Customers Bancorp, Inc

Hello and thank you for standing by. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the customer's Bancorp Inc. Second Quarter 2025 earnings webcast and conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, press star one again. I would now like to turn the conference over to David Patty with Customers Bank. Please go ahead.

Thank you, Regina, and good morning, everyone. Thank you for joining us for the Customer Bancorp earnings webcast for Q2 of 2025. The presentation deck you will see during today's webcast has been posted on the investors web page of the bank's website at customersbank.com. You can scroll to Q2 25 results and click download presentation. You can also download a PDF of the full press release at this spot. Our investor presentation includes important details that we will walk through on this morning's webcast. I encourage you to download and use the document. Before we begin, we would like to remind you that some of the statements we make today may be considered forward looking. These forward looking statements are subject to a number of risk and uncertainties that may cause actual performance results to differ materially from what is currently anticipated. Please note that these forward looking statements speak only as of the date of this presentation, and we undertake no obligation to update these forward looking statements in light of new information or future events, except to the extent required by applicable securities laws. Please refer to our SEC filings, including our form 10K and 10Q, for a more detailed description of the risk factors that may affect our results. Copies may be obtained from the SEC or by visiting the investor relations section of our website. Now at this time, it's my pleasure to introduce Customers' Bancorp Chair, Jay Sidhu. Jay?

Thank you, Dave, and good morning, ladies and gentlemen. Welcome to Customers' Bancorp Second Quarter 2025 earnings call. I'm joined this morning by our president and chief executive officer of the bank, Sam Sidhu, and Customers' Bancorp CFO, Phil Watkins, and Customers' Bank CFO, Mark McCollum. First, I'm thrilled to welcome Mark on the call. Mark and I were partners at Southern Bancorp, and I'm thrilled he is now on the Customers' team. And you know Mark joined us in early June and will complete the transition to CFO of Customers' Bancorp in the coming weeks. We are very excited about the continued depth of leadership we are building as our franchise grows. I also wish to thank Phil Watkins for his exceptional performance as chief financial officer of Customers' Bancorp over the past few quarters. He will continue to be a part of our top team. We are pleased to report another strong quarter, reporting results that materially exceed the consensus street estimates. Before we dive into the results from the quarter, I'd like to take a few minutes to reflect on some of the incredible accomplishments of this organization. As many of you know, we founded Customers' Bank in 2009, and then a year later, Customers' Bancorp, all with the objective of creating a company with a bold idea to build a client-centric, tech-forward, high-performing business bank that could compete and win in the fast-evolving industry. Since then, we've grown from a small, troubled 200 million asset bank in 2009, which had become a 3.2 billion asset bank by 2012, and today is a 22 billion commercial bank with national reach, high-performing, and I'm incredibly proud of our team and what we've accomplished together. As you can see from slide three, over the past 15 years, we built a differentiated model, anchored in disciplined growth, innovation, and exceptional client service. And over the last five years, since Sam Sidhu joined the executive team, our transformation has meaningfully continued to accelerate. Under his leadership, Customers' Bank, team has expanded into high-growth verticals, launched cutting-edge payment platforms like Cubics, and delivered industry-leading growth and tangible book value, revenue, and earnings per share. And as expected, this has resulted in incredible value for our shareholders as our stock price has increased nearly 500% over the last five years. Perhaps most importantly, we've attracted and developed what I believe is the best management team I've had a privilege to work with, and I was a CEO of a 90 billion asset company and served on the board of a multinational top five bank in the world. I am excited this morning to share that effective January 1st, 2026, I will be transitioning to the role of executive chairman of Customers' Bank Corp. And Sam will assume the role of chief executive officers of Customers' Bank Corp. Sam is a visionary leader with deep conviction in our strategy and culture, and we have every confidence in his ability to take this institution to even higher levels. Six years ago, the board of directors of Customers' Bank Corp and Customers' Bank embarked on its responsibilities for choosing a successor for our incredible COO at that time, Dick East, who had expressed his desire to retire. One of the best decisions in my opinion, that Dick and the board made at that time was to select and convince one of their fellow directors, Sam Sidhu, to join the bank as chief operating officer in 2020. A year later, upon Dick's retirement, Sam was named the CEO of the bank. And we have been thrilled with Sam's leadership style, and we couldn't be more excited to have a thoughtful, strategic, and dynamic leader like Sam to be the CEO of Customers' Bank Corp. and lead us into the future. We are all convinced that our best years are ahead of us. I remain the largest individual shareholder of the company, and for the past several years, I've even taken my short-term annual bonus completely in Customers' Bank Corp stock. Even our board receives majority of their compensation in company stock. Our interests are totally aligned with the interests of our long-term shareholders. Our mission remains unchanged, to strive to deliver above average, long-term value for shareholders and our communities by putting clients first and executing in a superb manner. The board and I look forward to continuing to work closely and support and guide Sam and our exceptional management team as they take on tomorrow. Please join me in congratulating Sam, and with that, I'll turn the call over to Sam on slide four.

