After stock zooms up, Internet bank aims higher

First Internet Bank of Indiana is suddenly making noise, more than 14 years after its founding during the dot-com boom.

Shares of parent company First Internet Bancorp have more than doubled since December, when founder and CEO David Becker boosted the visibility of the stock by announcing it was shifting from the over-the-counter market to NASDAQ.

And now First Internet is poised to raise $25 million in a secondary stock offering—a hefty sum for an institution with a market value of just $80 million.

First Internet—which provides Internet banking nationally and commercial and industrial lending within a 100-mile radius of Indianapolis—is offering only generalities about how it would use the cash infusion.

“We intend to use the net proceeds generated by this offering to support our organic growth and other general corporate purposes,” First Internet said in a Sept. 30 filing with the Securities and Exchange Commission.

Becker Becker

First Internet said that could include acquisitions, but “we do not have any immediate plans.” Though the offering would boost First Internet’s shares outstanding by nearly one-third, the bank boldly predicts it can deploy the additional capital “to support our organic growth without significantly diluting our earnings per share.”

Becker declined to comment while the offering is pending. But the scale of the offering surprised one banking observer, John Reed, executive vice president of investment banking at David A. Noyes & Co. He said First Internet, which has $657 million in assets, already had sufficient capital to support steady growth.

“They must have big plans; they’ve got something cooking,” Reed said. “They have enough equity they could expand the balance sheet by $100 million or $200 million without getting too skinny on equity.”

Though First Internet has no traditional bank branches, its Internet-based platform has not driven all its growth. In 2007, the bank acquired Indianapolis-based Landmark Savings Bank, then used its platform to take mortgage lending national. Over the past three years, it has ramped up commercial banking—first offering commercial real estate lending and, more recently, commercial and industrial loans.

While Internet banking may seem impersonal, commercial lending is a relationship business. To gain market share, First Internet has hired veteran local bankers with deep contacts and a strong understanding of the local market.

The blend of traditional and Internet banking has sent earnings on an upward trajectory. Profit rose from $3.2 million in 2011 to $5.6 million in 2012. And through the first six months of 2013, it was $3.2 million, up from $2.4 million in the first half of 2012.

Not surprisingly, First Internet’s no-branch strategy helps keep expenses low. Its so-called efficiency ratio—which measures overhead as a percentage of revenue—was a solid-but-not-spectacular 61 percent at the end of 2012, regulatory filings show.

But continued growth could bring that number down in a hurry. In its Sept. 30 SEC filing, First Internet, which has 117 full-time employees, believes its “highly scalable Internet banking platform” and efficient work force can increase deposits and loans “without significant additional hires.”

The filing added: “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.”

Investors who bought into the story before the big run-up are sitting on healthy gains. The stock now fetches around $28, up from a 52-week low of $10.67 in October 2012.

One of those investors was Portland, Ore.-based Community BanCapital, which runs a $50 million fund that buys banks’ subordinated debt. An SEC filing shows that in June, Community BanCapital snapped up $3 million in First Internet debt and offered to buy another $3 million by the end of the year.

The debt pays 8 percent. But the biggest payoff could end up being the warrants to buy nearly 50,000 shares of stock that Community BanCapital received to induce it into the deal. The exercise price on the shares is $19.33, which means Community already has a paper profit of nearly $425,000.

Community BanCapital partner Frank Reppenhagen said in an email that Becker and his team have done an impressive job focusing on “profitable growth while maintaining strong risk management. They have a long track record of taking local banking businesses and safely and profitably expanding them nationally.”•

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