Customers Bancorp's Jay Sidhu, Persistent Protagonist

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The last time Jay Sidhu was making big headlines, it was 2006 and he was walking out the door at Sovereign Bancorp, the once-tiny Wyomissing, Pa., thrift he grew into an $89 billion-asset northeastern banking powerhouse.

Or was he being pushed?

Like much of Sidhu's story, the details are open to interpretation, but there's never been any doubting his energy and passion, or the polarizing effect he seems to have on those around him. Most people either love the guy or they hate him.

Sidhu, 61, has been back in the news lately, doing the two things he does best: building and agitating.

In 2009, he raised $13.6 million to take a controlling stake in the troubled New Century Bank, a $265 million-asset, five-branch institution based in Phoenixville, Pa., less than an hour's drive from his old Sovereign offices.

As chairman and CEO of the since-renamed Customers Bancorp, Sidhu has moved the headquarters to Wyomissing, brought on several former lieutenants and embarked on an ambitious growth strategy aimed at recreating—in a modern-day sort of way—the magic of his early days at Sovereign.

So far, so good. In just four years, Customers has grown into a $3.8 billion-asset operation with 16 branches in Pennsylvania, New Jersey and New York, and visions of building an $8 billion- plus institution within the next five years. Profit in the first half of 2013 was $15.4 million, up 60 percent from the first half of 2012.

"It's one of the best stories in banking—one of the few banks that's growing, and the growth is profitable," says Bob Ramsey, an analyst for FBR Capital Markets in Arlington, Va.

Perhaps. But the story pales in terms of intrigue next to Sidhu's battle with the board of Atlantic Coast Financial Corp., a Jacksonville, Fla., thrift company where Sidhu served as chairman for a year and a half and remains a board member.

In June, shareholders rejected Atlantic Coast's proposed $13.1 million sale to Bond Street Holdings of Weston, Fla. Sidhu was the chief critic of the plan, arguing that the offer was low and that the thrift would be better off recapitalizing. He rallied other shareholders in a nasty, four-month-long proxy battle to defeat the merger on a 55-45 vote.

"I'm not an activist, but I said to the board, 'There's no darned way you belong in Corporate America if this is your attitude. You are ripping off people's wealth,'" Sidhu says.

Atlantic Coast did not respond to requests for a comment.

After the merger was voted down, G. Thomas Frankland resigned as chairman and CEO of the $742 million-asset Atlantic Coast, and three other board members announced they would not stand for re-election.

The whole ordeal seems more than a little ironic, given that Sidhu departed Sovereign after a vicious feud of his own with shareholders. Back then, the party line—the one in Sovereign's carefully crafted press release, and the one Sidhu likes—was that he left for "family health-related reasons." His brother, Harry, was diagnosed with leukemia in September 2006, and Sidhu resigned two weeks later with his severance and a retained chairmanship, so the story fits. (Harry is doing better now, thanks to a bone marrow transplant from his younger sister.)

The story most everyone believes, however, is that Sovereign's board ousted its CEO of 17 years in response to investor pressure over poor results. Critics—and there were many of them—viewed Sidhu as a "deal junkie," and Sovereign as a non-distinct roll-up that lacked identity and ran out of steam when the acquisition train halted in the mid-00s.

A controversial sale of one-quarter of the company to Spain's Banco Santander made matters worse. (Santander, which would buy out the rest of Sovereign a few years later, is about to rebrand the franchise, dropping the Sovereign name.)

A group led by activist Ralph Whitworth of Relational Investors took out full-page ads in the New York Times and Wall Street Journal to complain about the deal to give Santander a stake, charging that directors were "creating more value for themselves than for Sovereign shareholders." Several of them had business relationships with the company. Eventually, the board buckled.

Sidhu didn't go down without a fight, validating his reputation as one of the banking industry's most-combative CEOs. Yet, as recent experience illustrates, the same passion that occasionally leads him to burst into full-throated tirades when people disagree with him—and to sometimes personalize business disputes—can be energizing if you're in Sidhu's corner.

"People know what Jay's capable of, and they want to be a part of it," says James Hogan, Sovereign's chief financial officer under Sidhu, and Customers' CFO before announcing his retirement in July. Nine of Customers' top 15 executives, plus a growing number of lending officers, once worked at Sovereign. Many of the bank's investors have put money behind Sidhu before.

In May, Customers raised $103.5 million in a public offering that was oversubscribed five times and brought in $18 million more than intended.

But even the offering was not without drama. An attemped offering a year earlier had been called off because of poor market conditions, and the company raised capital through private placements instead. As recently as February of this year, Sidhu said that while Customers would look to list its stock on the Nasdaq or New York Stock Exchange to give investors better liquidity, he had no plans to reconsider an IPO. Two months later, the offering was back on.

"Almost everyone knows Jay, and he can be a bit controversial," FBR's Ramsey says. "But you can find a lot of people who are interested in his story—investors who have made money with him in the past, and employees that have liked working for him."

Sidhu's departure from Sovereign was humbling and came with a noncompete clause that barred him from banking in the Northeast.

The man is a workaholic—associates tell of regularly receiving late—night calls or emails from him, often to discuss some arcane matter that has him vexed—and the forced retirement made him restless. He bought a beach house in Florida and traveled the world with his brother, including extensive time in his native India. He golfed. To stay active in banking, Sidhu raised $500 million in commitments for a private equity fund, but never made an investment.

"We did about 15 due diligences, but couldn't find a target. Either the problems were too big or the management talent wasn't there to turn things around," he says now.

Sidhu's relationship with Atlantic Coast began after he was approached by former management in 2009 to help with some fund-raising. The next year he rounded up a "circle of friends and family"-past investors who trusted him—to contribute the bulk of a badly needed $17 million capital injection.

