|Shares Out. (in M):||28||P/E||12.9x||10.5x|
|Market Cap (in M):||528||P/FCF||0.0x||0.0x|
|Net Debt (in M):||0||EBIT||0||0|
Customers Bancorp, Inc. (Ticker: CUBI) is an underfollowed, northeast bank, which only listed on a national exchange 15 months ago, trading at 10.5x 2015E EPS and 1.2x TBV, a 21% and 20% discount to peers, respectively. The bank is growing like a weed and comprises Jay Sidhu’s platform to re-create Signature Bank’s low-cost, high-growth business model, which trades at 18x 2015E EPS today (Sidhu and other insiders own 17% of CUBI). Signature went public in 2004 at 1.5x book, earning a low-teens ROE, and investors in the IPO have since made nearly 8x as mgmt has steadily expanded the business, a rarity in bank land. I believe CUBI represents a similar early-stage bank growth opportunity, at a significant discount trading at 1.2x / 10.5x 2015E consensus. I believe the stock today is worth $29.48 or 15x mid-2015 earnings run-rate of $1.97, a 56% premium to the current stock price. Growth stocks are extremely difficult to come by for bank investors, and I believe once CUBI is discovered by the bank investor community, it will trade to a premium valuation to reflect its level of growth.
The first positive catalyst occurred after the close yesterday with CUBI putting out an 8K stating the DOJ has completed its review of alleged CRA infractions without any enforcement action. The most recent company to come out of an investigation is up 26% in the 7 months since making the same announcement. Resolution of the Religare investment overhang, another positive catalyst, should also occur sometime over the next few months.Overview
Customers Bancorp, Inc. is $5.6bn in asset bank headquartered in Wyomissing, PA. The company operates 15 branches with an impressive $178mm deposits per branch (vs the national median of ~$40mm). The bank provides a full range of banking services to small and medium-sized businesses, professionals, individuals, and families through a branch-lite operating model. The bank currently offers CRE, C&I, mortgage warehouse LOC, and multifamily loans. CUBI expects to reach $9bn in assets by the end of 2019, at which point it will stop growing assets to remain under the Dodd-Frank $10bn asset exemption, and likely pursue a sale of the bank. The bank’s need for equity capital will be limited after a few more years of growth.
CUBI was formerly known as New Century Bank, and was hemorrhaging money coming out of the crisis. Jay Sidhu, former CEO of Sovereign Bank, joined CUBI in May 2009 as Chairman & CEO, and has recapitalized the bank and recruited many of his former colleagues from Sovereign.
2010: acquired three banks
Management: With Controversy, Comes Opportunity
The most important aspect of a bank is management so I will spend more time than I normally do on management. CUBI has a controversial CEO and Chairman in Jay Sidhu, 62. I take the view that Sidhu is one of the more talented bankers I have met running a bank under $50bn in assets, let alone under $10bn in assets. I come to this conclusion after: 1) meeting with 10+ business heads, which offered unprovoked insights into Sidhu’s skills as a leader and bank CEO, 2) calls with former employees of Sidhu, 3) getting to know Sidhu over the past few years, and 4) seeing Sidhu and team turn a $250mm money-losing bank into a $5bn+ in asset, high-performing bank in only a few years.
Sidhu has an interesting life story, particularly for a U.S. CEO, and his interview on Building New York with Michael Stoler in January 2014 does a good job showcasing this (http://tinyurl.com/oznje35). And the exposé in American Banker in August of 2013 walks through some of the controversy surrounding Sidhu. Customers Bancorp's Jay Sidhu, Persistent Protagonist. I read through all the Sovereign Bancorp filings from back in the day and all the press coverage I could find for when Relational went activist on Sovereign Bancorp. Relational’s presentation and proxy gives all the dirt you need to know and be able to come to terms with. In fairness, it’s not a pretty read.
There are many reasons I don’t see the controversy at Sovereign foreshadowing issues to come at CUBI:
The bottom-line is an investment in CUBI is an investment in Sidhu and team. I think this is CUBI’s biggest strength today and we’re getting the optionality that they accomplish something great (e.g., SBNY’s success or the mobile banking platform gains traction) for next to nothing. It’s not going to come without a few hiccups along the way but my view is that over the next 3-5 years this is the team you want to invest in, particularly at today’s prices.
The Banking Model
The bank is focused on a branch lite model with lower overhead costs than peers with extensive branch networks. This is done through a “high touch, high tech” concierge banking strategy where the bankers go to customers’ homes or offices instead of a meeting in the branch. Branches are located in non-prime locations to save on expenses and have significantly more deposits per branch than peers. As a result, the bank spends more on its cost of funds (a temporary phenomenon) but much less on branch operating expenses to generate an all-in cost of funds advantage.
I went to the headquarters in Wyomissing, PA and met with the whole team over the course of a day. I quickly learned the effort to save on unnecessary expenses is tangible. It’s engrained in the firm culture to generate $2 in revenue for every $1 in expenses. There’s no better example than the NYC team, which came out of the high performing Signature Bank (Ticker: SBNY). The team has an office at 99 Park Ave on the 15th floor, where rent is a fraction of what a branch on the ground level would cost. The focus is on avoiding unnecessary costs associated with the antiquated branch banking model.