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  1. Home
  2. / Investing
  3. / Financial Services

Customers Bancorp Offers Custom-Made Bank Play

A recent fraudulent loan hit shouldn't outweigh its business banking benefits.
By JIM COLLINS
Aug 03, 2015 | 12:00 PM EDT
Stocks quotes in this article: CUBI

I had the opportunity to sit down with Bob Wahlman, chief financial officer of Customers Bancorp (CUBI) this week in New York. CUBI is my favorite regional bank play, and I included it in my recent Sweet 16 portfolio for a new international client of my asset management firm, Portfolio Guru LLC.

CUBI's bias towards business banking (95% of its revenues) versus consumer banking fits a trend I've been trying to play. Corporate balance sheets are quite strong in 2015. Meanwhile, the average consumer's wage growth as reported last Friday is basically nonexistent and earnings of consumer-facing companies are exhibiting very little correlation with poor numbers being reported for sentiment, expectations, and so forth. Roger Arnold explained this very well in his Real Money column Friday. So, I'm looking for business-to-business versus business-to-consumer, and Customers Bancorp certainly fits that profile.

I set up the Sweet 16 portfolio the day before CUBI reported earnings and, wouldn't you know it, the stock dropped precipitously on the earnings report. The internals were fine. Book value per share rose 85 cents in the first six months, deposit growth for the quarter exceeded loan growth (11.9% vs. 7.5%) and return on equity for the quarter was a healthy 12.5%.

The stock's decline was caused by the discovery of a fraudulent loan on the day before CUBI was to report earnings. CUBI was forced to take a $6 million reserve against a $9 million loan as management discovered this loan was based on a fraudulent letter of credit. That letter of credit was with a Top 20 bank, which had vouched for its customer's credit to CUBI, but the hit was to CUBI, with a 13-cent charge to second-quarter earnings per share to cover the reserve.

CUBI since has reviewed its loan portfolio and concluded the fraud was an isolated incident. Indeed, Wahlman told me that CUBI only has one other loan on its books guaranteed by a letter of credit, and that loan is much smaller than the one that led to the charge.

CUBI's nonperforming loan ratio was an infinitesimal 0.16% at June 30, and even if the loan in question were totally written off (technically, it was still performing as of June 30), by my calculations CUBI's nonperforming loan ratio would still be less than 0.30%. This is almost a full percentage point below CUBI's peer group average and nearly two percentage points below industry average. That's the benefit of banking corporates instead of consumers.

So, really, the fury over CUBI's second-quarter earnings charge was much ado about nothing. The positive from it was management's decision to issue a second press release that same day outlining its guidance for 2016. CUBI expects 2016 EPS of $2.40 to $2.50, implying 20% growth versus expected 2015 EPS of about $2.00 ex-charges.

Wahlman disaggregated that 20% EPS growth forecast for me as follows:

  • 10-12% asset growth, with deposit growth continuing to outpace loan growth
  • Revenues growing at least 2x as fast as book value.
  • Additional fee income through the core business as well as CUBI's millennial-focused BankMobile platform
  • Growth in small business lending

That is a phenomenal rate of growth for a regional bank, and also implies that CUBI was trading as of Friday's close at slightly more than 10x earnings -- well below its peer group average. So, CUBI is cheap, well-positioned, and a key component of my Sweet 16.

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At the time of publication, Jim Collins' firm, Portfolio Guru, was long CUBI. 

TAGS: Investing | U.S. Equity | Financial Services

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