Like many stocks during the pandemic, Bancorp Customers (CUBES -0.48%), a roughly $20 billion asset bank based in Pennsylvania, has made a nice ascent. Its shares have risen from around $18 at the start of 2021 to over $74 at the start of 2022.
And also, like many stocks this year, Customers has been heavily sold, now trading below $32. This means that client stocks are now trading below their tangible book value or net worth.
Despite the liquidation, the bank’s performance continues to be strong and management continues to develop new product niches that promise to generate strong returns across the board. I think the market is sleeping here, and it’s time to buy.
A top tech bank
There are thousands of banks in the US, but Customers’ management team believes it’s one of the top 10 tech banks in the country. While still developing many different initiatives, the bank has launched a number of niche businesses that you may not see with your traditional lender.
It offers a ton of specialty banking, including specialty real estate finance, an extensive consumer banking portfolio, and venture capital banking, to name a few. Clients also built a digital banking platform for small and medium businesses that they used during the pandemic to provide PPP loans. He ultimately wants to enable these small businesses to be able to quickly and seamlessly apply online and obtain revolving lines of credit, term loans and business credit cards with quick decision-making.
Clients are also entering the world of payments with its blockchain-based Customer Bank Instant Token (CBIT), which has real-time payment capabilities specifically aimed at facilitating crypto trading between institutional clients and crypto exchanges. Additionally, customers hope to use similar technology to build a cash and payments platform to make life easier for their business customers.
Finally, Customers is rolling out banking as a service, where it can partner with fintech companies to help them originate and manage loans, manage deposits, and provide potential payment capabilities. .
Clients are facing near-term headwinds from rising deposit costs and likely declining credit quality. The bank’s cost of deposits has now fallen from 0.42 percentage points towards the end of 2021 to 1.42 percentage points at the end of the third quarter.
CBIT helps offset some of the increased funding costs because it brings many customers to the bank who hold large sums of non-interest bearing deposits, on which the bank pays no interest. But this funding source is currently facing some challenges amid the crypto winter.
Still, the bank onboarded 111 customers to CBIT during the third quarter, and I would expect it to be a great source of cheap deposits for customers once the crypto winter is over. According to management, some of the new vertical lending clients in the early stages of rollout also have good core deposit pipelines.
Investors may also have questions regarding credit, primarily due to Clients’ consumer installment loan portfolio. But customers sold $500 million of these consumer loans in the quarter to help reduce portfolio risk – and did so almost at face value on the loans, despite the sharp rise in interest rates This year. Clients still have about $1.4 billion of those loans on their balance sheet, but the portfolio’s average FICO score is high at 736.
Customers saw probable loan losses increase in the third quarter, but it appears to have adequate reserve coverage for potential future losses.
Buy customers at this market value
Investors can certainly take the customers as a telling story, but the bank has made tangible progress on many of these new initiatives and is already posting extremely attractive returns.
In the third quarter, the bank generated a 19.3% return on common stock and a 1.24% return on average assets, both above industry averages. Additionally, the bank has already made a base profit of $5.15 per share through the third quarter, which is higher than management had originally expected for the full year.
With the stock currently below $32, customers are trading at less than 5x 2022 base earnings if you annualize base earnings through Q3. It is also trading at just 87% of its tangible book value, an extremely cheap valuation.
Management said it would get full approval to buy back 2 million shares from the bank over the next few months if the stock continues to trade at such a discount. I would get on board before that happens.
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