayment. Additionally, we assume immediate prepayment for TruPS issued
by banks with greater than $15 billion in assets and a fixed coupon of 7% or greater. The bulk of the issuances with coupons greater
than 7% were issued at rates wider than current market debt yield (thus making refinancing certain). Similarly, for those TruPS
issued by banks with assets between $2 billion and $15 billion and coupons greater than 7%, we assume a constant annual
prepayment rate of 5%. This rate is meant to reflect the possibility that some mid-size banks with limited access to the capital
markets may choose to refinance the relatively high cost debt despite the remaining positive capital treatment of their TruPS.
At present there is no prepayment rate being applied to insurance collateral. This is due to the de minimus rate of
prepayment observed for insurance collateral. As stated above, the impact of a prepayment would be positive for insurance only
CDOs. Additionally, unlike large banks which experienced a “taking away” of preferential capital treatment, insurance companies
were never subject to such an adverse event and thus have no new incentive to prepay. There would be no increase in credit loss
when adding a 1% prepayment assumption. However, there would be an increase in fair value of approximately one point.
For CDOs with only bank collateral, such as the ALESCO CDO, generally senior tranches experience increased value
and no credit loss effect with increased prepayment assumptions, while mezzanine tranches typically experience increased credit
loss when collateral prepayment assumptions are increased. Typically redemptions are completed by issuers with stronger credit
and/or higher coupon paper (as higher coupon paper has a higher probability of redemption due to refinancing options). Issuers
with stronger credit are more likely to continue making interest payments (less likely to default) and higher coupon paper accounts
for higher interest proceeds available to pay tranches in the CDO. The mezzanine tranches benefit from these heightened interest
proceeds over time and prepayments compromise the likelihood of those payments.
For CDOs with only insurance collateral, such as the PreTSL CDO, given the significant amounts of subordination and
excellent asset coverage (due to the absence of material credit events), prepayments would have a positive effect on fair value for
nearly all tranches and is unlikely to cause impairment. There would be no increase in credit loss when adding a 1% prepayment
assumption. However, there would be an increase in fair value of approximately one and a half points.
Investment Maturities
The total amount of securities in an unrealized loss position for greater than 12 months is comprised of municipal,
mortgage-backed, U.S. Government-sponsored enterprises, and other securities. Our management periodically evaluates each
security available-for-sale in an unrealized loss position to determine if the impairment is temporary or other than temporary. The
unrealized losses are due solely to interest rate changes and we have the ability and intent to hold all investment securities with
identified impairments resulting from interest rate changes to the earlier of the forecasted recovery or the maturity of the underlying
investment security. As of December 31, 2013, we did not have any investment securities that constituted 10% or more of the
stockholders’ equity of any third party issuer.
40
The following table summarizes the maturity schedule of our investment securities at their amortized cost and their
weighted average yields at December 31, 2013.
(dollars in thousands)
1 year or Less
More than 1 year
to 5 years
More than 5 years
to 10 years
More than 10 years
Total
Amortized
Cost
Wtd.
Avg.
Yield
Amortized
Cost
Wtd.
Avg.
Yield
Amortized
Cost
Wtd.
Avg.
Yield
Amortized
Cost
Wtd.
Avg.
Yield
Amortized
Cost
Wtd.
Avg.
Yield
Securities available for sale:
U.S. Government-
sponsored enterprises
$
Municipals
Mortgage- and asset-
backed securities –
government-sponsored
enterprises
Mortgage- and asset-
backed securities –
private labeled
—
—
—
—
—% $
20,699
1.04% $
10,556
4.67% $
26,314
3.31% $
57,569
—%
3,989
3.58%
6,848
3.35%
35,289
3.66%
46,126
2.74%
3.60%
—%
823
4.97%
29,252
2.80%
44,983
2.59%
75,058
2.70%
Other securities
2,000
2.16%
—%
342
—
4.72%
—%
—
—
—%
—%
971
3,025
1.15%
1.55%
1,313
5,025
2.08%
1.79%
Total securities
available for sale
$
2,000
$
25,853
$
46,656
$ 110,582
$ 185,091
Critical Accounting Policies and Estimates
Allowance for Loan Losses. We believe the allowance for loan losses is the critical accounting policy that requires the
most significant judgments and assumptions used in the preparation of our consolidated financial statements. An estimate of
potential losses inherent in the loan portfolio are determined and an allowance for those losses is established by considering factors
including historical loss rates, expected cash flows, and estimated collateral values. The allowance for loan losses represents
management’s best estimate of losses inherent in the existing loan portfolio. The allowance for loan losses is increased by the
provision for loan losses charged to expense and reduced by loans charged off, net of recoveries. Management evaluates the
allowance for loan losses quarterly. If the underlying assumptions later prove to be inaccurate based on subsequent loss evaluations,
the allowance for loan losses is adjusted.
Management estimates the appropriate level of allowance for loan losses by separately evaluating impaired and non-
impaired loans. A specific allowance is assigned to an impaired loan when expected cash flows or collateral do not justify the
carrying amount of the loan. The methodology used to assign an allowance to a non-impaired loan is more subjective. Generally,
the allowance assigned to non-impaired loans is determined by applying historical loss rates to existing loans with similar risk
characteristics, adjusted for qualitative factors including changes in economic conditions, changes in underwriting standards, and
changes in the level of credit risk associated with specific industries and markets. Because the economic and business climate in
any given industry or market, and its impact on any given borrower, can change rapidly, the risk profile of the loan portfolio is
periodically assessed and adjusted when appropriate. Notwithstanding these procedures, there still exists the possibility that the
assessment could prove to be significantly incorrect and that an immediate adjustment to the allowance for loan losses would be
required.
Investment in Debt and Equity Securities. We classify investments in debt and equity securities as either held-to-maturity
or available-for-sale in accordance with Accounting Standards Codification, or ASC, Topic 320, Accounting for Certain Investments
in Debt and Equity Securities. Securities classified as held-to-maturity would be recorded at cost or amortized cost. Available-for-
sale securities are carried at fair value. Fair value calculations are based on quoted market prices when such prices are available.
If quoted market prices are not available, estimates of fair value are computed using a variety of pricing sources, including Reuters/
EJV, Interactive Data and Standard & Poors. Due to the subjective nature of the valuation process, it is possible that the actual
fair values of these investments could differ from the estimated amounts, thereby affecting our financial position, results of
operations and cash flows. If the estimated value of investments is less than the cost or amortized cost, management evaluates
whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the
investment. If such an event or change has occurred and management determines that the impairment is other-than-temporary, a
further determination is made as to the portion of impairment that is related to credit loss. The impairment of the investment that
is related to the credit loss is expensed in the period in which the event or change occurred. The remainder of the impairment is
recorded in other comprehensive income.
Other Real Estate Owned (OREO). OREO acquired through loan foreclosure is initially recorded at fair value less costs
to sell when acquired, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the allowance
41
for loan losses. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the
OREO or foreclosed asset could differ from the original estimate. If it is determined that fair value declines subsequent to foreclosure,
a valuation adjustment is recorded through non-interest expense. Operating costs associated with the assets after acquisition are
also recorded as non-interest expense. Gains and losses on the disposition of OREO and foreclosed assets are netted and posted
through non-interest income.
Impairment of Goodwill. As a result of the acquisition of Landmark Financial Corporation, goodwill, an intangible asset
with an indefinite life, is reflected on the balance sheet. Goodwill is evaluated for impairment annually, unless there are factors
present that indicate a potential impairment, in which case, the goodwill impairment test is performed more frequently than annually.
Deferred Income Tax Assets/Liabilities. Our net deferred income tax asset arises from differences in the dates that items
of income and expense enter into our reported income and taxable income. Deferred tax assets and liabilities are established for
these items as they arise. From an accounting standpoint, deferred tax assets are reviewed to determine if they are realizable based
on the historical level of taxable income, estimates of future taxable income and the reversals of deferred tax liabilities. In most
cases, the realization of the deferred tax asset is based on future profitability. If we were to experience net operating losses for tax
purposes in a future period, the realization of deferred tax assets would be evaluated for a potential valuation reserve.
Additionally, management reviews our uncertain tax positions annually under ASC Topic 740, Income Taxes. An uncertain
tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination,
with a tax examination being presumed to occur. The amount actually recognized is the largest amount of tax benefit that is greater
than 50% likely to be recognized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is
recorded. A significant amount of judgment is applied to determine both whether the tax position meets the “more likely than not”
test as well as to determine the largest amount of tax benefit that is greater than 50% likely to be recognized. Differences between
the position taken by management and that of taxing authorities could result in a reduction of a tax benefit or increase to tax
liability, which could adversely affect future income tax expense.
Recent Accounting Pronouncements
Refer to Note 20 to the Company's consolidated financial statements.
Off-Balance Sheet Arrangements
In the ordinary course of business, the Company enters into financial transactions to extend credit and forms of
commitments that may be considered off-balance sheet arrangements. We enter into forward contracts relating to our mortgage
banking business to hedge the exposures we have from commitments to extend new residential mortgage loans to our customers
and from our mortgage loans held for sale. At December 31, 2013 we had commitments to sell residential real estate loans of
$30.63 million. These contracts mature in less than one year.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 8.
Financial Statements and Supplementary Data
The financial statements and notes thereto required pursuant to this Item begin on page F-1 of this report.
42
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information the Company
is required to disclose in reports that the Company files or submits under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”) is recorded, processed, summarized and reported within the time period specified in SEC rules and forms. These
controls and procedures are also designed to ensure that such information is accumulated and communicated to management,
including our principal executive and principal financial officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating disclosure controls and procedures, the Company has recognized that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control
objectives. Management is required to apply judgment in evaluating its controls and procedures.
The Company performed an evaluation under the supervision and with the participation of management, including the
Company’s principal executive and principal financial officer, to assess the effectiveness of the design and operation of our
disclosure controls and procedures under the Exchange Act. Based on that evaluation, our management, including our principal
executive and principal financial officer, concluded that our disclosure controls and procedures were effective as of December 31,
2013.
Management’s Report on Internal Control Over Financial Reporting
This annual report does not include a report of management’s assessment regarding internal control over financial reporting
or an attestation report of the Company’s registered public accounting firm because such reports are not required of smaller
reporting companies.
Changes in Internal Control Over Financial Reporting
There has been no change in the Company’s internal control over financial reporting during the quarter ended December 31,
2013, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Other Information
None.
43
PART III
Certain information required by Part III is incorporated by reference from our definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on May 19, 2014 (the “Proxy Statement”), which we intend to file with the SEC pursuant to
Regulation 14A within 120 days after December 31, 2013. Except for those portions specifically incorporated in this report by
reference to our Proxy Statement, no other portions of the Proxy Statement are deemed to be filed as part of this report.
Item 10.
Directors, Executive Officers and Corporate Governance
Directors
Incorporated into this item by reference is the information set forth under the caption “Proposal No. 1 – Election of
Directors” in the Proxy Statement.
Executive Officers
Information regarding our executive officers is set forth in Item 1 of Part I of this annual report under the caption “Executive
Officers of the Registrant.”
Code of Business Conduct and Ethics
We have adopted a code of business conduct and ethics that applies to all of our directors and officers and other employees,
including our principal executive officer, principal financial officer and principal accounting officer. This code is publicly available
through the Investor Relations section of our website at www.firstinternetbancorp.com. To the extent permissible under applicable
law, the rules of the SEC or NASDAQ listing standards, we intend to post on our website any amendment to the code of business
conduct and ethics, or any grant of a waiver from a provision of the code of business conduct and ethics, that requires disclosure
under applicable law, the rules of the SEC or NASDAQ listing standards.
Audit Committee
Incorporated into this item by reference is the information relating to our audit committee set forth under the caption
“Corporate Governance” in the Proxy Statement.
Section 16(a) Beneficial Ownership Reporting Compliance
Incorporated into this item by reference is the information relating to reports filed under Section 16(a) of the Exchange
Act set forth under the caption “Corporate Governance” in the Proxy Statement.
Corporate Governance
Incorporated into this item by reference is the information relating to the procedures by which shareholders may
recommend nominees to the board of directors set forth under the caption “Corporate Governance” in the Proxy Statement.
Item 11.
Executive Compensation
Incorporated into this item by reference is the information in the Proxy Statement regarding the compensation of our
named executive officers appearing under the heading “Executive Compensation,” the information regarding compensation
committee interlocks and insider participation under the heading “Corporate Governance” and the information regarding
compensation of non-employee directors under the heading “Executive Compensation.”
