Jay S. Sidhu is a builder, and during his 20 years as chief executive officer at Sovereign Bancorp Inc., he built it from a small thrift in Wyomissing, Pennsylvania, into one of the largest banks in the country, with $80 billion in assets. He was an aggressive deal maker who did so many acquisitions that they became a line of business, just like checking accounts and home mortgages.
Sidhu left Sovereign in 2006 after a prolonged and bitter struggle with an activist investor who thought his wheeling and dealing was hurting the company. News reports at the time said Sidhu had been pushed out by Sovereign’s board of directors, and the company later disclosed in a regulatory filing that he had faced termination for cause, although Sidhu has always maintained that he took early retirement.
After a restless couple of years in which he played golf (a game he doesn’t particularly enjoy) and set up two funds to invest in financial companies while waiting for his non-compete agreement to expire, the 61-year-old Sidhu returned to the banking business when he and a group of investors acquired New Century Bank, an ailing institution in the suburban Philadelphia market. Sidhu renamed it Customers Bank, and also recruited several ex-Sovereign bankers to join his senior team. So Sidhu is back in business, but the industry is much different today than when he left—and apparently so is he. Sidhu is still doing deals—in fact, he has completed three of them since 2010, and two more are pending. But they were small transactions just to gain access to new markets, and the bank has about $3.2 billion in assets and about 14 branches in Pennsylvania, New Jersey, New York and Connecticut. Of far greater importance to Sidhu is Customers Bank’s organic growth strategy, which is designed around niche lending, ambitious substitution of technology for brick-and-mortar distribution and strong customer service.
“Our model is either we do de novo [expansion] or we do acquisitions if they’re cheaper than de novo,” explains Sidhu. “Otherwise we will not do a deal. That’s very different than the way we did it in the past.”
And so far, it has worked quite well. Customers Bank turned in an impressive performance on Bank Director magazine’s 2013 Growth Leaders Ranking, which ranked all U.S. banks and thrifts across four key growth areas: core income (defined as net-interest income plus noninterest income, excluding available-for-sale gains and losses and other-real-estate-owned gains and losses), core deposits, net loans and leases and core noninterest income. Customers Bank placed first in the core income and net loans and leases categories, and second in the noninterest income category. The core income ranking is the most important since it is inclusive of the other three.
“Customers Bank has achieved excellent growth by executing its unique operating strategy and listening to its market to deliver the right products and services to the right customers,” says Kevin Tweddle, president of Bank Intelligence Solutions, a subsidiary of Fiserv Inc. that constructed the Growth rankings using data from regulatory agency call reports for the first three quarters of 2012.
The business environment for banks is certainly tougher today than when Sidhu left Sovereign in 2006. In fact, he pretty much missed the financial crisis in its entirety. Back then, banks were more highly leveraged and had the wind of a strong U.S. economy and booming housing market at their backs. Today, of course, economic growth is lukewarm at best and the housing market is still recovering from its catastrophic collapse in 2007. Banks are also much more tightly regulated than before the crisis, and they are required to carry much higher levels of capital, which drives down their financial returns.
Indeed, given the stiff headwinds banks are facing today, one must wonder why Sidhu was so keen to get back in the game. “We’ve run little banks, we’ve run mid-sized banks and we’ve run one of the top 20 banks in the country,” he says, referring to himself and his seasoned team of senior ex-Sovereign executives. “We’ve made mistakes along the way and we’ve learned from our mistakes. This is a tough environment, but it’s also one of the best environments. If you have a unique strategy, a talented management team and capital, this is about the best time to be in the banking business.”
Some of Customers Bank’s loan growth has come in such bread-and-butter categories as small business, commercial and industrial, multifamily and commercial real estate, but the lion’s share of its growth has come from mortgage warehouse lending where it provides funding to nonbank originators. That market has shrunk drastically since the collapse of the housing market, and it was one that Sidhu sought to exploit early on. In fact, Glenn Hedde, executive vice president and president of Customers Bank’s warehouse lending operation, was one of Sidhu’s first hires when he came back. The business has a relatively low credit risk because the short-term loans turn over on a relatively short cycle, which drives up the bank’s loan volume, while also producing approximately $1 million a month in fees.
“We have hired some of the best people in the industry to do it,” Hedde says. “When a lot of other banks were exiting the business we were able to get in and [build] a good-sized operation with some scale. We have a relationship model. We’re not just there to charge the customer. We’re there to help them, and when they have a need, we’re there to solve it.”
The bank also places a premium on speed and execution, which President and Chief Operating Officer Richard A. Ehst believes differentiates Customers Bank from its competitors. “You won’t find another $3 billion bank that operates with just 250 employees,” says Ehst, who held several senior positions at Sovereign. “We are a flat organization by design. We focus on execution. Strategy without execution is kind of a hollow suit. We spend a considerable amount of time making sure we can deliver on our promises.”
Another key element in Customers Bank’s growth strategy is its heavy utilization of technology to keep its distribution costs down. The bank has a small branch network given the breadth of its geographic market, and most of the branches it does have are only about 2,000 square feet in size. Most of them don’t even have drive-up facilities. Instead, individual and business customers are encouraged to use Customers Bank’s online and mobile channels. For example, customers can make a deposit by simply accessing their account through their smart phone and taking a picture of the check. The bank also provides a concierge service where a banker will visit a customer’s home or office 12 hours a day, seven days a week, to handle his or her needs.
Executive Vice President Warren Taylor, a former Sovereign division president who runs Customers Bank’s community banking operation, says his branches average about $125 million in deposits, compared to $54 million for most big banks. Customers Bank’s heavy reliance on technology over brick-and-mortar distribution also gives him a significant cost advantage over his competitors. Taken together, the advantages of high deposit footings and low overhead allows him to run a profitable branch banking business while paying 10 to 20 basis points more for deposits than other banks in his market. “We can bring customers in [by offering them] an exceptional value,” he says. “The reason why we can do that is our overhead is so low.”
Sidhu is in the process of extending the Customers Bank brand from Boston to Washington, D.C. Some of that expansion will be de novo, and some will most likely be acquisitions, as when the bank bought Troy, Michigan-based Flagstar Bancorp Inc.’s New England commercial banking business, including a team of veteran bankers. Sidhu will use that platform to expand throughout the region. He also intends to list Customers Bank’s stock on a public exchange later this year (the company files regular financial reports with the Securities and Exchange Commission, so technically it’s a public company), and having a liquid stock will make it easier for him to do more targeted deals.
“We are not about growth for the sake of growth,” says Sidhu. “That is not in our strategy. But we see so many growth opportunities that we can’t stop.”