First Internet Bancorp: Breaking The Shackles

Traditional bank stocks have been pretty boring until recently.  Yes, that is changing.  The prospects of a steeper yield curve could make for better earnings in 2018.  But if it weren’t for some of the exciting things to come along in financial technology, the S&P 500 financial index would still be stuck in the rut of underperformance.

So let’s take a look at one of the early innovators that draw their roots to the small town of Fisher Indiana in 1999.  That was era of landline telephones and dial up Internet.

The Original Internet Bank  

So what makes First Internet Bank (INBK: NASDAQ) different?  For starters, they are the first state-chartered, Federal Deposit Insurance Corporation (“FDIC”) insured Internet bank.

INBK does not have a conventional brick and mortar branch system. It operates through a scalable Internet banking platform.  That may not sound like a big deal since every bank around has mobile banking.

Everybody in fintech wants to tap into branchless online banking but getting and FDIC charter isn’t so easy. It takes a huge amount of paperwork and lots of time to get approval.

Many startups like Simple attempted to enter the game acting as a broker for FDIC insured banks.  However, under banking rules growing out of the 2008 financial crisis, this proved a tuff road.  

So little old plane vanilla First Internet Bancorp has the key benefit of being an FDIC chartered and insured bank just like the big boys like Citibank and JP Morgan Chase but without the bricks and mortar branches.

INBK’s structure gives them nationwide reach. The implications for costs and customer acquisition being a major benefit.  Until more recently, however, capital limitations put the brakes on major expansion opportunities.  But now, things have changed.

What To Do With $150 Million

On August 8, 2017 INBK filed a registration statement for a $150 million secondary offering with all proceeds going to the company for “general corporate purposes.” Considering the market cap of INBK at the time was about $250 million, the offering was huge.  It substantially bolstered Tier One Capital.  That means for the first time in a while since the financial crisis that INBK could expand its deposit and lending base.

These days INBK’s balance sheet looks darn attractive with cash and deposits more than tripling since 2015 to $656 million and long term investments more than doubling to $2.4 billion.  INBK is exceptionally lean.  They have no long term debt.  When you add up all the fixed overhead like offices, computers and employees, it amounts to just a little under $15 million.  That, as they say, is chump change.  

Full Service Banking

INBK offers the usual assortment of commercial, small business, consumer and municipal banking products and services. They conduct consumer and small business deposit operations primarily through online channels on a nationwide basis and have no traditional branch offices.

Residential mortgage products are offered nationwide primarily through an online direct-to-consumer platform and are supplemented with Central Indiana-based mortgage and construction lending.

Consumer lending products are originated nationwide over the Internet as well as through relationships with dealerships and financing partners.

Commercial banking products and services are delivered through a relationship banking model and include commercial real estate (“CRE”) banking, commercial and industrial (“C&I”) banking and public finance.

A public finance team was established in early 2017, provides a range of public and municipal lending and leasing products to government entities on a nationwide basis.

Free At Last

In 2017 customers shelled out about $45 billion in fees to the banking industry in account service fees, check return fees, overdraft fees and more.  All of this was needed to cover the overhead of the bazillion bank branches.

In 20 years it is possible that 80% of all branches will be replaced by mobile devices. Perhaps there will be none at all.

With no branch overhead to cover, First Internet and others like them can offer appealing perks like free checking, no overdraft or bounced check fees.  That is a big selling point.

Customer Turnover Is Low In Banking

Customers hate those annoying fees but it takes a lot to get them to move.  Costs are often measured on the amount of marketing dollars needed to attract new customers.  There are many ways of measuring these costs so there is no single guide to the true cost.

One bank, BBVA placed the cost at $100.  Other estimates run as high as $145.  Both numbers include the cost of branches.

A study that I participated in several years ago placed the cost for an online bank as low as $50 per new customer.  The difference in these two numbers is just one reason why you should get excited about pure online banks.  First Internet Bank looks well positioned.

Featured image courtesy of Shutterstock. 

Author:
James Waggoner is a veteran Wall Street analyst and hedge fund manager who has spent the past few years researching the fintech possibilities of cryptocurrencies. He has a special passion for writing about the future of crypto.