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Quick, Cautionary Note on Customers Bancorp Preferreds

Smaller bancorp Customer Bancorp (CUBI) has 4 fixed-to-floating rate preferreds outstanding of which 1 issue is currently floating–the 7% CUBI-C is floating.

The other 3 issues all become floating in 2021 and based upon the current yield of the 7% issue it looks like all of the 3 issues are trading 3% to 7% too high and holders can expect to have no return during 2021 if held too long.

CUBI-D has just one more dividend at 6.50% before it begins to float in March. This issue should trade around $24 and currently trades at $24.74–current yield is 6.58%, but this will need to adjust to the 5.3% area–so look for it to drift lower over 3 months–or maybe take one quick plunge.

Anyone holding the D issue should consider moving to the C issue. The other 2 issues will drift lower as well over time.

26 thoughts on “Quick, Cautionary Note on Customers Bancorp Preferreds”

  1. All of my CUBI exposure is in CUBI-C. If I was putting in new money I would go for CUBI-E. The yield, based on where the two issues would reset based on current LIBOR, is 5.56% for C and 5.75% for E.

    As my CUBI-C is in taxable I won’t make the switch. If it was in qualified I would.

    I’m not considering call risk as I don’t see any.

    1. Bob – Am I sensing a typo? Wouldn’t CUBI-E reset @ 5.37% today vs 5.56% for CUBI-C? Still, with 3 more dividends at 6.45% left on E and C subject to reset each quarter, I do not see why C should be trading higher than E right now…

      1. Trans-positional error spread for E on my part. C and E are neck and neck and D isn’t far behind. F trails the pack for some reason.

        CUBI is far from my favorite bank stock but I like floating rate issues selling below redemption price. I think there will be CUBI preferred outstanding for some time. If they had sold BM instead of spinning it off they might have been able to pay off some of the preferred.

  2. I’ve grown cautious on the name .

    As to Libor floats you can look at any co with both types of structure to compare. I’d say the yield diff is generally about 1 to 1 1/2 % lower ytc with the fixed structure. But there are some good credit name F2F that are trading surprisingly rich. Desks continue to warn about libor risks…while showing f2f issues for consideration! I keep hearing about the case Ted is making. That at these levels prices need to drop to 22-23 to compensate for low libor. WHEN they float is another big concern. Opinions are moving targets and subject to change.

    There is inflation risk in these markets. That’s one reason behind banks popping. Hope for higher rates.

  3. That’s still more than other banks are paying. How much worse is CUBI if they’re worth more?

  4. I own CUBI-E which is a 6.45% issue trading at $24.65 and floats on 6/15/21 at 3 month libor plus 514 bp. I’ve owned it for over 5 years. Any opinions as to where it might be priced, assuming all else the same, come closer to 6/15. I’ve sold my lower yielding CUBI issues but have held on to this one. Not sure what to do with this one.

    1. Originally I bot heavily into CUBI preferreds C and E in 2018 and early ’19 under the premise that under any or all market conditions, CUBI would call them in at first call because they were issued at a time when CUBI was a lesser credit and, therefore, they would be able to refinance with comparable f/f preferreds if they chose to continue to issue f/f with substantially lower f/f premiums than the existing libor + 5.30 for C or +5.14 for E or +5.09 on D. Proof of the premise was F being subsequently done at libor + only 4.76. When March came around and the theory was taken off the table because of the possiblity of not being able to refinance at all, I managed to sell the larger position in C before it crashed but held on to the smaller amount I owned of E. What’s been interesting to watch was first, how the market price for C was VERY slow to adjust for the beginning of the floating rate and loss of the 7% divvy. For months it remained the highest priced preferred even though it had become the lowest coupon one at the same time….. And with E, what’s been interesting these past 2 months is the unusual number of times that there have been crazy high spikes in price occurring with one going as high as 26.85. Somehow or other I missed them all until after the fact by not being observant enough but I’m hoping the pattern of occasional spikes will remain in tact AND the next time around I pay closer attention to take advantage.

    2. randy–my quick and dirty would say around a 75 cents lower, but there are 2 divi’s left so you won’t lose, but won’t make anything for the 6 months. Might want to swap to the 7% issue which will put you 70 cents ahead by June (theoretically).

  5. I would add that CUBI-C is callable now. Even at a floating rate of 3mo LIBOR + 5.3%, CUBI might be tempted to call them in this crazy time of ultralow interest rates. I would not stray much above par in buying CUBI-C.

    1. Yes–you are correct donocash–I am pondering a purchase of C around current levels (just shy of $25), but I have a full position in the 5.37% baby bonds just to have an extra level of safety.

