How regulations drove a digital bank into unlikely hands

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Luvleen Sidhu admits she is disappointed BankMobile is being forced to part ways with its corporate parent, Customers Bancorp, but Sidhu calls its prospective buyer, Flagship Bank, the perfect new business partner.

When the $9.4 billion-asset Customers in Wyomissing, Pa., decided last fall to spin off BankMobile, one of the key attributes it looked for in a purchaser was size — in this case the smaller the better.

“We expect [BankMobile] to remain a high-growth company, so we wanted to position ourselves to remain under $10 billion of assets” for as long as possible to avoid regulatory strictures that would have kicked in at that size, Sidhu said Wednesday in an interview after the deal with Flagship in Clearwater, Fla., was announced.

Consider that box checked.

The 11-year-old Flagship, which has two branches and just $113 million of assets, certainly qualifies as small. Indeed, the $260 million-plus that Flagship is seeking to raise in a private placement to pay for BankMobile is 20 times the $13.2 million of capital it held as of Dec. 31, according to Federal Deposit Insurance Corp. figures.

The $10 billion-asset threshold, of course, is the mark at which the Durbin amendment and its 44-cent cap on interchange fees kicks in for banks. Continued growth at the holding company level created a huge challenge for BankMobile, where debit card fee income is a make-or-break component of its revenue stream.

With Flagship — which plans to adopt BankMobile as its corporate name — as its parent, the two-year-old digital-only bank will not have to worry again about bumping up against the Durbin amendment for several years. Even so, Sidhu said she regrets things came to this pass.

“It’s unfortunate,” she said. “If the regulation was different, we definitely would have chosen to stay with Customers.”

Ironically, Flagship also recognized BankMobile’s predicament as a strategic inflection point.

Flagship is well capitalized, and it has been profitable, earning $1.3 million the past five years. Still, board members were concerned about its future, Frank Burke, its chairman, president and CEO, said Wednesday.

“We looked at our long-term prospects,” Burke said. “We’re a small bank, and while we’re well capitalized, the opportunities to keep growing in this market and to continue raising capital were limited.”

The board explored various M&A alternatives, but when the BankMobile opportunity surfaced, Burke said it seemed to offer the “best of both worlds” — the chance to continue operating as a local community bank while at the same time hitching its wagon to a rapidly growing national digital banking franchise, which has reached $500 million in deposits in just two years of operation.

Flagship had $93.2 million of deposits at Dec. 31.

With BankMobile’s 1.7 million customer accounts dwarfing Flagship’s book, agreeing to change the corporate name to BankMobile was a no-brainer, Burke said.

Flagship has agreed to pay $175 million for BankMobile. That price works out to about a 25% core deposit premium, according to Sandler O’Neill analyst Frank Schiraldi. While that might seem high at first glance, Schiraldi wrote in a research note Wednesday it could be supported, provided Customers stays on its present high-growth path.

“Though BankMobile has a short track record, in the past management has said it believes the model can earn [approximately] $30 million by 2018 or 2019, which would put the purchase price at six times estimated earnings,” Schiraldi wrote.

He added that Customers’ shareholders will likely support the deal since the company’s after-tax take will add more than $2 per share to tangible book value.

BankMobile has been something of a labor of love for Sidhu and her father, Customers Chairman and CEO Jay Sidhu. They dreamed up the idea for a digital-only bank in 2014, opened it in January 2015 and have been expanding it steadily since. The unit lost $4.8 million last year, but that can be partly blamed on growth-minded investments.

In August 2015, the father-daughter team created a 12-person, in-house innovation team. Four months later, they agreed to acquire Higher One’s student loan disbursement business, which was ultimately folded into BankMobile in June and was a big source of new accounts and deposits.

The Sidhus may rue the necessity of selling BankMobile, but they are not leaving it behind. The deal is expected to close before the end of the third quarter and when it does, Jay Sidhu will serve as the merged company’s chairman, and he will remain chairman and CEO of Customers. Luvleen Sidhu will serve as president and chief strategy officer for BankMobile’s digital division, while Burke will continue to run the community banking operation.

Flagship has also agreed to retain all of BankMobile’s 220 employees. The goal is to make the transition as seamless as possible for customers, Luvleen Sidhu said.

“We’ll be a division of the new BankMobile going forward, but nothing about the customer experience will really change,” she said.

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