First Internet Bancorp

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Interactive Buyside Equity ResearchFebruary 25th, 2014

FIRST INTERNET BANCORP

Thesis Overview

First Internet Bancorp is a provider of online retail and business banking services nationwide.

The Company is the parent company of First Internet Bank of Indiana. First Internet Bank of

Indiana is the first state-chartered, FDIC-insured institution to operate solely through the

Internet and has customers in 50 states. First Internet Bank of Indiana offers personal and

business banking services. The Companys personal banking services include checking, debit,

savings and money markets, and credit cards. Investment services include certificate of deposit

(CDs), individual retirement accounts and Coverdell education saving accounts. It also

provides loan services, which include mortgages, home equity loans, installment loans and

private student loans. Business banking includes checking, savings and money markets, CDs

and commercial lending.

We missed out on a 5-bagger three years ago when we passed on INBK's closest competitor

(BOFI). The companies are "eerily similar" to use the words of CEO David Becker. If INBK

executes we think there is every likelihood they will surpass their goal of $1B in assets by

2015. Margin expansion and multiple expansion will compound investor returns. Downside

risk is limited as INBK trades at only a small premium to book value. Overall, the future of the

company looks stable and promising.

Stock Rating BU

Catalyst Category Val

Price Target $40.

Price (2/25/14): $21.87

Upside/(Downside): 83%

Ticker: INBK

Exchange: NASDAQ

Industry: Financial Services

Trading Stats ($USD millions)

Market Cap: $77

Enterprise Value: $53

Price / Book: 1.24x

Dividend Yield: 1.1%

Source: Company filings

Price Performance

52 Week range:

$14.43 - $36.00

Analyst Details

IB Username: Mike Curran

Employer:CUSH Capital

Job Title: Portfolio Manager

Analyst Disclosure

INBK Position Held: Yes
http://www.cushcapital.com/http://www.cushcapital.com/http://www.cushcapital.com/http://www.cushcapital.com/


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Company Overview

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 thecompany. First Internet Bancorp has grown substantially since its incorporation. In fact, they just recently reached the 100-

employee mark. The companys financial growth surpasses its physical growth, however, as they have grown loans, deposits, and

assets at double-digit rates since 2010.2 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 they were able to create a more robust webbased 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 INBKs strong suit, but management has been

anticipating rising interest rates and working to diversify their 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 their consumer loans,

which make up a large part of their portfolio. Most of the consumer loans consist of horse trailers and RVs. INBK has been in

this market for 14 years, so they have a sound customer base and knowledge for the market. Overall, the diversification appears

to have been a great success, as evidenced by the table (right). 3

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 companys 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.4

The NASDAQ listing and subsequent 3 for 2 stock split and secondary offering in November of 2013 should serve to accelerate

INBKs growth as they seek to capitalize on a more solidified national reputation and invest capital through a combination of

prudent loan growth and M&A activity.


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Investment ThesisThree years ago we passed on an opportunity to invest in Bank of the Internet (BOFI), a small but fast growing internet only bank

with a low-cost, scalable platform that allows for industry leading efficiency ratios. At the time the bank has just completed a

secondary offering positioning the bank to dramatically grow its loan portfolio. Moreover, a close colleague and member of our

local investors club with 30 plus years of banking experience had recently visited the company and returned with a very favorable

report on the management team and their strategy. We followed this up with our own due diligence and were similarly impressed

with what we saw. We were hopeful to have an opportunity to buy in for less than book value, but never quite got the chance.

Ever since, its been nothing but pain and anguish watchingthis opportunity run away from us. Our thumb-sucking caused us to

miss out on what turned into a 5- bagger!!


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Luckily Mr. Market has offered us a mulligan. We jumped at the chance for a do-over when the same colleague brought INBK to

our attention: another fast-growing Internet bank whose story has yet to be discovered. They similarly completed a secondary

offering in the fourth quarter of 2013 and will be deploying the capital to grow their loan portfolio which should in turn serve as a

catalyst for the stock.

To better understand the opportunity that First Internet Bank (INBK) is positioned to capitalize on, investors can whet their

appetite with some recent comments from The Motley Fools Hidden Gems newsletter [paraphrased]:

Internet banking is a game-changer shaking up one of the most hated industries in the country. Americans are fed up with commercial banks. Savings account rates are at near-historic lows, while banks are charging more fees than ever. The dreaded ATM fees, remote deposit fees, and even paper account statement fees are all now a growing part of the

income strategy for most banks.