Good morning, Jay. I want to begin by expressing my deep gratitude to you and our board of directors for their trust and confidence in appointing me as CEO of Customers' Bank Corp. It is truly an honor to step into this role and to build on the incredible foundation that Jay and his team have established since the bank's founding in 2009. What makes this moment especially meaningful is this opportunity to lead alongside such an extraordinary team. Across the organization, from our commercial bankers to the team members in our operations, technology, risk, finance, and many other areas, I see a shared drive to innovate, serve with purpose, and never settle for average. That entrepreneurial winning culture is what defines customers, and it's what gives me tremendous confidence in our future. While we're proud of the progress we've made, as you heard from Jay, and the momentum that we're carrying, we know the opportunity ahead is even larger. We have the right foundation, a clear roadmap, and an incredibly talented team. And we're gonna stay relentlessly focused on deepening client relationships, executing with discipline, and delivering durable value for all of our stakeholders. We are unwavering our belief that long-term success will be defined in three things. A client-first approach, consistent financial performance, and -in-class risk and operating framework. These are the principles that will make us built to last, and they will continue to guide us in everything we do as we move forward. These pillars are reinforced by our culture, one that's been entrepreneurial, client-centric, and performance-driven. That's why we've been able to consistently attract and retain top talent. The proof is in the results, and in the trust that we've earned from our clients, our team, and our shareholders. From a financial perspective, Customers Bank has been the number one financial performer in EPS and in book value growth over the last five years. And that's translated into long-term returns for our shareholders. We have also been, as you heard from Jay, the number one performing US bank stock over a five-year period. Moving to slide five, Q2 was another very strong quarter across the board. Here's a quick look at the highlights. We had nearly $300 million in deposit growth from our new commercial banking teams in what is typically a slow quarter. We also delivered annualized loan growth of 8% with diversified contributions across the franchise. Our net interest margin expanded by 14 basis points quarter over quarter. Our efficiency ratio improved again, even as we continued to invest. And we continued to grow tangible book value crossing $56 per share. We accomplished all of this while maintaining strong credit quality and liquidity metrics. Advancing to slide six, you'll see our gap financials. And then moving to slide seven, I'll run through the core financials for the quarter. Our beat relative to expectations on both the gap and core basis was driven by broad, strong results. We delivered core EPS of $1.80 with core ROE and ROA of 13.3 and 1.1 respectively. This reflects broad-based strength across the business. And more importantly, our credit metrics remain strong, which Phil will cover in more detail later. As you recall, on our third quarter 2024 earnings call, I stated that we could achieve 30% core EPS growth in one year if we executed in our strategic priorities. I'm incredibly proud to say that we've exceeded that with about 35% of core EPS growth from those levels one quarter early. Now let's turn to deposits in the next slide, where we continue to execute on our deposit transformation with a meaningful shift towards franchise enhancing high quality deposits. Total deposits were steady at 19 billion, but it's under the hood, but it's what's under the hood that matters. Our new banking teams onboarded since June, 2023 contributed nearly $300 million in high quality deposits this quarter. These teams now manage $2.4 billion in relationship-based granular funding. That's about 13% of our total deposits in less than two years, which is absolutely phenomenal. And to reinforce the granularity of this growth, commercial account openings remain strong, up 14% this quarter and over 60% since the end of 2022. The planned reduction in deposit service by BMTX had an approximately three basis point impact on total average cost of deposits and approximately a six basis point impact on total interest bearing deposit costs in the quarter. Adjusting for this impact, interest bearing deposit costs would have declined by five basis points in the quarter. This shows the continued power of our deposit remix efforts. We reduced our broker deposits again by $350 million this quarter and have now reduced these balances by about a billion dollars over the last year. Continuing to reduce these balances remains a top priority for us. Non-interest bearing deposits remain strong at about 29% of total deposits. At the heart of our deposit franchise transformation is one of our most powerful advantages, our ability to consistently recruit top tier banking talent and giving them the resources and platform to excel and produce quickly. When we talk about team recruitment, we're not just talking about adding headcount, we're talking about strategically growing the franchise by onboarding experienced professionals with deep market knowledge, existing client relationships and a proven track record of performance. I mentioned our commercial banking teams we onboarded over the last couple of years and while these teams continue to have a lot of runway ahead, we are also focused on teams that will spearhead the next phase of customer's bank's growth. Year to date, we've onboarded three new teams to the bank and continue to recruit high performing deposit focused teams. Two additional teams will be starting soon this quarter and we are in advanced negotiation with a few more. Our brand reputation as a high performance tech forward institution with an entrepreneurial culture is attracting more and more top tier bankers. Those looking to leave behind bureaucratic legacy institutions for a platform where they can serve clients more effectively. Team recruitment is not a tactic for customer's bank, it is core to our strategy. It's how we win relationships, it's how we expand our franchise with purpose and it's one of the clearest ways we continue to create long term value for our shareholders. Now turning to slide nine, I'd like to illuminate Cubics, our proprietary in-house developed payments platform. Cubics is purpose built for our institutional clients who are looking for a tech forward service oriented and reliable banking partner. Cubics has become a mission critical payments platform for our commercial clients. It's delivering value to our customers in three ways. 24 seven 365 instant payment capabilities, continuous product enhancements based on client feedback and a growing network effect with thousands of unique pairs, trading pairs. Cubics is not just a tech platform, it's a relationship deepener and a competitive edge. Today it is primarily used by the digital asset industry as an on off ramp for institutional players looking to trade and settle on our network via APIs 24 seven providing a direct connection to all major exchanges, stable coin providers, market makers and institutional investors. To try and help put this in context, just how critical and utilized this network is, in 2024 we processed about one and a half trillion dollars in payments volume. If you ranked us against household name payments networks, this would put us at number three, only behind Amex and Visa commercial. This very much aligns with our philosophy of being a top three to five player in franchise businesses we participate in and being able to achieve industry leading performance. This summer, we have seen the beginning of regulatory clarity and institutional safeguards that the industry has long been awaiting. Institutional adoption began significantly increasing with ETF approvals last year and with stable coin legislation now coming out of Washington, we as a leading stable coin infrastructure and digital asset payments provider believe we will be the bank that benefits the most from this post genius landscape. We are building a resilient compliance focused and scalable platform that is aligned with the longterm evolution of digital finance. One that positions customers bank as a partner of choice for the future of the industry. Cubics has been a hidden gem in our franchise and we believe frankly has been a misunderstood and therefore mispriced asset. Let's turn to loan growth on slide 10. We delivered roughly $320 million of net held for investment loan growth this quarter translating to a strong 8% annualized pace. Importantly, the growth was diversified, strategic and relationship driven. Here's what's driving that performance. Our corporate and specialized verticals continue to outperform. Mortgage finance was a nice contributor driven by our longstanding leadership in the space. Fund finance had a strong quarter and healthcare lending is gaining solid momentum. Our equipment finance group continues to deliver consistent growth with strong yield and structure and credit. And our commercial banking teams while primarily deposit focused have been also producing high quality granular loan volume with strong relationship economics. And we're doing all this while maintaining pricing and credit discipline. The depth and breadth of our platform means we're not overly reliant on anyone geography, industry or client segment. That gives us the flexibility to go where the opportunity lies and where the right credit exists. Looking ahead, our loan pipelines remain strong across multiple verticals. We believe we're well positioned to acquire high quality clients and relationships often from much larger institutions. With that, I'll turn the call over to Phil on slide 11.