As part of the deal, Sidhu was named executive chairman, replacing Charles Martin Jr. "Jay is leading the way in developing and helping execute strategies to make Atlantic Coast Bank a stronger bank," Martin said at the time in a press release.

Almost immediately, the relationship began to sour. A former credit union, Atlantic Coast got socked by the Southeast's housing-price implosion. Sidhu says board members initially seemed "very open to ideas and thoughts on how the company could be turned around."

But once things stabilized, the board "didn't want to execute on anything," Sidhu says. "They said, 'This is Florida. We are victims, and there isn't anything we can do. The economy will turn around.' Hope and wishful thinking became a strategy."

The company lost $6.7 million, or $2.67 per share, in 2012, and has been operating under a consent order from the Comptroller's Office to raise more capital. Frustrated, Sidhu resigned as chairman in May 2012, but stayed on the holding company board. Then, in February of this year, Atlantic Coast announced its sale to Bond Street for $13 million.

Frankland hailed the transaction, valued at $5 per share, with $3 paid up front and another $2 held in escrow to cover anticipated legal challenges. He called it "a win for our stockholders, a win for our customers and a win for our banking franchise."

But Sidhu was incensed, arguing that Atlantic Coast's board was leaving money on the table. The back-and-forth that commenced included multiple shareholder letters and a lawsuit.

The board withdrew the escrow holdback, but still argued that $5 was the best shareholders would get, and that Atlantic Coast might fail without the deal. "Do not trust Sidhu," read a May 16 letter to shareholders, one of many exchanges during the fight. The directors said they were "concerned" that Sidhu might be in "violation of Federal Reserve regulations" by coordinating with other stockholders in the proxy fight.

Sidhu, who proposed recapitalizing the company and backed a rival slate of candidates opposing the three incumbent directors up for election, responded five days later, calling the board's assertion that it was acting in the best interests of shareholders "insulting," and demanding Frankland's removal.

The day after losing the vote, Frankland resigned. Atlantic Coast's fate, now that the sale has been nixed, remains in flux. In its second-quarter earnings release, the company said it was exploring a possible recapitalization.

"We learned that we're really operators, not investors," Sidhu shrugs. But he's not inclined to get too involved himself, because he's already getting his operating fix-right in his old backyard, in fact.

Customers' predecessor, New Century, was a moderately stressed Pennsylvania thrift looking to bolster its capital levels in a private placement. Sidhu, whose noncompete had expired, got a board seat and helped raise most of the needed $13 million-plus in capital. Within a month, he was made CEO and began talking about a "new banking playbook," more focused on organic growth and expense controls than acquisitions.

A casual observer couldn't be blamed for viewing Customers as Sidhu's attempt to reincarnate Sovereign. The Northeast marketplace, along with some of Sidhu's catch phrases and tactics—including a stated willingness to actively steal ideas from other banks—don't seem much different from 15 years ago.

"We are definitely not believers in the idea that it must be invented here. We are believers in copying superbly something that was not invented here," he says, echoing his Sovereign days.

Yet, there are some crucial differences. The old Sidhu built Sovereign largely via acquisitions—four government-assisted transactions in the early-90s, followed by 17 whole bank or thrift deals over the next 13 or so years. Throw in another five branch purchases and a dozen portfolio acquisitions too.

The new Sidhu isn't afraid to do deals. He's already purchased two banks and four loan portfolios, including a pending $20.8 million acquisition of White Plains, N.Y.-based CMS Bancorp, a $263 million-asset thrift. The recent stock offering gives him plenty of dry powder to buy more.

But he swears this time it's more about hiring teams of lenders in strategic locales and leveraging new technology, as opposed to blanketing the countryside with branches. "Back then, growth was about having more stores. Everything was about the 'five golden minutes' of face-to-face interaction with customers, and you needed branches to attract them. Today, we're in an iPad/iPhone environment," Sidhu says.

"We will do M&A only if it's better than organic growth," he adds. "That's the opposite of how we looked at things at Sovereign, but this is a new model of banking. The operating environment is different [from a decade ago]. If you can't adapt to it, then you should get the hell out of the banking business."

Sidhu describes Customers as a grouping of three de novo banks: a national mortgage warehousing business that looks a lot like one at Dallas-based Texas Capital Bancshares; a commercial real estate operation, centered on New York and Philadelphia, that is modeled after New York Community Bancorp's; and a small-business lending group similar to a community bank's core business.

"This is a new model for de novo banks," Sidhu says. "We put together a team that can run its own bank, take away all of the obstacles that come with a de novo bank and put them in business with our risk-management model."

Time will tell how much substance is behind Sidhu's promise of change. There have been a few hiccups. An agreement to buy Acacia Federal Savings Bank in Falls Church, Va., was scuttled earlier this year by regulatory delays. And in March, Customers disclosed a potential fraud in its mortgage warehousing operation, forcing it to set aside $2 million as a loss contingency and raising questions about whether the company's risk-management processes can keep pace with the rapid growth.

In June, Customers surprised observers by investing $23 million in Religare Enterprises, a financial services firm based in Delhi. Religare plans to enter the Indian banking market, and it principal owners needed to reduce their stakes to meet their domestic regulatory requirements. Customers hopes to get double-digit returns on the investment, and to use the relationship as a platform to facilitate trade and other business dealings between its clients in the Northeast and Asia. It also has an option to double its ownership stake in Religare.

Ramsey says what makes Customers stand out is its ability to generate growth, and that sometimes necessitates a bit of stretching. Sidhu, he says, has special motivation this time around.

"This is Jay's final gig—the bank he builds and grows and then eventually sells," Ramsey says. "And then it will be time for him to retire."

Don't bet on it.

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