Dive Brief:

• First Internet Bank plans to purchase First Century Bank in an $80 million all-cash deal the Indiana-based digital bank said will help it expand into the payments business.
• Roswell, Georgia-based First Century’s key lines of business include payments, tax product lending, sponsored card programs and homeowners association (HOA) services. 
• Upon completion of the merger, the $408 million-asset First Century will maintain operations in its two physical locations in Commerce, Georgia and Hilton Head Island, South Carolina, the banks said. All of First Century’s employees are expected to join First Internet, including key members of First Century’s senior management team. The deal, which is still subject to regulatory and shareholder approval, is expected to close in the first quarter of next year.

Dive Insight:

"We see tremendous opportunity to deepen and expand First Century’s existing relationships, given our larger balance sheet and greater resources," First Internet Bank Chairman and CEO David Becker told analysts during a conference call Tuesday. "Additionally, we have the ability and scale to leverage the platform First Century has built to partner with additional payments providers to achieve further market penetration."

Becker said the bank views the $80 million purchase price as a $21 million capital investment, as measured by the premium paid to the $59 million in tangible book value expected at closing. 

"We believe that the business can contribute approximately $11 million of after tax earnings in 2023, with a long runway for growth in the coming year," Becker said. 

First Internet, which has $4.3 billion in assets, is a digital banking pioneer. Founded by Becker in 1999, it was the first Federal Deposit Insurance Corp. (FDIC)-insured bank to operate as a digital-only institution.

Becker said the planned tie-up with First Century solidifies First Internet’s position as a "technology-forward, growth-oriented financial services company operating under a bank charter," and First Century’s payments business will be a key source of revenue going forward.

"Over the past 12-plus years, First Century has developed a payment-as-a-service platform that has evolved in scope and importance, each year, in succession," Becker said. 

Becker said First Century’s payment service enables payment processing for some of the world's largest online retail companies. The bank has processed $13.1 billion in Automated Clearing House volume and $32.5 billion in virtual lockbox payments since 2018, he said. 

First Century also recently introduced a virtual card product built on the Mastercard credit rail, Becker added. 

"This product is widely accepted, and interchange fees are more profitable than traditional prepaid card programs," he said. "This product is being targeted to merchants participating in online marketplaces to pay for social media advertising campaigns."

Additionally, the "substantial niche" First Century has developed in the HOA services sector will help First Internet gather low-cost deposits, Becker said. 

First Century has a software licensing agreement that delivers deposit services integrated with a cash management and accounting solution tailored to the HOA industry, Becker said.

Becker said First Internet also plans to expand First Century’s tax product lending business. 

"Due to balance sheet constraints, First Century has been limited in its ability to both capture all the economics in this line of business and onboard tax preparation partners," he said. "With our much larger balance sheet and access to greater sources of liquidity, we will have the ability to aggressively pursue new opportunities with additional national tax preparers, particularly given some of the recent market disruption." 

First Internet anticipates it will see $500 million in deposit growth from First Century’s payments, cards and HOA lines of business — $350 million of which it projects will be non-interest-bearing, First Internet CFO Ken Lovick said on the call. 

First Century Chairman and CEO William Blanton called First Internet the "perfect strategic and cultural partner." 

"This is a natural step in our evolution and a very positive development for our customers and business partners," he said in a statement. "We believe First Internet’s larger balance sheet, digital banking expertise and broader array of products will enhance our existing client relationships and enable us to drive long-term growth for the combined organization."