Thanks Sam and good morning everyone. I'll start on margin where our disciplined execution continues to deliver meaningful results. In Q2, our net interest margin expanded by 14 basis points to 327, marking the third consecutive quarter of NIM improvement. And our net interest income increased by about 6% to $176.7 million in the quarter. On the asset side of the balance sheet, we saw positive impacts from an increase in average loan balances of more than $500 million in the quarter. This growth along with slightly higher loan yields and the impacts from the balance sheet optimization efforts we undertook, collectively drove interest income higher. And on the liability side, our interest expense was well managed. Thanks to our robust deposit and loan pipelines we're well positioned to continue expanding that interest income. One item to note was that late in the quarter, we bought out a participant at a discount and an existing portfolio of loans that will positively impact interest income and margin through the remainder of 2025. The purchase closed in mid-June, so there wasn't a significant benefit in Q2 that we expect this to increase to about $10 million in each of the next two quarters. In short, we believe we've built a business that has positive drivers for NNI and NIM on both sides of the balance sheet. Moving on to slide 12, we'll cover non-interest expenses. In Q2, non-interest expenses were $106.6 million. As we previously communicated, these increased as we reinvested a portion of the operational excellence proceeds back into the franchise. Even with this investment, our core efficiency ratio improved for the third consecutive quarter to .6% as we drove positive operating leverage in the business. Our core efficiency ratio is well below the industry average even with the investments we've made. And our non-interest expense to average asset ratio of .91% is top quartile of peers. On slide 13, we'll talk about tangible book value, which we believe is one of the clearest markers of long-term shareholder value creation in bank stocks. At the end of Q2, tangible book value per share reached $56.24 and continues our multi-year trend of double digit annual growth. To put that in perspective, since Q4 of 2019, we've more than doubled tangible book value per share of 15% compound annual growth rate, significantly outperforming peers and positioning us at the top of the industry. And it's worth underscoring, we've achieved this level of compounding through a period marked by a global pandemic, historical historic rate volatility and a regional banking crisis. We accomplished this as a result of our differentiated business model and by being strategically nimble in order to best capitalize on market opportunities. Now let's move to slide 12 to discuss capital. Our capital ratios remain strong and provide us with substantial flexibility for organic growth opportunities. As previously announced, we fully redeemed our series Z preferred stock in the quarter, utilizing a portion of our organically generated capital. Our TCE ratio increased by about 20 basis points in the quarter, even with some growth in the size of our balance sheet. And at 12%, we remain in excess of our CET1 target, even while utilizing some risk-based capital for loan growth in the quarter. On slide 15, we continue to be pleased with our credit performance. Non-performing assets remain low at 27 basis points of total assets. Our commercial and consumer portfolios are both performing well. You can see this as total net charge-offs improved down about 25% quarter over quarter. Additionally, special mention and substandard loans were down 7% in the quarter. While we continue to closely monitor any emerging risks, we feel the portfolio is well positioned. And with that, I'll pass the call back over to Sam before we open up the line for Q&A.