Yes you read that right. Youre probably getting charged THIS MONTH for the bank to send youa paper version ofyour own billing statement.

In fact, what many Americans dont know is that nearly 33%of bank income is now made up of non-interest income

or penalty-fee income. A number almost double what it was back in 1970.

People are waking up to the fact that they dont need traditional banks anymore and theyremoving; not just to onlinebanking, which almost every bank offers, but to internet-only banking, with no need for a branch at all.

Every time a brick and mortar bank executes a transaction, it costs roughly SEVEN times more than the sametransaction done through an ATM or mobile device.

Internet banks put that cash directly back in your pocket through vastly increased interest rates on your savingsaccounts.

With 4% average annual decline in branch traffic over the past 16 years, internet banking is positioned for tremendousgrowth.

Given the many parallels between INBK and BOFI, we asked CEO David Becker if they use BOFI as a template for business

growth. While he did not admit to using it as a template, he did note how eerily similar the two companies are overall, which is

very positive given BOFIs success. He touted INBKs recent growth and pointed to last years NASDAQ listing and subsequentsecondary offering as catalysts that would help the company achieve its lofty financial goalsspecifically $1 billion in assets by

2015. When we asked Mr. Becker about this goal, he replied:

Ill tell you my 30-year entrepreneurial history is under-promise, over deliver ... If we can find the right merger partner

and opportunity to bring that talent base in, use our technologies and national marketing skills to launch a national

platform, I think we can very easily blow through that $1 billion mark.1


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We believe they are positioned to do it, thus creating an 80% plus total return opportunity as INBK grows earnings and investors

benefit from margin expansion. Moreover the downside is limited as the current price represents only a small premium to

tangible book value (TBV = $19.38 vs current price of $23.00).

Management Team

First Internet Bancorp has a strong management team. David Becker has been Chairman and CEO of the company since its

inception. He is known for being a widely successful entrepreneur. Other than First Internet Bancorp, he has founded several

companies such as Member Data Services, AmeriCard Services, VIFI, OMIF, Inception, and DyKnow. His entrepreneurial

ventures have been so successful that he was recognized as the Ernst & Young Entrepreneur of the Year in 2001. While staying

involved in his past entrepreneurial ventures, Mr. Becker still finds time to serve the Indianapolis community, especially in the

field of education. As the first in his family to make it through college, he feels he owes a lot to the system. Between himself and

his childrens trust, Mr. Becker owns 10% of the company.

Kay Whitaker has been the CFO and Senior Vice President since January of 2013. Before joining INBK, Ms. Whitaker was the

CFO for Central Indiana Community Foundation (CICF). While there, she won the Indianapolis Business Journals award for

CFO of the Year in the non-profit sector. Even though she is no longer at CICF, she still remains highly involved in the non-profit sector. Currently, she serves on the advisory board for Grameen America Indianapolis, which established a micro-finance

model to help alleviate poverty. She is also the Treasurer of the Indianapolis Neighborhood Housing Partnership Initiative. Prior

to joining CICF, Ms. Whitaker served as the CFO and Treasurer at Citizens Energy. The third member of the executive

management team is Charles Perfetti, Senior Vice President. Mr. Perfetti served as President and CEO of Landmark from 1989

until its acquisition by INBK in 2007. He also once served as the Chief Investment Manager for the State of Indiana before his

tenure at Landmark.5

As part of our due diligence effort, CUSH engages the management teams of the companies in which we invest. Speaking with

Mr. Becker and Ms. Whitaker certainly ranked near the top of the hundreds of conversations we have held with management

teams over the years. They were more than generous with their time, giving insightful, thoughtful and thorough answers to all of

our questions. From our conversation, the two seem to have a strong grasp on how to effectively utilize the runway ahead of

them. They know how to deal with a wide array of investors. For example, we were curious as to why INBK pays a dividend? It

seemed unusual to be distributing capital and raising capital in the same timeframe. They answered that they do it to force themarket to realize the underlining value of their shares. We like management teams that are shareholder-friendly. They also know

exactly what kind of corporate culture to establish. In an article in the Indianapolis Star about Mr. Beckers serial

entrepreneurship practices, he is quoted as saying, No matter how much time and effort you put into an idea, youre going to

miss something.6 We asked him what he missed with INBK:

I hired traditional bankers because the regulatory world was scared to death. Im from a technology basis They

were just completely blown away by thegrowth and everything about the bank They didnt really trust anybody with

the IT savvy in the market So we literally, out of the block, stumbled on the everyday blocking and tackling of

running the bank.7

They needed more creative, adaptive personalities in a company with such entrepreneurial spirit. He feels like he has that now,

especially with the addition of Ms. Whitaker.

