First Internet Bank leverages online roots

First Internet Bank, launched just 14 years ago, is reaching all-time highs in assets and profitability and plans to become a $1 billion institution by 2015.

Ironically, the Indianapolis bank’s recent growth is fueled by commercial lending, which has as much to do with relationships as the attractive interest rates that have been the bank’s main competitive advantage since its launch in 1999.

Those interest rates have been possible because, as one of the first online-only banks, it has minimal brick and mortar. There still are no retail branches.

The bank is adding commercial lenders without building brick-and-mortar locations so as to maintain its cost advantage.

Commercial real estate, added in 2010, and commercial and industrial lending, begun in late 2011, more than doubled their share of assets, to $107 million last year.

Profit last year was $5.6 million, up 76 percent from 2011, and assets reached $636 million.

“We were able to put the pedal down and blow right by a lot of people in the last 18, 24 months,” founder and CEO David Becker said.

Becker had more than a decade of experience with financial-services technology and a successful track record in business by the time he launched First Internet. He founded re:Member Data Services Inc., which provided data processing to credit unions, in 1981 and

served as its CEO until its sale in 2004. He also started OneBridge, which sells credit card verification services.

Some of the Internet-based banks that launched in the late 1990s have folded.

“Execution matters. The business plan matters,” said Peyton Green, a senior research analyst at Birmingham, Ala.-based brokerage Sterne Agee. “That was not a great focus, as it was not for a lot of Internet companies.”

First Internet is doing well on key performance measures, said Carmel-based banking consultant Mike Renninger. The share of non-performing assets to total assets was 1.9 percent at the end of 2012, he noted. That’s on par with the top-performing banks in the Indianapolis area last year.

Assets, earnings and capital ratios have all improved since 2009, Renninger said. “They look like they’re in a position to do well.”

First Internet began as a pure retail bank, competing nationally with giants like ING Direct.

Unlike some of its peers, such as NextBank and CompuBank, First Internet survived the 2001 tech bubble. While it took a loss in 2009 because of bad loans, Becker said the damage was mitigated by First Internet’s 50-state footprint.

Seeing traditional banks hobbled by overexposure to certain industries, First Internet dove into commercial lending. The bank hired Michael E. Lewis, former commercial real estate manager at Huntington National Bank, in August 2010 to lead a new commercial real estate division. Then, in late 2011, the bank hired Connie Shepherd, a senior vice president at the former Marshall & Isley Bank, to head up commercial and industrial lending.

First Internet employs 102 people in its Keystone at the Crossing headquarters, 40 of whom were hired in 2012. The bank will add another 48 this year at a new Fishers location because of its expanding mortgage-lending operation.

The commercial lending teams work in central Indiana and markets within a day’s drive. Like many traditional small banks, First Internet touts its quick decision-making and the autonomy of its lenders.

Green, who covers online bank EverBank of Jacksonville, Fla., thinks it’s wise for the Internet-based banks to diversify. Everbank, which traditionally had 80 percent of its business in mortgage lending, added commercial leasing in 2010 and bought GE Capital’s commercial real estate business last year, he noted.

“Most of the industry has an over-concentration in construction, commercial real estate,” Green said. “There’s an opportunity to gain market share, for at least another year or two.”

The regional approach to commercial banking is unusual for an online-only bank. One of First Internet’s peers, San Diego-based Bank of the Internet, has been in commercial real estate since its inception but specializes in loans for apartment complexes.

Becker thinks commercial lending, like First Internet’s other services, will grow by word of mouth.

“We made some lifelong friends from people who had no other place to turn,” he said.

But if First Internet wants to take the business beyond Indiana, it’s going to have to acquire banks in other regions. First Internet, which has been traded over-the-counter since 2006, is hoping to raise more capital for acquisitions with its Feb. 22 debut on the NASDAQ stock exchange. Most institutional investors don’t consider companies that can’t at least pass NASDAQ muster.

Becker said the ideal acquisition target would be much like Landmark Savings Bank, which brought First Internet a substantial mortgage business in 2007. Landmark, for which First Internet paid $12 million, had just two branch offices, and it was a strong loan generator, he said.

First Internet transferred Landmark’s mortgage business to its online platform, and it now generates more loans in a month than Landmark could generate in a year, Becker boasted.

Low profile

Back when online banking was new, regulators worried that an Internet bank would appeal to college students who didn’t have much money, Becker recalled.

Instead, First Internet’s advertising in Money Magazine and USA Today drew frequent business travelers, typically high-earning men in their 30s. The demographic profile stuck. About two-thirds of First Internet depositors today are men, and the average credit score of its mortgage borrowers is 777. The highest possible score is 850.

“We’re the natural for the person who lives out of a suitcase,” Becker said.

First Internet spent $7 million on marketing in the first two years of its existence, but it’s kept a low profile, especially compared with Dutch financial conglomerate ING’s Internet bank, ING Direct, and Ally Bank, formerly GMAC.

Trying to keep up with other online banks in marketing would have negated any savings of operating zero branch offices. So First Internet limited its presence to sites like Bankrate.com, where the interest rates speak for themselves.

“We still had geometric growth at that time,” Becker said of the early years. “We didn’t try to be all things to all people.” That initial push was enough to form a $100 million asset base in the first 18 months, Becker said, and First Internet was profitable by 2001.

Word of mouth does work for an Internet bank, Becker said, noting that 30 percent of its mortgage business comes through referral. Will First Internet’s low-key style be enough to grow assets another 57 percent, to $1 billion by 2015?

Renninger, the consultant, thinks it’s possible. “If they can identify a niche and market to that niche, they’ll probably be more successful than to carry out what has got to be a very expensive radio/television package that you hear out of Ally.”

First Internet hopes the commercial lending will help other aspects of its balance sheet.

First Internet had $530.7 million in deposits at the end of 2012. Bank officials hope to add to that by persuading borrowers opening business checking accounts. Those accounts don’t earn interest, so they also come at a lower cost, which is always a concern for Internet banks.

Paying higher rates to depositors squeezes interest margins, so First Internet earns about 2.6 percent, versus 3 percent to 4 percent for most of the top Indianapolis-area banks.

Variable-rate commercial loans could also help First Internet in a rising rate environment, as rising loan rates would help offset increased deposit rates.•