Thanks for that, Phil. As we look ahead to the rest of 2025, though there is some continued market uncertainty, we're excited about our positioning and confident in our ability to navigate the current environment. We're positively updating a few of our guidance items this quarter as an outcome of the strong results we've achieved in the first half of the year. On full year loan growth, we're raising the range to 8% to 11% from 7% to 10%. We now project net interest income to grow between 7% to 10% up from 3% to 7% previously. This increase reflects a strong performance on both sides of the balance sheet in driving increased revenue and the benefits Phil discussed earlier. And lastly, as a result of the stronger revenue growth and well-managed expenses, we now have a bias towards the low end of the efficiency ratio range. I'd also like to echo Jay's sentiment and thank Phil for his leadership as customer bank corp CFO. We're excited for him to be spearheading strategic initiative to support the company's long-term growth. In closing, we're building on a strong foundation, one defined by disciplined execution, strategic growth, and a relentless focus on our clients. With the right talent, technology, and operating model in place, we're confident in our ability to sustain this momentum. And we remain committed to delivering long-term value for our clients, communities, and shareholders. With that, I'd like to open up the line for questions please.

We will now begin the question and answer session. In order to ask a question, press star followed by the number one on your telephone keypad. Our first question will come from the line of Peter Winter with DA Davidson. Please go ahead.

Good morning. Congratulations Sam on the promotion and Jay. With your future plans to start off. But if I could just, first question, just Phil you mentioned the increase of about 10 million next two quarters. Can you just go over that one more time? In your prepared remarks.

Yeah, hey, good morning Peter. I hope you're doing well. Yeah, it's, you know, really it was a small portfolio of loans that we originated with a partner. We had the opportunity to purchase out the interest at a discount and did. And so the results of that will flow through net interest income over the next couple quarters.

And it's 10 million benefit each quarter?

Yeah, we expect. Or over

the next 10 million over the next two quarters?

We expect it to be around 10 million each of the next two quarters.

Got it, thank you. And then Sam, if I could just ask, just with this passage of the genius act, just how maybe are you thinking about crypto related deposits going forward? And just, you know, it seems like it's gonna be incredibly competitive with stable coins. I mean, we've seen JP Morgan step into this. PNC announced a joint partnership as well. So I'm just curious if you could talk about this.

Yeah, sure Peter. Thank you so much for your comments earlier. So, you know, the net takeaway is this is incredibly exciting for, you know, for Customers Bank. And, you know, what I would say about the recent legislation from Washington is it is first and foremost, it really just reinforces what we at Customers Bank have believed for a long time, which is that digital assets are here to stay. You know, and I think that we have really established ourselves as the leaders in digital asset banking. And in this position, we will, we have and will continue to benefit from regulatory clarity. You heard me talk about the ETFs early last year. You know, you had a bump with the election, you know, last November. You have Genius now from a stable coin perspective. And then there's further market structure legislation that is penciled out, you know, for later this year. Each one of these milestones has resulted in, you know, increased activity, increased, you know, deposits, increased fee income, you know, at Customers Bank. So, you know, to get a little bit more specific on your question about stable coins, you know, what I would say is, is that, you know, this legislation almost certainly benefits a number of our existing customers, as you can appreciate. They will likely benefit from more AUM today and in the future. It also is gonna mean that there's gonna be, you know, new institutional issuers, you know, starting with non-banks. As you can appreciate, if you continue to pull this thread, all major institutional issuers that launch a stable coin are likely gonna need to be a customer of Customers Bank. You know, we are the leading stable coin infrastructure and payments provider, you know, in the country. You know, and a little bit more on Cubics. I don't know if we've shared this before, but, you know, we only have about 10% or so of our deposits that come from stable coin issuers today out of our, you know, overall Cubics deposits. So we could very well see that increase over time. You know, and, you know, getting back to your question about big banks, you know, at the end of the day, if you're a large bank, this is something that you, you know, you have to be involved in. If you have a large network of customers that need to move money, whether there's pull from your customers today, you will need to, you know, have this as a means of payment. But at the end of the day, large banks make money when there's friction and an efficient flow in the banking system, you know, whether that's FX, payments, capital markets, and a stable coin, if it truly proves out to be more efficient, cheaper, faster, you really can't advise in your existing revenue. So there's a lot of pros and cons and a lot to be determined. I think this is gonna be a long runway over the medium to long-term, but the most important thing is that this is gonna be a huge benefit for a customer's bank in the near to medium and long-term. The pie is gonna increase and regardless of increased competition, you know, we have the strongest payments network. We laid out some of those stats there to kind of put that in perspective, you know, we are continuing to trend and grow that business, you know, July, as I mentioned, you know, will actually be our most active month to date on the platform.