Mr. Beckers entrepreneurial experiences and successes give us great confidence regarding the future of this business. The fact

that he has steered this company through a tumultuous time in banking, which included two market corrections, also makes us

more confident in his leadership abilities. That, combined with Ms. Whitakers financial knowledge as a long time CFO, gives us

a strong sense of confidence in this management team overall. Moreover, recent insider buying is indicative of a management

team with a high degree of confidence in their own abilities and the Companys future prospects.


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Moat

First Internet Bank entered the market of Internet banking early. The Bank was founded in 1996, incorporated in 1997, and

opened up to the public, commencing banking operations, in 1999. When Mr. Becker was founding the company, the regulatory

environment was really tightening down the screws.

The Internet bubble was in full swing, and the environment had gotten a little out of hand. It was also pre-Y2K, so nobody knew

where the company was going to go. Mr. Becker saw a future in the industry and took a large risk in starting the company. The

risk seems to be in the process of paying off.

INBKs most objective moat has to do with their low cost advantage and sound underwriting, which is evidenced by their solid

capital ratios and efficiency ratio. Banking is a sticky business, so as INBK continues to grow, we expect their ratios to improve.

BOFI serves as evidence of this, as they have grown likewise. The chart on the right compares the efficiency ratios of BOFI and

INBK over the past five years. Since 2008, INBKs efficiency ratio has actually increased due to the addition of CRE and C&I

lending. INBK also hired teams of experienced bankers with lending expertise in certain industries for these new lending

ventures. They gave these experienced bankers authority to make pricing and credit decisions in a very non-traditional way.

These factors have likely kept the effiency ratio artificially high. However, we expect the ratio to drop into the mid-to-low 40s,

just as BOFIs did, in the near future.

In 2008, specifically, financial institutions were struggling to the point that government intervention was necessary. In October of

the same year, the Troubled Asset Relief Program (TARP) was signed into law. As a result of TARP, the government purchased

assets and equity from financial institutions to strengthen the financial sector. However, no TARP funds were accepted by INBKdue to the strong capital ratios and sufficient reserves. Today, TARP still plays a big role in the industry, as more than 60% of the

banks still remaining in the TARP havebeen labeled problem institutions by the FDIC.8Also, most of the banks that have left

TARP simply refinanced through other federal programs, such as the Small Business Lending Fund (SBLF). SBLF is a fund that

encourages lending to small business by providing capital to qualified community banks; however, the remaining TARP banks in

SBLF have only increased small business lending by $1.13 for each $1 received from SBLF. Non-TARP banks in SBLF, on the

other hand, increased small business lending by $3.45 for every $1 received by SBLF.9 TARP banks took advantage of SBLF,

using it as nothing more than an escape plan.10 These occurrences not only damaged the reputation of many of these banks, but

they allowed INBK to truly stand out and begin to grow its reputation in the national market. This is great news for INBK,


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because as other banks fail to find capital to pay off stimulus bills, more acquisition opportunities open up for INBK, potentially

accelerating corporate growth.11

Another factor strengthening INBKs moat is their unique company culture. First Internet Bank was recently named the Best

Place to Work in Indiana, which is largelybased on an employee survey.12 Naturally, we asked about it because it is trulyimpressive to have employee endorsement to that extent. As a result, we were given much insight about the culture of the

company. INBK is much different than traditional banks in the sense that the entrepreneurial and creative spirit is very much

alive inside this company. People just get up every morning feeling energized. Thats the secret sauce, if you will. You can see it

in peoples faces, as Ms. Whitaker put it.13However, they realize that not every kind of worker fits well in this non-traditional

environment, which is why they introduce prospective employees to as many workers as possible, thus maximizing transparency.

