$CUBI - Trouble in Paradise or an Easy Bar to Clear

My $CUBI Earnings Punt for Today - Manifestation of my low IQ or a Well Reasoned Trade - You Decide.

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This is not investment advice. The opinions express herein are likely uninformed, and solely the opinions of a guy pretending to be Chief Inspector Cluseau. You would be a fool to base investments off a guy impersonatingg a decades old movie online. Always consult a financial advisor / tax advisor before making investment decisions. By reading this article, you agree to hold harmless and indemnify the author (me), from your conduct relating to this article, including, but not limited to, trading decisions that result from your reading of this article. Furthermore, by reading, you acknowledge that the opinions herein are not investment advice (they are opinions, duh), and in no way constitute financial advice.

Trade #30:

Sector: Financials (Warning: Extreme Risk)

LONG Customer's Bancorp ($CUBI) 5,800 Shares @ 48.80

Long 44 May 45 Strike Puts (protection)

Short 44 May 55 Strike Calls (pay for protection)

$CUBI is the griftiest bank I know. If there was an olympic sport for willingness to to pick up dollars in landfill, $CUBI would win gold, silver, and bronze. These guys have taken advantage of every opportunity that avails them, from PPP in 2022, to crypto banking / CBIT token in 2021, to carpetbagging $SBNY's venture loan portfolio / banking team in 2023 / 2024.

The analyst estimate of 1.63 seems extremely soft, I have them doing 1.75 and tangible book value something in the range of 49.15 to 49.35 depending on the marks to their AFS securities portfolio.

Now, the question is, will they get any credit for this impressive performance? Overshadowing the excellent bank they have built themselves into is the fact that the CFO, Carla Leibold, who personally I think was a clown pushing papers, was fired just a few weeks ago "for cause".

Interestingly, the 8-K reveals she disputes the nature of her firing. Was she fired for bringing up an AML / KYC concern? Was it for an office romance? Who knows? I lean towards a more innocuous cause for her firing, I can't imagine she brought up a serious concern and was fired for it, that seems like it would clearly catch a regulators eye or whistleblower protections and obviously be clearly in the "not cause" category.

Anyways, I have been long $CUBI since 24, and I still like it at 48 and change. To minimize risk on this trade, I have purchase 45 strike puts and sold 55 strike calls, so if they do happen to have a substantial issue related to the CFO's departure, my loss is limited to $45 aside from the 800 shares I have unprotected.

Absent any CFO problems, I have them handily beating 1.63.

Good luck to all!

Not financial advice, obviously!

Bonus Round:

Why I Like Customer’s Bancorp:

1. Alignment

2. Excellent Balance Sheet Management

3. “Grift” Is Good

Alignment

Too many banks management teams abuse their position of power to grift the absolute maximum from shareholders. Others, for some bizarre reason, own significant stakes in their own stock but hate other shareholders, and refuse to pay dividends or conduct buybacks at depressed valuations. Nothing is more insulting than insiders dumping stock at half of tangible book (see: Eagle Bancorp, which bizarrely paid a $23 Million fine for self dealing with the CEO’s affiliated companies, and then in further insult to injury, spent additional millions fighting shareholders arguing that “it had paid, but still did nothing wrong”. Weird.

On the other hand, CUBI 0.00%↑ was built from the ground up by Jay Sidhu, and he remains a significant shareholder clocking in at 1.7 Million shares. All together, the CUBI insiders control about 8%, nearly $120 Million in value, with just $11 Million in total executive compensation paid.

I like this. It should also be noted that at the height of the 2023 crisis, the management team elected to recieve their entire bonus in shares rather than stock, which was a testatement to their belief in the company, and they also purchased shares at the absolute low.