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Incorporated into this item by reference is the information in the Proxy Statement appearing under the headings “Security
Ownership of Certain Beneficial Owners” and “Equity Compensation Plan Information.”
44
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Incorporated into this item by reference is the information in the Proxy Statement regarding director independence under
the heading “Proposal No. 1 – Election of Directors” and the information regarding related person transactions under the heading
“Corporate Governance.”
Item 14.
Principal Accountant Fees and Services
Incorporated into this item by reference is the information in the Proxy Statement under the heading “Proposal No. 3 –
Ratification of Appointment of Independent Registered Public Accounting Firm.”
45
PART IV
Item 15.
Exhibits and Financial Statement Schedules
(a) Documents Filed as Part of this annual report on Form 10-K:
1. See our financial statements beginning on page F-1.
(b) Exhibits:
Unless otherwise indicated, all documents incorporated into this annual report on Form 10-K by reference to a document
filed with the SEC pursuant to the Exchange Act are located under SEC file number 1-35750.
Exhibit No.
3.1
3.2
4.1
Description
Articles of Incorporation of First Internet Bancorp (incorporated by reference to Exhibit 3.1 to
registration statement on Form 10 filed November 30, 2012)
Amended and Restated Bylaws of First Internet Bancorp as amended March 18, 2013
(incorporated by reference to Exhibit 3.2 annual report on Form 10-K for the year ended
December 31, 2012)
Warrant to purchase common stock dated June 28, 2013 (incorporated by reference to Exhibit 4.1
to current report on Form 8-K filed July 5, 2013)
10.1
First Internet Bancorp 2013 Equity Incentive Plan (incorporated by reference to Appendix Z to the
definitive proxy statement on Schedule 14A filed April 9, 2013)
10.2
Form Restricted Stock Agreement under 2013 Equity Incentive Plan (incorporated by reference to
Exhibit 10.1 to current report on Form 8-K filed July 26, 2013)*
10.3
First Internet Bancorp Directors’ Deferred Stock Plan (incorporated by reference to Exhibit 10.3
to registration statement on Form 10 filed November 30, 2012)*
10.4
Amended and Restated Employment Agreement among First Internet Bank of Indiana, First
Internet Bancorp and David B. Becker dated March 28, 2013 (incorporated by reference to Exhibit
10.4 to annual report on Form 10-K for the year ended December 31, 2012)*
10.5
10.6
10.7
10.8
10.9
10.10
10.11
Change in Control Agreement between First Internet Bank of Indiana and Kay E. Whitaker dated
January 14, 2013 (incorporated by reference to Exhibit 10.6 to annual report on Form 10-K for the
year ended December 31, 2012)*
2013 Senior Management Bonus Plan (incorporated by reference to Exhibit 10.8 to annual report
on Form 10-K for the year ended December 31, 2012)*
Contract for Purchase of Property between First Internet Bancorp and LHRET Ascension SV, LLC
dated January 30, 2013 (incorporated by reference to Exhibit 10.10 to annual report on Form 10-K
for the year ended December 31, 2012)
Offer and Contract for Purchase of Real Estate between First Internet Bancorp and St. Vincent
Hospital and Health Care Center, Inc., accepted February 5, 2013 (incorporated by reference to
Exhibit 10.11 to annual report on Form 10-K for the year ended December 31, 2012)
Lease dated as of March 6, 2013, by and between First Internet Bancorp and First Internet Bank of
Indiana (incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed March 11,
2013)
Subordinated Debenture Purchase Agreement with Community BanCapital, L.P., dated June 28,
2013 (incorporated by reference to Exhibit 10.1 to current report on Form 8-K filed July 5, 2013)
Subordinated Debenture dated June 28, 2013 (incorporated by reference to Exhibit 10.2 to current
report on Form 8-K filed July 5, 2013)
21.1
List of Subsidiaries (incorporated by reference to Exhibit 21.1 to registration statement on
Form 10 filed November 30, 2012)
23.1
31.1
31.2
32.1
Consent of Independent Registered Public Accounting Firm
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
Section 1350 Certifications
46
Exhibit No.
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
Description
XBRL Instance Document
XBRL Taxonomy Extension Schema
XBRL Taxonomy Extension Calculation Linkbase
XBRL Taxonomy Extension Definition Linkbase
XBRL Taxonomy Extension Label Linkbase
XBRL Taxonomy Extension Presentation Linkbase
__________________________________
*Management contract, compensatory plan or arrangement required to be filed as an exhibit.
47
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 31, 2014.
SIGNATURES
FIRST INTERNET BANCORP
By
/s/ David B. Becker
David B. Becker,
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following
persons on behalf of the Registrant and in the capacities indicated on March 31, 2014.
/s/ David B. Becker
David B. Becker,
Chairman, President,
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ John K. Keach, Jr.
John K. Keach, Jr., Director
/s/ Ann D. Murtlow
Ann D. Murtlow, Director
/s/ Jerry Williams
Jerry Williams, Director
/s/ Kay E. Whitaker
Kay E. Whitaker,
Senior Vice President-Finance,
Chief Financial Officer and Secretary
(Principal Financial Officer)
/s/ David R. Lovejoy
David R. Lovejoy, Director
/s/ Ralph R. Whitney, Jr.
Ralph R. Whitney, Jr., Director
/s/ Jean L. Wojtowicz
Jean L. Wojtowicz, Director
48
First Internet Bancorp
December 31, 2013 and 2012
Contents
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements
Balance Sheets
Statements of Income
Statements of Comprehensive Income
Statements of Shareholders’ Equity
Statements of Cash Flows
Notes to Financial Statements
F-2
F-3
F-4
F-5
F-6
F-7
F-8
F-1
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Shareholders
First Internet Bancorp
Indianapolis, Indiana
We have audited the accompanying consolidated balance sheets of First Internet Bancorp as of December 31, 2013 and 2012, and
the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for the years then
ended. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for
designing auditing procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits
also included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of First Internet Bancorp as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then
ended in conformity with accounting principles generally accepted in the United States of America.
/s/ BKD, LLP
Indianapolis, Indiana
March 31, 2014
F-2
First Internet Bancorp
Consolidated Balance Sheets
(Amounts in thousands except share data)
Assets
Cash and due from banks
Interest-bearing demand deposits
Total cash and cash equivalents
Interest-bearing time deposits
Securities available for sale - at fair value (amortized cost of $185,091 in 2013 and
$153,896 in 2012)
Loans held for sale (includes $24,254 and $0 at fair value, respectively)
Loans receivable - net of allowance for loan losses of $5,426 and $5,833 at December
31, 2013 and 2012, respectively
Accrued interest receivable
Federal Home Loan Bank of Indianapolis stock
Cash surrender value of bank-owned life insurance
Premises and equipment, net
Goodwill
Other real estate owned
Accrued income and other assets
Total assets
Liabilities and Shareholders’ Equity
Liabilities
Non-interest bearing deposits
Interest-bearing deposits
Total deposits
Advances from Federal Home Loan Bank
Subordinated debt
Accrued interest payable
Accrued expenses and other liabilities
Total liabilities
Shareholders’ Equity
Preferred stock, no par value; 4,913,779 shares authorized; issued and outstanding -
none
Voting common stock, no par value; 45,000,000 shares authorized; 4,448,326 and
2,815,094 shares issued and outstanding, respectively
Nonvoting common stock, no par value; 86,221 shares authorized; issued and
outstanding - none
Retained earnings
Accumulated other comprehensive income (loss)
Total shareholders’ equity
Total liabilities and shareholders’ equity
See Notes to Consolidated Financial Statements
F-3
December 31,
2013
2012
$
2,578
$
51,112
53,690
2,500
181,409
28,610
495,727
2,904
2,943
11,935
7,134
4,687
4,381
6,422
2,881
29,632
32,513
—
156,693
63,234
352,328
2,196
2,943
11,539
793
4,687
3,666
5,775
$
802,342
$
636,367
$
19,386
$
653,709
673,095
31,793
2,789
102
3,655
711,434
—
71,378
—
21,902
(2,372)
90,908
13,187
517,504
530,691
40,686
—
120
3,520
575,017
—
41,508
—
18,024
1,818
61,350
$
802,342
$
636,367
First Internet Bancorp
Consolidated Statements of Income
(Amounts in thousands except share and per share data)
Interest Income
Loans
Securities – taxable
Securities – non-taxable
Total interest income
Interest Expense
Deposits
Other borrowed funds
Total interest expense
Net Interest Income
Provision for Loan Losses
Net Interest Income After Provision for Loan Losses
Noninterest Income
Service charges and fees
Mortgage banking activities
Other-than-temporary impairment
Total loss related to other than temporarily impaired securities
Portion of loss recognized in other comprehensive income (loss)
Other-than-temporary impairment loss recognized in net income
Gain (loss) on sale of securities
Loss on asset disposals
Other
Total noninterest income
Noninterest Expense
Salaries and employee benefits
Marketing, advertising, and promotion
Consulting and professional fees
Data processing
Loan expenses
Premises and equipment
Deposit insurance premium
Other
Total noninterest expense
Income Before Income Taxes
Income Tax Provision
Net Income
Income Per Share of Common Stock
Basic
Diluted
Year Ended
December 31,
2013
2012
$
$
$
20,843
3,082
1,611
25,536
6,861
1,227
8,088
17,448
324
17,124
687
8,682
(129)
80
(49)
(63)
(146)
406
9,517
10,458
1,870
2,267
916
800
1,923
451
1,797
20,482
6,159
1,566
4,593
1.51
1.51
19,560
3,133
1,681
24,374
7,172
1,360
8,532
15,842
2,852
12,990
685
10,647
(1,452)
1,200
(252)
48
(93)
388
11,423
8,529
1,362
1,422
897
1,097
1,711
455
1,140
16,613
7,800
2,194
5,606
1.95
1.95
$
$
$
Weighted-Average Number of Common Shares Outstanding
Basic
Diluted
Dividends Declared Per Share
3,041,666
3,050,001
0.2200
$
2,869,365
2,869,365
0.1667
$
See Notes to Consolidated Financial Statements
F-4
First Internet Bancorp
Consolidated Statements of Comprehensive Income
(Dollar amounts in thousands)
Net income
Other comprehensive income (loss)
Net unrealized holding gains (losses) on securities available for sale
Reclassification adjustment for (gains) losses realized
Net unrealized holding losses on securities available for sale for which an other-than-
temporary impairment has been recognized in income
Reclassification adjustment for other-than-temporary impairment loss recognized in income
Other comprehensive income (loss) before tax
Income tax provision (benefit)
Other comprehensive income (loss) - net of tax
Comprehensive income
See Notes to Consolidated Financial Statements
Year Ended
December 31,
2013
2012
$
4,593
$
5,606
(6,462)
63
(129)
49
(6,479)
(2,289)
(4,190)
403
$
2,161
(48)
(1,452)
252
913
315
598
$
6,204
F-5
First Internet Bancorp
Consolidated Statements of Shareholders’ Equity
(Dollar amounts in thousands except per share data)
Voting and
Nonvoting
Common
Stock
Accumulated
Other
Comprehensive
Income
(Loss)
Retained
Earnings
Total
Shareholders’
Equity
Balance, January 1, 2012
$
41,306
$
1,220
$
12,897
$
Net income
Other comprehensive income
Cash dividends declared ($0.1667 per share)
Recognition of the fair value of share-based
compensation
Issuance of directors’ deferred stock rights
Balance, December 31, 2012
Net income
Other comprehensive loss
Cash dividends declared ($0.2200 per share)
Recognition of the fair value of share-based
compensation
Issuance of common stock warrants
Issuance of directors’ deferred stock rights
Net cash proceeds from common stock
issuance
—
—
—
107
95
41,508
—
—
—
387
255
127
29,101
Balance, December 31, 2013
$
71,378
$
—
598
—
—
—
1,818
—
(4,190)
—
—
—
—
—
(2,372) $
5,606
—
(479)
—
—
18,024
4,593
—
(715)
—
—
—
—
21,902
$
55,423
5,606
598
(479)
107
95
61,350
4,593
(4,190)
(715)
387
255
127
29,101
90,908
See Notes to Consolidated Financial Statements
F-6
First Internet Bancorp
Consolidated Statements of Cash Flows
Years Ended December 31, 2013 and 2012
(Dollar amounts in thousands except per share data)
Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization
Loss (gain) from real estate owned
Increase in cash surrender value of bank-owned life insurance
Provision for loan losses
Stock compensation expense
Loss on other-than-temporary impairment of securities
Gain (loss) from sale of available-for-sale securities
Loans originated for sale
Proceeds from sale of loans
Gain on loans sold
Unrealized loss on loans held-for-sale
Gain on derivatives
Net change in:
Accrued interest receivable
Other assets
Accrued expenses and other liabilities
Net cash provided by (used in) operating activities
Investing Activities
Net change in loans
Net change in interest bearing deposits
Loans purchased
Bank owned life insurance purchased
Proceeds from liquidation of other real estate owned
Maturities of securities available for sale
Proceeds from sale of securities available for sale
Purchase of securities available for sale
Purchase of premises and equipment
Net cash used in investing activities
Financing Activities
Net increase in deposits
Cash dividends paid
Proceeds from issuance of subordinated debt and related warrants
Net proceeds from common stock issuance
Repayment of FHLB advances
Proceeds from FHLB advances
Net cash provided by financing activities
Net Increase (Decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents, Beginning of Year
Cash and Cash Equivalents, End of Year
Supplemental Disclosures of Cash Flows Information
Cash paid during the year for interest
Cash paid during the year for taxes
Loans transferred to real estate owned
Cash dividends declared, not paid
Year Ended December 31,
2013
2012
$
4,593
$
5,606
2,257
11
(396)
324
514
49
63
(741,078)
784,077
(8,379)
4
(307)
(708)
552
(36)
41,540
(61,039)
(2,500)
(83,265)
—
1,268
29,757
72,019
(134,471)
(7,187)
(185,418)
142,404
(450)
3,000
29,101
(22,000)
13,000
165,055
21,177
32,513
53,690
8,106
770
581
265
$
$
2,862
(99)
(378)
2,852
202
252
(48)
(738,225)
730,729
(10,647)
—
—
(67)
417
861
(5,683)
(19,274)
—
(9,737)
(3,000)
1,345
45,625
4,223
(59,002)
(309)
(40,129)
44,026
(479)
—
—
—
—
43,547
(2,265)
34,778
32,513
8,532
2,253
3,401
—
$
$
See Notes to Consolidated Financial Statements
F-7
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except shares and per share data)
Note 1:
Summary of Significant Accounting Policies
The accounting policies of First Internet Bancorp and its subsidiaries (the Company) conform to accounting principles
generally accepted in the United States of America (GAAP). A summary of the Company’s significant accounting policies
follows:
Description of Business
The Company was incorporated on September 15, 2005, and was approved to consummate a plan of exchange on March
21, 2006, by which the Company became a bank holding company owning 100% of First Internet Bank of Indiana (the
Bank).
