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First Internet deal termination highlights sellers' rising price expectations


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First Internet deal termination highlights sellers' rising price expectations

First Internet Bancorp's planned acquisition of First Century Bancorp. fell apart in a clash over First Century's valuation amid rising price expectations among sellers in bank M&A deals.

First Century raised its asking price by more than 15% — an "outrageous" level — while the banks were waiting for regulatory approval, First Internet Chairman and CEO David Becker said in a call held to discuss the deal termination, following a session in which his bank's share price fell more than 14%. First Century Chairman and CEO William Blanton said in a separate interview, however, that the deal-making environment simply changed.

"We felt like our value had gone up dramatically. When we originally negotiated the contract in August 2021, the world was very different," Blanton said.

First Internet and First Century originally announced their now-terminated deal on Nov. 2, 2021, with expectations that it would close in the first quarter. The Federal Reserve approved the deal April 29, and the companies tried to renegotiate the merger agreement — which was set to expire if the merger did not close on or before April 30 — to keep the deal together through the customary waiting period that follows Fed approval. But First Century broke off the companies' merger agreement after they could not agree on an amended purchase price.

"I think it was just a window of opportunity when the regulators didn't sign off until the end of April and we needed to get an extension," Becker said. "When we started to question, there was dead silence for quite a period of time and then we got a pretty outrageous offer that we just could not get to."

First Internet felt its original $80 million purchase price was a "full premium" for First Century but nevertheless raised its offer to $85 million during renegotiations, Becker said on the May 2 call. First Century rejected that offer, and First Internet did not feel comfortable paying more since First Century's shareholders' equity at closing was lower than initial projections and would have increased goodwill and tangible book dilution, Becker said.

In renegotiations, First Century requested a new purchase price of $92.5 million on the basis that the value of its large noninterest-bearing deposit base had gone up, First Century's Blanton said.

"There was no doubt in our minds," Blanton said, that the deposits were worth "substantially more."

A seller's market

The termination illustrates a current bank M&A environment in which sellers' pricing expectations have skyrocketed in recent months as bankers feel more optimistic about the operating environment, Lee Bradley, a Southeast investment banker for Community Capital Advisors, said in an interview.

"They want the max price they can get," Bradley said. "The sellers have got the leverage at the moment."

Sellers with high concentrations of noninterest-bearing deposits and diversified revenue streams believe they hold a higher value today than they did six months ago, Paul Davis, director of market intelligence for advisory firm Strategic Resource Management, said in an interview.

"It would make sense that if you have a large base of noninterest-bearing deposits, you're, at least from your own perspective, a more valued institution now than you were back in November," Davis said. "There should be a number of other banks out there with niche businesses like prepaid and other things and that have a low cost of funds that will pay attention to this termination and kind of take a look at what their own valuation is."

Sellers' surging price expectations have led to the recent slowdown in M&A announcements and will continue to weigh on the pace of M&A, Bradley said. Only 10 bank deals were announced in April, a sharp decline from 24 announcements in April 2021.

A matter of perception

First Century had $203.1 million in noninterest-bearing deposits at March 31, making up nearly two-thirds of its deposit base, according to its first-quarter call report. Conversely, noninterest-bearing deposits made up only $163.5 million of First Internet's $3.26 billion in total deposits at March 31.

First Internet's Becker suggested in the conference call that First Century's noninterest-bearing deposits still did not merit the bank's asking price given that First Century's accumulated other comprehensive income had depreciated during the past six months.

"They put forth some details about why they were trying to justify their price, but it was all future opportunities," Becker said.

In the interview, Blanton said First Century's securities portfolio had a premium of $2.5 million during original negotiations, but First Internet did not factor that into the original price. Thus, "it didn't seem right for us now that the shoe was on the other foot that they were holding the depreciation against us," Blanton said.

Ultimately, the companies could not agree on First Century's value. "It's a perception of value," Blanton said. "Value is in the eye of the beholder."

Further, Blanton said the companies were more different culturally than originally thought.

"They're more mass market," Blanton said, "and we're more customized."

The companies' futures

Piper Sandler analyst Nathan Race called the loss of First Century's lower-cost deposit base, revenue diversity and expected 21% accretion to 2023 earnings per share a "clear negative" for First Internet.

The Street also viewed the termination as a negative for First Internet. The company's stock price closed down 14.24% on May 2, compared to a 1.11% gain in the KBW Nasdaq Bank Index.

Following the termination, First Internet plans to focus on internal initiatives, pursuing projects in the commercial finance space and building its fintech and banking-as-a-service platform. It also intends to buy back its shares as part of a current authorization to repurchase up to $30 million in stock. The company has purchased about $11.4 million in common stock.

First Internet will consider requesting the board approve another buyback plan unless it plans to use its cash on future M&A opportunities or other investments, Becker said.

"We are getting inquiries on a daily basis," Becker said, regarding M&A. "We've got a lot of opportunities in the hopper and more coming in every day. This will allow us to look at more and possibly expedite some other opportunities."

First Century, meanwhile, plans to remain independent. When First Internet approached the bank in 2021, it was not seeking a buyer, Blanton said.

"We weren't looking to sell then, and we aren't now," Blanton said.