God, that's helpful, and then just one last quick question, just the professional fees increased 2 million this quarter, quarter to quarter, could you just talk about that and maybe the outlook?

Yeah, hey, Peter, good morning again. Yeah, you know, I'd say generally, if you look back, they were actually pretty consistent with where they were sort of two quarters ago. So, you know, Q1 was probably a bit lower. We actually saw some increases kind of broadly across the platform, but from the risk management sort of investment side, they were largely consistent quarter over quarter.

And I would just add, Peter, if you're asking about sort of regulatory expenses, I'd say that we, you know, are largely on track, we will be prior, you know, prior guided towards and expect those really, that portion, which is not contributing to the growth this quarter, but that portion, you know, to, you know, to drop off significantly, if not completely in the next 90 days.

Thanks, Sam, thanks Phil.

Our next question comes from the line of Kelly Mata with KBW, please go ahead.

Hi, good morning, thanks for the question. I would like to continue on with the topic of Cubics. Notably, I think investors are interested as to how big of a contributor this could be to your business. I know you had previously capped these deposits at 15% of total, which has been lifted a bit. Can you one, provide how, what the size of the Cubics deposits were this quarter? And two, just from a high level, as you think about the potential opportunity, as well as, you know, risk management, thinking through concentrations, is there a way to think about how this business could grow with the industry? Just any high level thoughts there?

Yep, good morning, Kelly, happy to take that. So first of all, I think you asked about, you know, where we were at the end of the quarter. From a spot basis perspective, we were at 3.2 billion, which is roughly in line with where we were last quarter. It's actually about $100 million lower. What I would say is that a spot basis is not really the best indicator, you know, of thinking about where that is. That puts it probably at 16 or 17% as of 6.30, which is above the prior cap that you, you know, that we had talked about. But really, when we had that cap, we were not initially, in February of 23, we were not holding these all in cash, which is what we're doing today. So as we discussed earlier this year, that cap has been removed. I referenced July activity a little bit earlier to kind of put that in perspective. If as of the 25th of July, we've had the most active month, you know, on Cubics to date. So it's still, you know, almost a week to go, you know, in the month. Our deposit balances are up about 20%, you know, in the month of July to kind of put that perspective. Increased activity leads to increased deposits and increased deposits leads to higher interest income, as well as, you know, increased activity, which leads to fee income. So over time, we expect that, you know, these deposit balances will, could potentially, you know, increase as we get more institutional flow. I think one of the things that's not fully understood and appreciated is we have about 20% of our flow today, which was not the case two years ago, comes from traditional finance players who are active in the digital asset trading and settlement space. And we expect that percentage to increase over time. And as that percentage increases over time, we may see increased, you know, slightly increased balances as we continue to grow. But again, our goal is not to grow the deposits first, it's actually to grow the strength of the network, it's the additional products and services, payment rails that we offer to our customers. With that, we will likely continue to have sort of our, you know, modest, you know, deposit growth as activity increases. So hopefully that answers your question, but happy to answer any followups.

That's really helpful. I guess as a followup here, as you've mentioned several times now, you hold these deposits in cash. I think some larger players are considering lending against such related deposits. Given the softening regulatory tone in the industry, is this something that's coming up with discussions on the board and any change in terms of how you're viewing it potentially longer term with regards to how you hold these deposits?

Sure. So the short answer is we're not, you know, looking to change, you know, the way that we approach and hold on these deposits. I think the longer answer is over time, as you can probably appreciate over a multi-year period, we'll continue to get more, you know, more internal data on how these deposits operate and fluctuate. We'll continue to have longer term relationships with our customers and can work on structure. And you just have a sense of sort of a minimum amount of payments flowed. So the answer over the medium term is that we will likely consider, you know, but this will be customer driven and it'll be business driven. And sitting where we are today, it is entirely appropriate to hold these in cash, especially where rates are.

Got it. Maybe last question for me, and then I'll step back into the queue is, you know, this slide nine where you draw out the payment volume is super powerful. I know this is, you know, a huge benefit of this platform is the payments related, fee income potentially generated. Can you elaborate how much that contributed to 2Q and any commentary about the potential for further monetization of payments fees longer term?

Yep. So late last year, we instituted sort of traditional, you know, wire fees and platform fees to some of our customers. That has resulted in about an $8 million run rate of fees. It was about similar in the second quarter. So nothing, you know, necessarily, you know, material in the second quarter, but going forward, we could see that increase over time. Again, our objective is not to continue to, you know, materially drive fees. Our majority of our income today is coming from interest income over time. We'll likely see that shift from a mixed perspective, especially as there's a potentially, you know, changing rate environment over the medium term. So, you know, one of the things that's, that is important about that overall volume is it really just shows the incredible strength of the network. And, you know, while it was one and a half trillion last year, you know, we're at about a trillion year to date. So it kind of puts it in perspective that this is growing, activity is growing, and the strength of the network is only growing and our lead in our moat is increasing.