The Bank was incorporated on October 28, 1998, and was approved to accept FDIC-insured deposits on December 28,
1998. The Bank commenced operations to the public on February 22, 1999. The Bank provides commercial and retail
banking, with operations conducted on the World Wide Web (Internet) at www.firstib.com and through its corporate office
located in Indianapolis, Indiana. The majority of the Bank’s income is derived from commercial lending, retail lending,
and mortgage banking activities. The Bank is subject to competition from other financial institutions. The Bank is regulated
by certain state and federal agencies and undergoes periodic examinations by those regulatory authorities.
JKH Realty Services, LLC was established August 20, 2012 as a single member LLC wholly owned by the Bank to
manage other real estate owned properties as needed.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiary. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from those estimates. Estimates most susceptible
to change in the near term include the allowance for loan losses and the fair value of securities available for sale.
Securities
The Company classifies its securities in one of three categories and accounts for the investments as follows:
•
•
•
Securities that the Company has the positive intent and ability to hold to maturity are classified as “securities
held to maturity” and reported at amortized cost. The Company had zero securities classified as “securities held
to maturity” at December 31, 2013 and 2012.
Securities that are acquired and held principally for the purpose of selling them in the near term with the objective
of generating economic profits on short-term differences in market characteristics are classified as “securities
held for trading” and reported at fair value, with unrealized gains and losses included in earnings. The Company
had zero securities classified as “securities held for trading” at December 31, 2013 and 2012.
Securities not classified as either held to maturity or trading securities are classified as “securities available for
sale” and reported at fair value, with unrealized gains and losses, after applicable taxes, excluded from earnings
and reported in a separate component of shareholders’ equity. Declines in the value of debt securities and
marketable equity securities that are considered to be other-than-temporary are recorded as an other-than-
temporary impairment of securities available for sale with the unrealized losses recorded in the consolidated
statements of income.
F-8
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
Interest and dividend income, adjusted by amortization of premium or discount, is included in earnings using the effective
interest rate method. Purchases and sales of securities are recorded in the consolidated balance sheets on the trade date.
Gains and losses from security sales or disposals are recognized as of the trade date in the consolidated statements of
income for the period in which securities are sold or otherwise disposed of. Gains and losses on sales of securities are
determined on the specific-identification method.
Loans Held for Sale
Loans originated and intended for sale in the secondary market under best-efforts pricing agreements are carried at the
lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance
by charges to noninterest income.
Loans originated and intended for sale in the secondary market under mandatory pricing agreements are carried at fair
value to facilitate hedging of the loans. Gains and losses resulting from changes in fair value are included in noninterest
income. Prior to April 1, 2013, all mortgage loans held for sale were carried at the lower of cost or fair value.
Gains and losses on loan sales are recorded in noninterest income, and direct loan origination costs and fees are deferred
at origination of the loan and are recognized in noninterest income upon sale of loan.
Revenue Recognition
Interest income on loans is based on the principal balance outstanding and is recognized as earned on the interest method,
except for interest on loans on nonaccrual status, which is recorded as a reduction of loan principal when received.
Premiums and discounts are amortized using the effective interest rate method.
Loan fees, net of certain direct origination costs, primarily salaries and wages, are deferred and amortized to interest
income as a yield adjustment over the life of the loan.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported
at their outstanding principal balance adjusted for unearned income, charge-offs, the allowance for loan losses, any
unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.
For loans recorded at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net
of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment
over the respective term of the loan.
Allowance for Loan Losses Methodology
Company policy is designed to maintain an adequate allowance for loan losses (“ALLL”). Primary responsibility for
ensuring that the Company has processes in place to consistently assess the adequacy of the ALLL rests with the Board.
The Board has charged management with responsibility for establishing the methodology to be used and to assess the
adequacy of the ALLL quarterly. Quarterly, the Board reviews recommendations from management to adjust the allowance
as appropriate.
The methodology employed by management for each portfolio segment, at a minimum, contains the following:
1. Loans are segmented by type of loan.
2. The required ALLL for types of performing homogeneous loans which do not have a specific reserve is
determined by applying a factor based on historical losses averaged over the past twelve months. In those
instances where the Company’s historical experience is not available, management develops factors based
on industry experience and best practices.
F-9
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
3. All criticized, classified and impaired loans are tested for impairment by applying one of three methodologies:
a. Present value of future cash flows;
b. Fair value of collateral less costs to sell; or
c. The loan’s observable market price
4. All troubled debt restructurings (TDR) are considered impaired loans.
5. Loans tested for impairment are removed from other pools to prevent layering (double-counting).
6. The required ALLL for each group of loans are added together to determine the total required ALLL for the
Company. The required ALLL is compared to the current ALLL to determine the provision required to
increase the ALLL or credit to decrease the ALLL.
The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced over
the prior twelve months. Management believes the historical loss experience methodology is appropriate in the current
economic environment, as it captures loss rates that are comparable to the current period being analyzed.
The Company also factors in the following qualitative considerations:
1. Changes in policies and procedures;
2. Changes in national, regional, and local economic and business conditions;
3. Changes in the composition and size of the portfolio and in the terms of loans;
4. Changes in the experience, ability, and depth of lending management and other relevant staff;
5. Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and
severity of adversely classified or graded loans;
6. Changes in the quality of the Company’s loan review system;
7. Changes in the value of underlying collateral for collateral-dependent loans;
8. The existence and effect of any concentration of credit and changes in the level of such concentrations; and
9. The effect of other external factors such as competition and legal and regulatory requirements on the level
of estimated credit losses in the existing portfolio.
Provision for Loan Losses
A provision for estimated losses on loans is charged to operations based upon management’s evaluation of the potential
losses. Such an evaluation, which includes a review of all loans for which full collectibility may not be reasonably assured
considers, among other matters, the estimated net realizable value of the underlying collateral, as applicable, economic
conditions, loan loss experience, and other factors that are particularly susceptible to changes that could result in a material
adjustment in the near term. While management endeavors to use the best information available in making its evaluations,
future allowance adjustments may be necessary if economic conditions change substantially from the assumptions used
in making the evaluations.
Accounting Standards Codification (ASC) Topic 310, Receivables, requires that impaired loans be measured based on
the present value of expected future cash flows discounted at the loans effective interest rates or the fair value of the
underlying collateral, less costs to sell, and allows existing methods for recognizing interest income.
F-10
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
Nonaccrual Loans
Any loan which becomes 90 days delinquent or has the full collection of principal and interest in doubt will be considered
for nonaccrual status. At the time a loan is placed on nonaccrual, all accrued but unpaid interest will be reversed from
interest income. Placing the loan on nonaccrual does not relieve the borrower of the obligation to repay interest. A loan
placed on nonaccrual may be restored to accrual status when all delinquent principal and interest has been brought current,
and the Company expects full payment of the remaining contractual principal and interest.
Impaired Loans
A loan is designated as impaired when, based on current information or events, it is probable that the Company will be
unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Payments
with insignificant delays not exceeding 90 days outstanding are not considered impaired. Certain nonaccrual and
substantially all delinquent loans may be considered to be impaired. Generally, loans are placed on nonaccrual status at
90 days past due and accrued interest is reversed against earnings, unless the loan is well-secured and in the process of
collection. The accrual of interest on impaired and nonaccrual loans is discontinued when, in management’s opinion, the
borrower may be unable to meet payments as they become due.
Troubled Debt Restructurings (TDR)
The loan portfolio includes certain loans that have been modified in a TDR, where economic concessions have been
granted to borrowers who have experienced financial difficulties. These concessions typically result from loss mitigation
efforts and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other
actions. Certain TDRs are classified as nonperforming at the time of restructuring and typically are returned to performing
status after considering the borrower’s sustained repayment performance for a reasonable period, generally not less than
six months.
When loans are modified in a TDR, any possible impairment similar to other impaired loans is evaluated based on the
present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, or
use the current fair value of the collateral, less selling costs for collateral dependent loans. If it is determined that the
value of the modified loan is less than the recorded balance of the loan, impairment is recognized through a specific
allowance or charge-off to the allowance. In periods subsequent to modification, all TDRs, including those that have
payment defaults, are evaluated for possible impairment, and impairment is recognized through the allowance.
Policy for Charging Off Loans
A loan should be charged off at any point in time when it no longer can be considered a bankable asset, meaning collectable
within the parameters of policy. A secured loan generally should be charged off to the estimated fair value of the collateral,
less costs to sell, no later than when it is 120 days past due as to principal or interest. An unsecured loan generally should
be charged off no later than when it is 180 days past due as to principal or interest. All charge-offs are approved by the
Credit Review Committee.
Federal Home Loan Bank (FHLB) Stock
Federal law requires a member institution of the FHLB system to hold common stock of its district FHLB according to
a predetermined formula. This investment is stated at cost, which represents redemption value, and may be pledged as
collateral for FHLB advances.
F-11
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
Other Real Estate Owned
Other real estate owned represents real estate acquired through foreclosure or deed in lieu of foreclosure and is recorded
at its fair value less estimated costs to sell. When property is acquired, it is recorded at its fair value at the date of acquisition,
with any resulting write-down charged against the allowance for loan losses. Any subsequent deterioration of the property
is charged directly to operating expense. Costs relating to the development and improvement of real estate owned are
capitalized, whereas costs relating to holding and maintaining the property are charged to expense as incurred. The
Company has $4,381 and $3,666 of other real estate owned as of December 31, 2013 and 2012, respectively.
Premises and Equipment
Premises and equipment is stated at cost, less accumulated depreciation. Depreciation is computed on the straight-line
method over the estimated useful lives, which range from three to five years for equipment, 39 years for buildings, and
ten years for land improvements.
Derivative Financial Instruments
The Company uses derivative financial instruments to help manage exposure to interest rate risk and the effects that
changes in interest rates may have on net income and the fair value of assets and liabilities. The Company enters into
forward contracts for the future delivery of mortgage loans to third party investors and enters into interest rate lock
commitments with potential borrowers to fund specific mortgage loans that will be sold into the secondary market. The
forward contracts are entered into in order to economically hedge the effect of changes in interest rates resulting from
the Company’s commitment to fund the loans.
