Sidhu Achieves IPO Capital Goals with Acquisition

Sometimes the best deals are the ones that are passed on. For Customers Bancorp (CUUU), that rationale also applies to a decision last month to forgo an initial public offering.

The Wyomissing, Pa., company now has an opportunity to build capital without turning to public markets after it struck a deal with a life insurance company that was looking to sell its thrift but was reluctant to completely exit the banking industry.

The $2 billion-asset company said on Thursday that it would buy Acacia Federal Savings Bank from Ameritas Mutual Holding. Customers will give Ameritas $65 million in stock, or roughly a 19.9% ownership stake. Customers will receive a $1 billion-asset thrift with $126 million in tangible common equity. The company had hoped to raise about $100 million by going public.

"With the IPO, we were looking at a price range of around book value. The markets became choppy … we would not dilute our existing shareholders," says Jay Sidhu, Customers' chairman and chief executive.

Ameritas is "the kind of company we would have called upon in our IPO to be an institutional investor," Sidhu says. "We're delighted to issue them stock at a much, much, much better price than we would have in the IPO."

Ameritas is set to take $45 million in common equity, priced at 115% of Customers' tangible book value at expected time of closing. The remaining $20 million involves preferred stock.

The thrift deal, at first glance, achieves what the scuttled IPO set out to accomplish, with a premium, says Joshua Siegel, the chief executive of StoneCastle Partners, a New York fund that invests in community banks. Customers also put itself in a better position to conduct an IPO in the future.

"It is interesting, strange and cool. On the surface, it seems like Jay may have stumbled upon a gem," Siegel says. "And he grows his institution by $1 billion. That likely changes his price to book because bigger companies typically trade at a better book multiple. It puts him in another size category that would most likely mean a higher price should they explore an IPO in the future."

The deal is unusual, but not unexpected from Sidhu, who grew Sovereign Bancorp to $90 billion from $500 million. Last week's deal speaks to Sidhu's savvy and to the insurer's desire to get out. Sidhu left Sovereign in 2006; the company is now owned by Banco Santander (SAN)

"It says that Jay is willing to do a wide variety of deals with a wide variety of financial institutions," says Jeff Marsico, an executive vice president at Kafafian Group in Parsippany, N.J. "Clearly, this insurance company was motivated to get the thrift off of its books."

Scott Stuckey, an Ameritas spokesman, says the Lincoln, Neb., company has operated the Falls Church, Va., thrift since a 1999 merger with Acacia Life Insurance. The insurer decided that it no longer wanted to be an operator.

"Our board is recommitting its focus to our core businesses of insurance and investments," Stuckey says, "All the new regulations as part of the Dodd-Frank Act did play a role in the final decision to sell."

Chip MacDonald, a partner at Jones Day, says Ameritas likely has not felt the full sting of Dodd-Frank's regulatory changes, which include oversight by the Federal Reserve in way similar to bank holding company regulation. He says that insurer may have wanted to avoid it such regulation going forward.

The Fed "is looking carefully at how they are regulating these sorts of entities and being careful about how they might implement the laws," MacDonald says. "They likely had yet to get the full Fed treatment yet."

Ameritas' voting stock in Customers' will be equivalent to 9.9% when the deal closes in the fourth quarter, so the insurance company will not have to register as a bank holding company.

"This keeps them invested in the banking sector, while they hand over the keys of the" thrift, Sidhu says. "I've been referring to this as 'Project Win-Win.'"

It might be too early to determine all the winners, though. Ameritas will keep $265 million of nonperforming assets and other assets that Sidhu and his management team deemed risky.

Industry observers says Acacia's $678 million deposit base is noteworthy. Siegel says about 25% of its deposits are brokered. He says it will be interested to see if the core deposits stay with Customers, or if they were housed at Acacia because of existing business with the insurer.

Marsico notes that Acacia only has one office, so Customers will likely need to add branches. Sidhu says he is planning three or four in coming years throughout the Washington D.C., area.

The deal also gives Customers a network that stretches from New York to northern Virginia. Sidhu has repeatedly said that his focus this time is organic growth, unless an acquisition helps him accomplish his objectives at a better price.

"There are 80 prospects trading below book value between New York and Washington," Sidhu says. "Maybe we can acquire three, four or five of them in the next few years, if we can make the numbers work. If we can't, we'll do it organically."