An internet banking pioneer’s view from the catbird seat
If David Becker's career were put to country song, the title might be "I was internet banking when internet banking wasn't cool."
Becker founded the online-only First Internet Bank in 1998, well before the term digital platform was thrown around. Online banking long had promise, but to hear Becker tell it, it's really coming into its own — and he has a front-row seat to change.
Consumers find digital banks more appealing thanks to rocketing deposit rates and big-bank scandals, he said, and the increasing number of online-only rivals has made the market more mainstream.
The Fishers, Ind., bank averaged about 35% annual compounded growth over the past five years to $4 billion of assets. Small Business Administration loans are expected to fuel more expansion over the next couple of years with the help of a recent acquisition, and health care financing has shown promise, nearly tripling year over year to $252 million at Sept. 30.
The following is an edited version of Becker's comments on rising competition, First Internet's ability to respond to fluctuations in deposit and mortgage rates, and how its lack of geographic bounds could foster additional growth and avoid late-cycle mistakes in credit decisions.
What are the opportunities and challenges for First Internet as more financial institutions make an increasingly large play in the digital space?
DAVID BECKER: Really it's helped our position. One of the concerns we had over the past 20 years was with people who didn't really grasp the idea [of an online-only bank] and how it could work for them. So having additional competition and players is similar to how you find McDonald's and Arby's and Wendy's all together — the more folks in the market, the better it is in a lot of respects. Take a look at what happened to Wells Fargo the last couple of years with the consumer play. When they blow up and Wells Fargo gets dinged for something, our volume in new-account activity goes up. Folks are now comfortable with the web, and they go there to search for an alternative, and we pop up at the top.
Are you surprised how big the digital banking market has become?
No, I'm actually surprised it didn't happen sooner. Part of that is just the educational component. Twenty years ago there was a lot of fear around the internet and security, and I think a lot of those things have been overcome. There's still a little hesitancy out there, but I think the consumer lives their daily life on the internet. My kids wouldn't know an encyclopedia or a dictionary if I him them over the head with it [laughs]. It's just a natural course of business today.
On your most recent earnings call, you talked about the strength of your consumer mortgage business. Are you taking more business from online players or from more traditional lenders?
It's really a mixture of both. We are direct to consumers — we don't use brokers in between. About 95% of all homes purchased today involve someone doing research on the web, so it's a natural progression for them to move from the research component to the financing side. And the efficiency is tremendous. We can get anybody, anywhere in the country closed in 30 business days.
Mortgage has cycles, and there was a bit of a downturn a year or two ago when millennials were debating whether they wanted to buy houses, and we were about 60% new business and 40% refi[nancing]. But now [that rates have fallen] it's flipped back again to 70% refi and 30% first-time buyers. Productivity in the mortgage area has been phenomenal for us.
You mentioned refis. What geographic markets in the U.S. are particularly hot?
The hottest market by far has been California. It's definitely the No. 1 real estate market. Probably 20% to 25% of our business is California-based. Another hot market over the past few years is the Southeast — particularly Georgia, Florida and Texas. There's just so much activity in those markets that when the rates come down people will act. The rates could drop a quarter point, and that's significant enough for people to think about refi. If the 10-year Treasury stays in that 1.75% range or below, the refi game is going to continue to be a boom. And we can get those done in three to four weeks.
On the deposit side, does being a digital bank make the battle for funding easier or harder?
It's made it easier for us because with the online systems we have, a person can make in essence an impulse buy because they can open an application with us in about five minutes. Obviously that's faster than you could in a traditional brick-and-mortar bank. Historically most banks weren't price-sensitive on the deposit side. They just assumed people would take what they get and they'll be there forever. But there was a real awakening in 2018 when rates went up faster than I've seen in our 20-year history. There was a lot of activity with people jumping ship and figuring out how to get paid even more, so there was a real race to the top on rates. Now some [certificate of deposit] rates have fallen 100 basis points or more. But deposit gathering has never been an issue for us. We can tweak rates a couple basis points, and money flows through the front door.
On the third-quarter earnings call, you said the bank's margin "hit the floor" when it dropped to 1.54% from 2.06% a year earlier. So what gives you confidence when you look at the net interest margin going forward?
It's partly because of the activity from a year or so ago when the rates were skyrocketing. Most of that came on within a 15- to 18-month term. And we weren't putting on four- and five-year CDs. So over the course of the next 12 months we have over $1 billion in CDs that are going to mature at an average cost of about 2.6%. And the new CDs we brought on in October were less than 2%. And if the Fed bumps rates down again or does anything next year, that rate could be in the 1.50% or 1.60% range, so we're picking up almost 100 basis points in savings on $1 billion in deposits. And that's phenomenally significant to the bottom line.
How are you feeling about credit quality as talk of a looming recession continues?
The real key for us is our national footprint. If we were slugging it out with 14 other banks here in the Indianapolis market, I would probably be making some credit decisions that are not in our best interest. But we're able to set a box that we're comfortable in financing within, and if the opportunity doesn't meet that box, we just move on to the next one.