Each of these items are considered derivatives, but are not designated as accounting hedges, and therefore, are recorded
at fair value with changes in fair value reflected in noninterest income on the consolidated statements of income. The fair
value of derivative instruments with a positive fair value are reported in accrued income and other assets in the consolidated
balance sheets while derivative instruments with a negative fair value are reported in accrued expenses and other liabilities
in the consolidated balance sheets.
Fair Value Measurements
The Company records or discloses certain assets and liabilities at fair value. ASC Topic 820, Fair Value Measurement,
defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Fair value measurements are classified within one of three levels
in a valuation hierarchy. ASC Topic 820 describes three levels of inputs that may be used to measure fair value:
Level 1 Quoted prices in active markets for identical assets or liabilities
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value
of the assets or liabilities
Income Taxes
Deferred income tax assets and liabilities reflect the impact of temporary differences between amounts of assets and
liabilities for financial reporting purposes and the basis of such assets and liabilities as measured by tax laws and regulations.
Deferred income tax expense or benefit is based upon the change in deferred tax assets and liabilities from period to
period, subject to an ongoing assessment of realization of deferred tax assets. Deferred tax assets are reduced by a valuation
allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred
tax asset will not be realized.
F-12
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
The Company files income tax returns in the U.S. federal and Indiana jurisdictions. With few exceptions, the Company
is no longer subject to U.S. federal, state and local examinations by tax authorities for years before 2009.
ASC Topic 740, Income Taxes, prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company
did not identify any uncertain tax positions that it believes should be recognized in the consolidated financial statements.
Earnings Per Share
Earnings per share of common stock are based on the weighted-average number of basic shares and dilutive shares
outstanding during the year.
The following is a reconciliation of the weighted-average common shares for the basic and diluted earnings per share
computations.
Basic earnings per share
Net income available to common shareholders
Weighted-average common shares
Basic earnings per common share
Diluted earnings per share
Net income applicable to diluted earnings per share
Weighted-average common shares
Dilutive effect of warrants
Dilutive effect of equity compensation
Year Ended December 31,
2013
2012
$
$
$
4,593
3,041,666
1.51
$
$
5,606
2,869,365
1.95
4,593
$
5,606
3,041,666
2,869,365
5,933
2,402
—
—
Weighted-average common and incremental shares
Diluted earnings per common share
3,050,001
1.51
$
2,869,365
1.95
$
Number of shares and warrants excluded from the calculation of diluted
earnings per share as the exercise prices were greater than the average
market price of the Company's common stock during the year
—
—
Dividend Restrictions
Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Company
or by the Company to shareholders. As of December 31, 2013 and 2012 approximately $14,691 and $14,737 was available
to be paid as dividends to the Company by the Bank.
Stock Compensation
The Company has a stock-based employee compensation plan using the fair value recognition provisions of ASC Topic
718, Compensation - Stock Compensation. The plan is described more fully in Note 9.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income
(loss) includes unrealized gains and losses on securities available for sale, which are also recognized as separate
components of equity. Accumulated other comprehensive income (loss) at December 31, 2013 and 2012 is solely related
to unrealized gains and losses on investment securities.
F-13
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
Reclassification adjustments have been determined for all components of other comprehensive income or loss reported
in the consolidated statements of changes in shareholders’ equity.
Statements of Cash Flows
Cash and cash equivalents are defined to include cash on-hand, noninterest and interest-bearing amounts due from other
banks and federal funds sold. Generally, federal funds are sold for one-day periods. The Company reports net cash flows
for customer loan transactions and deposit transactions.
Bank-Owned Life Insurance
Bank-owned life insurance policies are carried at their cash surrender value. The Company recognizes tax-free income
from the periodic increases in the cash surrender value of these policies and from death benefits.
Goodwill
Goodwill is tested at least annually for impairment. If the implied fair value of goodwill is lower than its carrying amount,
goodwill impairment is indicated and goodwill is written down to its implied fair value. Subsequent increases in goodwill
value are not recognized in the consolidated financial statements.
Reclassifications
Certain reclassifications have been made to the 2012 financial statements to conform to the 2013 financial statement
presentation. These reclassifications had no effect on net income.
Note 2:
Cash and Cash Equivalents
At December 31, 2013, the Company’s interest-bearing cash accounts at other institutions did not exceed the limits for
full FDIC insurance coverage. However, approximately $7,064 and $44,046 of cash is held by the FHLB of Indianapolis
and Federal Reserve Bank of Chicago, respectively, which are not federally insured.
The Company is required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank. The reserve
required at December 31, 2013 was $267.
F-14
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
Note 3:
Securities
Securities at December 31, 2013 and 2012 are as follows:
Amortized
Cost
2013
Gross Unrealized
Gains
Losses
Fair
Value
Securities available for sale
U.S. Government-sponsored enterprises
$
57,569
$
470
$
Municipals
Mortgage-backed and asset-backed securities –
government-sponsored enterprises
Mortgage-backed and asset-backed securities –
private labeled
Other securities
46,126
75,058
1,313
5,025
1,080
696
9
—
Total available for sale
$
185,091
$
2,255
$
(1,762) $
(883)
56,277
46,323
(1,813)
73,941
(90)
(1,389)
(5,937) $
1,232
3,636
181,409
Amortized
Cost
2012
Gross Unrealized
Gains
Losses
Fair
Value
Securities available for sale
U.S. Government-sponsored enterprises
$
18,666
$
953
$
(1) $
Municipals
Mortgage-backed and asset-backed securities –
government-sponsored enterprises
Mortgage-backed and asset-backed securities –
private labeled
Other securities
39,999
75,782
2,696
16,753
2,685
1,884
17
105
Total available for sale
$
153,896
$
5,644
$
(144)
(177)
(260)
(2,265)
(2,847) $
19,618
42,540
77,489
2,453
14,593
156,693
The carrying value of securities at December 31, 2013 is shown below by their contractual maturity date. Actual maturities
will differ because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Within one year
One to five years
Five to ten years
After ten years
Mortgage-backed and asset-backed securities – government-sponsored enterprises
Mortgage-backed and asset-backed securities – private labeled
Available for Sale
Amortized
Cost
Fair
Value
$
2,000
$
24,688
17,404
64,628
108,720
75,058
1,313
1,962
24,344
17,381
62,549
106,236
73,941
1,232
Totals
$
185,091
$
181,409
Gross gains of $461 and $56, and gross losses of $524 and $8 resulting from sales of available-for-sale securities were
realized for 2013 and 2012, respectively.
F-15
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
Certain investments in debt securities are reported in the consolidated financial statements at an amount less than their
historical cost. Total fair value of these investments at December 31, 2013 and 2012 was $109,946 and $41,986, which
is approximately 61% and 27%, respectively, of the Company’s available-for-sale securities portfolio. These declines
primarily resulted from fluctuations in market interest rates after purchase.
Except as discussed below, management believes the declines in fair value for these securities are temporary.
Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be
reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.
The following tables show the Company’s investments’ gross unrealized losses and fair value, aggregated by investment
category and length of time that individual securities have been in a continuous unrealized loss position at December 31,
2013 and 2012:
Securities available for sale:
U.S. Government-sponsored
enterprises
Municipals
Mortgage-backed and asset-backed
securities - government-sponsored
enterprises
Mortgage-backed and asset-backed
securities – private labeled
Other securities
Securities available for sale:
U.S. Government-sponsored
enterprises
Municipals
Mortgage-backed and asset-backed
securities - government-sponsored
enterprises
Mortgage-backed and asset-backed
securities – private labeled
Other securities
Less Than 12 Months
2013
12 Months or Longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
$
43,085
$
14,105
(1,761) $
(882)
14
$
351
(1) $
(1)
43,099
$
14,456
(1,762)
(883)
47,875
(1,813)
—
—
47,875
(1,813)
43
1,962
$ 107,070
$
(1)
(38)
(4,495) $
838
1,673
2,876
$
881
(89)
(1,351)
3,635
(1,442) $ 109,946
$
(90)
(1,389)
(5,937)
Less Than 12 Months
2012
12 Months or Longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
$
— $
470
— $
(4)
119
$
(1) $
119
$
2,618
(140)
3,088
(1)
(144)
28,505
(177)
—
—
28,505
(177)
—
5,947
$
34,922
$
—
(53)
(234) $
1,504
2,823
7,064
$
(260)
(2,212)
(2,613) $
1,504
8,770
41,986
$
(260)
(2,265)
(2,847)
F-16
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
U.S. Government Sponsored Enterprise and Municipal Securities
The unrealized losses on the Company’s investments in securities issued by U.S. Government sponsored enterprises and
municipal securities were caused by interest rate changes. The contractual terms of those investments do not permit the
issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does
not intend to sell the investments at a loss and it is not more likely than not the Company will be required to sell the
investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those
investments to be other than temporarily impaired at December 31, 2013.
Mortgage-Backed Securities
The unrealized losses on the Company’s investment in mortgage-backed securities were caused by interest rate changes.
The Company expects to recover the amortized cost basis over the term of the securities. Because the decline in market
value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell
the investments at a loss and it is not more likely than not the Company will be required to sell the investments before
recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be
other than temporarily impaired at December 31, 2013.
For identified mortgage-backed securities in the investment portfolio, an extensive, quarterly review is conducted to
determine if an other-than-temporary impairment has occurred. Various inputs to the economic models are used to
determine if an unrealized loss is other than temporary. The most significant inputs are voluntary prepay rates, default
rates, liquidation rates and loss severity.
To determine if the unrealized loss for mortgage-backed securities is other than temporary, the Company projects total
estimated defaults of the underlying assets (mortgages) and multiplies that calculated amount by an estimate of realizable
value upon sale in the marketplace (severity) in order to determine the projected collateral loss. The Company also
evaluates the current credit enhancement underlying the bond to determine the impact on cash flows. If the Company
determines that a given mortgage-backed security position will be subject to a write-down or loss, the Company records
the expected credit loss as a charge to earnings.
Other Securities
The Company’s unrealized loss on investments in other securities is primarily made up of two investments.
The first investment is a $2,000 par investment in I-PreTSL I B-2 pooled trust security. The unrealized loss was primarily
caused by a sector downgrade by several industry analysts. The Company currently expects to recover the entire amortized
cost basis of the investment. The determination of no credit loss was calculated by comparing expected discounted cash
flows based on performance indicators of the underlying assets in the security to the carrying value of the investment.
Because the Company does not intend to sell the investment and it is not more likely than not the Company will be
required to sell the investment before recovery of its amortized cost basis, which may be maturity, it does not consider
the remainder of the investment to be other than temporarily impaired at December 31, 2013.
The second investment is a $2,000 par investment in ALESCO IV Series B2 pooled trust security on which the Company
recognized an other than temporary impairment loss. The unrealized loss was primarily caused by (a) a decrease in
performance and (b) a sector downgrade by several industry analysts. The Company currently expects this security to
settle at a price less than the contractual amount of the investment (that is, the Company expects to recover less than the
entire amortized cost basis of the security). The Company has recognized a loss equal to the credit loss, establishing a
new, lower amortized cost basis. The credit loss was calculated by comparing expected discounted cash flows based on
performance indicators of the underlying assets in the security to the carrying value of the investment. Because the
Company does not intend to sell the investment and it is unlikely the Company will be required to sell the investment
before recovery of its new, lower amortized cost basis, which may be maturity, it does not consider the remainder of the
investment in ALESCO IV to be other-than-temporarily impaired at December 31, 2013.
F-17
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
The credit losses recognized in earnings during the years ended December 31, 2013 and 2012 were as follows:
ALESCO IV Series B2
Mortgage-backed and asset-backed securities – private labeled
Credit Losses Recognized on Investments
2013
2012
$
$
— $
49
49
$
112
140
252
Certain debt securities have experienced fair value deterioration due to credit losses, as well as due to other market factors,
but are not otherwise other than temporarily impaired.
The following table provides information about debt securities for which only a credit loss was recognized in income and
other losses are recorded in other comprehensive income (loss).
