First Internet buying like-minded Georgia bank to boost payments business

One of the first banks to focus solely on digital delivery instead of a branch network, First Internet Bancorp is turning to the payments industry for its next chapter.

First Internet, of Fishers, Indiana, said Tuesday that it has agreed to acquire First Century Bancorp in Roswell, Georgia, for $80 million. The $408 million-asset First Century specializes in payments, tax lending, card programs and cash management services for homeowners associations. The deal comes as smaller banks face pressure to add digital payments to accommodate the fast growth in e-commerce and the incursion of fintechs while at the same time increasing fee revenue.

"The acquisition of First Century Bancorp will solidify our position as a technology-forward financial services company," David Becker, chairman and chief executive of the $4.3 billion-assetFirst Internet, said during a conference call to discuss the deal. "First Century has developed key relationships with industry-leading partners across the country, while maintaining a minimal physical footprint."

First Century's payment products include ACH, virtual lockbox and check clearing. It handles payments for global retail brands and online marketplaces, processing more than $13 billion in total ACH credit volume and $32 billion in virtual lockbox volume since 2018. First Century is also one of the 15 largest U.S. commercial prepaid card issuers, with $1.2 billion in prepaid spending since 2018. First Century was founded in 2002 as the National Bank of Gainesville and changed its name in 2007. It later acquired First Covenant Bank in Commerce, Georgia, in 2019.

"We see tremendous opportunity to deepen and expand First Century's existing relationship, given our larger balance sheet with greater resources," Decker said. "Additionally, we have the ability and scale to leverage the prepaid platform First Century has built to partner with additional payments providers to achieve further market penetration."

First Century recently launched a virtual prepaid Mastercard. The card's "interchange fees are more profitable than traditional prepaid card programs," Becker said, adding the virtual card is being targeted to merchants participating in online marketplaces and social media marketing campaigns. "The virtual card has taken off like gangbusters," Becker said.

First Century additionally offers tax refund anticipation loans in partnership with national tax preparation providers, lending $1 billion since 2018. And it has relationships with more than 20 national management companies that serve homeowners associations with more than 1,500 HOA accounts.

Most of these accounts are in the southeast, and earlier this year First Century added staff to expand geographically, a strategy First Internet hopes to accelerate. "We see enormous potential to expand this business across the U.S., creating a national low-cost funding vehicle," Decker said, adding that HOAs also represent a potential lending opportunity, given the recent trend toward homeowners making upgrades during the pandemic.

First Internet Bank was founded in 1999 as an early digitally-focused bank — it's the first institution insured by the Federal Deposit Insurance Corp. to operate entirely online. More recently, First Internet has pushed to expand its Small Business Administration 7(a) lending and reached a deal with the bank technology company Finzly to power the bank's payment modernization initiative. That deal includes use of Finzly's open-source, cloud-based hub, Payment Galaxy, to support new payment projects in the future while avoiding a larger and more expensive overhaul of First Internet's core processing system. First Internet is using Finzly to support faster payment processing, including participation in The Clearing House's RTP rail and pilots of the pending FedNow service early next year.

First Internet also partnered with the San Francisco-based franchise financing software company ApplePie Capital. First Internet will acquire $100 million of ApplePie's loans by the end of 2021 as part of the bank's push to expand its small-business unit.

As another benefit of the acquisition, First Century will allow First Internet to boost its noninterest income, according to Ken Lovick, First Internet's chief financial officer, who also spoke during the conference call.

While banks have turned to acquiring nonbanks to boost fee income as a way to offset lower revenue from lending, First Century's revenue comes mostly from noninterest sources, with Lovick saying 80% of First Century's revenue is derived from fees. That is expected to boost First Internet's noninterest income from 26% to 33%, with added diversification, "coming from revenue channels that have tremendous growth potential, Lovick said. By adding the scalable fintech partnership platforms in the HOA services business, First Internet's overall cost of funds can be lowered, expanding the bank's net interest margin over the next two years, according to Lovick.

"We are conservatively estimating an additional $500 million of deposit growth from the payments, cards and HOA lines of business, of which $350 million is projected to be non-interest-bearing," Lovick said.

Upon completion of the acquisition, which is expected in the first quarter of 2022, First Century will merge into First Internet and maintain operation of its lines of business in current locations, including a branch in Commerce that supports consumer and small- business banking, and another branch in Hilton Head, South Carolina. All of First Century's employees are expected to join First Internet, including senior management. The boards of both banks have approved the deal, which is expected to be 21% accretive to 2023 earnings per share, First Internet said.

First Internet was advised by Keefe, Bruyette & Woods, and SmithAmundsen served as legal counsel. First Century was advised by Janney Montgomery Scott, and Troutman Pepper served as legal counsel.