          1. I’ll try this again
            Customers is well positioned to execute on its 2020 and 2026 LT strategies

            Loan growth, excluding PPP and mortgage warehouse balances, is expected to average in the mid-to-high single digits over the next several quarters.
            Total assets are projected to be about $12 billion -$13 billion at year-end 2020, excluding PPP loans and subject to refinance activity impacting loans to mortgage companies.
            The total risk based capital ratio is expected to exceed 12% by year-end 2020 and be about 14% by year-end 2021.
            Preferred equity will not be called in 2020 or 2021.
            We project the NIM in the 2.90%-3.00% range for the full year 2020 excluding PPP loans.
            Operating expenses are expected to be about flat over the next few quarters excluding the impact of the BankMobile divestiture.
            The effective tax rate is forecast to be about 21% – 22.0% for 2020
            PPP loans will add about $100 million in pre-tax origination fees. A substantial portion of this amount will be recognized in the first half of 2021.
            A run-rate of $3.00+ in core EPS for 2020 and 2021 and $6.00 in core EPS for 2026 remains a goal.

            1. Yes, CUBI is a strong unrated midsize bank. In the prior quarterly report transcript, some analysts ask the CEO why he does not redeem the callable preferreds, he let the CFO to make the reply. She said it will ALL be reverted to floating rate when it becomes callable.
              Thank you, Tim, I quickly sold my 400 shares this morning, taking the LAST price. I thought about adding more to AATRL. Then I thought I should buy some equity position. Went ahead with PFE, not a great company historically. The price seems to be reasonable with positive take from both Schwab (which watches for the analysts) and Fidelity, with pro forma yield a little over 4.1% dividend coming up in mid Jan. I apparently did sell all my 600 shares of CUBI-F way back.

              1. I have been trading PFE this year also. $35-$36 buy range. $42 sell range. I typically sell call options at $41 to juice the 4% yield.

                It has worked so far.

                If stock drops, I am ok holding at 4% yield and ability to sell call options.

                Tipranks that I use in addition to Schwab and Morningstar also has analyst ratings that say the stock value is $41 per share.

                1. Same here Steve,
                  But I don’t play options. You have to consider its probably going to report a good year end quarter considering world wide sales. Traded it a couple times and also ended up with 67 shares of VTRS from the spin off which I sold at 17.20 If it goes below 17 I might buy it again.
                  I been trying to keep my fingers off the button the past 2 weeks and just watch the show. Lot of day traders sitting at home right now.

                2. SteveA – I have been playing the same game with PFE for years. I keep rolling over a covered calls every two months and continue to collect the dividend. PFE has not been a great stock for capital growth. But this stock has stayed in a predictable collar between $30-45 for a decade or two – allowing for predictable covered call action. I also have another PFE holdings – originally WLA – in another account, and I have kept this holding for some time just for the dividend. I don’t dare sell options on these; too afraid to get caught with the really low cost basis.

                3. Steve: And if the it rises, are you okay with being called away?

                  It’s probably just me, but somehow I am always okay with selling at the strike when I sell a call, but when the stock starts rising I usually panic and close the contract (at a loss of course). I know it’s a complete psychological block and I have to get past it…

                    1. Yeah, I have to learn to be. Do you then buy it back and sell new calls?

                  1. Bur, Let it get called if it is profitable. Do not enter a trade that will NOT be profitable to you! There is a larger, patient, recycling strategy if your shares are called away and now you are converted to cash:
                    Now, use your cash to sell cash secured puts below the current strike price , collect the income as “interest on the new cash” and let the cash be there to fulfil an order IF the put is exercised. If exercised, then you have converted the cash back into the shares at a LOWER price.
                    Now that you own shares at a lower price, sell calls above the strike price at a profitable level.
                    This can be a recycling process using puts to buy lower and calls to sell higher, then income (premiums since you are the seller) too.
                    Write it out. You’ll see it. Get this part first.
                    Then you can see how divys fit in too.
                    You know the approach and ex-div move in the price of a stock stock applies pressure on the price of the security; thus the prices of call or puts too. Logically, ex-div (lower stock price) applies higher pressures on puts since the strike price has now declined; a good time to sell puts for a higher price. They say that that is built into the selling price, but that is not been my experience.

                    1. Joel, thanks for taking the time to spell it out. Very clear. I have been letting the emotion of losing the upside if I’m called get in the way of the *fact* that I have a profit in hand. Remembering I can turn around and sell the put is what I was missing (doh).

    2. If it weren’t for the risk of redemption at $26.26, the Ally-A offers a better investment. The Ally pays a floating rate of around six and is a much better credit. I switched to Cubi when the Ally sold for more than $26.

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