Got it. Thank you so much for all the color. I'll step back. Our next question comes from the line of Harold Getch with Bryley Securities. Please go ahead.

Hey, thank you. Congratulations for all the changes and the leadership there. I hope you all succeed and are happy with where things are headed. Congratulations. I think my question is still on the, you know, cubics and, you know, the payment flows across the rails are just enormous. The monetization is, you know, it's quite low. Is this really a vehicle outside of even digital assets is to increase banking relationships and the size of connections to many commercial accounts because it seems like, you know, I appreciate your comment on how big banks make money. They make it through friction. And this seems to be very low cost, almost a low cost producer or a low cost option. And because of that, you know, volume is coming your way. Could you just kind of comment on your strategy with your current pricing and the related volume gains you're getting?

Yeah. Good morning, Hal. Happy to take that. So, you know, as we think about the, you know, the cubics platform, it's helpful to kind of just remind folks what it is. It's really just, you know, software that sits on top of our existing, you know, core and payments infrastructure at the bank. It allows our customers, commercial customers who are more institutional and in many cases, tech savvy, you know, to operate. So, you know, prior to cubics, we had something called CBIT, which was a blockchain, you know, tokenized deposit, you know, from a traditional finance perspective, I will admit that was a lot tougher of a cell to get some of the, you know, traditional commercial customers, you know, to interact with that. When you're talking about the digital deposit sort of format that we're using today, -7-365, along with a ton of other additional, not just, you know, intrabank type transfers, but really a full suite of products and payment rails and services and connectivity and data and information. You know, we are seeing, you know, tremendous amount of use cases, you know, from commercial customers. I was just sitting in someone's office yesterday and we have, you know, a real estate customer who has hundreds of accounts with us that's now gonna be using this for some of their internal, you know, GL ledger type activity. And again, this is not necessarily driving, you know, new deposits with that customer, but it is actually strengthening our relationship. It's providing an incremental service and, you know, think of it as sort of a, you know, software as a service type solution. So we continue to see it, you know, as an opportunity to strengthen relationships, drive incremental deposits with our existing customer, but also importantly open up, you know, more traditional finance type, you know, opportunities that, you know, many of the big banks have these types of capabilities, but on a one-off basis and a very clunky basis and an inability to do it in the, you know, incredibly streamlined format that we have.

Thank you very much.

Our next question comes from the line of David Bishop with Hubday Group. Please go ahead.

Yeah, good morning. Take a quick question, Sam, in terms of the loan mix here, you guys have been pretty successful. Past couple quarters in growing commercial real estate, maybe take us to share, given your capacity. Just curious, you have the appetite to grow some of those commercial real estate segments. And as we look at the loan mix in terms of the breakdown for segments, does that stay relatively consistent? You think over the next year, do you continue to see, you know, the specialty lending C&I build as a percent of loan, thanks?

Yeah, hey, Dave, good morning, it's Phil. I'll take that for you. I mean, I think, yeah, we've talked about over the last two or three quarters, we, you know, somewhat opportunistically stepped into a bit of a void, especially here in our New York markets or in the Northeast markets in commercial real estate. You know, as others pulled back in Q4 and Q1, we were really able to win, again, not transactional, but full relationship-based opportunities where we, you know, were able to perform for clients when others weren't. We still definitely see some opportunities there in the pipeline, you know, we've got a nice pipeline on the commercial real estate side, but we're being very disciplined, again, not, you know, seeking out just transactional interest earning assets. It's gotta be full relationship driven. And so, you know, we have seen some of the participants that had stepped out for a few quarters start to step back in. So again, we're not going to chase transactions there just for the sake of it, but we are still seeing, you know, some good opportunities. As we look across the rest of the franchise, you know, as Sam mentioned in his comments, that is part of, that is one of the real strengths here is that, you know, we have the ability to dial up or down, especially across the various specialty lenders, but even as you just highlighted in areas like commercial real estate over the last couple of quarters. So, you know, we will continue to do that and go where we see the best opportunities for that franchise enhancing growth. So, yeah, we can give you the look out of the pipeline, you know, call it, you know, 90 days out, which does have some commercial real estate, but also some, again, continued contributions from the specialized CNI. But as we look, you know, three, four quarters out, it'll be very dependent on the opportunities, but we're incredibly well positioned for that.

I would just add, you know, David, as you mentioned, you know, we have about, you know, $500 million or so in the, you know, the loan backlog, you know, right now.

Got it. Appreciate that guidance there. And then just curious in terms of the BMT deposit to run off, is there any more plans in the near future? Will that be a headwind or is that mostly behind you? Thanks.

I think we well telegraphed that. That was Q2 headwind, and anything like it is behind us.

Great. Thank you.

Our next question comes from the line of Steve Moss with Raymond James. Please go ahead.

Good morning, guys. And Sam, congratulations on the promotion here. Maybe just on the deposit side, with, you know, the pipeline remaining strong there, just curious, you know, if, you know, with the expectation rates will be coming down here at some point over the short to medium term, you know, is that entering the conversation with the deposit customers you're bringing on these days and just kind of where is, you know, what's the blended cost of those deposits today?

