BEHIND THE NEWS
First Internet's acquisition is no run-of-the-mill bank
Bank mergers happen all the time in Indiana, but this one is about as unique as they come.
The buyer, Indianapolis-based First Internet Bancorp, was one of the nation's first Web-only banks when it opened its doors in 1999. Today, it's among the top five in that field, with assets topping $445 million.
The seller is Indianapolis-based Landmark Financial Corp., parent of Landmark Savings Bank. Landmark Financial, with assets of $65 million, may be the lowest-profile banking company in the state-even though it has its headquarters and sole retail branch on bustling Monument Circle.
So why did First Internet announce Aug. 28 that it was paying $12 million to buy a company with little name recognition? The answer, said CEO David Becker, is Landmark's residential-lending firepower.
Home mortgages and builder loans are Landmark's bread-and-butter business-and one First Internet lacks. First Internet's loan portfolio includes mortgages bought on the secondary market, but those have less profit potential.
"We've been a great deposit-gathering organization," Becker said, noting that because First Internet doesn't operate a costly network of branches, it can pay more on CDs and other deposits. "But generating assets has been a much tougher play for us."
Mike Alley, former CEO of Fifth Third Bank's central Indiana operation, said the reasoning makes sense. First Internet already makes consumer loans. Making mortgage loans will provide it with another attractive channel to deploy deposits.
"A mortgage loan has less risk inherent in it than a traditional car loan or a business loan," Alley said, since the lender has first dibs on the home in the event of default.
The purchase doesn't mark a shift in strategy for First Internet, which has been humming along on its own. The 27-employee company, which is owned by 250 investors, posted second-quarter profit of $782,091, up more than 50 percent from a year earlier.
First Internet now has 30,000 accounts across the country. Becker-a 52-year-old entrepreneur who in 2004 sold locally based Re:Member Data Services Inc., a provider of processing services to financial institutions, for $20 million-said that as traditional banks expand their Internet offerings, customers are realizing they can do without the bricks and mortar.
His Internet bank addresses one of customers' primary concerns-the lack of ATMs-by giving them a monthly credit of up to $6 to offset the fees they rack up using others' automated tellers.
Even so, with the Landmark deal, First Internet is tiptoeing into the branch world. After the acquisition closes early next year, First Internet will put its own moniker on Landmark's Circle location. But the bank has no plans to roll out others, Becker said.
Charles "C.P." Perfetti, Landmark's longtime CEO, said: "This is an opportunity for both of us to have expansion. Both organizations are very complementary to one another."
Perfetti will stay on after the purchase. His duties will include overseeing First Internet's mortgage business. Becker said First Internet also plans to absorb the company's other 25 or so employees, though some will assume new roles.
The acquisition grew out of a lending relationship the companies struck more than a year ago. Because of Landmark's small size, its maximum loan was a little more than $1 million. It began pairing with First Internet to make larger loans.
First Internet says it will offer checking accounts at the Circle branch, a service Landmark did not offer. It played a different game-amassing deposits by offering attractive rates on CDs and money-market savings accounts.
Like First Internet, it can outprice the competition because of low overhead. Beyond its Circle space, Landmark has just three locations-loan-production offices in Hamilton and Johnson counties, and a data-processing site at 10th and Meridian streets.
The gap between what it and traditional banks pay is sizable. On Aug. 30, for instance, Landmark was offering a 5.39-percent interest rate on 24-month CDs with a $1,000 minimum deposit. Across the Circle, Chase's comparable rate was 4.16 percent.
A Landmark deal
Landmark, which is owned by more than 60 local investors, traces its roots to 1925. It moved into Monument Circle quarters more than two decades ago.
It's been a low-profile run. The only exception was the early 1990s, when the Securities and Exchange Commission filed a civil lawsuit accusing Michael Maio, then Landmark Financial's chairman, of insider trading in shares of the document-management firm Anacomp Inc.
The case did not involve allegations of any improprieties involving Landmark itself. A judge ultimately ruled against Maio, and he paid $500,000 to the SEC. During the trial, Maio acknowledged that, despite his Landmark post, he had a severe reading problem that hindered his ability to comprehend written documents.