I had the opportunity to meet with management from Customers Bancorp (CUBI) in New York Wednesday. I spoke with CEO Jay Sidhu and CFO Bob Wahlman.
Sidhu is quite well known in Southeastern Pennsylvania (where I grew up) for his 20 years at the helm of Sovereign Bank (now part of Banco Santander), which he built from a small thrift into a bank with $80 billion in assets.
So, the fact that Sidhu chose to put the band back together (CUBI's management team is composed mainly of ex-Sovereign execs) and create a community bank with a branch-lite model is intriguing. That type of financial institution sits at the cutting edge of the U.S. economy. Loans to small businesses to build housing and corporate spaces and/or expand existing businesses are the No. 1 driver of economic growth. Lest anyone forget, small business creates 70% of the new jobs in the U.S. and as a small business owner myself, I can tell you, support from lenders/investors is absolutely critical to growing an emerging enterprise.
So, the most important question to Sidhu had to be "how would you grade the U.S. economy?"
His answer: B.
He admitted some disappointment that this far into the recovery, loan growth was not as robust as he had hoped. He is seeing strong growth in auto and credit card loans (areas where CUBI doesn't participate), but growth in other consumer sectors remains weak. Even more importantly, core lending to businesses, referred to as commercial and industrial (C&I) is growing, by his calculation, at 3-5%, a slower pace than he would like to see and one that is indicative of 2-2.5% growth in the U.S. economy overall, a tepid pace by historic standards.
So, after all the back and forth over the health of the U.S. economy, given the first quarter's figures, which provided more questions than they answered like was it all weather related or is there a slowdown, you have an answer from a banker on the front lines. The U.S. economy is good, but not great.
The raging bulls in this market with their incessant economic cheerleading would do well to talk to Sidhu, but the permabears could probably learn a thing or two, as well. It's a "meh" economy, which is the perfect backdrop for corporate fixed income (as I've written before).
In fact, I came out of the meeting determined to run the numbers on Customers' 6.375% Notes due 2018 (CUBIL), which could be an addition for portfolios of my most-risk-averse clients.
But in addition to the macro picture from Sidhu, I also gained insight from Wahlman on how management plans to grow CUBI, which is really only in its fourth full year of existence. Obviously the goal is to take market share, but how to do it when competing against the Goliaths?
It's a twofold answer for CUBI. It uses person-to-person contact and aggressive pricing. Customers uses a private/personal banker approach to try and bank privately-held businesses and high net worth families that have income producing real estate.
Wahlman also noted that CUBI's low overhead cost (the bank only has 14 branches on a total deposit base of about $3.6 billion) allows the company to price below market on loans and above market on deposits. Combine that with pristine credit quality and a pick-and-choose rationale for lending (Wahlman noted CUBI's rejection rate for loan applications is 75%) and one can see the appeal of running a boutique bank.
Wahlman noted Signature Bank and Texas Capital Bancshares as two other banks in the aspirational, or boutique, category. These banks are going after the big boys' customers with laser focus on service and delivering value via low costs. It's a shot across the bows of only to JPMorgan Chase (JPM) and Bank of America (BAC), but also politicians who insist on growth-stifling regulations and solutions that answer problems raised in the crash of '29, not the one in '08.
CUBI has found a great niche, but from a macro perspective I don't see value in financial stocks here. CUBI is trading at 1.3x tangible book value, the group median is 1.6x and as a hard-core value manager I really only get excited at 1x book. But I have been a fan of Sidhu for many years and I will enjoy watching him grow this new bank.