The company was also a finalist for the 2012 Mortgage Technology Award. When asked about the award, Mr. Becker

commented:

The reason we got the award and made it to the final state is our productivity throughput. Our average loan officer can

originate 11 to 12 loans per month. The average underwriter can originate 6 to 7 items per month. Were about double

the average of everybody that was on the list in terms of productivity and throughput. 14

As a result, the company has been highly successful in mortgage originations. It is also likely that loan officer productivity is

higher because of worker satisfaction at INBK. Awards such as this prove the competitive edge that INBK has in the industry, as

well as a superior rate of efficiency, which is good for corporate health overall. Company culture is often difficult to grasp when

looking at an organization from the outside, but the sense of transparency we got from Mr. Becker and Ms. Whitaker lead us to

think of the culture as a truly positive, motivating one.

Mis-pricing / Valuation

Rising interest rates in the 2nd half of 2013 significantly cut the volume of home re- fis and consequently INBKs non-interest

income. Falling earnings in the short-term put pressure on the stock and created the current opportunity to buy INBK at only a

small premium to tangible book value (TBV = $19.38 vs current price of $23.00). We expect the stock to appreciate as

management executes on its expansion plan. Regarding their future growth, management commented in their 10K:

We believe that we are well positioned to continue to take advantage of the consumer-driven shift from branch banking

to direct banking. We believe Internet banking is now the preferred banking channel by consumers. According to a

2011 Bankers Association survey, the number of bank customers who prefer to do their banking online increased from

21% to 62% between 2007 and 2011, while those who prefer branch banking declined from 39% to 20% over the same

period.15


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When evaluating INBK from a book value perspective investors need to consider the quality of their loanbook. Most of INBKs

mortgage loans are sold into the secondary market; in 2012, it was 97% of them. INBK primarily retains only those loans with

adjustable rates and higher credit quality. This limits longterm exposure from interest rate risk and gives us a greater confidence

in their loan portfolio. Moreover, INBK has a good track-record of properly reserving for credit losses.

In 2012, the weighted average credit score of their mortgage customers was 775 at time of origination.16 The companys volume

of loans and assets continues to increase, but due to the precautions taken by the management team, the percentage of non-

performing assets and loans has actually decreased. The precautionary steps taken by management combined with the reported

financial growth signal great potential growth overall.

As previously mentioned, Mr. Becker believes INBK will be able to reach $1 billion in assets by 2015. We did some calculations

to measure the impact of this. Here is what we gathered:

We used BOFIs 2008 number for the 2015 efficiency ratio because this is the year that BOFI broke through the $1 billion in

assets barrier. This number seems achievable in light of INBKs own history too, as its 5yr average efficiency ratio is 59.38%

Also, instead of using INBKs 2012 non-interest income number, we used their 2011 number to approximate an environment that

wasnt so heavily weighted towards re-financings (like 2012) which are unlikely to recur in a rising interest rate environment. In

order to make these promising numbers come to life, INBK will have to achieve a compound annual loan growth rate of about

12% between 2013 and 2015. We believe this is realistic, especially considering the way the management team discussed the

possibility of an acquisition similar to that of Landmark in 2007.


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Risks

As an Internet bank, INBK puts a significant amount of reliance in the companys communication and information systems. Any

disruption in these systems can create security risks and poor customer service. Poor customer service can also escalate a possible

reputational risk, which could lead to poor customer retention and minimized expansion.

Part of the Banks strategy is potential M&A activity. We are encouraged by past successes, but M&A activity always carries

with it the potential for value destruction. Investors should watch this carefully.

On the managerial side, Mr. Beckers growing number of commitments could interfere and become a risk. In our conversation

with him, he assured us that INBK was his number one priority, but we know that there is always a possibility of him being

distracted by a new entrepreneurial venture. First Internet Bancorp has a number of business risks that could affect investors. As a

bank, the company is subject to a significant amount of government regulation, which places restrictions on the operations of the

company. However, we trust that the management team of the company will work around these restrictions to continue to operate

efficiently.

Of course, there are several other business risks and risks related to the company. For a detailed, fivepage analysis of potential

risks, we encourage you to consult the First Internet Bancorp 10K.


