Prepared by Stephanie and Tara, Analysts at BAD BEAT Investing

I (Stephanie) have been covering a ton of banks lately in my work for Quad 7 Capital. In this research, we have seen a few good opportunities, but only one so far qualified for our members at BAD BEAT Investing. This bank, which there are no red flags on operationally, was and still is trading at an immense discount to book and to tangible book. We are talking about Customers Bancorp (CUBI).

I know we have recommended a few other banks, both large and small, but this one has promise. We think you have to consider this one. The bank is slowly growing its presence in the northeast.

(Source: Customers Bancorp earnings presentation)

The common stock could double in the next 12 months, but we are expecting at least a 30% gain on this one.

The play

We think you should buy now and add in 30-cent declines in 10 percent larger blocks (note this was the play highlighted for BAD BEAT Investing members two weeks ago)


Target entry 1: $13.75 100 shares

Target entry 2: $13.45 110 shares

Target entry 3: $13.15 121 shares

Target entry 4: $12.85 133 shares

Target entry 5: $12.55 146 shares

Target entry 6: $12.25 160 shares

Target entry 7: $11.95 176 shares


The bank just reported Q3 2020 net income of $47.1 million, or $1.48 per diluted share. Core earnings for Q3 2020 totaled $38.2 million, or $1.20 per diluted share. Revenues were up 42% over last year, and they have held expense growth to 10%. At the same time, asset quality improved materially, with non-performing assets as a percent of total assets declining to only 0.34% as of September 30, 2020.

(Source: Customers Bancorp earnings presentation)

Maintaining strong asset quality remains the highest priority at Customers Bancorp, which includes a highly active portfolio monitoring process. In addition to frequent client outreach and monitoring at the individual loan level, the bank employs a bottom-up data driven approach to analyze its commercial portfolio.

Each borrower has been stressed for liquidity, debt capacity, and business profitability using forward-looking views of their particular business sector, which sometimes reflect shock, reboot, and new normal scenarios. This data-driven approach, completed with risk management processes, best positions the bank to get out ahead of any deterioration in credit quality.

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(Source: Customers Bancorp earnings presentation)

The bank has a strong commercial loan portfolio with very low concentration in COVID-19-impacted industries and commercial real estate. Total commercial deferments declined to $277 million, or 2.4% of total loans and leases, excluding PPP loans at September 30, 2020, down from $691 million, or 6.8% of total loans and leases, excluding PPP loans, as of July 24, 2020. Customers’ commercial deferments peaked at about $1.2 billion earlier this year. Exposure to industry segments significantly impacted by COVID-19 is not substantial. At September 30, 2020, Customers Bancorp had $86 million in energy and utilities exposure (79% are wind farms, with no deferments), $64 million in colleges and universities (no deferments requested), $71 million in CRE retail sales exposure (mostly auto sales, with no deferments), $29 million in franchise restaurants and dining, and $26 million in entertainment-only businesses.

(Source: Customers Bancorp earnings presentation)

The hospitality portfolio was approximately $404 million (3.5% of total loans and leases, excluding PPP loans), with 31% in deferment. Approximately 19% of the portfolio was operating at 95%+ occupancy under government contracts for transitional housing. The majority of the hotels in its current assessment have on-hand and/or access to the cash resources needed to get through the COVID-19 crisis, and for those who may need assistance, the bank is working with them closely to bridge any potential cash flow gaps.

(Source: Customers Bancorp earnings presentation)

(Source: Customers Bancorp earnings presentation)

(Source: Customers Bancorp earnings presentation)

What about other risk areas? At September 30, 2020, the healthcare portfolio was approximately $310 million, comprised predominantly of skilled nursing, which has been deemed an essential business and through a number of federal and state actions has been provided immunity from liability for COVID-19-related deaths. No deferments were requested, and there are no delinquencies. That is a major positive. Big time. The multi-family portfolio is highly seasoned, with an average vacancy rate of 3.4% and loan to value of 60.3% as of quarter-end. One risk the market is baking in? 58% of the portfolio was in New York City, of which 70% was in rent-controlled/regulated properties with a vacancy rate of only 1.8%. As of September 30, 2020, 4% of the portfolio was on 90-day deferment.

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What’s more, the consumer installment, mortgage and home equity loan portfolios continue to perform well. Total consumer-related deferments declined to $25 million, or 0.2% of total loans and leases, excluding PPP loans, as of September 30, 2020, down from $60 million, or 0.6% of total loans and leases, excluding PPP loans, as of July 24, 2020. The $1.2 billion consumer installment loan portfolio outperformed industry peers, with deferments dropping to 1.2% and 30+ DPD delinquency below 1%. Strong credit quality (avg. FICO: 741), low concentration in at-risk job segments and outstanding performance of CB Direct originations have resulted in solid results through the end of Q3 2020.

(Source: Customers Bancorp earnings presentation)

The bank is also aggressively addressing non-performing assets. During September 2020, Customers Bancorp sold a collateral dependent loan secured by a Class A office building in northern New Jersey. It is also proactively addressing another large loan, which makes up approximately 29% of non-performing assets as of September 30, 2020, and plans to move it off the balance sheet over the next 2-3 months. The bank remains well-capitalized by all regulatory measures. At the Customers Bancorp level, the total risk-based capital ratio and the tangible common equity to tangible assets were 11.6% and 5.9%, respectively, as of September 30, 2020.

(Source: Customers Bancorp earnings presentation)

Before COVID-19, Customers Bancorp was projecting core earnings per share of $3.00 for 2020 with continued improvement expected in all profitability metrics. Like the rest of the industry, rapid changes in economic activity introduced uncertainty to its near-term profitability.

Provisions are higher, most customer activity remains slow, and there have been disruptions, but we are also seeing positive trends in deposits and selected growth in certain loan categories. Despite all of this, management is still expecting to achieve about $3.00 per share in core earnings for 2020. It is looking for $6.00 per share in annual core earnings by the end of 2026. At $3.00 now, the stock is at 4.5X 2020 EPS. So undervalued. But the big reason we want you buying? The discount to book.

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Management stated this on the call:

“I’m sorry, 43% to tangible book value, and that is leading 55% minimum appreciation from a valuation point of view on the table. We think our peer group are is trading at somewhere in the 90% to 110% of tangible book, and we are not going to be satisfied until we get there. “

Final thoughts

The stock is trading at a massive discount. Book value has continued to appreciate. It was $26.43 at the end of Q3. Further, tangible book value was $25.97. This discount is way overdone. Buy the stock.

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Disclosure: I am/we are long CUBI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.