Equity research: Is First Internet Bancorp a good investment? (Part 2 of 6)
First Internet Bancorp (INBK) is a bank holding company based in Indianapolis, Indiana. All business activities for First Internet Bancorp are conducted through its subsidiary, First Internet Bank of Indiana. Although the company is located primarily in Indianapolis, products and services can be utilized on a national basis due to the innovative Internet-based structure of the company.
First Internet Bancorp has grown substantially since its incorporation. In fact, it just recently reached the 100-employee mark. The company’s financial growth surpasses its physical growth, however, as it has grown loans, deposits, and assets at double-digit rates since 2010. Through the acquisition of Landmark Financial Corporation in 2007, also an Indianapolis-headquartered bank, INBK was able to expand its talent pool and introduce a turnkey mortgage lending operation. The web-based product was in the creation stages in terms of the Internet-based mortgage lending operation, and, with this acquisition, it was able to set the foundation for its financial growth.
The acquisition of Landmark gave INBK a significant amount of knowledge about mortgage lending and automation, as it was able to create a more robust web-based product. Since this acquisition, INBK has grown significantly, helped especially by the low interest rate environment, which has made refinancing an attractive opportunity for homeowners. Mortgage lending has been INBK’s strong suit, but management has been anticipating rising interest rates and working to diversify the company’s portfolio. In 2010, the company introduced commercial real estate lending (CRE) as well as commercial and industrial lending (C&I). The company is also very savvy with its consumer loans, which make up a large part of its portfolio. Most of the consumer loans consist of horse trailers and RVs. INBK has been in this market for 14 years, so it has a sound customer base and knowledge for the market. Overall, the diversification appears to have been a great success, as evidenced by the table.
As a result of its national growth, First Internet Bancorp was listed on the NASDAQ stock exchange in February of 2013, when the company changed its ticker from FIBP to INBK. During the new listing celebration, David Wick, vice president of NASDAQ, commented:
“From the time of the company’s launch of its innovative Internet banking services to today, the company has really combined innovation, technology, and a vision to truly become a premier provider of nationwide online retail and business banking services. All of this has positioned the company to deliver solid financial performance.”
The NASDAQ listing and subsequent three-for-two stock split and secondary offering in November of 2013 should serve to accelerate INBK’s growth as the company seeks to capitalize on a more solidified national reputation and invest capital through a combination of prudent loan growth and M&A activity.
The Market Realist Take
To reduce sensitivity to interest rate adjustments, the company’s mortgage banking unit made significant progress during 3Q 2013 on transitioning from a refinance-based national mortgage origination platform to a preferred home purchase lender. Interest rate fluctuations affected all national mortgage lenders this quarter, and INBK too experienced the slowdown in mortgage refinancing activity that was triggered by increased interest rates.
INBK’s commercial lending teams also saw success in growing their loan portfolios by increasing the number and types of borrowers while achieving a balanced and diversified mix of loans. The company’s expanding loan portfolio fuels growth in interest income and non-interest income. Plus, its teams are focused on building non–interest-bearing deposit account relationships, which not only offers the company an attractive low-cost source of funding but also demonstrates its ability to build more robust banking relationships.
Commercial loans comprised 40% of the loan portfolio, excluding mortgages held for sale in 2013, compared with 28% in 2012. In an extremely competitive environment, total commercial loans increased to $197.60 million in 2013 compared with $99.19 million in 2012, reflecting growth in both commercial real estate and commercial and industrial lending. Commercial real estate loans increased 68% and commercial and industrial loans increased 287% compared to December 31, 2012. Total net loans receivable increased 41%, to $495.73 million in 2013.
Residential real estate loans retained by the bank were $191.01 million at year-end 2013, representing 39% of the loan portfolio excluding mortgages held for sale, up from $128.82 million at year-end 2012. As the bank maintained its focus on building its commercial business in 2013, consumer loans, which include specialty lending categories like horse trailers and other recreational vehicles, were $107.56 million in 2013 compared with $126.49 million in 2012.
The company last year announced the expansion of its commercial lending capabilities through an asset-based lending line of business. Operating under the name First Internet Bank Business Capital, the new division provides working capital to small- to medium-sized companies of $2 million to $5 million. 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.
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