Credit losses on debt securities held
January 1, 2012
Realized losses related to OTTI
Additions related to OTTI losses not previously recognized
Additions related to increases in previously recognized OTTI losses
December 31, 2012
Realized losses related to OTTI
Additions related to OTTI losses not previously recognized
Additions related to increases in previously recognized OTTI losses
December 31, 2013
Accumulated
Credit Losses
$
$
1,835
(350)
68
184
1,737
(603)
31
18
1,183
Amounts reclassified from accumulated other comprehensive income (loss) and the affected line items in the consolidated
statements of income during the years ended December 31, 2013 and 2012, were as follows:
Securities available for sale
Gain (loss) realized in earnings
OTTI losses recognized in earnings
Total reclassified amount before tax
Tax benefit
Total reclassifications out of accumulated
other comprehensive income (loss)
$
$
Amounts Reclassified from
Accumulated Other
Comprehensive Income (Loss)
for the Year Ended
December 31,
2013
2012
Affected Line Item in the
Statements of Income
(63) $
48 Gain (loss) on sale of securities
Other-than-temporary impairment
loss recognized in net income
Income Before Income Taxes
Income Tax Provision
Net Income
(252)
(204)
69
(135)
(49)
(112)
38
(74) $
F-18
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
Note 4:
Loans Receivable
Categories of loans at December 31, include:
Real estate loans
Residential
Commercial
Total real estate loans
Commercial loans
Consumer loans
Total loans
Deferred loan origination costs and premiums and discounts on purchased loans
Allowance for loan losses
Total net loans
December 31,
2013
2012
$
191,007
$
128,815
142,429
333,436
55,168
107,562
496,166
4,987
(5,426)
495,727
$
84,918
213,733
14,271
126,486
354,490
3,671
(5,833)
352,328
$
The risk characteristics of each loan portfolio segment are summarized as follows:
Commercial Real Estate: These loans are viewed primarily as cash flow loans and secondarily as loans secured by real
estate. Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans
is generally dependent on the successful operation of the property securing the loan or the business conducted on the
property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate
markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse
in terms of property type and geographic location. Management monitors and evaluates commercial real estate loans
based on property financial performance, collateral value, and other risk grade criteria. As a general rule, the Company
avoids financing special use projects or properties outside of its designated market areas unless other underwriting factors
are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans
versus nonowner-occupied loans.
Commercial: Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the
underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected, and the
collateral securing these loans may fluctuate in value. Loans are made for working capital, equipment purchases, or other
purposes. Most commercial loans are secured by the assets being financed and may incorporate a personal guarantee;
however, some short-term loans may be made on an unsecured basis.
Residential and Consumer: With respect to residential loans that are secured by 1-4 family residences and are generally
owner occupied, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage
insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family
residences, and consumer loans are secured by consumer assets such as automobiles, horse trailers, or recreational vehicles.
Some consumer loans are unsecured, such as small installment loans and certain lines of credit. Repayment of these loans
is primarily dependent upon the personal income of the borrowers, which can be impacted by economic conditions in
their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on
residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a
large number of borrowers.
The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on
portfolio segment and impairment method as of December 31, 2013 and 2012:
F-19
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
Residential
Real Estate
Commercial
Real Estate Commercial
Consumer
Total
2013
Allowance for loan losses:
Balance, beginning of year
Provision charged to expense
Losses charged off
Recoveries
Balance, end of year
Ending balance: individually evaluated
for impairment
Ending balance: collectively evaluated
for impairment
Loans:
Ending balance
Ending balance: individually evaluated
for impairment
Ending balance: collectively evaluated
for impairment
$
$
$
$
$
$
$
1,149
$
136
(164)
98
1,219
116
1,103
191,007
1,684
189,323
$
$
$
$
$
$
3,107
(352)
(238)
—
2,517
98
2,419
142,429
1,054
141,375
$
$
$
$
$
$
$
371
378
—
70
819
$
— $
819
$
$
1,206
$
162
(810)
313
871
28
843
$
$
$
$
$
$
5,833
324
(1,212)
481
5,426
242
5,184
496,166
3,077
493,089
55,168
$
107,562
— $
339
55,168
$
107,223
2012
Allowance for loan losses:
Balance, beginning of year
Provision charged to expense
Losses charged off
Recoveries
Balance, end of year
Ending balance: individually evaluated
for impairment
Ending balance: collectively evaluated
for impairment
Loans:
Ending balance
Ending balance: individually evaluated
for impairment
Ending balance: collectively evaluated
for impairment
Residential
Real Estate
Commercial
Real Estate Commercial
Consumer
Total
$
$
$
$
$
$
$
1,099
411
(509)
148
1,149
206
943
128,815
2,482
126,333
$
$
$
$
$
$
$
2,485
2,086
(1,464)
—
3,107
682
2,425
84,918
2,467
82,451
$
$
$
$
$
$
$
333
(37)
—
75
371
$
$
1,739
392
(1,438)
513
1,206
— $
54
371
$
1,152
14,271
$
126,486
— $
474
14,271
$
126,012
$
$
$
$
$
$
$
5,656
2,852
(3,411)
736
5,833
942
4,891
354,490
5,423
349,067
The Company utilizes a risk grading matrix to assign a risk grade to each of its commercial loans. Loans are graded on
a scale of 1 to 8. A description of the general characteristics of the 8 risk grades is as follows:
• Grades 1 & 2 - These grades are assigned to loans with very high credit quality borrowers of investment or near
investment grade or where the loan is primarily secured by cash or conservatively margined high quality
marketable securities. These borrowers are generally publicly traded, have significant capital strength, possess
investment grade public debt ratings, demonstrate low leverage, exhibit stable earnings and growth, and have
ready access to various financing alternatives.
F-20
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
• Grades 3 & 4 - Loans assigned these grades include loans to borrowers possessing solid credit quality with
acceptable risk. Borrowers in these grades are differentiated from higher grades on the basis of size (capital and/
or revenue), leverage, asset quality, stability of the industry or specific market area and quality/coverage of
collateral. These borrowers generally have a history of consistent earnings and reasonable leverage.
• Grade 5 - This grade includes “pass grade” loans to borrowers which require special monitoring because of
deteriorating financial results, declining credit ratings, decreasing cash flow, increasing leverage, marginal
collateral coverage or industry stress that has resulted or may result in a changing overall risk profile.
• Grade 6 - This grade is for “Special Mention” loans in accordance with regulatory guidelines. This grade is
intended to include loans to borrowers whose credit quality has clearly deteriorated and where risk of further
decline is possible unless active measures are taken to correct the situation. Weaknesses are considered potential
at this state and are not yet fully defined.
• Grade 7 - This grade includes “Substandard” loans in accordance with regulatory guidelines. Loans categorized
in this grade possess a well-defined credit weakness, and the likelihood of repayment from the primary source
is uncertain. Significant financial deterioration has occurred, and very close attention is warranted to ensure the
full repayment without loss. Collateral coverage may be marginal, and the accrual of interest has been suspended.
• Grade 8 - This grade includes “Doubtful” loans in accordance with regulatory guidelines. Such loans have been
placed on nonaccrual status and may be heavily dependent upon collateral possessing a value that is difficult to
determine or based upon some near-term event which lacks clear certainty. These loans have all of the weaknesses
of those classified as Substandard; however, based on existing conditions, these weaknesses make full collection
of the principal balance highly improbable.
The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment
activity as of December 31, 2013 and 2012:
Rating:
1-5 Pass
6 Special Mention
7 Substandard
8 Doubtful
Total
Performing
Nonaccrual
Total
2013
Commercial
Real Estate
Commercial
$
139,052
$
2,323
1,054
—
54,035
1,133
—
—
$
142,429
$
55,168
2013
Residential
Real Estate
Consumer
$
$
190,377
630
191,007
$
$
107,412
150
107,562
F-21
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
2012
Commercial
Real Estate
Commercial
$
$
$
$
80,830
$
13,860
1,621
2,467
—
411
—
—
84,918
$
14,271
2012
Residential
Real Estate
Consumer
127,426
1,389
128,815
$
$
126,331
155
126,486
Rating:
1-5 Pass
6 Special Mention
7 Substandard
8 Doubtful
Total
Performing
Nonaccrual
Total
The following tables present the Company’s loan portfolio aging analysis as of December 31, 2013 and 2012:
30-59
Days
Past Due
60-89
Days
Past Due
90 Days
or More
Past Due
Total
Past Due
Current
Total
Loans
Receivable
Nonaccrual
Loans
Total Loans
90 Days or
More Past
Due
and Accruing
2013
Residential real estate
Commercial real estate
Commercial
Consumer
Total
$
$
122
$
— $
—
—
484
606
$
—
—
45
45
$
603
955
—
84
725
955
—
613
$
190,282
$
191,007
$
630
$
141,474
55,168
106,949
142,429
55,168
107,562
1,054
—
150
$
1,642
$
2,293
$
493,873
$
496,166
$
1,834
$
—
—
—
18
18
30-59
Days
Past Due
60-89
Days
Past Due
90 Days
or More
Past Due
Total
Past Due
Current
Total
Loans
Receivable
Nonaccrual
Loans
Total Loans
90 Days or
More Past
Due
and Accruing
2012
Residential real estate
$
130
$
Commercial real estate
Commercial
Consumer
Total
—
—
1,025
$
1,155
$
5
—
—
148
153
$
1,555
$
1,690
$
127,125
$
128,815
$
1,389
$
2,362
—
122
2,362
—
1,295
82,556
14,271
84,918
14,271
125,191
126,486
2,362
—
155
$
4,039
$
5,347
$
349,143
$
354,490
$
3,906
$
450
—
—
21
471
A loan is considered impaired, in accordance with the impairment accounting guidance in ASC Topic 310, Receivables,
when based on current information and events, it is probable the Company will be unable to collect all amounts due from
the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial
loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers
experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment
extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.
F-22
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
The following tables present the Company’s impaired loans as of December 31, 2013 and 2012:
Loans without a specific valuation
allowance
Residential real estate loans
Commercial real estate loans
Commercial loans
Consumer loans
Total
Loans with a specific valuation
allowance
Residential real estate loans
Commercial real estate loans
Commercial loans
Consumer loans
Total
Total impaired loans
Residential real estate loans
Commercial real estate loans
Commercial loans
Consumer loans
Total
Recorded
Balance
Unpaid
Principal
Balance
Specific
Allowance
Average
Balance
Interest
Income
2013
$
$
$
$
$
$
1,551
$
1,842
$
— $
1,894
$
956
—
271
2,310
—
326
—
—
—
239
—
315
2,778
$
4,478
$
— $
2,448
$
133
$
141
$
116
$
66
$
98
—
68
299
1,684
1,054
—
339
$
$
98
—
80
319
1,983
2,408
—
406
$
$
98
—
28
242
116
98
—
28
$
$
1,617
—
78
1,761
1,960
1,856
—
393
$
$
3,077
$
4,797
$
242
$
4,209
$
29
—
—
28
57
3
5
—
2
10
32
5
—
30
67
F-23
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
Loans without a specific valuation
allowance
Residential real estate loans
Commercial real estate loans
Commercial loans
Consumer loans
Total
Loans with a specific valuation
allowance
Residential real estate loans
Commercial real estate loans
Commercial loans
Consumer loans
Total
Total impaired loans
Residential real estate loans
Commercial real estate loans
Commercial loans
Consumer loans
Total
Recorded
Balance
Unpaid
Principal
Balance
Specific
Allowance
Average
Balance
Interest
Income
2012
$
$
$
$
$
$
2,047
$
2,357
$
— $
1,685
$
—
—
380
—
—
577
—
—
—
275
—
385
2,427
$
2,934
$
— $
2,345
$
435
$
442
$
2,467
—
94
2,996
2,482
2,467
—
474
$
$
2,925
—
206
3,573
2,799
2,925
—
783
$
$
$
$
$
206
682
—
54
942
206
682
—
54
514
$
6,089
$
$
—
93
6,696
2,199
6,364
—
478
5,423
$
6,507
$
942
$
9,041
$
29
—
—
—
29
—
6
—
—
6
29
6
—
—
35
In the course of working with troubled borrowers, the Company may choose to restructure the contractual terms of certain
loans in an effort to work out an alternative payment schedule with the borrower in order to optimize the collectability
of the loan. Any loan modified is reviewed by the Company to identify if a TDR has occurred, which is when the Company
grants a concession to the borrower that it would not otherwise consider based on economic or legal reasons related to a
borrower’s financial difficulties. Terms may be modified to fit the ability of the borrower to repay in line with its current
financial status or the loan may be restructured to secure additional collateral and/or guarantees to support the debt, or a
combination of the two.
Loans classified as a TDR during the years ended December 31, 2013 and 2012 are shown in the tables below. These
modifications consisted primarily of interest rate and maturity date concessions.
