Customers Bancorp and BankMobile are parting ways, and each is convinced that shedding the weight of the other will lighten regulatory loads and open new paths for growth.
The $18 billion-asset Customers, which agreed on Thursday to sell its digital bank to Megalith Financial Acquisition, can focus on becoming a larger commercial lender.
BankMobile, to be rebranded as BM Technologies when it joins Megalith later this year, should be able to pursue more white-label relationships and focus more on its fledgling partnership with Google Pay once it is no longer operating as part of a bank.
BM Technologies will still be subject to a cap on interchange fees. Customers, which will keep the deposits generated by BankMobile and will own about 47% of BM Technologies, will reimburse the fintech for the next two years for any interchange fees lost.
But the long-term plan is for Customers to fully divest its ownership stake in BM Technologies and for the rebranded BankMobile to identify one or more banks that are exempt from the cap.
Each company should be better positioned to pursue acquisitions over time, industry observers said.
For Customers, the biggest immediate benefit could be less regulatory oversight, Chairman and CEO Jay Sidhu said during a conference call to discuss the transaction. He indicated that Customers has received more regulatory scruitiny than most banks its size because it oversees what is essentially a fintech platform in BankMobile.
"Regulators do not like bank subsidiaries to be operating nonbanking businesses," he said.
Jacob Thompson, managing director of investment banking at SAMCO Capital Markets, agreed.
“The burden is lightened” for Customers “in the sense that you remove a layer of regulation that goes with” BankMobile, Thompson said. “And you free up management and resources to focus on the commercial bank.”
"We look at the deal as a potential welcome" event for Customers, Frank Schiraldi, an analyst at Piper Sandler, wrote in a note to clients, adding that the sale will deliver "modest accretion" to tangible book value and tangible common equity "with limited impact to operations."
Customers, which is based in Wyomissing, Pa., will receive $32 million in cash from Megalith and $55 million in BM Technologies stock. Over time, Customers plans to sell its stake in BM Technologies.
The deal is a family affair for Jay Sidhu, who is Customers' chairman and CEO and executive chairman at Megalith. His son Sam was Megalith's CEO before joining Customers earlier this year as head of corporate development; he is still on the buyer's board. Luvleen Sidhu, BankMobile's CEO, is Jay Sidhu's daughter.
Jay Sidhu said during a conference call Thursday that Megalith was among dozens of companies that Raymond James, Customers' investment bank, contacted as part of the process. A special committee of independent directors evalutated three bids before recommending Megalith's offer.
The Sidhus “completely recused" themselves from the process, Jay Sidhu said. “We did not participate in any [discussions] or voting on the board level.”
Customers has "absolutely no intention of having any control or influence" over BM Technologies, the elder Sidhu added. "This should truly be an independent company. There will be no board seats demanded by Customers and no Customers management will serve at BM Technologies. ... All agreements will be at arms’ length."
Jay Sidhu said he sees no complications completing the divestiture.
Customers tried to spin off BankMobile off in 2018, but a complex transaction with Flagship Community Bank fell through when the Clearwater, Fla., bank struggled to raise capital. A seperate effort to spin off BankMobile ended when Customers failed to secure an exemption from a legal cap on interchange fees that applies to banks with more than $10 billion of assets.
"The structure of the transaction is a bit complex, although at first blush we believe this deal should have a higher probability of being approved by the regulators given no deposits [or] loans are transferring, and the new ... entity will not be operating as a bank," Michael Perito, an analyst at Keefe, Bruyette & Woods, wrote in a note to clients.
BankMobile, for its part, should be able to move more quickly when it is no longer operating as part of a bank, and it should have the financial backing to expand more aggressively as part of the publicly traded Megalith, industry experts said.
“There's a general distribution strategy that matters,” said Jacob Jegher, president at Javelin Strategy. “That requires money and financing. Even if you're just the backend partner for Google, that alone could require greater infrastructure depending on how successful it is.”
BankMobile “is in many ways, a tech company, and in the tech industry you need to be nimble and react quickly to change,” said Charles Wendel, president of Financial Institutions Consulting. “They will be less confined now by regulations and freed up to pursue new things more quickly.”
Luvleen Sidhu said as much in remarks made during a prerecorded call for investors. The deal will “accelerate our growth as world-class digital banking platform,” she said.
BankMobile is aggressively pursuing white-label partnerships similar to its 2017 deal with T-Mobile. The companies debuted an app in late 2018, called T-Mobile Money, that offers basic mobile banking, bill payment and person-to-person payments. It comes with a checking account and a debit card.
The digital bank will also incorporate Google Pay into its higher-education business next year, leveraging a recently announced partnership.
Its ambitions are lofty. Though it still hasn’t turned an annual profit — it's projected to lose $7 million this year — the company is predicting it will earn $4.7 million in 2021 with an estimated $104 million in revenue. It also expects average serviced deposits to nearly double in 2021, to roughly $1.4 billion.
BankMobile has the opportunity to reach up to 200 million customers through white-label channels, Luvleen Sidhu said. The Google Pay partnership could help the fintech bring in more college accounts, including more than a million newly enrolled students.
“We also look forward to M&A opportunities in the future that would further propel our growth,” she added.
Jay Sidhu also acknowledged on Customers' call that owning BankMobile may be hurting the company's stock price.
The sale will "simplify the story of Customers Bancorp and let us focus on being a core commercial bank," he said. "We realize that bank investors put no value on innovative startups in the banking business."
Customers is also focused on costs, with plans to close three branches over the next six to 12 months, Jay Sidhu added.
SAMCO's Thompson said that there should be plenty of acquisition opportunities for Customers when the coronavirus pandemic subsides and banks have a better handle on credit quality.
And Jay Sidhu certainly has experience with bank acquisitions, as he aggressively bought banks to take the former Sovereign Bancorp from a small community bank to an $89 billion-asset regional prior to the financial crisis.
Sidhu sold a 25% stake in Sovereign to Banco Santander in 2006 before leaving the company. Santander bought the rest of Sovereign three years later.
“You’re going to have some wounded and tired banks coming out of this that will want to sell,” Thompson said. "It could be smart to get in position as a potential buyer."
Penny Crosman contributed to this report.