Customers Bancorp: Acquisition Of Higher One Business Lines Is A Coup, Will Lead To Immediate EPS Expansion

Dec. 18, 2015 1:45 PM ETCustomers Bancorp, Inc. (CUBI)
Dallas Salazar profile picture
Dallas Salazar


  • CUBI has done it again.
  • CUBI continues to find more and more creative ways to drive shareholder value - inclusive of providing highly visible value unlocking long into the future.
  • Jay Sidhu has executed a coup of sorts in finding "model overlay" business lines that will drive EPS on all durations.

Customers Bancorp (NYSE:NYSE:CUBI) is out with news of a major acquisition. CUBI has announced that it has agreed to acquire the One Account Student Checking and Refund Management Disbursement Services business of Higher One, Inc. - the leading provider of refund disbursements to approximately 800 higher education campuses across the United States. This deal is hugely meaningful in more than one way for CUBI and should be far reaching in terms of CUBI's broader business model. I'll explain.

First, what could be argued as CUBI's primary strategic initiative heading into 2016 is the expansion and buildout further of its BankOne product/arm. Coming in as a close second to that, at least in my opinion, is the continued overall technological development of the bank as a whole. But, to be clear, only in ways that are also net-positives for the broader model.

CUBI CEO Jay Sidhu has already found several model value-add, shareholder-value unlocking ways to do this (SEE: CUBI's return since its overlooked IPO) and I've well-advertised these in previous coverage notes. That said, it looks like Sidhu has found yet another way to advance this strategic initiative and this time with considerable "known" size. I highlight "known" in that this is an existing model being acquired (via Higher One) that CUBI can drop "over the top" of its existing model, as an overlay of sorts, that will generate an estimated $65-$75 million in annual interchange income. That's day one "through the door". Yes, without having optimized access to CUBI's network, CUBI's talent, CUBI's reach, etc. That's through the door. I'll take that.

Even better, CUBI is familiar with the program it just purchased in that it was participating in the program prior. CUBI has been a Higher One partner since August of 2013. This should give it an easier path to and higher percentage chance of executing a fully optimized integration.

In that familiarity I also put significant confidence in CUBI's expectation that this acquisition add approximately $250 million of additional core demand deposits from students currently utilizing Higher One disbursement related bank accounts at another partner bank. That's meaningful and that's in addition to the interchange income expected. The other ancillary factor that should be considered, but clearly immeasurable at this point, is the ability for CUBI - with the Higher One program now in-house and part of its broader vertical operating model - to "decommoditize" the services it will be performing. What I mean by this is CUBI's ability to retain business initiated by primary touchpoint of the program is a huge potential upside that should NOT be overlooked.

As just pointed out, CUBI expects to be able to win business currently housed at other partner banks of the program. That's because this program is a "top of funnel" program in which partner banks provide services of the program in exchange for what can be generalized as new customer or new relationship leads. It's then up to the bank to retain the new business from the program (if in fact it is new business).

However, assuming no other business relationship exists prior to the program-generated business creating a new relationship retention rates are likely suboptimal (they in fact are suboptimal based on my experience in consulting regional banks). That, in turn, makes the banks providing this highly commoditized service exactly that - a commodity. CUBI, at least based on its press release outlining the acquisition, believes it can "decommoditize" this service. If it can, this acquisition will be looked at in hindsight as incredibly cheap and something of a coup. If I'm betting, and I am being long the stock, I'm betting that Sidhu can do what he proposed he can do in the PR.

All told I believe this acquisition will drive shareholder value long into the future and I believe this acquisition will do that with high visibility. The reasons for taking on this business and allocating capital to this acquisition rather than, say, driving organic growth are obvious and in that are well-placed. I couldn't be more supportive of this move and I look forward to seeing this "model overlay" realize synergies. I continue to view CUBI as the single most attractive regional bank.

Good luck everybody.

This article was written by

Dallas Salazar profile picture
Dallas Salazar is the CEO an Austin-based consulting firm that specializes in private company lifecycle management, up to and including taking companies public, and in helping consult publicly traded companies. Mr. Salazar is also a venture investor in a portfolio of energy and commodity startups, including startups extracting oil, natural gas, helium, and carbon dioxide, as well as engaged in the business of large scale carbon sequestration. Mr. Salazar has recently had large exits in Comstock Resources, Eclipse Resources, Torchlight Energy, as well as numerous privately held natural resource and commodity extraction ventures.

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.

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