Yep. So I think the good news is, is that, you know, we're continuing to bring on, you know, new deposit customers at similar levels. So we were sort of, sort of high 20s, 30% non-interest bearing, you know, component blending at about that .5% plus or minus, you know, type basis, which we feel, you know, pretty, you know, privileged to be doing. And then a lot of that credit goes to, you know, our existing and as well as sort of new, you know, teams to the bank, as well as future teams to the bank. You know, when you're in competition and taking market share, in some cases, you have to sort of match, you know, the top dollar as rates decline, you know, a receding tide sort of, you know, brings all boats down. And I think that many of those conversations are, are had and expected, you know, by customers, especially when it's not connected with, you know, a migration of an account.

Okay. Appreciate that. And just in terms of the teams you hired here, same as the ones you're about to bring on, just kind of curious if you could size up the potential, those deposit books.

I don't want to get premature in sizing up the deposit books, but what I would say is that, you know, it looks like we'll have about half a dozen or so teams, you know, this year, based upon sort of where we are in discussions with, you know, you know, five already, you know, three on board at two, you know, this quarter, and, you know, another one or two, plus or minus, even more. You know, the goal would be to start building for 26 and 27. You know, one of the things that's worth mentioning about our prior teams, as a reminder, they were break even in the first half of this year. Call that a 100% efficiency ratio, right? So there's a lot of opportunity for that to come down, you know, first by, you know, having, you know, the revenues be two times expenses. Eventually we'd like to get that to a minimum of three. And that's going to provide us a tremendous amount of operating leverage, you know, over the next 12 to 24 months on the old teams. On new teams, we're considered, you know, we're working on a similar 12 to 18 month type, you know, break even. And, you know, safe to say, you know, each one of our teams, you know, we would expect to be at a minimum and sort of that couple hundred million dollars or so, you know, book on the high end, they do get to 10 figure.

Okay, appreciate that. And in terms of, you know, I know you guys have gotten to NII growth, but just curious how you guys are thinking about the margin here. I realize there's a lot of moving pieces, but is it relative stability at current levels or, you know, could we see some more margin expansion just given your deposit, they should continue to get better here.

Yeah, hey Steve, good morning. So, you know, I'd say overall, you know, there are, as you said, there are moving pieces on both sides. I mean, we've got the positive on the loan growth side and we continue to have some positive momentum, you know, opportunities on the remix side. Some of it, you know, so some of it does continue to depend on the rate outlook, you know, we do continue to be modestly asset sensitive, though, as you know, we've taken, you know, meaningful steps, you know, and method, measured steps over the last year plus to continue to bring that closer to neutral. So I'd say overall on a net basis, we probably have a little bit of an upward bias, but it will be a bit dependent on that outlook. I guess the one thing I would highlight as I noted earlier, you will see, you know, clearly some benefits in Q3 and Q4 from that additional interest income flowing through. Right, okay,

thanks for that, Bill. And then I guess just maybe, I hear you guys in terms of, you know, gonna be bringing on more customers with regard to Cubics and, you know, deposit growth out of the platform, you know, in terms of, I realize it's kind of difficult to see where it could shake out, but just kind of curious as to, you know, how you're thinking about managing those deposit balances, or are you just willing to let it ramp up and, you know, how do we think about concentration with regard to that, and if you guys have any thoughts over the medium term?

It's a very valid question, Steve, and, you know, from a liquidity risk perspective, I think we've well contained it. I think as you think about strategic risk, you also don't want a lot of concentration from any one vertical, and so, you know, these are conversations that we're having and that we're thinking about, and that's why, you know, I've stated before, our goal is not to sit here and drive, you know, deposits, it's to increase the strength of the network, increasing the strength of the network, increases, you know, sort of activity and associated, you know, deposit balances, and we view those as the high quality, you know, value of the franchise, not spot balances with sort of a new account funding that's not active.

Right, okay. Well, I appreciate all the call here today and thank you very much.

Thanks, Steve, and what I would like to say to, you know, is I forgot to say at the beginning, congratulations on the new baby.

Thanks, Sam.

Our final question comes from the line of Matthew Brees with Stevens, please go ahead.

Hey, good morning. I had a few questions. First of all, how much more room do you have to remix securities into loans and how should we be thinking about kind of overall balance sheet size over the next year?

Yeah, hey, Matt, good morning. You know, I'd say overall, we probably feel, you know, pretty good about where our securities portfolio is a percent of average assets is. Obviously, you know, we did, we were able to reinvest a portion of those proceeds, as we talked about, from some of the sales, but, you know, at this point, it would probably be, you know, be more cashflow driven. And then, you know, as far as balance sheet, from a balance sheet growth perspective, excuse me, as I said, you know, as we've said before, you know, the first half of this year, we would continue to expect to be heavier on the deposit remix side. And so as a result, you know, you wouldn't see a lot of balance sheet growth, which is what occurred, but that as we got into the back half of the year and certainly into 26, you know, while we still have, you know, some opportunities on the remix side, we would expect more growth overall on the balance sheet.