Residential real estate
Commercial real estate
Commercial
Consumer
Total
2013
Modifications
Recorded
Balance
Before
Recorded
Balance
After
Number of
Contracts
— $
— $
—
—
4
4
$
—
—
25
25
$
—
—
—
25
25
F-24
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
Residential real estate
Commercial real estate
Commercial
Consumer
Total
2012
Modifications
Recorded
Balance
Before
Recorded
Balance
After
Number of
Contracts
1
—
—
8
9
$
$
29
—
—
140
169
$
$
29
—
—
122
151
There were zero TDR loans which had payment defaults during the year ended December 31, 2013. TDR loans which
had payment defaults during the year ended December 31, 2012 are shown in the table below. Default occurs when a loan
is 90 days or more past due or transferred to nonaccrual within 12 months of restructuring.
Residential real estate
Commercial real estate
Commercial
Consumer
Total
Number
of
Defaults
2012
1
—
—
1
2
$
$
Recorded
Balance
29
—
—
20
49
The following tables summarize loan modifications that occurred during the years ended December 31, 2013 and 2012:
Payment Extension
Principal Reduction
Rate Reduction
Number
Amount
Number
Amount
Number
Amount
2013
Residential real estate
Commercial real estate
Commercial
Consumer
Total
— $
—
—
2
2
$
—
—
—
2
2
—
—
—
—
—
— $
—
—
2
2
$
—
—
—
23
23
— $
—
—
—
— $
2012
Residential real estate
Commercial real estate
Commercial
Consumer
Total
Payment Extension
Principal Reduction
Rate Reduction
Number
Amount
Number
Amount
Number
Amount
1
—
—
3
4
$
$
29
—
—
16
45
— $
—
—
2
2
$
—
—
—
28
28
— $
—
—
3
3
$
—
—
—
78
78
Principal reductions were made based on orders from a bankruptcy court. Payment extensions and rate reductions have
proven to be successful in optimizing the overall collectability of the loan by increasing the period of time that the borrower
is able to make required payments to the Company.
F-25
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
Note 5:
Premises and Equipment
Premises and equipment at December 31, 2013 and 2012 consists of the following:
Land
Building and improvements
Furniture and equipment
Less: accumulated depreciation
December 31,
2013
2012
$
$
2,500
$
2,858
4,883
(3,107)
7,134
$
—
159
3,362
(2,728)
793
In the first quarter of 2013, the Company acquired an office building with approximately 52,000 square feet of office
space and related real estate located in Fishers, Indiana. The Company acquired the property for the current and future
operations of the Bank for $4,083. The cost basis of the building is being depreciated on a straight-line basis over 39
years. The remaining increase is primarily related to investments in building and leasehold improvements at both the
Fishers location and the Company’s corporate office.
Note 6:
Goodwill
The change in the carrying amount of goodwill for the two years ended December 31, 2013 was:
Balance as of January 1, 2012
Changes in goodwill during the year
Balance as of December 31, 2012
Changes in goodwill during the year
Balance as of December 31, 2013
$
$
4,687
—
4,687
—
4,687
Goodwill is tested for impairment on an annual basis as of August 31, or whenever events or changes in circumstances
indicate the carrying amount of goodwill exceeds its implied fair value. No events or changes in circumstances have
occurred since the August 31, 2013 annual impairment test that would suggest it was more likely than not goodwill
impairment existed.
F-26
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
Note 7:
Deposits
Deposits at December 31, 2013 and 2012 are as follows:
Regular savings accounts
Noninterest-bearing demand deposit accounts
Interest-bearing demand deposit accounts
Money market accounts
Total transaction accounts
Certificates of deposits
Brokered deposits
Premiums on brokered deposits
Total deposits
$
December 31,
2013
2012
$
14,330
19,386
73,748
255,169
362,633
292,685
17,890
(113)
11,583
13,187
73,660
202,388
300,818
211,542
18,490
(159)
$
673,095
$
530,691
Certificates of deposit in the amount of $100 or more totaled approximately $237,273 and $133,570 at December 31,
2013 and 2012, respectively.
A summary of certificate accounts by scheduled maturities at December 31, 2013 is as follows:
2014
2015
2016
2017
2018
Thereafter
Note 8:
FHLB Advances
$
$
141,810
75,971
65,186
13,423
14,185
—
310,575
The Company has outstanding FHLB advances of $31,793 and $40,686 as of December 31, 2013 and 2012, respectively.
Advances, at interest rates from 0.39% to 4.57% at December 31, 2013, are subject to restrictions or penalties in the event
of prepayment. The advances are collateralized by mortgage loans pledged and held by the Company and investment
securities pledged by the Company and held in safekeeping with the FHLB. Mortgage loans pledged were approximately
$96,195 and $0 as of December 31, 2013 and 2012, respectively, and the fair value of investment securities pledged was
approximately $73,698 and $49,523 as of December 31, 2013 and 2012, respectively.
F-27
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
The FHLB advances are scheduled to mature according to the following schedule:
2014
2015
2016
2017
Thereafter
Deferred prepayment penalties on advance restructure
Note 9:
Benefit Plans
401(k) Plan
Amount
15,000
11,000
3,000
—
3,000
32,000
(207)
31,793
$
$
The Company has a 401(k) plan established for substantially all full-time employees, as defined. Employee contributions
are limited to the maximum established by the Internal Revenue Service on an annual basis. The Company has elected
to match contributions equal to 100% of the first 1% of employee deferrals and then 50% on deferrals over 1% up to a
maximum of 6% of an individual’s total eligible salary, as defined by the plan. Employer-matching contributions begin
vesting after one year at a rate of 50% per year of employment and are fully vested after the completion of two years of
service. Contributions each year during the years ended December 31, 2013 and 2012, totaled approximately $252 and
$214, respectively.
Employment Agreements
The Company has entered into employment or change in control agreements with certain executives that provide for the
continuation of salary and certain benefits for a specified period of time under certain conditions. Under the terms of the
agreements, these payments could occur in the event of a change in control of the Company, as defined, along with other
specific conditions.
2013 Equity Incentive Plan
The 2013 Equity Incentive Plan (the “2013 Plan”) authorizes the issuance of 750,000 shares of the Company’s common
stock in the form of equity-based awards to employees, directors, and other eligible persons. The 2013 Plan replaced the
2006 Stock Option Plan, which had 595,500 shares of common stock available for issuance when the 2013 Plan became
effective. Under the terms of the 2013 Plan, the pool of shares available for issuance may be used for available types of
equity awards under the 2013 Plan, which includes stock options, stock appreciation rights, restricted stock awards, stock
unit awards, and other stock-based awards. All employees, consultants and advisors of the Company or any subsidiary,
as well as all non-employee directors of the Company, are eligible to receive awards under the 2013 Plan.
The Company recorded $387 of share-based compensation expense for the year ended December 31, 2013 related to
awards made under the 2013 Plan. The Company recorded $0 share-based compensation expense in the same period of
2012 for the 2006 Stock Option Plan.
F-28
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
The following table summarizes the status of the Company’s restricted stock awards as of December 31, 2013, and activity
for the year ended December 31, 2013:
Nonvested at January 1, 2013
Granted
Vested
Forfeited
Restricted
Stock
Awards
Weighted-
Average Grant
Date Fair Value
Per Share
— $
46,232
—
—
—
25.09
—
—
Nonvested at December 31, 2013
46,232
$
25.09
As of December 31, 2013, the total unrecognized compensation cost related to nonvested awards was $773, with a
weighted-average expense recognition period of 2.00 years.
Directors Deferred Stock Plan
Until January 1, 2014, the Company had a stock compensation plan for members of the Board of Directors (“Directors
Deferred Stock Plan”). The Company reserved 180,000 shares of common stock that could have been issued pursuant to
the Directors Deferred Stock Plan. The plan provided directors the option to elect to receive up to 100% of their annual
retainer in either common stock or deferred stock rights. Deferred stock rights were to be settled in common stock following
the end of the deferral period payable on the basis of one share of common stock for each deferred stock right.
Director compensation totaled $205 and $144 in 2013 and 2012, respectively, of which $127 and $95 in 2013 and 2012,
respectively, were paid in deferred stock rights. Awards were granted on January 1 at fair value and vested from January
1 until December 31. The Company recognized compensation expense ratably over the vesting period based upon the
fair value of the stock on the grant date.
The following is an analysis of deferred stock rights and common stock related to the Directors Deferred Stock Plan for
the year ended December 31, 2013:
Outstanding, beginning of year
Granted
Exercised
Outstanding, end of year
Deferred
Rights
70,315
9,361
—
79,676
Beginning on January 1, 2014, tandem awards of shares of restricted stock and deferred stock units issued under the 2013
Plan replaces the Directors Deferred Stock Plan.
F-29
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
Note 10:
Income Taxes
The provision (credit) for income taxes consists of the following:
Current
Deferred
Total
2013
2012
$
$
(693) $
2,259
1,566
$
2,385
(191)
2,194
Income tax provision (credit) is reconciled to the 34% statutory rate applied to pre-tax income as follows:
Statutory rate times pre-tax income
Add (subtract) the tax effect of:
Income from tax-exempt securities
State income tax, net of federal tax effect
Bank-owned life insurance
Other differences
Total income taxes
The net deferred tax asset at December 31 consists of the following:
Deferred tax assets (liabilities)
Allowance for loan losses
Unrealized (gain) loss on available for sale securities
Other than temporarily impaired securities
Mark to market adjustments
Depreciation
Deferred compensation
Deferred loan origination fees
Prepaid assets
Other
Total deferred tax assets, net
Note 11:
Related Party Transactions
2013
2012
$
2,094
$
2,652
(514)
33
(135)
88
1,566
2013
1,930
1,310
—
(1,840)
(270)
510
(209)
(205)
691
1,917
$
$
$
(533)
36
(129)
168
2,194
2012
2,042
(979)
415
371
(267)
460
(109)
(92)
237
2,078
$
$
$
In the normal course of business, we may enter into transactions with various related parties. In management’s opinion,
such loans, other extensions of credit, and deposits were made in the ordinary course of business and were made on
substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable
transactions with other persons. Further, in management’s opinion, these loans did not involve more than normal risk of
collectibility or present other unfavorable features.
Deposits from related parties held by the Company at December 31, 2013 and 2012 totaled $13,904 and $14,646,
respectively.
The Company’s card processing services are provided by OneBridge, Inc., which was controlled by a shareholder of the
Company. The shareholder sold OneBridge subsequent to December 31, 2013. Total expenses incurred related to card
processing provided by OneBridge during the years ended December 31, 2013 and 2012, were approximately $95 and
$109, respectively.
F-30
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
Note 12:
Regulatory Capital Requirements
The Company and the Bank are each subject to regulatory capital requirements administered by federal banking regulatory
agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated
financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting practices. These capital amounts and
classification are also subject to qualitative judgments by the regulators about components, risk weightings and other
factors. Furthermore, the regulators of the Company and Bank could require adjustments to regulatory capital not reflected
in these consolidated financial statements.
Quantitative measures that have been established by regulation to ensure capital adequacy require the Company to maintain
minimum capital amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations)
to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined).
To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios as set forth in the table. As of December 31, 2013, the most recent notification from the FDIC categorized
the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or
events since that notification that management believes have changed the Bank’s categories.
During 2013, we changed the methodology we use to determine a component of our risk-weighted assets for regulatory
capital purposes. The old methodology overstated the risk to which we were exposed on these assets, as we reported as
assets sold with recourse loans we had sold to investors who had no right to return them. We discussed our intention to
make this change with our regulators and began using the new methodology in the Company’s June 30, 2013 regulatory
filings. We subsequently amended the Company’s December 31, 2012 and March 31, 2013 regulatory filings to conform
the computation of these regulatory capital ratios to the new methodology. The change in methodology had no impact on
our financial statements prepared in accordance with GAAP because the transfers of the assets to the investors were
considered true sales under relevant accounting guidance.
As of December 31, 2013:
Total capital (to risk-weighted assets)
Consolidated
Bank
Tier 1 capital (to risk-weighted assets)
Consolidated
Bank
Tier 1 capital (to average assets)
Consolidated
Bank
As of December 31, 2012:
Total capital (to risk-weighted assets)
Consolidated
Bank
Tier 1 capital (to risk-weighted assets)
Consolidated
Bank
Tier 1 capital (to average assets)
Consolidated
Bank
Actual
Minimum
Capital
Requirement
Minimum to be
Well Capitalized
Under Prompt
Corrective Actions
Amount
Ratio
Amount
Ratio
Amount
Ratio
$
$
96,981
77,862
88,555
72,436
88,555
72,436
60,489
59,678
54,844
54,036
54,844
54,036
F-31
17.1% $
13.8%
45,386
45,287
8.0%
N/A
8.0% $
56,609
15.6%
12.8%
11.7%
9.6%
22,693
22,644
30,385
30,329
4.0%
4.0%
4.0%
4.0%
N/A
33,965
N/A
37,911
13.5% $
13.3%
35,960
35,937
8.0%
N/A
8.0% $
44,921
12.2%
12.0%
8.9%
8.8%
17,980
17,969
24,667
24,653
4.0%
4.0%
4.0%
4.0%
N/A
26,953
N/A
30,817
N/A
10.0%
N/A
6.0%
N/A
5.0%
N/A
10.0%
N/A
6.0%
N/A
5.0%
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
Note 13:
Commitments and Credit Risk
In the normal course of business, the Company makes various commitments to extend credit which are not reflected in
the accompanying consolidated financial statements. At December 31, 2013 and 2012, the Company had outstanding
loan commitments totaling approximately $49,100 and $33,598, respectively.
