Customers Bancorp in Wyomissing, Pa., is preparing for life after the spinoff of its digital bank.
The company’s second attempt to sell BankMobile is going as planned and should close in the third quarter, Chairman and CEO Jay Sidhu said. Flagship Community Bank, which is expected to raise about $100 million for the transaction, has applied with the Federal Deposit Insurance Corp. to acquire BankMobile’s deposits.
Those following Customers are hopeful that the spinoff will help create a more valuable company that grows well beyond its current $10 billion in assets. Customers has been staying below that threshold because the regulatory cap on interchange fees would have stymied revenue growth at BankMobile, which lost $1 million in the first quarter.
“I think the BankMobile situation now is distracting and is more of a negative,” said Michael Diana, at analyst at Maxim Group. “The valuation of the entire entity is ridiculously low. I think that’s because people are waiting to see what happens with BankMobile.”
Customers will concentrate more than ever on its community banking segment — where the focus is on business banking and profit rose 4% from a year earlier to $25.1 million — post-BankMobile, Sidhu said. To help that business flourish, Customers recently implemented a new core-banking platform.
While there are always risks associated with a major systems conversion, Sidhu said he felt that the FIS core-banking platform would offer more than its prior setup. Customers also uses nCino and Salesforce.com software.
“First we started with our strategy — what is unique about our bank, how can we differentiate ourselves and help us accelerate and grow the business?” Sidhu said. “We put it on our whiteboard and said, ‘What kind of tech support do we need to make that happen?’ FIS alone wasn’t able to fill in all the gaps, but it was a better core than the core processing system we were on.”
At the same time, Customers has been aggressively hiring private and commercial bankers in New York, Chicago and Washington to expand its balance sheet. Sidhu has poached lenders from Associated Bank, Bank of America, Signature Bank and Sterling National Bank.
The key for Customers will be managing expenses while adding revenue producers in key markets, said Russell Gunther, an analyst at D.A. Davidson.
Sidhu "has done a nice job of taking a struggling, $200 million-asset bank and transforming it into a high-growth commercial franchise,” Gunther said. “It’s just removing some of the headwinds and noise around BankMobile and allowing that core commercial bank to really shine.”
Noninterest expense rose 7.8% from a year earlier, to $52.3 million, due to higher salary costs and ongoing investment in BankMobile's infrastructure. Customers' efficiency ratio rose to 60.8% from 56.8% a year ago. In comparison, banks with $7.5 billion to $12.5 billion in assets had an average efficiency ratio of 53.57% on Dec. 31, according to FDIC data.
Customers has projected that the efficiency ratio for its community bank segment should be somewhere between 45% and 49% for the rest of this year.
The company is also focused on attracting low-cost deposits; it will lose about $500 million in deposits when BankMobile is divested. Upgraded technology and new hires should help the company add low-cost funding, Sidhu said during the company's quarterly conference call.
“They're starting to do these things in anticipation of losing [BankMobile's] funding," said Michael Perito, an analyst at Keefe, Bruyette & Woods. Customers' ultimate earnings trajectory will hinge on its deposit-gathering abilities, which could face challenges with rising interest rates, he added.
“I think relationships are still critical, but clients are becoming more aware of rising rates and getting paid on their balance at the bank,” Perito said. “It’s becoming more expensive to bring people over.”
At the end of the day, the BankMobile spinoff will allow everyone to focus on the core commercial bank, Gunther said.
“I don’t see folks losing interest in this story, post-BankMobile,” Gunther said. “I actually think it will re-engage the core commercial bank investor with more earnings ability going forward and allowing that quality core commercial bank to shine through and retake center stage.”