While I’m hesitant to rate the alignment at the A+ levels IGIC 0.00%↑ exhibits, I still think the Customer’s Bancorp management team has much more skin in the game than the average regional bank. See the below table for the most recent ownership disclosures, overall, I rate them B+

Excellent Balance Sheet Management

Sometimes you just need to call it quits. This is a message that the shipping industry, most of the small cap drillers, and banks don’t understand. If the market is valuing you at 0.75x Tangible Book, why invest further in your business. Unless you are curing cancer or doing something truly magical, it’s best to take your foot off the gas and relax and put on some Lana Del Rey and smell the roses.

Take for example Danaos. You’re rolling the dough. Shipping rates have touched all time highs. You’re making close to $30 bucks a year with a $75 share price and just half of tangible book? You are buying more ships? Sheesh…

The nice thing about Customer’s Bancorp is it is one of the few regionals that understands risk is not being rewarded in the current environment. Total loans and leases decline in the fourth quarter from $13.5 Billion to $12.8 Billion. Commercial Real Estate loans declined from $1.29 Billion in 2022 to $1.18 Billion in 2023, just 9.2% of total loans (another 6.2% of CRE is owner occupied, carrying significantly lower risk). Wisely, Customer’s has realized the CRE exposures it carries is not something the market appreciates. Why continue lending if the market is only going to punish you?

Customer’s carries some of the lowest exposure to Commercial Real Estate in the Regional Banking industry, and it’s decision to let the loan book roll off and instead investment customer deposits in extremely short duration low-risk AAA securities makes sense. Unlike other banks which are bagholding 20-Year duration MBS or Pledged Asset Lines at 2 and change (see Charles Schwab), CUBI 0.00%↑ is sitting on an AFS portfolio with a yield of 5.12% and a duration of just 1.5 Years, making them a perfect beneficiary of higher for longer. The held to maturity portfolio has a duration of 3 years and a spot yield of 4.31%, also among the best in the industry.

Simply put, if your Customer’s are stupid enough to entrust you with their money at 0%, don’t be silly and go out and lend to some low-rate junkies looking to flip some terrible CRE on the East Coast. Sit back, relax, and enjoy the risk free rate.

“Grift Is Good”

A long time ago, there was a segment where Mr. Wonderful berated the CUBI 0.00%↑ CEO for being one of the top participants in the PPP Program, which if you ever watched Dave Chapelle, was akin to the 5 O’Clock Free Crack Giveaway. See the below link.

The PPP program (technically I am saying the Payroll Protection Program Program which is gramatically incorrect) was a total joke.

Banks got to charge 1% interest and a 5% paperwork fee for loans in the range of 1-100k for simply lending out government stimmy to customer’s, which would later be forgiven. Many banks dragged their feet on this, but Customer’s, realizing it was simply corporate welfare, jumped on the bandwagon and was the Number #1 lender for banks under $1 Billion in market capitalization.

Kevin O’Leary complained on CNBC about this grift, but honestly, if the government is handing free money out, wouldn’t you want your companies to grift the maximum. Karma doesn’t really exist…

Customer’s Bancorp also rugged a spac, Megalith Acqusition Corporation, by spinning off the back office College Treasury Department, now known as BankMobile. Some will complain it was an unethical move, but just like ICE 0.00%↑ spun off Bakkt, put your investors first and put the Silicon Valley money second.

Conclusion:

To conclude (what an oxymoron), at roughly 7x 2024 EPS and right at book value, Customer’s has proven time and time again it is willing to do whatever it takes to make a buck. It has wisely concealed it’s involvement in crypto (Paxos), and has told its CRE customers to go elsewhere. The management team is aligned, the balance sheet is clean, and it is a clear beneficiary off higher for longer given short duration securities portfolio and it’s impressive loan to deposit ratio.

I am long 6,200 shares into earnings with 45 Puts as protection and 55 Calls (sold) to subsidize the puts. The only weakness I think could shoot CUBI 0.00%↑ down is if the CFO indeed left for a serious reason, although I am doubtful this is the case.

As always, conduct your own research, this is not financial advice.