As of December 31, 2013, the Company had leased several office facilities under various operating leases. The leases
may be subject to additional rentals based on building operating costs and property taxes in excess of specified amounts.
Future minimum cash lease payments are as follows:
2014
2015
2016
2017
2018
Thereafter
Amount
598
611
557
517
526
1,168
3,977
$
$
Note 14:
Initial Adoption of Fair Value Option
ASC Topic 825, Financial Instruments, permits entities to measure recognized financial assets and financial liabilities
using either historical cost or the fair value option at specified election dates. During 2013, the Company began using
derivative financial instruments to manage exposure to interest rate risk in its mortgage banking business. These derivative
financial instruments are recorded at fair value with changes in fair value reflected in noninterest income on the
consolidated statements of income.
To mitigate the volatility reported in earnings caused by measuring related assets and liabilities differently, the Company
has elected the fair value option for the hedged item, mortgage loans held for sale under mandatory pricing agreements,
that were originated on or after April 1, 2013. The Company continues to record mortgage loans held for sale under best-
efforts pricing agreements at the lower of cost or fair value. Prior to April 1, 2013, all mortgage loans held for sale were
carried at the lower of cost or fair value.
Electing the fair value option had the following effect on the 2013 financial statements:
December 31, 2013
Aggregate
Value
Loss
Fair Value
Loans held for sale
$
24,258
$
(4) $
24,254
Note 15:
Fair Value of Financial Instruments
ASC Topic 820, Fair Value Measurement, defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also
specifies a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to
measure fair value:
Level 1 Quoted prices in active markets for identical assets or liabilities
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities
F-32
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value
of the assets or liabilities
Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring
basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets
pursuant to the valuation hierarchy.
Securities
Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation
hierarchy. Level 1 securities include highly liquid mutual funds. If quoted market prices are not available, then fair values
are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.
Level 2 securities include U.S. Government-sponsored enterprises, mortgage and asset-backed securities and obligations
of state, municipals and certain corporate securities. Matrix pricing is a mathematical technique widely used in the banking
industry to value investment securities without relying exclusively on quoted prices for specific investment securities but
rather relying on the investment securities’ relationship to other benchmark quoted investment securities.
In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy
and include certain other securities. Fair values are calculated using discounted cash flows. Discounted cash flows are
calculated based off of the anticipated future cash flows updated to incorporate loss severities and volatility. Rating agency
and industry research reports as well as default and deferral activity are reviewed and incorporated into the calculation.
Loans Held for Sale
The fair value of loans held for sale is determined using quoted prices for a similar asset, adjusted for specific attributes
of that loan (Level 2).
Forward Contracts
The fair values of forward contracts on to-be-announced securities are determined using quoted prices in active markets,
or benchmarked thereto (Level 1).
Interest Rate Lock Commitments
The fair value of interest rate lock commitments (IRLCs) are determined using the projected sale price of individual loans
based on changes in market interest rates, projected pull-through rates (the probability that an IRLC will ultimately result
in an originated loan), the reduction in the value of the applicant’s option due to the passage of time, and the remaining
origination costs to be incurred based on management’s estimate of market costs (Level 3).
The following tables present the fair value measurements of securities available for sale recognized in the accompanying
consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in
which the fair value measurements fall at December 31, 2013 and 2012:
F-33
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
2013
Fair Value Measurements Using
Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1)
Fair
Value
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
U.S. Government-sponsored enterprises
$
56,277
$
— $
56,277
$
Municipals
Mortgage-backed and asset-backed securities -
government-sponsored enterprises
Mortgage-backed and asset-backed securities - private
labeled
Other securities
46,323
73,941
1,232
3,636
—
—
—
1,963
46,323
73,941
1,232
—
Total available for sale securities
$
181,409
$
1,963
$
177,773
$
Loans held for sale (mandatory pricing agreements)
Forward contracts
Interest rate lock commitments
24,254
227
79
—
227
—
24,254
—
—
—
—
—
—
1,673
1,673
—
—
79
2012
Fair Value Measurements Using
Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1)
Fair
Value
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
U.S. Government-sponsored enterprises
$
19,618
$
— $
19,618
$
Municipals
Mortgage-backed and asset-backed securities -
government-sponsored enterprises
Mortgage-backed and asset-backed securities - private
labeled
Other securities
Total available for sale securities
42,540
77,489
2,453
14,593
156,693
$
$
—
—
—
1,553
1,553
$
42,540
77,489
2,453
12,200
154,300
$
—
—
—
—
840
840
F-34
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized
in the accompanying consolidated balance sheets using significant unobservable (Level 3) inputs:
Balance, January 1, 2012
Total realized and unrealized gains and losses
Included in net income
Included in other comprehensive income
Balance, December 31, 2012
Total realized and unrealized gains and losses
Included in net income
Included in other comprehensive income
Balance, December 31, 2013
$
Securities
Available for
Sale
$
470
Interest Rate
Lock
Commitments
—
$
(112)
482
840
—
833
1,673
$
—
—
—
79
—
79
Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring
basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets
pursuant to the valuation hierarchy.
Impaired Loans (Collateral Dependent)
Loans for which it is probable that the Company will not collect all principal and interest due according to contractual
terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating
fair value using the fair value of the collateral for collateral dependent loans.
If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment
is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor
to the value.
Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is
determined using the fair value method.
The following tables present the fair value measurements recognized in the accompanying consolidated balance sheets
measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value
measurements fall at December 31, 2013 and 2012:
2013
Fair Value Measurements Using
Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1)
Fair
Value
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Impaired loans
$
137
$
— $
— $
137
F-35
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
2012
Fair Value Measurements Using
Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1)
Fair
Value
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Impaired loans
$
1,481
$
— $
— $
1,481
Unobservable (Level 3) Inputs
The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level
3 fair value measurements other than goodwill.
Fair Value at
December 31,
2013
Valuation
Technique
Unobservable
Inputs
1,673 Discounted cash flow
137 Fair value of collateral
Discount margin
Cumulative default %
Loss given default %
Cumulative prepayment %
Discount for type of
property and current
market conditions
Range
6% - 12.5%
2% - 100%
85% - 100%
0% - 100%
0% - 54%
79 Discounted cash flow
Loan closing rates
53% - 97%
Other securities
Collateral dependent
impaired loans
IRLCs
$
$
$
Fair Value at
December 31,
2012
Valuation
Technique
Unobservable
Inputs
Discount margin
Cumulative default %
Loss given default %
Cumulative prepayment %
Range
7% - 14.25%
2% - 100%
85% - 100%
0% - 100%
Marketability discount
12%
Other securities
Collateral dependent
impaired loans
$
$
840 Discounted cash flow
Market comparable
properties
1,481
The following methods were used to estimate the fair value of all other financial instruments recognized in the
accompanying consolidated balance sheets at amounts other than fair value:
Cash and Cash Equivalents
For these instruments, the carrying amount is a reasonable estimate of fair value.
Interest Bearing Time Deposits
The fair value of these financial instruments approximates carrying value.
F-36
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
Loans Held For Sale
The fair value of these financial instruments approximates carrying value.
Loans Receivable
The fair value of loans receivable is estimated by discounting future cash flows using current rates at which similar loans
would be made to borrowers with similar credit ratings and remaining maturities.
Accrued Interest Receivable
The fair value of these financial instruments approximates carrying value.
Federal Home Loan Bank Stock
The carrying amount approximates fair value.
Deposits
The fair value of noninterest-bearing demand deposits and savings and NOW accounts is the amount payable as of the
reporting date. The fair value of fixed maturity certificates of deposit is estimated using rates currently offered for deposits
of similar remaining maturities.
FHLB Advances
The fair value of fixed rate advances is estimated using rates currently offered for similar remaining maturities.
Accrued Interest Payable
The fair value of these financial instruments approximates carrying value.
Subordinated Debt
The fair value of our subordinated debt is estimated using discounted cash flow analysis, based on our current incremental
borrowing rates for similar types of borrowing arrangements.
Commitments
The fair value of commitments to extend credit are based on fees currently charged to enter into similar agreements with
similar maturities and interest rates. The Company determined that the fair value of commitments was zero based on the
contractual value of outstanding commitments at December 31, 2013 and 2012.
F-37
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
The following schedule includes the carrying value and estimated fair value of all financial assets and liabilities at
December 31, 2013 and 2012:
Cash and cash equivalents
Interest bearing time deposits
Loans held for sale (best efforts pricing agreements)
Loans receivable - net
Accrued interest receivable
FHLB stock
Deposits
FHLB advances
Accrued interest payable
Subordinated debt
2013
Fair Value Measurements Using
Quoted
Prices
In Active
Market for
Identical
Assets
(Level 1)
Carrying
Amount
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
53,690
$
53,690
$
— $
2,500
4,356
495,727
2,904
2,943
673,095
31,793
102
2,789
2,500
—
—
2,904
—
362,634
—
102
—
—
4,356
—
—
2,943
—
33,415
—
2,978
—
—
—
500,447
—
—
315,179
—
—
—
2012
Fair Value Measurements Using
Quoted
Prices
In Active
Market for
Identical
Assets
(Level 1)
Carrying
Amount
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Cash and cash equivalents
Loans held for sale (best efforts pricing agreements)
Loans receivable - net
Accrued interest receivable
FHLB stock
Deposits
FHLB advances
Accrued interest payable
$
$
32,513
63,234
352,328
2,196
2,943
530,691
40,686
120
32,513
—
—
2,196
—
300,818
—
120
$
— $
63,234
—
—
2,943
—
42,986
—
—
—
351,194
—
—
236,375
—
—
Note 16:
Derivative Financial Instruments
The Company uses derivative financial instruments to help manage exposure to interest rate risk and the effects that
changes in interest rates may have on net income and the fair value of assets and liabilities. The Company enters into
forward contracts for the future delivery of mortgage loans to third party investors and enters into IRLCs with potential
borrowers to fund specific mortgage loans that will be sold into the secondary market. The forward contracts are entered
into in order to economically hedge the effect of changes in interest rates resulting from the Company’s commitment to
fund the loans.
F-38
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
Each of these items are considered derivatives, but are not designated as accounting hedges, and therefore, are recorded
at fair value with changes in fair value reflected in noninterest income on the consolidated statements of income. The fair
value of derivative instruments with a positive fair value are reported in accrued income and other assets in the consolidated
balance sheets while derivative instruments with a negative fair value are reported in accrued expenses and other liabilities
in the consolidated balance sheets.
The Company did not use any derivative financial instruments prior to 2013. At December 31, 2013 the notional amount
and fair value of IRLCs and forward contracts utilized by the Company were as follows:
December 31, 2013
Fair
Value
Notional
Amount
December 31, 2012
Fair
Value
Notional
Amount
Asset Derivatives
Derivatives not designated as hedging instruments
IRLCs
Forward contracts
$
$
20,752
30,628
$
79
227
— $
—
—
—
Fair values of derivative financial instruments were estimated using changes in mortgage interest rates from the date the
Company entered into the IRLC and the balance sheet date. Periodic changes in the fair value of the derivative financial
instruments on the consolidated statements of income for the twelve months ended December 31, 2013 and 2012 were
as follows:
Amount of gain / (loss) recognized in the
twelve months ended
December 31, 2013
December 31, 2012
Asset Derivatives
Derivatives not designated as hedging instruments
IRLCs
Forward contracts
$
79
$
227
—
—
Note 17:
Subordinated Debenture
On June 28, 2013, the Company entered into a subordinated debenture purchase agreement with a third party and issued
a subordinated debenture in the principal amount of $3,000 which bears interest at a fixed annual rate of 8.00% and is
scheduled to mature on June 28, 2021; however, the Company can repay the debenture without premium or penalty at
any time after June 28, 2016. The debenture qualifies for treatment as Tier 2 capital for regulatory capital purposes. The
purchase agreement and the debenture contain customary subordination provisions and events of default; however, the
right of the investor to accelerate the payment of the debenture is limited to bankruptcy or insolvency.