Okay, it's safe to say that we should expect more of the, you know, the long growth transition into total asset growth at this point. That's a fair statement. That's right. Okay. And then in the presentation and in the earnings release, you noted that, you know, part of the deposit mix shift resulted in, I think, 350 million less broker deposits. For the call report last quarter, I thought you had around 6.6 billion brokered. Is it fair to take those two numbers and figure out the net number, or what is your broker deposit balance today? And is there a targeted goal there? Where would you like to be broker deposits, total deposits?

Yep. That's the simple math, you know, Matt. And so, yes, they have declined, and they've declined by about a billion over the last year. I think we've been pretty vocal about, you know, some of the changes in categorization, some of the deposits that happened over time, but it is consistent that those changes have been made sort of more broadly across the industry. Those deposits are now being de-emphasized and remixed out. So, you know, where do we want those deposits to be? You know, we are not a traditional sort of branch-based, you know, bank that has a broad base of, of, you know, branch-based retail deposits. Having said that, I think we've always said, well, we expect to sort of operate a little bit on the higher edge of a traditional bank. You know, whether that's, you know, 25 or 20, it's to be determined, we definitely want these below 30 percent in the near to medium term.

Thank you. Okay. And then I had a couple of questions on QVIPs myself. I guess the first one is just on the stablecoin bill, and I was hoping you could help me better understand, you know, one of the inherent things is that all stablecoins will need to be backed by U.S. treasuries, which inherently invites global uses, and I think there's some strong use cases around that. But, you know, for yourselves and others in the banking system, how do you protect yourself from a BSA, AML, know your customer standpoint? Who bears responsibility for making sure that there's, you know, good incremental actors into the system, especially if this now becomes something that, you know, extends beyond the U.S.

borders? Yep. So, you know, I think that it, from first and foremost, I think I mentioned this earlier on the call, it is incredibly helpful to have, you know, our customers come in, you know, formal federal regulatory, you know, framework, you know, while all of our customers are regulated in some way, shape or form, and in some cases, many, you know, shapes and form. This provides, you know, sort of a very, you know, constructive and cohesive roadmap, not only on the, you know, compliance side and BSA, AML, but also, you know, importantly, on sort of the liquidity management and sort of the consumer protection, as you were sort of referencing, you know, before. You know, there's about a plus or minus 18 month implementation phase where a lot of detail, you know, will be, you know, will be coming out, you know, for a number of our, you know, customers. As I mentioned, this is about 10% plus or minus of our existing, you know, deposits today. And we're thrilled that there's now going to be a federal framework that also, you know, includes, you know, much more comprehensive BSA, AML, and we'll look to really just partner, you know, with the structure that our customers are in, and what we're looking to do at Customers Bank on the BSA, AML side because we've already invested significant sums of money, you know, to build up our infrastructure and our technology, and we view it as a strength of the organization. And the fact that our customers are also going to be leveling up and entering a US federal framework is going to, you know, even further, you know, strengthen the overall institutional flow of the bank, but also really increase the mode around our business.

And you said stablecoin is 10% of existing deposits. Is that total deposits or just the cubits deposits?

Cubics deposits.

OK, OK. And then the other thing I was curious about is just in terms of your cubics customers, you know, could you talk a little bit about the granularity of those deposits and how many accounts, you know, you know, are frequent users of cubics? I just wanted to get a sense for, you know, is this is just kind of a, you know, an upside down pyramid where there's there's a small number of really big kind of deposit holders or is it pretty granular for us to board? You know, frame for us, what kind of, you know, customers are actually within your system?

Yeah, so, you know, we have essentially all major exchanges, all major stablecoin providers, all major market makers, all major investors, you know, digital asset specific as well as traditional institutional investors, you know, who operate in the digital asset space. So really, you know, it is a wide swath of market share and really the folks at bank with us come to us for the payments network, you know, first and foremost, and that's really where our focus has been. So the short answer to question is everyone is looking to be active on the network, and that's also why there are customers at the bank. The longer answer is, is that as you can appreciate, the larger the exchange, the larger the AUM of the stablecoin provider and the larger the network, even when someone is new to the bank, it takes time for them to build a larger network. You know, they do build, you know, in many cases, larger activity, which comes from larger deposit balances and the deposit balances are diversified across those major thresholds. But you will see, you know, say, you know, a nine figure deposit with an exchange and you will see maybe a $5 million deposit, you know, with, you know, a medium-sized investor.

I'll leave it

there.

Thanks for taking my question, Sam. Appreciate it.

And that will conclude our question and answer session. I will hand the call back over to Sam to do for any closing remarks.

Thanks so much, everyone, for your continued interest and support of Customers Bank Corp. We really appreciate you being a part of this incredible franchise that we're building and we look forward to speaking with you next quarter. Thank you so much and have a great day and weekend.

This concludes today's call. Thank you all for joining. You may now disconnect.