First Internet up-shifts in commercial lending

First Internet Bank raised eyebrows this month when it filed a $25 million secondary stock offering said to be for organic growth and “other general corporate purposes.”

It’s a big chunk of money for a bank with a market value of $80 million, and the bank’s rather mysterious strategy for a new line of business lending has bank analysts perplexed.

The Indianapolis-based bank born amid the consumer online banking craze of the late 1990s has already been growing its business lending. But in a brief announcement earlier this month, First Internet said it was also setting up an asset-based lending unit to serve smaller businesses.

While it already makes commercial real estate and industrial loans, the new unit will offer revolving lines of credit and term loans in the range of $2 million to $5 million.

“They’d need a lot of capital to take on those kinds of loans,” said Mike Renninger, president of Carmel-based Renninger & Associates.

First Internet executives declined to elaborate on their new unit’s plans while the $25 million secondary offering is still pending.

In a brief announcement Nov. 6, CEO David Becker said the unit will offer revolving lines of credit backed by accounts receivable and inventory, along with term loans backed by real estate and equipment.

“This new line of business allows us to serve a greater base of businesses and accelerates our growth by generating additional high-quality assets,” Becker said.

But local banking observers are puzzled by other details, such as that the unit will be based in Portland, Ore., and headed by former GE Capital and U.S. Bank executive Gregg Corey.
Becker hailed Corey for his more than 30 years of experience in asset-based lending, commercial and industrial lending, and income property financing.

Hiring someone of that experience suggests “that they’re planning on plunging into this in a significant way,” said John Reed, an investment bank

er at David A. Noyes & Co. in Indianapolis.

Reed wondered whether First Internet will focus on businesses in particular industries. Will it have a geographic focus—and why base it in Oregon?

“If they have operations 2,000 miles away, would they have adequate oversight and control systems here in Indianapolis to monitor this remote operation?” he added.

He and Renninger pointed to Indiana’s failed Irwin Union Bank, which was burned by lending in hot markets in the West.

“This could portend additional risk if not managed right,” Renninger said. “I have to believe, underneath the surface … they must know there are markets they can penetrate.”

First Internet, while offering online banking nationally, has managed to keep its commercial and industrial lending focus within 100 miles of Indianapolis. That’s allowed the bank to maintain relationships with business borrowers and maintain more feel for market conditions.

The head of an Oregon investment firm that this summer bought $3 million in First Internet debt, Frank Reppenhagen, of Community BanCapital, said t

he recently announced asset-based lending seems a “logical extension” of First Internet’s commercial and industrial lending.

“What I have observed with this bank is that they want to be in businesses that can be expanded to a national scope.”

But, Reppenhagen added, First Internet has taken its time to start “small and local.

“I suspect they will begin on the West Coast and move their way east, once their procedures are established and they have determined that the growth will be done in a ‘safe and sound’ manner.”

The bank has noted in recent financial disclosures that its commercial loan portfolio exposes it to higher credit risks than residential real estate and consumer loans.

Commercial loans tend to be larger than residential and real estate loans, which could also bring concentration risks.

First Internet has also noted that its commercial real estate and commercial and industrial loans were originated relatively recently and thus, “the current level of delinquencies and default may not be representative of the level that will prevail when the portfolio becomes more seasoned.”

Commercial and industrial loan balances zoomed 232 percent in the third quarter, to $47.1 million, over the balance at Dec. 31.•