As partial inducement for the third party to purchase the debenture, the Company issued to the third party a warrant to
purchase up to 48,750 shares of the Company's common stock, at an initial per share exercise price equal to $19.33. The
warrant will become exercisable on June 28, 2014, and, unless previously exercised, will expire on June 28, 2021. The
Company has the right to force an exercise of the warrant after the debenture has been repaid in full if the 20-day volume-
weighted average price of a share of its common stock exceeds $30.00.
The Company used the Black-Scholes option pricing model to assign a fair value of $255 to the warrant as of June 28,
2013. The following assumptions were used to value the warrant: a risk-free interest rate of 0.66% per the U.S. Treasury
yield curve in effect at the date of issuance, an expected dividend yield of 1.19% calculated using the dividend rate and
stock price at the date of the issuance, and an expected volatility of 34% based on the estimated volatility of the Company’s
stock over the expected term of the warrant, which is estimated to be three years.
F-39
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
Note 18:
Shareholders’ Equity
In 2013, the Company completed a public offering of 1.587 million shares of its common stock, including 207,000 shares
issued pursuant to the underwriters’ 30-day option, at a price to the public of $20.00 per share. The net proceeds to the
Company after deducting underwriting discounts and commissions and estimated offering expenses was approximately
$29,101.
Note 19:
Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial position, results of operations, and cash flows of the
Company:
Condensed Balance Sheets
Assets
Cash and cash equivalents
Investment in common stock of subsidiaries
Premises and equipment, net
Accrued income and other assets
Total assets
Liabilities and Equity
Subordinated debt
Note payable to the Bank
Accrued expenses and other liabilities
Total liabilities
Shareholders’ equity
$
$
$
December 31,
2013
2012
17,983
$
74,789
4,524
967
782
60,542
—
283
98,263
$
61,607
2,789
$
4,000
566
7,355
—
—
257
257
90,908
61,350
Total liabilities and equity
$
98,263
$
61,607
F-40
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
Condensed Statements of Income
Income
Dividends from subsidiaries
Total income
Expenses
Interest on borrowings
Professional services
Other expenses
Total expenses
Years Ended
December 31,
2013
2012
$
$
500
500
307
859
638
1,804
Loss Before Income Tax and Equity in Undistributed Net Income of Subsidiaries
(1,304)
Income Tax Benefit
Loss Before Equity in Undistributed Net Income of Subsidiaries
(596)
(708)
250
250
—
385
99
484
(234)
(41)
(193)
Equity in Undistributed Net Income of Subsidiaries
5,301
5,799
Net Income
$
4,593
$
5,606
Condensed Statements of Comprehensive Income
Net income
Other comprehensive income (loss)
Net unrealized holding gains (losses) on securities available for sale
Reclassification adjustment for (gains) losses realized
Net unrealized holding losses on securities available for sale for which an other-than-
temporary impairment has been recognized in income
Reclassification adjustment for other-than-temporary impairment loss recognized in
income
Other comprehensive income (loss) before tax
Income tax provision (benefit)
Other comprehensive income (loss) - net of tax
Comprehensive income
Years Ended
December 31,
2013
2012
$
4,593
$
5,606
(6,462)
63
2,161
(48)
(129)
(1,452)
49
(6,479)
(2,289)
(4,190)
403
$
252
913
315
598
$
6,204
F-41
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
Condensed Statements of Cash Flows
Operating Activities
Net income
Items not providing cash
Net cash provided by (used in) operating activities
Investing Activities
Capital contribution to the Bank
Purchase of premises and equipment
Net cash used in investing activities
Financing Activities
Cash dividends paid
Proceeds from issuance of subordinated debt and related warrants
Proceeds from loan from the Bank
Net proceeds from common stock issuance
Net cash provided by (used in) financing activities
Net Increase in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Years Ended
December 31,
2013
2012
$
$
4,593
(5,402)
(809)
5,606
(4,604)
1,002
(13,000)
(4,641)
(17,641)
(450)
3,000
4,000
29,101
35,651
17,201
782
—
—
—
(479)
—
—
107
(372)
630
152
782
Cash and Cash Equivalents at End of Year
$
17,983
$
Note 20:
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-02
to improve the transparency of reporting reclassifications out of accumulated other comprehensive income. Other
comprehensive income includes gains and losses that are initially excluded from net income for an accounting period.
Those gains and losses are later reclassified out of accumulated other comprehensive income into net income. The
amendments in the Update do not change the current requirements for reporting net income or other comprehensive
income in financial statements. All of the information required within this Update is already required to be disclosed
elsewhere in the financial statements under GAAP.
The new amendments require an organization to:
•
Present (either on the face of the statement where net income is presented or in the notes) the effects on the line
items of net income of significant amounts reclassified out of accumulated other comprehensive income–but only if the
item reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period.
•
Cross-reference to other disclosures currently required under GAAP for other reclassification items (that are not
required under GAAP) to be reclassified directly to net income in their entirety in the same reporting period. This would
be the case when a portion of the amount reclassified out of accumulated other comprehensive income is initially transferred
to a balance sheet account instead of directly to income or expense.
•
The amendments are effective for reporting periods beginning after December 15, 2012. The Company has
adopted the methodologies prescribed by this ASU, and the ASU did not have a material effect on its financial position
or results of operations.
F-42
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
In February 2013, the FASB issued ASU 2013-04. The amendments in this Update provide guidance for the recognition,
measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total
amount of the obligation within the scope of this Update is fixed at the reporting date, except for obligations addressed
within existing guidance in U.S. GAAP. The guidance requires an entity to measure those obligations as the sum of the
amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount
the reporting entity expects to pay on behalf of its co-obligors.
The guidance in this Update also requires an entity to disclose the nature and amount of the obligation as well as other
information about those obligations. This Accounting Standards Update is the final version of Proposed Accounting
Standards Update EITF12D – Liabilities (Topic 405) which has been deleted.
The amendments in this Update are effective for fiscal years beginning after December 31, 2013. Early adoption is
permitted. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate
that the ASU will have a material effect on its financial position or results of operations.
In April 2013, the FASB issued ASU 2013-07. The objective of this Update is to clarify when an entity should apply the
liquidation basis of accounting and to provide principles for the measurement of assets and liabilities under the liquidation
basis of accounting, as well as any required disclosures. This Accounting Standards Update is the final version of Proposed
Accounting Standards Update 2012-210 – Presentation of Financial Statements (Topic 205), which has been deleted.
The amendments are effective for entities that determine liquidation is imminent during annual reporting periods beginning
after December 15, 2013, and interim reporting periods therein. Entities should apply the requirements prospectively
from the day that liquidation becomes imminent. Early adoption is permitted. The Company will adopt the methodologies
prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial
position or results of operations.
In July 2013, the FASB issued ASU 2013-10. The objective of this Update is to provide for the inclusion of the Fed Funds
Effective Swap Rate - Overnight Index Swap Rate (OIS) as a U.S. benchmark interest rate for hedge accounting purposes,
in addition to U.S. Treasury (UST) or London Interbank Offered Rate (LIBOR) indices. The Update also removes a
restriction stating that entities must use the same rates for similar hedges, offering greater flexibility in hedge accounting.
The amendments in this Update are effective prospectively for qualifying new or re-designated hedging relationships
entered into on or after July 17, 2013. The Company has adopted the applicable methodologies prescribed by this ASU
and does not anticipate that the ASU will have a material effect on its financial position or results of operations.
In July 2013, FASB issued ASU 2013-11. This update pertains to the unrecognized tax benefit when a net operating loss
carry forward, a similar tax loss or a tax credit carry forward exists. The ASU is intended to end the varying ways that
entities present these situations since GAAP is non-specific and leads to diversity in practice. The new standard deems
that any unrecognized tax benefit or portion of an unrecognized tax benefit should be presented in the financial statements
as a reduction to a deferred tax asset for a net operating loss carry forward, a similar tax loss, or a tax credit carry forward
except for certain defined situations.
The amendments in this Update are effective for fiscal years beginning after December 15, 2013. Early adoption is
permitted. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate
that the ASU will have a material effect on its financial position or results of operations.
In January 2014, the FASB issued ASU 2014-01, “Accounting for Investments in Qualified Affordable Housing Projects,”
to permit entities to make an accounting policy election to account for their investments in qualified affordable housing
projects using the proportional amortization method if certain conditions are met. The ASU modifies the conditions that
an entity must meet to be eligible to use a method other than the equity or cost methods to account for qualified affordable
housing project investments. The ASU is effective for fiscal years, and interim periods within those years, beginning after
December 15, 2014. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated
financial statements.
F-43
First Internet Bancorp
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
In January 2014, the FASB issued Accounting Standards Update (ASU) 2014-04, “Reclassification of Residential Real
Estate Collateralized Consumer Mortgage Loans upon Foreclosure,” to reduce diversity by clarifying when a creditor
should be considered to have received physical possession of residential real estate property collateralizing a consumer
mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The ASU is
effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Adoption of the
ASU is not expected to have a significant effect on the Company’s consolidated financial statements.
Note 21:
Subsequent Events
On December 20, 2013, the Compensation Committee of the Board of Directors of the Company approved the issuance,
as of January 1, 2014, of tandem awards of shares of restricted stock and deferred stock units to each of the Company’s
non-employee directors under the 2013 Plan. Each award has a grant date fair value of $20. The awards represent the
non-cash component of the compensation payable for the directors’ service during 2014. The economic terms of the
awards are substantially the same as the non-cash retainer compensation the non-employee directors received in 2013
and earlier in the form of restricted stock and director deferred stock rights. The shares of restricted stock vest in twelve
substantially equivalent increments at the end of each calendar month in 2014.
In January 2014, the Company sold all securities that were held in its municipal securities portfolio at December 31,
2013. The sale resulted in the Company recording a pretax gain on sale of securities of approximately $360.
F-44
EXHIBIT INDEX
Exhibit No.
3.1
Articles of Incorporation of First Internet Bancorp
Description
Method of Filing
Incorporated by Reference
Incorporated by Reference
Incorporated by Reference
Incorporated by Reference
Amended and Restated Bylaws of First Internet Bancorp as amended March 18,
2013
Warrant to purchase common stock dated June 28, 2013
First Internet Bancorp 2013 Equity Incentive Plan
Form of Restricted Stock Agreement Under 2013 Equity Incentive Plan
Incorporated by Reference
First Internet Bancorp Directors’ Deferred Stock Plan
Amended and Restated Employment Agreement among First Internet Bank of
Indiana, First Internet Bancorp and David B. Becker dated March 28, 2013
Incorporated by Reference
Incorporated by Reference
Change in Control Agreement between First Internet Bank of Indiana and Kay E.
Whitaker dated January 14, 2013
Incorporated by Reference
2013 Senior Management Bonus Plan
Contract for Purchase of Property between First Internet Bancorp and LHRET
Ascension SV, LLC dated January 30, 2013
Incorporated by Reference
Incorporated by Reference
Offer and Contract for Purchase of Real Estate between First Internet Bancorp
and St. Vincent Hospital and Health Care Center, Inc., accepted February 5, 2013
Incorporated by Reference
Lease dated as of March 6, 2013, by and between First Internet Bancorp and First
Internet Bank of Indiana
Incorporated by Reference
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
Subordinated Debenture Purchase Agreement with Community BanCapital, L.P.,
dated June 28, 2013
Incorporated by Reference
10.11
Subordinated Debenture dated June 28, 2013
21.1
23.1
31.1
31.2
32.1
List of Subsidiaries
Consent of Independent Registered Public Accounting Firm
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
Section 1350 Certifications
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
Incorporated by Reference
Incorporated by Reference
Filed Electronically
Filed Electronically
Filed Electronically
Filed Electronically
Filed Electronically
Filed Electronically
Filed Electronically
Filed Electronically
Filed Electronically
Filed Electronically
“Our company holds great promise! With
the right people, products, and processes
in place, we have the building blocks for
sustained organic growth. Should the right
acquisition opportunity present itself, one
that will broaden our asset-generating
capabilities, we have a sufficient capital base
to pursue it. I believe our company is well
positioned to continue its growth trajectory.”
8888 Keystone Crossing, Suite 1700
Indianapolis, IN 46240 • (317) 532-7900
www.firstinternetbancorp.com
2 0 1 3 A N N UA L R E P O R T