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Financial Snapshot


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References

1 Becker, David, and Kay Whitaker. "First Internet Bancorp Call." Telephone interview. 1 July 2013.

2 INBK 2012 Annual Report. First Internet Bancorp, 2012. Web. Summer 2013.


4 "First Internet Bancorp Rings the NASDAQ Stock Market Opening Bell to Celebrate New Listing." First Internet Bancorp.

N.p., 1 Mar. 2013.

Web. Summer 2013.

5 "Board of Directors and Management." First Internet Bancorp. N.p., n.d. Web. Summer 2013.

6 Heikens, Norm. "Internet Bank Founder Is Invested in Startups." Indianapolis Star, 17 Sept. 2006. Web. Summer 2013.


8 Browdie, Brian. "FDIC's 'Problem' List Populated by Tarp Banks." American Banker, 8 May 2013. Web. Summer 2013.

9 Chen, Liyan. "Small Banks Used Small Business Lending Fund to Exit TARP." Inc., 10 Apr. 2013. Web. Summer 2013.

10 Blumenthal, Jeff. "SBLF Used by Many as TARP Exit Strategy." Philadelphia Business Journal, 12 Apr. 2013. Web. Summer

2013.

11 Menkin, Christopher. "Small Business Lending Grows Under SBLF, TARP Banks Lag." Seeking Alpha. SNL Financial, 25

Apr. 2013. Web.

Summer 2013.

12 "First Internet Bank Designated a Best Place to Work in Indiana." First Internet Bank, 28 Feb. 2013. Web. Summer 2013.






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Disclosures

Important Disclosures

The information presented in this presentation is not intended to be used as the sole basis of any investment decisions, nor should it be

construed as advice designed to meet the investment needs of any particular investor. Nothing in our research constitutes legal, accounting or

tax advice or individually tailored investment advice.Our research is prepared for general circulation and has been prepared without regard to the individual financial circumstances and objectives

of persons who receive or obtain access to it.

Our research is based on sources that we believe to be reliable. However, we do not make any representation or warranty, expressed or

implied, as to the accuracy of our research, the completeness, or correctness or make any guarantee or other promise as to any results that

may be obtained from using our research. To the maximum extent permitted by law, neither we, any of our affiliates, nor any other person,

shall have any liability whatsoever to any person for any loss or expense, whether direct, indirect, consequential, incidental or otherwise,

arising from or relating in any way to any use of or reliance on our research or the information contained therein.

Some discussions contain forward looking statements which are based on current expectations and differences can be expected. All of our

research, including the estimates, opinions and information contained therein, reflects our judgment as of the publication or other

dissemination date of the research and is subject to change without notice. Further, we expressly disclaim any responsibility to update such

research.

Risk Considerations

Investing involves substantial risk. Past performance is not a guarantee of future results, and a loss of original capital may occur. No one

receiving or accessing our research should make any investment decision without first consulting his or her own personal financial advisor and

conducting his or her own research and due diligence, including carefully reviewing any applicable prospectuses, press releases, reports and

other public filings of the issuer of any securities being considered.None of the information presented should be construed as an offer to sell or buy any particular security. As always, use your best judgment

when investing.

Additional Points for Consideration

As mentioned, this material is provided for information only and is not intended as a recommendation or an offer or solicitation for the

purchase or sale of any security or financial instrument. This material is not a complete analysis of all material facts respecting any issuer,

industry or security or of your investment objectives, parameters, needs or financial situation, and therefore is not a sufficient basis alone on

which to base an investment decision. Cush Capital Management LLC and/or Cush Capital Partners may have positions (long or short), effect

transactions or financial instruments mentioned herein (or options with respect thereto), or provide advice or loans to, or participate in the

underwriting or restructuring of the obligations of, issuers mentioned herein. Moreover, investment strategies and client portfolios of Cush

Capital Management LLC may have acted on the basis of this material. The information contained herein is as of the date and time referenced

above and Cush Capital Management LLC does not undertake any obligation to update such information. All market prices, data and other

information are not warranted as to completeness or accuracy and are subject to change without notice. Past performance is not indicative of

future results. The investments discussed may fluctuate in price or value. Changes in rates of exchange may have an adverse effect on the value

of investments. Transactions involving financial instruments mentioned herein may not be suitable for all investors.

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First Internet Bancorp