Small banks have been under great stress since the 2008 financial crisis. What with increased burden of regulation and the Fed pegging down interest rates to near zero, small banks find it difficult to make profits from the only way they have known (and have been relying on) for ages - the spread between the rate at which they accept deposits and the rate at which they lend to borrowers.
In such a scenario, Customers Bancorp Inc. (CUBI) has scored a hit by beating street expectations by $0.02 by reporting earnings of $0.33 per share for Q3 FY 2013.
Customers Bancorp Inc., holding company of Customers Bank, is a community-based bank with shareholder equity of $388.89 million and net tangible assets of $385.21 million. In the last four quarters - from December 2012 to September 2013 - the bank's quarterly revenue has increased from $31.73 million to $38.41 million and net income from $7.57 million to $8.27 million.
YTD, the Bank reported a 95% increase in loans that touched $2 billion and an 11% increase in book value.
Customers Bancorp had more than $345 million in cash and cash equivalents, which it plans to use to increase shareholder value. On November 26, 2013, it announced that the Board has approved a 5% share repurchase program at up to 20% premium to its current book value. The bank had 24.7 million shares outstanding and as of September 30, 2013 its book value per share stood at $15.75.
No mean achievement
Strong quarterly numbers and share repurchase within three years of incorporation is by no means a small achievement considering that the 2010 Dodd-Frank financial regulations law has compelled small banks to increase staff by as much as four times for complying with the new regulatory provisions, which has had a huge impact on profitability of small financial institutions. In addition, due to limited resources, small banks find it difficult to keep abreast with technology, which is extremely necessary due to change from personal banking to internet banking and ATMs.
This has also to be looked at in light of the fact that the number of banks has hit a record low since 1934 and small banks form an overwhelming majority of the 10,000 bank closures due to whatever reason - mergers, consolidations and failures.
Providing banking services including loans to people living and working in the neighborhood and low fees (as compared to large banks) are among the advantages that small community banks have over large banking corporations. Moreover, banks like Customers are the mainstay of small and medium enterprises (SMEs) and the farming community as they are the primary source of finance for them. At the same time, these banks provide services comparable (though not in the same scale) to large banks.
37.5% of all outstanding loans to small businesses and farms were provided by small banks having an asset base of less than $1 billion and 57.9% by those with less than $10 billion. This is significant because asset-wise, small banks form only 10% of the U.S. banking industry.
The financial sector has been a long time favorite with investors. At least that was the case until the 2008/2009 financial crisis. With the economy rapidly coming back on the rails, the financial sector is again attracting the attention of the long-term investor looking for growth stocks in the sector.
Moreover, despite the closure of a large number of small banks in recent years, small community banks, particularly financially sound banks such as Customers Bank, are here to stay. A neighborhood bank, owned and operated by local people is easier to approach than those hoity-toity snooty large banks.
Moreover, the expected easing of federal regulatory pressures is a big positive and small banks are likely to grow faster than they did in the last few years. In addition, with merger and consolidation in the air and Customers Bancorp trading at a small premium to its book value and a strong balance sheet, Customers Bancorp makes an attractive acquisition/merger target.
In my opinion there is a significant amount of upside in Customers Bancorp and a good investment for the long haul.